SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998
Commission File No.: 0-24479
AF BANKSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Federally Chartered 56-0125319
State of Incorporation IRS Employer Number
206 South Jefferson Avenue
P.O. Box 26
West Jefferson, North Carolina 28694
(Address of Principal Executive Offices)
Issuer's telephone, including area code: (336) 246-4344
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Title of Class
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B contained herein or any amendment to this Form
10-KSB.
The revenues for the issuer's fiscal year ended June 30, 1998 are
$8,347,654
The issuer had 1,053,678 shares of common stock outstanding as of September
2, 1998. The aggregate value of the voting stock held by non-affiliates of the
issuer, computed by reference to the price at which the common stock was sold on
September 2, 1998 ($19.00) was $8,416,430.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Stockholders for the year ended June 30,
1998 are incorporated by reference into Part I and II of this Form 10-KSB.
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-KSB.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS..............................................1
ITEM 2. PROPERTIES..........................................................30
ITEM 3. LEGAL PROCEEDINGS...................................................31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................31
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............31
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................................31
ITEM 7. FINANCIAL STATEMENTS................................................31
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................32
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS........32
ITEM 10. EXECUTIVE COMPENSATION..............................................32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......32
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................32
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.............................32
SIGNATURES....................................................................34
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
AF Bankshares, Inc. (the "Company") is a federally chartered stock holding
company for AF Bank (the "Bank "), a federally chartered stock savings bank
which conducts business from its main office located in West Jefferson, North
Carolina, branches in Jefferson and Warrensville, North Carolina operating under
the trade name Ashe Federal Bank and one branch in Alleghany County, North
Carolina operating under the trade name Alleghany First Bank. The Bank was
founded in 1939 as a building and loan association. In the early 1980s, the Bank
converted from a North Carolina chartered building and loan to a federally
chartered mutual savings and loan association, and in August of 1995 converted
to a federally chartered mutual savings bank. During fiscal year 1997, the Bank
converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank which is majority owned by AsheCo, M.H.C., a mutual
holding company. On June 16, 1998, the Bank completed its reorganization into a
two-tier mutual holding company and became a wholly owned subsidiary of the
Company. See "Management's Discussion and Analysis -- The Reorganization." The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. At June 30, 1998, the Bank had total assets of $99.6 million,
total deposits of $82.5 million and equity of $11.5 million.
The historical operations of the Company has been that of a portfolio
mortgage lender, providing fixed rate loans for the residents of Ashe County,
North Carolina. While the Company plans to maintain its focus on traditional
mortgage lending, management has recently expanded the market area of the
Company to include Alleghany County and has diversified its product lines by
engaging in non-mortgage lending and offering non-traditional financial
services, such as insurance and brokerage products. More specifically, since
1996, the Company has made a major commitment to small business commercial
lending and consumer lending as a means to increase the yield on its loan
portfolio and attract lower cost deposit accounts. As a result of this
commitment, commercial loans have increased by 131.8% and consumer loans have
increased by 66.9% since June 30, 1996. In addition, since July 1997, the
Company has offered traditional property and casualty, life and health insurance
products through AF Insurance Services, Inc., a wholly-owned subsidiary of the
Bank. In August of 1998, the Company also began offering various uninsured
investment products, including fixed-rate and variable annuities and mutual
funds through a relationship with a third-party broker-dealer. The Company plans
to offer such investment products through its own broker-dealer subsidiary
beginning in the third quarter of fiscal 1998. The Company believes that its
strategy of expanding its market area and diversifying its product lines will
enhance its franchise value and strengthen earnings in the future.
The Company's operating results are primarily dependent upon net interest
income, fees and charges and insurance commissions. Net interest income is the
difference between interest earned on loans, investments and interest-earning
deposits at other financial institutions and the interest-bearing savings
deposits and with other borrowings. The primary interest-earning asset of the
Company is its mortgage loan portfolio representing almost 83.8% of total loans,
with approximately one-half of portfolio mortgage loans at fixed rates at June
30, 1998. The net interest income of the Company is affected by changes in
economic conditions that influence market interest rates. This exposure to
changes in interest rates contributes to a moderate degree of interest rate risk
because of the negative impact of increasing rates to the Bank's earnings and to
the net market value of its assets and liabilities. Additionally, the Company
receives fee income primarily from loan origination fees, late loan payment
fees, commissions from the sale of credit life, accident and health insurance,
insurance commissions generated from the insurance agency subsidiary and in
payment for other services provided to the customer by the Company. The major
non-interest costs to the Company include compensation and benefits, FDIC
insurance, including a one-time special assessment during 1997, and data
processing costs. Other external factors that affect the operating results of
the Company include changes in government and accounting
<PAGE>
regulations, costs of implementing information technology, and changes in the
competition's emphasis within the Company's market.
As of June 30, 1998, $63.4 million, or 83.8% of the Bank's total loan
portfolio consisted of real estate loans. Total loans at June 30, 1998 were
$75.7 million of which $55.5 million or 73.3% were secured by one-to-four family
residences. The Bank also invests in consumer loans and commercial loans. Total
mortgage loans, including construction loans, totaled $63.4 million as of June
30, 1998. Of that amount, 46.8% were adjustable rate loans.
As of June 30, 1998, the Bank's consumer loans and commercial loan
portfolios were $12.3 million, or 16.2% of total loans. Commercial loans totaled
$4.0 million, or 5.2% of the Bank's total loan portfolio. The Bank invests a
portion of its assets in equity securities issued by the FHLB and the Federal
Home Loan Mortgage Corporation (the "FHLMC") and began investing in
mortgage-backed securities during fiscal 1996. Mortgage-backed securities
totaled $2.2 million or 2.2% of total assets at June 30, 1998, and FHLB, Federal
Farm Credit Bank and FHLMC securities investments totaled $6.0 million, or 6.0%,
of total assets at June 30, 1998.
REORGANIZATION
On October 4, 1996, the Bank reorganized into the mutual holding company
form of organization. Members of the mutual holding company consist of
depositors of the Bank, who have the sole authority to elect the board of
directors of the mutual holding company for as long as it remains in mutual
form. Initially, the mutual holding company's principal assets are the shares of
the Bank's common stock received in the reorganization and on its initial
capitalization of $100,000 in cash. The mutual holding company, which by law
must own in excess of 50% of the stock of the Bank, was issued stock in the
Reorganization resulting in a majority ownership interest of 53.8% of the Bank.
The remaining shares of common stock of the Bank were sold to the depositors and
borrowers of the Bank. By virtue of its ownership of a majority of the
outstanding shares of the Bank, the mutual holding company can generally control
the outcome of most matters presented to the stockholders of the Bank for
resolution by vote except for certain matters related to stock compensation
plans, a vote regarding conversion of the mutual holding company to stock form,
or others matters which require a vote only by the minority stockholders. The
mutual holding company has registered as a savings and loan holding company and
its subject to regulation, examination, and supervision by the Office of Thrift
Supervision (OTS).
On June 16, 1998, the Bank completed its reorganization into a two-tier
mutual holding company, pursuant to the agreement and plan of reorganization
approved by the Bank's shareholders on December 8, 1997. Under the
reorganization, the Bank became the wholly-owned subsidiary of AF Bankshares,
Inc., a newly formed stock holding company (the "Company") and holders of the
Bank's common stock became holders of the Company's common stock, on an equal
share for shares exchange.
MARKET AREA AND COMPETITION
Previously, the Bank's market area for deposit gathering and lending has
been concentrated in Ashe County, North Carolina. However, management believes
that the Company must expand its market base to build value for the Company and
its shareholders. In March 1998, the Company opened a branch of AF Bank in
Alleghany County and operates the branch under the trade name Alleghany First
Bank. At the same time, an insurance agency branch of AF Insurance Services,
Inc., was opened in the same location. The staff of Alleghany First came from
the local banking community and is attuned to the needs and habits of Alleghany
citizens. The insurance agency personnel direct their attention to the special
needs of Alleghany County citizens as well. Management now believes that it is
delivering the same personalized customer service to Alleghany County that it
has historically delivered to Ashe County.
2
<PAGE>
The Bank faces substantial competition for both the deposits it accepts and
the loans it makes. Management believes that the Bank has the third largest
deposit base in Ashe County, with approximately 22% of the market for deposits,
and the second largest deposit base in the part of Ashe County which comprises
its primary zip code, 28694, with approximately 30% of that market. Located
within Ashe County are branches of six other depository institutions, four of
which are commercial banks and two of which are credit unions. The Bank competes
for deposits by offering a variety of customer services and deposit accounts at
competitive interest rates. The Bank, like its competitors, is affected by
general economic conditions, particularly changes in market interest rates, real
estate market values, government policies and regulatory authorities' actions.
Changes in the ratio of the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions which may
have greater resources than the Bank, but which have not generally engaged in
lending activities in the Bank's market area in the past, and from credit unions
that can expand into the Bank's market area and compete for customers without
the level of taxation experienced by the Company. Competition may also increase
as a result of the lifting of restrictions on the interstate operations of
financial institutions. See "--Regulation."
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
mortgage loans. The Bank also makes consumer and commercial loans.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board (the "FRB"), and
legislative tax policies.
3
<PAGE>
The following table sets forth the composition of the Bank's mortgage and
other loan portfolios in dollar amounts and percentages at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
1998 1997 1996
------------------------ ----------------------- ----------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.......... $ 55,462 76.36% $ 53,903 76.75% $ 51,401 82.26%
Multi-family................. 668 0.92% 742 1.06% 638 1.02%
Non-residential.............. 1,418 1.95% 2,804 3.99% 3,413 5.46%
Land......................... 2,424 3.34% 1,586 2.26% 1,708 2.73%
Construction................. 3,477 4.79% 1,562 2.22% 798 1.28%
-------- -------- -------- -------- -------- --------
Total mortgage loans........ $ 63,449 87.36% 60,597 86.28% 57,958 92.75%
======== -------- ======== ======== ======== ========
Other loans:
Commercial................... 3,975 5.48% 4,182 5.95% 1,715 2.75%
Consumer loans............... 8,282 11.40% 7,705 10.97% 4,962 7.94%
-------- -------- -------- -------- -------- --------
Total other loans........... 12,257 16.88% 11,887 16.92% 6,677 10.69%
-------- -------- -------- -------- -------- --------
Gross loans.................. 75.706 104.24% 72,484 103.20% 64,635 103.44%
-------- -------- -------- -------- -------- --------
Less:
Undisbursed loan funds....... 1,598 2.20% 759 1.08% 546 0.88%
Deferred loan fees........... 316 0.44% 458 0.65% 508 0.81%
Allowance for loan losses.... 1,164 1.60% 1,031 1.47% 1,096 1.75%
-------- -------- -------- -------- -------- --------
3,078 4.24% 2,248 3.20% 2,150 3.44%
-------- -------- -------- -------- -------- --------
Loans, net.................. 72,628 100.00% $ 70,236 100.00% $ 62,485 100.00%
======== ======== ======== ======== ======== ========
Loans serviced for others:
One- to four-family and
cooperative apartment..... 8,511 100.00% $ 383 100.00% $ 39 100.00%
-------- -------- -------- -------- -------- --------
Total loans serviced
for others........... 8,511 100.00% $ 383 100.00% $ 39 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
4
<PAGE>
Loan Maturity. The following table shows the maturity or period to
repricing of the Bank's loan portfolio at June 30, 1998. Loans that have
adjustable rates are shown using scheduled principal amortization. The table
does not consider estimated prepayments of principal. Prepayments and scheduled
principal amortization on the Bank's loan portfolio, excluding loan portfolio
held for sale, totaled $24.8 million for the year ended June 30, 1998, and $18.9
million and $13.5 million for the years ended June 30, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------------------------------------------------------------------
MORTGAGE LOANS
---------------------------------------------------------
ONE- TO
FOUR- MULTI- NON- COMMERCIAL CONSUMER TOTAL
FAMILY FAMILY RESIDENTIAL LAND CONSTRUCTION LOANS LOANS LOANS
-------- --------- ----------- ------------ ------------- ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amount due:
One year or less $ 2,947 $--- $ 10 $ 3 $ 3,477 $ 876 $ 372 $ 7,685
------- ------- ------- ------- ------- ------- ------- -------
After one year:
One to three years 2,313 -- 38 139 -- 632 1,187 4,309
More than three years to five years 2,017 -- 20 498 -- 949 5,968 9,452
More than five years to ten years 8,095 136 247 545 -- 397 483 9,903
More than ten years to 272 24,504
twenty years 20,926 532 1,016 637 -- 1,121
Over twenty years 19,164 -- 87 602 -- -- -- 19,853
------- ------- ------- ------- ------- ------- ------- -------
Total due or repricing after one year 52,515 668 1,408 2,421 -- 3,099 7,910 58,021
------- ------- ------- ------- ------- ------- ------- -------
Total amounts due or repricing, gross $55,482 $ 668 $ 1,418 $ 2,424 $ 3,477 $ 3,975 $ 8,282 $75,706
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the dollar amounts in each loan category at
June 30, 1998 that are due after June 30, 1999, and whether such loans have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1999
--------------------------------------------------------------
FIXED ADJUSTABLE TOTAL
------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.......................... $30,184 $22,331 $52,515
Multi-family................................. 332 336 668
Non-residential.............................. 751 657 1,408
Land......................................... 1,169 1,252 2,421
Commercial loans............................... 711 2,388 3,099
Consumer loans................................. 2,408 5,502 7,910
------- ------- -------
$35,555 $32,466 $68,021
======= ======= =======
</TABLE>
Origination, Purchase, Sale and Servicing of Loans. The Bank's lending
activities are conducted through its branches in Ashe and Alleghany counties,
North Carolina. The Bank originates both adjustable-rate loans and fixed-rate
mortgage loans for portfolio and for sale in the secondary market.
Adjustable-rate mortgage loans carried in portfolio and fixed-rate mortgage
loans carry maximum maturities of 30 years and 15 years, respectively. Fixed
rate loans originated for sale in the secondary market have maximum maturities
of 30 years. Historically, the Bank held for its portfolio all loans it
originated. The Bank now sells all qualified fixed-rate loans to Fannie Mae, but
retains the servicing rights. The determination to sell loans is based upon
management's efforts to reduce interest rate risk. At June 30, 1998, the Bank
serviced approximately $8.5 million of loans for Fannie Mae.
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
adjustable-rate mortgage loans, with maturities up to 30 years, which are
secured by one- to four-family residences, which generally are owner-occupied.
Fixed-rate loans held in the Bank's portfolio have higher interest rates and
shorter terms than those loans sold to Fannie Mae. Most are secured by property
located in Ashe and Alleghany counties, North Carolina. Loan originations are
generally obtained from existing or past customers and members of the local
communities. See "--Origination, Purchase, Sale and Servicing of Loans."
5
<PAGE>
The Bank offers three to five year call loans, which are either called or
modified based on the Bank's interest rates currently in effect at the call
date. These loans are similar to adjustable rate loans in that the loans
generally amortize over terms of up to 30 years but are not indexed to any
widely recognized rate, such as the one year U.S. Treasury securities rate, and
do not have interest rate caps or floors. Instead, the majority of such loans
are modified at the call date and the rate is adjusted to the Bank's current
rate offered for similar loans being originated on such dates. For purposes of
the tabular presentations throughout this document, such loans are considered to
be adjustable.
In view of its operating strategy, the Bank adheres to its Board approved
underwriting guidelines for loan origination, which, though prudent in approach
to credit risk and evaluation of collateral, allow management flexibility with
respect to documentation of certain matters and certain credit requirements. As
a result, such underwriting guidelines in certain lending situations are less
rigid than comparable Fannie Mae underwriting guidelines. The Bank's loans are
typically originated under terms, conditions and documentation which permit them
to be sold to U.S. government sponsored agencies such as Fannie Mae. The Bank
sells all qualifying fixed-rate loans to Fannie Mae, while retaining servicing
rights. The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan. The Bank offers products with a
higher loan-to-value ratio in conjunction with private mortgage insurance.
Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.
Construction Lending. The Bank originates construction loans primarily to
finance construction of one- to four-family homes to the individuals who will be
the owners and occupants upon completion of construction in the Bank's market
area. At June 30, 1998, that Bank's portfolio contained approximately $3.5
million, or 4.6%, of construction loans. The Bank's policy is to disburse loan
proceeds as construction progresses and as periodic inspections warrant. These
loans are made primarily to the individuals who will ultimately occupy the home,
and are structured to guarantee the permanent financing to the Bank as well.
Thus construction loans typically "roll" into permanent financing. Construction
loans are made for a maximum of 12 months, by which time permanent financing
must be obtained.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost of construction. If the estimate of
construction cost proves to be inaccurate, the Bank may be compelled to advance
additional funds to complete construction.
Non-Residential Mortgage Lending. The Bank originates commercial real
estate mortgage loans that are generally secured by properties used for business
purposes and retail facilities, such as small office buildings and church loans.
The Bank's underwriting procedures provide that non-residential mortgage loans
may be made in amounts up to the lesser of (i) 80% of the lesser of the
appraised value or purchase price of the property or (ii) the Bank's current
loans-to-one-borrower limit. These loans are generally originated as three to
five year call loans with amortization periods of up to 15 years. The Bank
considers factors such as the borrower's expertise, credit history,
profitability, cash flow, and the value of the collateral while underwriting
these loans. At June 30, 1998, the Bank's non-residential mortgage loan
portfolio was $1.4 million, or 2.0% of total loans outstanding. The largest
non-residential mortgage loan in the Bank's portfolio at June 30, 1998 was
approximately $468,000 and is secured by a commercial property.
Mortgage loans secured by non-residential properties can be larger and
therefore may involve a greater degree of credit risk than one- to four-family
residential mortgage loans. This risk is attributable to the uncertain
realization of projected income-producing cash flows which are affected by
vacancy rates, the ability to maintain rent levels against competitively-priced
properties and the ability to collect rent from tenants on a
6
<PAGE>
timely basis. Because payments on loans secured by non-residential properties
are often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's income and debt service ratio.
Other Mortgage Lending. The Bank also offers loans secured by land and
multi-family residences. Land loans generally consist of residential building
lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for agricultural use and a
minor amount for speculative purposes. Multi-family loans generally consist of
residential properties with more than four units, typically small apartment
complexes, located in the Bank's primary lending area. At June 30, 1998, the
Bank's total land loan portfolio was $2.4 million or 3.3% of total loans and its
multi-family loan portfolio was $668,000 or 0.9% of total loans.
The Bank requires appraisals of all mortgage loans. Appraisals are
performed by independent appraisers designated by the Bank. The appraisals of
such properties are then reviewed by the Bank's management. The independent
appraisers used by the Bank are reviewed annually by management and the Board of
Directors.
The Bank originates multi-family residential loans with both fixed and
adjustable interest rates which vary as to maturity. Such loans are typically
income-producing investment loans. Loan to value ratios on the Bank's
multi-family residential loans are generally limited to 80%. As part of the
criteria for underwriting these loans, the Bank's general policy is to require
principals of corporate borrowers to become co-borrowers or to obtain personal
guarantees from the principals of corporate borrowers.
Multi-family residential lending generally entails significant additional
risks as compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand, conditions in the market for
multi-family residential properties as well as to regional and economic
conditions generally.
Consumer Loans. Subject to the restrictions contained in federal laws and
regulations, the Bank also is authorized to make loans for a wide variety of
personal or consumer purposes. As of June 30, 1998, $8.3 million, or 11.4%, of
the Bank's total loan portfolio consisted of consumer loans (including home
equity credit line loans and second mortgage loans). The primary component of
the Bank's consumer loan portfolio was $4.1 million of home equity credit lines.
Consumer loans are available at fixed or variable interest rates.
Consumer loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness, and
personal bankruptcy. In many cases, any repossessed collateral resulting from a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation and improper repair and
maintenance of the underlying security. The remaining deficiency usually does
not warrant further substantial collection efforts against the borrower.
As of June 30, 1998, the Bank had $6,000 of non-performing consumer loans.
Charge-offs for consumer loans totaled $13,000, $69,000, and $31,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
7
<PAGE>
The Bank also offers loans secured by savings accounts at the Bank.
Interest rates charged on such loans are tied to the prime rate and are
available in amounts up to 90% of the value of the account. Savings account
loans are reviewed and approved in conformity with standards approved by the
Bank's Board of Directors. At June 30, 1998, the Bank's savings account loan
portfolio totaled $312,000 or 0.43% of the total loans outstanding.
The Bank offers adjustable rate home equity credit lines tied to the prime
interest rate. The home equity portfolio amounted to $4.1 million or 5.75% of
the total loan portfolio as of June 30, 1998. The home equity credit line is
available on any owner-occupied one-to-four family home, townhouse, or
condominium in the Bank's lending area provided the homeowner meets the Bank's
lending criteria. A home equity loan is an adjustable rate mortgage which is
based on the equity in the home, and is generally secured by a first or second
mortgage on the residence. Loan amounts currently range from $5,000 to $100,000
(up to 80% of the appraised value of the home less any outstanding senior
mortgage/lien.) The current maximum term is 180 months. The Bank may offer home
equity loans up to 100% of the value of the collateral to certain customers
meeting a higher level of credit criteria.
Commercial Business Loans. The Bank offers commercial business loans that
are generally provided to various types of closely held businesses located in
the Bank's primary market area. Commercial business loans generally have terms
of three years or less and interest rates which float in accordance with the
prime rate although the Bank occasionally originates commercial business loans
with fixed rates of interest. The Bank performs a cash flow analysis in
underwriting these loans. The Bank's commercial loans generally are secured by
equipment, machinery or other corporate assets including real estate and
receivables. The Bank requires principals of corporate borrowers to become
co-borrowers or obtains personal guarantees from the principals of the borrower
with respect to all commercial business loans.
Commercial business lending generally entails significantly greater credit
risk than residential real estate lending. The repayment of commercial business
loans typically is dependent on the successful operations and income of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial business lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
As of June 30, 1998, the Bank had no non-performing commercial business
loans. The Bank had no charge-offs with respect to commercial business loans in
the years ended June 30, 1998, 1997 or 1996.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank. The Board of Directors has established the
following lending authority: the Bank's Chief Executive Officer and lending
officers may approve loans in amounts within assigned lending limits, and the
Loan Committee, comprised of the full Board of Directors may approve loans up to
the Bank's loans-to-one-borrower limit. In addition, the staff loan committee,
comprised of the chief executive officer, chief financial officer, chief lending
officer, collection officer and compliance officer, meets twice a week to review
all loan applications, except for secured consumer loan applications for less
than $25,000 that meet all lending policy criteria. The staff loan committee can
approve lending relationships up to $750,000. Larger amounts must be approved by
the Board of Directors. The foregoing lending limits are reviewed annually and,
as needed, revised by the Board of Directors. The Board generally ratifies all
loans on a monthly basis.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information supporting the borrower's ability to repay is required. An
appraisal performed by a Bank approved independent appraiser is required for all
real property intended to secure the proposed loan. The Board annually approves
the independent appraisers used by the Bank and approves the Bank's appraisal
policy. It is the Bank's policy to obtain title insurance on all real estate
loans of $50,000 or more and hazard insurance on all improved real estate loans.
In connection with a borrower's request for a renewal of a mortgage loan, the
Bank evaluates both the borrower's ability to service
8
<PAGE>
the renewed loan applying an interest rate that reflects prevailing market
conditions and the customer's payment history, as well as the value of the
underlying collateral property.
ASSET QUALITY
Non-Performing Loans. Loans are considered non-performing if they are in
foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and period of delinquency. The Bank's policies generally provide that delinquent
mortgage loans be reviewed and that a written late charge notice be mailed no
later than the 17th day of delinquency. The Bank's policies provide that
telephone contact and further written notification will be attempted to
ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
attempts to obtain full payment or work out a repayment schedule with the
borrower to avoid foreclosure.
It is the Bank's general policy to reserve all accrued interest due on all
loans that are 90 days or more past due.
Real Estate Owned. Property acquired by the Bank as a result of foreclosure
on a mortgage loan is classified as real estate owned ("REO"). At June 30, 1998,
the Bank held $38,000 in REO and non-performing loans, defined as loans that are
90 days or more delinquent, totaled $24,000. The Bank's REO is initially
recorded at the fair value of the related assets at the date of foreclosure.
Thereafter, if there is a further deterioration in value, the Bank provides an
REO valuation allowance and charges operations for the diminution in value less
cost to sell. It is the policy of the Bank to obtain an appraisal on all real
estate acquired through foreclosure as soon as practicable after it takes
possession of the property. The Bank generally reassesses the value of REO at
least annually thereafter. The policy for loans is to establish loss reserves in
accordance with the Bank's asset classification process, based on Generally
Accepted Accounting Principles ("GAAP").
9
<PAGE>
Non-performing Assets. The following table sets forth information regarding
the Bank's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual mortgage loans:
One- to four-family........................ $ -- $ -- $ --
Multi-family............................... -- -- --
Non-residential............................ -- -- --
Land....................................... -- -- --
Construction............................... -- -- --
------ ------ ------
Total mortgage loans................... -- -- --
------ ------ ------
Commercial................................. -- -- --
Consumer Loans............................. -- -- --
------ ------ ------
Total non-accruing loans................. $ -- $ -- $ --
------ ------ ------
Loans delinquent 90 or more days for
which interest is fully reserved and still
accruing:
One- to four-family........................ $ 18 $ 119 $ 174
Multi-family............................... -- -- --
Non-residential............................ -- -- --
Land....................................... -- -- --
Construction............................... -- -- --
------ ------ ------
Total mortgage loans.................... 18 119 174
------ ------ ------
Commercial................................. -- -- --
Consumer Loans............................. 6 12 --
------ ------ ------
Total loans delinquent 90 or more days for which
interest has been fully reserved........... 24 131 174
------ ------ ------
Total non-performing loans..................... $ 24 $ 131 $ 174
------ ====== ======
Total real estate owned........................ 38 -- --
------ ------ ------
Total non-performing assets................ $ 62 $ 131 $ 174
====== ====== ======
Total non-performing loans to loans, gross..... 0.03% 0.18% 0.27%
Total non-performing assets to total assets.... 0.06% 0.16% 0.24%
</TABLE>
Classified Assets. Federal regulations and the Bank's Classification of
Assets Policy require the Bank to use an internal asset classification system as
a means of reporting problem and potential problem assets. The Bank has
incorporated the Office of Thrift Supervision ("OTS") internal asset
classifications as a part of its credit monitoring system. The Bank currently
classifies problem and potential problem assets as "Special Mention,"
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current equity and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the
10
<PAGE>
weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
The Bank's management reviews and classifies the Bank's assets monthly and
reports the results to the Bank's Board of Directors on a monthly basis. The
Bank classifies assets in accordance with the management guidelines described
above. At June 30, 1998, the Bank had $164,000 of assets classified as
Substandard, $6,000 of assets classified as Special Mention, $26,000 of assets
classified as Loss and $6,000 of assets classified as Doubtful.
Allowance for Loan Losses. The ALL is established through a provision for
loan losses based on management's evaluation of the risks inherent in the Bank's
loan portfolio and the general economy. The ALL is maintained at an amount
management considers adequate to cover loan losses which are deemed probable and
estimable. The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience,
and the Bank's underwriting policies. At June 30, 1998, the Bank's ALL was $1.2
million, or 1.5% of total loans, as compared to $1.0 million or 1.4%, at June
30, 1997. The Bank had non-performing loans of $24,000 and $131,000 at June 30,
1998 and June 30, 1997, respectively. The Bank will continue to monitor and
modify its ALL as conditions dictate. Various regulatory agencies, as an
integral part of their examination processes, periodically review the Bank's
ALL. These agencies may require the Bank to establish additional valuation
allowances, based on their judgments of the information available at the time of
the examination.
11
<PAGE>
The following table sets forth activity in the Bank's ALL at or for the
dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------
1998 1997 1996
----------------------------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total loans outstanding at end of period.............. $ 75,706 $ 72,484 $ 64,635
Average total loans outstanding....................... 74,095 69,332 61,677
Balance at beginning of year.......................... 1,031 1,096 1,209
-------- -------- --------
Provision for loan losses............................. (25) 20 57
-------- -------- --------
Charge-offs:
One- to four-family residential.................... -- (20) (148)
Multi-family residential........................... -- -- --
Non-residential and land........................... -- -- --
Construction....................................... -- -- --
Commercial......................................... -- -- --
Consumer loans..................................... (13) (69) (31)
-------- --------- ---------
Total charge-offs................................ (13) (89) (179)
-------- --------- ---------
Recoveries............................................ 171 4 9
-------- -------- --------
Balance at end of year................................ $ 1,164 $ 1,031 $ 1,096
======== ======== ========
Allowance for loan losses to total loans
at end of period.................................... 1.54% 1.42% 1.70%
======== ======== ========
Allowance for loan losses to total non-performing
assets at end of period............................ 1877.42% 787.02% 629.89%
======== ======== ========
Allowance for loan losses to total non-performing
loans at end of period............................. 4850.00% 787.02% 629.89%
======== ======== ========
Ratio of net charge-offs during the period
To average loans outstanding during period......... 0.02% 0.13% 0.29%
======== ======== ========
</TABLE>
12
<PAGE>
The following table sets forth the Bank's ALL allocated by loan category
and the percent of loans in each category to total loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------------
Percent of Percent of
Loans in Loans in
Percent of Each Percent of Each
Allowance Category Allowance Category
Allowance to Total to Total Allowance to Total to Total
Amount Allowance Loans Amount Allowance Loans
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.... $ 634 54.47% 73.26% $ 543 52.67% 74.37%
Multi-family........... 8 0.69% 0.88% 7 0.68% 1.02%
Non-residential and land 58 4.98% 5.07% 42 4.07% 6.06%
Construction........... 7 0.60% 4.59% 5 0.48% 2.15%
Other:
Consumer............... 457 39.26% 10.94% 434 42.10% 10.63%
Commercial............. -- -- 5.26% -- -- 5.77%
------ ------ ------ ------ ------ ------
Total.................. $1,164 100.00% 100.00% $1,031 100.00% 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
At June 30,
-------------------------------------
1996
-------------------------------------
Percent of
Loans in
Percent of Each
Allowance Category
Allowance to Total to Total
Amount Allowance Loans
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.... $ 510 46.55% 79.53%
Multi-family........... 6 0.58% 0.99%
Non-residential and land 51 4.65% 7.93%
Construction........... 3 0.22% 1.23%
Other:
Consumer............... 526 48.00% 7.67%
Commercial............. -- -- 2.65%
------ -------- --------
Total.................. $1,096 100.00% 100.00%
====== ======== ========
</TABLE>
INVESTMENT ACTIVITIES
The Bank's investment policy permits it to invest in U.S. government
obligations, certain securities of various government-sponsored agencies,
including mortgage-backed securities issued/guaranteed by Fannie Mae, the FHLMC
and the Government National Mortgage Association ("GNMA"), certificates of
deposit of insured banks and savings institutions, federal funds, and overnight
deposits at the FHLB. At June 30, 1998, the Bank held $9.0 million in investment
securities.
The following table sets forth activity in the Bank's investment securities
portfolio for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost at beginning of period...................... $ 6,362 $ 5,272 $ 2,493
Purchases, net............................................. 2,609 1,390 2,744
Principal payments from mortgage backed
securities............................................ (731) (316) --
Gain on sales.............................................. 306 -- --
Premium and discount amortization, net..................... (13) 16 35
-------- -------- --------
Amortized cost at end of period............................ 8,533 6,362 5,272
Net unrealized gain(1)..................................... 484 575 288
-------- -------- --------
Total securities, net...................................... $ 9,017 $ 6,937 $ 5,560
======== ======== ========
</TABLE>
- ----------
(1) The net unrealized gain at June 30, 1998, 1997 and 1996 relates to
available for sale securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115. The net unrealized gain is presented
in order to reconcile the "Amortized Cost" of the Bank's securities
portfolio in the "Carrying Cost," as reflected in the Statements of
Financial Condition.
13
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
------------ ----------- ------------ ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae....................... $2,174 $2,235 $1,375 $1,440 $ 853 $ 887
------ ------ ------ ------ ------ ------
Other debt securities:
U.S. Treasury and Agency......... 5,530 5,522 4,200 4,177 3,700 3,628
Other............................ 198 198 198 198 198 198
------ ------ ------ ------ ------ ------
Total debt securities.............. 5,728 5,720 4,398 4,375 3,898 3,826
------ ------ ------ ------ ------ ------
Equity securities(1)............... 7 438 13 546 13 339
Federal Home Loan Bank Stock....... 624 624 576 576 508 508
Net unrealized gain(2)............. 484 -- 575 -- 288 --
------ ------ ------ ------ ------ ------
Total securities, net.............. $9,017 $9,017 $6,937 $6,937 $5,560 $5,560
====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Equity securities consist of FHLMC common stock.
(2) The net unrealized gain at June 30, 1998, 1997 and 1996 relates to
available for sale securities in accordance with SFAS No.115. The net
unrealized gain is presented in order to reconcile the "Amortized Cost" of
the Bank's securities portfolio in the "Carrying Cost," as reflected in the
Statements of Financial Condition.
The following table sets forth the amortized cost and fair value of the
Bank's securities, by accounting classification and by type of security, at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------- --------------------------- ------------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
----------- ---------- ----------- ------------- ------------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
Other debt securities............... $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
------ ------ ------ ------ ------ ------
Total held to maturity........ 100 100 100 100 100 100
------ ------ ------ ------ ------ ------
Available-for-Sale:
Mortgage-backed securities.......... 2,174 2,235 1,375 1,440 853 887
Other debt securities:.............. 5,430 5,422 4,100 4,077 3,600 3,528
Equity securities................... 7 438 13 546 13 339
Net unrealized gain(1).............. 484 -- 575 -- 288 --
------ ------ ------ ------ ------ ------
Total available-for-sale...... 8,095 8,095 6,063 6,063 4,754 4,754
------ ------ ------ ------ ------ ------
Certificates of deposit................ 198 198 198 198 198 198
------ ------ ------ ------ ------ ------
Federal Home Loan Bank Stock........... 624 624 576 576 508 508
------ ------ ------ ------ ------ ------
Total securities, net............... $9,017 $9,017 $6,937 $6,937 $5,560 $5,560
====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) The net unrealized gains at June 30, 1998, 1997 and 1996 relate to
available for sale securities in accordance with SFAS No. 115. The net
unrealized gain is presented in order to reconcile the "Amortized Cost" of
the Bank's securities portfolio in the "Carrying Cost," as reflected in the
Statements of Financial Condition.
14
<PAGE>
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Bank's debt securities at
June 30, 1998, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no effect
has been given to periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE
------------------------------------------- -------------------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
------------- ----------- --------------- ------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Debt Securities
Mortgaged-backed securities:
Due within 1 year..................... $ -- $ -- --% $ -- $ -- --%
Due after 1 year but within 5 years... -- -- -- -- -- --
Due after 5 years but within 10 years. -- -- -- -- -- --
Due after 10 years.................... -- -- -- 2,174 2,235 6.93
-------- -------- -------- --------
Total......................... -- -- -- 2,174 2,235 6.93
-------- -------- -------- --------
U.S. Treasury and Agency:
Due within 1 year..................... -- -- -- -- -- --
Due after 1 year but within 5 years... 100 100 5.83 5,430 5,422 6.16
Due after 5 years but within 10 years. -- -- -- -- -- --
Due after 10 years.................... -- -- -- -- -- --
-------- -------- -------- --------
Total......................... 100 100 5.83 5,430 5,422 6.16
-------- -------- -------- --------
Corporate & Other:
Due within 1 year..................... -- -- -- -- -- --
Due after 1 year but within 5 years... 198 198 6.18 -- -- --
Due after 5 years but within 10 years. -- -- -- -- -- --
Due after 10 years.................... -- -- -- -- -- --
-------- -------- -------- --------
Total......................... 198 198 6.18 -- -- --
-------- -------- -------- --------
Equity Securities:...................... -- -- -- 7 438 --
-------- -------- -------- --------
Total:
Due within 1 year..................... -- -- -- -- -- --
Due after 1 year but within 5 years... 298 298 6.06 5,430 5,422 6.16
Due after 5 years but within 10 years. -- -- -- -- -- --
Due after 10 years.................... -- -- -- 2,174 2,235 6.93
Equity Securities..................... -- -- -- 7 438 --
-------- -------- -------- --------
298 298 6.06 7,611 8,095 6.37
-------- -------- -------- --------
Federal Home Loan Bank Stock.......... 624 624 -- -- -- --
-------- -------- -------- --------
Total......................... $ 922 $ 922 6.06% $ 7,611 $ 8,095 6.37%
======== ======== ======== ========
</TABLE>
15
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan and security repayments and prepayments, proceeds
of refinanced loans sold to Fannie Mae and cash flows generated from operations
are the primary sources of the Bank's funds for use in lending and for other
general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of regular (passbook)
savings accounts, checking accounts, money market deposit accounts, statement
savings accounts, IRAs and certificates of deposit. In recent years, the Bank
has offered certificates of deposit with maturities of up to 48 months. At June
30, 1998, the Bank's core deposits (which the Bank considers to consist of
checking accounts, regular savings accounts and statement savings accounts)
constituted 37.0% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Bank's deposits are obtained
predominantly from Ashe and Alleghany counties. The Bank relies primarily on
customer service and long-standing relationships with customers to attract and
retain these deposits; however, market interest rates and rates offered by
competing financial institutions significantly affect the Bank's ability to
attract and retain deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total deposits at beginning of period,
including accrued interest................... $ 68,218 $ 63,468 $ 58,496
Net increase before interest credited.......... 10,728 1,554 1,768
Interest credited.............................. 3,542 3,196 3,204
--------- --------- ---------
Total deposits at end of period................ $ 82,488 $ 68,218 $ 63,468
========= ========= =========
</TABLE>
At June 30, 1998, the Bank had approximately $13.9 million in Jumbo
certificate of deposits (accounts in amounts over $100,000) maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
--------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Maturity Period
Within three months........................................ $ 3,997 5.57%
After three but within six months.......................... 3,072 5.69%
After six but within 12 months............................. 5,252 5.74%
After 12 months............................................ 1,573 5.45%
----------
Total........................................... $ 13,894 5.65%
==========
</TABLE>
16
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------------
1998 1997
--------------------------------------- -------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts....... $3,469 4.21% --% $ 901 1.33% --
Now/Money Market
accounts................ 10,321 12.51% 3.13% 11,347 16.63% 3.38%
Passbook savings........ 16,729 20.28% 4.25% 10,672 15.64% 4.03%
Certificates of deposit. 51,801 62.80% 5.52% 45,133 66.16% 5.52%
Accrued interest........ 168 0.20% -- 165 0.24% --
------- ------ ------ ------- ------- ------
Totals $82,488 100.00% 4.94% $68,218 100.00% 4.96%
======= ====== ====== ======= ======= ======
<CAPTION>
AT JUNE 30,
----------------------------------------
1996
----------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE
----------------------------------------
<S> <C> <C> <C>
Checking accounts....... $ 392 0.62% --
Now/Money Market
accounts................ 8,870 13.98% 3.50%
Passbook savings........ 9,586 15.10% 4.06%
Certificates of deposit. 44,477 70.08% 5.60%
Accrued interest........ 143 0.23% --
------- ------ ----
Totals $63,468 100.00% 5.13%
======== ====== ====
</TABLE>
The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at June 30, 1998 and the period to maturity.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------
LESS THAN ONE TO FOUR TO
INTEREST RATE RANGE ONE YEAR THREE YEARS FIVE YEARS TOTAL
- ---------------------------------- --------------------- --------------------- ----------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4.01% to 6.00% $39,114 $5,771 $527 $45,412
6.01% to 8.00%.................... 4,557 1,696 136 6,389
------- ------ ---- -------
Total.............. $43,671 $7,467 $663 $51,801
======= ====== ==== =======
</TABLE>
Borrowings. The Bank historically has not used borrowings as a source of
funds. However, the Bank may obtain advances from the FHLB as an alternative to
retail deposit funds and may do so in the future as part of its operating
strategy. These advances would be collateralized primarily by certain of the
Bank's mortgage loans and secondarily by the Bank's investment in capital stock
of the FHLB. See "Regulation--Regulation of Federal Savings Banks--Federal Home
Loan Bank System." Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. As of June 30, 1998, the maximum
amount of FHLB advances available to the Bank was $13.0 million. The Bank had
short term advances of $4.1 million at June 30, 1998 from the FHLB. Interest is
payable at rates ranging from 5.68% to 6.87%. $1.5 million of the advances are
due by August of 1998, $2.5 million are due by September of 2002, with the
remaining amounts due January 2007.
SUBSIDIARY ACTIVITIES
AF Insurance Services, Inc., a wholly owned subsidiary of the Bank, was
formed in July 1997 upon the purchase of two independent insurance agencies for
the sole purpose of selling traditional property and casualty, life and health
insurance. AF Insurance Services, Inc. offers these services in a segregated
location at the Bank's executive offices, Sparta and North Wilkesboro, North
Carolina.
17
<PAGE>
PERSONNEL
As of June 30, 1998, the Company had 39 full-time employees and 9 part-time
employees. The employees are not represented by a collective bargaining unit and
the Company considers its relationship with its employees to be good. See
"Executive Compensation" for a description of certain compensation and benefit
programs offered to the Bank's employees.
REGULATION
GENERAL
The Company and the Bank are subject to extensive regulation, examination
and supervision by the OTS, as their chartering agency. The Bank's deposit
accounts are insured up to applicable limits by the FDIC and it is a member of
the FHLB of Atlanta. The Bank must file reports with the OTS concerning its
activities and financial condition and it must obtain regulatory approvals prior
to entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions. The OTS conducts periodic examinations to assess
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings institution can engage and is intended primarily for the protection of
the insurance fund and depositors. The Company and the Holding Company, as
savings and loan holding companies, are required to file certain reports with,
and otherwise comply with, the rules and regulations of the OTS.
The OTS has significant discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the
OTS or the Congress, could have a material adverse impact on the Holding
Company, the Company or the Bank.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings institutions and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
REGULATION OF FEDERAL SAVINGS BANKS
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act ("HOLA") and the regulations of the OTS
thereunder. Under these laws and regulations, the Bank may invest in mortgage
loans secured by residential and non-residential real estate, commercial and
consumer loans, certain types of debt securities and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(f) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings institution may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not exceeding 10% of the association's unimpaired capital and surplus, if
such loans and extensions of credit are fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion,
18
<PAGE>
but generally does not include real estate. At June 30, 1998, the Bank's limit
on loans to one borrower was approximately $1.72 million. At June 30, 1998, the
Bank's largest aggregate amount of loans to one borrower was $772,000,
consisting of four loans, the largest of which was approximately $246,000 at
June 30, 1998, and is secured by a mix of one- to four-family, multifamily and
commercial properties. The second largest borrower had an aggregate balance of
approximately $608,000, secured by an apartment complex. At June 30, 1998, all
of the loans in both of these lending relationships were performing in
accordance with their terms.
QTL Test. HOLA requires a savings institution to meet a Qualified Thrift
Lender ("QTL") test. A savings institution may satisfy the QTL test by
maintaining at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least 9 months of the most recent 12-month period. "Portfolio
assets" means, in general, an association's total assets less the sum of (a)
specified liquid assets up to 20% of total assets, (b) certain intangibles,
including goodwill and credit card and purchased mortgage servicing rights and
(c) the value of property used to conduct the association's business. The term
"qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
an association's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans, and small business loans. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal Revenue Code of 1986. At June 30, 1998, the Bank
maintained 96.6% of its portfolio assets in qualified thrift investments. The
Bank had also satisfied the QTL test in each of the prior 12 months and,
therefore, was a qualified thrift lender.
A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB and (d)
establishing any new branch in a location not permissible for a national bank in
the association's home state. In addition, within one year of the date a savings
institution ceases to meet the QTL test, any company controlling the association
would have to register under, and become subject to the requirements of, the
Bank Holding Company Act of 1956, as amended ("BHC Act"). If the savings
institution does not requalify under the QTL test within the three-year period
after it failed the QTL test, it would be required to terminate any activity and
to dispose of any investment not permissible for a national bank and would have
to repay as promptly as possible any outstanding advances from an FHLB. A
savings institution that has failed the QTL test may requalify under the QTL
test and be free of such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets and a risk-based
capital ratio requirement of 8% of core and supplementary capital to total
risk-weighted assets. The OTS and the federal banking regulators have proposed
amendments to their minimum capital regulations to provide that the minimum
leverage capital ratio for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Ratings
System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. In determining compliance with the risk-based capital requirement,
a savings association must compute its risk-weighted assets by multiplying its
assets and certain off-balance sheet items by risk-weights, which range from 0%
for cash and obligations issued by the United States Government or its agencies
to 100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
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<PAGE>
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. The
allowance for loan and lease losses includable in supplementary and capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has promulgated a regulation that requires a savings association
with "above normal" interest rate risk, when determining compliance with its
risk-based capital requirement, to hold additional capital to account for its
"above normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) resulting from a hypothetical 2%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3-month Treasury bond
equivalent yield falls below 4%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2%. A savings association whose measured interest rate risk
exposure exceeds 2% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2%, multiplied by the
estimated economic value of the association's assets. That dollar amount is
deducted from an association's total capital in calculating compliance with its
risk-based capital requirement. Any required deduction for interest rate risk
becomes effective on the last day of the third quarter following the reporting
date of the association's financial data on which the interest rate risk was
computed. The regulations authorize the Director of the OTS to waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS has
indefinitely deferred the implementation of the interest rate risk component in
the computation of an institution's risk-based capital requirements. The OTS
continues to monitor the interest rate risk of individual institutions and
retains the right to impose additional capital requirements on individual
institutions. At June 30, 1998, the Bank was not required to maintain any
additional risk-based capital under this rule. At June 30, 1998, the Bank met
each of its capital requirements.
The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at June 30, 1998:
<TABLE>
<CAPTION>
Capital Excess
AMOUNT Requirements Capital
------ ------------ -------
(In thousands)
<S> <C> <C> <C>
Core capital.................................. $10,907 $2,989 $7,918
Risk-based capital............................ 11,607 4,543 7,064
</TABLE>
A reconciliation between regulatory capital and GAAP capital at June 30,
1998 in the accompanying financial statements is presented below:
<TABLE>
<CAPTION>
Risk-
Core Based
Capital Capital
------- -------
<S> <C> <C>
GAAP capital...................................... $ 11,486 $ 11,486
Net unrealized gain on available for
sale investment securities, net of tax.......... (294) (294)
Allowance for loan losses included as
supplementary capital........................... -- 715
Goodwill and other nonincludible assets........... (285) (300)
----------- ------------
Regulatory capital................................ $ 10,907 $ 11,607
=========== ===========
</TABLE>
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<PAGE>
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days prior written notice
must be given to the OTS of a proposed capital distribution by a savings
institution, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. An association that has
capital in excess of all fully phased-in regulatory capital requirements before
and after a proposed capital distribution and that is not otherwise restricted
in making capital distributions, could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year equal to
the greater of (a) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (b) 75% of its net earnings for the previous four
quarters. Any additional capital distribution would require prior OTS approval.
In addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to meet its minimum capital requirements, as described above.
See "--Prompt Corrective Regulatory Action." The OTS has proposed amendments of
its capital distribution regulations to reduce regulatory burdens on savings
associations. If adopted as proposed, certain savings associations will be
permitted to pay capital distributions within the amounts described above for
Tier 1 institutions without notice to, or the approval of, the OTS. However, a
savings association subsidiary of a savings and loan holding company, such as
the Bank after the Reorganization, will continue to have to file a notice unless
the specific capital distribution requires an application.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
for the month ended June 30, 1998 was approximately 25.7% which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Bank's latest quarterly Thrift Financial Report. The deposit insurance
premium expense incurred by the Bank for the fiscal years ended June 30, 1998,
1997 and 1996 totaled $44,000, $86,000 and $136,000, respectively. Additionally,
the Bank paid a one time special SAIF assessment of $368,000 during the year
ended June 30, 1997.
The OTS has proposed amendments to its regulations that are intended to
assess savings associations on a more equitable basis. The proposed regulations
would base the assessment for an individual savings association on three
components: the size of the association, on which the basic assessment would be
based; the association's supervisory condition, which would result in percentage
increases for any savings institution with a composite rating of 3, 4 or 5 in
its most recent safety and soundness examination; and the complexity of the
association's operations, which would result in percentage increases for a
savings association that managed over $1 billion in trust assets, serviced for
others loans aggregating more than $1 billion, or had certain off-balance sheet
assets aggregating more than $1 billion. In order to avoid a disproportionate
impact on the smaller savings institutions, the OTS is proposing to permit the
portion of the assessment based on assets size either under the current
regulations or under the amended regulations. Management believes that, assuming
the proposed regulations are adopted as proposed, any change in its rate of OTS
assessments will not be material.
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<PAGE>
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings institutions to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
institutions located in another state and (b) to an association that either
satisfies the "QTL" test for a qualified thrift lender or qualifies as a
"domestic building and loan association" under the Internal Revenue Code of 1986
(the "Code"), which imposes qualification requirements similar to those for a
"qualified thrift lender" under HOLA. See "--QTL Test." The authority for a
federal savings institution to establish an interstate branch network would
facilitate a geographic diversification of the association's activities. This
authority under HOLA and the OTS regulations preempts any state law purporting
to regulate branching by federal savings institutions.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination on January 20, 1998.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its assessment areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefitting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. The amended CRA
regulations clarify how an institution's CRA performance would be considered in
the application process.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings institution (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (a) be made on terms that are
substantially the same as, and follow credit
22
<PAGE>
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings institution.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the
Riegle Community Development and Regulatory Improvement Act of 1994 ("Community
Development Act"), the OTS, together with the other federal bank regulatory
agencies, adopted a set of guidelines prescribing safety and soundness
standards. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings standards, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. The OTS and the other agencies determined
that stock valuation standards were not appropriate. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings institution to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Banks are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value limitations so
long as such exceptions
23
<PAGE>
are reviewed and justified appropriately. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standards are
justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings institutions. For
this purpose, a savings institution would be placed in one of five categories
based on the association's capital. Generally, a savings institution is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings institution will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the CAMEL financial institutions rating system). A savings institution
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings institution
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for
an association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depositary association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90- day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC
24
<PAGE>
from, among other things, entering into certain material transactions or paying
interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts. The Bank is a member of the SAIF, and the
Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains
another insurance fund, the Bank Insurance Fund (the "BIF"), which primarily
insures the deposits of banks and state chartered savings banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the reporting period ending seven months before the
assessment period. The three capital categories consist of (a) well capitalized,
(b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subcategories within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27%of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds
Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the
reserve ratio requirement. If the FDIC determines that assessment rates should
be increased, institutions in all risk categories could be affected. The FDIC
has exercised this authority several times in the past and could raise insurance
assessment rates in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.
The Funds Act also amended the FDIA to expand the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the assessment base for
the FICO bonds included the deposits of both BIF- and SAIF-insured institutions.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on July 1, 1998 was 0.0122% for BIF-assessable deposits and
0.0610% for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress. The Secretary of the Treasury recommended to the Congress that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. However, the current version of bank modernization legislation, The
Financial Services Act of 1998, H.R. 10, which was passed by the U.S. House of
Representatives in May 1998 and is currently being considered by the U.S.
Senate, does not require thrift institutions to convert to bank charter.
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<PAGE>
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Atlanta,
which is one of the regional FHLBs composing the FHLB System. Each FHLB provides
a central credit facility primarily for its member institutions. The Bank, as a
member of the FHLB of Atlanta, is required to acquire and hold shares of capital
stock in the FHLB of Atlanta in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year or 1/20 of its advances
(borrowings) from the FHLB of Atlanta. The Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock at June 30, 1997, of
$576,000. Any advances from a FHLB must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance.
For the fiscal years ended June 30, 1998, 1997 and 1996, dividends from the
FHLB of Atlanta to the Bank amounted to $43,000, $38,000 and $36,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely also be reduced.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depositary institutions may be required
to maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.4 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
REGULATION OF THE HOLDING COMPANY
General. The Holding Company and the Company are holding companies
chartered pursuant to Section 10(o) of the HOLA. As such, the Holding Company
and the Company are registered with and subject to OTS examination and
supervision as well as certain reporting requirements. In addition, the OTS has
enforcement authority over the Company and the Holding Company and any of its
non-savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness, or stability of a subsidiary savings
institution. Unlike bank holding companies, federal mutual holding companies are
not subject to any regulatory capital requirements or to supervision by the
Federal Reserve System.
Restrictions Applicable to Activities of Mutual Holding Companies. Pursuant
to Section 10(o) of the HOLA, a mutual holding company may engage only in the
following activities: (i) investing in the stock of a savings institution; (ii)
acquiring a mutual association through the merger of such association into a
savings institution subsidiary of such holding company or an interim savings
institution subsidiary of such holding company; (iii) merging with or acquiring
another holding company, one of whose subsidiaries is a savings institution;
(iv) investing in a corporation the capital stock of which is available for
purchase by a savings
26
<PAGE>
institution under federal law or under the law of any state where the subsidiary
savings institution or associations have their home offices; (v) furnishing or
performing management services for a savings institution subsidiary of such
holding company; (vi) holding, managing, or liquidating assets owned or acquired
from a savings institution subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings institution subsidiary of such company;
(viii) acting as trustee under a deed of trust; (ix) any other activity (a) that
the FRB, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the BHC Act, unless the Director of the OTS, by
regulation, prohibits or limits any such activity for savings and loan holding
companies, or (b) in which multiple savings and loan holding companies were
authorized by regulation to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such holding company
is approved by the Director of the OTS. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed above, and it has a period of two years to cease any
non-conforming activities and divest any non-conforming investments.
Restrictions Applicable to All Savings and Loan Holding Companies. The HOLA
prohibits a savings and loan holding company, including a federal mutual holding
company, directly or indirectly, from acquiring (i) control (as defined under
HOLA) of another savings institution (or a holding company parent thereof)
without prior OTS approval; (ii) more than 5% of the voting shares of another
savings institution (or holding company parent thereof) that is not a
subsidiary, subject to certain exceptions; (iii) through merger, consolidation,
or purchase of assets, another savings institution or a holding company thereof,
or acquiring all or substantially all of the assets of such institution (or a
holding company thereof) without prior OTS approval; or (iv) control of any
depository institution not insured by the FDIC (except through a merger with and
into the holding company's savings institution subsidiary that is approved by
the OTS).
A savings and loan holding company may not acquire as a separate subsidiary
an insured institution that has a principal office outside of the state where
the principal office of its subsidiary institution is located, except (i) in the
case of certain emergency acquisitions (as defined under HOLA) approved by the
FDIC; (ii) if such holding company controls a savings institution subsidiary
that operated a home or branch office in such additional state as of March 5,
1987, and (iii) if the laws of the state in which the savings institution to be
acquired is located specifically authorize a savings institution chartered by
that state to be acquired by a savings institution chartered by the state where
the acquiring savings institution or savings and loan holding company is located
or by a holding company that controls such a state chartered association. The
conditions imposed upon interstate acquisitions by those states that have
enacted authorizing legislation vary. Some states impose conditions of
reciprocity, which have the effect of requiring that the laws of both the state
in which the acquiring holding company is located (as determined by the location
of its subsidiary savings institution) and the state in which the association to
be acquired is located, have each enacted legislation allowing its savings
institutions to be acquired by out-of-state holding companies on the condition
that the laws of the other state authorize such transactions on terms no more
restrictive than those imposed on the acquirer by the state of the target
association. Some of these states also impose regional limitations, which
restrict such acquisitions to states within a defined geographic region. Other
states allow full nationwide banking without any condition of reciprocity. Some
states do not authorize interstate acquisitions of savings institutions. In
evaluating an application by a holding company to acquire a savings institution,
the OTS must consider the financial and managerial resources and future
prospects of the company and savings institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community, and competitive factors.
If the savings institution subsidiary of a federal mutual holding company
fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS, the holding company must register with the FRB as a bank
holding company under the BHC Act within one year of the savings institution's
failure to so qualify. For additional information in this regard, see "--
Regulation of Federal Savings Banks -- QTL Test."
27
<PAGE>
For a description of certain restrictions on transactions between the Bank
and its affiliates, including, without limitation, the Holding Company, see "--
Regulation of Federal Savings Banks -- Transactions with Related Parties."
THE YEAR 2000 PROBLEM
Financial institution regulators have recently increased their focus upon
Year 2000 issues, issuing guidance concerning the responsibilities of senior
management and directors. The Federal Financial Institutions Examination Council
("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 Problem. In addition, the FDIC and the other federal banking regulators
have issued safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any Year 2000 problems.
The federal banking agencies have asserted that Year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams, and thus an institution's failure to address appropriately the Year 2000
problem could result in supervisory action, including such enforcement actions
as the reduction of the institution's supervisory ratings, the denial of
applications for approval of a merger or acquisition, or the imposition of civil
money penalties.
The Company's Year 2000 project remains on schedule according to the
guidelines set forth by the FFIEC. The Company replaced all of its computer
systems with Year 2000 compliant systems in the fall of 1997. The Company's
internal software remediation, replacement and testing efforts are approximately
85% complete with full completion set for December 1998. The Company is also
monitoring the progress of its customers and vendors in becoming Year 2000
compliant. See "Management Discussion and Analysis - Impact of the Year 2000."
REGULATION OF INSURANCE ACTIVITIES
The Company offers various insurance products through AF Insurance
Services, Inc, a wholly owned subsidiary of AF Bank. AF Insurance Services, Inc.
is licensed and regulated by the North Carolina Department of Insurance (the
"Department"). As such AF Insurance Services, Inc. is subject to the
supervision, examination and reporting requirements of the Department and its
activities are governed by the laws and regulations of the State of North
Carolina.
FEDERAL SECURITIES LAWS
The Common Stock of the Company is registered with the SEC under the
Exchange Act. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
28
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following discussion is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Bank, Mutual Company or Stock Company. The Bank has not be audited for the last
seven years.
For federal income tax purposes, the Bank reports its income on the basis
of a taxable year ending June 30, using the accrual method of accounting, and is
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's tax reserve for bad debts,
discussed below. The Bank and Stock Company constitute an affiliated group of
corporations and, therefore, are eligible to report their income on a
consolidated basis. Because the Mutual Company will own less than 80% of the
Common Stock, it will not be a member of such affiliated group and will report
its income on a separate return.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
June 30, 1996. Since the Bank has already provided a deferred tax liability
equal to the amount of such recapture, the recapture will not adversely impact
the Bank's financial condition or results of operations.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., it reserve as of
June 30, 1998, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
constitute non-dividend distributions and, therefore, will not be included in
the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired, under
current Administration proposals, such tax will be retroactively reinstated for
taxable years beginning after December 31, 1996 and before January 2008.
Elimination of Dividends; Dividends Received Deduction. The Stock Company
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. Because, following completion of
the Reorganization, Mutual Company will not be a member of such affiliated
29
<PAGE>
group, it will not qualify for such 100% dividends exclusion, but will be
entitled to deduct 80% of the dividends it receives from Stock Company so long
as it owns more than 20% of the Common Stock.
STATE TAXATION
Under North Carolina law, the corporate income tax is 7.50% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of .0015 applied
to the greatest of the institution's (i) capital stock, surplus and undivided
profits, (ii) investment in tangible property in North Carolina or (iii) 55% of
the appraised valuation of property in North Carolina.
ITEM 2. PROPERTIES
The Company conducts its business through its main office, located in West
Jefferson, North Carolina, and its branches located in Warrensville, Jefferson
and Sparta, North Carolina. The Company owns the main office, corporate offices
and the Jefferson Branch, with net book value for property of $210,000, $486,000
and $534,000, respectively, as of June 30, 1998. Management believes that the
Bank's current facilities are adequate to meet the present and immediately
foreseeable needs of the Bank and the Holding Company.
<TABLE>
<CAPTION>
Date Lease Net Book
LEASED OR Leased or Expiration Value at
OWNED Acquired Date June 30, 1998
------------------- ---------------------- ---------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Corporate Offices.............. Owned 06/30/97 -- $ 486
206 S. Jefferson Avenue
West Jefferson, NC 28694
West Jefferson Branch Owned 06/30/63 -- 210
205 S. Jefferson Avenue
West Jefferson, NC 28694
Jefferson Branch............... Owned 05/18/94 -- 534
840 E. Main Street
Jefferson, NC 28640
Warrensville Branch............ Leased 08/31/95 08/31/2000* --
4951 NC Hwy. 88 West
Warrensville, NC 28693
Alleghany First ............... Leased 01/09/98 12/31/2000** --
403 South Main Street
Sparta, NC
</TABLE>
- ----------
* Option to renew for two additional five-year periods.
** Option to renew for an additional three-year period.
30
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
At June 30, 1998, there were no material legal proceedings to which the
Bank was a party or to which any of its property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Common Stock" and "Market for the
Common Stock" in the Registrant's 1998 Annual Report to Stockholders on page 54,
and is incorporated herein by reference.
Information relating to the payment of dividends by the Registrant appears
under "Common Stock" and "Market for the Common Stock" in the Registrant's 1998
Annual Report to Stockholders on page 54, and is incorporated herein by
reference. A dividend declared by the Board of Directors of the Bank is
considered a capital distribution from the Bank to the stockholders, including
AsheCo, M.H.C., its mutual holding company. Under the requirements of the OTS,
there are certain restrictions on the ability of the Bank to pay a capital
distribution. See "Regulation--Limitation on Capital Distributions."
The Bank paid cash dividends totaling $0.20 per share and $0.10 per share
during the years ended June 30, 1998 and 1997, respectively.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain of the above-captioned information appears under "Management's
Discussion and Analysis" and "Selected Financial and Other Data of the Company"
in the Registrant's 1998 Annual Report to Stockholders on pages 1 and 2 and 5
through 18 and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of AF Bankshares, Inc., together with the report
thereon by McGladrey & Pullen, LLP appears in the Registrant's 1998 Annual
Report to Stockholders on pages 19 through 51 and are incorporated herein by
reference.
Page(s) in
Annual Report
-------------
o Independent Auditor's Report.................................. 19
o Consolidated Statements of Financial Condition,
June 30, 1998 and 1997................................... 20
o Consolidated Statements of Income,
Years Ended June 30, 1998 and 1997....................... 21
o Consolidated Statements of Stockholders' Equity,
Years Ended June 30, 1998 and 1997....................... 22-23
o Consolidated Statements of Cash Flows,
Years Ended June 30, 1998 and 1997....................... 24-26
o Notes Consolidated to Financial Statements.................... 27-51
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information relating to Directors and Executive Officers of the Company
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on November 2, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein
by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 2, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on November 2, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on November 2, 1998.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
2.1 Agreement and Plan of Reorganization dated September 15, 1997
by and among Ashe Federal Bank, AF Bankshares, Inc., and Ashe
Interim Savings Bank as filed with the SEC on June 16, 1998
(the "Form 8-A").
3.1 Federal Stock Charter of the Company (Incorporated by
reference to Exhibit 3.1 of the Form 8-A).
3.2 Bylaws of the Company (Incorporated by reference to Exhibit
3.2 of the Form 8-A).
4.1 Common Stock Certificate of the Company (Incorporated by
reference to Exhibit 4.3 of the Form 8-A).
10.1 Employment Agreement with James A. Todd, President and Chief
Executive Officer, is filed herewith.
10.2 Employment Agreement with Melanie Paisley Miller, Senior Vice
President, Chief Financial Officer, Secretary and Treasurer,
is filed herewith.
10.3 Employment Agreement with Martin G. Little, Senior Vice
President and Chief Lending Officer, is filed herewith.
32
<PAGE>
10.4 Employee Stock Ownership Plan of Ashe Federal Bank is filed
herewith.
13.1 1998 Annual Report to Stockholders, is filed herewith.
21.1 Subsidiary Information is incorporated herein by reference to
"Part I - Subsidiary Activities."
27.1 Financial Data Schedule.*
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the year ended June 30, 1997.
- ---------
*Filed in electronic format only.
33
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
AF BANKSHARES, INC.
(Small Business Issuer)
Date: September 24, 1998 By: /s/ James A. Todd
------------------ -------------------------------------
James A. Todd
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date
----
/s/James A. Todd September 24, 1998
- ---------------------------------------------- -------------------
James A. Todd
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Melanie Paisley Miller September 24, 1998
- ---------------------------------------------- -------------------
Melanie Paisley Miller
Senior Vice President, Secretary, Treasurer
and Chief Financial Officer
(Principal Financial Officer) (Controller)
/s/Jan R. Caddell September 24, 1998
- ---------------------------------------------- -------------------
Jan R. Caddell - Director
/s/Kenneth R. Greene September 24, 1998
- ---------------------------------------------- -------------------
Kenneth R. Greene - Director
/s/William O. Ashley, Jr. September 24, 1998
- ---------------------------------------------- ------------------
William O. Ashley, Jr. - Director
/s/Wayne R. Burgess September 24, 1998
- ---------------------------------------------- -------------------
Wayne R. Burgess - Director
34
<PAGE>
/s/Frank E. Roland September 24, 1998
- ---------------------------------------------- -------------------
Frank E. Roland - Director
/s/Jerry L. Roten September 24, 1998
- ---------------------------------------------- -------------------
Jerry L. Roten - Director
/s/John D. Weaver September 24, 1998
- ---------------------------------------------- -------------------
John D. Weaver - Director
35
Exhibit 10.1
ASHE FEDERAL BANK
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
October 4, 1996 by and between ASHE FEDERAL BANK, a mutual savings bank
organized and operating under the federal laws of the United States and having
an office at 205 South Jefferson Avenue, West Jefferson, North Carolina 28694
("Bank") and JAMES A. TODD, an individual residing at 849 Clyde Houck Road,
Todd, North Carolina 28684 ("Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Executive currently serves the Bank in the capacity of
President, Chief Executive Officer and Director; and
WHEREAS, the Bank has decided to reorganize from a mutual savings bank to a
stock form savings bank which is majority owned by a mutual holding company
("Mutual Holding Company") formed pursuant to the Plan of Reorganization from
Mutual Bank to Mutual Holding Company (the "Plan of Reorganization"); and
WHEREAS, the Bank desires to assure for itself the continued availability
of the Executive's services and the ability of the Executive to perform such
services with a minimum of personal distraction in the event of a pending or
threatened Change in Control (as hereinafter defined); and
WHEREAS, the Executive is willing to continue to serve the Bank on the
terms and conditions hereinafter set forth; and
WHEREAS, the Bank has agreed to provide the Executive with additional
salary as added consideration for the Executive agreeing to the restrictive
covenants hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter set forth, the Bank and the Executive hereby agree as
follows:
SECTION 1. EMPLOYMENT.
The Bank agrees to continue to employ the Executive, and the Executive
hereby agrees to such continued employment, during the period and upon the terms
and conditions set forth in this Agreement.
Page 1 of 18
<PAGE>
SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD.
(a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this section 2
("Employment Period"). The Employment Period shall be for an initial term of
three years beginning on the date of this Agreement. Prior to the first
anniversary of the date of this Agreement and each anniversary date thereafter
(each, an "Anniversary Date"), the Board of Directors of the Bank ("Board")
shall review the terms of this Agreement and the Executive's performance of
services hereunder and may, in the absence of objection from the Executive and
subject to section 2(d), approve an extension of the Employment Period. In such
event, the Employment Period shall be extended to the third anniversary of the
relevant Anniversary Date.
(b) For all purposes of this Agreement, the term "Remaining Unexpired
Employment Period" as of any date shall mean the period beginning on such date
and ending on the Anniversary Date on which the Employment Period (as extended
pursuant to section 2(a) of this Agreement) is then scheduled to expire.
(c) Nothing in this Agreement shall be deemed to prohibit the Bank from
terminating the Executive's employment at any time during the Employment Period
with or without notice for any reason; PROVIDED, HOWEVER, that the relative
rights and obligations of the Bank and the Executive in the event of any such
termination shall be determined under this Agreement.
(d) In no event shall an extension of the Employment Period be made during
any time period during which the Executive may tender voluntary resignation and
collect severance benefits pursuant to either section 9(a) or section 11 of this
Agreement.
SECTION 3. DUTIES.
The Executive shall serve as the President and Chief Executive Officer and
a Director of the Bank, having such power, authority and responsibility and
performing such duties as are prescribed by or under the By-Laws of the Bank and
as are customarily associated with such position or as assigned by the Board
acting in good faith. The chief executive officer is responsible for all facets
of operations of the bank and for implementing the directions of the board of
directors limited by regulatory and prudent business constraints. The chief
executive officer is to engage full energies towards improving the position of
the bank within its market area. The responsibilities of the Chief Executive
Officer include, but are not necessarily limited to, the following:
o Developing strategic objectives for presentation to the board of
directors for approval.
o Developing and implementing tactics necessary to achieve the
objectives approved by the board of directors.
o Selecting and implementing marketing plans necessary to achieve the
bank's objectives.
Page 2 of 18
<PAGE>
o Maintaining an awareness of the bank and its contribution to the
community by providing a personal presence within the bank's market
area.
o Developing policies and procedures for the activities of the bank,
presenting those policies to the board of directors for consideration
and approval, for seeing that the approved policies are implemented by
all functions within the bank and for developing changes to those
policies as conditions change within the market place and as the
objectives of the bank change.
o Developing and implementing an employee training and development
program so that the quality of service provided to customers is
delivered by a well informed staff.
o Identifying new opportunities for the bank including new products and
market segments that will enhance the bank's attractiveness to people
within the bank's market area and that will enhance the income
opportunities. A long term viewpoint is critical so that longer term
stability is not sacrificed for shorter term profits.
o Maintaining an adequate system on internal control including loan
quality control and compliance with rules, regulations and prudent
practices.
o Reporting accurately the condition of the bank to the board of
directors, regulators and other entities with a vested or required
interest in the condition of the bank.
o Business development through contacts within the community and through
directing officer and employee call programs.
The Executive shall devote his full business time and attention (other than
during weekends, holidays, approved vacation periods, and periods of illness or
approved leaves of absence) to the business and affairs of the Bank and shall
use his best efforts to advance the interests of the Bank.
SECTION 4. CASH COMPENSATION.
(a) In consideration for the services to be rendered by the Executive
hereunder, the Bank shall pay to him a salary at an initial annual rate of
EIGHTY THOUSAND DOLLARS ($80,000), payable in approximately equal installments
in accordance with the Bank's customary payroll practices for senior officers.
Prior to each Anniversary Date occurring during the Employment Period, the Board
shall review the Executive's annual rate of salary and may, in its discretion,
approve an increase therein. In addition to salary, the Executive may receive
other cash compensation from the Bank for services hereunder at such times, in
such amounts and on such terms and conditions as the Board may determine from
time to time.
(b) If elected to the Board, and if Executive chooses to serve on such
Board, Executive will be compensated for such service in the same manner as
other members of the Board.
Page 3 of 18
<PAGE>
SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated as an employee
of the Bank and shall be eligible to participate in and receive benefits under
any and all qualified or non-qualified retirement, pension, savings,
profit-sharing or stock bonus plans, any and all group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans, and any other employee benefit and compensation
plans (including, but not limited to, any incentive compensation plans or
programs, stock option and appreciation rights plans and restricted stock plans)
as may from time to time be maintained by, or cover executive employees of, the
Bank, in accordance with the terms and conditions of such employee benefit plans
and programs and compensation plans and programs and consistent with the Bank's
customary practices.
SECTION 6. INDEMNIFICATION AND INSURANCE.
(a) During the Employment Period and for a period of six (6) years
thereafter, the Bank shall cause the Executive to be covered by and named as an
insured under any policy or contract of insurance obtained by it to insure its
directors and officers against personal liability for acts or omissions in
connection with service as an officer or director of the Bank or service in
other capacities at the request of the Bank. The coverage provided to the
Executive pursuant to this section 6 shall be of the same scope and on the same
terms and conditions as the coverage (if any) provided to other officers or
directors of the Bank.
(b) To the maximum extent permitted under 12 C.F.R. ss.545.121, during the
Employment Period and for a period six (6) years thereafter, the Bank shall
indemnify, and shall cause its subsidiaries and affiliates to indemnify the
Executive against and hold him harmless from any costs, liabilities, losses and
exposures to the fullest extent and on the most favorable terms and conditions
that similar indemnification is offered to any director or officer of the Bank
or any subsidiary or affiliate thereof. This section 6(b) shall not be
applicable where section 18 is applicable.
SECTION 7. OUTSIDE ACTIVITIES.
The Executive may serve as a member of the boards of directors of such
business, community and charitable organizations as he may disclose to and as
may be approved by the Board (which approval shall not be unreasonably
withheld); PROVIDED, HOWEVER, that such service shall not materially interfere
with the performance of his duties under this Agreement. The Executive may also
engage in personal business and investment activities which do not materially
interfere with the performance of his duties hereunder; PROVIDED, HOWEVER, that
such activities are not prohibited under any code of conduct or investment or
securities trading policy established by the Bank and generally applicable to
all similarly situated executives (including, without limitation, any applicable
conflict of interest policy adopted by the Board of Directors as contemplated by
12 C.F.R. ss.571.7 and ss.571.9). The Executive may also serve as an officer or
director of the Mutual Holding Company on such terms and conditions as the Bank
and the Mutual Holding Company may mutually agree upon, and such service shall
not be deemed to materially interfere with the
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<PAGE>
Executive's performance of his duties hereunder or otherwise to result in a
material breach of this Agreement.
SECTION 8. WORKING FACILITIES AND EXPENSES.
The Executive's principal place of employment shall be at the Bank's
executive offices at the address first above written, or at such other location
within Ashe County at which the Bank shall maintain its principal executive
offices, or at such other location as the Bank and the Executive may mutually
agree upon. The Bank shall provide the Executive at his principal place of
employment with a private office, secretarial services and other support
services and facilities suitable to his position with the Bank and necessary or
appropriate in connection with the performance of his assigned duties under this
Agreement. The Bank shall reimburse the Executive for his ordinary and necessary
business expenses, including, without limitation, fees for memberships in such
clubs and organizations as the Executive and the Bank shall mutually agree are
necessary and appropriate for business purposes, and his travel and
entertainment expenses incurred in connection with the performance of his duties
under this Agreement, in each case upon presentation to the Bank of an itemized
account of such expenses in such form as the Bank may reasonably require.
SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS.
(a) The Executive shall be entitled to the severance benefits described
herein in the event that his employment with the Bank terminates during the
Employment Period under any of the following circumstances:
(i) the Executive's voluntary resignation from employment with the
Bank within forty-five (45) days following:
(A) the failure of the Board to appoint or re-appoint or elect or
re-elect the Executive to the office stated in section 3 of this
Agreement (or a more senior office) of the Bank;
(B) the expiration of a thirty (30) day period following the date
on which the Executive gives written notice to the Bank of its
material failure, whether by amendment of the Bank's Organization
Certificate or By-laws, action of the Board or the Bank's stockholders
or otherwise, to vest in the Executive the functions, duties, or
responsibilities prescribed in section 3 of this Agreement as of the
date hereof, unless, during such thirty (30) day period, the Bank
fully cures such failure;
(C) the expiration of a thirty (30) day period following the date
on which the Executive gives written notice to the Bank of its
material breach of any term, condition or covenant contained in this
Agreement (including, without limitation any reduction of the
Executive's rate of base
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<PAGE>
salary in effect from time to time and any change in the terms and
conditions of any compensation or benefit program in which the
Executive participates which, either individually or together with
other changes, has a material adverse effect on the aggregate value of
his total compensation package), unless, during such thirty (30) day
period, the Bank fully cures such failure; or
(ii) the termination of the Executive's employment with the Bank for
any other reason not described in section 10(a); or
(iii) the Executive's mandatory resignation from employment with the
Bank within 45 days following the failure of the stockholders of the Bank
to elect or re-elect the Executive to the Board of the failure of the Board
(or the nominating committee thereof) to nominate the Executive for such
election or re-election; PROVIDED, HOWEVER, that such failure is not the
result of a vote cast by the Executive.
In such event, subject to section 25, the Bank shall provide the benefits and
pay to the Executive the amounts described in section 9(b).
(b) Upon the termination of the Executive's employment with the Bank under
circumstances described in section 9(a) of this Agreement, the Bank shall pay
and provide to the Executive (or, in the event of his death, to his estate):
(i) his earned but unpaid compensation, including bonuses awarded and
not yet received, as of the date of the termination of his employment with
the Bank, such payment to be made at the time and in the manner prescribed
by law applicable to the payment of wages but in no event later than thirty
(30) days after termination of employment;
(ii) the benefits, if any, to which he is entitled as a former
employee under the employee benefit plans and programs and compensation
plans and pro- grams maintained for the benefit of the Bank's officers and
employees;
(iii) continued group life, health (including hospitalization, medical
and major medical), dental, accident and long term disability insurance
benefits, in addition to that provided pursuant to section 9(b)(ii), and
after taking into account the coverage provided by any subsequent employer,
if and to the extent necessary to provide for the Executive, for the
Remaining Unexpired Employment Period, coverage equivalent to the coverage
to which he would have been entitled under such plans (as in effect on the
date of his termination of employment, or, if his termination of employment
occurs after a Change in Control, on the date of such Change in Control,
whichever benefits are greater) if he had continued working for the Bank
during the Remaining Unexpired Employment Period at the highest annual rate
of compensation achieved during that portion of the Employment Period which
is prior to the Executive's termination of employment with the Bank; and
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<PAGE>
(iv) within thirty (30) days following his termination of employment
with the Bank, a lump sum payment, in an amount equal to the present value
of the salary that the Executive would have earned if he had continued
working for the Bank during the Remaining Unexpired Employment Period at
the highest annual rate of salary achieved during that portion of the
Employment Period which is prior to the Executive's termination of
employment with the Bank, where such present value is to be determined
using a discount rate equal to the applicable short-term federal rate
prescribed under section 1274(d) of the Internal Revenue Code of 1986
("Code"), compounded using the compounding period corresponding to the
Bank's regular payroll periods for its officers, such lump sum to be paid
in lieu of all other payments of salary provided for under this Agreement
in respect of the period following any such termination.
The Bank and the Executive hereby stipulate that the damages which may be
incurred by the Executive following any such termination of employment are not
capable of accurate measurement as of the date first above written and that the
payments and benefits contemplated by this section 9(b) constitute reasonable
damages under the circumstances and shall be payable without any requirement of
proof of actual damage and without regard to the Executive's efforts, if any, to
mitigate damages. The Bank and the Executive further agree that the Bank may
condition the payments and benefits (if any) due under sections 9(b)(iii) and
(iv) on the receipt of the Executive's resignation from any and all positions
which he holds as an officer, director or committee member with respect to the
Bank or the Mutual Holding Company or any subsidiary or affiliate of either of
them.
SECTION 10. TERMINATION WITHOUT ADDITIONAL BANK LIABILITY.
(a) In the event that Executive's employment with the Company shall
terminate during the Employment Period on account of:
(i) the discharge of the Executive for "cause," which, for purposes of
this Agreement shall mean personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease and desist order, or any material breach of this Agreement, in each
case as measured against standards generally prevailing at the relevant
time in the savings and community banking industry; PROVIDED, HOWEVER, that
the Executive shall not be deemed to have been discharged for cause unless
and until the following procedures shall have been followed:
(A) the Board shall adopt a resolution duly approved by
affirmative vote of a majority of the entire Board at a meeting called
and held for such purpose calling for the Executive's termination for
cause and setting forth the purported grounds for such termination
("Proposed Termination Resolution");
Page 7 of 18
<PAGE>
(B) as soon as practicable, and in any event within five (5)
days, after adoption of such resolution, the Board shall furnish to
the Executive a written notice of termination which shall be
accompanied by a certified copy of the Proposed Termination Resolution
("Notice of Proposed Termination");
(C) the Executive shall be afforded a reasonable opportunity to
to make oral and written presentations to the members of the Board, on
his own behalf, or through a representative, who may be his legal
counsel, to refute the grounds set forth in the Proposed Termination
Resolution at one or more meetings of the Board to be held no sooner
than fifteen (15) days and no later than thirty (30) after the
Executive's receipt of the Proposed Termination Notice ("Termination
Hearings"); and
(D) within ten (10) days following the end of the Termination
Hearings, the Board shall adopt a resolution duly approved by
affirmative vote of a majority of the entire Board at a meeting called
and held for such purpose (A) finding that in the good faith opinion
of the Board the grounds for termination set forth in the Proposed
Termination Resolution exist and (B) terminating the Executive's
employment ("Termination Resolution"); and
(E) as promptly as practicable, and in any event within one (1)
business day after adoption of the Termination Resolution, the Board
shall furnish to the Exective written notice of termination, which
notice shall include a copy of the Termination Resolution and specify
an effective date of termination that is not later than the date on
which such notice is given;
(ii) Executive's voluntary resignation from employment with the
Company for reasons other than those specified in section 9(a);
(iii) Executive's death; or
(iv) a determination that Executive is eligible for long-term
disability benefits under the Company's long-term disability insurance
program or, if there is no such program, under the federal Social Security
Act;
then the Company shall have no further obligations under this Agreement, other
than the payment to Executive (or, in the event of his death, to his estate) of
his earned but unpaid salary as of the date of the termination of his
employment, and the provision of such other benefits, if any, to which he is
entitled as a former employee under the employee benefit plans and pro- grams
and compensation plans and programs maintained by, or covering employees of, the
Company.
(b) For purposes of section 10(a)(i)(A) or (B), no act or failure to act,
on the part of Executive, shall be considered "willful" unless it is done, or
omitted to be done, by Executive in bad faith or without reasonable belief that
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or based upon the written advice of counsel for the
Page 8 of 18
<PAGE>
Company shall be conclusively presumed to be done, or omitted to be done, by
Executive in good faith and in the best interests of the Company. The cessation
of employment of Executive shall not be deemed to be for "cause" within the
meaning of section 10(a)(i) unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote of
three-fourths of the non-employee members of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice is provided to
Executive and Executive is given an opportunity, together with counsel, to be
heard before the Board), finding that, in the good faith opinion of the Board,
Executive is guilty of the conduct described in section 10(a)(i) above, and
specifying the particulars thereof in detail.
SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL.
(a) A Change in Control of the Bank ("Change in Control") shall be deemed
to have occurred upon the happening of any of the following events:
(i) approval by the stockholders of the Bank of a transaction that
would result in the reorganization, merger or consolidation of the Bank,
respectively, with one or more other persons, other than a transaction
following which:
(A) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
1934 ("Exchange Act")) in substantially the same relative proportions
by persons who, immediately prior to such transaction, beneficially
owned (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) at least 51% of the outstanding equity ownership interests in the
Bank; and
(B) at least 51% of the securities entitled to vote generally in
the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same relative
proportions by persons who, immediately prior to such transaction,
beneficially owned (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Bank;
(ii) the acquisition of all or substantially all of the assets of the
Bank or beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 25% or more of the outstanding securities of the
Bank entitled to vote generally in the election of directors by any person
or by any persons acting in concert, or approval by the stockholders of the
Bank of any transaction which would result in such an acquisition; or
(iii) a complete liquidation or dissolution of the Bank, or approval
by the stockholders of the Bank of a plan for such liquidation or
dissolution; or
Page 9 of 18
<PAGE>
(iv) the occurrence of any event if, immediately following such event,
at least 50% of the members of the board of directors of the Bank do not
belong to any of the following groups:
(A) individuals who were members of the Board of the Bank on the
date of this Agreement; or
(B) individuals who first became members of the Board of the Bank
after the date of this Agreement either:
(I) upon election to serve as a member of the Board of
directors of the Bank by affirmative vote of three-quarters of
the members of such board, or of a nominating committee thereof,
in office at the time of such first election; or
(II) upon election by the stockholders of the Board to serve
as a member of the board of directors of the Board, but only if
nominated for election by affirmative vote of three-quarters of
the members of the board of directors of the Board, or of a
nominating committee thereof, in office at the time of such first
nomination;
PROVIDED, HOWEVER, that such individual's election or nomination did
not result from an actual or threatened election contest (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents (within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf of the
Board of the Bank;
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Bank by any employee
benefit plan maintained by the Bank. For purposes of this section 11, the term
"person" shall have the meaning assigned to it under sections 13(d)(3) or
14(d)(2) of the Exchange Act.
(b) In the event of a Change in Control, the Executive shall be entitled to
the payments and benefits contemplated by section 9(b) in the event of his
termination of employment with the Bank under any of the circumstances described
in section 9(a) of this Agreement or under any of the following circumstances:
(i) resignation, voluntary or otherwise, by the Executive at any time
during the Employment Period and within ninety (90) days following his
demotion, loss of title, office or significant authority or responsibility,
or following any reduction in any element of his package of compensation
and benefits;
(ii) resignation, voluntary or otherwise, by the Executive at any time
during the Employment Period and within ninety (90) days following any
relocation of his principal place of employment or any change in working
conditions at such principal place of employment which is embarrassing,
derogatory or otherwise materially adverse to the Executive;
Page 10 of 18
<PAGE>
(iii) resignation, voluntary or otherwise, by the Executive at any
time during the Employment Period following the failure of any successor to
the Bank in the Change in Control to include the Executive in any
compensation or benefit program maintained by it or covering any of its
executive officers, unless the Executive is already covered by a
substantially similar plan of the Bank which is at least as favorable to
his; or
(iv) resignation, voluntary or otherwise, for any reason whatsoever
following the expiration of a transition period of thirty days beginning on
the effective date of the Change in Control (or such longer period, not to
exceed ninety (90) days beginning on the effective date of the Change in
Control, as the Bank or its successor may reasonably request) to facilitate
a transfer of management responsibilities.
SECTION 12. COVENANT NOT TO COMPETE.
The Executive hereby covenants and agrees that, in the event of his
termination of employment with the Bank prior to the expiration of the
Employment Period, for a period of one (1) year following the date of his
termination of employment with the Bank (or, if less, for the Remaining
Unexpired Employment Period), he shall not, without the written consent of the
Bank, become an officer, employee, consultant, director or trustee with
executory, managerial, supervisory or strategic authority or influence at any
savings bank, savings and loan association, savings and loan holding company,
bank or bank holding company, or any direct or indirect subsidiary or affiliate
of any such entity, that entails working within one hundred (100) miles of the
headquarters of the Bank on the date of the Executive's termination of
employment; PROVIDED, HOWEVER, that this section 12 shall not apply if the
Executive's employment is ter- minated for the reasons set forth in section
9(a); and PROVIDED, further, that if the Executive's employment shall be
terminated on account of disability as provided in section 10(d) of this
Agreement, this section 12 shall not prevent the Executive from accepting any
position or performing any services if (a) he first offers, by written notice,
to accept a similar position with, or perform similar services for, the Bank on
substantially the same terms and conditions and (b) the Bank declines to accept
such offer within ten (10) days after such notice is given.
SECTION 13. CONFIDENTIALITY.
Unless he obtains the prior written consent of the Bank, the Executive
shall keep confidential and shall refrain from using for the benefit of himself,
or any person or entity other than the Bank or any entity which is a subsidiary
of the Bank or of which the Bank is a subsidiary, any material document or
information obtained from the Bank, or from its parent or subsidiaries, in the
course of his employment with any of them concerning their properties,
operations or business (unless such document or information is readily
ascertainable from public or published information or trade sources or has
otherwise been made available to the public through no fault of his own) until
the same ceases to be material (or becomes so ascertainable or available);
PROVIDED, HOWEVER, that nothing in this section 13 shall prevent the Executive,
with or without the Bank's consent, from participating in or disclosing
documents or information in connection with
Page 11 of 18
<PAGE>
any judicial or administrative investigation, inquiry or proceeding to the
extent that such participation or disclosure is required under applicable law.
SECTION 14. SOLICITATION.
The Executive hereby covenants and agrees that, for a period of one (1)
year following his termination of employment with the Bank, he shall not,
without the written consent of the Bank, either directly or indirectly:
(a) solicit, offer employment to, or take any other action intended,
or that a reasonable person acting in like circumstances would expect, to
have the effect of causing any officer or employee of the Bank or any
affiliate, as of the date of this Agreement, of either of them to terminate
his or his employment and accept employment or become affiliated with, or
provide services for compensation in any capacity whatsoever to, any
savings bank, savings and loan association, bank, bank holding company,
savings and loan holding company, or other institution engaged in the
business of accepting deposits and making loans, doing business within one
hundred (100) miles of the headquarters of the Bank or any affiliate, as of
the date of this Agreement, of either of them;
(b) provide any information, advice or recommendation with respect to
any such officer or employee of any savings bank, savings and loan
association, bank, bank holding company, savings and loan holding company,
or other institution engaged in the business of accepting deposits and
making loans, doing business within one hundred (100) miles of the
headquarters of the Bank or any affiliate, as of the date of this
Agreement, of either of them that is intended, or that a reasonable person
acting in like circumstances would expect, to have the effect of causing
any officer or employee of the Bank or any affiliate, as of the date of
this Agreement, of either of them to terminate his or his employment and
accept employment or become affiliated with, or provide services for
compensation in any capacity whatsoever to, any savings bank, savings and
loan association, bank, bank holding company, savings and loan holding
company, or other institution engaged in the business of accepting deposits
and making loans, doing business within one hundred (100) miles of the
headquarters of the Bank or any affiliate, as of the date of this
Agreement, of either of them;
(c) solicit, provide any information, advice or recommendation or take
any other action intended, or that a reasonable person acting in like
circumstances would expect, to have the effect of causing any customer of
the Bank to terminate an existing business or commercial relationship with
the Bank.
SECTION 15. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS.
The termination of the Executive's employment during the term of this
Agreement or thereafter, whether by the Bank or by the Executive, shall have no
effect on the rights and obligations of the parties thereto under the Bank's
qualified or non-qualified retirement, pension,
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savings, thrift, profit-sharing or stock bonus plans, group life, health
(including hospitalization, medical and major medical), dental, accident and
long term disability insurance plans or such other employee benefit plans or
programs, or compensation plans or programs, as may be maintained by, or cover
employees of, the Bank from time to time.
SECTION 16. SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon the
Executive, his legal representatives and testate or intestate distributees, and
the Bank and its successors and assigns, including any successor by merger or
consolidation or any other person or firm or corporation to which all or
substantially all of the assets and business of the Bank may be sold or
otherwise transferred. Failure of the Bank to obtain from any successor its
express written assumption of the Bank's obligations hereunder at least sixty
(60) days in advance of the scheduled effective date of any such succession
shall be deemed a material breach of this Agreement unless cured within ten (10)
days after notice thereof by the Executive to the Bank.
SECTION 17. NOTICES.
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to the Executive:
James A. Todd
849 Clyde Houck Road
Todd, North Carolina 28684
If to the Bank:
Ashe Federal Bank
P.O. Box 26
West Jefferson, North Carolina 28694
Attention: Chairman Of The Board
---------------------
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: W. Edward Bright, Esq.
---------------------
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<PAGE>
SECTION 18. INDEMNIFICATION FOR ATTORNEYS' FEES.
The Bank shall indemnify, hold harmless and defend the Executive against
reasonable costs, including legal fees, incurred by the Executive in connection
with or arising out of any action, suit or proceeding in which he may be
involved, as a result of his efforts, in good faith, to defend or enforce the
terms of this Agreement; PROVIDED, HOWEVER, that the Executive shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding and such court or arbitrator shall have approved such
indemnification, or in a settlement. In the case of a settlement, such
indemnification provided for in this section shall require an approval from a
majority of the disinterested directors of the Board of Directors of the Bank
that the Executive acted in good faith and that such indemnification is in the
best interests of the institution. For purposes of this Agreement, any
settlement agreement which provides for payment of any amounts in settlement of
the Bank's obligations hereunder shall be conclusive evidence of the Executive's
entitlement to indemnification hereunder, and any such indemnification payments
shall be in addition to amounts payable pursuant to such settlement agreement,
unless such settlement agreement expressly provides otherwise.
SECTION 19. SEVERABILITY.
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
SECTION 20. WAIVER.
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
SECTION 21. COUNTERPARTS.
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
SECTION 22. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of North
Carolina applicable to contracts entered into and to be performed entirely
within the State of North Carolina.
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SECTION 23. HEADINGS AND CONSTRUCTION.
The headings of sections in this Agreement are for convenience of reference
only and are not intended to qualify the meaning of any section. Any reference
to a section number shall refer to a section of this Agreement, unless otherwise
stated.
SECTION 24. ENTIRE AGREEMENT; MODIFICATIONS.
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.
SECTION 25. REQUIRED REGULATORY PROVISIONS.
The following provisions are included for the purposes of complying with
various laws, rules and regulations applicable to the Bank:
(a) Notwithstanding anything herein contained to the contrary, in no
event shall the aggregate amount of compensation payable to the Executive
under section 9(b) hereof (exclusive of amounts described in section
9(b)(i)) exceed the three times the Executive's average annual compensation
for the last five consecutive calendar years to end prior to his
termination of employment with the Bank (or for his entire period of
employment with the Bank if less than five calendar years). The
compensation payable to the Executive hereunder shall be further reduced
(but not below zero) if such reduction would avoid the assessment of excise
taxes on excess parachute payments (within the meaning of section 280G of
the Code).
(b) Notwithstanding anything herein contained to the contrary, any
payments to the Executive by the Bank, whether pursuant to this Agreement
or otherwise, are subject to and conditioned upon their compliance with
section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C.
ss.1828(k), and any regulations promulgated thereunder.
(c) Notwithstanding anything herein contained to the contrary, if the
Executive is suspended from office and/or temporarily prohibited from
participating in the conduct of the affairs of the Bank pursuant to a
notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C.
ss.1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service of such notice, unless stayed
by appropriate proceedings. If the charges in such notice are dismissed,
the Bank, in its discretion, may (i) pay to the Executive all or part of
the compensation withheld while the Bank's obligations hereunder were
suspended and (ii) reinstate, in whole or in part, any of the obligations
which were suspended.
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(d) Notwithstanding anything herein contained to the contrary, if the
Executive is removed and/or permanently prohibited from participating in
the conduct of the Bank's affairs by an order issued under section 8(e)(4)
or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all
prospective obligations of the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights and obligations of
the Bank and the Executive shall not be affected.
(e) Notwithstanding anything herein contained to the contrary, if the
Bank is in default (within the meaning of section 3(x)(1) of the FDI Act,
12 U.S.C. ss.1813(x)(1), all prospective obligations of the Bank under this
Agreement shall terminate as of the date of default, but vested rights and
obligations of the Bank and the Executive shall not be affected.
(f) Notwithstanding anything herein contained to the contrary, all
prospective obligations of the Bank hereunder shall be terminated, except
to the extent that a continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his designee or the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the FDI Act, 12 U.S.C. ss.1823(c); (ii) by
the Director of the OTS or his designee at the time such Director or
designee approves a supervisory merger to resolve problems related to the
operation of the Bank or when the Bank is determined by such Director to be
in an unsafe or unsound condition. The vested rights and obligations of the
parties shall not be affected.
If and to the extent that any of the foregoing provisions shall cease to be
required or by applicable law, rule or regulation, the same shall become
inoperative as though eliminated by formal amendment of this Agreement.
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IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and
the Executive has hereunto set his hand, all as of the day and year first above
written.
--------------------------------------
JAMES A. TODD
President and Chief Executive Officer
ATTEST: ASHE FEDERAL BANK
By _____________________________ By __________________________________
MELANIE C. PAISLEY JAN R. CADDELL
Secretary Chairman of the Board of Directors
[Seal]
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<PAGE>
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF ASHE )
On this ________ day of ____________________, 1996, before me personally
came James A. Todd, to me known, and known to me to be the individual described
in the foregoing instrument, who, being by me duly sworn, did depose and say
that he resides at the address set forth in said instrument, and that he signed
his name to the foregoing instrument.
---------------------------------------
Notary Public
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF ASHE )
On this ________ day of ____________________, 1996, before me personally
came ___________________, to me known, who, being by me duly sworn, did depose
and say that he resides at ______________________________________________, that
he is a member of the Board of Directors of ASHE FEDERAL BANK, the savings bank
described in and which executed the foregoing instrument; that he knows the seal
of said mutual savings bank; that the seal affixed to said instrument is such
seal; that it was so affixed by order of the Board of Directors of said savings
bank; and that he signed his name thereto by like order.
---------------------------------------
Notary Public
Page 18 of 18
Exhibit 10.2
ASHE FEDERAL BANK
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
October 4, 1996 by and between ASHE FEDERAL BANK, a mutual savings bank
organized and operating under the federal laws of the United States and having
an office at 205 South Jefferson Avenue, West Jefferson, North Carolina 28694
("Bank") and MELANIE C. PAISLEY, an individual residing at 8217A NC Highway 163,
West Jefferson, North Carolina 28694 ("Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Executive currently serves the Bank in the capacity of Chief
Financial Officer, Secretary/Treasurer; and
WHEREAS, the Bank has decided to reorganize from a mutual savings bank to a
stock form savings bank which is majority owned by a mutual holding company
("Mutual Holding Company") formed pursuant to the Plan of Reorganization from
Mutual Bank to Mutual Holding Company (the "Plan of Reorganization"); and
WHEREAS, the Bank desires to assure for itself the continued availability
of the Executive's services and the ability of the Executive to perform such
services with a minimum of personal distraction in the event of a pending or
threatened Change in Control (as hereinafter defined); and
WHEREAS, the Executive is willing to continue to serve the Bank on the
terms and conditions hereinafter set forth; and
WHEREAS, the Bank has agreed to provide the Executive with additional
salary as added consideration for the Executive agreeing to the restrictive
covenants hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter set forth, the Bank and the Executive hereby agree as
follows:
SECTION 1. EMPLOYMENT.
The Bank agrees to continue to employ the Executive, and the Executive
hereby agrees to such continued employment, during the period and upon the terms
and conditions set forth in this Agreement.
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<PAGE>
SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD.
(a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this section 2
("Employment Period"). The Employment Period shall be for an initial term of
three years beginning on the date of this Agreement. Prior to the first
anniversary of the date of this Agreement and each anniversary date thereafter
(each, an "Anniversary Date"), the Board of Directors of the Bank ("Board")
shall review the terms of this Agreement and the Executive's performance of
services hereunder and may, in the absence of objection from the Executive and
subject to section 2(d), approve an extension of the Employment Period. In such
event, the Employment Period shall be extended to the third anniversary of the
relevant Anniversary Date.
(b) For all purposes of this Agreement, the term "Remaining Unexpired
Employment Period" as of any date shall mean the period beginning on such date
and ending on the Anniversary Date on which the Employment Period (as extended
pursuant to section 2(a) of this Agreement) is then scheduled to expire.
(c) Nothing in this Agreement shall be deemed to prohibit the Bank from
terminating the Executive's employment at any time during the Employment Period
with or without notice for any reason; PROVIDED, HOWEVER, that the relative
rights and obligations of the Bank and the Executive in the event of any such
termination shall be determined under this Agreement.
(d) In no event shall an extension of the Employment Period be made during
any time period during which the Executive may tender voluntary resignation and
collect severance benefits pursuant to either section 9(a) or section 11 of this
Agreement.
SECTION 3. DUTIES.
The Executive shall serve as the Chief Financial Officer,
Secretary/Treasurer of the Bank, having such power, authority and responsibility
and performing such duties as are prescribed by or under the By-Laws of the Bank
and as are customarily associated with such position or as assigned by the Board
acting in good faith. The Chief Financial Officer is responsible for assuring
that the books and records of the bank reflect the actual financial condition of
the bank at any time. In addition, the chief financial officer is responsible
for the following duties:
o Assisting the CEO in developing investment strategies.
o Measuring the daily cash position and recording liquidity levels.
o Assuring that all transactions are recorded and reconciled on a daily
basis.
o Maintaining an accurate record of the bank's assets.
o Recording minutes of actions of the board of directors.
o Preparing reports for the regulatory authorities, management, and the
board of directors.
o Assuring that all transactions of the bank are within guidelines.
o Coordinating the annual audit with the outside auditors.
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<PAGE>
o Coordinating the regulatory examination of the bank.
o Approves transfers of monetary assets from and to the Federal Reserve
Bank and the Federal Home Loan Bank to meet the bank's cash transfer
and reserve requirements.
o Administering personnel policies including maintaining personnel
records.
The Executive shall devote her full business time and attention (other than
during weekends, holidays, approved vacation periods, and periods of illness or
approved leaves of absence) to the business and affairs of the Bank and shall
use her best efforts to advance the interests of the Bank.
SECTION 4. CASH COMPENSATION.
(a) In consideration for the services to be rendered by the Executive
hereunder, the Bank shall pay to her a salary at an initial annual rate of
THIRTY-TWO THOUSAND DOLLARS ($32,000.00), payable in approximately equal
installments in accordance with the Bank's customary payroll practices for
senior officers. Prior to each Anniversary Date occurring during the Employment
Period, the Board shall review the Executive's annual rate of salary and may, in
its discretion, approve an increase therein. In addition to salary, the
Executive may receive other cash compensation from the Bank for services
hereunder at such times, in such amounts and on such terms and conditions as the
Board may determine from time to time.
(b) If elected to the Board, and if Executive chooses to serve on such
Board, Executive will be compensated for such service in the same manner as
other members of the Board.
SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated as an employee
of the Bank and shall be eligible to participate in and receive benefits under
any and all qualified or non-qualified retirement, pension, savings,
profit-sharing or stock bonus plans, any and all group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans, and any other employee benefit and compensation
plans (including, but not limited to, any incentive compensation plans or
programs, stock option and appreciation rights plans and restricted stock plans)
as may from time to time be maintained by, or cover executive employees of, the
Bank, in accordance with the terms and conditions of such employee benefit plans
and programs and compensation plans and programs and consistent with the Bank's
customary practices.
SECTION 6. INDEMNIFICATION AND INSURANCE.
(a) During the Employment Period and for a period of six (6) years
thereafter, the Bank shall cause the Executive to be covered by and named as an
insured under any policy or
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<PAGE>
contract of insurance obtained by it to insure its directors and officers
against personal liability for acts or omissions in connection with service as
an officer or director of the Bank or service in other capacities at the request
of the Bank. The coverage provided to the Executive pursuant to this section 6
shall be of the same scope and on the same terms and conditions as the coverage
(if any) provided to other officers or directors of the Bank.
(b) To the maximum extent permitted under 12 C.F.R. ss.545.121, during the
Employment Period and for a period six (6) years thereafter, the Bank shall
indemnify, and shall cause its subsidiaries and affiliates to indemnify the
Executive against and hold her harmless from any costs, liabilities, losses and
exposures to the fullest extent and on the most favorable terms and conditions
that similar indemnification is offered to any director or officer of the Bank
or any subsidiary or affiliate thereof. This section 6(b) shall not be
applicable where section 18 is applicable.
SECTION 7. OUTSIDE ACTIVITIES.
The Executive may serve as a member of the boards of directors of such
business, community and charitable organizations as she may disclose to and as
may be approved by the Board (which approval shall not be unreasonably
withheld); PROVIDED, HOWEVER, that such service shall not materially interfere
with the performance of her duties under this Agreement. The Executive may also
engage in personal business and investment activities which do not materially
interfere with the performance of her duties hereunder; PROVIDED, HOWEVER, that
such activities are not prohibited under any code of conduct or investment or
securities trading policy established by the Bank and generally applicable to
all similarly situated executives (including, without limitation, any applicable
conflict of interest policy adopted by the Board of Directors as contemplated by
12 C.F.R. ss.571.7 and ss.571.9). The Executive may also serve as an officer or
director of the Mutual Holding Company on such terms and conditions as the Bank
and the Mutual Holding Company may mutually agree upon, and such service shall
not be deemed to materially interfere with the Executive's performance of her
duties hereunder or otherwise to result in a material breach of this Agreement.
SECTION 8. WORKING FACILITIES AND EXPENSES.
The Executive's principal place of employment shall be at the Bank's
executive offices at the address first above written, or at such other location
within Ashe County at which the Bank shall maintain its principal executive
offices, or at such other location as the Bank and the Executive may mutually
agree upon. The Bank shall provide the Executive at her principal place of
employment with a private office, secretarial services and other support
services and facilities suitable to her position with the Bank and necessary or
appropriate in connection with the performance of her assigned duties under this
Agreement. The Bank shall reimburse the Executive for her ordinary and necessary
business expenses, including, without limitation, fees for memberships in such
clubs and organizations as the Executive and the Bank shall mutually agree are
necessary and appropriate for business purposes, and her travel and
entertainment expenses incurred in connection with the performance of her duties
under this Agreement, in each case upon present
Page 4 of 18
<PAGE>
ation to the Bank of an itemized account of such expenses in such form as the
Bank may reasonably require.
SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS.
(a) The Executive shall be entitled to the severance benefits described
herein in the event that her employment with the Bank terminates during the
Employment Period under any of the following circumstances:
(i) the Executive's voluntary resignation from employment with the
Bank within forty-five (45) days following:
(A) the failure of the Board to appoint or re-appoint or elect or
re-elect the Executive to the office stated in section 3 of this
Agreement (or a more senior office) of the Bank;
(B) if the Executive is or becomes a member of the Board, the
failure of the stockholders of the Bank to elect or re-elect the
Executive to the Board or the failure of the Board (or the nominating
committee thereof) to nominate the Executive for such election or
re-election; PROVIDED, HOWEVER, that such failure is not the result of
a vote cast by the Executive;
(C) the expiration of a thirty (30) day period following the date
on which the Executive gives written notice to the Bank of its
material failure, whether by amendment of the Bank's Organization
Certificate or By-laws, action of the Board or the Bank's stockholders
or otherwise, to vest in the Executive the functions, duties, or
responsibilities prescribed in section 3 of this Agreement as of the
date hereof, unless, during such thirty (30) day period, the Bank
fully cures such failure;
(D) the expiration of a thirty (30) day period following the date
on which the Executive gives written notice to the Bank of its
material breach of any term, condition or covenant contained in this
Agreement (including, without limitation any reduction of the
Executive's rate of base salary in effect from time to time and any
change in the terms and conditions of any compensation or benefit
program in which the Executive participates which, either individually
or together with other changes, has a material adverse effect on the
aggregate value of her total compensation package), unless, during
such thirty (30) day period, the Bank fully cures such failure; or
(ii) the termination of the Executive's employment with the Bank for
any other reason not described in section 10(a).
Page 5 of 18
<PAGE>
In such event, subject to section 25, the Bank shall provide the benefits and
pay to the Executive the amounts described in section 9(b).
(b) Upon the termination of the Executive's employment with the Bank under
circumstances described in section 9(a) of this Agreement, the Bank shall pay
and provide to the Executive (or, in the event of her death, to her estate):
(i) his earned but unpaid compensation, including bonuses awarded and
not yet received, as of the date of the termination of her employment with
the Bank, such payment to be made at the time and in the manner prescribed
by law applicable to the payment of wages but in no event later than thirty
(30) days after termination of employment;
(ii) the benefits, if any, to which she is entitled as a former
employee under the employee benefit plans and programs and compensation
plans and pro- grams maintained for the benefit of the Bank's officers and
employees;
(iii) continued group life, health (including hospitalization, medical
and major medical), dental, accident and long term disability insurance
benefits, in addition to that provided pursuant to section 9(b)(ii), and
after taking into account the coverage provided by any subsequent employer,
if and to the extent necessary to provide for the Executive, for the
Remaining Unexpired Employment Period, coverage equivalent to the coverage
to which she would have been entitled under such plans (as in effect on the
date of her termination of employment, or, if her termination of employment
occurs after a Change in Control, on the date of such Change in Control,
whichever benefits are greater) if she had continued working for the Bank
during the Remaining Unexpired Employment Period at the highest annual rate
of compensation achieved during that portion of the Employment Period which
is prior to the Executive's termination of employment with the Bank; and
(iv) within thirty (30) days following her termination of employment
with the Bank, a lump sum payment, in an amount equal to the present value
of the salary that the Executive would have earned if she had continued
working for the Bank during the Remaining Unexpired Employment Period at
the highest annual rate of salary achieved during that portion of the
Employment Period which is prior to the Executive's termination of
employment with the Bank, where such present value is to be determined
using a discount rate equal to the applicable short-term federal rate
prescribed under section 1274(d) of the Internal Revenue Code of 1986
("Code"), compounded using the compounding period corresponding to the
Bank's regular payroll periods for its officers, such lump sum to be paid
in lieu of all other payments of salary provided for under this Agreement
in respect of the period following any such termination.
The Bank and the Executive hereby stipulate that the damages which may be
incurred by the Executive following any such termination of employment are not
capable of accurate measurement as of the date first above written and that the
payments and benefits contemplated by this section
Page 6 of 18
<PAGE>
9(b) constitute reasonable damages under the circumstances and shall be payable
without any requirement of proof of actual damage and without regard to the
Executive's efforts, if any, to mitigate damages. The Bank and the Executive
further agree that the Bank may condition the payments and benefits (if any) due
under sections 9(b)(iii) and (iv) on the receipt of the Executive's resignation
from any and all positions which she holds as an officer, director or committee
member with respect to the Bank or the Mutual Holding Company or any subsidiary
or affiliate of either of them.
SECTION 10. TERMINATION WITHOUT ADDITIONAL BANK LIABILITY.
(a) In the event that Executive's employment with the Company shall
terminate during the Employment Period on account of:
(i) the discharge of the Executive for "cause," which, for purposes of
this Agreement shall mean personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease and desist order, or any material breach of this Agreement, in each
case as measured against standards generally prevailing at the relevant
time in the savings and community banking industry; PROVIDED, HOWEVER, that
the Executive shall not be deemed to have been discharged for cause unless
and until the following procedures shall have been followed:
(A) the Board shall adopt a resolution duly approved by
affirmative vote of a majority of the entire Board at a meeting called
and held for such purpose calling for the Executive's termination for
cause and setting forth the purported grounds for such termination
("Proposed Termination Resolution");
(B) as soon as practicable, and in any event within five (5)
days, after adoption of such resolution, the Board shall furnish to
the Executive a written notice of termination which shall be
accompanied by a certified copy of the Proposed Termination Resolution
("Notice of Proposed Termination");
(C) the Executive shall be afforded a reasonable opportunity to
to make oral and written presentations to the members of the Board, on
his own behalf, or through a representative, who may be his legal
counsel, to refute the grounds set forth in the Proposed Termination
Resolution at one or more meetings of the Board to be held no sooner
than fifteen (15) days and no later than thirty (30) after the
Executive's receipt of the Proposed Termination Notice ("Termination
Hearings"); and
(D) within ten (10) days following the end of the Termination
Hearings, the Board shall adopt a resolution duly approved by
affirmative vote of a majority of the entire Board at a meeting called
and held for such
Page 7 of 18
<PAGE>
purpose (A) finding that in the good faith opinion of the Board the
grounds for termination set forth in the Proposed Termination
Resolution exist and (B) terminating the Executive's employment
("Termination Resolution"); and
(E) as promptly as practicable, and in any event within one (1)
business day after adoption of the Termination Resolution, the Board
shall furnish to the Exective written notice of termination, which
notice shall include a copy of the Termination Resolution and specify
an effective date of termination that is not later than the date on
which such notice is given;
(ii) Executive's voluntary resignation from employment with the
Company for reasons other than those specified in section 9(a);
(iii) Executive's death; or
(iv) a determination that Executive is eligible for long-term
disability benefits under the Company's long-term disability insurance
program or, if there is no such program, under the federal Social Security
Act;
then the Company shall have no further obligations under this Agreement, other
than the payment to Executive (or, in the event of his death, to his estate) of
his earned but unpaid salary as of the date of the termination of his
employment, and the provision of such other benefits, if any, to which she is
entitled as a former employee under the employee benefit plans and pro- grams
and compensation plans and programs maintained by, or covering employees of, the
Company.
(b) For purposes of section 10(a)(i)(A) or (B), no act or failure to act,
on the part of Executive, shall be considered "willful" unless it is done, or
omitted to be done, by Executive in bad faith or without reasonable belief that
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or based upon the written advice of counsel for the Company
shall be conclusively presumed to be done, or omitted to be done, by Executive
in good faith and in the best interests of the Company. The cessation of
employment of Executive shall not be deemed to be for "cause" within the meaning
of section 10(a)(i) unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote of
three-fourths of the non-employee members of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice is provided to
Executive and Executive is given an opportunity, together with counsel, to be
heard before the Board), finding that, in the good faith opinion of the Board,
Executive is guilty of the conduct described in section 10(a)(i) above, and
specifying the particulars thereof in detail.
SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL.
(a) A Change in Control of the Bank ("Change in Control") shall be deemed
to have occurred upon the happening of any of the following events:
Page 8 of 18
<PAGE>
(i) approval by the stockholders of the Bank of a transaction that
would result in the reorganization, merger or consolidation of the Bank,
respectively, with one or more other persons, other than a transaction
following which:
(A) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
1934 ("Exchange Act")) in substantially the same relative proportions
by persons who, immediately prior to such transaction, beneficially
owned (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) at least 51% of the outstanding equity ownership interests in the
Bank; and
(B) at least 51% of the securities entitled to vote generally in
the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same relative
proportions by persons who, immediately prior to such transaction,
beneficially owned (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Bank;
(ii) the acquisition of all or substantially all of the assets of the
Bank or beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 25% or more of the outstanding securities of the
Bank entitled to vote generally in the election of directors by any person
or by any persons acting in concert, or approval by the stockholders of the
Bank of any transaction which would result in such an acquisition; or
(iii) a complete liquidation or dissolution of the Bank, or approval
by the stockholders of the Bank of a plan for such liquidation or
dissolution; or
(iv) the occurrence of any event if, immediately following such event,
at least 50% of the members of the board of directors of the Bank do not
belong to any of the following groups:
(A) individuals who were members of the Board of the Bank on the
date of this Agreement; or
(B) individuals who first became members of the Board of the Bank
after the date of this Agreement either:
(I) upon election to serve as a member of the Board of
directors of the Bank by affirmative vote of three-quarters of
the members of such board, or of a nominating committee thereof,
in office at the time of such first election; or
(II) upon election by the stockholders of the Board to serve
as a member of the board of directors of the Board, but only
Page 9 of 18
<PAGE>
if nominated for election by affirmative vote of three-quarters
of the members of the board of directors of the Board, or of a
nominating committee thereof, in office at the time of such first
nomination;
PROVIDED, HOWEVER, that such individual's election or nomination did
not result from an actual or threatened election contest (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents (within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf of the
Board of the Bank;
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Bank by any employee
benefit plan maintained by the Bank. For purposes of this section 11, the term
"person" shall have the meaning assigned to it under sections 13(d)(3) or
14(d)(2) of the Exchange Act.
(b) In the event of a Change in Control, the Executive shall be entitled to
the payments and benefits contemplated by section 9(b) in the event of her
termination of employment with the Bank under any of the circumstances described
in section 9(a) of this Agreement or under any of the following circumstances:
(i) resignation, voluntary or otherwise, by the Executive at any time
during the Employment Period and within ninety (90) days following her
demotion, loss of title, office or significant authority or responsibility,
or following any reduction in any element of her package of compensation
and benefits;
(ii) resignation, voluntary or otherwise, by the Executive at any time
during the Employment Period and within ninety (90) days following any
relocation of her principal place of employment or any change in working
conditions at such principal place of employment which is embarrassing,
derogatory or otherwise materially adverse to the Executive;
(iii) resignation, voluntary or otherwise, by the Executive at any
time during the Employment Period following the failure of any successor to
the Bank in the Change in Control to include the Executive in any
compensation or benefit program maintained by it or covering any of its
executive officers, unless the Executive is already covered by a
substantially similar plan of the Bank which is at least as favorable to
his; or
(iv) resignation, voluntary or otherwise, for any reason whatsoever
following the expiration of a transition period of thirty days beginning on
the effective date of the Change in Control (or such longer period, not to
exceed ninety (90) days beginning on the effective date of the Change in
Control, as the Bank or its successor may reasonably request) to facilitate
a transfer of management responsibilities.
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<PAGE>
SECTION 12. COVENANT NOT TO COMPETE.
The Executive hereby covenants and agrees that, in the event of her
termination of employment with the Bank prior to the expiration of the
Employment Period, for a period of one (1) year following the date of her
termination of employment with the Bank (or, if less, for the Remaining
Unexpired Employment Period), she shall not, without the written consent of the
Bank, become an officer, employee, consultant, director or trustee with
executory, managerial, supervisory or strategic authority or influence at any
savings bank, savings and loan association, savings and loan holding company,
bank or bank holding company, or any direct or indirect subsidiary or affiliate
of any such entity, that entails working within one hundred (100) miles of the
headquarters of the Bank on the date of the Executive's termination of
employment; PROVIDED, HOWEVER, that this section 12 shall not apply if the
Executive's employment is ter- minated for the reasons set forth in section
9(a); and PROVIDED, further, that if the Executive's employment shall be
terminated on account of disability as provided in section 10(d) of this
Agreement, this section 12 shall not prevent the Executive from accepting any
position or performing any services if (a) she first offers, by written notice,
to accept a similar position with, or perform similar services for, the Bank on
substantially the same terms and conditions and (b) the Bank declines to accept
such offer within ten (10) days after such notice is given.
SECTION 13. CONFIDENTIALITY.
Unless she obtains the prior written consent of the Bank, the Executive
shall keep confidential and shall refrain from using for the benefit of himself,
or any person or entity other than the Bank or any entity which is a subsidiary
of the Bank or of which the Bank is a subsidiary, any material document or
information obtained from the Bank, or from its parent or subsidiaries, in the
course of her employment with any of them concerning their properties,
operations or business (unless such document or information is readily
ascertainable from public or published information or trade sources or has
otherwise been made available to the public through no fault of her own) until
the same ceases to be material (or becomes so ascertainable or available);
PROVIDED, HOWEVER, that nothing in this section 13 shall prevent the Executive,
with or without the Bank's consent, from participating in or disclosing
documents or information in connection with any judicial or administrative
investigation, inquiry or proceeding to the extent that such participation or
disclosure is required under applicable law.
SECTION 14. SOLICITATION.
The Executive hereby covenants and agrees that, for a period of one (1)
year following her termination of employment with the Bank, she shall not,
without the written consent of the Bank, either directly or indirectly:
(a) solicit, offer employment to, or take any other action intended,
or that a reasonable person acting in like circumstances would expect, to
have the effect of causing any officer or employee of the Bank or any
affiliate, as of the date of this Agreement, of either of them to terminate
her or her employment and accept employment or become affiliated with, or
provide services for compensation in any
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<PAGE>
capacity whatsoever to, any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making loans,
doing business within one hundred (100) miles of the headquarters of the
Bank or any affiliate, as of the date of this Agreement, of either of them;
(b) provide any information, advice or recommendation with respect to
any such officer or employee of any savings bank, savings and loan
association, bank, bank holding company, savings and loan holding company,
or other institution engaged in the business of accepting deposits and
making loans, doing business within one hundred (100) miles of the
headquarters of the Bank or any affiliate, as of the date of this
Agreement, of either of them that is intended, or that a reasonable person
acting in like circumstances would expect, to have the effect of causing
any officer or employee of the Bank or any affiliate, as of the date of
this Agreement, of either of them to terminate her or her employment and
accept employment or become affiliated with, or provide services for
compensation in any capacity whatsoever to, any savings bank, savings and
loan association, bank, bank holding company, savings and loan holding
company, or other institution engaged in the business of accepting deposits
and making loans, doing business within one hundred (100) miles of the
headquarters of the Bank or any affiliate, as of the date of this
Agreement, of either of them;
(c) solicit, provide any information, advice or recommendation or take
any other action intended, or that a reasonable person acting in like
circumstances would expect, to have the effect of causing any customer of
the Bank to terminate an existing business or commercial relationship with
the Bank.
SECTION 15. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS.
The termination of the Executive's employment during the term of this
Agreement or thereafter, whether by the Bank or by the Executive, shall have no
effect on the rights and obligations of the parties thereto under the Bank's
qualified or non-qualified retirement, pension, savings, thrift, profit-sharing
or stock bonus plans, group life, health (including hospitalization, medical and
major medical), dental, accident and long term disability insurance plans or
such other employee benefit plans or programs, or compensation plans or
programs, as may be maintained by, or cover employees of, the Bank from time to
time.
SECTION 16. SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon the
Executive, her legal representatives and testate or intestate distributees, and
the Bank and its successors and assigns, including any successor by merger or
consolidation or any other person or firm or corporation to which all or
substantially all of the assets and business of the Bank may be sold or
otherwise transferred. Failure of the Bank to obtain from any successor its
express written assumption of the Bank's obligations hereunder at least sixty
(60) days in advance of the scheduled
Page 12 of 18
<PAGE>
effective date of any such succession shall be deemed a material breach of this
Agreement unless cured within ten (10) days after notice thereof by the
Executive to the Bank.
SECTION 17. NOTICES.
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to the Executive:
Melanie C. Paisley
8217A NC Highway 163
West Jefferson, North Carolina 28694
If to the Bank:
Ashe Federal Bank
P.O. Box 26
West Jefferson, North Carolina 28694
Attention: Chairman Of The Board
---------------------
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: W. Edward Bright, Esq.
---------------------
SECTION 18. INDEMNIFICATION FOR ATTORNEYS' FEES.
The Bank shall indemnify, hold harmless and defend the Executive against
rea- sonable costs, including legal fees, incurred by the Executive in
connection with or arising out of any action, suit or proceeding in which she
may be involved, as a result of her efforts, in good faith, to defend or enforce
the terms of this Agreement; PROVIDED, HOWEVER, that the Executive shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding and such court or arbitrator shall have approved such
indemnification, or in a settlement. In the case of a settlement, such
indemnification provided for in this section shall require an approval from a
majority of the disinterested directors of the Board of Directors of the Bank
that the Executive acted in good faith and that such indemnification is in the
best interests of the institution. For purposes of this Agreement, any
settlement agreement which provides for payment of any amounts in settlement
Page 13 of 18
<PAGE>
of the Bank's obligations hereunder shall be conclusive evidence of the
Executive's entitlement to indemnification hereunder, and any such
indemnification payments shall be in addition to amounts payable pursuant to
such settlement agreement, unless such settlement agreement expressly provides
otherwise.
SECTION 19. SEVERABILITY.
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
SECTION 20. WAIVER.
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
SECTION 21. COUNTERPARTS.
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
SECTION 22. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of North
Carolina applicable to contracts entered into and to be performed entirely
within the State of North Carolina.
SECTION 23. HEADINGS AND CONSTRUCTION.
The headings of sections in this Agreement are for convenience of reference
only and are not intended to qualify the meaning of any section. Any reference
to a section number shall refer to a section of this Agreement, unless otherwise
stated.
SECTION 24. ENTIRE AGREEMENT; MODIFICATIONS.
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.
Page 14 of 18
<PAGE>
SECTION 25. REQUIRED REGULATORY PROVISIONS.
The following provisions are included for the purposes of complying with
various laws, rules and regulations applicable to the Bank:
(a) Notwithstanding anything herein contained to the contrary, in no
event shall the aggregate amount of compensation payable to the Executive
under section 9(b) hereof (exclusive of amounts described in section
9(b)(i)) exceed the three times the Executive's average annual compensation
for the last five consecutive calendar years to end prior to her
termination of employment with the Bank (or for her entire period of
employment with the Bank if less than five calendar years). The
compensation payable to the Executive hereunder shall be further reduced
(but not below zero) if such reduction would avoid the assessment of excise
taxes on excess parachute payments (within the meaning of section 280G of
the Code).
(b) Notwithstanding anything herein contained to the contrary, any
payments to the Executive by the Bank, whether pursuant to this Agreement
or otherwise, are subject to and conditioned upon their compliance with
section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C.
ss.1828(k), and any regulations promulgated thereunder.
(c) Notwithstanding anything herein contained to the contrary, if the
Executive is suspended from office and/or temporarily prohibited from
participating in the conduct of the affairs of the Bank pursuant to a
notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C.
ss.1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service of such notice, unless stayed
by appropriate proceedings. If the charges in such notice are dismissed,
the Bank, in its discretion, may (i) pay to the Executive all or part of
the compensation withheld while the Bank's obligations hereunder were
suspended and (ii) reinstate, in whole or in part, any of the obligations
which were suspended.
(d) Notwithstanding anything herein contained to the contrary, if the
Executive is removed and/or permanently prohibited from participating in
the conduct of the Bank's affairs by an order issued under section 8(e)(4)
or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all
prospective obligations of the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights and obligations of
the Bank and the Executive shall not be affected.
(e) Notwithstanding anything herein contained to the contrary, if the
Bank is in default (within the meaning of section 3(x)(1) of the FDI Act,
12 U.S.C. ss.1813(x)(1), all prospective obligations of the Bank under this
Agreement shall terminate as of the date of default, but vested rights and
obligations of the Bank and the Executive shall not be affected.
Page 15 of 18
<PAGE>
(f) Notwithstanding anything herein contained to the contrary, all
prospective obligations of the Bank hereunder shall be terminated, except
to the extent that a continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or her designee or the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the FDI Act, 12 U.S.C. ss.1823(c); (ii) by
the Director of the OTS or her designee at the time such Director or
designee approves a supervisory merger to resolve problems related to the
operation of the Bank or when the Bank is determined by such Director to be
in an unsafe or unsound condition. The vested rights and obligations of the
parties shall not be affected.
If and to the extent that any of the foregoing provisions shall cease to be
required or by applicable law, rule or regulation, the same shall become
inoperative as though eliminated by formal amendment of this Agreement.
Page 16 of 18
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and
the Executive has hereunto set her hand, all as of the day and year first above
written.
--------------------------------------
MELANIE C. PAISLEY
Senior Vice President,
Secretary, Treasurer and Chief
Financial Officer
ATTEST: ASHE FEDERAL BANK
By _____________________________ By ____________________________________
MARTIN G. LITTLE JAMES A. TODD
Senior Vice President and President and Chief Executive Officer
Retail Banking Officer
[Seal]
Page 17 of 18
<PAGE>
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF ASHE )
On this ________ day of ____________________, 1996, before me personally
came Melanie C. Paisley, to me known, and known to me to be the individual
described in the foregoing instrument, who, being by me duly sworn, did depose
and say that she resides at the address set forth in said instrument, and that
she signed her name to the foregoing instrument.
----------------------------------------
Notary Public
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF ASHE )
On this ________ day of ____________________, 1996, before me personally
came __________________, to me known, who, being by me duly sworn, did depose
and say that he resides at ____________________________________________________,
that he is a member of the Board of Directors of ASHE FEDERAL BANK, the savings
bank described in and which executed the foregoing instrument; that he knows the
seal of said mutual savings bank; that the seal affixed to said instrument is
such seal; that it was so affixed by order of the Board of Directors of said
savings bank; and that he signed his name thereto by like order.
----------------------------------------
Notary Public
Page 18 of 18
Exhibit 10.3
ASHE FEDERAL BANK
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
October 4, 1996 by and between ASHE FEDERAL BANK, a mutual savings bank
organized and operating under the federal laws of the United States and having
an office at 205 South Jefferson Avenue, West Jefferson, North Carolina 28694
("Bank") and MARTIN G. LITTLE, an individual residing at 435 Holly Ridge Road,
West Jefferson, North Carolina 28694 ("Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Executive currently serves the Bank in the capacity of Senior
Vice President; and
WHEREAS, the Bank has decided to reorganize from a mutual savings bank to a
stock form savings bank which is majority owned by a mutual holding company
("Mutual Holding Company") formed pursuant to the Plan of Reorganization from
Mutual Bank to Mutual Holding Company (the "Plan of Reorganization"); and
WHEREAS, the Bank desires to assure for itself the continued availability
of the Executive's services and the ability of the Executive to perform such
services with a minimum of personal distraction in the event of a pending or
threatened Change in Control (as hereinafter defined); and
WHEREAS, the Executive is willing to continue to serve the Bank on the
terms and conditions hereinafter set forth; and
WHEREAS, the Bank has agreed to provide the Executive with additional
salary as added consideration for the Executive agreeing to the restrictive
covenants hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter set forth, the Bank and the Executive hereby agree as
follows:
SECTION 1. EMPLOYMENT.
The Bank agrees to continue to employ the Executive, and the Executive
hereby agrees to such continued employment, during the period and upon the terms
and conditions set forth in this Agreement.
Page 1 of 18
<PAGE>
SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD.
(a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this section 2
("Employment Period"). The Employment Period shall be for an initial term of
three years beginning on the date of this Agreement. Prior to the first
anniversary of the date of this Agreement and each anniversary date thereafter
(each, an "Anniversary Date"), the Board of Directors of the Bank ("Board")
shall review the terms of this Agreement and the Executive's performance of
services hereunder and may, in the absence of objection from the Executive and
subject to section 2(d), approve an extension of the Employment Period. In such
event, the Employment Period shall be extended to the third anniversary of the
relevant Anniversary Date.
(b) For all purposes of this Agreement, the term "Remaining Unexpired
Employment Period" as of any date shall mean the period beginning on such date
and ending on the Anniversary Date on which the Employment Period (as extended
pursuant to section 2(a) of this Agreement) is then scheduled to expire.
(c) Nothing in this Agreement shall be deemed to prohibit the Bank from
terminating the Executive's employment at any time during the Employment Period
with or without notice for any reason; PROVIDED, HOWEVER, that the relative
rights and obligations of the Bank and the Executive in the event of any such
termination shall be determined under this Agreement.
(d) In no event shall an extension of the Employment Period be made during
any time period during which the Executive may tender voluntary resignation and
collect severance benefits pursuant to either section 9(a) or section 11 of this
Agreement.
SECTION 3. DUTIES.
The Executive shall serve as the Senior Vice President/Retail Banking
Manager of the Bank, having such power, authority and responsibility and
performing such duties as are prescribed by or under the By-Laws of the Bank and
as are customarily associated with such position or as assigned by the Board
acting in good faith. The Retail Banking Manager will be responsible for
generating loans and deposits within the market area with direct responsibility
for directing the performance of the bank's lending function while coordinating
customer service and deposit gathering objectives with the operations manager.
Specific responsibilities include:
o Establishing performance guidelines for individual lending officers.
o Identifying and defining market segments for additional penetration
o Coordinating with the compliance officer to assure that lending
activities comply with regulatory and bank policies.
o Recommending changes to the bank's lending policies and practices when
conditions change so that the bank can maximize its penetration of the
desired market segments while accurately measuring the mitigating the
risks so that the level of non-performing loans remain at below .5% of
assets.
Page 2 of 18
<PAGE>
o Assisting the CEO in creating a positive image for the bank in the
realtor and builder communities.
o Functioning as a loan officer.
The Executive shall devote his full business time and attention (other than
during weekends, holidays, approved vacation periods, and periods of illness or
approved leaves of absence) to the business and affairs of the Bank and shall
use his best efforts to advance the interests of the Bank.
SECTION 4. CASH COMPENSATION.
(a) In consideration for the services to be rendered by the Executive
hereunder, the Bank shall pay to him a salary at an initial annual rate of
THIRTY-SIX THOUSAND DOLLARS ($36,000.00), payable in approximately equal
installments in accordance with the Bank's customary payroll practices for
senior officers. Prior to each Anniversary Date occurring during the Employment
Period, the Board shall review the Executive's annual rate of salary and may, in
its discretion, approve an increase therein. In addition to salary, the
Executive may receive other cash compensation from the Bank for services
hereunder at such times, in such amounts and on such terms and conditions as the
Board may determine from time to time.
(b) If elected to the Board, and if Executive chooses to serve on such
Board, Executive will be compensated for such service in the same manner as
other members of the Board.
SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated as an employee
of the Bank and shall be eligible to participate in and receive benefits under
any and all qualified or non-qualified retirement, pension, savings,
profit-sharing or stock bonus plans, any and all group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans, and any other employee benefit and compensation
plans (including, but not limited to, any incentive compensation plans or
programs, stock option and appreciation rights plans and restricted stock plans)
as may from time to time be maintained by, or cover executive employees of, the
Bank, in accordance with the terms and conditions of such employee benefit plans
and programs and compensation plans and programs and consistent with the Bank's
customary practices.
SECTION 6. INDEMNIFICATION AND INSURANCE.
(a) During the Employment Period and for a period of six (6) years
thereafter, the Bank shall cause the Executive to be covered by and named as an
insured under any policy or contract of insurance obtained by it to insure its
directors and officers against personal liability for acts or omissions in
connection with service as an officer or director of the Bank or service in
other capacities at the request of the Bank. The coverage provided to the
Executive pursuant to
Page 3 of 18
<PAGE>
this section 6 shall be of the same scope and on the same terms and conditions
as the coverage (if any) provided to other officers or directors of the Bank.
(b) To the maximum extent permitted under 12 C.F.R. ss.545.121, during the
Employment Period and for a period six (6) years thereafter, the Bank shall
indemnify, and shall cause its subsidiaries and affiliates to indemnify the
Executive against and hold him harmless from any costs, liabilities, losses and
exposures to the fullest extent and on the most favorable terms and conditions
that similar indemnification is offered to any director or officer of the Bank
or any subsidiary or affiliate thereof. This section 6(b) shall not be
applicable where section 18 is applicable.
SECTION 7. OUTSIDE ACTIVITIES.
The Executive may serve as a member of the boards of directors of such
business, community and charitable organizations as he may disclose to and as
may be approved by the Board (which approval shall not be unreasonably
withheld); PROVIDED, HOWEVER, that such service shall not materially interfere
with the performance of his duties under this Agreement. The Executive may also
engage in personal business and investment activities which do not materially
interfere with the performance of his duties hereunder; PROVIDED, HOWEVER, that
such activities are not prohibited under any code of conduct or investment or
securities trading policy established by the Bank and generally applicable to
all similarly situated executives (including, without limitation, any applicable
conflict of interest policy adopted by the Board of Directors as contemplated by
12 C.F.R. ss.571.7 and ss.571.9). The Executive may also serve as an officer or
director of the Mutual Holding Company on such terms and conditions as the Bank
and the Mutual Holding Company may mutually agree upon, and such service shall
not be deemed to materially interfere with the Executive's performance of his
duties hereunder or otherwise to result in a material breach of this Agreement.
SECTION 8. WORKING FACILITIES AND EXPENSES.
The Executive's principal place of employment shall be at the Bank's
executive offices at the address first above written, or at such other location
within Ashe County at which the Bank shall maintain its principal executive
offices, or at such other location as the Bank and the Executive may mutually
agree upon. The Bank shall provide the Executive at his principal place of
employment with a private office, secretarial services and other support
services and facilities suitable to his position with the Bank and necessary or
appropriate in connection with the performance of his assigned duties under this
Agreement. The Bank shall reimburse the Executive for his ordinary and necessary
business expenses, including, without limitation, fees for memberships in such
clubs and organizations as the Executive and the Bank shall mutually agree are
necessary and appropriate for business purposes, and his travel and
entertainment expenses incurred in connection with the performance of his duties
under this Agreement, in each case upon presentation to the Bank of an itemized
account of such expenses in such form as the Bank may reasonably require.
Page 4 of 18
<PAGE>
SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS.
(a) The Executive shall be entitled to the severance benefits described
herein in the event that his employment with the Bank terminates during the
Employment Period under any of the following circumstances:
(i) the Executive's voluntary resignation from employment with the
Bank within forty-five (45) days following:
(A) the failure of the Board to appoint or re-appoint or elect or
re-elect the Executive to the office stated in section 3 of this
Agreement (or a more senior office) of the Bank;
(B) if the Executive is or becomes a member of the Board, the
failure of the stockholders of the Bank to elect or re-elect the
Executive to the Board or the failure of the Board (or the nominating
committee thereof) to nominate the Executive for such election or
re-election; PROVIDED, HOWEVER, that such failure is not the result of
a vote cast by the Executive;
(C) the expiration of a thirty (30) day period following the date
on which the Executive gives written notice to the Bank of its
material failure, whether by amendment of the Bank's Organization
Certificate or By-laws, action of the Board or the Bank's stockholders
or otherwise, to vest in the Executive the functions, duties, or
responsibilities prescribed in section 3 of this Agreement as of the
date hereof, unless, during such thirty (30) day period, the Bank
fully cures such failure;
(D) the expiration of a thirty (30) day period following the date
on which the Executive gives written notice to the Bank of its
material breach of any term, condition or covenant contained in this
Agreement (including, without limitation any reduction of the
Executive's rate of base salary in effect from time to time and any
change in the terms and conditions of any compensation or benefit
program in which the Executive participates which, either individually
or together with other changes, has a material adverse effect on the
aggregate value of his total compensation package), unless, during
such thirty (30) day period, the Bank fully cures such failure; or
(ii) the termination of the Executive's employment with the Bank for
any other reason not described in section 10(a).
In such event, subject to section 25, the Bank shall provide the benefits and
pay to the Executive the amounts described in section 9(b).
Page 5 of 18
<PAGE>
(b) Upon the termination of the Executive's employment with the Bank under
circumstances described in section 9(a) of this Agreement, the Bank shall pay
and provide to the Executive (or, in the event of his death, to his estate):
(i) his earned but unpaid compensation, including bonuses awarded and
not yet received, as of the date of the termination of his employment with
the Bank, such payment to be made at the time and in the manner prescribed
by law applicable to the payment of wages but in no event later than thirty
(30) days after termination of employment;
(ii) the benefits, if any, to which he is entitled as a former
employee under the employee benefit plans and programs and compensation
plans and programs maintained for the benefit of the Bank's officers and
employees;
(iii) continued group life, health (including hospitalization, medical
and major medical), dental, accident and long term disability insurance
benefits, in addition to that provided pursuant to section 9(b)(ii), and
after taking into account the coverage provided by any subsequent employer,
if and to the extent necessary to provide for the Executive, for the
Remaining Unexpired Employment Period, coverage equivalent to the coverage
to which he would have been entitled under such plans (as in effect on the
date of his termination of employment, or, if his termination of employment
occurs after a Change in Control, on the date of such Change in Control,
whichever benefits are greater) if he had continued working for the Bank
during the Remaining Unexpired Employment Period at the highest annual rate
of compensation achieved during that portion of the Employment Period which
is prior to the Executive's termination of employment with the Bank; and
(iv) within thirty (30) days following his termination of employment
with the Bank, a lump sum payment, in an amount equal to the present value
of the salary that the Executive would have earned if he had continued
working for the Bank during the Remaining Unexpired Employment Period at
the highest annual rate of salary achieved during that portion of the
Employment Period which is prior to the Executive's termination of
employment with the Bank, where such present value is to be determined
using a discount rate equal to the applicable short-term federal rate
prescribed under section 1274(d) of the Internal Revenue Code of 1986
("Code"), compounded using the compounding period corresponding to the
Bank's regular payroll periods for its officers, such lump sum to be paid
in lieu of all other payments of salary provided for under this Agreement
in respect of the period following any such termination.
The Bank and the Executive hereby stipulate that the damages which may be
incurred by the Executive following any such termination of employment are not
capable of accurate measurement as of the date first above written and that the
payments and benefits contemplated by this section 9(b) constitute reasonable
damages under the circumstances and shall be payable without any requirement of
proof of actual damage and without regard to the Executive's efforts, if any, to
mitigate damages. The Bank and the Executive further agree that the Bank may
condition the
Page 6 of 18
<PAGE>
payments and benefits (if any) due under sections 9(b)(iii) and (iv) on the
receipt of the Executive's resignation from any and all positions which he holds
as an officer, director or committee member with respect to the Bank or the
Mutual Holding Company or any subsidiary or affiliate of either of them.
SECTION 10. TERMINATION WITHOUT ADDITIONAL BANK LIABILITY.
(a) In the event that Executive's employment with the Company shall
terminate during the Employment Period on account of:
(i) the discharge of the Executive for "cause," which, for purposes of
this Agreement shall mean personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease and desist order, or any material breach of this Agreement, in each
case as measured against standards generally prevailing at the relevant
time in the savings and community banking industry; PROVIDED, HOWEVER, that
the Executive shall not be deemed to have been discharged for cause unless
and until the following procedures shall have been followed:
(A) the Board shall adopt a resolution duly approved by
affirmative vote of a majority of the entire Board at a meeting called
and held for such purpose calling for the Executive's termination for
cause and setting forth the purported grounds for such termination
("Proposed Termination Resolution");
(B) as soon as practicable, and in any event within five (5)
days, after adoption of such resolution, the Board shall furnish to
the Executive a written notice of termination which shall be
accompanied by a certified copy of the Proposed Termination Resolution
("Notice of Proposed Termination");
(C) the Executive shall be afforded a reasonable opportunity to
to make oral and written presentations to the members of the Board, on
his own behalf, or through a representative, who may be his legal
counsel, to refute the grounds set forth in the Proposed Termination
Resolution at one or more meetings of the Board to be held no sooner
than fifteen (15) days and no later than thirty (30) after the
Executive's receipt of the Proposed Termination Notice ("Termination
Hearings"); and
(D) within ten (10) days following the end of the Termination
Hearings, the Board shall adopt a resolution duly approved by
affirmative vote of a majority of the entire Board at a meeting called
and held for such purpose (A) finding that in the good faith opinion
of the Board the grounds for termination set forth in the Proposed
Termination Resolution exist and
Page 7 of 18
<PAGE>
(B) terminating the Executive's employment ("Termination Resolution");
and
(E) as promptly as practicable, and in any event within one (1)
business day after adoption of the Termination Resolution, the Board
shall furnish to the Exective written notice of termination, which
notice shall include a copy of the Termination Resolution and specify
an effective date of termination that is not later than the date on
which such notice is given;
(ii) Executive's voluntary resignation from employment with the
Company for reasons other than those specified in section 9(a);
(iii) Executive's death; or
(iv) a determination that Executive is eligible for long-term
disability benefits under the Company's long-term disability insurance
program or, if there is no such program, under the federal Social Security
Act;
then the Company shall have no further obligations under this Agreement, other
than the payment to Executive (or, in the event of his death, to his estate) of
his earned but unpaid salary as of the date of the termination of his
employment, and the provision of such other benefits, if any, to which he is
entitled as a former employee under the employee benefit plans and pro- grams
and compensation plans and programs maintained by, or covering employees of, the
Company.
(b) For purposes of section 10(a)(i)(A) or (B), no act or failure to act,
on the part of Executive, shall be considered "willful" unless it is done, or
omitted to be done, by Executive in bad faith or without reasonable belief that
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or based upon the written advice of counsel for the Company
shall be conclusively presumed to be done, or omitted to be done, by Executive
in good faith and in the best interests of the Company. The cessation of
employment of Executive shall not be deemed to be for "cause" within the meaning
of section 10(a)(i) unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote of
three-fourths of the non-employee members of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice is provided to
Executive and Executive is given an opportunity, together with counsel, to be
heard before the Board), finding that, in the good faith opinion of the Board,
Executive is guilty of the conduct described in section 10(a)(i) above, and
specifying the particulars thereof in detail.
SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL.
(a) A Change in Control of the Bank ("Change in Control") shall be deemed
to have occurred upon the happening of any of the following events:
(i) approval by the stockholders of the Bank of a transaction that
would result in the reorganization, merger or consolidation of the Bank,
respectively, with one or more other persons, other than a transaction
following which:
Page 8 of 18
<PAGE>
(A) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
1934 ("Exchange Act")) in substantially the same relative proportions
by persons who, immediately prior to such transaction, beneficially
owned (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) at least 51% of the outstanding equity ownership interests in the
Bank; and
(B) at least 51% of the securities entitled to vote generally in
the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same relative
proportions by persons who, immediately prior to such transaction,
beneficially owned (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Bank;
(ii) the acquisition of all or substantially all of the assets of the
Bank or beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 25% or more of the outstanding securities of the
Bank entitled to vote generally in the election of directors by any person
or by any persons acting in concert, or approval by the stockholders of the
Bank of any transaction which would result in such an acquisition; or
(iii) a complete liquidation or dissolution of the Bank, or approval
by the stockholders of the Bank of a plan for such liquidation or
dissolution; or
(iv) the occurrence of any event if, immediately following such event,
at least 50% of the members of the board of directors of the Bank do not
belong to any of the following groups:
(A) individuals who were members of the Board of the Bank on the
date of this Agreement; or
(B) individuals who first became members of the Board of the Bank
after the date of this Agreement either:
(I) upon election to serve as a member of the Board of
directors of the Bank by affirmative vote of three-quarters of
the members of such board, or of a nominating committee thereof,
in office at the time of such first election; or
(II) upon election by the stockholders of the Board to serve
as a member of the board of directors of the Board, but only if
nominated for election by affirmative vote of three-quarters of
the members of the board of directors of the Board, or of a
nominating committee thereof, in office at the time of such first
nomination;
Page 9 of 18
<PAGE>
PROVIDED, HOWEVER, that such individual's election or nomination did
not result from an actual or threatened election contest (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents (within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf of the
Board of the Bank;
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Bank by any employee
benefit plan maintained by the Bank. For purposes of this section 11, the term
"person" shall have the meaning assigned to it under sections 13(d)(3) or
14(d)(2) of the Exchange Act.
(b) In the event of a Change in Control, the Executive shall be entitled to
the payments and benefits contemplated by section 9(b) in the event of his
termination of employment with the Bank under any of the circumstances described
in section 9(a) of this Agreement or under any of the following circumstances:
(i) resignation, voluntary or otherwise, by the Executive at any time
during the Employment Period and within ninety (90) days following his
demotion, loss of title, office or significant authority or responsibility,
or following any reduction in any element of his package of compensation
and benefits;
(ii) resignation, voluntary or otherwise, by the Executive at any time
during the Employment Period and within ninety (90) days following any
relocation of his principal place of employment or any change in working
conditions at such principal place of employment which is embarrassing,
derogatory or otherwise materially adverse to the Executive;
(iii) resignation, voluntary or otherwise, by the Executive at any
time during the Employment Period following the failure of any successor to
the Bank in the Change in Control to include the Executive in any
compensation or benefit program maintained by it or covering any of its
executive officers, unless the Executive is already covered by a
substantially similar plan of the Bank which is at least as favorable to
his; or
(iv) resignation, voluntary or otherwise, for any reason whatsoever
following the expiration of a transition period of thirty days beginning on
the effective date of the Change in Control (or such longer period, not to
exceed ninety (90) days beginning on the effective date of the Change in
Control, as the Bank or its successor may reasonably request) to facilitate
a transfer of management responsibilities.
SECTION 12. COVENANT NOT TO COMPETE.
The Executive hereby covenants and agrees that, in the event of his
termination of employment with the Bank prior to the expiration of the
Employment Period, for a period of one (1) year following the date of his
termination of employment with the Bank (or, if less, for the
Page 10 of 18
<PAGE>
Remaining Unexpired Employment Period), he shall not, without the written
consent of the Bank, become an officer, employee, consultant, director or
trustee with executory, managerial, supervisory or strategic authority or
influence at any savings bank, savings and loan association, savings and loan
holding company, bank or bank holding company, or any direct or indirect
subsidiary or affiliate of any such entity, that entails working within one
hundred (100) miles of the headquarters of the Bank on the date of the
Executive's termination of employment; PROVIDED, HOWEVER, that this section 12
shall not apply if the Executive's employment is ter- minated for the reasons
set forth in section 9(a); and PROVIDED, further, that if the Executive's
employment shall be terminated on account of disability as provided in section
10(d) of this Agreement, this section 12 shall not prevent the Executive from
accepting any position or performing any services if (a) he first offers, by
written notice, to accept a similar position with, or perform similar services
for, the Bank on substantially the same terms and conditions and (b) the Bank
declines to accept such offer within ten (10) days after such notice is given.
SECTION 13. CONFIDENTIALITY.
Unless he obtains the prior written consent of the Bank, the Executive
shall keep confidential and shall refrain from using for the benefit of himself,
or any person or entity other than the Bank or any entity which is a subsidiary
of the Bank or of which the Bank is a subsidiary, any material document or
information obtained from the Bank, or from its parent or subsidiaries, in the
course of his employment with any of them concerning their properties,
operations or business (unless such document or information is readily
ascertainable from public or published information or trade sources or has
otherwise been made available to the public through no fault of his own) until
the same ceases to be material (or becomes so ascertainable or available);
PROVIDED, HOWEVER, that nothing in this section 13 shall prevent the Executive,
with or without the Bank's consent, from participating in or disclosing
documents or information in connection with any judicial or administrative
investigation, inquiry or proceeding to the extent that such participation or
disclosure is required under applicable law.
SECTION 14. SOLICITATION.
The Executive hereby covenants and agrees that, for a period of one (1)
year following his termination of employment with the Bank, he shall not,
without the written consent of the Bank, either directly or indirectly:
(a) solicit, offer employment to, or take any other action intended,
or that a reasonable person acting in like circumstances would expect, to
have the effect of causing any officer or employee of the Bank or any
affiliate, as of the date of this Agreement, of either of them to terminate
his or his employment and accept employment or become affiliated with, or
provide services for compensation in any capacity whatsoever to, any
savings bank, savings and loan association, bank, bank holding company,
savings and loan holding company, or other institution engaged in the
business of accepting deposits and making loans, doing business within one
hundred (100) miles of the headquarters of the Bank or any affiliate, as of
the date of this Agreement, of either of them;
Page 11 of 18
<PAGE>
(b) provide any information, advice or recommendation with respect to
any such officer or employee of any savings bank, savings and loan
association, bank, bank holding company, savings and loan holding company,
or other institution engaged in the business of accepting deposits and
making loans, doing business within one hundred (100) miles of the
headquarters of the Bank or any affiliate, as of the date of this
Agreement, of either of them that is intended, or that a reasonable person
acting in like circumstances would expect, to have the effect of causing
any officer or employee of the Bank or any affiliate, as of the date of
this Agreement, of either of them to terminate his or his employment and
accept employment or become affiliated with, or provide services for
compensation in any capacity whatsoever to, any savings bank, savings and
loan association, bank, bank holding company, savings and loan holding
company, or other institution engaged in the business of accepting deposits
and making loans, doing business within one hundred (100) miles of the
headquarters of the Bank or any affiliate, as of the date of this
Agreement, of either of them;
(c) solicit, provide any information, advice or recommendation or take
any other action intended, or that a reasonable person acting in like
circumstances would expect, to have the effect of causing any customer of
the Bank to terminate an existing business or commercial relationship with
the Bank.
SECTION 15. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS.
The termination of the Executive's employment during the term of this
Agreement or thereafter, whether by the Bank or by the Executive, shall have no
effect on the rights and obligations of the parties thereto under the Bank's
qualified or non-qualified retirement, pension, savings, thrift, profit-sharing
or stock bonus plans, group life, health (including hospitalization, medical and
major medical), dental, accident and long term disability insurance plans or
such other employee benefit plans or programs, or compensation plans or
programs, as may be maintained by, or cover employees of, the Bank from time to
time.
SECTION 16. SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon the
Executive, his legal representatives and testate or intestate distributees, and
the Bank and its successors and assigns, including any successor by merger or
consolidation or any other person or firm or corporation to which all or
substantially all of the assets and business of the Bank may be sold or
otherwise transferred. Failure of the Bank to obtain from any successor its
express written assumption of the Bank's obligations hereunder at least sixty
(60) days in advance of the scheduled effective date of any such succession
shall be deemed a material breach of this Agreement unless cured within ten (10)
days after notice thereof by the Executive to the Bank.
Page 12 of 18
<PAGE>
SECTION 17. NOTICES.
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to the Executive:
Martin G. Little
435 Holly Ridge Road
West Jefferson, North Carolina 28694
If to the Bank:
Ashe Federal Bank
P.O. Box 26
West Jefferson, North Carolina 28694
Attention: Chairman of the Board
---------------------
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: W. Edward Bright, Esq.
---------------------
SECTION 18. INDEMNIFICATION FOR ATTORNEYS' FEES.
The Bank shall indemnify, hold harmless and defend the Executive against
rea- sonable costs, including legal fees, incurred by the Executive in
connection with or arising out of any action, suit or proceeding in which he may
be involved, as a result of his efforts, in good faith, to defend or enforce the
terms of this Agreement; PROVIDED, HOWEVER, that the Executive shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding and such court or arbitrator shall have approved such
indemnification, or in a settlement. In the case of a settlement, such
indemnification provided for in this section shall require an approval from a
majority of the disinterested directors of the Board of Directors of the Bank
that the Executive acted in good faith and that such indemnification is in the
best interests of the institution. For purposes of this Agreement, any
settlement agreement which provides for payment of any amounts in settlement of
the Bank's obligations hereunder shall be conclusive evidence of the Executive's
entitlement to indemnification hereunder, and any such indemnification payments
shall be in addition to amounts payable pursuant to such settlement agreement,
unless such settlement agreement expressly provides otherwise.
Page 13 of 18
<PAGE>
SECTION 19. SEVERABILITY.
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
SECTION 20. WAIVER.
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
SECTION 21. COUNTERPARTS.
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
SECTION 22. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of North
Carolina applicable to contracts entered into and to be performed entirely
within the State of North Carolina.
SECTION 23. HEADINGS AND CONSTRUCTION.
The headings of sections in this Agreement are for convenience of reference
only and are not intended to qualify the meaning of any section. Any reference
to a section number shall refer to a section of this Agreement, unless otherwise
stated.
SECTION 24. ENTIRE AGREEMENT; MODIFICATIONS.
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.
Page 14 of 18
<PAGE>
SECTION 25. REQUIRED REGULATORY PROVISIONS.
The following provisions are included for the purposes of complying with
various laws, rules and regulations applicable to the Bank:
(a) Notwithstanding anything herein contained to the contrary, in no
event shall the aggregate amount of compensation payable to the Executive
under section 9(b) hereof (exclusive of amounts described in section
9(b)(i)) exceed the three times the Executive's average annual compensation
for the last five consecutive calendar years to end prior to his
termination of employment with the Bank (or for his entire period of
employment with the Bank if less than five calendar years). The
compensation payable to the Executive hereunder shall be further reduced
(but not below zero) if such reduction would avoid the assessment of excise
taxes on excess parachute payments (within the meaning of section 280G of
the Code).
(b) Notwithstanding anything herein contained to the contrary, any
payments to the Executive by the Bank, whether pursuant to this Agreement
or otherwise, are subject to and conditioned upon their compliance with
section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C.
ss.1828(k), and any regulations promulgated thereunder.
(c) Notwithstanding anything herein contained to the contrary, if the
Executive is suspended from office and/or temporarily prohibited from
participating in the conduct of the affairs of the Bank pursuant to a
notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C.
ss.1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service of such notice, unless stayed
by appropriate proceedings. If the charges in such notice are dismissed,
the Bank, in its discretion, may (i) pay to the Executive all or part of
the compensation withheld while the Bank's obligations hereunder were
suspended and (ii) reinstate, in whole or in part, any of the obligations
which were suspended.
(d) Notwithstanding anything herein contained to the contrary, if the
Executive is removed and/or permanently prohibited from participating in
the conduct of the Bank's affairs by an order issued under section 8(e)(4)
or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all
prospective obligations of the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights and obligations of
the Bank and the Executive shall not be affected.
(e) Notwithstanding anything herein contained to the contrary, if the
Bank is in default (within the meaning of section 3(x)(1) of the FDI Act,
12 U.S.C. ss.1813(x)(1), all prospective obligations of the Bank under this
Agreement shall terminate as of the date of default, but vested rights and
obligations of the Bank and the Executive shall not be affected.
Page 15 of 18
<PAGE>
(f) Notwithstanding anything herein contained to the contrary, all
prospective obligations of the Bank hereunder shall be terminated, except
to the extent that a continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his designee or the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the FDI Act, 12 U.S.C. ss.1823(c); (ii) by
the Director of the OTS or his designee at the time such Director or
designee approves a supervisory merger to resolve problems related to the
operation of the Bank or when the Bank is determined by such Director to be
in an unsafe or unsound condition. The vested rights and obligations of the
parties shall not be affected.
If and to the extent that any of the foregoing provisions shall cease to be
required or by applicable law, rule or regulation, the same shall become
inoperative as though eliminated by formal amendment of this Agreement.
Page 16 of 18
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and
the Executive has hereunto set his hand, all as of the day and year first above
written.
---------------------------------------
MARTIN G. LITTLE
Senior Vice President and
Retail Banking Manager
ATTEST: ASHE FEDERAL BANK
By _______________________________ By __________________________________
MELANIE C. PAISLEY JAMES A. TODD
Secretary President and Chief
Executive Officer
[Seal]
Page 17 of 18
<PAGE>
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF ASHE )
On this ________ day of ____________________, 1996, before me personally
came Martin G. Little, to me known, and known to me to be the individual
described in the foregoing instrument, who, being by me duly sworn, did depose
and say that he resides at the address set forth in said instrument, and that he
signed his name to the foregoing instrument.
---------------------------------------
Notary Public
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF ASHE )
On this ________ day of ____________________, 1996, before me personally
came ___________________, to me known, who, being by me duly sworn, did depose
and say that he resides at ______________________________________________, that
he is a member of the Board of Directors of ASHE FEDERAL BANK, the savings bank
described in and which executed the foregoing instrument; that he knows the seal
of said mutual savings bank; that the seal affixed to said instrument is such
seal; that it was so affixed by order of the Board of Directors of said savings
bank; and that he signed his name thereto by like order.
---------------------------------------
Notary Public
Page 18 of 18
Exhibit 10.4
EMPLOYEE STOCK OWNERSHIP PLAN
OF
ASHE FEDERAL BANK
ADOPTED ON SEPTEMBER 10, 1996
EFFECTIVE ON JULY 1, 1996
INCORPORATING AMENDMENT NO. 3
<PAGE>
TABLE OF CONTENTS
-----------------
Page
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ARTICLE I
DEFINITIONS
SECTION 1.1 ACCOUNT....................................................... 1
SECTION 1.2 AFFILIATED EMPLOYER........................................... 1
SECTION 1.3 ALLOCATION COMPENSATION....................................... 1
SECTION 1.4 BOARD......................................................... 2
SECTION 1.5 BENEFICIARY................................................... 2
SECTION 1.6 BREAK IN SERVICE.............................................. 2
SECTION 1.7 CHANGE IN CONTROL............................................. 2
SECTION 1.8 CODE.......................................................... 2
SECTION 1.9 COMMITTEE..................................................... 2
SECTION 1.10 DISABILITY.................................................... 2
SECTION 1.11 DOMESTIC RELATIONS ORDER...................................... 2
SECTION 1.12 EFFECTIVE DATE................................................ 3
SECTION 1.13 ELIGIBLE EMPLOYEE............................................. 3
SECTION 1.14 ELIGIBLE PARTICIPANT.......................................... 3
SECTION 1.15 EMPLOYEE...................................................... 3
SECTION 1.16 EMPLOYER...................................................... 3
SECTION 1.17 EMPLOYMENT COMMENCEMENT DATE.................................. 3
SECTION 1.18 ERISA......................................................... 3
SECTION 1.19 ESOP CONTRIBUTION............................................. 3
SECTION 1.20 FAIR MARKET VALUE............................................. 3
SECTION 1.21 FAMILY MEMBER................................................. 4
SECTION 1.22 FINANCED SHARE................................................ 4
SECTION 1.23 FIVE PERCENT OWNER............................................ 4
SECTION 1.24 FORFEITURES................................................... 4
SECTION 1.25 FORMER PARTICIPANT............................................ 4
SECTION 1.26 GENERAL INVESTMENT ACCOUNT.................................... 4
SECTION 1.27 HIGHLY COMPENSATED EMPLOYEE................................... 4
SECTION 1.28 HOUR OF SERVICE............................................... 5
SECTION 1.29 INVESTMENT ACCOUNT............................................ 5
SECTION 1.30 INVESTMENT FUND............................................... 5
SECTION 1.31 LOAN REPAYMENT ACCOUNT........................................ 6
SECTION 1.32 LOAN REPAYMENT CONTRIBUTION................................... 6
SECTION 1.33 MATERNITY OR PATERNITY LEAVE.................................. 6
SECTION 1.34 MILITARY SERVICE.............................................. 6
SECTION 1.35 NAMED FIDUCIARY............................................... 6
SECTION 1.36 OFFICER....................................................... 6
SECTION 1.37 PARTICIPANT................................................... 6
SECTION 1.38 PERIOD OF SERVICE............................................. 6
(i)
<PAGE>
Page
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SECTION 1.39 PERIOD OF SEVERANCE........................................... 6
SECTION 1.40 PLAN.......................................................... 7
SECTION 1.41 PLAN ADMINISTRATOR............................................ 7
SECTION 1.42 PLAN YEAR..................................................... 7
SECTION 1.43 QUALIFIED DOMESTIC RELATIONS ORDER............................ 7
SECTION 1.44 QUALIFIED PARTICIPANT......................................... 7
SECTION 1.45 RETIREMENT.................................................... 7
SECTION 1.46 SHARE......................................................... 7
SECTION 1.47 SHARE ACQUISITION LOAN........................................ 7
SECTION 1.48 SHARE INVESTMENT ACCOUNT...................................... 7
SECTION 1.49 TENDER OFFER.................................................. 8
SECTION 1.50 TOTAL COMPENSATION............................................ 8
SECTION 1.51 TRUST......................................................... 8
SECTION 1.52 TRUST AGREEMENT............................................... 8
SECTION 1.53 TRUST FUND.................................................... 8
SECTION 1.54 TRUSTEE....................................................... 8
SECTION 1.55 VALUATION DATE................................................ 8
ARTICLE II
PARTICIPATION
SECTION 2.1 ELIGIBILITY FOR PARTICIPATION................................. 9
SECTION 2.2 COMMENCEMENT OF PARTICIPATION................................. 9
SECTION 2.3 TERMINATION OF PARTICIPATION.................................. 9
SECTION 2.4 ADJUSTMENTS TO PERIOD OF SERVICE.............................. 9
ARTICLE III
SPECIAL PROVISIONS
SECTION 3.1 MILITARY SERVICE.............................................. 10
SECTION 3.2 MATERNITY OR PATERNITY LEAVE.................................. 10
SECTION 3.3 LEAVE OF ABSENCE.............................................. 11
ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
SECTION 4.1 CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED................... 11
(ii)
<PAGE>
Page
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ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
SECTION 5.1 IN GENERAL.................................................... 12
SECTION 5.2 LOAN REPAYMENT CONTRIBUTIONS.................................. 12
SECTION 5.3 ESOP CONTRIBUTIONS............................................ 12
SECTION 5.4 TIME AND MANNER OF PAYMENT.................................... 13
ARTICLE VI
SHARE ACQUISITION LOANS
SECTION 6.1 IN GENERAL.................................................... 13
SECTION 6.2 COLLATERAL; LIABILITY FOR REPAYMENT........................... 14
SECTION 6.3 LOAN REPAYMENT ACCOUNT........................................ 14
SECTION 6.4 RELEASE OF FINANCED SHARES.................................... 15
SECTION 6.5 RESTRICTIONS ON FINANCED SHARES............................... 16
ARTICLE VII
ALLOCATION OF CONTRIBUTIONS
SECTION 7.1 ALLOCATION AMONG ELIGIBLE PARTICIPANTS........................ 16
SECTION 7.2 ALLOCATION OF RELEASED SHARES OR OTHER PROPERTY............... 16
SECTION 7.3 ALLOCATION OF ESOP CONTRIBUTIONS.............................. 16
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
SECTION 8.1 OPTIONAL LIMITATIONS ON ALLOCATIONS OF ESOP CONTRIBUTIONS..... 17
SECTION 8.2 GENERAL LIMITATIONS ON CONTRIBUTIONS.......................... 17
(iii)
<PAGE>
Page
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ARTICLE IX
VESTING
SECTION 9.1 VESTING....................................................... 21
SECTION 9.2 VESTING ON DEATH, DISABILITY, RETIREMENT OR CHANGE IN CONTROL. 21
SECTION 9.3 FORFEITURES ON TERMINATION OF EMPLOYMENT...................... 21
SECTION 9.4 AMOUNTS CREDITED UPON RE-EMPLOYMENT........................... 22
SECTION 9.5 ALLOCATION OF FORFEITURES..................................... 22
ARTICLE X
THE TRUST FUND
SECTION 10.1 THE TRUST FUND................................................ 22
SECTION 10.2 INVESTMENTS................................................... 23
SECTION 10.3 DISTRIBUTIONS FOR DIVERSIFICATION OF INVESTMENTS.............. 23
SECTION 10.4 USE OF COMMINGLED TRUST FUNDS................................. 24
SECTION 10.5 MANAGEMENT AND CONTROL OF ASSETS.............................. 24
ARTICLE XI
VALUATION OF INTERESTS IN THE TRUST FUND
SECTION 11.1 ESTABLISHMENT OF INVESTMENT ACCOUNTS.......................... 25
SECTION 11.2 SHARE INVESTMENT ACCOUNTS..................................... 25
SECTION 11.3 GENERAL INVESTMENT ACCOUNTS................................... 25
SECTION 11.4 VALUATION OF INVESTMENT ACCOUNTS.............................. 26
SECTION 11.5 ANNUAL STATEMENTS............................................. 26
ARTICLE XII
SHARES
SECTION 12.1 SPECIFIC ALLOCATION OF SHARES................................. 26
SECTION 12.2 DIVIDENDS..................................................... 27
SECTION 12.3 VOTING RIGHTS................................................. 27
SECTION 12.4 TENDER OFFERS................................................. 29
(iv)
<PAGE>
Page
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ARTICLE XIII
PAYMENT OF BENEFITS
SECTION 13.1 IN GENERAL.................................................... 31
SECTION 13.2 DESIGNATION OF BENEFICIARIES.................................. 32
SECTION 13.3 DISTRIBUTIONS TO PARTICIPANTS AND FORMER PARTICIPANTS......... 33
SECTION 13.4 MANNER OF PAYMENT............................................. 35
SECTION 13.5 MINIMUM REQUIRED DISTRIBUTIONS................................ 36
SECTION 13.6 DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS............ 37
SECTION 13.7 VALUATION OF SHARES UPON DISTRIBUTION TO A PARTICIPANT........ 39
SECTION 13.8 PUT OPTIONS
SECTION 13.9 RIGHT OF FIRST REFUSAL
ARTICLE XIV
ADMINISTRATION
SECTION 14.1 NAMED FIDUCIARIES............................................. 41
SECTION 14.2 PLAN ADMINISTRATOR............................................ 41
SECTION 14.3 COMMITTEE RESPONSIBILITIES.................................... 42
SECTION 14.4 CLAIMS PROCEDURE.............................................. 44
SECTION 14.5 CLAIMS REVIEW PROCEDURE....................................... 44
SECTION 14.8 ALLOCATION OF FIDUCIARY RESPONSIBILITIES AND EMPLOYMENT OF
ADVISORS...................................................... 45
SECTION 14.9 OTHER ADMINISTRATIVE PROVISIONS............................... 45
ARTICLE XV
AMENDMENT, TERMINATION AND TAX QUALIFICATION
SECTION 15.1 AMENDMENT AND TERMINATION BY ASHE FEDERAL BANK................ 46
SECTION 15.2 AMENDMENT OR TERMINATION OTHER THAN BY ASHE FEDERAL BANK...... 46
SECTION 15.3 CONFORMITY TO INTERNAL REVENUE CODE........................... 46
SECTION 15.4 CONTINGENT NATURE OF CONTRIBUTIONS............................ 47
(v)
<PAGE>
Page
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ARTICLE XVI
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
SECTION 16.1 IN GENERAL.................................................... 47
SECTION 16.2 DEFINITION OF TOP HEAVY PLAN.................................. 48
SECTION 16.3 DETERMINATION DATE............................................ 48
SECTION 16.4 CUMULATIVE ACCRUED BENEFITS................................... 49
SECTION 16.5 KEY EMPLOYEES................................................. 49
SECTION 16.6 REQUIRED AGGREGATION GROUP.................................... 50
SECTION 16.7 PERMISSIBLE AGGREGATION GROUP................................. 50
SECTION 16.8 SPECIAL REQUIREMENTS DURING TOP HEAVY PLAN YEARS.............. 50
ARTICLE XVII
MISCELLANEOUS PROVISIONS
SECTION 17.1 GOVERNING LAW................................................. 51
SECTION 17.2 NO RIGHT TO CONTINUED EMPLOYMENT.............................. 52
SECTION 17.3 CONSTRUCTION OF LANGUAGE...................................... 52
SECTION 17.4 HEADINGS...................................................... 52
SECTION 17.5 MERGER WITH OTHER PLANS....................................... 52
SECTION 17.6 NON-ALIENATION OF BENEFITS.................................... 52
SECTION 17.7 PROCEDURES INVOLVING DOMESTIC RELATIONS ORDERS................ 53
SECTION 17.8 LEASED EMPLOYEES.............................................. 53
SECTION 17.9 STATUS AS AN EMPLOYEE STOCK OWNERSHIP PLAN.................... 54
ARTICLE XVIII
CHANGE IN CONTROL
SECTION 18.1 DEFINITION OF CHANGE IN CONTROL............................... 54
SECTION 18.2 VESTING ON CHANGE OF CONTROL.................................. 56
SECTION 18.3 REPAYMENT OF LOAN............................................. 56
SECTION 18.4 PLAN TERMINATION AFTER CHANGE IN CONTROL...................... 57
SECTION 18.5 AMENDMENT OF ARTICLE XVIII.................................... 57
(vi)
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
OF
ASHE FEDERAL BANK
ARTICLE I
---------
DEFINITIONS
-----------
The following definitions shall apply for the purposes of the Plan,
unless a different meaning is clearly indicated by the context:
SECTION 1.1 ACCOUNT means an account established for each
Participant to which is allocated such Participant's share, if any, of all
Financed Shares and other property that are re leased from the Loan Repayment
Account in accordance with section 6.4, together with his share, if any, of any
ESOP Contributions that may be made by the Employer.
SECTION 1.2 AFFILIATED EMPLOYER means any corporation which is a
member of a controlled group of corporations (as defined in section 414(b) of
the Code) that includes the Employer; any trade or business (whether or not
incorporated) that is under common control (as defined in section 414(c) of the
Code) with the Employer; any organization (whether or not incorporated) that is
a member of an affiliated service group (as defined in section 414(m) of the
Code) that includes the Employer; any leasing organization (as defined in
section 414(n) of the Code) to the extent that any of its employees are required
pursuant to section 414(n) of the Code to be treated as employees of the
Employer; and any other entity that is required to be aggregated with the
Employer pursuant to regulations under section 414(o) of the Code.
SECTION 1.3 ALLOCATION COMPENSATION during any period means the
compensation taken into account in determining the allocation of benefits and
contributions among Participants and consists of the aggregate compensation
received by an Employee from the Employer with respect to such period as
reported to the Internal Revenue Service as wages for such period pursuant to
section 6041(a) of the Code, plus the amount by which such Employee's
compensation with respect to such period has been reduced pursuant to a
compensation reduction agreement under the terms of any of the following plans
which may be maintained by the Employer:
(a) a qualified cash or deferred arrangement described in
section 401(k) of the Code;
(b) a salary reduction simplified employee pension plan described in
section 408(k) of the Code;
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(c) a tax deferred annuity plan described in section 403(b) of the
Code; or
(d) a cafeteria plan described in section 125 of the Code.
In no event, however, shall an Employee's Allocation Compensation for any Plan
Year include any compensation in excess of $150,000. The $150,000 limitation set
forth in the preceding sentence shall be indexed in accordance with regulations
prescribed under section 401(a)(17) of the Code. If there are less than twelve
(12) months in the Plan Year, the $150,000 limitation (as adjusted) shall be
prorated by multiplying such limitation by a fraction, the numerator of which is
the number of months in the Plan Year and the denominator of which is twelve
(12). For purposes of applying the foregoing limitations to any person who is a
Five Percent Owner or who is one of the ten Highly Compensated Employees with
the highest Total Compensation (determined prior to the application of this
sentence), any Allocation Compensation paid to the spouse of such person or to
any lineal descendant of such person who has not attained age 19 on or before
the last day of such Plan Year shall be deemed to have been paid to such person.
SECTION 1.4 BOARD means the Board of Directors of Ashe Federal Bank.
SECTION 1.5 BENEFICIARY means the person or persons designated by a
Participant or Former Participant or other person entitled to a benefit under
the Plan, or otherwise determined to be entitled to a benefit under the Plan. If
more than one person is designated, each shall have an equal share unless the
person making the designation directed otherwise. The word "person" includes an
individual, a trust, an estate or any other person that is permitted to be named
as a Beneficiary.
SECTION 1.6 BREAK IN SERVICE means a Period of Severance of at least
365 consecutive days.
SECTION 1.7 CHANGE IN CONTROL means an event as defined in section
18.1.
SECTION 1.8 CODE means the Internal Revenue Code of 1986 (including
the corresponding provisions of any succeeding law).
SECTION 1.9 COMMITTEE means the Compensation Committee described in
section 14.3.
SECTION 1.10 DISABILITY means a condition of total incapacity,
mental or physical, for further performance of duty with the Employer, which the
Plan Administrator shall have deter mined, on the basis of competent medical
evidence, is likely to be permanent.
SECTION 1.11 DOMESTIC RELATIONS ORDER means a judgment, decree or
order (including the approval of a property settlement) that is made pursuant to
a state domestic relations or community property law and relates to the
provision of child support, alimony payments, or
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marital property rights to a spouse, child or other dependent of a Participant
or Former Participant.
SECTION 1.12 EFFECTIVE DATE means July 1, 1996.
SECTION 1.13 ELIGIBLE EMPLOYEE means an Employee who is eligible for
participation in the Plan in accordance with Article II.
SECTION 1.14 ELIGIBLE PARTICIPANT means, for any Plan Year, an
Employee who is a Participant during all or any part of such Plan Year.
SECTION 1.15 EMPLOYEE means any person, including an officer, who is
employed by the Employer.
SECTION 1.16 EMPLOYER means Ashe Federal Bank, and any successor
thereto and any Affiliated Employer which, with the prior written approval of
the Board and subject to such terms and conditions as may be imposed by the
Board, shall adopt this Plan.
SECTION 1.17 EMPLOYMENT COMMENCEMENT DATE means the date on which a
person first performs an Hour of Service, except that if an Employee separates
from service with the Employer, incurs a Break in Service and subsequently
returns to service with the Employer, his Employment Commencement Date shall be
the date on which he first performs an Hour of Service following the Break in
Service.
SECTION 1.18 ERISA means the Employee Retirement Income Security Act
of 1974, as amended from time to time (including the corresponding provisions of
any succeeding law).
SECTION 1.19 ESOP CONTRIBUTION means Shares or amounts of money
contributed to the Plan by the Employer in accordance with section 5.3.
SECTION 1.20 FAIR MARKET VALUE on any date means:
(a) with respect to a Share:
(i) the final quoted sale price on the date in question (or,
if there is no reported sale on such date, on the last preceding
date on which any reported sale occurred) as reported in the
principal consolidated reporting system with respect to securities
listed or admitted to trading on the principal United States
securities exchange on which like Shares are listed or admitted to
trading; or
(ii) if like Shares are not listed or admitted to trading on
any such exchange, the closing bid quotation with respect to a Share
on such date on the National Association of Securities Dealers
Automated Quotation
<PAGE>
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System, or, if no such quotation is provided, on another
similar system, se lected by the Committee, then in use; or
(iii) if sections 1.20(a)(i) and (ii) are not applicable, the
fair mar ket value of a Share as determined by an appraiser
independent of the Em ployer and experienced and expert in the field
of corporate appraisal.
(b) with respect to property other than Shares, the fair market
value determined in the manner determined by the Trustee.
SECTION 1.21 FAMILY MEMBER means, with respect to any person, such
person's spouse and lineal ascendants or descendants and the spouses of such
lineal ascendants or descendants.
SECTION 1.22 FINANCED SHARE means: (a) a Share that has been
purchased with the proceeds of a Share Acquisition Loan, that has been allocated
to the Loan Repayment Account in accordance with section 6.3 and that has not
been released in accordance with section 6.4; or (b) a Share that constitutes a
dividend paid with respect to a Share described in section 1.22(a), that has
been allocated to the Loan Repayment Account in accordance with section 6.3 and
that has not been released in accordance with section 6.4.
SECTION 1.23 FIVE PERCENT OWNER means, for any Plan Year, a person
who, during such Plan Year, owned (or was considered as owning for purposes of
section 318 of the Code): (a) more than 5% of the value of all classes of
outstanding stock of the Employer; or (b) stock possessing more than 5% of the
combined voting power of all classes of outstanding stock of the Employer.
SECTION 1.24 FORFEITURES means the amounts forfeited by Participants
and Former Participants on termination of employment prior to full vesting,
pursuant to section 9.3, less amounts credited because of re-employment,
pursuant to section 9.4.
SECTION 1.25 FORMER PARTICIPANT means a Participant whose
participation in the Plan has terminated pursuant to section 2.3.
SECTION 1.26 GENERAL INVESTMENT ACCOUNT means an Investment Account
established and maintained in accordance with Article XI.
SECTION 1.27 HIGHLY COMPENSATED EMPLOYEE means, for any Plan Year,
an Employee who:
(a) at any time during such Plan Year or the immediately preceding
Plan Year was a Five Percent Owner; or
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(b) is a member of the group consisting of the 100 Employees and
persons employed by any Affiliated Employer who received the greatest
Total Compensation for such Plan Year and during such Plan Year:
(i) received Total Compensation for such Plan Year in excess
of $75,000 (or such higher amount as may be permitted under section
414(q) of the Code); or
(ii) received Total Compensation for such Plan Year that was
in excess of both (A) $50,000 (or such higher amount as may be
permitted under section 414(q) of the Code) and (B) the Total
Compensation for such Plan Year of at least 80% of the Employees and
persons employed by any Affiliated Employer for such Plan Year; or
(iii) was an Officer of the Employer or any Affiliated
Employer and received Total Compensation for such Plan Year in
excess of 50% of the amount in effect under section 415(b)(1)(A) of
the Code for such Plan Year; or
(c) during the immediately preceding Plan Year:
(i) received Total Compensation for such Plan Year in excess
of $75,000 (or such higher amount as may be permitted under section
414(q) of the Code); or
(ii) received Total Compensation for such Plan Year that was
in excess of both (A) $50,000 (or such higher amount as may be
permitted under section 414(q) of the Code) and (B) the Total
Compensation for such Plan Year of at least 80% of the Employees and
persons employed by an Affiliated Employer for such Plan Year; or
(iii) was an Officer of the Employer or any Affiliated
Employer and received Total Compensation for such Plan Year in
excess of 50% of the amount in effect under section 415(b)(1)(A) of
the Code for such Plan Year.
The determination of who is a Highly Compensated Employee will be made in
accordance with section 414(q) of the Code and the regulations thereunder. For
purposes of applying any provisions of the Plan applicable to Highly Compensated
Employees, any person who is a Family Member of a Five Percent Owner or one of
the ten Highly Compensated Employees with the highest Total Compensation for a
Plan Year shall not be treated as a separate person for such Plan Year, and any
Total Compensation or Allocation Compensation paid to such person for such Plan
Year, as well as his share of allocations of contributions or Shares under this
Plan, shall be attributed to the Five Percent Owner or Highly Compensated
Employee.
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SECTION 1.28 HOUR OF SERVICE means each hour for which a person is
paid, or entitled to payment, for the performance of duties for the Employer or
any Affiliated Employer.
SECTION 1.29 INVESTMENT ACCOUNT means either a General Investment
Account or a Share Investment Account.
SECTION 1.30 INVESTMENT FUND means any one of the three or more
funds as may be established from time to time by the Committee which, together
with any and all Shares and other investments held under the Plan, constitutes
the Trust Fund.
SECTION 1.31 LOAN REPAYMENT ACCOUNT means an account established and
maintained in accordance with section 6.3.
SECTION 1.32 LOAN REPAYMENT CONTRIBUTION means amounts of money
contributed to the Plan by the Employer in accordance with section 5.2.
SECTION 1.33 MATERNITY OR PATERNITY LEAVE means a person's absence
from work for the Employer and all Affiliated Employers: (a) by reason of the
pregnancy of such person; (b) by reason of the birth of a child of such person;
(c) by reason of the placement of a child with the person in connection with the
adoption of such child by such person; or (d) for purposes of caring for a child
of such person immediately following the birth of the child or the placement of
the child with such person.
SECTION 1.34 MILITARY SERVICE means service in the armed forces of
the United States. It may also include, if and to the extent that the Board so
provides and if all Participants and Former Participants in like circumstances
are similarly treated, special service for the government of the United States
and other public service.
SECTION 1.35 NAMED FIDUCIARY means any person, committee,
corporation or organization as described in section 14.1.
SECTION 1.36 OFFICER means an employee who is an administrative
executive in regular and continued service with the Employer or any Affiliated
Employer; PROVIDED, HOWEVER, that at no time shall more than the lesser of (a)
50 employees or (b) the greater of: (i) 3 employees or (ii) 10% of all employees
be treated as Officers. The determination of whether an employee is to be
considered an Officer shall be made in accordance with section 416(i) of the
Code.
SECTION 1.37 PARTICIPANT means any person who has satisfied the
eligibility requirements set forth in section 2.1, who has become a Participant
in accordance with section 2.2, and whose participation has not terminated under
section 2.3.
SECTION 1.38 PERIOD OF SERVICE means a period of consecutive days
commencing on a person's Employment Commencement Date and ending on the date a
Period of Severance begins, with any adjustments required under section 2.4.
Whenever used in the Plan, a Period of
<PAGE>
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Service "of year(s)" means the quotient of the Period of Service divided by 365,
and any fractional part of a year shall for such purposes be disregarded.
SECTION 1.39 PERIOD OF SEVERANCE means a period of consecutive days
commencing with the earlier of:
(a) the date on which a person terminates service with the Employer
and all Affiliated Employers by reason of resignation, retirement,
discharge or death; or
(b) the first anniversary of the date on which a person terminates
service with the Employer and all Affiliated Employers for any other
reason including layoff, disability, leave of absence or any other
cessation of service not otherwise included as service under the Plan;
and ending on the first date following such separation from service on which
such person performs an Hour of Service.
SECTION 1.40 PLAN means the Employee Stock Ownership Plan of Ashe
Federal Bank and Certain Affiliates as amended from time to time. The Plan may
be referred to as the "Employee Stock Ownership Plan of Ashe Federal Bank and
Certain Affiliates."
SECTION 1.41 PLAN ADMINISTRATOR means any person, committee,
corporation or organization designated in section 14.2, or appointed pursuant to
section 14.2, to perform the responsibilities of that office.
SECTION 1.42 PLAN YEAR means the period commencing on the Effective
Date and ending on June 30, 1997 and each 12-month period beginning on each July
1st thereafter.
SECTION 1.43 QUALIFIED DOMESTIC RELATIONS ORDER means a Domestic
Relations Order that: (a) clearly specifies (i) the name and last known mailing
address of the Participant or Former Participant and of each person given rights
under such Domestic Relations Order, (ii) the amount or percentages of the
Participant's or Former Participant's benefits under this Plan to be paid to
each person covered by such Domestic Relations Order, (iii) the number of
payments or the period to which such Domestic Relations Order applies, and (iv)
the name of this Plan; and (b) does not require the payment of a benefit in a
form or amount that is (i) not otherwise provided for under the Plan, or (ii)
inconsistent with a previous Qualified Domestic Relations Order.
SECTION 1.44 QUALIFIED PARTICIPANT means a Participant who has
attained age 55 and who has been a Participant in the Plan for at least 10
years.
SECTION 1.45 RETIREMENT means: (a) any termination of participation
in the Plan at or after attainment of age 65; and (b) any retirement under an
applicable qualified defined benefit plan of the Employer as in effect from time
to time with entitlement to a normal or early retirement allowance.
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SECTION 1.46 SHARE means a share of any class of stock issued by the
Employer or any Affiliated Employer; provided that such share is a "qualifying
employer security" within the meaning of section 409(l) of the Code and section
407(d)(5) of ERISA.
SECTION 1.47 SHARE ACQUISITION LOAN means a loan obtained by the
Trustee in accordance with Article VI.
SECTION 1.48 SHARE INVESTMENT ACCOUNT means an Investment Account
established and maintained in accordance with Article XI.
SECTION 1.49 TENDER OFFER means a tender offer made to holders of
any one or more classes of Shares generally, or any other offer, made to holders
of any one or more classes of Shares generally, to purchase, exchange, redeem or
otherwise transfer Shares, whether for cash or other consideration.
SECTION 1.50 TOTAL COMPENSATION during any period means an
employee's aggregate total compensation paid by the Employer and any Affiliated
Employer with respect to such period as reported to the Internal Revenue Service
for such person pursuant to section 6041(a) of the Code. In addition, solely for
purposes of identifying those employees who are Highly Compensated Employees,
each employee's Total Compensation shall include any amounts by which the
employee's compensation paid by the Employer or any Affiliated Employer has been
reduced pursuant to a compensation reduction agreement under the terms of any
qualified cash or deferred arrangement described in section 401(k) of the Code,
any salary reduction simplified employee pension plan described in section
408(k) of the Code, any tax deferred annuity plan des cribed in section 403(b)
of the Code, or any cafeteria plan described in section 125 of the Code. In no
event, however, shall an employee's Total Compensation include any compensation
in excess of $150,000 (or such higher amount as may be permitted under section
401(a)(17) of the Code). For purposes of applying the foregoing limitations to
any person who is a Five Percent Owner or who is one of the ten Highly
Compensated Employees with the highest Total Compensation (determined prior to
the application of this sentence), any Total Compensation paid to the spouse of
such person or to any lineal descendant of such person who has not attained age
19 on or before the last day of such Plan Year shall be deemed to have been paid
to such person.
SECTION 1.51 TRUST means the legal relationship created by the Trust
Agreement pursuant to which the Trustee holds the Trust Fund in trust. The Trust
may be referred to as the "Employee Stock Ownership Plan Trust of Ashe Federal
Bank and Certain Affiliates."
SECTION 1.52 TRUST AGREEMENT means the agreement between Ashe
Federal Bank and the Trustee therein named or its successors pursuant to which
the Trust Fund shall be held in trust.
SECTION 1.53 TRUST FUND means the corpus (consisting of
contributions paid over to the Trustee, and investments thereof), and all
earnings, appreciations or additions thereof and thereto, held by the Trustee
under the Trust Agreement in accordance with the Plan, less any depreciation
thereof and any payments made therefrom pursuant to the Plan.
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SECTION 1.54 TRUSTEE means the Trustee of the Trust Fund from time
to time in office. The Trustee shall serve as Trustee until it is removed or
resigns from office and is re placed by a successor Trustee appointed in
accordance with the terms of the Trust Agreement.
SECTION 1.55 VALUATION DATE means the last business day of June.
ARTICLE II
----------
PARTICIPATION
-------------
SECTION 2.1 ELIGIBILITY FOR PARTICIPATION.
(a) Only Eligible Employees may be or become Participants in the
Plan. An Employee shall be an Eligible Employee if he is a common-law employee
of an Employer and is not excluded under section 2.1(b).
(b) An Employee is not an Eligible Employee if he:
(i) is an Employee who has waived any claim to participation
in the Plan; or
(ii) is an Employee or in a unit of Employees covered by a
collective bargaining agreement with the Employer where retirement
benefits were the subject of good-faith bargaining, unless such agreement
expressly provides that Employees such as he be covered under the Plan; or
(iii) is a "leased employee" as defined in section 17.8(a).
SECTION 2.2 COMMENCEMENT OF PARTICIPATION.
Every Employee who is an Eligible Employee on the Effective Date
shall automatically become a Participant on the Effective Date. An Employee who
becomes an Eligible Employee after the Effective Date shall automatically become
a Participant on the first day of the month following the month in which he
becomes an Eligible Employee.
SECTION 2.3 TERMINATION OF PARTICIPATION.
Participation in the Plan shall cease, and a Participant shall
become a Former Participant, upon termination of employment with the Employer,
death, Disability or Retirement,
<PAGE>
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failure to return to work upon the expiration of a leave of absence granted by
the Employer pursuant to section 3.3 or becoming an Employee who is excluded
under section 2.1(b).
SECTION 2.4 ADJUSTMENTS TO PERIOD OF SERVICE.
(a) The Period of Service of an Employee shall include any period
during which the Employee is separated from the service of the Employer and all
Affiliated Employers if such period is less than 365 consecutive days measured
from the date on which such Employee terminates service and ending with the
first date following such termination for which the Employer is credited with an
Hour of Service.
(b) The Period of Service of an Employee who returns to the service
of the Employer and all Affiliated Employers following a separation from service
shall commence with the first date following such separation from service for
which the Employer is credited with an Hour of Service, and he shall be given
credit for any Period of Service prior to such separation, except that if such
separation includes a Break in Service, such credit shall not be given until he
completes a Period of Service of one year following such Break in Service. If a
non-vested Employee returns to the service of the Employer or any Affiliated
Employer following a Period of Severance of greater than five consecutive years,
then such Employee shall forfeit any Period of Service prior to such separation.
(c) The Period of Service of an Employee who is absent on Maternity
or Paternity Leave shall exclude any period of such absence that occurs after
the first anniversary of the commencement of such absence.
(d) An Employee's Period of Service shall also be adjusted to the
extent required by the Family and Medical Leave Act or any regulations
promulgated thereunder.
ARTICLE III
-----------
SPECIAL PROVISIONS
------------------
SECTION 3.1 MILITARY SERVICE.
In the case of a termination of employment of any Employee to enter
directly into Military Service, the entire period of his absence shall be
treated, for purposes of vesting and eligibility for participation (but not,
except as required by law, for purposes of eligibility to share in allocations
of contributions in accordance with Article VII), as if he had worked for the
Employer during the period of his absence. In the event of the re-employment of
such person by the Employer within a period of not more than six months:
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(a) after he becomes entitled to release or discharge, if he
has entered into the armed forces; or
(b) after such service terminates, if he has entered into other
service defined as Military Service;
such period, also, shall be deemed to be Military Service.
SECTION 3.2 MATERNITY OR PATERNITY LEAVE.
(a) Subject to section 3.2(b), in the event of an Employee's absence
from work in the service of the Employer and all Affiliated Employers for a
period:
(i) that commences on or after October 1, 1985;
(ii) for which the person is not paid or entitled to payment by the
Employer or any Affiliated Employer;
(iii) that constitutes Maternity or Paternity Leave; and
(iv) that exceeds one year;
then solely for purposes of determining when a Break in Service has occurred or
when a Period of Severance of five years has occurred, the period of such an
absence commencing on the first anniversary of such absence and ending on the
second anniversary of the commencement of such absence (or, if earlier, on the
last day of such absence) shall not be treated as a Period of Severance.
(b) Notwithstanding anything in the Plan to the contrary, this
section 3.2 shall not apply unless the person furnishes to the Plan
Administrator such information as the Plan Administrator may reasonably require
in order to establish: (i) that the person's absence is one described in section
3.2(a); and (ii) the number of working days during such absence.
SECTION 3.3 LEAVE OF ABSENCE.
In the event of temporary absence from work in the service of the
Employer and all Affiliated Employers for any period of two years or less for
which a Participant shall have been granted a leave of absence by the Employer,
the entire period of his absence shall be treated for purposes of vesting and
eligibility for participation (but not for purposes of eligibility to share in
the allocation of contributions in accordance with Article VII), as if he had
worked for the Employer during the period of his absence. Absence from work for
a period greater than, or failure to return to work upon the expiration of, the
period of leave of absence granted by the Employer shall terminate participation
in the Plan as of the date on which such period ended. In
<PAGE>
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granting leaves of absence for purposes of the Plan, all Employees in like
circumstances shall be similarly treated.
ARTICLE IV
----------
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
-------------------------------------------
SECTION 4.1 CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED.
Participants shall not be required, nor shall they be permitted, to
make contributions to the Plan.
ARTICLE V
---------
CONTRIBUTIONS BY THE EMPLOYER
-----------------------------
SECTION 5.1 IN GENERAL.
Subject to the limitations of Article VIII, for each Plan Year, the
Employer shall contribute to the Plan the amount, if any, determined by the
Board, but in no event less than the amount described in section 5.2(a). The
amount contributed for any Plan Year shall be treated as a Loan Repayment
Contribution, an ESOP Contribution, or a combination thereof, in accordance with
the provisions of this Article V.
SECTION 5.2 LOAN REPAYMENT CONTRIBUTIONS.
For each Plan Year, a portion of the Employer's contributions, if
any, to the Plan for such Plan Year equal to the sum of:
(a) the minimum amount required to be added to the Loan Repayment
Account in order to provide adequate funds for the payment of the
principal and interest then required to be repaid under the terms of any
outstanding Share Acquisition Loan obtained by the Trustee; plus
(b) the additional amount, if any, designated by the Committee to be
applied to the prepayment of principal or interest under the terms of any
outstand ing Share Acquisition Loan obtained by the Trustee;
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shall be treated as a Loan Repayment Contribution for such Plan Year. A Loan
Repayment Contribution for a Plan Year shall be allocated to the Loan Repayment
Account and shall be applied by the Trustee, in the manner directed by the
Committee, to the payment of accrued interest and to the reduction of the
principal balance of any Share Acquisition Loan obtained by the Trustee that is
outstanding on the date on which the Loan Repayment Contribution is made. To the
extent that a Loan Repayment Contribution for a Plan Year results in a release
of Financed Shares in accordance with section 6.4, such Shares shall be
allocated among the Accounts of Eligible Participants for such Plan Year in
accordance with section 7.2.
SECTION 5.3 ESOP CONTRIBUTIONS.
In the event that the amount of the Employer's contributions to the
Plan for a Plan Year exceeds the amount of the Loan Repayment Contributions for
such Plan Year, such excess shall be treated as an ESOP Contribution and shall
be allocated among the Accounts of the Eligible Participants for such Plan Year
in accordance with section 7.3.
SECTION 5.4 TIME AND MANNER OF PAYMENT.
(a) Payment of contributions made pursuant to this Article V shall
be made:
(i) in cash, in the case of a Loan Repayment Contribution; and
(ii) in cash, in Shares or in a combination of cash and Shares, in
the case of an ESOP Contribution.
(b) Contributions made pursuant to this Article V for a Plan Year
shall be paid to the Trust Fund on or before the due date (including any
extensions thereof) of the Employer's federal income tax return for its taxable
year during which such Plan Year ends. All such contributions shall be allocated
to the Accounts of the Eligible Participants, in the case of an ESOP
Contribution, or to the Loan Repayment Account, in the case of a Loan Repayment
Contribution, as soon as is practicable following the payment thereof to the
Trust Fund.
(a) to purchase Shares; or
(b) to make payments of principal or interest, or a combination of
principal and interest, with respect to such Share Acquisition Loan; or
(c) to make payments of principal and interest, or a combination of
principal and interest, with respect to a previously obtained Share
Acquisition Loan that is then outstanding.
Any such Share Acquisition Loan shall be obtained on such terms and conditions
as the Committee may approve; PROVIDED, HOWEVER, that such terms and conditions
shall provide for the payment of
<PAGE>
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interest at no more than a reasonable rate and shall permit such Share
Acquisition Loan to satisfy the requirements of section 4975(d)(3) of the Code
and section 408(b)(3) of ERISA.
SECTION 6.2 COLLATERAL; LIABILITY FOR REPAYMENT.
(a) The Committee may direct the Trustee to pledge, at the time a
Share Acquisition Loan is obtained, the following assets of the Plan as
collateral for such Share Acquisition Loan:
(i) any Shares purchased with the proceeds of such Share Acquisition
Loan and any earnings attributable thereto;
(ii) any Financed Shares then pledged as collateral for a prior
Share Acquisition Loan which is repaid with the proceeds of such Share
Acquisition Loan and any earnings attributable thereto; and
(iii) pending the application thereof to purchase Shares or repay a
prior Share Acquisition Loan, the proceeds of such Share Acquisition Loan
and any earn ings attributable thereto.
Except as specifically provided in this section 6.2(a), no assets of the Plan
shall be pledged as collateral for the repayment of any Share Acquisition Loan.
(b) No person entitled to payment under a Share Acquisition Loan
shall have any right to the assets of the Plan except for:
(i) Financed Shares that have been pledged as collateral for such
Share Acquisition Loan pursuant to section 6.2(a);
(ii) Loan Repayment Contributions made pursuant to section 5.2; and
(iii) earnings attributable to Financed Shares described in section
6.2(b)(i) and to Loan Repayment Contributions described in section
6.2(b)(ii).
Except in the event of a default or a refinancing pursuant to which an existing
Share Acquisition Loan is repaid, the aggregate amount of all payments of
principal and interest made by the Trustee with respect to all Share Acquisition
Loans obtained on behalf of the Plan shall at no time exceed the aggregate
amount of all Loan Repayment Contributions theretofore made plus the aggregate
amount of all earnings (other than dividends paid in the form of Shares)
attributable to Financed Shares and to such Loan Repayment Contributions.
(c) Any Share Acquisition Loan shall be without recourse against the
Plan and Trust.
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SECTION 6.3 LOAN REPAYMENT ACCOUNT.
In the event that one or more Share Acquisition Loans shall be
obtained, a Loan Repayment Account shall be established under the Plan. The Loan
Repayment Account shall be credited with all Shares acquired with the proceeds
of a Share Acquisition Loan, all Loan Repayment Contributions and all earnings
(including dividends paid in the form of Shares) or appreciation attributable to
such Shares and Loan Repayment Contributions. The Loan Repayment Account shall
be charged with all payments of principal and interest made by the Trustee with
respect to any Share Acquisition Loan, all Shares released in accordance with
section 6.4 and all losses, depreciation or expenses attributable to Shares or
to other property credited thereto. The Financed Shares, as well as any earnings
thereon, shall be allocated to such Loan Repayment Account and shall be
accounted for separately from all other amounts contributed under the Plan.
SECTION 6.4 RELEASE OF FINANCED SHARES.
As of the last day of each Plan Year during which a Share
Acquisition Loan is outstanding, a portion of the Financed Shares purchased with
the proceeds of such Share Acquisition Loan and allocated to the Loan Repayment
Account shall be released. The number of Financed Shares released in any such
Plan Year shall be equal to the amount determined according to one of the
following methods:
(a) by computing the product of: (i) the number of Financed Shares
purchased with the proceeds of such Share Acquisition Loan and allocated
to the Loan Repayment Account immediately before the release is effected;
multiplied by (ii) a fraction, the numerator of which is the aggregate
amount of the principal and interest payments (other than payments made
upon the refinancing of a Share Acquisition Loan as contemplated by
section 6.1(c)) made with respect to such Share Acquisition Loan during
such Plan Year, and the denominator of which is the aggregate amount of
all principal and interest remaining to be paid with respect to such Share
Acquisition Loan as of the first day of such Plan Year; or
(b) by computing the product of: (i) the number of Financed Shares
purchased with the proceeds of such Share Acquisition Loan and allocated
to the Loan Repayment Account immediately before the release is effected;
multiplied by (ii) a fraction, the numerator of which is the aggregate
amount of the principal payments (other than payments made upon the
refinancing of a Share Acquisition Loan as contemplated by section 6.1(c))
made with respect to such Share Acquisition Loan during such Plan Year,
and the denominator of which is the aggregate amount of all principal
remaining to be paid with respect to such Share Acquisition Loan as of the
first day of such Plan Year; PROVIDED, HOWEVER, that the method described
in this section 6.4(b) may be used only if the Share Acquisition Loan does
not extend for a period in excess of 10 years after the date of
origination and only to the extent that principal payments on such Share
Acquisition Loan are
<PAGE>
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made at least as rapidly as under a loan of like principal amount with a
like interest rate and term requiring level amortization of principal and
interest.
The method to be used shall be specified in the documents governing the Share
Acquisition Loan or, if not specified therein, prescribed by the Committee, in
its discretion. In the event that property other than, or in addition to,
Financed Shares shall be held in the Loan Repayment Account and pledged as
collateral for a Share Acquisition Loan, then the property to be released
pursuant to this section 6.4 shall be property having a Fair Market Value
determined by applying the method to be used to the Fair Market Value of all
property pledged as collateral for such Share Acquisition Loan; PROVIDED,
HOWEVER, that no property other than Financed Shares shall be released pursuant
to this section 6.4 unless all Financed Shares have previously been released.
SECTION 6.5 RESTRICTIONS ON FINANCED SHARES.
Except to the extent required under any applicable law, rule or
regulation, no Shares purchased with the proceeds of a Share Acquisition Loan
shall be subject to a put, call or other option, or to any buy-sell or similar
arrangement, while held by the Trustee or when distri buted from the Plan. The
provisions of this section 6.5 shall continue to apply in the event that this
Plan shall cease to be an employee stock ownership plan, within the meaning of
section 4975(e)(7) of the Code.
ARTICLE VII
-----------
ALLOCATION OF CONTRIBUTIONS
---------------------------
SECTION 7.1 ALLOCATION AMONG ELIGIBLE PARTICIPANTS.
Subject to the limitations of Article VIII, ESOP Contributions for a
Plan Year made in accordance with section 5.3 and Financed Shares and other
property that are released from the Loan Repayment Account for a Plan Year in
accordance with section 6.4 shall be allocated among the Eligible Participants
for such Plan Year, in the manner provided in this Article VII.
SECTION 7.2 ALLOCATION OF RELEASED SHARES OR OTHER PROPERTY.
Subject to the limitations of Article VIII, in the event that
Financed Shares or other property are released from the Loan Repayment Account
for a Plan Year in accordance with section 6.4, such released Shares or other
property shall be allocated among the Accounts of the Eligible Participants for
the Plan Year in the proportion that each such Eligible Participant's Allocation
Compensation for the portion of the Plan Year during which he was a Participant
bears
<PAGE>
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to the aggregate Allocation Compensation of all Eligible Participants for the
portion of the Plan Year during which they were Participants.
SECTION 7.3 ALLOCATION OF ESOP CONTRIBUTIONS.
Subject to the limitations of Article VIII, in the event that the
Employer makes an ESOP Contribution for a Plan Year, such ESOP Contribution
shall be allocated among the Accounts of the Eligible Participants for such Plan
Year in the proportion that each such Eligible Participant's Allocation
Compensation for the portion of the Plan Year during which he was a Participant
bears to the aggregate Allocation Compensation of all Eligible Participants for
the portion of such Plan Year during which they were Eligible Participants.
ARTICLE VIII
------------
LIMITATIONS ON ALLOCATIONS
--------------------------
SECTION 8.1 OPTIONAL LIMITATIONS ON ALLOCATIONS OF ESOP
CONTRIBUTIONS.
If, for any Plan Year, the application of sections 7.2 and 7.3 would
result in more than one-third of the number of Shares or of the amount of money
or property to be allocated thereunder being allocated to the Accounts of
Eligible Participants for such Plan Year who are also Highly Compensated
Employees for such Plan Year, then the Committee may, but shall not be required
to, direct that this section 8.1 shall apply in lieu of sections 7.2 and 7.3. If
the Committee gives such a direction, then the Committee shall impose a maximum
dollar limitation on the amount of Allocation Compensation that may be taken
into account for each Eligible Participant. The dollar limitation which shall be
imposed shall be the limitation which produces the result that the aggregate
Allocation Compensation taken into account for Eligible Participants who are
Highly Compensated Employees constitutes exactly one-third of the aggregate
Allocation Compensation taken into account for all Eligible Participants. In
determining whether more than one-third of the number of Shares or of the amount
of money or property to be allocated under the Plan for a Plan Year would be
allocated to the Highly Compensated Employees, any allocation to be made to the
Account of a Family Member of a Highly Compensated Employee who is either a Five
Percent Owner or one of the ten Highly Compensated Employees with the highest
Total Compensation shall be treated as an allocation to such Highly Compensated
Employee.
SECTION 8.2 GENERAL LIMITATIONS ON CONTRIBUTIONS.
(a) No amount shall be allocated to a Participant's Account under
this Plan for any Limitation Year, to the extent that such an allocation would
result in an Annual Addition of an amount greater than the lesser of (i) $30,000
(or such other amount as is permissible under
<PAGE>
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section 415(c)(1)(A) of the Code, or (ii) 25% of the Participant's Total
Compensation for such Limitation Year.
(b) In the case of a Participant who may be entitled to benefits
under any qualified defined benefit plan (whether or not terminated) now in
effect or ever maintained by the Employer, such Participant's Annual Additions
under this Plan shall, in addition to the limitations provided under section
8.2(a), be further limited so that the sum of the Participant's Defined
Contribution Plan Fraction plus his Defined Benefit Plan Fraction does not
exceed 1.0 for any Limitation Year; PROVIDED, HOWEVER, that for any Limitation
Year ending prior to January 1, 1983, the sum of his Defined Contribution Plan
Fraction plus his Defined Benefit Plan Fraction shall not exceed 1.4; and
provided further, that this limitation shall only apply if and to the extent
that the benefits under the Employer's Retirement Plan are not limited so that
such sum is not exceeded.
(c) For purposes of this section 8.2, the following special
definitions shall apply:
(i) ANNUAL ADDITION means the sum of the following amounts allocated
on behalf of a Participant for a Limitation Year:
(A) all contributions by the Employer (including contributions
made under a salary reduction agreement pursuant to section 401(k),
408(k) or 403(b) of the Code) under any qualified defined
contribution plan (other than this Plan) maintained by the Employer,
as well as the Participant's allocable share, if any, of any
forfeitures under such plans; plus
(B) (I) for Limitation Years that began prior to January 1,
1987, the lesser of (1) 50% of the Participant's voluntary
nondeductible contributions to all qualified defined contribution
plans maintained by the Employer, or (2) the amount by which the
Participant's nondeductible voluntary contributions to such plans
exceeds 6% of his Total Compensation; and (II) for Limitation Years
that begin after December 31, 1986, all of the Par ticipant's
voluntary nondeductible contributions to such plans; plus
(C) all ESOP Contributions under this Plan; plus
(D) except as hereinafter provided in this section 8.2(c)(i),
a portion of the Employer's Loan Repayment Contributions to the Plan
for such Limitation Year which bears the same proportion to the
total amount of the Employer's Loan Repayment Contributions for the
Limitation Year that the number of Shares (or the Fair Market Value
of property other than Shares) allocated to the Participant's
Account pursuant to section 7.2 or 8.1, whichever is applicable,
bears to the aggregate number of Shares (or Fair Market Value of
property other than Shares) so allocated to all Participants for
such Limitation Year.
<PAGE>
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Notwithstanding section 8.2(c)(i)(D), if, for any Limitation Year, the
aggregate amount of ESOP Contributions allocated to the Accounts of the
individuals who are Highly Compensated Employees for such Limitation Year,
when added to such Highly Compensated Employees' allocable share of any
Loan Repayment Contributions for such Limitation Year, does not exceed
one-third of the total of all ESOP Contributions and Loan Repayment
Contributions for such Limitation Year, then that portion, if any, of the
Loan Repayment Contributions for such Limitation Year that is applied to
the payment of interest on a Share Acquisition Loan shall not be included
as an Annual Addition. In determining whether more than one-third of the
number of Shares or of the amount of money or property to be allocated
under the Plan for a Plan Year would be allocated to the Highly
Compensated Employees, any allocation to be made to the Account of a
Family Member of a Highly Compensated Employee who is either a Five
Percent Owner or one of the ten Highly Compensated Employees with the
highest Total Compensation shall be treated as an allocation to such
Highly Compensated Employee. In no event shall any Financed Shares, any
dividends or other earnings thereon, any proceeds of the sale thereof or
any portion of the value of the foregoing be included as an Annual
Addition.
(ii) EMPLOYER means Ashe Federal Bank, and all members of a con
trolled group of corporations, as defined in section 414(b) of the Code,
as modified by section 415(h) of the Code, all commonly controlled trades
or businesses, as defined in section 414(c) of the Code, as modified by
section 415(h) of the Code, all affiliated service groups, as defined in
section 414(m) of the Code, of which Ashe Federal Bank is a member, as
well as any leasing organization, as defined in section 17.8, that employs
any person who is considered an employee under section 17.8 and any other
entity that is required to be aggregated with the Employer pursuant to
regulations under section 414(o) of the Code.
(iii) DEFINED BENEFIT PLAN FRACTION means, for any Participant for
any Limitation Year, a fraction, the numerator of which is the Projected
Annual Benefit (determined as of the end of such Limitation Year) of the
Participant under any qualified defined benefit plans (whether or not
terminated) maintained by the Employer for the current and all prior
Limitation Years, and the denominator of which is as follows: (A) for
Limitation Years ending prior to January 1, 1983, the lesser of (I) the
dollar limitation in effect under section 415(b)(1) (A) of the Code for
such Limitation Year, or (II) the amount which may be taken into account
under section 415(b)(1)(B) of the Code with respect to such Participant
for such Limita tion Year; and (B) in all other cases, the lesser of (I)
(except as provided in section 16.8(b) for a Top Heavy Plan Year) the
product of 1.25 multiplied by the dollar limitation in effect under
section 415(b)(1)(A) of the Code for such Limitation Year, or (II) the
product of 1.4 multiplied by the amount which may be taken into account
under section 415(b)(1)(B) of the Code with respect to such Participant
for such Limitation Year.
<PAGE>
-20-
(iv) DEFINED CONTRIBUTION PLAN FRACTION means, for any Participant
for any Limitation Year, a fraction (A) the numerator of which is the sum
of such Participant's Annual Additions (determined as of the end of such
Limitation Year) under this Plan and any other qualified defined
contribution plans (whether or not terminated) maintained by the Employer
for the current and all prior Limitation Years, and (B) the denominator of
which is as follows: (I) for Limitation Years ending prior to January 1,
1983, the sum of the lesser of the following amounts for such Limitation
Year and for each prior Limitation Year during which such Participant was
employed by the Employer: (1) the Maximum Permissible Amount for such
Limitation Year (without regard to section 415(c)(6) of the Code), or (2)
the amount which may be taken into account under section 415(c)(1)(B) of
the Code with respect to such Participant for such Limitation Year; and
(II) in all other cases, the sum of the lesser of the following amounts
for such Limitation Year and for each prior Limitation during which such
Participant was employed by the Employer: (1) (except as provided in
section 16.8(b) for a Top Heavy Plan Year) the product of 1.25 multiplied
by the Maximum Permissible Amount for such Limitation Year (determined
without regard to section 415(c)(6) of the Code), or (2) the product of
1.4 multiplied by the amount which may be taken into account under section
415(c)(1)(B) of the Code (or section 415(c)(7) of the Code, if applic
able) with respect to such Participant for such Limitation Year; PROVIDED,
HOWEVER, that the Plan Administrator may, at his election, adopt the
transition rule set forth in section 415(e)(6) of the Code in making the
computation set forth in this section 8.2(c)(iv). If the sum of a
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction exceeded 1.0 as of September 30, 1983, then such Participant's
Defined Contribution Plan Fraction shall be determined under regulations
to be prescribed by the Secretary of the Treasury so that the sum of the
fractions does not exceed 1.0.
(v) LIMITATION YEAR means the Plan Year; PROVIDED, HOWEVER, that if
the Employer changes the Limitation Year, the new Limitation Year shall
begin on a date within the Limitation Year in which the amendment is made.
(vi) MAXIMUM PERMISSIBLE AMOUNT means (A) $25,000 (or such higher
amount as may be permitted under section 415(d) of the Code because of
cost of living increases) for Limitation Years beginning prior to January
1, 1983, and (B) the greater of (I) $30,000, or (II) 25% of the dollar
limitation in effect under section 415(b)(1)(A) of the Code for Limitation
Years beginning on or after January 1, 1983.
(vii) PROJECTED ANNUAL BENEFIT means a Participant's annual
retirement benefit (adjusted to the actuarial equivalent of a straight
life annuity if expressed in a form other than a straight life or
qualified joint and survivor annuity) under any qualified defined benefit
plan maintained by the Employer, whether or not ter minated, assuming that
the Participant will continue employment until the later of current age or
normal retirement age under such plan, and that the Participant's
<PAGE>
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Total Compensation for the Limitation Year and all other relevant factors
used to determine benefits under such plan will remain constant for all
future Limitation Years.
(d) When a Participant's Annual Addition to this Plan must be
reduced to satisfy the limitations of section 8.2(a) or (b), such reduction
shall be effected (i) by reducing the amount of future ESOP Contributions and
Loan Repayment Contributions, in that order of priority, to be made to the Plan
and attributable to the Participant for the Limitation Year, to the extent that
such reduction may be made without violating the terms of the Plan; and (ii) to
the extent that actions taken under section 8.2(d)(i) do not produce compliance
with the limitations, by reducing the Participant's Annual Additions to this
Plan attributable to ESOP Contributions and Loan Repayment Contributions, in
that order of priority, and reallocating such amounts to other Participants in
the current Limitation Year; and (iii) if an excess Annual Addition occurs due
to a reasonable error in estimating compensation pursuant to section 8.2(e), the
allocation of Forfeitures, or other circumstances permitted by the Commissioner
of Internal Revenue, and the excess Annual Addition is not eliminated in the
current Limitation Year, then amount of the Participant's excess Annual Addition
to this Plan shall be allocated in accordance with Articles V and VII as a
contribution by the Employer in the next succeeding Limitation Year.
(e) Prior to determining a Participant's actual Total Compensation
for a Limitation Year, the Employer may determine the limitations under this
section 8.2 for a Participant on the basis of a reasonable estimation of the
Participant's Total Compensation for the Limitation Year that is uniformly
determined for all Participants who are similarly situated. As soon as it is
administratively feasible after the end of the Limitation Year, the limitations
of this section 8.2 shall be determined on the basis of the Participant's actual
Total Compensation for the Limitation Year.
ARTICLE IX
----------
VESTING
-------
SECTION 9.1 VESTING.
Subject to the provisions of section 18.2, the balance credited to
each Employee's Account shall become vested in accordance with the following
schedule:
Period of Service Vested
In Years Percentage
----------------- ----------
less than 3 0%
3 or more 100%
<PAGE>
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SECTION 9.2 VESTING ON DEATH, DISABILITY, RETIREMENT OR CHANGE IN
CONTROL.
Any previously unvested portion of the remainder of the balance
credited to the Account of a Participant or of a person who is a Former
Participant solely because he is excluded from participation under section
2.1(b) shall become fully vested in him immediately upon attainment of age 65,
or, if earlier, upon the termination of his participation by reason of death,
Disability, Retirement or upon the occurrence of a Change in Control of the
Employer.
SECTION 9.3 FORFEITURES ON TERMINATION OF EMPLOYMENT.
Upon the termination of employment of a Participant or Former
Participant for any reason other than death, Disability, Retirement, that
portion of the balance credited to his Account which is not vested at the date
of such termination shall be forfeited as of the last Valuation Date for the
Plan Year in which such termination of employment occurs. The proceeds of such
forfeitures, less amounts, if any, required to be credited because of
re-employment pursuant to section 9.4, shall be treated as Forfeitures and shall
be disposed of as provided in section 9.5.
SECTION 9.4 AMOUNTS CREDITED UPON RE-EMPLOYMENT.
If an Employee forfeited any amount of the balance credited to his
Account upon his termination of employment with the Employer, and is re-employed
prior to the occurrence of a Period of Severance of five years, then:
(i) an amount equal to the Fair Market Value of the Shares
forfeited, determined as of the date of forfeiture; and
(ii) the amount credited to his General Investment Account that was
forfeited, determined as of the date of forfeiture;
shall be credited back to his Account from the proceeds of forfeitures which are
redeemed pursuant to section 9.3 during the Plan Year in which he is
re-employed, unless such proceeds are insufficient, in which case the Employer
shall make an additional contribution in the amount of such deficiency.
SECTION 9.5 ALLOCATION OF FORFEITURES.
Any Forfeitures that occur during a Plan Year shall be used to
reduce the contributions required of the Employer under the Plan and shall be
treated as Loan Repayment Contributions and ESOP Contributions in the
proportions designated by the Committee in accordance with Article V.
<PAGE>
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ARTICLE X
---------
THE TRUST FUND
--------------
SECTION 10.1 THE TRUST FUND.
The Trust Fund shall be held and invested under the Trust Agreement
with the Trustee. The provisions of the Trust Agreement shall vest such powers
in the Trustee as to invest ment, control and disbursement of the Trust Fund,
and such other provisions not inconsistent with the Plan, including provision
for the appointment of one or more "investment managers" within the meaning of
section 3(38) of ERISA to manage and control (including acquiring and disposing
of) all or any of the assets of the Trust Fund, as the Board may from time to
time authorize. Except as required by ERISA, no bond or other security shall be
required of any Trustee at any time in office.
SECTION 10.2 INVESTMENTS.
(a) Except to the extent provided to the contrary in section 10.3,
the Trust Fund shall be invested in:
(i) Shares;
(ii) units of interest in such Investment Funds as may be
established from time to time by the Committee; and
(iii) such other investments as may be permitted under the Trust
Agreement;
in such proportions as shall be determined by the Committee or, if so provided
under the Trust Agreement, as directed by one or more investment managers or by
the Trustee, in its discretion; PROVIDED, HOWEVER, that the investments of the
Trust Fund shall consist primarily of Shares. Notwithstanding the immediately
preceding sentence, the Trustee may temporarily invest the Trust Fund in
short-term obligations of, or guaranteed by, the United States Government or an
agency thereof, or may retain uninvested, or sell investments to provide,
amounts of cash required for purposes of the Plan.
(b) Initially, the value of each unit in each Investment Fund shall
be $1, and one unit in any such Investment Fund shall be credited to each
Participant or Former Participant, or the Beneficiary of a deceased Participant
or Former Participant, for each $1 applicable to the purchase for him of units
in such Investment Fund. Thereafter, the Plan Administrator shall deter mine the
value of units in each such Investment Fund as of each Valuation Date by
dividing the fair market value of all property in each such Investment Fund as
of such Valuation Date (after
<PAGE>
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deducting any expenses or other amounts then properly chargeable against the
particular Investment Fund) by the number of units then outstanding in each such
Investment Fund, and making such other adjustments as shall be necessary to
properly reflect transactions occurring subsequent to the immediately preceding
Valuation Date. For the purposes of this Article X, fractions of units computed
to three decimal places, as well as whole units, in any of the Investment Funds
may be redeemed or purchased for the credit of Employees, Participants or Former
Participants or their Beneficiaries.
SECTION 10.3 DISTRIBUTIONS FOR DIVERSIFICATION OF INVESTMENTS.
(a) Notwithstanding section 10.2, each Qualified Participant may:
(i) during the first 90 days of each of the first four Plan Years to
begin after the Plan Year in which he first becomes a Qualified
Participant, elect that such percentage of the balance credited to his
Account as he may specify, but in no event more than 25% of the balance
credited to his Account, be distributed to him pursuant to this section;
and
(ii) during the first 90 days of the fifth Plan Year to begin after
the Plan Year in which he first becomes a Qualified Participant or of any
Plan Year thereafter, elect that such percentage of the balance credited
to his Account as he may specify, but in no event more than 50% of the
balance credited to his Account, be distributed to him pursuant to this
section.
For purposes of an election under this section 10.3, the balance credited to a
Participant's Account shall be the balance credited to his Account determined as
of the last Valuation Date to occur in the Plan Year immediately preceding the
Plan Year in which such election is made.
(b) An election made under section 10.3(a) shall be made in writing,
in the form and manner prescribed by the Plan Administrator, and shall be filed
with the Plan Administrator during the election period specified in section
10.3(a). As soon as is practicable, and in no case later than 90 days, following
the end of the election period during which such election is made, the Plan
Administrator shall take such actions as are necessary to cause the specified
percentage of the balance credited to the Account of the Qualified Participant
making the election to be distributed to such Qualified Participant.
(c) An election made under section 10.3(a) may be changed or revoked
at any time during the election period described in section 10.3(a) during which
it is initially made. In no event, however, shall any election under this
section 10.3 result in more than 25% of the balance credited to the
Participant's Account being distributed to the Participant, if such election is
made during a Plan Year to which section 10.3(a)(i) applies, or result in more
than 50% of the balance distributed to the Participant, if such election is made
during the Plan Year to which section 10.3(a)(ii) applies or thereafter.
<PAGE>
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SECTION 10.4 USE OF COMMINGLED TRUST FUNDS.
Subject to the provisions of the Trust Agreement, amounts held in
the Trust Fund may be invested in:
(a) any commingled or group trust fund described in section 401(a)
of the Code and exempt under section 501(a) of the Code; or
(b) any common trust fund exempt under section 584 of the Code
maintained exclusively for the collective investment of the assets of
trusts that are exempt under section 501(a) of the Code;
provided that the trustee of such commingled, group or common trust fund is a
bank or trust company.
SECTION 10.5 MANAGEMENT AND CONTROL OF ASSETS.
All assets of the Plan shall be held by the Trustee in trust for the
exclusive benefit of Participants, Former Participants and their Beneficiaries.
No part of the corpus or income of the Trust Fund shall be used for, or diverted
to, purposes other than for the exclusive benefit of Participants, Former
Participants and their Beneficiaries, and for defraying reasonable
administrative expenses of the Plan and Trust Fund. No person shall have any
interest in or right to any part of the earnings of the Trust Fund, or any
rights in, to or under the Trust Fund or any part of its assets, except to the
extent expressly provided in the Plan.
ARTICLE XI
----------
VALUATION OF INTERESTS IN THE TRUST FUND
----------------------------------------
SECTION 11.1 ESTABLISHMENT OF INVESTMENT ACCOUNTS.
The Plan Administrator shall establish, or cause to be established,
for each person for whom an Account is maintained a Share Investment Account and
a General Investment Account. Such Share Investment Accounts and General
Investment Accounts shall be maintained in accordance with this Article XI.
SECTION 11.2 SHARE INVESTMENT ACCOUNTS.
The Share Investment Account established for a person in accordance
with section 11.1 shall be credited with: (a) all Shares allocated to such
person's Account; (b) all Shares pur-
<PAGE>
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chased with amounts of money or property allocated to such person's Account; (c)
all dividends paid in the form of Shares with respect to Shares credited to his
Account; and (d) all Shares purchased with amounts credited to such person's
General Investment Account. Such Share Investment Account shall be charged with
all Shares that are sold or exchanged to acquire other investments or to provide
cash and with all Shares that are distributed in kind.
SECTION 11.3 GENERAL INVESTMENT ACCOUNTS.
The General Investment Account that is established for a person in
accordance with section 11.1 shall be credited with: (a) all amounts, other than
Shares, allocated to such person's Account; (b) all dividends paid in a form
other than Shares with respect to Shares credited to such person's Share
Investment Account; (c) the proceeds of any sale of Shares credited to such
person's Share Investment Account; and (d) any earnings attributable to amounts
credited to such person's General Investment Account. Such General Investment
Account shall be charged with all amounts credited thereto that are applied to
the purchase of Shares, any losses or depreciation attributable to amounts
credited thereto, any expenses allocable thereto and any distributions of
amounts credited thereto.
SECTION 11.4 VALUATION OF INVESTMENT ACCOUNTS.
(a) The Plan Administrator shall determine, or cause to be
determined, the aggregate value of each person's Share Investment Account as of
each Valuation Date by multiplying the number of Shares credited to such Share
Investment Account on such Valuation Date by the Fair Market Value of a Share on
such Valuation Date.
(b) The Plan Administrator shall determine, or cause to be
determined, the aggregate value of each person's General Investment Account as
of each Valuation Date as follows:
(i) To the extent that all or a portion of such person's General
Investment Account is invested in one or more of the Investment Funds, the
Plan Administrator shall multiply the number of units in each Investment
Fund credited to such person as of the immediately preceding Valuation
Date by the value of a unit in such Investment Fund as of the current
Valuation Date.
(ii) To the extent that all or a portion of such person's General
Investment Account is invested in investments other than the Investment
Funds, the Plan Administrator shall adjust the balance in such manner as
it shall deem appropriate to reflect earnings, losses, expenses, benefit
payments and other transactions properly chargeable to such Account.
<PAGE>
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SECTION 11.5 ANNUAL STATEMENTS.
There shall be furnished, by mail or otherwise, at least once in
each Plan Year to each person who would then be entitled to receive all or part
of the balance credited to any Account if the Plan were then terminated, a
statement of his interest in the Plan as of such date as shall be selected by
the Plan Administrator, which statement shall be deemed to have been accepted as
correct and be binding on such person unless the Plan Administrator receives
written notice to the contrary within 30 days after the statement is mailed or
furnished to such person.
ARTICLE XII
-----------
SHARES
------
SECTION 12.1 SPECIFIC ALLOCATION OF SHARES.
All Shares purchased under the Plan shall be specifically allocated
to the Share Investment Accounts of Participants, Former Participants and their
Beneficiaries in accordance with section 11.2, with the exception of Financed
Shares, which shall be allocated to the Loan Repayment Account.
SECTION 12.2 DIVIDENDS.
(a) Dividends paid with respect to Shares held under the Plan shall
be credited to the Loan Repayment Account, if paid with respect to Financed
Shares. Such dividends shall be: (i) applied to the payment of principal and
accrued interest with respect to any Share Acquisition Loan, if paid in cash; or
(ii) held in the Loan Repayment Account as Financed Shares for release in
accordance with section 6.4, if paid in the form of Shares.
(b) Dividends paid with respect to Shares allocated to a person's
Share Investment Account shall be credited to such person's Share Investment
Account. Cash dividends credited to a person's Share Investment Account shall
be, at the direction of the Board, either: (i) held in such Share Investment
Account and invested in accordance with sections 10.2 and 11.2; (ii) distributed
immediately to such person; (iii) distributed to such person within 90 days of
the close of the Plan Year in which such dividends were paid; or (iv) used to
make payments of principal or interest on a Share Acquisition Loan; PROVIDED,
HOWEVER, that the Fair Market Value of Financed Shares released from the Loan
Repayment Account equals or exceeds the amount of the dividend.
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SECTION 12.3 VOTING RIGHTS.
(a) Each person shall direct the manner in which all voting rights
appurtenant to Shares allocated to his Share Investment Account will be
exercised, provided that such Shares were allocated to his Share Investment
Account as of the applicable record date. Such person shall, for such purpose,
be deemed a "named fiduciary" within the meaning of section 402(a)(2) of ERISA.
Such a direction shall be given by completing and filing with the inspector of
elections, the Trustee or such other person who shall be independent of the
Employer as the Committee shall designate, at least 10 days prior to the date of
the meeting of holders of Shares at which such voting rights will be exercised,
a written direction in the form and manner prescribed by the Committee. The
inspector of elections, the Trustee or such other person designated by the
Committee shall tabulate the directions given on a strictly confidential basis,
and shall provide the Committee with only the final results of the tabulation.
The final results of the tabulation shall be followed by the Committee in
directing the Trustee as to the manner in which such voting rights shall be
exercised. The Plan Administrator shall make a reasonable effort to furnish, or
cause to be furnished, to each person for whom a Share Investment Account is
maintained all annual reports, proxy materials and other information known by
the Plan Administrator to have been furnished by the issuer of the Shares, or by
any solicitor of proxies, to the holders of Shares.
(b) To the extent that any person shall fail to give instructions
with respect to the exercise of voting rights appurtenant to Shares allocated to
his Share Investment Account:
(i) the Trustee shall, with respect to each matter to be voted upon:
(A) cast a number of affirmative votes equal to the product of (I) the
number of allocated Shares for which no written instructions have been
given, multiplied by (II) a fraction, the numerator of which is the number
of allocated Shares for which affirmative votes will be cast in accordance
with written instructions given as provided in section 12.3(a) and the
denominator of which is the aggregate number of affirmative and negative
votes which will be cast in accordance with written instructions given as
aforesaid, and (B) cast a number of negative votes equal to the excess (if
any) of (I) the number of allocated Shares for which no written
instructions have been given over (II) the number of affirmative votes
being cast with respect to such allocated Shares pursuant to section
12.3(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent with
its fiduciary duties, vote the allocated Shares for which no written
instructions have been given in the manner described in section
12.3(b)(i), it shall vote such Shares in such manner as it, in its
discretion, may determine to be in the best interests of the persons to
whose Share Investment Accounts such Shares have been allocated.
(c) (i) The voting rights appurtenant to Financed Shares shall be
exercised as follows with respect to each matter as to which holders of Shares
may vote:
(A) a number of votes equal to the product of (I) the total number
of votes appurtenant to Financed Shares allocated to the Loan Repayment
Account on
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the applicable record date; multiplied by (II) a fraction, the numerator
of which is the total number of affirmative votes cast by Participants,
Former Participants and the Beneficiaries of deceased Former Participants
with respect to such matter pursuant to section 12.3(a) and the
denominator of which is the total number of affirmative and negative votes
cast by Participants, Former Participants and the Beneficiaries of
deceased Former Participants, shall be cast in the affirmative; and
(B) a number of votes equal to the excess of (I) the total number of
votes appurtenant to Financed Shares allocated to the Loan Repayment
Account on the applicable record date, over (II) the number of affirmative
votes cast pursuant to section 12.3(c)(i)(A) shall be cast in the
negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.3(c)(i) shall be applied separately with respect to each class
of Shares.
(ii) If voting rights are to be exercised with respect to Financed
Shares as provided in section 12.3(c)(i)(A) and (B) at a time when there are no
Shares allocated to the Share Investment Accounts of Participants, Former
Participants and the Beneficiaries of deceased Former Participants, then the
voting rights appurtenant to Financed Shares shall be exercised as follows with
respect to each matter as to which holders of Shares may vote:
(A) Each person who is a Participant on the applicable record date
and who was a Participant on the last day of the Plan Year ending on or
immediately prior to such record date will be granted a number of votes
equal to the quotient, rounded to the nearest integral number, of (I) such
Participant's Allocation Com pensation for the Plan Year ending on or
immediately prior to such record date (or for the portion of such Plan
Year during which he was a Participant); divided by (II) $1,000.00; and
(B) a number of votes equal to the product of (I) the total number
of Financed Shares allocated to the Loan Repayment Account on the
applicable record date; multiplied by (II) a fraction, the numerator of
which is the total number of votes that are cast in the affirmative with
respect to such matter pursuant to section 12.3(c)(ii)(A) and the
denominator of which is the total number of votes that are cast either in
the affirmative or in the negative with respect to such matter pursuant to
section 12.3(c)(ii)(A), shall be cast in the affirmative; and
(C) a number of votes equal to the excess of (I) the total number of
Financed Shares allocated to the Loan Repayment Account on the applicable
record date, over (II) the number of affirmative votes cast with respect
to such matter pursuant to section 12.3(c)(ii)(B), shall be cast in the
negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.3(c)(ii) shall be applied separately with respect to each class
of Shares.
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SECTION 12.4 TENDER OFFERS.
(a) Each person shall direct whether Shares allocated to his Share
Investment Account will be delivered in response to any Tender Offer. Such
person shall, for such purpose, be deemed a "named fiduciary" within the meaning
of section 402(a)(2) of ERISA. Such a direc tion shall be given by completing
and filing with the Trustee or such other person who shall be independent of the
Employer as the Committee shall designate, at least 10 days prior to the latest
date for exercising a right to deliver Shares pursuant to such Tender Offer, a
written direction in the form and manner prescribed by the Committee. The
Trustee or other person designated by the Committee shall tabulate the
directions given on a strictly confidential basis, and shall provide the
Committee with only the final results of the tabulation. The final results of
the tabulation shall be followed by the Committee in directing the number of
Shares to be delivered. The Plan Administrator shall make a reasonable effort to
furnish, or cause to be furnished, to each person for whom a Share Investment
Account is maintained, all information known by the Plan Administrator to have
been furnished by the issuer or by or on behalf of any person making such Tender
Offer, to the holders of Shares in connection with such Tender Offer.
(b) To the extent that any person shall fail to give instructions
with respect to Shares allocated to his Share Investment Account:
(i) the Trustee shall (A) tender or otherwise offer for purchase,
exchange or redemption a number of such Shares equal to the product of (I)
the number of allocated Shares for which no written instructions have been
given, multiplied by (II) a fraction, the numerator of which is the number
of allocated Shares tendered or otherwise offered for purchase, exchange
or redemption in accordance with written instructions given as provided in
section 12.4(a) and the denominator of which is the aggregate number of
allocated Shares for which written instructions have been given as
aforesaid, and (B) withhold a number of Shares equal to the excess (if
any) of (I) the number of allocated Shares for which no written
instructions have been given over (II) the number of Shares being tendered
or otherwise offered pursuant to section 12.4(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent with
its fiduciary duties, exercise the tender or other rights appurtenant to
allocated Shares for which no written instructions have been given in the
manner described in section 12.4(b)(i), it shall tender, or otherwise
offer, or withhold such Shares in such manner as it, in its discretion,
may determine to be in the best interests of the persons to whose Share
Investment Accounts such Shares have been allocated.
(c) In the case of any Tender Offer, any Financed Shares held in the
Loan Repayment Account shall be dealt with as follows:
(i) If such Tender Offer occurs at a time when there are no Shares
allocated to the Share Investment Accounts of Participants, Former
Participants and
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the Beneficiaries of deceased Former Participants, then the disposition of
the Finan ced Shares shall be determined as follows:
(A) each person who is a Participant on the applicable record
date and who was a Participant on the last day of the Plan Year
ending on or immediately prior to such record date will be granted a
number of tender rights equal to the quotient, rounded to the
nearest integral number, of (I) such Participant's Allocation
Compensation for the Plan Year ending on or immediately prior to
such record date (or for the portion of such Plan Year during which
he was a Participant), divided by (II) $1,000.00; and
(B) on the last day for delivering Shares or otherwise
responding to such Tender Offer, a number of Shares equal to the
product of (I) the total number of Financed Shares allocated to the
Loan Repayment Account on the last day of the effective period of
such Tender Offer; multiplied by (II) a fraction, the numerator of
which is the total number of tender rights exercised in favor of the
delivery of Shares in response to the Tender Offer pursuant to
section 12.4(c)(i)(A) and the denominator of which is the total
number of tender rights that are exercisable in response to the
Tender Offer pursuant to section 12.4(c)(i)(A), shall be delivered
in response to the Tender Offer; and
(C) a number of Shares equal to the excess of (I) the total
number of Financed Shares allocated to the Loan Repayment Account on
the last day of the effective period of such Tender Offer; over (II)
the number of Shares to be delivered in response to the Tender Offer
pursuant to section 12.4(c)(i)(B), shall be withheld from delivery.
(ii) If such Tender Offer occurs at a time when the voting rights
appurte nant to such Financed Shares are to be exercised in accordance
with section 12.3(c)(i), then:
(A) on the last day for delivering Shares or otherwise
responding to such Tender Offer, a number of Financed Shares equal
to the product of (I) the total number of Financed Shares allocated
to the Loan Repayment Account on the last day of the effective
period of such Tender Offer; multi plied by (II) a fraction, the
numerator of which is the total number of Shares delivered from the
Share Investment Accounts of Participants, Former Participants and
the Beneficiaries of deceased Former Participants in response to
such Tender Offer pursuant to section 12.4(a), and the deno minator
of which is the total number of Shares allocated to the Share
Investment Accounts of Participants, Former Participants and
Beneficiaries of deceased Former Participants immediately prior to
the last day for delivering Shares or otherwise responding to such
Tender Offer, shall be delivered; and
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(B) a number of Financed Shares equal to the excess of (I) the
total number of Financed Shares allocated to the Loan Repayment
Account on the last day for delivering Shares or otherwise
responding to such Tender Offer; over (II) the number of Financed
Shares to be delivered pursuant to section 12.4(c)(ii)(A), shall be
withheld from delivery.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.4(c) shall be applied separately with respect to each class of
Shares.
ARTICLE XIII
------------
PAYMENT OF BENEFITS
-------------------
SECTION 13.1 IN GENERAL.
The balance credited to a Participant's or Former Participant's
Account under the Plan shall be paid only at the times, to the extent, in the
manner and to the persons provided in this Article XIII.
SECTION 13.2 DESIGNATION OF BENEFICIARIES.
(a) Subject to section 13.2(b), any person entitled to a benefit
under the Plan may designate a Beneficiary to receive any amount to which he is
entitled that remains undistributed on the date of his death. Such person shall
designate his Beneficiary (and may change or revoke any such designation) in
writing in the form and manner prescribed by the Plan Administrator. Such
designation, and any change or revocation thereof, shall be effective only if
received by the Plan Administrator prior to such person's death and shall become
irrevocable upon such person's death.
(b) A Participant or Former Participant who is married shall
automatically be deemed to have designated his spouse as his Beneficiary,
unless, prior to the time such designation would, under section 13.2(a), become
irrevocable:
(i) the Participant or Former Participant designates an additional
or a different Beneficiary in accordance with this section 13.2; and
(ii) (A) the spouse of such Participant or Former Participant
consents to such designation in a writing that acknowledges the effect of
such consent and is witnessed by a Plan representative or a notary public;
or (B) the spouse of such Participant or Former Participant has previously
consented to such designation by signing a written waiver of any right to
consent to any designation made by the
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Participant or Former Participant, and such waiver acknowledged the effect
of the waiver and was witnessed by a Plan representative or a notary
public; or (C) it is established to the satisfaction of a Plan
representative that the consent required under section 13.2(b)(ii)(A) may
not be obtained because such spouse cannot be located or because of other
circumstances permitted under regulations issued by the Secretary of the
Treasury.
(c) In the event that a Beneficiary entitled to payments hereunder
shall die after the death of the person who designated him but prior to
receiving payment of his entire interest in the Account of the person who
designated him, then such Beneficiary's interest in the Account of such person,
or any unpaid balance thereof, shall be paid as provided in section 13.3 to the
Beneficiary who has been designated by the deceased Beneficiary, or if there is
none, to the executor or administrator of the estate of such deceased
Beneficiary, or if no such executor or administrator is appointed within such
time as the Plan Administrator, in his sole discretion, shall deem reasonable,
to such one or more of the spouse and descendants and blood relatives of such
deceased Beneficiary as the Plan Administrator may select. If a person entitled
to a benefit under the Plan and any of the Beneficiaries designated by him shall
die in such circumstances that there shall be substantial doubt as to which of
them shall have been the first to die, for all purposes of the Plan, the person
who made the Beneficiary designation shall be deemed to have survived such
Beneficiary.
(d) If no Beneficiary survives the person entitled to the benefit
under the Plan or if no Beneficiary has been designated by such person, such
benefit shall be paid to the executor or administrator of the estate of such
person, or if no such executor or administrator is appointed within such time as
the Plan Administrator, in his sole discretion, shall deem reasonable, to such
one or more of the spouse and descendants and blood relatives of such deceased
person as the Plan Administrator may select.
SECTION 13.3 DISTRIBUTIONS TO PARTICIPANTS AND FORMER PARTICIPANTS.
(a)(i) Subject to the provisions of section 13.5 with respect to
required minimum distributions, the vested portion of the balance credited to a
Participant's or a Former Participant's Account shall be distributed to him
commencing as of the last Valuation Date to occur in the Plan Year in which the
Participant or Former Participant terminates employment with the Employer or
attains age 65, whichever is later; unless the Participant or Former Participant
elects otherwise pursuant to section 13.3(a)(ii), and the payment, or first in a
series of payments, is actually made within three months following such
Valuation Date.
(ii) A Participant or Former Participant may, upon request on a form
provided by the Plan Administrator and filed with the Plan Administrator not
later than 15 days prior to the date on which his employment with the Employer
terminates, elect that his vested interest in his Account be paid commencing as
of any earlier or later Valuation Date after his termination of employment, but
in no event later than the last Valuation Date to occur in the calendar year in
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which the Participant or Former Participant attains age 70 1/2, in which case
the payment, or first in a series of payments, shall be made within three months
following such Valuation Date.
(b)(i) Subject to section 13.3(b)(ii), the vested portion of the
balance credited to the Account of a Participant or Former Participant will be
paid to him, commencing as of the Valuation Date determined under section
13.3(a), in substantially equal annual installments over a fixed period equal to
the greater of:
(A) five years; or
(B) if the vested portion of the balance credited to the Account of
the Participant or Former Participant, determined as of the Valuation Date
determined under section 13.3(a), is greater than $500,000 (or such larger
amount as may be prescribed by the Secretary of the Treasury pursuant to
section 409(o) of the Code), the sum of five years plus the lesser of (I)
five additional years, or (II) one additional year for each $100,000 (or
fraction thereof) by which the vested portion of the balance credited to
the Participant's or Former Participant's Account exceeds $500,000 (or
such larger amount as may be prescribed by the Secretary of the Treasury
pursuant to section 409(o) of the Code).
(ii) A Participant or Former Participant may, upon request on a form
provided by the Plan Administrator and filed with the Plan Administrator not
later than 15 days prior to the date on which his employment terminates, elect
that the vested portion of the balance credited to his Account be paid,
commencing as of the Valuation Date determined under section 13.3(a):
(A) in substantially equal annual installments over a fixed period
not to exceed the lesser of (I) 10 years, or (II) the life expectancy of
the Participant or Former Participant, or, if his Beneficiary is a natural
person, the joint life and last survivor expectancy of the Participant or
Former Participant and his Beneficiary; or
(B) subject to section 13.4, in a lump sum payment.
(c) If any person entitled to a benefit under the Plan dies before
his entire benefit has been distributed to him, then the remainder of such
benefit shall be paid to the Beneficiary designated by him under section 13.2
either:
(i) in a lump sum distribution as of the Valuation Date next
following the date of his death, and the amount thereof shall be based
upon the vested portion of the balance credited to his Account as of such
Valuation Date; or
(ii) if, prior to the death of the Participant or Former Participant
whose vested Account is being distributed, an election pursuant to section
13.3(b)(ii)(B) is in effect for him, in a lump sum distribution as of the
Valuation Date specified in such election, or, if earlier, as of the
latest Valuation Date that would permit
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payment to be made within five years after the Participant's or Former
Participant's death, and the amount thereof shall be based upon the vested
portion of the balance credited to his Account as of such Valuation Date;
or
(iii) if, prior to the death of the Participant or Former
Participant whose vested Account is being distributed, an election
pursuant to section 13.3(b)(ii)(A) is in effect for him:
(A) over the period and at the times set forth in such
election, if distribution has begun prior to the Participant's or
Former Participant's death; or
(B) commencing at the time set forth in such election and over
the period set forth in such election (or, if less, over a period
equal to the life expectancy of the Beneficiary of the deceased
Participant or Former Participant), if the deceased Participant's or
Former Participant's spouse is his Beneficiary and distribution has
not begun prior to the deceased Participant's or Former
Participant's death; or
(C) commencing on the date specified in such election (or, if
earlier, the last Valuation Date that will permit payment to begin
within one year after the deceased Participant's or Former
Participant's death) and over the period set forth in such election
(or, if less, over a period equal to the life expectancy of the
Beneficiary of the deceased Participant or Former Participant), if
the deceased Participant's or Former Participant's Beneficiary is a
natural person other than his spouse and distribution has not begun
prior to the deceased Participant's or Former Participant's death;
and the amount thereof shall be based upon the vested portion of the
balance credited to his Account as of the Valuation Dates as of which
payments are determined; or
(iv) upon written application of the Beneficiary made in such form
and manner as the Plan Administrator may prescribe, at another time or in
another manner permitted under section 13.3(a) or (b), subject to the
following limitations:
(A)(I) If such Beneficiary is a natural person other than the
spouse of the deceased Participant or Former Participant whose
vested Account is being distributed, a distribution that commences
within one year after such deceased Participant's or Former
Participant's death shall be made over a fixed period that does not
exceed the life expectancy of such Beneficiary when distribution
commences.
(II) If such Beneficiary is the spouse of the deceased
Participant or Former Participant whose vested Account is being
distributed, a
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distribution that commences no later than the later of: (1) the date
on which the deceased Participant or Former Participant would have
attained age 70 1/2 had he lived; or (2) the first anniversary of
the death of such deceased Participant or Former Participant, shall
be made over a fixed period that does not exceed the life expectancy
of such Beneficiary when distribution commences.
(III) In all other cases where the spouse of the deceased
Partici pant or Former Participant whose vested Account is being
distributed is not the Beneficiary, payment must be completed within
five years after the death of such deceased Participant or Former
Participant.
(B) In cases where distribution has commenced prior to the
death of the deceased Participant or Former Participant whose vested
Account is being distributed, distribution must be completed at
least as rapidly as under the method in effect prior to such
deceased Participant's or Former Participant's death.
SECTION 13.4 MANNER OF PAYMENT.
(a) Subject to section 13.4(b), payments of distributions made
pursuant to section 13.3 or section 13.5 shall be paid, in accordance with the
written direction of the person requesting the payment, in whole Shares, in
cash, or in a combination of cash and whole Shares. Such written direction shall
be given in such form and manner as the Plan Administrator may prescribe. If no
such direction is given, then payment shall be made in the maximum number of
whole Shares that may be acquired with the amount of the payment, plus, if
necessary, an amount of money equal to any remaining amount of the payment that
is less than the Fair Market Value of a whole Share.
(b) No distribution of a lump sum payment shall be made in cash to
the extent that the making of such distribution, when combined with all other
distributions to be made in cash as of the same Valuation Date, would require
the sale of Shares constituting 1% or more of all outstanding Shares; PROVIDED,
HOWEVER, that this section 13.4(b) shall not apply to or in respect of a
Participant or Former Participant:
(i) following such Participant's or Former Participant's termination
of employment with the Employer on account of his Retirement or
Disability; or
(ii) following such Participant's or Former Participant's 65th
birthday; or
(iii) following the death of such Participant or Former Participant.
<PAGE>
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SECTION 13.5 MINIMUM REQUIRED DISTRIBUTIONS.
(a) Required minimum distributions of a Participant's or Former
Participant's Account shall commence no later than:
(i) if the Participant or Former Participant attained age 70 1/2
prior to January 1, 1988 and was not a Five Percent Owner at any time
during the Plan Year ending in the calendar year in which he attained age
70 1/2, during any of the four preceding Plan Years or during any
subsequent years, the later of (A) the calendar year in which he attains
or attained age 70 1/2 or (B) the calendar year in which he terminates
employment with the Employer; or
(ii) if the Participant or Former Participant attained age 70 1/2
prior to January 1, 1988 and is or was a Five Percent Owner at any time
during the Plan Year ending in the calendar year in which he attained age
70 1/2, or during any of the four preceding Plan Years or during any
subsequent years, the later of (A) the calendar year in which he attains
age 70 1/2 or (B) the calendar year in which he first becomes a Five
Percent Owner; or
(iii) in all other cases, the calendar year in which the Participant
or Former Participant attains age 70 1/2.
(b) The required minimum distributions contemplated by section
13.5(a) shall be made as follows:
(i) The minimum required distribution to be made for the calendar
year for which the first minimum distribution is required shall be no
later than April 1st of the immediately following calendar year and shall
be equal to the quotient obtained by dividing (A) the vested balance
credited to the Participant's or Former Participant's Account as of the
last Valuation Date to occur in the calendar year immediately preceding
the calendar year in which the first minimum distribution is required
(adjusted to account for any additions thereto or subtractions therefrom
after such Valuation Date but on or before December 31st of such calendar
year); by (B) the Participant's or Former Participant's life expectancy
(or, if his Beneficiary is a natural person, the joint life and last
survivor expectancy of him and his Beneficiary); and
(ii) the minimum required distribution to be made for each calendar
year following the calendar year for which the first minimum distribution
is required shall be made no later than December 31st of the calendar year
for which the distribution is required and shall be equal to the quotient
obtained by dividing (A) the vested balance credited to the Participant's
or Former Participant's Account as of the last Valuation Date to occur in
the calendar year prior to the calendar year for which the distribution is
required (adjusted to account for any additions thereto or subtractions
therefrom after such Valuation Date but on or before December
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31st of such calendar year and, in the case of the distribution for the
calendar year immediately following the calendar year for which the first
minimum distribution is required, reduced by any distribution for the
prior calendar year that is made in the current calendar year); by (B) the
Participant's or Former Participant's life expectancy (or, if his
Beneficiary is a natural person, the joint life and last survivor
expectancy of him and his Beneficiary).
For purposes of this section 13.5, the life expectancy of a Participant or
Former Participant (or the joint life and last survivor expectancy of a
Participant or Former Participant and his designated Beneficiary) for the
calendar year in which the Participant or Former Participant attains age 70 1/2
shall be determined on the basis of Tables V and VI, as applicable, of section
1.72-9 of the Income Tax Regulations as of the Participant's or Former
Participant's and Beneficiary's birthday in such year. Such life expectancy or
joint life and last survivor expectancy for any subsequent year shall be equal
to the excess of (1) the life expectancy or joint life and last survivor
expectancy for the year in which the Participant or Former Participant attains
age 70 1/2, over (2) the number of whole years that have elapsed since the
Participant or Former Participant attained age 70 1/2.
(c) Payment of the distributions required to be made to a
Participant or Former Participant under this section 13.5 shall be made in
accordance with section 13.4.
SECTION 13.6 DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.
(a) A Distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible Retirement Plan specified by
the Distributee in a Direct Rollover.
(b) The following rules shall apply with respect to Direct Rollovers
made pursuant to this section 13.6:
(i) A Participant may only elect to make a Direct Rollover of an
Eligible Rollover Distribution if such Eligible Rollover Distribution
(when combined with other Eligible Rollover Distributions made or to be
made in the same calendar year) is
reasonably expected to be at least $200;
(ii) If a Participant elects a Direct Rollover of a portion of an
Eligible Rollover Distribution, that portion must be equal to at least
$500; and
(iii) A Participant may not divide his or her Eligible Rollover
Distribution into separate distributions to be transferred to two or more
Eligible Retirement Plans.
(c) For purposes of this section 13.6 and any other applicable
section of the Plan, the following definitions shall have the following
meanings:
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(i) "Direct Rollover" means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
(ii) "Distributee" means an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's spouse or former spouse who is the alternate payee under a
Qualified Domestic Relations Order are considered Distributees with regard
to the interest of the spouse or former spouse.
(iii) "Eligible Retirement Plan" means an individual retirement
account described in section 408(a) of the Code, an individual retirement
annuity described in section 408(b) of the Code, an annuity plan described
in section 403(a) of the Code, or a qualified trust described in section
401(a) of the Code that accepts the Distributee's Eligible Rollover
Distribution. However, in the case of an Eligible Rollover Distribution to
the current or former spouse who is the alternative payee under a
Qualified Domestic Relations Order or to a surviving spouse, an Eligible
Retirement Plan is an individual retirement account or individual
retirement annuity.
(iv) "Eligible Rollover Distribution" means any distribution of all
or any portion of the balance to the credit of the Distributee, except
that an Eligible Rollover Distribution does not include: any distribution
that is one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of the
Distributee's designated Beneficiary, or for a specified period of ten
(10) years or more; any distribution to the extent such distribution is
required under section 401(a)(9) of the Code; and the portion of any
distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to
employer securities).
SECTION 13.7 VALUATION OF SHARES UPON DISTRIBUTION TO A PARTICIPANT.
Notwithstanding any contrary provision in this Article XIII, in the
event that all or a portion of a payment of a distribution to a Participant is
to be made in cash, such Participant shall only be entitled to receive the
proceeds of the Shares allocated to his Account that are sold in connection with
such distribution and which are valued as of the date of such sale.
SECTION 13.8 PUT OPTIONS.
(a) Subject to section 13.8(c) and except as provided otherwise in
section 13.8(b), each Participant or Former Participant to whom Shares are
distributed under the Plan, each Beneficiary of a deceased Participant or Former
Participant, including the estate of a deceased Participant or Former
Participant, to whom Shares are distributed under the Plan, and each person to
whom such a Participant, Former Participant or Beneficiary gives Shares that
have been
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distributed under the Plan shall have the right to require the Employer to
purchase from him all or any portion of such Shares. A person shall exercise
such right by delivering to the Employer a written notice, in such form and
manner as the Employer may by written notice to such person prescribe, setting
forth the number of Shares to be purchased by the Employer, the number of the
stock certificate evidencing such person's ownership of such Shares, and the
effective date of the purchase. Such notice shall be given at least 30 days in
advance of the effective date of purchase, and the effective date of purchase
specified therein shall be, either within the 60-day period that begins on the
date on which the Shares to be purchased by the Employer were distributed from
the Plan or within the 60-day period that begins on the first day of the Plan
Year immediately following the Plan Year in which the Shares to be purchased by
the Employer are distributed from the Plan. As soon as practicable following its
receipt of such a notice, the Employer shall take such actions as are necessary
to purchase the Shares specified in such notice at a price per Share equal to
the Fair Market Value of a Share determined as of the Valuation Date coincident
with or immediately preceding the effective date of the purchase.
(b) The Employer shall have no obligation to purchase any Share (i)
pursuant to a notice that is not timely given, or on an effective date of
purchase that is not within the periods prescribed in section 13.8(a), or (ii)
following the earliest date on which Shares are publicly traded on an
established market.
(c) This section 13.8 shall not apply so long as the Employer is
prohibited by law from redeeming or purchasing its own securities.
SECTION 13.9 RIGHT OF FIRST REFUSAL.
(a) Subject to section 13.9(d), for any period during which Shares
are not pub licly traded in any established market, no person who owns Shares
that were distributed from the Plan, other than a person to whom such Shares
were sold in compliance with this section 13.9, shall sell such Shares to any
person other than the Employer without first offering to sell such Shares to the
Employer in accordance with this section 13.9.
(b) In the event that a person to whom this section 13.9 applies
shall receive and desire to accept from a person other than the Employer an
offer to purchase Shares to which this section 13.9 applies, he shall furnish to
the Employer a written notice which shall:
(i) include a copy of such offer to purchase;
(ii) offer to sell to the Employer the Shares subject to such
offer to purchase at a price per Share that is equal to the greater
of:
(A) the price per Share specified in such offer to
purchase; or
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(B) the Fair Market Value of a Share as of the Valuation
Date coincident with or immediately preceding the date of such
notice;
and otherwise upon the same terms and conditions as those
specified in such offer to purchase; and
(iii) include an indication of his intention to accept such
offer to purchase if the Employer does not accept his offer to sell.
Such person shall refrain from accepting such offer to purchase for a period of
fourteen days following the date on which such notice is given.
(c) Subject to section 13.9(d), the Employer shall have the right to
purchase the Shares covered by the offer to sell contained in a notice given
pursuant to section 13.9(b), on the terms and conditions specified in such
notice, by written notice given to the party making the offer to sell not later
than the fourteenth day after the notice described in section 13.9(b) is given.
If the Employer does not give such a notice during the prescribed fourteen-day
period, then the person owning such Shares may accept the offer to purchase
described in the notice.
(d) This section 13.9 shall not apply so long as the Employer is
prohibited by law from redeeming or purchasing its own securities
ARTICLE XIV
-----------
ADMINISTRATION
--------------
SECTION 14.1 NAMED FIDUCIARIES.
The term "Named Fiduciary" shall mean (but only to the extent of the
responsi bilities of each of them) the Plan Administrator, the Committee, the
Board and the Trustee. This Article XIV is intended to allocate to each Named
Fiduciary the responsibility for the prudent execution of the functions assigned
to him or it, and none of such responsibilities or any other responsibility
shall be shared by two or more of such Named Fiduciaries. Whenever one Named
Fiduciary is required by the Plan or Trust Agreement to follow the directions of
another Named Fiduciary, the two Named Fiduciaries shall not be deemed to have
been assigned a shared responsibility, but the responsibility of the Named
Fiduciary giving the directions shall be deemed his sole responsibility, and the
responsibility of the Named Fiduciary receiving those directions shall be to
follow them insofar as such instructions are on their face proper under
applicable law.
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SECTION 14.2 PLAN ADMINISTRATOR.
There shall be a Plan Administrator, who shall be the Senior Human
Resources Officer of the Employer, or such Employee or officer as may be
designated by the Committee, as hereinafter provided, and who shall, subject to
the responsibilities of the Committee and the Board, have the responsibility for
the day-to-day control, management, operation and administra tion of the Plan
(except trust duties). The Plan Administrator shall have the following
responsibilities:
(a) To maintain records necessary or appropriate for the
administration of the Plan;
(b) To give and receive such instructions, notices, information,
materials, reports and certifications to the Trustee as may be necessary
or appro priate in the administration of the Plan;
(c) To prescribe forms and make rules and regulations consistent
with the terms of the Plan and with the interpretations and other actions
of the Commit tee;
(d) To require such proof of age or evidence of good health of an
Employee, Participant or Former Participant or the spouse of either, or of
a Beneficiary as may be necessary or appropriate in the administration of
the Plan;
(e) To prepare and file, distribute or furnish all reports, plan
descrip tions, and other information concerning the Plan, including,
without limitation, filings with the Secretary of Labor and communications
with Participants, Former Participants and other persons, as shall be
required of the Plan Administrator under ERISA;
(f) To determine any question arising in connection with the Plan,
and the Plan Administrator's decision or action in respect thereof shall
be final and conclusive and binding upon the Employer, the Trustee,
Participants, Former Participants, Beneficiaries and any other person
having an interest under the Plan; PROVIDED, HOWEVER, that any question
relating to inconsistency or omission in the Plan, or interpretation of
the provisions of the Plan, shall be referred to the Committee by the Plan
Administrator and the decision of the Committee in respect thereof shall
be final;
(g) Subject to the provisions of section 14.5, to review and dispose
of claims under the Plan filed pursuant to section 14.4;
(h) If the Plan Administrator shall determine that by reason of
illness, senility, insanity, or for any other reason, it is undesirable to
make any payment to a Participant, Former Participant, Beneficiary or any
other person entitled
<PAGE>
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thereto, to direct the application of any amount so payable to the use or
benefit of such person in any manner that he may deem advisable or to
direct in his discretion the withholding of any payment under the Plan due
to any person under legal disability until a representative competent to
receive such payment in his behalf shall be appointed pursuant to law;
(i) To discharge such other responsibilities or follow such
directions as may be assigned or given by the Committee or the Board; and
(j) To perform any duty or take any action which is allocated to the
Plan Administrator under the Plan.
The Plan Administrator shall have the power and authority necessary or
appropriate to carry out his responsibilities. The Plan Administrator may resign
only by giving at least 30 days' prior written notice of resignation to the
Committee, and such resignation shall be effective on the date specified in such
notice.
SECTION 14.3 COMMITTEE RESPONSIBILITIES.
The Committee shall, subject to the responsibilities of the Board,
have the following responsibilities:
(a) To review the performance of the Plan Administrator;
(b) To hear and decide appeals, pursuant to the claims procedure
contained in section 14.5 of the Plan, taken from the decisions of the
Plan Administrator;
(c) To hear and decide questions, including interpretation of the
Plan, as may be referred to the Committee by the Plan Administrator;
(d) To review the performance of the Trustee and such investment
managers as may be appointed in or pursuant to the Trust Agreement in
investing, managing and controlling the assets of the Plan;
(e) To the extent required by ERISA, to establish a funding policy
and method consistent with the objectives of the Plan and the requirements
of ERISA, and to review such policy and method at least annually;
(f) To report and make recommendations to the Board regarding
changes in the Plan, including changes in the operation and management of
the Plan and removal and replacement of the Trustee and such investment
managers as may be appointed in or pursuant to the Trust Agreement;
<PAGE>
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(g) To designate an Alternate Plan Administrator to serve in the
event that the Plan Administrator is absent or otherwise unable to
discharge his responsi bilities;
(h) To remove and replace the Plan Administrator or Alternate, or
both of them, and to fill a vacancy in either office;
(i) To the extent provided under and subject to the provisions of
the Trust Agreement, to appoint "investment managers" as defined in
section 3(38) of ERISA to manage and control (including acquiring and
disposing of) all or any of the assets of the Plan;
(j) With the prior approval of the Board, to direct the Trustee to
obtain one or more Share Acquisition Loans;
(k) To develop and provide procedures and forms necessary to enable
Participants to give voting and tendering directions on a confidential
basis;
(l) To discharge such other responsibilities or follow such
directions as may be assigned or given by the Board; and
(m) To perform any duty or take any action which is allocated to the
Committee under the Plan.
The Committee shall have the power and authority necessary or appropriate to
carry out its responsibilities.
SECTION 14.4 CLAIMS PROCEDURE.
Any claim relating to benefits under the Plan shall be filed with
the Plan Administrator on a form prescribed by him. If a claim is denied in
whole or in part, the Plan Administrator shall give the claimant written notice
of such denial, which notice shall specifically set forth:
(a) The reasons for the denial;
(b) The pertinent Plan provisions on which the denial was based;
(c) Any additional material or information necessary for the
claimant to perfect his claim and an explanation of why such material or
information is needed; and
(d) An explanation of the Plan's procedure for review of the denial
of the claim.
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In the event that the claim is not granted and notice of denial of a claim is
not furnished by the 30th day after such claim was filed, the claim shall be
deemed to have been denied on that day for the purpose of permitting the
claimant to request review of the claim.
SECTION 14.5 CLAIMS REVIEW PROCEDURE.
Any person whose claim filed pursuant to section 14.5 has been
denied in whole or in part by the Plan Administrator may request review of the
claim by the Committee, upon a form prescribed by the Plan Administrator. The
claimant shall file such form (including a statement of his position) with the
Committee no later than 60 days after the mailing or delivery of the written
notice of denial provided for in this section 14.5, or, if such notice is not
provided, within 60 days after such claim is deemed denied pursuant to this
section 14.5. The claimant shall be permitted to review pertinent documents. A
decision shall be rendered by the Committee and communicated to the claimant not
later than 30 days after receipt of the claimant's written request for review.
However, if the Committee finds it necessary, due to special circumstances (for
example, the need to hold a hearing), to extend this period and so notifies the
claimant in writing, the decision shall be rendered as soon as practicable, but
in no event later than 120 days after the claimant's request for review. The
Committee's decision shall be in writing and shall specifically set forth:
(a) The reasons for the decision; and
(b) The pertinent Plan provisions on which the decision is based.
Any such decision of the Committee shall be binding upon the claimant and the
Employer, and the Plan Administrator shall take appropriate action to carry out
such decision.
SECTION 14.8 ALLOCATION OF FIDUCIARY RESPONSIBILITIES AND
EMPLOYMENT OF ADVISORS.
Any Named Fiduciary may:
(a) Allocate any of his or its responsibilities (other than trustee
responsibilities) under the Plan to such other person or persons as he or
it may designate, provided that such allocation and designation shall be
in writing and filed with the Plan Administrator;
(b) Employ one or more persons to render advice to him or it with
regard to any of his or its responsibilities under the Plan; and
(c) Consult with counsel, who may be counsel to the Employer.
<PAGE>
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SECTION 14.9 OTHER ADMINISTRATIVE PROVISIONS.
(a) Any person whose claim has been denied in whole or in part must
exhaust the administrative review procedures provided in section 14.5 prior to
initiating any claim for judicial review.
(b) No bond or other security shall be required of a member of the
Committee, the Plan Administrator, or any officer or Employee of the Employer to
whom fiduciary respon sibilities are allocated by a Named Fiduciary, except as
may be required by ERISA.
(c) Subject to any limitation on the application of this section
14.9(c) pursuant to ERISA, neither the Plan Administrator, nor a member of the
Committee, nor any officer or Employee of the Employer to whom fiduciary
responsibilities are allocated by a Named Fiduciary, shall be liable for any act
of omission or commission by himself or by another person, except for his own
individual willful and intentional malfeasance.
(d) The Plan Administrator or the Committee may, except with respect
to actions under section 14.5, shorten, extend or waive the time (but not beyond
60 days) required by the Plan for filing any notice or other form with the Plan
Administrator or the Committee, or taking any other action under the Plan.
(e) The Plan Administrator or the Committee may direct that the
costs of services provided pursuant to section 14.6, and such other reasonable
expenses as may be incurred in the administration of the Plan, shall be paid out
of the funds of the Plan unless the Employer shall pay them.
(f) Any person, group of persons, committee, corporation or
organization may serve in more than one fiduciary capacity with respect to the
Plan.
(g) Any action taken or omitted by any fiduciary with respect to the
Plan, including any decision, interpretation, claim denial or review on appeal,
shall be conclusive and binding on all interested parties and shall be subject
to judicial modification or reversal only to the extent it is determined by a
court of competent jurisdiction that such action or omission was arbitrary and
capricious and contrary to the terms of the Plan.
ARTICLE XV
----------
AMENDMENT, TERMINATION AND TAX QUALIFICATION
--------------------------------------------
<PAGE>
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SECTION 15.1 AMENDMENT AND TERMINATION BY ASHE FEDERAL BANK.
The Employer expects to continue the Plan indefinitely, but
specifically reserves the right, in its sole discretion, at any time, by
appropriate action of the Board, to amend, in whole or in part, any or all of
the provisions of the Plan and to terminate the Plan at any time. Subject to the
provisions of section 15.2, no such amendment or termination shall permit any
part of the Trust Fund to be used for or diverted to purposes other than for the
exclusive benefit of Participants, Former Participants, Beneficiaries or other
persons entitled to benefits, and no such amendment or termination shall reduce
the accrued benefit of any Participant, Former Participant, Beneficiary or other
person who may be entitled to benefits, without his consent. In the event of a
termination or partial termination of the Plan, or in the event of a complete
discontinuance of the Employer's contributions to the Plan, the Accounts of each
affected person shall forthwith become nonforfeitable and shall be payable in
accordance with the provisions of Article XIII.
SECTION 15.2 AMENDMENT OR TERMINATION OTHER THAN BY ASHE FEDERAL
BANK.
In the event that a corporation or trade or business other than Ashe
Federal Bank shall adopt this Plan, such corporation or trade or business shall,
by adopting the Plan, empower Ashe Federal Bank to amend or terminate the Plan,
insofar as it shall cover employees of such corporation or trade or business,
upon the terms and conditions set forth in section 15.1; PROVIDED, HOWEVER, that
any such corporation or trade or business may, by action of its board of
directors or other governing body, amend or terminate the Plan, insofar as it
shall cover employees of such corporation or trade or business, at different
times and in a different manner. In the event of any such amendment or
termination by action of the board of directors or other governing body of such
a corporation or trade or business, a separate plan shall be deemed to have been
established for the employees of such corporation or trade or business, and the
assets of such plan shall be segregated from the assets of this Plan at the
earliest practicable date and shall be dealt with in accordance with the
documents governing such separate plan.
SECTION 15.3 CONFORMITY TO INTERNAL REVENUE CODE.
The Employer has established the Plan with the intent that the Plan
and Trust will at all times be qualified under section 401(a) and exempt under
section 501(a) of the Code and with the intent that contributions under the Plan
will be allowed as deductions in computing the net income of the Employer for
federal income tax purposes, and the provisions of the Plan and Trust Agreement
shall be construed to effectuate such intentions. Accordingly, notwithstanding
anything to the contrary hereinbefore provided, the Plan and the Trust Agreement
may be amended at any time without prior notice to Participants, Former
Participants, Beneficiaries or any other persons entitled to benefits, if such
amendment is deemed by the Board to be necessary or appropriate to effectuate
such intent.
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SECTION 15.4 CONTINGENT NATURE OF CONTRIBUTIONS.
(a) All ESOP Contributions to the Plan are conditioned upon the
issuance by the Internal Revenue Service of a determination that the Plan and
Trust are qualified under section 401(a) of the Code and exempt under section
501(a) of the Code. If the Employer applies to the Internal Revenue Service for
such a determination within 90 days after the date on which it files its federal
income tax return for its taxable year that includes the last day of the Plan
Year in which the Plan is adopted, and if the Internal Revenue Service issues a
determination that the Plan and Trust are not so qualified or exempt, all ESOP
Contributions made by the Employer prior to the date of receipt of such a
determination may, at the election of the Employer, be returned to the Employer
within one year after the date of such determination.
(b) All ESOP Contributions and Loan Repayment Contributions to the
Plan are made upon the condition that such ESOP Contributions and Loan Repayment
Contributions will be allowed as a deduction in computing the net income of the
Employer for federal income tax purposes. To the extent that any such deduction
is disallowed, the amount disallowed may, at the election of the Employer, be
returned to the Employer within one year after the deduction is disallowed.
(c) Any contribution to the Plan made by the Employer as a result of
a mistake of fact may, at the election of the Employer, be returned to the
Employer within one year after such contribution is made.
ARTICLE XVI
-----------
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
--------------------------------------
SECTION 16.1 IN GENERAL.
As of the Determination Date for each Plan Year, the Plan
Administrator shall determine whether the Plan is a Top Heavy Plan in accordance
with the provisions of this Article XVI. If, as of such Determination Date, the
Plan is a Top Heavy Plan, then the Plan Year immediately following such
Determination Date shall be a Top Heavy Plan Year and the special provisions of
this Article XVI shall be in effect; PROVIDED, HOWEVER, that if, as of the
Determination Date for the Plan Year in which the Effective Date occurs, the
Plan is a Top Heavy Plan, such Plan Year shall be a Top Heavy Plan Year, and the
provisions of this Article XVI shall be given retroactive effect for such Plan
Year.
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SECTION 16.2 DEFINITION OF TOP HEAVY PLAN.
(a) Subject to section 16.2(c), the Plan is a Top Heavy Plan if, as
of a Deter mination Date: (i) it is not a member of a Required Aggregation
Group, and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key
Employees exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all
Employees (excluding former Key Employees), former Employees (excluding former
Key Employees and other former Employees who have not performed any services for
the Employer or any Affiliated Employer during the immediately preceding five
Plan Years), and their Beneficiaries.
(b) Subject to section 16.2(c), the Plan is a Top Heavy Plan if, as
of a Deter mination Date: (i) the Plan is a member of a Required Aggregation
Group, and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key
Employees under all plans that are members of the Required Aggregation Group
exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all Employees
(excluding former Key Employees), former Employees (excluding former Key
Employees and other former Employees who have not performed any services for the
Employer or any Affiliated Employer during the immediately preceding five Plan
Years), and their Benefic iaries under all plans that are members of the
Required Aggregation Group.
(c) Notwithstanding sections 16.2(a) and 16.2(b), the Plan is not a
Top Heavy Plan if, as of a Determination Date: (i) the Plan is a member of a
Permissible Aggregation Group, and (ii)(A) the sum of the Cumulative Accrued
Benefits of all Key Employees under all plans that are members of the
Permissible Aggregation Group does not exceed 60% of (B) the sum of the
Cumulative Accrued Benefits of all Employees (excluding former Key Employees),
former Employees (excluding former Key Employees and other former Employees who
have not performed any services for the Employer or any Affiliated Employer
during the immediately preceding five Plan Years), and their Beneficiaries under
all plans that are members of the Permissible Aggregation Group.
SECTION 16.3 DETERMINATION DATE.
The Determination Date for the Plan Year in which the Effective Date
occurs shall be the last day of such Plan Year, and the Determination Date for
each Plan Year beginning after the Plan Year in which the Effective Date occurs
shall be the last day of the preceding Plan Year. The Determination Date for any
other qualified plan maintained by the Employer for a plan year shall be the
last day of the preceding plan year of each such plan, except that in the case
of the first plan year of such plan, it shall be the last day of such first plan
year.
SECTION 16.4 CUMULATIVE ACCRUED BENEFITS.
(a) An individual's Cumulative Accrued Benefits under this Plan as
of a Determination Date are equal to the sum of:
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(i) the balance credited to such individual's Account under this
Plan as of the most recent Valuation Date preceding the Determination
Date;
(ii) the amount of any ESOP Contributions or Loan Repayment
Contributions made after such Valuation Date but on or before the
Determination Date; and
(iii) the amount of any distributions of such individual's
Cumulative Accrued Benefits under the Plan during the five year-period
ending on the Deter mination Date.
For purposes of this section 16.4(a), the computation of an individual's
Cumulative Accrued Benefits, and the extent to which distributions, rollovers
and transfers are taken into account, will be made in accordance with section
416 of the Code and the regulations thereunder.
(b) For purposes of this Plan, the term "Cumulative Accrued
Benefits" with respect to any other qualified plan shall mean the cumulative
accrued benefits determined for purposes of section 416 of the Code under the
provisions of such plans.
(c) For purposes of determining the top heavy status of a Required
Aggregation Group or a Permissible Aggregation Group, the Cumulative Accrued
Benefits under this Plan and the Cumulative Accrued Benefits under any other
plan shall be determined as of the Determination Date that falls within the same
calendar year as the Determination Dates for all other members of such Required
Aggregation Group or Permissible Aggregation Group.
SECTION 16.5 KEY EMPLOYEES.
(a) For purposes of the Plan, the term Key Employee means any
employee or former employee of the Employer or any Affiliated Employer who is at
any time during the current Plan Year or was at any time during the immediately
preceding four Plan Years:
(i) a Five Percent Owner;
(ii) a person who would be described in section 1.23 if the number
"1%" were substituted for the number "5%" in section 1.23 and who has an
annual Total Compensation from the Employer and any Affiliated Employer of
more than $150,000;
(iii) an Officer of the Employer or any Affiliated Employer who has
an annual Total Compensation greater than 50% of the amount in effect
under section 415(b)(1)(A) of the Code for any such Plan Year; or
(iv) one of the ten persons owning the largest interests in the
Employer and having an annual Total Compensation from the Employer or any
Affiliated
<PAGE>
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Employer in excess of the dollar limitation in effect under section
415(c)(1)(A) of the Code for such Plan Year.
(b) For purposes of section 16.5(a):
(i) for purposes of section 16.5(a)(iii), in the event the Employer
or any Affiliated Employer has more officers than are considered Officers,
the term Key Employee shall mean those officers, up to the maximum number,
with the highest annual compensation in any one of the five consecutive
Plan Years ending on the Determination Date; and
(ii) for purposes of section 16.5(a)(iv), if two or more persons
have equal ownership interests in the Employer, each such person shall be
considered as having a larger ownership interest than any such person with
a lower annual compensation from the Employer or any Affiliated Employer.
(c) For purposes of section 16.5(a): (i) a person's compensation
from Affiliated Employers shall be aggregated, but his ownership interests in
Affiliated Employers shall not be aggregated; (ii) an employee shall only be
deemed to be an officer if he has the power and responsibility of a person who
is an officer within the meaning of section 416 of the Code; and (iii) the term
Key Employee shall also include the Beneficiary of a deceased Key Employee.
SECTION 16.6 REQUIRED AGGREGATION GROUP.
For purposes of this Article XVI, a Required Aggregation Group shall
consist of (a) this Plan; (b) any other qualified plans maintained by the
Employer and any Affiliated Employers that cover Key Employees; and (c) any
other qualified plans that are required to be aggregated for purposes of
satisfying the requirements of sections 401(a)(4) and 410(b) of the Code.
SECTION 16.7 PERMISSIBLE AGGREGATION GROUP.
For purposes of this Article XVI, a Permissible Aggregation Group
shall consist of (a) the Required Aggregation Group and (b) any other qualified
plans maintained by the Employer and any Affiliated Employers; PROVIDED,
HOWEVER, that the Permissible Aggregation Group must satisfy the requirements of
sections 401(a)(4) and 410(b) of the Code.
SECTION 16.8 SPECIAL REQUIREMENTS DURING TOP HEAVY PLAN YEARS.
(a) Notwithstanding any other provision of the Plan to the contrary,
for each Top Heavy Plan Year, in the case of a Participant (other than a Key
Employee) on the last day of such Top Heavy Plan Year who is not also a
participant in another qualified plan which satisfies
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the minimum contribution and benefit requirements of section 416 of the Code
with respect to such Participant, the sum of the ESOP Contributions and Loan
Repayment Contributions made with respect to such Participant, when expressed as
a percentage of his Total Compensation for such Top Heavy Plan Year, shall not
be less than 3% of such Participant's Total Compensation for such Top Heavy Plan
Year or, if less, the highest combined rate, expressed as a percentage of Total
Compensation at which ESOP Contributions and Loan Repayment Contributions were
made on behalf of a Key Employee for such Top Heavy Plan Year. The Employer
shall make an additional contribution to the Account of each Participant to the
extent necessary to satisfy the foregoing requirement.
(b) For any Top Heavy Plan Year, the number "1.0" shall be
substituted for the number "1.25" in sections 8.2(c)(iii) and 8.2(c)(iv), except
that:
(i) this section 16.8(b) shall not apply to any individual for a Top
Heavy Plan Year that is not a Super Top Heavy Plan Year if the
requirements of section 16.8(a) would be satisfied for such Super Top
Heavy Plan Year if the number "4%" were substituted for the number "3%" in
section 16.8(a); and
(ii) this section 16.8(b) shall not apply to an individual for a Top
Heavy Plan Year if, during such Top Heavy Plan Year, there are no ESOP
Contributions or Loan Repayment Contributions allocated to such individual
under this Plan, there are no contributions under any other qualified
defined contribution plan main tained by the Employer, and there are no
accruals for such individual under any qualified defined benefit plan
maintained by the Employer.
For purposes of this section 16.8(b), the term Super Top Heavy Plan Year means a
Top Heavy Plan Year in which the Plan would meet the definitional requirements
of section 16.2(a) or 16.2(b) if the term "90%" were substituted for the term
"60%" in sections 16.2(a), 16.2(b) and 16.2(c).
ARTICLE XVII
------------
MISCELLANEOUS PROVISIONS
------------------------
SECTION 17.1 GOVERNING LAW.
The Plan shall be construed, administered and enforced according to
the laws of the State of North Carolina without giving effect to the conflict of
laws principles thereof, except to the extent that such laws are preempted by
federal law.
<PAGE>
-53-
SECTION 17.2 NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the establishment of the Plan nor any provisions of the Plan
or of the Trust Agreement establishing the Trust Fund, nor any action of the
Plan Administrator, the Committee or the Trustee, shall be held or construed to
confer upon any Employee any right to a continuation of employment by the
Employer. The Employer reserves the right to dismiss any Employee or otherwise
deal with any Employee to the same extent as though the Plan had not been
adopted.
SECTION 17.3 CONSTRUCTION OF LANGUAGE.
Wherever appropriate in the Plan, words used in the singular may be
read in the plural, words used in the plural may be read in the singular, and
words importing the masculine gender may be read as referring equally to the
feminine and the neuter. Any reference to an Article or section number shall
refer to an Article or section of the Plan, unless otherwise indicated.
SECTION 17.4 HEADINGS.
The headings of Articles and sections are included solely for
convenience of reference. If there is any conflict between such headings and the
text of the Plan, the text shall control.
SECTION 17.5 MERGER WITH OTHER PLANS.
The Plan shall not be merged or consolidated with, nor transfer its
assets or liabilities to, any other plan unless each Participant, Former
Participant, Beneficiary and other person entitled to benefits, would (if that
plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit he would
have been entitled to receive if the Plan had terminated immediately before the
merger, consolidation or transfer.
SECTION 17.6 NON-ALIENATION OF BENEFITS.
(a) Except as provided in section 17.6(b), the right to receive a
benefit under the Plan shall not be subject in any manner to anticipation,
alienation or assignment, nor shall such right be liable for or subject to
debts, contracts, liabilities or torts. Should any Participant, Former
Participant or other person attempt to anticipate, alienate or assign his
interest in or right to a benefit, or should any person claiming against him
seek to subject such interest or right to legal or equitable process, all the
interest or right of such Participant or Former Participant or other person
entitled to benefits in the Plan shall cease, and in that event such interest or
right shall be held or applied, at the direction of the Plan Administrator, for
or to the benefit of such
<PAGE>
-54-
Participant or Former Participant, or other person or his spouse, children or
other dependents in such manner and in such proportions as the Plan
Administrator may deem proper.
(b) This section 17.6 shall not prohibit the Plan Administrator from
recognizing a Domestic Relations Order that is determined to be a Qualified
Domestic Relations Order in accordance with section 17.7.
SECTION 17.7 PROCEDURES INVOLVING DOMESTIC RELATIONS ORDERS.
Upon receiving a Domestic Relations Order, the Plan Administrator
shall segregate in a separate account or in an escrow account or separately
account for the amounts payable to any person pursuant to such Domestic
Relations Order, pending a determination whether such Domestic Relations Order
constitutes a Qualified Domestic Relations Order, and shall give notice of the
receipt of the Domestic Relations Order to the Participant or Former Participant
and each other person affected thereby. If, within 18 months after receipt of
such Domestic Relations Order, the Plan Administrator, a court of competent
jurisdiction or another appropriate authority determines that such Domestic
Relations Order constitutes a Qualified Domestic Relations Order, the Plan
Administrator shall direct the Trustee to pay the segregated amounts (plus any
interest thereon) to the person or persons entitled thereto under the Qualified
Domestic Relations Order. If it is determined that the Domestic Relations Order
is not a Qualified Domestic Relations Order or if no determination is made
within the prescribed 18-month period, the segregated amounts shall be
distributed as though the Domestic Relations Order had not been received, and
any later determination that such Domestic Relations Order constitutes a
Qualified Domestic Relations Order shall be applied only with respect to
benefits that remain undistributed on the date of such determination. The Plan
Administrator shall be authorized to establish such reasonable administrative
procedures as he deems necessary or appropriate to administer this section 17.7.
This section 17.7 shall be construed and administered so as to comply with the
requirements of section 401(a)(13) of the Code.
SECTION 17.8 LEASED EMPLOYEES.
(a) Subject to section 17.8(b), a leased employee shall be treated
as an Employee for purposes of the Plan. For purposes of this section 17.8, the
term "leased employee" means any person (i) who would not, but for the
application of this section 17.8, be an Employee and (ii) who pursuant to an
agreement between the Employer and any other person ("leasing organization") has
performed for the Employer (or for the Employer and related persons determined
in accordance with section 414(n)(6) of the Code), on a substantially full-time
basis for a period of at least one year, services of a type historically
performed by employees in the business field of the Employer.
(b) For purposes of the Plan:
<PAGE>
-55-
(i) contributions or benefits provided to the leased employee by the
leasing organization which are attributable to services performed for the
Employer shall be treated as provided by the Employer; and
(ii) section 17.8(a) shall not apply to a leased employee if:
(A) the number of leased employees performing services for the
Employer does not exceed 20% of the number of the Employer's Em
ployees who are not Highly Compensated Employees; and
(B) such leased employee is covered by a money purchase
pension plan providing (I) a nonintegrated contribution rate of at
least 10% of the leased employee's compensation; (II) immediate
participation; (III) full and immediate vesting; and (IV) coverage
for all of the employees of the leasing organization (other than
employees who perform substantially all of their services for the
leasing organization).
SECTION 17.9 STATUS AS AN EMPLOYEE STOCK OWNERSHIP PLAN.
It is intended that the Plan constitute an "employee stock ownership
plan," as defined in section 4975(e)(7) of the Code and section 407(d)(6) of
ERISA. The Plan shall be construed and administered to give effect to such
intent.
ARTICLE XVIII
-------------
CHANGE IN CONTROL
-----------------
SECTION 18.1 DEFINITION OF CHANGE IN CONTROL
A Change in Control of the Employer shall be deemed to have occurred
upon the happening of any of the following events:
(a) the occurrence of any event upon which any "person" (as such
term is used in sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended ("Exchange Act")), other than (A) a trustee or other
fiduciary holding securities under an employee benefit plan maintained for
the benefit of employees of Ashe Bancorp, Inc.; (B) a corporation owned,
directly or indirectly, by the stockholders of Ashe Bancorp, Inc. in
substantially the same proportions as their ownership of stock of Ashe
Bancorp, Inc.; or (C) any group constituting a person in which employees
of Ashe Bancorp, Inc. are substantial members, becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange
<PAGE>
-56-
Act), directly or indirectly, of securities issued by Ashe Bancorp, Inc.
representing 25% or more of the combined voting power of all of Ashe
Bancorp, Inc.'s then outstanding securities; or
(b) the occurrence of any event upon which the individuals who on
the date the Plan is adopted are members of the Board, together with
individuals whose election by the Board or nomination for election by Ashe
Bancorp, Inc.'s stockholders was approved by the affirmative vote of at
least two-thirds of the members of the Board then in office who were
either members of the Board on the date this Plan is adopted or whose
nomination or election was previously so approved, cease for any reason to
constitute a majority of the members of the Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of directors of Ashe Federal Bank (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act); or
(c) the shareholders of Ashe Federal Bank approve either:
(i) a merger or consolidation of Ashe Federal Bank with any
other corporation, other than a merger or consolidation following
which both of the following conditions are satisfied:
(A) either (1) the members of the Board immediately
prior to such merger or consolidation constitute at least a
majority of the members of the governing body of the
institution resulting from such merger or consolidation; or
(2) the shareholders of Ashe Federal Bank own securities of
the institution resulting from such merger or consolidation
representing 80% or more of the combined voting power of all
such securities then outstanding in substantially the same
proportions as their ownership of voting securities of Ashe
Federal Bank before such merger or consolidation; and
(B) the entity which results from such merger or
consolidation expressly agrees in writing to assume and
perform Ashe Federal Bank's obligations under the Plan; or
(ii) a plan of complete liquidation of Ashe Federal Bank or an
agreement for the sale or disposition by Ashe Federal Bank of all or
substantially all of its assets; and
(d) any event that would be described in section 18.1(b)(i), (ii) or
(iii) if "Ashe Bancorp, Inc." were substituted for "Ashe Federal Bank"
therein; and
In no event, however, shall a transaction by which Ashe Federal Bank converts
from a mutual savings bank to a stock savings bank, or any transaction by which
a company wholly owned by
<PAGE>
-57-
Ashe Federal Bank becomes the parent company of Ashe Federal Bank be deemed a
Change in Control.
SECTION 18.2 VESTING ON CHANGE OF CONTROL.
Upon the effective date of a Change in Control, the Account of each
person who would then, upon termination of the Plan, be entitled to a benefit,
shall be fully vested and nonforfeitable.
SECTION 18.3 REPAYMENT OF LOAN.
(a) Upon a Change in Control described in section 18.1(c) (or which
would be described in section 18.1(c) if "Ashe Bancorp, Inc." were substituted
for "Ashe Federal Bank" thereunder), the Committee shall direct the Trustee to
sell a sufficient number of Shares to repay any outstanding Share Acquisition
Loan in full. The proceeds of such sale shall be used to repay such Share
Acquisition Loan. After repayment of the Share Acquisition Loan, all remaining
Shares which had been unallocated (or the proceeds thereof, if applicable) shall
be allocated among the accounts of all Participants who were employed by an
Employer on the effective date of such Change in Control. Such allocation of
Shares or proceeds shall be credited as of the date on which the Change in
Control occurs to the Accounts of each Participant who has not had a termination
of participation under section 2.3 as of such date (each, an "Affected
Participant"), in proportion to their Allocation Compensation, for the period,
beginning on the January 1 immediately preceding the date on which the Change in
Control occurs and ending on the date on which the Change in Control occurs. If
any amount cannot be allocated to an Affected Participant in the year of such
Change in Control as a result of the limitations of section 415 of the Code, the
amounts will be allocated in subsequent years to those persons who were Affected
Participants and who continue to be Participants in the Plan until finally
distributed to Affected Participants.
(b) In the event that the application of section 415 of the Code
prevents the allocation of all of the Shares or other assets released from the
Loan Repayment Account as provided in section 18.3(a) as of the effective date
of the Change in Control, each Affected Participant shall be entitled to receive
a supplemental benefit payment directly from the Employer. The supplemental
benefit payment to each Affected Participant shall be an amount equal to the
excess of:
(i) the total amount of Shares or other property that would be
allocated to such Affected Participant's Account under section 18.3(a) if
section 415 of the Code did not apply; over
(ii) the total of Shares or other property actually allocated to
such Affected Participant's Account under section 18.3(a).
<PAGE>
-58-
Such payment (without offset for any allocations which may occur under this Plan
subsequent to the Change in Control) shall be made as soon as practicable, but
in any event within ten (10) business days, after the effective date of the
Change in Control. This section 18.3(b) shall be treated as a separate,
non-qualified "excess benefit plan" within the meaning of section 3(34) of ERISA
and shall be interpreted, administered and enforced in a manner consistent with
this intention. To the extent that any Affected Participant is entitled to the
same or a similar payment under any other non-qualified plan, program or
arrangement of the Employer, any payment under this section 18.3(b) shall be
coordinated with the payments under such other non-qualified programs, plan or
arrangements in such manner as shall be determined by the Committee to be
necessary to prevent the duplication of benefits.
SECTION 18.4 PLAN TERMINATION AFTER CHANGE IN CONTROL.
After repayment of the loan and allocation of shares or proceeds as
provided in section 18.2, the Plan shall be terminated and all amounts shall be
distributed as soon as practicable.
SECTION 18.5 AMENDMENT OF ARTICLE XVIII.
Article XVIII of the Plan may not be amended after a Change in
Control of the Employer unless required by the Internal Revenue Service as a
condition to the continued treatment of the Plan as a tax-qualified plan under
section 401(a) of the Code.
EXHIBIT 13.1
1998 ANNUANL REPORT
AF BANKSHARES, INC.(SM)
<PAGE>
CONTENTS
Selected Financial Data 1-2
President's Message 3-4
Management's Discussion and Analysis of Financial Condition and
Results of Operations 5-18
Independent Auditor's Report 19
Financial Statements 20-51
Corporate Information 52-54
<PAGE>
PRESIDENT'S MESSAGE
Dear Shareholders,
I am pleased to announce to our shareholders that AF Bankshares, Inc. ("the
Company") has completed a successful year. On June 16, 1998, AF Bank completed
its reorganization into a two-tier mutual holding company, pursuant to the
agreement and plan of reorganization approved by the Bank's shareholders on
December 8, 1997. Under the reorganization, the Bank became the wholly-owned
subsidiary of AF Bankshares, Inc., a newly formed stock holding company and
holders of the Bank's common stock became holders of AF Bankshares, Inc. stock,
on an equal share for share exchange.
We continued to see solid growth in the Company throughout the year. Net income
for the year ended June 30, 1998 was $708,403 or $.73 per share, compared to
$343,438 or $.44 per share, at June 30, 1997. Total assets increased to
$99,593,042, or 21.4% during the year. Stockholders' equity rose to $11.5
million at June 30, 1998, up from $11.0 million at June 30, 1997. The Company
issued a cash dividend of $.20 per share for the year ended June 30, 1998.
Special attention was given to our product delivery systems and our ability to
deliver quality and timely service to our customers. During fiscal year 1998, we
changed data processing service bureaus, automated our proof operation and
replaced our computer equipment. These changes enhanced our product delivery and
customer reporting functions and equipped the Company to properly deal with year
2000 issues.
We believe that our customers are beginning to expect more than simply banking
services, even from our small community oriented bank. We believe that to remain
competitive and to increase shareholder value, management must remain vigilant
in identifying customer needs and opportunities to meet those needs. One area of
the financial services industry that fits well with financing real and personal
property is the property, casualty, health and life insurance agency segment of
the industry. All of our bank customers need insurance coverage of one type or
another. After reviewing the possibilities, the Bank acquired two insurance
agencies, Ashelande Insurance Service, Inc., located in West Jefferson, North
Carolina and Brown Insurance Agency, located in North Wilkesboro, North Carolina
on July 1, 1997 and formed AF Insurance Services, Inc., a wholly-owned
subsidiary. The insurance subsidiary has had a successful first fiscal year, and
is expected to have continued success in the coming years.
We also believe that expanding our potential market area will add value to the
Company. We will enter new markets when we can structure our products and
services to meet the specific needs of the new areas. During the year we
expanded into Alleghany County, North Carolina, staffing the new office with
local people attuned to the specific market needs of the local community. In
March, we opened a branch of AF Bank, operating as Alleghany First Bank in
Sparta, North Carolina. Concurrently and in the same facility, we opened an
insurance branch operating as AF Insurance Services, Inc., to serve the
insurance needs of Alleghany County.
Adding the insurance agencies and opening the branches in Alleghany County
allows AF Bankshares, Inc. the ability to provide broader financial and
insurance services to people in our expanded market area, as well as increasing
the value of AF Bankshares, Inc. as a whole. During 1999 fiscal year we will
establish a broker-dealer subsidiary in order to offer alternative investment
opportunities to our customers. We believe
<PAGE>
that our commitment to personal customer service, to provide a broader range of
financial services and expanded product lines will allow us to increase our
market share and shareholder value.
On behalf of the board of directors, and employees of AF Bankshares, Inc., I
would like to thank each of you for your business, support and confidence shown
for our Company throughout the year.
Very truly yours,
James A. Todd
President and
Chief Executive Officer
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY
The following tables set forth certain information concerning the financial
position and results of operations of the Company at the dates and for the years
indicated. The selected financial condition data and the selected operating data
for the years then ended were derived from the audited financial statements of
the Company. The information should be read in conjunction with the Financial
Statements of the Company presented elsewhere.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ................................... $99,593 $82,024 $72,318 $65,440 $61,967
Loans receivable, net (1) ...................... 72,628 70,236 62,485 58,294 53,212
Investment securities (2) ...................... 9,017 6,937 5,560 2,754 3,666
Cash and cash equivalents(3) ................... 14,308 2,533 1,830 2,469 3,238
Savings deposits ............................... 82,488 68,218 63,468 58,496 55,596
FHLB advances .................................. 4,116 1,654 1,250 -- --
Equity ......................................... 11,486 10,979 7,238 6,768 6,192
Book value per share ........................... 10.90 10.98 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income and dividends .................................... $ 7,356 $ 6,213 $ 5,683 $ 5,108 $ 4,602
Interest expense .................................................. 3,795 3,245 3,204 2,630 2,287
Net interest income ....................................... 3,561 2,968 2,479 2,478 2,315
Provision for (recovery of) loan losses .......................... (25) 20 57 204 277
Net interest income after provision for (recovery of) loan
losses .................................................... 3,586 2,948 2,422 2,274 2,038
Non-interest income ............................................... 991 169 142 126 106
Non-interest expense .............................................. 3,488 2,556 1,809 1,507 1,001
Income before income tax expense and cumulative
effect of change in accounting principles ................. 1,089 561 755 893 1,143
Income tax expense ................................................ 381 218 301 347 445
Income before cumulative effect of changes of accounting principles 708 343 454 546 698
Cumulative effect on prior years of changing
to a different method of accounting for income taxes (4) .. -- -- -- -- 309
Net income ................................................ $ 708 $ 343 $ 454 $ 546 $ 1,007
Basic earnings per share (5) ...................................... $ 0.73 $ 0.44 $ N/A $ N/A $ N/A
Diluted earnings per share (5) .................................... $ 0.72 $ 0.44 $ N/A $ N/A $ N/A
Dividends per share ............................................... $ 0.20 $ 0.10 $ N/A $ N/A $ N/A
</TABLE>
- ----------
(1) Loans receivable, net is comprised of total loans less allowance for loan
losses, undisbursed loan funds, and deferred loan fees.
(2) Includes FHLB stock, certificates of deposit and investment securities.
(3) Includes interest-earning deposit balances of $11.4 million, $1.2 million,
$840,000, $1.5 million, and $2.9 million at June 30, 1998, 1997, 1996, 1995
and 1994 respectively.
(4) Pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), on July 1, 1993 the Bank
changed prospectively from the deferred method to the liability method of
accounting for income taxes. The effect of the adoption of this standard is
reflected in the financial statements as the cumulative effect of adopting
a change in accounting principle.
(5) Earnings per share has been calculated in accordance with the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", and is based
on net income for the year, divided by the weighted average number of
shares outstanding for the year. In accordance with the AICPA's SOP 93-6,
unallocated ESOP shares were deducted from outstanding shares used in the
computation of earnings per share. Diluted earnings per share includes the
effect of dilutive common stock equivalents in the weighted average number
of shares outstanding.
1
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1)
PERFORMANCE RATIOS:
Return on average assets (2) .................... 0.77% 0.44% 0.65% 0.86% 1.20%
Return on average equity (2) .................... 6.31% 3.64% 6.50% 8.66% 12.92%
Average equity to average assets ................ 12.21% 12.10% 10.05% 9.91% 9.29%
Equity to total assets at end of period ......... 11.53% 13.39% 10.01% 10.34% 9.99%
Interest rate spread (3) ........................ 3.64% 3.34% 3.38% 3.68% 3.74%
Average interest-earning assets to
to average interest-bearing liabilities .... 111.95% 114.40% 107.79% 108.94% 108.41%
Net interest margin (4) ......................... 4.17% 3.96% 3.76% 4.06% 4.09%
Non-interest expense to average assets .......... 3.80% 3.28% 2.62% 2.37% 1.72%
Efficiency ratio (5) ............................ 76.63% 81.48% 69.20% 57.87% 41.35%
Dividend payout ratio (7) ....................... 27.40% 22.73% N/A N/A N/A
REGULATORY CAPITAL RATIOS (6):
Tangible capital ................................ 10.90% 12.90% 9.80% 10.10% 9.99%
Core capital .................................... 10.90% 12.90% 9.80% 10.10% 9.99%
Total risk-based capital ........................ 20.40% 26.30% 19.80% 21.60% 19.59%
ASSET QUALITY RATIOS AND OTHER DATA:
Ratios:
Nonperforming loans to total loans ......... 0.03% 0.18% 0.27% 1.12% 1.48%
Nonperforming loans and real estate owned to
total assets ............................ 0.06% 0.16% 0.24% 1.08% 1.45%
Allowance for loan losses to:
Nonperforming loans ..................... 4851.10% 787.02% 629.89% 179.38% 139.38%
Total loans ............................. 1.60% 1.42% 1.70% 2.00% 2.06%
Number of full service branches ................. 4 3 3 2 2
</TABLE>
- ----------
(1) With the exception of end of period ratios, all ratios are based on average
monthly or quarterly balances during the indicated periods, and are
annualized where appropriate. Asset Quality Ratios and Regulatory Capital
Ratios are end of period ratios.
(2) Income before cumulative effect of changes in accounting principles is used
to calculate return on average assets and return on average equity ratios.
(3) The interest rate spread represents the difference between the
weighted-average yield on interest-bearing assets and the weighted-average
cost of interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest earning assets.
(5) The efficiency ratio represents non-interest expense as a percentage of the
sum of net interest income and non-interest income.
(6) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation - Regulation of Federal Savings
Associations - Capital Requirements." See "Regulatory Capital Compliance"
for the Bank's pro forma capital levels as a result of the Offering.
(7) The dividend payout ratio represents the dividends per share divided by the
earnings per share. Earnings per share has been calculated in accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per
Share", and is based on net income for the year, divided by the weighted
average number of shares outstanding for the year. In accordance with the
AICPA's SOP 93-6, unallocated ESOP shares were deducted from outstanding
shares used in the computation of earnings per share. Dividends declared
amounted to $0.20 per share.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates. Factors which
could influence the estimates include changes in general and local market
conditions, legislative and regulatory conditions and an adverse interest rate
environment. The information contained in this section should be read in
conjunction with the Financial Statements, the accompanying Notes to the
Financial Statements and the other sections contained in this document.
REORGANIZATION.
On October 4, 1996, AF Bank (the "Bank") reorganized into the mutual holding
company form of organization. Members of the mutual holding company consist of
depositors of the Bank, who have the sole authority to elect the board of
directors of the mutual holding company for as long as it remains in mutual
form. Initially, the mutual holding company's principal assets were the shares
of the Bank's common stock received in the reorganization and on its initial
capitalization of $100,000 in cash. The mutual holding company, which by law
must own in excess of 50% of the stock of the Bank, was issued stock in the
Reorganization resulting in an ownership interest of 53.8% of the Bank. The
remaining shares of common stock of the Bank was sold to the depositors of the
Bank. By virtue of its ownership of a majority of the outstanding shares of the
Bank, the mutual holding company can generally control the outcome of most
matters presented to the stockholders of the Bank for resolution by vote except
for certain matters related to stock compensation plans, a vote regarding
conversion of the mutual holding company to stock form, or other matters which
require a vote only by the minority stockholders. The mutual holding company has
registered as a savings and loan holding company and its subject to regulation,
examination, and supervision by the Office of Thrift Supervision (OTS).
On June 16, 1998, the Bank completed its reorganization into a two-tier mutual
holding company, pursuant to the agreement and plan of reorganization approved
by the Bank's shareholders on December 8, 1997. Under the reorganization, the
Bank became the wholly-owned subsidiary of AF Bankshares, Inc., a newly formed
stock holding company (the "Company") and holders of the Bank's common stock
became holders of the Company's common stock, on an equal share for share
exchange. The Company has no operations and conducts no business of its own
other than owning the Bank. The 1997 financial information includes AF Bank
(formerly Ashe Federal Bank) only and the "Company" is used throughout this
report for both 1998 and 1997. At June 30, 1998, the mutual holding company's
primary assets consist of owning 51.1% of AF Bankshares, Inc. and 50% of AA&G,
Inc., a real estate brokerage company.
GENERAL. The Company had net income of $708,000 and $343,000 for the years ended
June 30, 1998 and 1997, respectively. The Company's operating results are
primarily dependent upon net interest income, fees and charges and insurance
commissions. Net interest income is the difference between interest earned on
loans, investments and interest-earning deposits at other financial institutions
and the interest-bearing savings deposits and with other borrowings. The primary
interest-earning asset of the Company is its mortgage loan portfolio
representing 87.4% of total loans, with approximately one-half of portfolio
mortgage loans at fixed rates at June 30, 1998. The net interest income of the
Company is affected by changes in economic conditions that influence market
interest rates. This exposure to changes in interest rates contributes to a
moderate degree of interest rate risk, as evidenced by the impact of increasing
interest rates on the Company's potential earnings and on the net market value
of its assets and liabilities (see "Net Portfolio Value"). Additionally, the
Company receives fee income primarily from loan origination fees, late loan
payment fees, commissions from the sale of credit life, accident and health
insurance, insurance commissions generated from the insurance agency subsidiary
and in payment of other services provided to the customer by the Company. The
major non-interest costs to the Company include compensation and benefits, FDIC
insurance, including a one-time special assessment during 1997, and data
processing costs. Other external factors that affect the operating results of
the Company include changes in government and accounting regulations, costs of
implementing information technology, and changes in the competition's emphasis
within the Company's market area.
<PAGE>
MANAGEMENT STRATEGY.
The historical operations of the Company has been that of a portfolio mortgage
lender, providing fixed rate loans for the residents of Ashe County, North
Carolina. In the late 1980's adjustable rate mortgages (ARMs) were offered, and
at June 30, 1998, ARMs represented approximately one-half of portfolio mortgage
loans outstanding compared to approximately one-third at June 30, 1997. This
change in the composition of the mortgage loan portfolio results from the
Company's strategy implemented during the past year, of selling long term,
fixed-rate mortgages while retaining the servicing. The reduction in the level
of fixed rate mortgages has served to reduce the Company's exposure to interest
rate risk.
During 1995, management introduced fixed rate mortgage loans with provisions
allowing the Company to "call the loan due" after three or five year periods,
thus reducing the period of time that the Company is exposed to a fixed rate of
interest in order to reduce interest rate risk. The call provision is now used
primarily where the fixed rate mortgage does not qualify for sale in the
secondary market and where the borrower has no desire for an ARM. At
approximately the same time, the Company began to offer consumer loans,
including automobile and home improvement loans. In June 1998, the Company began
funding automobile loans originated by selected dealers in its market area where
the Company's loan officers have final underwriting authority to determine the
acceptability of the borrowers to the Company. At June 30, 1998, the Company had
closed approximately $416,000 of these loans. At June 30, 1998 consumer loans,
including home equity lines of credit (HELOCs), constituted approximately 11% of
gross portfolio loans. In 1994, the Company began offering commercial loans to
small businesses in Ashe County and expanded that business to include Alleghany
County during the fiscal year. Commercial loans generally have rates based on
the prime rate of interest. Additionally, consumer and commercial loans
generally have shorter terms and thus greater interest rate sensitivity than
mortgage loans. Management has pursued the above mortgage and non-mortgage loan
strategies to reduce the level of interest rate risk inherent in the Company's
loan portfolio and maintain acceptable levels of credit risk. Funding for loan
originations has been provided by aggressively marketing savings and checking
accounts while maintaining competitive pricing on certificates of deposits.
Additionally, the Company took advantage of favorable Federal Home Loan Bank
(FHLB) fixed rate loans that offered long term financing at favorable rates. At
June 30, 1998, the Company had borrowed money totaling $4.1 million compared to
$1.7 million at June 30, 1997.
In addition to loans, the Company invests in U.S. Treasury and Federal agency
securities, certificates of deposit (generally with terms of five years or
less), overnight deposits with the FHLB, equity securities in the Federal Home
Loan Mortgage Corporation (FHLMC) and mortgage-backed securities secured by
adjustable rate mortgages and issued by the Government National Mortgage
Association (GNMA) and Fannie Mae. Management does not engage in the practice of
trading securities. The Company's investment portfolio consists primarily of
securities designated as available for sale. Management intends to maintain
investment securities as a supplement to its lending activities, as a source of
liquidity and as a means to reduce interest rate risk and credit risk of its
asset base in exchange for lower rates of return than would typically be
available with other lending activities.
The Company is committed to delivering financial products with personal service
to the residents of Ashe through its three banking locations within Ashe County.
Management and the board of directors realize that the expectations of
traditional bank customers have changed to include a broader definition of
financial services. The market place is demonstrating to our customers that
financial services incorporate a wide variety of financial products including
insurance and alternative investment products. In response to the changing
complexion of the financial service industry, the Company acquired two insurance
agencies and brought these agencies together under AF Insurance Services, Inc.
Additionally, management believes that the Company must expand its market base
in order to build value for the Company. In March 1998, the Company opened a
branch of AF Bank in Alleghany County and operates the branch under the trade
name Alleghany First Bank. At the same time, an insurance agency branch of AF
Insurance Services, Inc., was opened in the same location. The staff of
Alleghany First came from the local banking community and is
<PAGE>
attuned to the needs and habits of Alleghany citizens. The insurance agency
personnel direct their attention to the special needs of Alleghany County
citizens as well. Management now believes that it is delivering the same
personalized customer service to Alleghany County that it has historically
delivered to Ashe County.
BROKERAGE SERVICES
Management believes that the Company's customers perceive "financial services"
to include three elements: funds transfer including checking accounts and
savings instruments, insurance and securities brokerage. Further, management
believes that failure to offer insurance and brokerage services will deter the
Company's growth and make retention of existing customers more difficult. During
the 1998 fiscal year, the Company acquired two insurance agencies to satisfy the
insurance portion of its customers' expectations. During the 1999 fiscal year,
the Company will offer brokerage services through a subsidiary, AF Securities,
Inc. AF Securities, Inc. will initially conduct brokerage services through a
third party vendor but expects to receive approval to operate with its
broker/dealer registration prior to the end of the fiscal year.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998, 1997 AND 1996:
At June 30, 1998, 1997 and 1996 assets totaled $99.6 million, $82.0 million, and
$72.3 million, respectively. Total assets increased by $17.6 million or 21.4%
from June 30, 1997 to June 30, 1998, primarily a result of an increase of $11.8
million, or 472.0%, in cash and cash equivalents and an increase of $2.4 million
or 3.4% in net loans receivable from June 30, 1997 to June 30, 1998. Management
believes that the increase in cash and cash equivalents is primarily a result of
an increase in deposits, FHLB advances and an increase in portfolio loan
refinances being sold in the secondary market. The Company's deposits increased
by $14.3 million from $68.2 million at June 30, 1997 to $82.5 million at June
30, 1998. Management believes that the increase in deposits is attributable to
its marketing efforts directed towards increasing balances in savings and
transaction accounts. The Company's level of advances from the FHLB increased
$2.4 million from $1.7 million at June 30, 1997 to $4.1 million at June 30,
1998. The Company's level of loans sold to the secondary market increased
significantly during the period ended June 30, 1998, to $8.5 million, primarily
due to the Company's decision to sell less profitable loans with lower interest
rates. The growth in assets from June 30, 1996 to June 30, 1997 can primarily be
attributed to proceeds received in the reorganization and an increase in savings
deposits which funded increases in loans receivable, investment securities and
liquidity. Net loans receivable, increased from $62.5 million at June 30, 1996
to $72.6 million at June 30, 1998, a $10.1 million or a 16.2% increase. Savings
deposits increased $19.0 million from $63.5 million at June 30, 1996 to $82.5
million at June 30, 1998 for a 30.0 % increase.
The principal category of earning assets is loans. During the year ended June
30, 1998, loans receivable, net, increased by $2.4 million compared to a $7.8
million increase for the year ended June 30, 1997. The reduced increase in net
loans is due to management's successful efforts to sell fixed rate mortgage
loans to the secondary market. The increase in net loans receivable is
attributable to operating in lending markets that have had sustained loan demand
over the past several years. Net originations on loans receivable held for
investment were $2.2 million and $7.6 million for the years ended June 30, 1998
and 1997, respectively. Beginning in the fiscal year ended June 30, 1997, the
Company began actively soliciting banking relationships with local commercial
customers. As a result of this focus, commercial loans receivable increased from
$1.7 million at June 30, 1996 to $4.0 million at June 30, 1998, an increase of
$2.3 million or 131.9%. These loans generally have rates based on the prime rate
of interest and have terms of three years or less. During 1996, 1997 and 1998,
the Company emphasized home equity line of credit loans. Home equity loans
increased from $1.0 million at June 30, 1996 to $4.1 million at June 30, 1998,
contributing to an increase of $10.1 million of net loans receivable from June
30, 1996 to June 30, 1998.
The Company's level of non-performing assets, defined as loans past due 90 days
or more and repossessed assets, decreased from .16 % of total assets at June 30,
1997, to .06 % of total assets at June 30, 1998. The decrease is attributable to
comprehensive lending policies and collection efforts. The Company's level of
non-performing loans has remained consistently low in relation to prior periods
and total loans outstanding.
<PAGE>
The Company recovered net of charge offs, totaling $158,000 during year ended
June 30, 1998 compared to net charge offs of $85,000 and $170,000, respectively,
for the years ended June 30, 1997 and 1996. As a result and based on
management's analysis of its allowances, no provision for additional loan loss
allowance was made during the year ended June 30, 1998 other than that realized
through recoveries.
The Company's investment portfolio increased by $2.1 million from $6.9 million
at June 30, 1997 to $9.0 million at June 30, 1998. The majority of investments
consist of U.S. Treasury and federal agency securities and mortgage-backed
securities secured by adjustable rate mortgages issued by Fannie Mae and the
GNMA. The increase during 1998 was funded through deposit growth and selling
fixed rate mortgage loans in the secondary market.
The Company's net investment in property and equipment increased $800,000 to
$2.2 million at June 30, 1998 from $1.4 million at June 30, 1996, as a result of
acquiring and renovating a building located at 206 South Jefferson Avenue in
West Jefferson, acquiring equipment for the Alleghany First Bank, leasehold
improvements in the Alleghany facility and updating the Company's data
processing equipment. The building at 206 South Jefferson Avenue is occupied by
the Company's insurance agency subsidiary, a board meeting room that also serves
as a community meeting room and the corporate offices for the Company. The
Alleghany facility is occupied by the banking offices as well as an insurance
agency subsidiary office. The Company completed replacing all of its computer
equipment during the year with equipment that is compatible with the year 2000
environment.
At June 30, 1998, retained earnings increased $214,000 or 3.0% to $7.3 million
dollars, from $7.1 million at June 30, 1997, as a result of earnings of
$708,000, a reduction for a fair market value adjustment for the ESOP stock put
option liability in the amount of $333,000 and dividends of $199,000. Additional
paid in capital increased by $1.0 million or 28.9% to $4.6 million at June 30,
1998 which was offset by an equal amount charged to a contra equity account, as
a result of additional shares issued under the Bank's Recognition and Retention
Plan. Unrealized gain on securities available for sale decreased by $56,000 or
15.9% at June 30, 1998 primarily as a result of the sale of 7,300 shares of
stock in Federal Home Loan Mortgage Corporation. At June 30, 1998 the Bank's
regulatory core capital amounted to $10.9 million compared to $12.9 million at
June 30, 1997, which as a percentage of total assets was 10.9% and was
considerably in excess of regulatory capital requirements at such date.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
1997:
GENERAL. Net income for the years ended June 30, 1998 and 1997 was $708,000 and
$343,000, respectively. The increase of $365,000 or 106.3% during the year ended
June 30, 1998 were primarily attributable to lower FDIC premiums, the absence of
the one time assessment from SAIF during the year ended June 30, 1997 and from
an increase in net interest income. In management's opinion, there has been an
improvement in the level of interest rate risk from the end of the Company's
most recent fiscal year.
NET INTEREST INCOME. Net interest income increased by $594,000 or 20.0% from
$3.0 million for the year ended June 30, 1997 to $3.6 million for the year ended
June 30, 1998. The increase is a result of increased average outstanding
balances in interest-earning assets and an improved interest rate spread in
effect during the year. The Company's interest rate spread increased primarily
because the average yield on loans was higher during the year June 30, 1998 as
compared to the year ended in 1997.
INTEREST INCOME. Interest income increased from $6.2 million to $7.4 million
during the year ended June 30, 1998, or an 18.4% increase. This increase was
attributable to both an overall increase in the weighted average yield of the
Company's loan portfolio and by a change in the volume and mix of
interest-earning assets outstanding.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1998 increased
$549,000 to $3.8 million. The increase is the result of an increase in the
average outstanding balances in the level of deposits and borrowings for the
year ended June 30, 1998 as compared to the similar year ended 1997. However,
the increase was partially offset by a slightly lower average rate for deposits
during the year ended June 30, 1998 than for the comparable year ended 1997, and
was an offsetting factor to interest expense.
PROVISION FOR LOAN LOSSES. Management did not make additional provisions for
loan losses during the year ended June 30, 1998; however, the Company
experienced net recoveries of $158,000 that served to increase the level of loan
loss reserves. During the year ended June 30, 1997, provisions were made
totaling $20,000. Provisions, which are charged to operations and resulting loan
loss allowances, are amounts that the Company's management believes will be
adequate to absorb potential losses on existing loans that may become
uncollectible. Loans are charged off against the allowance when management
believes that collection is unlikely. The evaluation to increase or decrease the
provisions and resulting allowances is based both on prior loan loss experience
and other factors, such as changes in the nature and volume of the loan
portfolio, overall portfolio quality and current economic conditions. The
Company's level of non-performing loans remained consistently low in relation to
prior periods and total loans outstanding during the year ended June 30, 1998.
At June 30, 1998 the Company's level of general valuation allowances for loan
losses amounted to $1.2 million which management believes is adequate to absorb
any losses that may exist in its loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $822,000 to $991,000
during the fiscal year 1998. The increase was primarily attributable to a gain
on the sale of FHLMC stock of $306,000 and insurance commissions of $404,000
generated by the insurance agency during the year ended June 30, 1998.
NON-INTEREST EXPENSE. Non-interest expense increased by $932,000 or 36.5% from
$2.6 million for the year ended June 30, 1997 to $3.5 million for the year ended
June 30, 1998. Increases for non-interest expense for the year ended June 30,
1998 are primarily attributable to compensation costs, occupancy cost, data
processing costs and legal expenses. Compensation costs increased by $866,000
for the year ended June 30, 1998, primarily as the result of the cost of the
Bank's Recognition and Retention Plan, insurance agency employees' salaries, and
Alleghany First employees' salaries. Occupancy cost increased by $110,000 for
the year ended June 30, 1998, because of increased depreciation expense
resulting from the addition of the new office facility at 206 South Jefferson
Avenue, the new branch location in Sparta, computer equipment acquired to
address the year 2000 problem and one-time charges associated with changing data
processing providers from NCR to Fiserv Orlando in October 1997. Additional
legal costs
<PAGE>
during the current period were the result of obtaining shareholder and
regulatory approvals for a recognition and retention plan, a stock option plan
and establishing a mid-tier holding company.
INCOME TAXES. Income taxes resulted from applying normal, expected tax rates on
income earned during the year ended June 30, 1998 and 1997. Income tax expense
was $381,000 and $218,000, for the years ended June 30, 1998 and 1997. The
effective tax rate applied was slightly lower than the statutory federal and
state tax rates, primarily due to qualifying investment income that was exempt
from state income taxes. Legislated decreases are expected in the North Carolina
corporate tax rate in future periods, which would lower the overall effective
tax rate.
IMPACT OF THE YEAR 2000. A lot of attention has been given to the impact that
the year 2000 date change will have on businesses, utilities and other
organizations that rely on computerized systems to help run their operations.
The year 2000 date change can affect any system that uses computer software or
computer chips including automated equipment and machinery. For example, many
computer programs and computer chips store the calendar year portion of the date
as two digits rather than four digits. These software programs and chips record
the year 1999 as "99". This approach works until the year 2000 when the "00" may
be interpreted as the year 1900 instead of the year 2000. Banks use computer
systems to perform financial calculations, transfer funds, record deposits and
loan payments, run security systems and vaults and a myriad of other functions.
Because banks rely heavily on their computer systems, the Federal Financial
Institutions Examination Council ("FFIEC") has placed significant emphasis on
the problems surrounding the year 2000 issues and has required financial
institutions to document the assessment, testing and corrections made to ready
their computer systems and programs for the year 2000 date change. The FFIEC and
OTS have strict regulations, guidelines, and milestones in place that each FDIC
insured financial institution must follow in order to remain operational. The
Company's board of directors has remained informed of the Company's position and
progress in its year 2000 project.
The Company's year 2000 project remains on schedule according to the guidelines
set forth by the FFIEC. The Company replaced all of its computer systems in the
fall of 1997 with year 2000 compliant systems. The Company's internal software
remediation, replacement, and testing efforts are approximately 85% complete
with full completion scheduled for December 1998. The Company's most critical
external exposure to year 2000 system problems is with its data processing
provider, Fiserv Orlando. Fiserv renovated its systems in June 1998 and is
currently testing its remediation efforts. Fiserv plans to have all of its
systems year 2000 compliant by December 1998. In addition, the Company has
contacted its major customers and vendors to inquire about their progress in
addressing the year 2000 problem and does not believe that the problems of such
customers and vendors will have a material adverse effect on the Company or its
operations. The Company will continue to monitor the progress of these parties
in addressing the year 2000 problem as the new millennium approaches.
As noted, the Company has replaced all of its computers and printers at a cost
of $244,000. Software costs amounted to $101,000 and include internal software
for accounts payable, fixed assets, payroll and insurance agency management.
Management believes that all material costs to prepare for the year 2000 that
are under the direct control of the Company have been incurred. The remaining
costs are expected to amount to less than $10,000 and relate primarily to travel
in order to test Fiserv Orlando's renovations to its software.
The year 2000 problems can affect the Company's operation in a number of ways
but the mission critical issue is maintaining customers' account information
including tracking deposits, interest accruals and loan payments. The Company is
dependent upon electricity, telephone lines, computer hardware and Fiserv
Orlando's data processing capability.
The Company is in contact with its electric utility and the utility's staff
regularly updates the Company as to its progress. Assurances have been given
that no major problems exist and that the electric company will have all year
2000 problems addressed well before December 31, 1999. If the electric utility
is unable to
<PAGE>
certify that its renovation is completed by June 30, 1999, the Company will
acquire portable generators with sufficient capacity to run the system servers
and at least one work station in each branch office.
The Company uses two telephone utilities: Skyline Telephone Membership
Corporation and Sprint. Skyline Telephone has tested its system with the Company
and had no date related problems. Service between Fiserv Orlando and the Company
is the responsibility of Fiserv Orlando. Fiserv will certify to communications
by the end of 1998.
To prevent difficulties in the event there is an unforeseen interruption in
either telephone or electrical service when the year changes, the Company will
print hard copies of all account information. In addition, the Company will
download all account information into programs on the Company's hardware that
will allow bank personnel to extract customer information without regard to
outside sources. Additionally, the Company stores customer information on
retrievable media in house. The Company has tested its equipment for
compatibility with the year 2000. The insurance agency's computer hardware is
tested to be compliant with the year 2000 and tracking program will be compliant
by December 31, 1998.
Fiserv Orlando has responded to the Company that renovation of its program is
virtually complete. Representatives of the Company are scheduled to test the
Fiserv program with the Company's applications in October 1998. All transactions
are to be tested using the Company's data and procedures and any additional
corrections are to be made on or before December 31, 1998. Fiserv has reported
that the progress of the update is on schedule. In the event that Fiserv Orlando
is unable to make the necessary corrections to its programs to accommodate the
year 2000, beginning in December 1998, the Company will convert its data to one
of the other Fiserv programs that is able to operate in the 2000 environment.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
1996:
GENERAL. Net income for the years ended June 30, 1997 and 1996 was $343,000 and
$454,000, respectively. The reduction in net income is primarily a result of an
increase in non-interest expenses of $747,000, consisting mainly of the one-time
SAIF assessment of $369,000, which was offset by an increase in net interest
income in fiscal 1997.
NET INTEREST INCOME. Net interest income increased by 19.7%, or $489,000 to $3.0
million during the year ended June 30, 1997. This increase is attributable to an
increase in volume, as the increase in the average interest-earning assets
exceeded the increase in the average interest-bearing liabilities by $4.7
million during the year. The increase in volume was funded through proceeds
received in the mutual holding company formation and related stock offering and
savings deposit growth. This was somewhat offset by a slight decrease in the
interest rate spread from 3.38% in 1996 to 3.34% in 1997. Overall interest rates
for interest-earning assets and interest-bearing liabilities both decreased
slightly during 1997.
INTEREST INCOME. Interest income from loans increased 7.9% or $422,000 to $5.7
million during the year ended June 30, 1997, primarily as a result of an
increase in the average balances outstanding of $7.8 million, which was
partially offset by a 39 basis point decrease in the average rate.
Interest income from investment securities increased by $145,000 to $377,000
during the year ended June 30, 1997. The change was due to a 58 basis point
increase in the average yield of the portfolio and by a $1.9 million increase in
the average balance of investment securities outstanding during the year.
The Bank's average yield on interest bearing-deposits increased by 86 basis
points during the year ended June 30, 1997 as the Company continues to hold its
deposits at the FHLB. The increase in yield was offset by a declined in the
average balances of $813,000. These factors contributed to a 29.1% or $37,000
decrease in interest income from interest-bearing deposits for the year ended
June 30, 1997.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1997 increased
$41,000 to $3.2 million. Included in the total is interest expense on borrowed
funds of $50,000. The additional cost resulted from a $4.2 million increase in
total average interest-bearing liabilities, including both deposits and borrowed
funds. This increase in volume was offset by a 25 basis point decrease in the
weighted average cost of total interest bearing liabilities.
PROVISION FOR LOAN LOSSES. During fiscal year 1997, the Bank's provision for
loan losses decreased $37,000. The provision expense for the year declined due
to a marked improvement in levels of delinquent and problem loans and in the
overall improvement in loan quality, reducing the need for additional reserves.
At June 30, 1997 and 1996 the allowance for loan losses was $1.0 million and
$1.1 million or 1.47% and 1.70%, respectively of its loan portfolio. At June 30,
1997 loans delinquent 90 days or more dropped to $131,000 or 0.16% of total
assets. As the delinquencies and problem assets declined to lower levels and
loan quality improved, the allowance for loan losses was reduced to levels
considered adequate by management. Management's periodic evaluation to increase
or decrease the provision and resulting allowances is based upon the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions. Management
believes the allowance for loan losses is adequate to absorb losses in its loan
portfolio, however, there can be no assurances that future periods will not
require additional provisions.
NON-INTEREST INCOME. Non-interest income increased 19.4% or $28,000 during
fiscal year 1997 as a result of additional fees charges on deposit accounts.
NON-INTEREST EXPENSE. For the year ended June 30, 1997, non-interest expense
increased $747,000 or 42%, primarily due to the one-time SAIF assessment of
$368,000, to $2.6 million from $1.8 million.
<PAGE>
Compensation and employee benefits represented the largest cost to the Bank.
During the year ended June 30, 1997, salary adjustments, including ESOP expense,
bonuses and additional personnel increased compensation costs by $129,000 or
15.9%. Included in this increase is compensation expense of $46,000 recognized
for the ESOP contribution. Management and the Board are committed to adequate
compensation for the Bank's employees and to rewarding its employees for
superior performance.
Additional depreciation from the previous two years renovations and upgrades is
the primary reason for the increases in occupancy and equipment costs of 28.6%
or $48,000 for the fiscal year ended June 30, 1997.
For the year ended June 30, 1997, the Bank was required to pay a one-time
special assessment to recapitalize the Savings Association Insurance Fund (SAIF)
up to a statutory goal of 1.25% on insured deposits. The assessment was equal to
65.7 basis points of the SAIF assessable deposit base as of March 31, 1995, and
amounted to $368,000. Regular deposit insurance premiums, also provided by the
SAIF and administered by the FDIC, decreased $50,000 to $86,000 during 1997.
The Bank uses a third party provider to supply data processing services for its
loans deposits, general ledger, and account payable functions. Data processing
charges have increased as deposits and loan accounts have increased and as the
Bank has added branches and increased its product offerings, both for loans and
deposits. For the year ended June 30, 1997, data processing costs increased
11.6% or $14,000 compared to the year ended June 30, 1996 due to the bank's
continued efforts to automate its general ledger activities.
Other non-interest expenses increased 37.8% or $223,000 for the 1997 fiscal year
compared to the 1996 fiscal year largely to increases in professional fees and
expenses associated with being a public company.
INCOME TAXES. Income taxes resulted from applying normal, expected tax rates on
income earned during the year ended June 30, 1997 and 1996. Income tax expense
was $218,000 and $301,000, for the years ended June 30, 1997 and 1996,
respectively.
CAPITAL RESOURCES AND LIQUIDITY.
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest earning deposits.
During the year ended June 30, 1998, cash and cash equivalents, a significant
source of liquidity, increased by approximately $11.8 million. A significant
portion of this increase is a direct result of the Company's banking subsidiary
selling loans in the secondary market, increases achieved in savings deposits
and retaining the proceeds in the Bank's Federal Home Loan Bank account.
As a federally chartered savings bank, the Bank must maintain a daily average
balance of liquid assets equal to at least 4% of withdrawable deposits and
short-term borrowings. During the year ended June 30, 1998 the OTS reduced the
required level of liquidity to 4% from 5%, eliminated the short term liquidity
requirement and imposed a new requirement that savings associations generally
maintain sufficient liquidity to ensure safe and sound operations. The Bank's
liquidity ratio at June 30, 1998, as computed under OTS regulations, was
considerably in excess of such requirements. Given its excess liquidity and its
ability to borrow from the Federal Home Loan Bank, the Bank believes that it
will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, and other cash requirements.
ASSET/LIABILITY MANAGEMENT.
<PAGE>
The Company's asset/liability management is focused primarily on evaluating and
managing the Company's net interest income in relation to various risk criteria.
Factors beyond the Company's control, such as the effects of changes in market
interest rates and competition, may also have an impact on the management of
interest rate risk.
In the absence of other factors, the Company's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Inversely, the Company's yields and cost of funds will decrease when market
rates decline. The Company is able to manage these fluctuations to some extent
by attempting to control the maturity or rate adjustments of its
interest-earning assets and interest-bearing liabilities over given periods of
time. One of the Company's tools to monitor interest rate risk is the
measurement of sensitivity of its net portfolio value to changes in interest
rates.
In order to minimize the potential effects of adverse material and prolonged
increases in market interest rates on the Company's operations, management has
implemented an asset/liability program designed to improve the Company's
interest rate risk exposure. The program emphasizes that originations of
five-year fixed rate balloon mortgages, adjustable rate mortgages, selling long
term fixed rate loans to the secondary market, shorter term consumer and
commercial loans, the investment of excess cash in short or intermediate term
interest-earning assets, and the solicitation of deposit accounts that can be
repriced rapidly.
Although the Company's asset/liability management program has generally helped
to decrease the exposure of its earnings to interest rate increases, the Company
continues to be susceptible to increased levels of interest rates, which will
adversely affect earnings during prolonged periods of rising interest rates and
positively affect earnings during prolonged periods of interest rate declines.
NET PORTFOLIO VALUE.
All federally regulated financial institutions are required to measure the
exposure to changes in interest rates. Institutions with assets of less than
$500 million may rely on outside sources of measurement such as that provided by
the Office of Thrift Supervision (OTS) and the Federal Home Loan Bank (FHLB).
The purpose is to determine how changes in interest rates affect the estimated
value or Net Portfolio Value ("NPV") of the insured institution's statement of
financial condition under several immediate or "shock" changes in market rates.
Since the timing of repricing opportunities for interest-earning assets and
interest-bearing liabilities are different, the impact of shock changes will
have a negative, neutral or positive impact on the NPV of the bank based on the
structure of the bank's assets and liabilities. Thus, NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts. Generally, the level of interest rate risk is
measured in a 200 basis point shock environment that has the most negative
impact on the Company.
<PAGE>
The Company's banking subsidiary, AF Bank, has historically been a mortgage
lender which means that it generally has longer terms before repricing its
assets than does its interest bearing liabilities or deposit accounts;
therefore, a rising rate environment will have the most negative impact on the
NPV of the Company. Management has implemented a strategy of limiting the terms
of mortgage loans that it cannot sell in the secondary market, increasing the
level of loans tied more closely to market interest rates such as the prime
rate, and generally reducing the terms of loans that the Company offers for
portfolio. The following table presents the Company's NPV at June 30, 1998, as
calculated by the OTS, based on information provided to the OTS by the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NPV as % of PV (5) of
- -------------------------------------------------------------------------------------------------------------------------
Net Portfolio Value Assets
------------------- ------
- -------------------------------------------------------------------------------------------------------------------------
Change in Rates $ Amount $ Change (1) % of Change (2) Ratio (3) Change (4)
--------------- -------- ------------ ---------------- --------- ----------
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
+400 bp 10,752 -2,621 -20% 10.99% -211 bp
- -------------------------------------------------------------------------------------------------------------------------
+300 bp 11,669 1,703 -13% 11.77% -133 bp
- -------------------------------------------------------------------------------------------------------------------------
+200 bp 12,477 -895 -7% 12.44% -67 bp
- -------------------------------------------------------------------------------------------------------------------------
+100 bp 13,096 -276 -2% 12.92% -18 bp
- -------------------------------------------------------------------------------------------------------------------------
0 bp 13,372 0 0% 13.10% 0 bp
- -------------------------------------------------------------------------------------------------------------------------
-100 bp 13,719 347 3% 13.34% +24 bp
- -------------------------------------------------------------------------------------------------------------------------
-200 bp 14,153 780 6% 13.65% +54 bp
- -------------------------------------------------------------------------------------------------------------------------
-300 bp 14,752 1,380 10% 14.08% +98 bp
- -------------------------------------------------------------------------------------------------------------------------
-400 bp 15,474 2,102 16% 14.61% +150 bp
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the excess (deficiency) of NPV assuming the indicated change in
interest rates minus the estimated NPV assuming no change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
(5) PV means present value.
<TABLE>
<CAPTION>
The following chart provided by the OTS reflects further measures of the
Company's interest rate risk.
<S> <C> <C>
RISK MEASURES: 200BP RATE SHOCK: June 30, 1998 June 30, 1997
Pre-Shock NPV Ratio: NPV as a % of PV of Assets 13.10% 16.23%
Exposure Measure: Post Shock NPV Ratio 12.44% 13.92%
Sensitivity Measure: Change in NPV -67 bp -231 bp
</TABLE>
Certain shortcomings are inherent in the methodology used in the above table.
Modeling changes in NPV requires the making of certain assumptions that may tend
to oversimplify the manner in which actual yields and costs respond to changes
in market interest rates. First, the models assume that the composition of the
Bank's interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured. Second, the models
assume that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements do provide an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income.
Furthermore, in times of decreasing interest rates, the value of fixed-rate
assets could increase in value and
<PAGE>
the lag in repricing of interest rate sensitive assets could be expected to have
a positive effect on the Company.
Management believes that the NPV method of assessing the Company's exposure to
interest rate risk and potential reductions in net interest income is a useful
tool for measuring risk. Management also believes that the charts reflect the
positive impact of strategies to reduce interest rate risk as evidenced most
prominently by the reduction in the Sensitivity Measure that shows a reduction
in the amount of decline in NPV from 231 basis point as measured at June 30,
1997 to 67 basis points at June 30, 1998. The strategies that have reduced the
level of interest rate risk under an increasing rate assumption will continue to
reduce the impact or rising rates as long term mortgages are sold and replaced
with shorter term mortgage and non-mortgage loans with rates that can be
adjusted to more closely simulate market rates of interest. Management believes
that a strong equity capital position and the existence of the corporate
authority to raise additional capital as necessary act as valuable tools to
absorb interest rate risk.
FUTURE REPORTING REQUIREMENTS
The FASB has issued SFAS No. 130, Reporting Comprehensive Income, which the Bank
has not been required to adopt as of June 30, 1998. The Statement, which is
effective for fiscal years beginning after December 15, 1997, establishes
standards for reporting and display of comprehensive income and its components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying footnotes have been prepared in
accordance with GAAP, which require the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The assets and liabilities of the Bank are primarily monetary in nature and
changes in market interest rates have a greater impact on the Company's
performance than do the effects of inflation.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
AF Bankshares, Inc. and Subsidiary
West Jefferson, North Carolina
We have audited the accompanying consolidated statements of financial condition
of AF Bankshares, Inc. and Subsidiary as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AF Bankshares, Inc. and
Subsidiary as of June 30, 1998 and 1997, and the results of their operations and
their cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Charlotte, North Carolina
July 30, 1998
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Interest-bearing deposits $ 11,358,167 $ 1,166,463
Noninterest-bearing deposits 2,949,842 1,366,042
Certificates of deposit, at cost 198,000 198,000
Securities held to maturity (fair value $100,000 in 1998 and
1997) (Note 2) 100,000 100,000
curities available for sale (Note 2) 8,094,739 6,063,321
Federal Home Loan Bank stock (Notes 2 and 6) 624,000 575,700
Loans receivable, net (Notes 3 and 6) 72,627,870 70,235,670
Real estate owned 38,115
Office properties and equipment, net (Note 4) 2,160,783 1,375,773
Accrued interest receivable on loans 321,679 315,044
Accrued interest receivable on investment securities 87,880 77,567
Prepaid expenses and other assets 439,663 280,285
Deferred income taxes, net (Note 12) 307,294 270,444
Intangible assets, net of accumulated amortization of $34,990 285,010 --
--------------------------------------------
TOTAL ASSETS $ 99,593,042 $ 82,024,309
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Savings deposits (Note 5) $ 82,488,216 $ 68,218,496
Note payable - ESOP (Note 9 and 17) 295,420 332,420
Advances from Federal Home Loan Bank (Note 6) 4,115,596 1,654,231
Accounts payable and other liabilities (Notes 8 and 10) 699,555 664,936
Redeemable common stock held by the ESOP, net of
unearned ESOP shares (Notes 9 and 17) 508,069 175,533
--------------------------------------------
TOTAL LIABILITIES 88,106,856 71,045,616
--------------------------------------------
Commitments and Contingencies (Notes 10 and 13)
Stockholders' equity: (Note 17)
Common stock, par value $.01 per share; authorized 5,000,000
shares; issued 1,053,678 shares at 1998 and 1,000,000 shares
at 1997 (Note 7) 10,537 10,000
Additional paid-in capital 4,580,151 3,552,726
Retained earnings, substantially restricted (Notes 7 and 12) 7,279,694 7,065,824
Deferred recognition and retention plan (Note 11) 678,576 --
Unrealized gain on securities available for sale,
net of tax (Note 2) 294,380 350,143
--------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,486,186 10,978,693
--------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 99,593,042 $ 82,024,309
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ----------------------
<S> <C> <C>
Interest income:
Loans $ 6,667,587 $ 5,746,015
Investment securities 421,609 377,226
Interest-bearing deposits 267,162 90,026
-------------------- -------------------
7,356,358 6,213,267
-------------------- -------------------
Interest expense:
Deposits (Note 5) 3,541,900 3,195,675
Federal Home Loan Bank advances (Note 6) 226,392 27,710
Note payable, ESOP 26,512 22,015
-------------------- -------------------
3,794,804 3,245,400
-------------------- -------------------
NET INTEREST INCOME 3,561,554 2,967,867
Provision for (recovery of) loan losses (Note 3) (25,000) 20,000
-------------------- -------------------
NET INTEREST INCOME AFTER
PROVISION FOR (RECOVERY OF) LOAN LOSSES 3,586,554 2,947,867
-------------------- -------------------
Noninterest income
Insurance commissions 403,900 --
Gain on sale on investments available for sale 305,550 --
Other 281,846 169,629
-------------------- -------------------
991,296 169,629
-------------------- -------------------
Noninterest expenses:
Compensation and employee
benefits (Notes 8, 9, 10 and 11) 1,801,254 935,503
Occupancy and equipment 327,944 217,645
Deposit insurance premiums 43,696 86,179
Computer processing charges 138,511 136,880
SAIF assessment (Note 16) 368,022 --
Amortization 34,990 --
Other 1,141,797 812,155
-------------------- -------------------
3,488,192 2,556,384
-------------------- -------------------
INCOME BEFORE INCOME TAXES 1,089,658 561,112
Income taxes (Note 12) 381,255 217,674
-------------------- -------------------
NET INCOME $ 708,403 $ 343,438
==================== ===================
Basic earning per share (Note 14) $ 0.73 $ 0.44
==================== ===================
Diluted earnings per share (Note 14) $ 0.72 $ 0.44
==================== ===================
Cash dividends per share $ 0.20 $ 0.10
===================== ===================
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 $ -- $ -- $ 7,062,76
Issuance of common stock,
net of conversion costs 4,249 3,543,720 --
Capitalization of mutual holding company 5,382 (105,382)
ESOP shares issued 369 369,051 --
Transfer to redeemable common stock
net of unearned ESOP shares -- (369,420) (138,533)
ESOP contribution -- 9,375 --
Cash dividend, $.10 per share -- -- (96,475)
Net change in unrealized gain on securities
available for sale, net (Note 2) -- -- --
Net income -- -- 343,438
-----------------------------------------------------------------
Balance, June 30, 1997 10,000 3,552,726 7,065,824
Adoption of recognition and retention plan 537 992,506 --
Vesting of recognition and retention plan -- -- --
Transfer to redeemable common stock
net of unearned ESOP shares -- (332,536)
ESOP contribution -- 34,919 37,000
Cash dividend, $.20 per share -- -- (198,997)
Net change in unrealized gain on securities
available for sale, net (Note 2) -- -- --
Net income -- -- 708,403
-----------------------------------------------------------------
Balance, June 30, 1998 $ 10,537 $ 4,580,151 $ 7,279,694
=================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Deferred Gain on
Recognition Securities Unearned Total
and Available ESOP Stockholders'
Retention Plan for Sale Shares Equity
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ -- $ 175,051 $ -- $ 7,237,827
-- -- -- 3,547,969
-- -- -- (100,000)
-- -- (369,420) --
-- -- 332,420 (175,533)
-- -- 37,000 46,375
-- -- -- (96,475)
-- 175,092 -- 175,092
-- -- -- 343,438
- --------------------------------------------------------------------------------------------
-- 350,143 -- 10,978,693
(993,043) -- -- --
(314,467) 314,467
-- -- -- (332,536)
-- -- -- (71,919)
-- -- -- (198,997)
-- (55,763) -- (55,763)
-- -- -- (708,403)
- --------------------------------------------------------------------------------------------
$ (678,576) $ 294,380 $ -- $ 11,486,186
============================================================================================
</TABLE>
23
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 708,403 $ 343,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan losses (25,000) 20,000
Loss on disposal of fixed assets 9,146 1,125
Gain on sale of investments available for sale (305,550) --
Provision for depreciation 238,568 154,346
Amortization of goodwill and noncompete covenant 34,990 --
Amortization of deferred loan fees (222,904) (134,638)
Amortization of premium/discount
on investments 12,687 16,275
Amortization of unearned ESOP shares 37,000 37,000
ESOP fair value adjustment 34,919 9,375
Vesting of recognition and retention plan 314,467 --
Proceeds from sale of loans held for sale 8,091,901 --
Origination of loans held for sale (8,084,101) --
Gain on sale of loans held for sale (7,800) --
Deferred income taxes (1,026) 55,627
(Increase) decrease in operating assets:
Accrued interest receivable (16,948) (84,817)
Prepaid expenses and other assets (159,378) 155,634
Increase in liabilities:
Accrued interest payable 2,630 22,116
Accounts payable and other liabilities 34,619 302,928
--------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 696,623 865,859
--------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (5,922,587) (1,922,013)
Purchase of FHLB stock (48,300) (67,400)
Proceeds from calls of securities
available for sale 3,050,000 600,000
Proceeds from sale of securities
available for sale 311,633 --
(Continued)
</TABLE>
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Principal payments received on
securities available for sale 730,812 316,694
Net originations of loans receivable (2,195,238) (7,636,514)
Purchase of office properties and equipment (1,036,924) (270,534)
Proceeds from sale of properties and equipment 4,200 --
Proceeds from sale of real estate owned 12,827 --
Purchase of goodwill and noncompete agreement (320,000) --
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,413,577) (8,979,767
-----------------------------------------------
Cash Flows from Financing Activities
Net increase in savings deposits $ 14,267,090 $ 4,728,625
Net borrowings on FHLB advances 2,461,365 404,231
Net proceeds from issuance of common stock -- 3,547,969
Proceeds from borrowings -- 369,420
Principal payments on borrowings (37,000) (37,000)
Capitalization of mutual holding company -- (100,000)
Cash dividends paid (198,997) (96,475)
-----------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 16,492,458 8,816,770
-----------------------------------------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 11,775,504 702,862
Cash and cash equivalents:
Beginning 2,532,505 1,829,643
-----------------------------------------------
Ending $ 14,308,009 $ 2,532,505
===============================================
Supplemental Schedule of Cash and
Cash Equivalents
Interest-bearing deposits $ 11,358,167 $ 1,166,463
Noninterest-bearing 2,949,842 1,366,042
-----------------------------------------------
$ 14,308,009 $ 2,532,505
===============================================
Supplemental Disclosures of Cash
Flow Information
Cash payments for:
Interest $ 3,792,174 $ 3,223,284
Income taxes 485,178 92,035
</TABLE>
25
(Continued)
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosure of Noncash
Investing and Financing Activities
Net change in unrealized gain on securities
available for sale, net of tax $ (55,763) $ 175,092
Transfer from loans receivable to real estate owned 50,942 --
Unearned ESOP shares issued -- (369,420)
Par value of common stock issued
to mutual holding company -- (5,382)
Fair value of ESOP shares in excess
of unearned ESOP shares 295,536 138,533
Transfer from retained earnings to redeemable common stock 332,536 175,533
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business: AF Bankshares, Inc. (the "Company") is a bank holding
company which owns 100% of the common stock of AF Bank (the "Bank"), formerly
Ashe Federal Bank. The 1997 financial statements include Ashe Federal Bank only.
The Company has no operations and conducts no business of its own other than
owning the Bank. The Bank is a federally chartered stock savings bank which
conducts business from its main office located in West Jefferson, North Carolina
and three branches in Sparta, Jefferson and Warrensville, North Carolina. The
principal activities of the Bank consist of obtaining savings deposits and
providing credit to customers in its primary market area, Ashe and Alleghany
Counties. On April 15,1996, the Board of Directors of the Bank adopted a Plan of
Reorganization and a related Stock Issuance Plan pursuant to which the Bank
exchanged its federal mutual savings bank charter for a federal stock savings
bank charter, conducted a minority stock offering, and formed AsheCo, M.H.C., a
mutual holding company which owned 53.8% of the common stock issued by the Bank.
The Bank conducted its minority stock offering in July and August of 1996 and
the closing occurred on October 4, 1996. The Bank sold 461,779 shares of common
stock in the minority stock offering, including 36,942 shares sold to its
Employee Stock Ownership Plan (the "ESOP"), and issued 538,221 shares to the
mutual holding company. See Note 17 for additional information concerning the
minority stock offering and the reorganization. On June 16, 1998, the Board of
Directors approved the formation of a mid-tier holding company, AF Bankshares,
Inc. which became a 100% owner of the Bank in a stock swap with AsheCo, M.H.C.,
which was accounted for similar to a pooling of interests. At June 30, 1998,
AsheCo, M.H.C.'s ownership of AF Bankshares, Inc. decreased to 51.1% due to the
shares issued under the recognition and retention plan discussed in Note 11.
On July 1, 1997, the Bank purchased two insurance companies to form AF Insurance
Services, Inc., which became a wholly owned subsidiary of the Bank. AF Insurance
Services, Inc. operates from its main office in West Jefferson, North Carolina
and branch offices in North Wilkesboro and Sparta, North Carolina. The
transaction was accounted for as a purchase. Revenues are not material to the
financial information.
The following is a description of the significant accounting policies used in
the preparation of the accompanying financial statements.
Principles of consolidation: The consolidated financial statements include the
accounts of AF Bankshares, Inc. and its wholly owned subsidiary, AF Bank and the
Bank's wholly owned subsidiary, AF Insurance Services, Inc. All significant
intercompany transactions and balances have been eliminated in consolidation.
Basis of financial statement presentation: The accounting and reporting policies
of the Company conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported revenues and expenses for the period. Actual results could differ from
those estimates.
Cash and cash equivalents: For purposes of reporting the statements of cash
flows, the Company includes cash on hand and demand deposits at other financial
institutions with terms less than 90 days as cash and cash equivalents. The
Company maintains amounts due from banks which, at times, may exceed federally
insured limits. The Company has not experienced any losses in such accounts.
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Investment securities: The Bank has investments in debt and equity securities.
Debt securities consist primarily of U. S. Treasury Notes, Federal Farm Credit
Notes, Federal Home Loan Bank bonds, Fannie Mae and Government National Mortgage
Association securities and certificates of deposit. Equity securities consist of
Federal Home Loan Mortgage Corporation (FHLMC) stock.
Management classifies all debt securities and certain equity securities as
trading, available for sale, or held to maturity as individual investment
securities are acquired, and thereafter the appropriateness of such
classification is reassessed at each statement of financial condition date.
Because the Bank does not buy investment securities in anticipation of
short-term fluctuations in market prices, none of the investment securities are
classified as trading in accordance with Statement 115. All securities have been
classified as either available for sale or held to maturity.
Securities available for sale: Securities classified as available for sale are
those securities that the Bank intends to hold for an indefinite period of time
but, as in the case of debt securities, not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Bank's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Premiums and discounts are
amoritized using the interest method over the securities' contractual lives.
Unrealized gains or losses are reported as increases or decreases in equity, net
of the related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in income.
Securities held to maturity: Securities classified as held to maturity are those
securities for which the Bank has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount, computed by the interest
method over their contractual lives. Based on the Bank's financial position and
liquidity, management believes the Bank has the ability to hold these securities
to maturity.
Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
Home Loan Bank (FHLB) system, is required to maintain an investment in capital
stock of the Federal Home Loan Bank in an amount equal to the greater of 1% of
its outstanding home loans or 5% of advances from the FHLB. No ready market
exists for the Federal Home Loan Bank stock, and it has no quoted market value.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, the undisbursed portion of construction loans,
and net deferred loan-origination fees and costs. The Bank's loan portfolio
consists principally of mortgage loans collateralized by first trust deeds on
single family residences, other residential property, commercial property and
land.
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Allowance for loan losses: The allowance for loan losses is increased by charges
to income and decreased by charge-offs (net of recoveries) based on the Bank's
evaluation of the potential and inherent risk of losses in its loan portfolio.
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management uses the best information available to make evaluations, future
adjustments may be necessary, if economic or other conditions differ or change
substantially from the assumptions used.
Impaired loans: SFAS No. 114, Accounting by Creditors for Impairment of a Loan,
requires that the Bank establish a specific loan allowance on an impaired loan
if the present value of the future cash flows discounted using the loan's
effective interest rate is less than the carrying value of the loan. An impaired
loan can also be valued based upon its fair value or the market value of the
underlying collateral if the loan is primarily collateral dependent. The Bank
assesses for impairment all loans delinquent more than 90 days. See Note 3 for a
further explanation of the Statement. No loans were impaired at June 30, 1998
and 1997, and there is no specific SFAS No. 114 allowance associated with the
portfolio.
Interest income: SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures, which amended SFAS No. 114 requires
disclosure of the Bank's method of accounting for interest income on impaired
loans. The Bank generally continues to accrue interest on loans delinquent 90
days or more. However, all such accrued interest is reversed by the
establishment of a reserve for uncollected interest, if in the opinion of
management collectibility is uncertain. Such interest, if ultimately collected,
is credited to income in the period received. The Bank anticipates that it will
account for interest on impaired loans in a similar fashion in the future if and
when it has impaired loans.
Loan-origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for actual prepayments.
Loans held for sale: Loans held for sale are those loans the Bank has the intent
to sell in the foreseeable future. They are carried at the lower of aggregate
cost or market value. Gains and losses on sales of loans are recognized at
settlement dates and are determined by the difference between the sales proceeds
and the carrying value of the loans. All sales are made without recourse. The
Bank has no loans held for sale at June 30, 1998 or 1997.
Real estate owned: Real estate owned is initially recorded at estimated fair
value at the date of foreclosure establishing a new cost basis. Subsequent to
foreclosure, valuations of the property are periodically performed by management
and the real estate is carried at the lower of cost or fair value minus
estimated costs to sell. Costs relating to improvement of the property are
capitalized, while holding costs of the property are charged to expense in the
period incurred.
Office properties and equipment: Office properties and equipment are stated at
cost less accumulated depreciation computed principally by the straight-line
method over estimated useful lives.
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Intangible assets: Goodwill is the cost of investment in AF Insurance Services,
Inc. in excess of the fair value of net assets at the date of purchase and is
being amoritized by the straight line method over a period of fifteen years.
Noncompete agreement is stated at cost less accumulated amoritization computed
by the straight-line method over a period of seven years.
Pension plans: The Bank has a 401(k) retirement plan available to substantially
all employees. The Bank matches certain portions of voluntary contributions by
participating employees.
The Bank has deferred compensation and retirement plan agreements for the
benefit of the Board of Directors. Both plans are unfunded and the liabilities
are being accrued over the terms of active service of the directors. The Bank
also has an ESOP which covers substantially all of it's employees. Contributions
to the plan are based on amounts necessary to fund the amortization requirements
of the ESOP's debt to an unrelated third party financial institution, subject to
compensation limitations, and are expensed based on the AICPA's Statement of
Position 93-6, Employers' Accounting for Employee Stock Ownership Plans.
Additionally, the Company has implemented a qualified stock option plan
authorizing the grant of up to 21,322 stock options to certain officers and
directors at the time of the adoption, either in the form of incentive stock
options or non-incentive stock options. The Bank has also implemented a
recognition and retention plan by reserving 53,678 shares of common stock for
issuance to certain officers and directors at the time of adoption.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Fair value of financial instruments: The estimated fair values required under
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
determined by the Company using available market information and appropriate
valuation methodologies; however, considerable judgment is required to develop
the estimates of fair value. Accordingly, the estimates presented for the fair
value of the Company's financial instruments are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair market value amounts.
The fair value estimates presented are based on pertinent information available
to management as of June 30, 1998 and 1997. Although management is not aware of
any factors that would significantly affect the estimated fair value amount,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date and therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Off-Statement of Financial Condition Risk: The Bank is a party to financial
instruments with off-statement of financial condition risk such as commitments
to extend credit and home equity lines of credit. Management assesses the risk
related to these instruments for potential losses on an ongoing basis.
Earnings per share: The FASB has issued Statement No. 128, Earnings Per Share,
which supersedes APB Opinion No. 15. Statement No. 128 requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per-share amounts. Basic per-share
amounts are computed by dividing net income (the numerator) by the
weighted-average number of common shares outstanding (the denominator). All
other entities are required to present basic and diluted per-share amounts.
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations. The earnings
per share computation for 1997 is based on net income earned from the date of
reorganization October 4, 1996, divided by the weighted average number of shares
outstanding from the date of reorganization to the end of the 1997 fiscal year.
The Company initially applied Statement No. 128 for the year ended June 30, 1998
and, as required by the Statement, has restated all per share information for
the prior years to conform to the Statement. See Note 14 for further
information.
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the statements of financial
condition according to management's intent. The carrying amount of securities
and approximate fair values at June 30 were as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Debt securities:
U.S. Government agency securities $ 5,029,967 $ 4,453 $ (11,156) $ 5,023,264
Federal Farm Credit Notes 400,000 -- (1,062) 398,938
Fannie Mae and Government
National Mortgage Association 2,174,353 60,503 -- 2,234,856
Equity securities:
Federal Home Loan Mortgage
Corporation Common Stock 6,917 430,764 -- 437,681
------------------------------------------------------------------------------------
7,611,237 495,720 (12,218) 8,094,739
------------------------------------------------------------------------------------
Held to maturity securities:
Debt securities:
Student Loan Marketing
Association 100,000 -- -- 100,000
------------------------------------------------------------------------------------
Other securities:
Federal Home Loan Bank stock 624,000 -- -- 624,000
------------------------------------------------------------------------------------
$ 8,335,237 $ 495,720 $ (12,218) $ 8,818,739
====================================================================================
</TABLE>
32
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. DEBT AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Debt securities:
U.S. Government agency securities $ 3,499,769 $ 2,501 $ (18,265) $ 3,484,005
Federal Farm Credit Notes 600,000 -- (6,749) 593,251
Fannie Mae and Government
National Mortgage Association 1,375,461 64,604 -- 1,440,065
Equity securities:
Federal Home Loan Mortgage
Corporation Common Stock 13,000 533,000 -- 546,000
-------------------------------------------------------------------------------------
5,488,230 600,105 (25,014) 6,063,321
-------------------------------------------------------------------------------------
Held to maturity securities:
Debt securities:
Student Loan Marketing
Association 100,000 -- -- 100,000
-------------------------------------------------------------------------------------
Other securities:
Federal Home Loan Bank stock 575,700 -- -- 575,700
-------------------------------------------------------------------------------------
$ 6,163,930 $ 600,105 $ (25,014) $ 6,739,021
=====================================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30, 1998,
by contractual maturity are shown below. Fannie Mae and Government National
Mortgage Association securities are not included in the maturity categories
because they do not have a single maturity date. Additionally, equity securities
and money market funds are not included in the maturity categories because they
do not have contractual maturities.
<TABLE>
<CAPTION>
Held to maturity securities: Available for sale securities:
---------------------------------------------------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due from one year to five years $ 100,000 $ 100,000 $ 5,429,967 $ 5,422,202
Fannie Mae and Government
National Mortgage Association
debt securities -- -- 2,174,353 2,234,856
Equity securities -- -- 6,917 437,681
---------------------------------------------------------------------------
$ 100,000 $ 100,000 $ 7,611,237 $ 8,094,739
===========================================================================
</TABLE>
33
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. DEBT AND EQUITY SECURITIES (CONTINUED)
Sales of securities are summarized as follows for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
<S> <C> <C>
Proceeds from calls of securities available for sale $ 3,050,000 $ 600,000
Proceeds from sale of securities available for sale 311,633
-----------------------------------------------
3,361,633 600,000
Realized gain on sale of securities available for sale (305,550)
-----------------------------------------------
Cost of securities sold $ 3,056,083 600,000
===============================================
</TABLE>
The change in net unrealized gains shown as a separate component of equity for
the years ended June 30, are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
<S> <C> <C>
Balance in equity component, beginning $ 350,143 $ 175,051
Change in net unrealized gains (91,589) 287,581
Change in deferred income taxes 35,826 (112,489)
-----------------------------------------------
Balance in equity component, ending $ 294,380 $ 350,143
===============================================
</TABLE>
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required
to maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to the greater of 1% of its outstanding home loans or 5% of
advances from the FHLB. No ready market exists for the Federal Home Loan Bank
stock, and it has no quoted market value. For presentation purposes, such stock
is assumed to have a market value which is equal to cost.
NOTE 3. LOANS RECEIVABLE
Loans receivable at June 30, consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
<S> <C> <C>
One to four-family 55,462,490 53,902,672
Multi-family 668,146 741,756
Non residential 1,417,513 2,803,966
Land 2,423,690 1,586,514
Construction loans 3,477,239 1,562,385
Commercial loans 3,974,669 4,182,118
Consumer loans 8,281,791 7,704,981
------------------------------------------------
75,705,538 72,484,392
Less:
Undisbursed loan funds (1,597,657) (758,859)
Deferred loan fees (315,748) (458,681)
Allowance for loan losses (1,164,263) (1,031,182)
------------------------------------------------
72,627,870 70,235,670
================================================
</TABLE>
34
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)
The following is an analysis of the allowance for loan losses for the years
ended June 30:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
<S> <C> <C>
Balance, beginning $ 1,031,182 $ 1,096,368
Provisions (recoveries) charged to operations 25,000 20,000
Charge-offs (12,936) (88,842)
Recoveries 171,017 3,656
------------------------------------------------
Balance, ending $ 1,164,263 $ 1,031,182
================================================
</TABLE>
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118 Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosure, requires that the Bank establish a specific allowance on
impaired loans and disclosure of the Bank's method of accounting for interest
income on impaired loans. The Bank assesses all loans delinquent more than 90
days for impairment and such loans amounted to approximately $24,000 and
$131,000 at June 30, 1998 and 1997, respectively. Average balances for loans
delinquent more than 90 days totaled approximately $111,000 and $142,000 for the
years ended June 30, 1998 and 1997, respectively. These loans are primarily
collateral dependent and management has determined that the underlying
collateral value is in excess of the carrying amounts. As a result, the Bank has
determined that specific allowances on these loans are not required. Interest
income foregone during 1998 and 1997 was $509 and $8,186, respectively. The Bank
established reserves for uncollectible interest on mortgage and consumer loans
totaling $5,485 and $4,485 at June 30, 1998 and 1997, respectively.
Loans to officers and directors of the Company totaled $943,194 and $855,339 at
June 30, 1998 and 1997, respectively. Activity, in aggregate, during the years
ended June 30, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------
<S> <C> <C>
Balance, beginning $ 855,339 $ 735,686
Disbursements 327,935 269,907
Payments received (240,080) (150,254)
---------------------------------------------------
Balance, ending $ 943,194 $ 855,339
===================================================
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. Mortgage loan portfolios serviced for Fannie
Mae were approximately $8,511,000 and 383,000 at June 30, 1998 and 1997,
respectively.
There were no loans held for sale or outstanding commitments to sell loans as of
June 30, 1998.
35
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------
<S> <C> <C>
Land and land improvements $ 260,399 $ 235,485
Buildings 1,239,304 831,226
Furniture and fixtures 1,065,993 683,388
Leasehold improvements 197,540 123,556
Automobiles 84,345 26,570
---------------------------------------------
2,847,581 1,900,225
Accumulated depreciation (686,798) (524,452)
---------------------------------------------
$ 2,160,783 $ 1,375,773
=============================================
</TABLE>
NOTE 5. SAVINGS DEPOSITS
Savings deposits at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------
<S> <C> <C>
NOW accounts at 3.00% (3.22% 1997) $ 8,465,225 $ 8,849,683
Commercial and free checking (non-interest bearing) 3,469,656 900,676
Passbook savings 4.25% (4.03% 1997) 16,729,421 1,067,227
Money market demand accounts 3.75% (3.95% 1997) 1,855,571 2,497,556
-----------------------------------------------------
30,519,873 2,292,019
-----------------------------------------------------
Certificates of Deposit:
weighted average rate of 5.52% (5.52% 1997)
4.00% to 5.99% 45,411,880 3,873,050
6.00% to 7.99% 6,388,645 6,402,610
-----------------------------------------------------
51,800,525 4,513,311
-----------------------------------------------------
Accrued interest payable 167,818 165,188
-----------------------------------------------------
$ 82,488,216 $ 68,218,496
=====================================================
Weighted average cost of savings deposits 4.94% 4.96%
=====================================================
</TABLE>
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 After Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4.00% to 5.99% $ 3,911,354 $ 4,044,083 $ 1,726,566 $ 277,260 $ 250,042 $ 4,541,188
6.00% to 7.99% 4,557,050 1,570,003 126,489 135,103 -- 6,388,645
--------------------------------------------------------------------------------------------------------
$ 43,670,599 $ 5,614,086 $ 1,853,055 $ 412,363 $ 250,422 $ 51,800,525
========================================================================================================
</TABLE>
36
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. SAVINGS DEPOSITS (CONTINUED)
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $13,894,135 and $11,598,470 at June 30, 1998 and
1997, respectively. At June 30, 1998, scheduled maturities of jumbo certificates
of deposit are as follows:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
------------------------------------------------------
<S> <C> <C>
Maturity period:
Within three months $ 3,997,344 5.57%
Three through six months 3,071,983 5.69
Six through twelve months 5,252,072 5.74
Over twelve months 1,572,736 5.45
------------------------------------------------------
$ 13,894,135 5.65%
======================================================
</TABLE>
Eligible savings accounts are insured to $100,000 by the Savings Association
Insurance Fund (SAIF) which is administered by the Federal Deposit Insurance
Corporation (FDIC).
The Bank has pledged securities with a fair value of $100,000 at June 30, 1998
as collateral on treasury tax and loan account
Interest expense on savings deposits consists of the following for the years
ended June 30:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------
<S> <C> <C>
Now accounts and money market accounts $ 353,185 $ 343,841
Passbook savings accounts 538,205 416,153
Certificate accounts 2,650,510 2,435,681
---------------------------------------------------
$ 3,541,900 $ 3,195,675
===================================================
</TABLE>
NOTE 6. FEDERAL HOME LOAN BANK ADVANCES
The Bank had advances outstanding of $4,115,596 and $1,654,231 at June 30, 1998
and 1997, respectively, from the Federal Home Loan Bank (FHLB). Interest is
payable at rates ranging from 5.68% to 6.87%. Pursuant to collateral agreements
with the FHLB, advances are collateralized by all the Bank's stock in the FHLB
and qualifying first mortgage loans. $1,500,000 of the advances are due by
August of 1998, $2,462,500 are due by September of 2002 and the remaining
$153,096 is due January 2007. Interest expense was $226,392 and $27,710 for the
years ended June 30, 1998 and 1997, respectively.
37
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Office of Thrift Supervision (OTS) regulations require institutions to have
a minimum regulatory tangible capital equal to 1.5% of total assets, a minimum
3% of total assets for the core capital ratio and 8% of risk-weighted assets for
the risk-based capital ratio. At June 30, 1998, the Bank exceeded all of the
capital requirements.
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under the requirements of the OTS at June 30, 1998
and 1997:
<TABLE>
<CAPTION>
June 30, 1998 Regulatory Capital
--------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Tangible Tangible Core Tangible Risk-based Risk-based
Capital Assets Capital Assets Capital Assets
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP capital $ 11,486,186 $ 11,486,186 $ 11,486,186
Goodwill and
other nonincludable
assets (285,010) (285,010) (300,010)
Unrealized gain on
securities
available for sale (294,380) (294,380) (294,380)
Qualifying general
loan loss
allowance _ _ 715,254
------------- ------------ ------------
Regulatory capital 10,906,796 10.9% 10,906,796 10.9% 11,607,050 20.4%
Minimum capital
requirement 11,494,270 1.5 2,988,540 3.0 4,543,304 8.0
---------------------------------------------------------------------------------------------
Excess regulatory
capital $ 9,412,526 9.4% $ 7,918,256 7.9% $ 7,063,746 12.4%
==============================================================================================
</TABLE>
38
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1998 Regulatory Capital
--------------------------------------------------------------------------------------------------------
Percent of Percent Percent
Tangible Tangible Core Tangible Risk-based Risk-based
Capital Assets Capital Assets Capital Assets
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GAAP capital $ 10,978,693 $ 10,978,693 $ 10,978,693
Unrealized gain on
securities
available for sale (350,143) (350,143) (350,143)
Qualifying general
loan loss
allowance _ _ 540,788
------------- ----------- ------------
Regulatory capital 10,628,550 12.9% 10,628,550 12.9% 11,169,338 26.3%
Minimum capital
requirement 1,240,564 1.5 2,481,128 3.0 3,421,449 8.0
--------------------------------------------------------------------------------------------------------
Excess regulatory
capital $ 9,387,986 11.4% $ 8,147,422 9.9% $ 7,747,889 18.3%
========================================================================================================
</TABLE>
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain total capital to risk weighted assets of 10%, Tier I
Capital to risk weighted assets of 6% and Tier I Capital to total assets of 5%
or $5,679,000, $3,407,000 and $4,981,000, respectively. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
Under the conversion regulations the Bank may not declare or pay a cash dividend
on any of its stock if the effect thereof would cause the Bank's equity to be
reduced below (1) the amount required for the liquidation account; or (2) the
net worth requirements imposed by the OTS.
The Company paid cash dividends totaling $.20 and $.10 per share during the
years ended June 30, 1998 and 1997, respectively. On July 20, 1998, the Company
declared a $.05 per share cash dividend for stockholders of record as of August
7, 1998 to be paid on September 2, 1998. This dividend will be funded by an
upstream dividend from the Bank to the Company.
NOTE 8. EMPLOYEE PENSION AND INCENTIVE PLANS
The Bank has adopted a profit-sharing plan during 1997 for the benefit of
substantially all employees. Contributions are discretionary and totaled $52,300
and $36,749 for the years ended June 30, 1998 and 1997, respectively.
The Bank also has a discretionary bonus plan under which bonuses are paid to all
employees if approved by the Board of Directors each year. Expense related to
these incentives was $54,289 and $60,787 for the years ended June 30, 1998 and
1997, respectively.
In addition, the Bank implemented a 401(k) retirement plan during the year ended
June 30, 1998 which contains provisions for specified matching contributions by
the Bank. The Bank funds contributions as they accrue and 401(k) plan expense
amounted to $74,239 for the year ended June 30, 1998.
39
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN
As part of the reorganization, the Bank established an ESOP to benefit
substantially all employees. The ESOP purchased 36,942 shares of common stock
with the proceeds from a loan from a third party financial institution. The note
requires annual principal payments of 10% of the outstanding principal balance
plus nterest at the lending institution's prime rate (8.5% at June 30, 1998)
less .5% with a balloon payment due June, 2002. The Bank is expected to make
quarterly contributions to the ESOP in amounts sufficient to allow the ESOP to
make its scheduled principal and interest payments on the note. The ESOP shares
are pledged as collateral for the debt. As the debt is repaid, shares are
released from collateral and allocated to active employees, based on proportion
of debt service paid in the year. The debt of the ESOP is recorded as debt in
the Company's accompanying statement of financial condition.
At June 30, 1998, future principal payments are due as follows:
<TABLE>
<CAPTION>
Year Ending June 30: Amount
- -------------------------------------------------------------------------
<S> <C>
1999 29,918
2000 26,926
2001 24,233
2002 214,343
--------------------
$ 295,420
====================
</TABLE>
Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Bank and are not reported as dividends in the financial statements. Dividends on
allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements.
Excluding interest, expense of $71,919 and $46,375 during 1998 and 1997 has been
incurred in connection with the ESOP. The expense includes, in addition to the
cash contribution necessary to fund the ESOP, $34,919 in 1998 and $9,375 in
1997, which represents the difference between the fair value of the shares which
have been released or committed to be released to participants, and the cost of
these shares to the ESOP. The Bank has credited this amount to paid-in capital
in accordance with the provisions of AICPA Statement of Position 93-6.
At June 30, 1998 and 1997, 7,400 and 3,700 shares held by the ESOP have been
released or committed to be released to the plan's participants for purposes of
computing earnings per share. The fair value of the unallocated shares amounted
to approximately $643,000 and $457,000 at June 30, 1998 and 1997, respectively.
The Bank has also recorded a liability for a put back option, which represents
the excess of the fair market value of the total number of ESOP shares over the
original cost of the unallocated ESOP shares. The liability recorded under the
put back option was $508,069 and $175,533 at June 30, 1998 and 1997,
respectively.
40
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. DEFERRED COMPENSATION AND RETIREMENT PLAN AGREEMENTS
The Bank has an unfunded deferred compensation agreement providing retirement,
disability, and death benefits for directors. Vested benefits under the
agreements are payable in monthly installments over a ten-year period upon the
director's death, disability or retirement. The Bank has insured the lives of
the directors for amounts sufficient to discharge its obligations under the
agreements. The Bank also has a retirement plan for members of the Board of
Directors which the Plan states that outside directors with at least ten years
of service will receive an amount equal to their annual retainer for ten years
after their retirement from the Board. The liability for the benefits is being
accrued over the terms of active service of the directors. The amount charged to
expense under these plans amounted to $78,812 and $83,590 for the years ended
June 30, 1998 and 1997, respectively.
NOTE 11. RECOGNITION AND RETENTION PLAN AND STOCK OPTION PLAN
The Bank's stockholders approved the Bank's Recognition and Retention Plan (the
"RRP") and the Bank's stock option plan on December 8, 1997. The stock option
plan provides for the issuance of up to 21,322 stock options to certain officers
and directors in the form of incentive stock options or non-incentive stock
options. The exercise price of the stock options may not be less than the fair
market value of the Company's common stock at the date of grant. Under the Plan
21,322 of options, which vest at the rate of 20% annually beginning at the date
of grant, were all granted on December 8, 1997 and expire on December 8, 2007.
As permitted under the generally accepted accounting principles, grants under
the plan are accounted for following the provisions of APB Opinion No. 25 and
its related interpretations. Accordingly, no compensation cost has been
recognized for grants made to date. Had compensation cost been determined based
on the fair value method prescribed in FASB Statement No. 123, the pro forma
effect on reported net income for the year ended June 30, 1998 would be as
follows:
<TABLE>
<S> <C>
Net income
As reported $ 708,403
Pro forma 679,748
Earnings per share
As reported
Basic $ 0.73
Diluted 0.72
Pro forma
Basic 0.70
Diluted 0.69
</TABLE>
In determining the fair value of the option grant as prescribed in Statement No.
123, the Black-Scholes option pricing model was used with the following
assumptions: a risk-free interest rate of 5.61%, expected lives of 10 years,
expected volatility of 17.19% and expected dividends of $0.20 per year.
At June 30, 1998, 21,322 options have been granted at an exercise price of
$18.50, of which 4,264 options are currently exercisable. No options have been
exercised to date and all options granted are outstanding at June 30, 1998.
41
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. RECOGNITION AND RETENTION PLAN AND STOCK OPTION PLAN (CONTINUED)
The RRP reserved for issuance 53,678 shares of common stock to certain officers
and directors at the time of the adoption. The Bank issued shares to fund the
RRP in December of 1997. The restricted common stock under the RRP vests at the
rate of 20% annually beginning at the date of grant. The expense related to the
vesting of the RRP totaled $314,467 for the year ended June 30, 1998.
NOTE 12. INCOME TAX MATTERS
Under the Internal Revenue code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through 1996, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience. Tax legislation
passed in 1996 eliminates the percentage of taxable income method as an option
for computing bad debt deductions in all future years. The Bank will still be
permitted to take deductions for bad debts, but will be required to compute such
deductions using an experience method.
The Bank will also have to recapture its tax bad debt reserves which have
accumulated since 1988 amounting to approximately $138,000 over a six year
period. The tax associated with the recaptured reserves is approximately
$54,000. The recapture was scheduled to begin with the Bank's 1997 year, but has
been delayed two years as the Bank has originated a certain level of mortgage
loans. Deferred income taxes have been previously established for the taxes
associated with the recaptured reserves and the ultimate payment of the taxes
will not result in a charge to earnings.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987 which are in excess of additions to recorded
loan loss allowances. At June 30, 1998, retained earnings contain certain
historical additions to bad debt reserves for income tax purposes of
approximately $870,000, the balance at June 30, 1987, for which no deferred
taxes have been provided because the Bank does not intend to use these reserves
for purposes other than to absorb losses. If amounts which qualified as bad debt
deductions are used for purposes other than to absorb bad debt losses or
adjustments arising from the carryback of net operating losses, income taxes may
be imposed at the then existing rates. The approximate amount of unrecorded
deferred tax liability associated with these historical additions is
approximately $340,000. In the future, if the Bank does not meet the income tax
requirements necessary to permit the deduction of an allowance for bad debts,
the Bank's effective tax rate would be increased to the maximum percent under
existing law.
42
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. INCOME TAX MATTERS (CONTINUED)
The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax asset as of June 30 were:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 453,480 $ 403,399
Reserve for uncollected interest 2,137 1,755
Deferred loan fees -- 97,492
Deferred compensation 176,954 143,548
Recognition and retention plan 44,793 --
--------------------------------------------
677,364 646,194
--------------------------------------------
Deferred tax liabilities:
Reserve for loan losses 53,563 35,936
Unrealized gain on securities available for sale 189,124 224,948
Depreciation 44,319 4,7345
FHLB stock dividends 60,949 6,0949
Deferred loan fees 22,115 --
Other 6,572
--------------------------------------------
370,070 375,750
--------------------------------------------
NET DEFERRED TAX ASSET $ 307,294 $ 270,444
============================================
</TABLE>
At June 30, 1998 and 1997, no valuation allowance was recorded on deferred tax
assets.
The provision for income taxes charged to operations for the years ended June
30, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------
<S> <C> <C>
Current $ 382,281 $ 162,047
Deferred (1,026) 55,627
-------------------------------------------------
$ 381,255 $ 217,674
=================================================
</TABLE>
A reconciliation of income taxes computed at the statutory federal income tax
rate to the income tax provision follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory rate $ 370,484 34.0% $ 190,775 34.0%
State tax, net of federal
benefit 37,892 3.5 20,194 3.6
Municipal interest income (19,813) (1.8)
Other (7308) (0.7) 6,705 1.2
------------------------------------------------------------------------------------------------
Total $ 381,255 35.0% $ 217,674 38.8%
================================================================================================
</TABLE>
43
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and equity lines of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk, except for undisbursed construction loan funds, is as
follows at June 30, 1998:
<TABLE>
<CAPTION>
Notional
Amount
---------------------
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Undisbursed home equity lines of credit $ 3,631,324
Undisbursed commercial lines of credit 937,157
</TABLE>
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Home equity
lines of credit have variable rates based on the prime rate of interest. Home
equity lines are reassessed every five years. Because many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The collateral obtained by
the Bank upon extension of credit is based on management's credit evaluation of
the customer. The collateral held is the underlying real estate. Undisbursed
commercial lines of credit have variable rates of prime plus two percent and are
reassessed on an annual basis. Prime at June 30, 1998 was 8.50%.
The Bank has entered into operating leases for the Warrensville and Sparta,
North Carolina branches. The Warrensville lease is for a five-year term with
minimum annual lease payments of $6,000, and the Sparta lease is for a
three-year term with minimum annual lease payments of $8,400.
44
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. EARNINGS PER SHARE
Earnings per share has been calculated in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share", and Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans". For
purposes of this computation, the number of shares of common stock purchased by
the Bank's employee stock ownership plan which have not been allocated to
participant accounts are not assumed to be outstanding. The following are
reconciliations of the amounts used in the per share calculations:
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998
----------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to stockholders $ 708,403 975,717 $ 0.73
=================
EFFECT OF DILUTIVE SECURITIES
RRP restricted stock awards $ -- 3,189
Stock options 1,854
---------------------------------------
DILUTED EPS
Income available to stockholders $ 708,403 980,760 $ 0.72
================================================================
<CAPTION>
For the Period from October 4, 1996 to June 30, 1997
----------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------------------------
<S> <C> <C> <C>
BASIC AND DILUTED EPS
Income available to stockholders from date
of reorganization October 4, 1996 to
June 30, 1997 $ 426,845 965,215 $ 0.44
================================================================
</TABLE>
45
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash
Interest-bearing $ 11,358,167 $ 11,358,167 $ 1,166,463 $ 1,166,463
Noninterest-bearing deposits 2,949,842 2,949,842 1,366,042 1,366,042
Certificates of deposit 198,000 198,000 198,000 198,000
Investments 8,194,739 8,194,739 6,163,321 6,163,321
Loans receivable 72,627,870 72,297,027 7,023,567 6,880,325
Accrued interest receivable 409,559 409,559 392,611 392,611
FHLB stock 624,000 624,000 575,700 575,700
Financial liabilities:
Deposits 2,488,216 82,589,250 6,821,849 6,840,647
Advances from Federal
Home Loan Bank 4,115,596 4,115,596 1,654,231 1,654,231
Note payable, ESOP 295,420 295,420 332,420 332,420
</TABLE>
The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that the
fair values disclosed in this table do not represent market values of all assets
and liabilities of the Company and, thus, should not be interpreted to represent
the market or liquidation value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and certificates of deposits: The carrying amounts for cash and short-term
instruments approximate their fair values.
Investment securities: Fair values for securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of similar securities.
Loans receivable: The fair value of fixed rate loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of variable rate loans approximates their carrying
value as these loans reprice frequently.
46
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Accrued interest receivable and accrued interest payable: The fair value of
accrued interest receivable and payable is the amount receivable or payable on
demand at the statement of financial condition date.
FHLB stock: The fair value of FHLB stock is the stated value by the FHLB.
Off-statement of financial condition instruments: Fair values for the Company's
off-statement of financial condition instruments (loan commitments) are based on
fees currently charged for similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standings. The fair value
for such commitments is nominal.
Deposits: The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the statement of financial
condition date. The fair value of fixed maturity certificates of deposit are
estimated based upon the discounted value of contractual cash flows using rates
currently offered for deposits with similar remaining maturities.
Advances from Federal Home Loan Bank and Note payable, ESOP: The fair value of
the Advances from Federal Home Loan Bank and Note payable, ESOP is equal to the
carrying value of the liability.
NOTE 16. SAIF ASSESSMENT
On September 30, 1996, the "Deposit Insurance Funds Act of 1996" was signed into
law. The legislation included a special one-time assessment to recapitalize the
Savings Association Insurance Fund (SAIF) up to a statutory goal of 1.25% of
insured deposits. The assessment was equal to approximately 65.7 basis points of
the SAIF assessable deposit base as of March 31, 1995. The expense recorded for
the special SAIF assessment for the year ending June 30, 1997 was $368,022.
NOTE 17. REORGANIZATION AND MINORITY STOCK OFFERING
On October 4, 1996, the Bank consummated its reorganization, as explained in
Note 1, and issued 461,779 shares in a minority stock offering (including 36,942
shares to the ESOP) which resulted in gross proceeds of $4,617,790, or
$3,917,389, net of conversion costs of $700,401. At closing, such costs were
netted against the stock proceeds received and shown as a reduction of
stockholders' equity. As a part of the reorganization, the Bank formed a mutual
holding company, AsheCo, M.H.C., which was issued 538,221 shares of the Bank's
common stock. Members of the mutual holding company consist of depositors of the
Bank, who have the sole authority to elect the board of directors of the mutual
holding company for as long as it remains in mutual form. Initially, the mutual
holding company's principal assets were the shares of the Bank's common stock
received in the reorganization and on its initial capitalization of $100,000 in
cash. The mutual holding company, which by law must own in excess of 50% of the
stock of the Bank, was issued stock in the reorganization resulting in an
ownership interest of 53.8% of the Bank. By virtue of its ownership of a
majority of the outstanding shares of the Bank, the mutual holding company can
generally control the outcome of most matters presented to the stockholders of
the Bank for resolution by vote except for certain matters related to stock
compensation plans, a vote regarding conversion of the mutual holding company to
stock form, or other matters which require a vote only by the minority
stockholders. The mutual holding company has registered as a savings and loan
holding company and is subject to regulation, examination, and supervision by
the Office of Thrift Supervision (OTS).
47
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. REORGANIZATION AND MINORITY STOCK OFFERING (CONTINUED)
The Bank also established an ESOP which was issued 36,942 shares of common stock
in the reorganization. The funds used by the ESOP to acquire these shares were
obtained from borrowings from an unaffiliated third party lender. The loan is
reflected in the financial statements of the Bank which makes contributions to
the ESOP necessary to amortize the debt. Such contributions are expensed based
upon the fair value of the ESOP shares released or committed to be released from
restriction (or no longer debt financed). The total number of shares of common
stock issued as a result of the offering and reorganization were 1,000,000. On
June 16, 1998, the Board of Directors approved the formation of a mid-tier
holding company, AF Bankshares, Inc. which became a 100% owner of the Bank in a
stock swap with AsheCo, M.H.C., which was accounted for similar to a pooling of
interests. At June 30, 1998, AsheCo, M.H.C.'s ownership of AF Bankshares, Inc.
decreased to 51.1% due to the shares issued under the recognition and retention
plan discussed in Note 11.
Concurrent with the reorganization, the Bank has established a liquidation
account in an amount equal to its net worth as reflected in its latest statement
of financial condition used in its final offering circular. The liquidation
account will be maintained for the benefit of eligible deposit account holders
and supplemental eligible deposit account holders who continue to maintain their
deposit accounts in the Bank after the reorganization. Only in the event of a
complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted sub account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock. Dividends
paid by the bank subsequent to the reorganization cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on its common stock if its
stockholders' equity would thereby be reduced below either the aggregate amount
then required for the liquidation account or the minimum regulatory capital
requirements imposed by federal regulations.
48
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA
The mid-tier holding company, AF Bankshares, Inc., was formed on June 16, 1998.
At June 30, 1998, the Company's only asset was the investment in AF Bank and
Subsidiary of $11,486,186. There were no significant operations from the date of
inception to June 30, 1998.
The following are the condensed financial statements of the mutual holding
company, AsheCo, M.H.C., as of and for the periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Condensed Balance Sheets
June 30, 1998 and 1997
1998 1997
-----------------------------------------
<S> <C> <C>
Assets:
Cash $ 154,534 $ 123,374
Investment in AA&G, Inc. and Subsidiary 42,574 18,156
Investment in AF Bankshares, Inc. and Subsidiary 6,290,429 6,014,340
Other assets 19,409 --
-----------------------------------------
$ 6,506,946 $ 6,155,870
=========================================
Liabilities and Equity:
Liabilities:
Accounts payable $ 12,000 $ 14,838
-----------------------------------------
Equity:
Capitalization by AF Bankshares, Inc. and Subsidiary 105,382 105,382
Equity in AF Bankshares, Inc. and Subsidiary 5,885,179 5,759,553
Retained earnings 461,978 181,862
Unrealized gain on securities available for sale, net 42,407 94,235
-----------------------------------------
6,494,946 6,141,032
-----------------------------------------
$ 6,506,946 $ 6,155,870
=========================================
</TABLE>
49
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)
Condensed Statements of Income
For the Period From October 4, 1996 to June 30, 1997 and the Year Ended
June 30, 1998
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
<S> <C> <C>
Interest income $ 4,770 $ 2,911
Dividend income, AF Bankshares, Inc. and Subsidiary 107,644 53,822
Equity in earnings subsidiaries 405,680 232,884
Income tax (expense) credits 12,048 (14,838)
Other expense (71,055) (18,359)
----------------------------------------------
NET INCOME $ 459,087 $ 256,420
==============================================
</TABLE>
Condensed Statement of Cash Flows
For the Period From October 4, 1996 to June 30, 1997 and the Year Ended
June 30, 1998
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 459,087 $ 256,420
Change in assets and liabilities:
Equity in earnings of subsidiaries (405,680) (232,884)
Increase (decrease) in accounts payable (2,838) 14,838
Increase in other assets (19,409) --
-----------------------------------------
Net cash provided by operating activities 31,160 38,374
-----------------------------------------
Cash Flows from Investing Activities:
Investment in AA&G, Inc. -- (15,000)
-----------------------------------------
Cash Flows from Financing Activities:
Capitalization by AF Bankshares, Inc. and Subsidiary -- 100,000
-----------------------------------------
Net increase in cash 31,160 123,374
Cash - beginning 123,374 --
-----------------------------------------
Cash - ending $ 154,534 $ 123,374
=========================================
</TABLE>
50
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19. RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 130, Reporting Comprehensive Income, which the
Company has not been required to adopt as of June 30, 1998. The Statement, which
is effective for fiscal years beginning after December 15, 1997, establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement requires that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
51
<PAGE>
A F BANKSHARES, INC.
CORPORATE INFORMATION
<TABLE>
<CAPTION>
OFFICERS
<S> <C>
JAMES A. TODD, President and MELANIE PAISLEY MILLER, Senior Vice President,
Chief Executive Officer Secretary/Treasurer, CFO
MARTIN G. LITTLE, Senior Vice President PAMELA S. BARKER, Vice President
JAMES R. WALKER, Vice President LINDA H. WOODIE, Vice President
CHRISTOPHER J. HARTLEY, Assistant Vice
President MARSHA B. GREENE, Vice President
ROBIN J. CARTER, Assistant Vice President GARY E. JOINES, Vice President
MICHELLE T. COX, Assistant Secretary MICHAEL R. JOHNSON, Vice President
ROBIN D. STEPHENS, Assistant Secretary MARIE P. PARKER, Assistant Vice President
BARBARA E. SHUMATE, Assistant Secretary SANDY B. BROWN, Assistant Secretary
KIMBERLY W. OSBORNE, Assistant Secretary ANGELA S. ROTEN, Assistant Secretary
LINDA D. MATEJ, Assistant Secretary
DIRECTORS
JAN R. CADDELL, Chairman KENNETH R. GREENE, Vice Chairman
JAMES A. TODD JOHN D. WEAVER
JERRY L. ROTEN WAYNE R. BURGESS
W. O. ASHLEY, JR. FRANK E. ROLAND
</TABLE>
52
<PAGE>
CORPORATE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
OFFICES
<S> <C>
Corporate Offices West Jefferson Office
206 S. Jefferson Avenue 205 S. Jefferson Avenue
West Jefferson, North Carolina 28694 West Jefferson, North Carolina 28694
Jefferson Office Warrensville Office
840 E. Main Street 4951 NC Hwy 88 West
Jefferson, North Carolina 28640 Warrensville, North Carolina 28693
Sparta Office-d/b/a Alleghany First Bank North Wilkesboro Office- AF Insurance
403 South Main Services, Inc. only
Sparta, NC 28675 1347 West D Street
North Wilkesboro, NC 28659
STOCK TRANSFER AGENT LEGAL COUNSEL
ChaseMellon Sharholders Services, LLC Vannoy & Reeves
Overpeck Centre 306 East Main Street
85 Challenger Road West Jefferson, North Carolina 28694
Ridgefield Park, New Jersey 07660
Thacher Proffitt & Wood
AUDITORS 1700 Pennsylvania Avenue
McGladrey & Pullen, LLP Washington, DC 20006
One Morrocroft Centre
6805 Morrison Boulevard, Suite 200 FORM 10-KSB
Charlotte, North Carolina 28211 A copy of Form 10-KSB as filed with the
Office of Thrift Supervision will be
ANNUAL MEETING furnished without charge to shareholders upon
The 1998 annual meeting of stockholders of written request to James A. Todd, President, AF
AF Bankshares, Inc. will be held on November 2, Bankshares, Inc., 206 S. Jefferson Avenue,
1998 at 6:00 p.m. at the Corporate Office, P. O. Box 26, West Jefferson, NC 28694.
206 S. Jefferson Avenue, West Jefferson,
North Carolina.
</TABLE>
53
<PAGE>
COMMON STOCK
The Company had 1,053,678 shares of common stock outstanding at August 31, 1998,
which are held by 471 shareholders of record. The majority of the outstanding
shares are held by the mutual holding company AsheCo. MHC. The remaining 515,457
shares are owned by minority shareholders including the Company's ESOP. Shares
are quoted on the OTC Electronic Bullentin Board under the symbol "ASFE."
MARKET FOR THE COMMON STOCK
There is no established market for the Company's common stock, excluding
occasional quotations, although the Company's common stock is quoted on the OTC
Electronic Bulletin Board. The table below reflects the stock trading and
dividend payment frequency of the Company for the years ended June 30, 1998 and
1997. For further information regarding the Company's dividend policy and
restrictions on dividends paid, please refer to note 7 of the notes to the
financial statements. Stock prices reflect bid prices between broker-dealers,
prior to any markups, markdowns or commissions, is based upon information
provided to management of the Company by certain securities firms effecting
transactions in the Company's stock on an ongoing basis, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
STOCK PRICE
1998: DIVIDENDS HIGH LOW
- ------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
First Quarter $ 0.05 $ 17.00 $ 10.50
Second Quarter 0.05 19.00 16.50
Third Quarter 0.05 21.00 19.25
Fourth Quarter 0.05 22.00 20.00
</TABLE>
<TABLE>
<CAPTION>
STOCK PRICE
1997: DIVIDENDS HIGH LOW
- ------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
First Quarter $ - $ - $ -
Second Quarter - 12.00 10.75
Third Quarter 0.05 13.63 11.25
Fourth Quarter 0.05 14.50 10.50
</TABLE>
DISCLAIMER: This statement has not been reviewed, or confirmed for accuracy or
relevance, by the Office of Thrift Supervision.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AF
BANKSHARES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1998 JUN-30-1997
<EXCHANGE-RATE> 1.000 1.000
<CASH> 2,950 1,366
<INT-BEARING-DEPOSITS> 11,358 1,166
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,095 6,063
<INVESTMENTS-CARRYING> 922 874
<INVESTMENTS-MARKET> 922 874
<LOANS> 73,792 71,267
<ALLOWANCE> 1,164 1,031
<TOTAL-ASSETS> 99,593 82,024
<DEPOSITS> 82,488 68,218
<SHORT-TERM> 4,116 1,654
<LIABILITIES-OTHER> 1,208 1,842
<LONG-TERM> 295 332
0 0
0 0
<COMMON> 11 10
<OTHER-SE> 11,476 10,969
<TOTAL-LIABILITIES-AND-EQUITY> 99,593 82,024
<INTEREST-LOAN> 6,668 5,746
<INTEREST-INVEST> 421 377
<INTEREST-OTHER> 267 90
<INTEREST-TOTAL> 7,356 6,213
<INTEREST-DEPOSIT> 3,542 3,196
<INTEREST-EXPENSE> 3,795 3,245
<INTEREST-INCOME-NET> 3,562 2,968
<LOAN-LOSSES> (25) 20
<SECURITIES-GAINS> 306 0
<EXPENSE-OTHER> 3,488 2,556
<INCOME-PRETAX> 1,090 561
<INCOME-PRE-EXTRAORDINARY> 1,090 561
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 708 343
<EPS-PRIMARY> .73 .44
<EPS-DILUTED> .72 .44
<YIELD-ACTUAL> 8.62 8.30
<LOANS-NON> 0 0
<LOANS-PAST> 24 131
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,031 1,096
<CHARGE-OFFS> 13 89
<RECOVERIES> 171 4
<ALLOWANCE-CLOSE> 1,164 1,031
<ALLOWANCE-DOMESTIC> 1,164 1,031
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
