SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement ( ) Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CAPITAL BANK CORPORATION
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
( ) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
( ) Fee paid previously with preliminary materials.
(X) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $13,211.73
2) Form, Schedule, or Registration Statement No.: Form S-4(333-65853)
3) Filing Party: Capital Bank Corporation
4) Date Filed: 10/19/98
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CAPITAL BANK
4400 FALLS OF NEUSE ROAD
RALEIGH, NORTH CAROLINA 27609
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 26, 1999
Capital Bank will hold a special meeting of shareholders at The Cardinal
Club, First Union Capitol Center, 28th Floor, Raleigh, North Carolina, at 1:30
p.m. local time on March 26, 1999, to vote on the following proposals:
1. The Agreement and Plan of Reorganization and Share Exchange, dated as
of August 12, 1998, between Capital Bank and Capital Bank Corporation, and the
transactions contemplated by the Agreement, including the holding company
reorganization of Capital Bank by which its shareholders will exchange their
shares of Capital Bank stock for shares of Capital Bank Corporation stock on a
one-for-one basis.
2. The proposal to issue up to 1,216,000 shares of Capital Bank
Corporation Common Stock to the shareholders of Home Savings Bank of Siler City,
Inc., SSB, in connection with Capital Bank Corporation's acquisition of Home
Savings.
3. Any other matters that properly come before this special meeting, or
any adjournments or postponements of this special meeting.
Record holders of Capital Bank Common Stock at the close of business on
February 8, 1999, will receive notice of and may vote at the special meeting,
including any adjournments or postponements. The Agreement for the holding
company reorganization requires approval by a majority of the shares of Capital
Bank Common Stock outstanding on February 8, 1999. The approval of the issuance
of Capital Bank Corporation stock in the Home Savings acquisition requires the
affirmative vote of a majority of those shares present, in person or by proxy,
at the special meeting. Holders of Capital Bank Common Stock may exercise
dissenters' rights under Article 13 of the North Carolina Business Corporation
Act. We have attached a copy of that law as an appendix to the accompanying
Joint Proxy Statement-Prospectus.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MATTERS THAT YOU WILL VOTE ON AT
THE SPECIAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Allen T. Nelson, Jr.
Secretary
Raleigh, North Carolina
February 17, 1999
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HOME SAVINGS BANK OF SILER CITY, INC., SSB
300 EAST RALEIGH STREET
SILER CITY, NORTH CAROLINA 27344
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 29, 1999
Home Savings Bank of Siler City, Inc., SSB will hold a special meeting of
shareholders at its offices on 300 East Raleigh Street, in Siler City, North
Carolina, at 12:00 noon local time on March 29, 1999, to vote on the following
proposals:
1. The Agreement and Plan of Reorganization and Share Exchange with
Capital Bank Corporation, dated as of September 29, 1998, and the transactions
contemplated by the Agreement, including the share exchange by which Capital
Bank Corporation (the holding company for Capital Bank) will acquire all of the
outstanding stock of Home Savings.
2. Any other matters that properly come before this special meeting, or
any adjournments or postponements of this special meeting.
Record holders of Home Savings Common Stock at the close of business on
February 12, 1999, will receive notice of and may vote at the special meeting,
including any adjournments or postponements. The Agreement with Capital Bank
Corporation requires approval by a majority of the shares of Home Savings Common
Stock outstanding on February 12, 1999. Holders of Home Savings Common Stock may
exercise dissenters' rights under Article 13 of the North Carolina Business
Corporation Act. We have attached a copy of that law as an appendix to the
accompanying Joint Proxy Statement-Prospectus.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MATTERS THAT YOU WILL VOTE ON AT
THE SPECIAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Jack L. Tanner
Corporate Secretary
Siler City, North Carolina
February 17, 1999
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[CAPITAL BANK LOGO] [HOME SAVINGS BANK
OF SILER CITY, SSB. LOGO]
ACQUISITION PROPOSED
YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Capital Bank Corporation and Home Savings Bank
of Siler City, Inc., SSB have agreed that Capital Bank Corporation will acquire
Home Savings by exchanging shares of Capital Bank Corporation common stock for
all outstanding Home Savings stock.
Before this transaction can be completed, Home Savings and Capital Bank
shareholders must vote to approve it. We are sending you this Joint Proxy
Statement-Prospectus to ask you to vote in favor of the transaction.
Home Savings shareholders would receive 1.28 shares of common stock of
Capital Bank Corporation for each share of Home Savings that they own just
before the transaction. On February 11, 1999, Capital Bank stock closed at
$10.50 per share, making the value of 1.28 shares of Capital Bank common stock
equal to $13.44 on that date. Home Savings stock closed at $11.25 per share on
the same date.
Shortly before the transaction, we expect that Capital Bank Corporation
will become the bank holding company for Capital Bank, currently a North
Carolina commercial bank, and that the value of Capital Bank Corporation stock
will equal the value of Capital Bank stock just prior to that transaction.
Capital Bank shareholders are separately being asked to approve the
reorganization of Capital Bank into a bank holding company as a prerequisite to
completion of the Home Savings acquisition.
Whether or not you plan to attend the shareholders' meetings, please take
the time to vote by completing and mailing the enclosed proxy card. If you sign,
date and mail your proxy card without indicating how you want to vote, we will
vote your proxy in favor of the holding company reorganization of Capital Bank
and in favor of the acquisition of Home Savings by Capital Bank Corporation. By
signing the proxy, you also authorize us to vote in our discretion for any
procedural motions, such as a motion for adjournment, that may come up at the
meetings.
THE DATE, TIME AND PLACE OF THE CAPITAL BANK SHAREHOLDERS' MEETING IS:
March 26, 1999
1:30 p.m. eastern time
The Cardinal Club
First Union Capitol Center
28th Floor
Raleigh, North Carolina
THE DATE, TIME AND PLACE OF THE HOME SAVINGS SHAREHOLDERS' MEETING IS:
March 29, 1999
12:00 noon eastern time
Home Savings' Offices
300 East Raleigh Street
Siler City, North Carolina
This Joint Proxy Statement-Prospectus provides you with detailed
information about the Capital Bank holding company reorganization and the
acquisition by Capital Bank Corporation of Home Savings. We encourage you to
read this entire document carefully.
- --------------------------------------------------------------------------------
THE BOARDS OF DIRECTORS OF CAPITAL BANK AND HOME SAVINGS UNANIMOUSLY RECOMMEND A
VOTE "FOR" THE PROPOSALS DESCRIBED IN THIS DOCUMENT.
- --------------------------------------------------------------------------------
JAMES A. BECK EDWIN E. BRIDGES
PRESIDENT AND CHIEF EXECUTIVE OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAPITAL BANK HOME SAVINGS BANK OF SILER CITY,
RALEIGH, NORTH CAROLINA INC., SSB
SILER CITY, NORTH CAROLINA
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS JOINT PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF ANY OF THE
PARTIES, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN CAPITAL BANK CORPORATION STOCK WILL INVOLVE CERTAIN
RISKS, INCLUDING A POSSIBLE LOSS OF INVESTMENT. SEE "RISK FACTORS" ON PAGE 9.
JOINT PROXY STATEMENT-PROSPECTUS DATED FEBRUARY 17, 1999 AND FIRST MAILED
TO SHAREHOLDERS ON FEBRUARY 17, 1999
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TABLE OF CONTENTS
SUMMARY........................................................................3
RISK FACTORS...................................................................9
MARKET PRICES AND DIVIDEND POLICIES...........................................12
SELECTED HISTORICAL FINANCIAL DATA............................................15
RECENT DEVELOPMENTS...........................................................17
CAPITAL BANK AND HOME SAVINGS UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION.........................................................18
GENERAL INFORMATION...........................................................22
REORGANIZATION OF CAPITAL BANK INTO A HOLDING COMPANY.........................25
DESCRIPTION OF THE HOLDING COMPANY AGREEMENT..................................26
Capital Bank................................................................26
Capital Bank Corporation....................................................26
Reasons for the Reorganization..............................................26
Holding Company Effective Date..............................................26
Actions at the Holding Company Effective Date...............................27
Conditions to the Holding Company Reorganization............................27
Termination.................................................................28
Exchange of Stock Certificates..............................................28
Effect of the Holding Company Reorganization on Capital Bank's Stock
Option Plans................................................................28
Federal Income Tax Consequences of Holding Company Reorganization...........29
Accounting Treatment of the Holding Company Reorganization..................30
CAPITAL BANK CORPORATION'S SHARE EXCHANGE WITH HOME SAVINGS BANK..............31
General.....................................................................31
Background of and Reasons for the Exchange..................................31
Recommendation of the Home Savings Board....................................35
Recommendation of the Capital Bank Board....................................35
Opinion of Home Savings'Financial Advisor...................................35
Opinion of Capital Bank's and Capital Bank Corporation's Financial Advisor..39
Effective Time of the Exchange..............................................45
Distribution of Consideration...............................................46
Conditions to Consummation of the Exchange..................................47
Regulatory Approval.........................................................48
Waiver, Amendment, and Termination..........................................48
Conduct of Business Pending the Exchange....................................51
Management and Operations After the Exchange................................52
Effect on Certain Employees and Benefit Plans...............................52
Federal Income Tax Consequences of the Exchange.............................55
Accounting Treatment........................................................56
Expenses and Fees...........................................................56
Resales of Capital Bank Corporation Common Stock............................57
Option Agreement............................................................57
DISSENTERS'RIGHTS.............................................................60
DESCRIPTION OF CAPITAL BANK CORPORATION CAPITAL STOCK.........................63
COMPARISON OF THE RIGHTS OF SHAREHOLDERS......................................65
PRO FORMA CONSOLIDATED CAPITALIZATION.........................................73
INFORMATION ABOUT CAPITAL BANK AND CAPITAL BANK CORPORATION...................73
INFORMATION ABOUT HOME SAVINGS................................................86
REGULATION AND SUPERVISION....................................................88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CAPITAL BANK.................................................93
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OF HOME SAVINGS
BANK OF SILVER CITY, INC., SSB...............................................106
LEGAL MATTERS................................................................116
EXPERTS......................................................................116
FORWARD LOOKING STATEMENTS...................................................116
WHERE YOU CAN GET MORE INFORMATION...........................................116
INFORMATION INCORPORATED BY REFERENCE........................................118
Index to Financial Statements................................................F-1
Appendix I: Agreement and Plan of Reorganization and Share Exchange -
Holding Company Reorganization
Appendix II: Agreement and Plan of Reorganization and Share Exchange - Home
Savings Acquisition
Appendix III: Opinion of Baxter Fentriss and Company
Appendix IV: Opinion of Interstate/Johnson Lane Corporation
Appendix V: Article 13 of North Carolina Business Corporation Act regarding
Dissenters' Rights
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS THE MATERIAL TERMS OF THIS JOINT PROXY
STATEMENT-PROSPECTUS. TO UNDERSTAND THE CAPITAL BANK HOLDING COMPANY
REORGANIZATION AND THE HOME SAVINGS ACQUISITION FULLY AND FOR A MORE COMPLETE
DESCRIPTION OF THE LEGAL TERMS OF THESE TRANSACTIONS, YOU SHOULD READ THIS
ENTIRE DOCUMENT, AND THE DOCUMENTS WE REFER YOU TO, CAREFULLY. SEE "WHERE YOU
CAN GET MORE INFORMATION." (PAGE 116)
CAPITAL BANK WILL REORGANIZE INTO A HOLDING COMPANY STRUCTURE (PAGE 26)
Under a holding company reorganization agreement between Capital Bank and
Capital Bank Corporation, all of the outstanding shares of Capital Bank stock
will be automatically converted into the right to receive shares of Capital Bank
Corporation stock in a one-for-one exchange. As a result, Capital Bank will be
owned by Capital Bank Corporation and Capital Bank will continue its current
business and operations as a North Carolina bank using its current name. So, for
example, if you hold 100 shares of Capital Bank common stock, you would receive
100 shares of Capital Bank Corporation common stock in the holding company
reorganization. The total cost of forming the holding company is estimated to be
$50,000. The cost will be borne by Capital Bank.
CAPITAL BANK CORPORATION WILL ACQUIRE HOME SAVINGS - EXCHANGE RATIO TO BE 1.28
SHARES OF CAPITAL BANK CORPORATION COMMON STOCK FOR EACH HOME SAVINGS SHARE
(PAGE 31)
If the share exchange with Home Savings is completed, Home Savings
shareholders will receive 1.28 shares of Capital Bank Corporation common stock
for each share of Home Savings stock that they own. On February 11, 1999, the
closing price of Capital Bank common stock was $10.50 making the value of 1.28
shares of Capital Bank common stock equal to $13.44. Because the market price of
Capital Bank stock fluctuates, you will not know when you vote what the shares
will be worth when issued in the share exchange. After the share exchange, the
former Home Savings shareholders will own about 32% of Capital Bank
Corporation's common stock.
The table below illustrates how many shares Capital Bank Corporation will
issue in the share exchange to shareholders of Home Savings assuming a Home
Savings shareholder currently owns the number of shares in the left column.
Shares of
Shares of Capital Bank
Home Savings Corporation
Owned to be Received
----- --------------
100 128
500 640
1,000 1,280
10,000 12,800
SHARE EXCHANGE AND HOLDING COMPANY REORGANIZATION RELATED, BUT INDEPENDENT
TRANSACTIONS
Capital Bank's holding company reorganization and the subsequent share
exchange between Capital Bank Corporation and Home Savings are entirely separate
transactions, although if the holding company reorganization is not approved,
Capital Bank Corporation is not obligated to complete the Home Savings
acquisition. As a result, a vote by Capital Bank shareholders against the
holding company reorganization is, in effect, also a vote against the Home
Savings share exchange. Even if shareholders do not approve the holding company
reorganization, Capital Bank and Home Savings could nevertheless pursue a
separate acquisition transaction, but without the benefit of the holding company
structure. If Capital Bank and Home Savings were to enter into a separate
acquisition transaction, that transaction would have to be approved by
shareholders in separate meetings and by banking regulatory authorities.
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FEDERAL INCOME TAX CONSEQUENCES (PAGES 29 AND 55)
We have structured the transactions so that neither Capital Bank nor Home
Savings shareholders would recognize any gain or loss for federal income tax
purposes. Capital Bank Corporation and Home Savings need not complete the share
exchange unless they receive an opinion from PricewaterhouseCoopers LLP that the
Home Savings shareholders will not recognize any gain or loss for federal income
tax purposes as a result of the share exchange. Capital Bank's lawyers will
furnish an opinion that the Capital Bank shareholders will not recognize any
gain or loss for federal income tax purposes as a result of the holding company
reorganization. These opinions are not binding on the Internal Revenue Service.
SINCE TAX MATTERS CAN BE COMPLICATED, AND TAX RESULTS MAY VARY AMONG
SHAREHOLDERS, WE URGE YOU TO CONTACT YOUR OWN TAX ADVISOR TO UNDERSTAND FULLY
HOW THE TRANSACTIONS WILL AFFECT YOU.
CAPITAL BANK CORPORATION DIVIDEND POLICY FOLLOWING THE SHARE EXCHANGE (PAGE 12)
You should not expect to receive any dividends from Capital Bank
Corporation for the next several years. Capital Bank has not paid any dividends
to date, although Home Savings has paid dividends in prior years, including a
special dividend in 1996. The Board of Capital Bank Corporation may decide from
time to time whether to pay dividends after evaluating business and financial
results and other factors, such as legal restrictions.
BOARDS RECOMMEND SHAREHOLDER APPROVAL (PAGE 35)
The Boards of Directors of both banks believe that the holding company
reorganization and share exchange are in the best interests of shareholders and
unanimously recommend that the shareholders vote "FOR" approval of each
transaction.
The Home Savings Board believes that shareholders of both banks will have
a stake in a larger, better capitalized community bank with the ability to serve
depositors in a wider area of the Research Triangle of North Carolina, including
Chatham County. This transaction should allow the combined company to increase
market share and geographic reach, position Capital Bank Corporation to manage
planned growth by adding experienced personnel from Home Savings and increase
the number of its branch offices.
The Board of Directors of Capital Bank believes that the share exchange
will help fulfill its long-term goals of enhancing shareholder value,
establishing a presence in an under-utilized contiguous market, adding services,
and generating growth in assets and deposits. The Board also believes that a
holding company structure will open up attractive opportunities to maintain
growth, without sacrificing its hometown philosophy and way of doing business.
EXCHANGE RATIO FAIR TO SHAREHOLDERS, ACCORDING TO TWO INVESTMENT BANKING FIRMS
(PAGES 35, 39)
In deciding to approve the share exchange between Capital Bank Corporation
and Home Savings, our Boards considered opinions from our respective financial
advisors as to the fairness of the exchange ratio from a financial point of
view. Home Savings received an opinion from Baxter Fentriss and Company, and
Capital Bank received an opinion from Interstate/Johnson Lane Corporation. These
opinions are attached as Appendices III and IV to this Joint Proxy
Statement-Prospectus.
In connection with delivering these opinions, our financial advisors
performed a variety of analyses. The analyses included:
o comparing Home Savings and Capital Bank historical stock prices and
other financial information to each other and to those of other
selected companies,
o comparing the financial terms of the share exchange to those of
other publicly announced transactions, and
o estimating the relative values and contributions of Home Savings and
Capital Bank based on past and
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estimated future performances and anticipated benefits of the share
exchange.
CAPITAL BANK SPECIAL MEETING (PAGE 22)
Capital Bank will hold its special meeting of shareholders to vote on the
holding company reorganization and Capital Bank Corporation's authority to issue
shares in the Home Savings share exchange at 1:30 p.m. on Friday, March 26,
1999, at The Cardinal Club, First Union Capitol Center, 28th Floor, Raleigh,
North Carolina.
HOME SAVINGS SPECIAL MEETING (PAGE 23)
Home Savings will hold its special meeting of shareholders at 12:00 noon
on Monday, March 29, 1999, at Home Savings' offices, 300 East Raleigh Street,
Siler City, North Carolina. The purpose of the Home Savings special meeting is
to vote on the share exchange with Capital Bank Corporation.
THE COMPANIES (PAGES 73, 86)
HOME SAVINGS BANK OF SILER CITY, INC., SSB
300 EAST RALEIGH STREET
SILER CITY, NORTH CAROLINA 27344
(919) 742-4186
Home Savings is a North Carolina state savings bank headquartered in Siler
City, North Carolina. Home Savings was organized as a North Carolina mutual
savings and loan association in 1950 under the name Home Savings and Loan
Association and was converted from mutual to stock form on November 14, 1995.
CAPITAL BANK
4400 FALLS OF NEUSE ROAD
RALEIGH, NORTH CAROLINA 27609
(919) 878-3100
Capital Bank is a state-chartered commercial bank organized under the laws
of the State of North Carolina. Capital Bank's main office is in Raleigh, North
Carolina at the address above. Capital Bank has four branch offices, two in Cary
and two in Sanford, North Carolina.
CAPITAL BANK CORPORATION
4400 FALLS OF NEUSE ROAD
RALEIGH, NORTH CAROLINA
(919) 878-3100
Capital Bank Corporation is a North Carolina corporation formed to be the
owner of all of Capital Bank's shares. If Capital Bank shareholders approve the
holding company reorganization agreement, then Capital Bank Corporation will own
all of the shares of Capital Bank and the former Capital Bank shareholders will
become the owners of all of Capital Bank Corporation's shares.
AGREEMENTS GOVERNING THE TRANSACTIONS ARE ATTACHED
We have attached both the holding company reorganization agreement and the
share exchange agreement as Appendices I and II at the back of this Joint Proxy
Statement-Prospectus. We encourage you to read these agreements as they are the
legal documents that govern the transactions.
MAJORITY VOTE REQUIRED TO APPROVE THE TRANSACTIONS (PAGES 22, 31)
Approval of the holding company reorganization requires the affirmative
vote of the holders of at least a majority of the outstanding shares of Capital
Bank common stock. Likewise, approval of the share exchange requires the
affirmative vote of the holders of at least a majority of Home Savings'
outstanding shares of common stock. In either case, a shareholder's failure to
vote will have the effect of a vote against approval of the transaction. As
required by Nasdaq Stock Market rules, Capital Bank shareholders are also voting
on whether to permit Capital Bank Corporation to issue its shares in the Home
Savings share exchange.
Directors and executive officers of Capital Bank own about 15% of the
shares that may be cast at the meeting, and we expect them to vote in favor of
the holding company reorganization and to permit the issuance of shares.
Directors and executive officers of Home Savings together own about 13% of the
shares that may be cast at the
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meeting, and we also expect them to vote in favor of the share exchange.
Brokers who hold shares as nominees, or in "street name," will not have
the authority to vote such shares in either the holding company reorganization
or the share exchange unless they receive instructions from the shareholder
whose account they hold.
If we receive shareholder approvals, we currently expect to complete the
holding company reorganization and the share exchange in March 1999,
particularly since we have received approvals from all regulatory authorities.
RECORD DATES FOR MEETINGS ARE FEBRUARY 8, 1999 (CAPITAL BANK) AND FEBRUARY 12,
1999 (HOME SAVINGS)
If you owned shares of Capital Bank at the close of business on February
8, 1999, or of Home Savings at the close of business on February 12, 1999, you
may vote on the matters to be considered at your shareholders' meeting.
On February 8, 1999, there were 2,477,651 shares of Capital Bank common
stock and on February 12, 1999, there were 922,686 shares of Home Savings'
common stock outstanding. Each Capital Bank and Home Savings shareholder will
have one vote at the meetings for each share of stock they owned on such dates.
INTERESTS OF MANAGEMENT IN THE SHARE EXCHANGE (PAGE 52)
Members of Home Savings' and Capital Bank's management and Board of
Directors have interests in the share exchange in addition to their interests as
shareholders of Capital Bank and Home Savings generally.
Among the matters for you to consider is Capital Bank Corporation's
intention to employ Edwin E. Bridges, currently the President and Chief
Executive Officer of Home Savings, for an annual salary of $107,000. The
agreement will provide for employment for a five-year initial term and for
severance benefits equal to the salary remaining under his agreement if his
employment is terminated without cause and is not due to Mr. Bridges' death. In
addition, Mr. Bridges and John F. Grimes, currently a director of Home Savings,
will become directors of Capital Bank Corporation, assuming completion of the
holding company reorganization and share exchange.
STOCK OPTION AGREEMENT (PAGE 57)
In connection with the share exchange, Home Savings granted to Capital Bank
an option to purchase up to 183,615 shares of Home Savings stock at a price of
$11.75 per share. Capital Bank may exercise this option if and when events occur
that are related to the potential acquisition of Home Savings by someone other
than Capital Bank Corporation. The option is intended to increase the likelihood
that Home Savings and Capital Bank Corporation will complete the share exchange
by making it more difficult and expensive for any third party to acquire control
of Home Savings.
CONDITIONS TO THE SHARE EXCHANGE (PAGE 47)
The completion of the share exchange depends upon meeting a number of
conditions, including the following:
o the approval of Capital Bank shareholders of the holding company
reorganization,
o the approval of Capital Bank and Home Savings shareholders and
o the assurances of Capital Bank Corporation's independent accountants
that the share exchange will qualify for pooling of interests
accounting treatment.
TERMINATION OF THE SHARE EXCHANGE AGREEMENT (PAGE 48)
Either party may terminate the agreement if any of the following occurs:
o the share exchange is not completed by June 30, 1999,
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o the approvals of shareholders are not received,
o the other party does not satisfy its obligations under the share
exchange agreement or
o the number of shares dissenting from the share exchange, if any,
prevents pooling of interests accounting treatment.
POOLING OF INTERESTS ACCOUNTING TREATMENT TO BE USED (PAGE 56)
We expect the share exchange to qualify as a pooling of interests, which
means that after the transactions we will treat our banks as if they had always
been combined for accounting and financial reporting purposes. This is important
to shareholders since we expect the pooling method of accounting to positively
impact our financial condition over time. Use of the alternative method -
purchase accounting - would not likely have had the same positive financial
impact.
DISSENTERS' RIGHTS (PAGE 60)
Shareholders who vote against or abstain from voting and properly exercise
their dissenters' rights prior to the special shareholders' meetings have the
right to receive a cash payment for the fair value of their stock. In order to
exercise these rights, shareholders must comply with Article 13 of the North
Carolina Business Corporation Act, which is attached as Appendix V to this Joint
Proxy Statement-Prospectus. If you wish to dissent, please read this information
carefully as you must take affirmative steps to preserve your rights.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGES 12-14)
Shares of Capital Bank common stock are listed on the Nasdaq SmallCap
Market under the symbol "CBKN" and shares of Home Savings are listed on the OTC
Bulletin Board under the symbol "HSSC". On September 29, 1998, the last full
trading day prior to the public announcement of the proposed exchange, Capital
Bank stock closed at $12.75 per share and Home Savings stock closed at $11.75
per share. On February 11, 1999, Capital Bank stock closed at $10.50 per share
and Home Savings stock closed at $11.25 per share.
LISTING OF CAPITAL BANK CORPORATION COMMON STOCK
Capital Bank Corporation will list its shares, including those to be
issued in connection with the holding company reorganization and the share
exchange, on the Nasdaq SmallCap Market under the symbol "CBKN". Nasdaq will
first have to approve our application for this listing.
OPERATIONS AFTER THE EXCHANGE (PAGE 52)
Following the completion of the transactions, Capital Bank and Home
Savings will operate as separate subsidiary banks of Capital Bank Corporation
and will continue to use their own names. Capital Bank Corporation anticipates
that within the first year after closing, Home Savings will merge into Capital
Bank and discontinue the use of the Home Savings name.
EXCHANGE OF SHARE CERTIFICATES (PAGE 22)
Certificates representing shares of Capital Bank or Home Savings stock will
not automatically represent shares of Capital Bank Corporation stock.
Shareholders will need to exchange their Capital Bank and Home Savings stock
certificates for Capital Bank Corporation stock certificates after the
transaction is completed. We will mail you information following the date on
which we complete the transactions.
7
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COMPARATIVE PER SHARE DATA
Comparative per share data below provides the Capital Bank and Home
Savings' shareholders with information about the value of their shares prior to
the exchange as opposed to the value of their shares after the exchange and once
the two banks are combined. Shareholders can use this comparative information to
help them evaluate, from a financial perspective, whether to vote in favor of
the transaction. Shareholders should also consider the other factors discussed
in this Joint Proxy Statement-Prospectus, including the long-term prospects
associated with the combined banks as opposed to Home Savings' ability to
independently maintain its competitiveness in its market.
Capital Bank's basic and diluted net income and historical per share data
for the year ended December 31, 1997 includes results of operations for the
period from June 20, 1997, its opening date, to December 31, 1997. Home Savings'
basic and diluted net income historical per share data for the year ended
December 31, 1997 includes results of operations for the year ended September
30, 1997. The proposed transactions will be accounted for on a pooling of
interests basis, and the pro forma data is derived in accordance with such
method. The unaudited pro forma combined financial data are not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of each of the periods presented
and should not be construed as representative of future operations.
The Home Savings equivalent per share amounts are computed by multiplying
the combined amounts by the exchange ratio of 1.28 so that the per share amounts
equate to the respective values for one share of Home Savings Common Stock. The
periods presented for Home Savings are the nine month period ended September 30,
1998 and the fiscal year ended September 30, 1997. You should not rely on the
pro forma information as necessarily indicative of historical results we would
have experienced had we been combined or of future results we will have after
the share exchange. Also you should not rely on the nine-month information as
indicative of results for the entire year.
<TABLE>
<CAPTION>
HOME
COMBINED SAVINGS
HISTORICAL PER SHARE DATA PRO FORMA EQUIVALENT
---------------------------- PER SHARE PRO FORMA
CAPITAL BANK HOME SAVINGS DATA PER SHARE DATA
------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998
Net income, basic... $ (0.33) $ 0.20 $ (0.17) $ (0.22)
Net income, diluted. (0.33) 0.20 (0.17) (0.22)
Dividends........... --- 0.40 0.10 0.13
Book value.......... 9.81 10.62 9.33 11.94
YEAR ENDED DECEMBER 31, 1997
Net income, basic... $ (0.29) $ 0.45 $ (0.09) $ (0.11)
Net income, diluted. (0.29) 0.44 (0.09) (0.11)
Dividends........... --- 0.50 0.12 0.16
Book value.......... 10.07 10.33 9.43 12.07
</TABLE>
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT-PROSPECTUS, YOU SHOULD CONSIDER THE
FOLLOWING MATERIAL RISK FACTORS CAREFULLY BEFORE DECIDING HOW TO VOTE AT THE
CAPITAL BANK AND HOME SAVINGS SPECIAL MEETINGS. IF ANY OF THE EVENTS DESCRIBED
BELOW OCCUR, OUR BUSINESS, FINANCIAL CONDITION, OR RESULTS OF OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED. IN THAT EVENT, THE TRADING PRICE OF CAPITAL
BANK CORPORATION COMMON STOCK MAY DECLINE, IN WHICH CASE THE VALUE OF YOUR
INVESTMENT MAY DECLINE AS WELL. PLEASE SEE PAGE 116 UNDER "FORWARD LOOKING
STATEMENTS" FOR ADDITIONAL INFORMATION TO BEAR IN MIND BEFORE CASTING YOUR VOTE.
WE HAVE NOT BEEN PROFITABLE SINCE WE OPENED IN JUNE 1997
Capital Bank was incorporated under the laws of the State of North
Carolina on May 30, 1997 and opened on June 20, 1997. As a result, Capital Bank
has minimal operating history against which to compare historical performance.
To date, Capital Bank has operated at a loss in each reporting period. From June
20, 1997 to December 31, 1997, Capital Bank had a net loss of $722,000 and from
January 1, 1998 to September 30, 1998, Capital Bank had a net loss of $813,000.
These results are consistent with Capital Bank's management projections and are
also consistent with the performance of most banks of its type that are in their
first three to four years of operations. Although Capital Bank is making every
reasonable effort to reach a level of profitability, Capital Bank cannot predict
with certainty its future profitability.
WE DEPEND HEAVILY ON OUR CEO, JIM BECK
Capital Bank currently depends heavily on the services of its Chief
Executive Officer, James A. Beck, and a number of other key management
personnel. Even though Capital Bank carries a $2 million key man life insurance
policy on Mr. Beck, the loss of his services or of other key personnel could
affect Capital Bank in a material and adverse way. Capital Bank's success will
also depend in part on its ability to attract and retain additional qualified
management personnel who have experience both in sophisticated banking matters
and in operating a small to mid-size bank. Competition for such personnel is
strong in the banking industry and Capital Bank may not be successful in
attracting or retaining the personnel it requires. Capital Bank attempts to
effectively compete in this area by offering financial packages that include
incentive-based compensation and the opportunity to join in the rewarding work
of building a new bank.
GOVERNMENT REGULATIONS MAY PREVENT OR IMPAIR OUR ABILITY TO PAY DIVIDENDS,
ENGAGE IN ACQUISITIONS OR OPERATE IN OTHER WAYS
Current and future legislation and the policies established by federal and
state regulatory authorities will affect Capital Bank's operations. Capital Bank
Corporation will be subject to supervision and periodic examination by the Board
of Governors of the Federal Reserve System and the North Carolina State Banking
Commission. Home Savings, as a state savings bank, also receives regulatory
scrutiny from the North Carolina Administrator of Savings Banks. Banking
regulations, designed primarily for the protection of depositors, may limit our
growth and the return to you, our investors, by restricting our activities, such
as:
o the payment of dividends to our shareholders;
o possible mergers with or acquisitions by other institutions;
o our desired investments;
o loans and interest rates;
o interest rates paid on our deposits;
o the possible expansion of our branch offices;
o our ability to provide securities or trust services.
9
<PAGE>
Capital Bank Corporation may be able to overcome some of these regulatory
hurdles as a bank holding company, but will have to comply with other federal
and state laws and regulations and could face enforcement actions by regulatory
agencies. Capital Bank Corporation cannot predict what changes, if any, will be
made to existing federal and state legislation and regulations or the effect
that such changes may have on its business. The cost of compliance with
regulatory requirements may adversely affect Capital Bank's ability to operate
profitably. (See page 88)
OUR TRADING VOLUME HAS BEEN LOW COMPARED WITH LARGER BANKS
The trading volume in Capital Bank stock on the Nasdaq SmallCap Market has
been comparable to other similarly-sized banks since trading began in December
1997. Nevertheless, this trading is relatively low when compared with more
seasoned companies listed on the Nasdaq SmallCap Market or other stock
exchanges. Thus, the market in Capital Bank stock is limited in scope relative
to other companies. In addition, we cannot say with any certainty that an active
and liquid trading market for Capital Bank Corporation stock will develop.
WE COMPETE WITH MUCH LARGER COMPANIES FOR SOME OF THE SAME BUSINESS
The banking and financial services business in Capital Bank's market areas
is highly competitive and is becoming more competitive as a result primarily of:
o changes in regulation;
o changes in technology and product delivery systems; and
o the accelerating pace of consolidation among financial services
providers.
Capital Bank Corporation may not be able to compete effectively in its
markets, and its results of operations could be adversely affected by the nature
or pace of change in competition. Capital Bank Corporation will compete for
loans, deposits and customers with various bank and nonbank financial services
providers, many of which are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services. (See page 73)
A HOME SAVINGS SHAREHOLDER WILL SEE THE IMMEDIATE ELIMINATION OF DIVIDENDS
AND REDUCED INCOME PER SHARE
After the share exchange, Home Savings shareholders will experience an
immediate decline in their share of the combined institution's net income since
the net income per share for Home Savings is currently higher than the expected
net income per share of the combined institution, which is below zero. While we
expect this difference to reverse itself over time, we cannot assure you that
will be the case. Also, Home Savings shareholders will no longer receive
dividends when they become shareholders of Capital Bank Corporation. In June,
2000, the regulatory restrictions on Capital Bank's ability to pay dividends
ends. Thereafter, management may determine to authorize the payment of
dividends. (See page 12)
IT IS POSSIBLE THAT THE HOME SAVINGS ACQUISITION MAY NOT PRODUCE THE
RESULTS WE EXPECT
The exchange with Home Savings involves numerous risks, including:
o combining Home Savings' operations and services into Capital Bank
Corporation's;
o the fact that focusing on the combination may divert our attention
from other business concerns;
o potential loss of Home Savings' key employees; and
10
<PAGE>
o the risk that Home Savings will not perform as expected.
Capital Bank Corporation will achieve the anticipated benefits from the exchange
only if it can successfully integrate the business into its operations. Such
integration will require substantial attention from management and may interrupt
certain of Capital Bank Corporation's operations and business cycles. Capital
Bank Corporation cannot assure you that it can successfully integrate Home
Savings into its operations. Furthermore, Capital Bank Corporation cannot assure
you that Home Savings will contribute favorably to its operations and financial
condition. The risks associated with the share exchange could adversely affect
Capital Bank Corporation's financial condition in a material way.
SOME HOME SAVINGS' DIRECTORS AND EXECUTIVE OFFICERS WILL RECEIVE
SUPPLEMENTAL BENEFITS FROM THE SHARE EXCHANGE
In considering the Home Savings Board's recommendation of the approval and
adoption of the share exchange agreement, Home Savings shareholders should be
aware that some of Home Savings' directors and executive officers have interests
in the exchange in addition to their interests as Home Savings shareholders. For
example, Edwin A. Bridges, currently president and chief executive officer of
Home Savings, will receive an employment agreement from Capital Bank
Corporation. The Board of Directors considered these interests, together with
other relevant factors, in recommending the approval and adoption of the share
exchange agreement. (See page 52)
THE YEAR 2000 COMPUTER BUG HAS CAUSED US TO SPEND TIME AND MONEY TO MAKE
SURE WE ARE NOT ADVERSELY AFFECTED
Through September 30, 1998, Capital Bank has spent $12,000 toward becoming
Year 2000 compliant. Home Savings estimates that it will spend approximately
$50,000 to become Year 2000 compliant (an amount which is not expected to be
material to its business) and that approximately $31,000 has been incurred to
date. Like many other companies, we expect to incur additional expenditures over
the next year to address this issue and have taken various actions to understand
the nature and work required to make our systems Year 2000 compliant. Capital
Bank continues to evaluate the estimated costs and has commenced portions of the
work required to achieve compliance. While compliance has and will involve
additional costs, budgeted to be $43,000 in total, Capital Bank believes, based
on current information, that it will achieve Year 2000 compliance without a
material adverse effect on its business. We cannot assure you, however, that our
estimates of costs involved will prove to be accurate or that we will have
resolved all Year 2000 related issues. Further, the Year 2000 problem could
impair customers' ability to repay their loan obligations. Loan defaults caused
by the Year 2000 problem would adversely affect the business of Capital Bank,
Home Savings and Capital Bank Corporation. Thus, despite our work and planning
on this issue, it is still possible that either Capital Bank or Home Savings
could experience a significant negative effect on its businesses.
(See pages 76 and 113)
11
<PAGE>
MARKET PRICES AND DIVIDEND POLICIES
CAPITAL BANK
Capital Bank Common Stock has traded publicly on the Nasdaq SmallCap
Market since December 18, 1997. The prices shown below do not include
commissions or other expenses charged by brokers. The following table sets forth
the high and low sale price information of Capital Bank Common Stock for the
periods indicated:
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1997
Fourth Quarter (beginning on December 18, 1997) $13.50 $11.375
YEAR ENDED DECEMBER 31, 1998
First Quarter
Second Quarter $16.00 $12.75
Third Quarter 18.125 15.50
Fourth Quarter 16.75 12.00
13.00 10.50
YEAR ENDING DECEMBER 31, 1999
First Quarter (through February 11, 1999) 10.75 10.50
- ----------------------
As provided under North Carolina banking law, Capital Bank has been
prohibited from paying any dividends on its stock since the Bank's inception in
June 1997 and will continue to be so prohibited until late June 2000. This
prohibition will, in turn, restrict Capital Bank Corporation's ability to pay
dividends. After the exchange, the only funds available to Capital Bank
Corporation for use in paying dividends would be dividends received from Capital
Bank and Home Savings. Because Capital Bank is not permitted to pay any
dividends until approximately June 2000, Capital Bank Corporation will not be
able to use funds from Capital Bank to pay dividends to Capital Bank Corporation
stockholders prior to that date. In addition, the Administrator of the North
Carolina Savings Institutions Division must grant its prior written approval
before Home Savings may pay dividends (see page 88). Accordingly, Home Savings
would be restricted in its ability to pay dividends to Capital Bank Corporation
after consummation of the share exchange, further restricting Capital Bank
Corporation's ability to pay dividends to its stockholders after consummation of
the exchange.
In addition, North Carolina corporate law precludes any distribution to
shareholders, including the payment of a dividend, if, after giving effect to
the distribution, Capital Bank Corporation:
o would not be able to pay its debts as they become due in the usual
course of business, or
o its total assets would be less than the sum of its total
liabilities.
Future dividends will be determined by Capital Bank Corporation's Board of
Directors in light of circumstances existing from time to time, including
Capital Bank Corporation's:
o growth,
o financial condition and results of operations,
12
<PAGE>
o the continued existence of the restrictions described above, and
o other factors that the Board of Directors considers relevant.
HOME SAVINGS
Home Savings Common Stock trades publicly on the OTC Bulletin Board. The
following table presents quarterly information on the price range of Home
Savings Stock for the calendar periods indicated. The table indicates the high
and low bid information for Home Savings Common Stock as obtained from
Bloomberg, L.P. The prices shown below do not include commissions or other
expenses charged by brokers. Home Savings was a mutual savings bank without
stock prior to its conversion to a stock savings bank on November 14, 1995.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996
First Quarter $13.50 $12.50
Second Quarter 14.50 13.25
Third Quarter 16.50 11.50
Fourth Quarter 13.00 12.375
YEAR ENDED DECEMBER 31, 1997
First Quarter $12.875 $12.375
Second Quarter 13.375 12.125
Third Quarter 13.75 13.50
Fourth Quarter 15.00 13.75
YEAR ENDED DECEMBER 31, 1998
First Quarter $14.875 $13.50
Second Quarter 13.625 12.25
Third Quarter 12.875 11.75
Fourth Quarter 14.00 11.75
YEAR ENDING DECEMBER 31, 1999
First Quarter (through February 11, 1999) 13.00 11.25
Since its conversion from mutual to stock form, Home Savings has paid five
regular dividends at the declared regular dividend rate of $.20 per share, and
has received approval from the North Carolina Administrator of Savings Banks to
pay an additional regular $.20 dividend on February 26, 1999. On August 12,
1996, Home Savings also paid a special dividend of $4.80 per share, and on
August 19, 1997, the Home Savings Board declared a $.30 per share dividend,
consisting of the regular semiannual dividend of $.20 per share and a special
dividend of $.10 per share. There can be no assurance that, in the event that
the share exchange with Capital Bank Corporation is not consummated, regular
dividends or special dividends would continue to be paid in the future. Home
Savings is required to obtain the prior written approval of the Administrator of
the North Carolina Savings Institutions Division before the payment of a
dividend. Written approval also is required before a savings bank, such as Home
Savings which has been in stock form for less than five years following its
conversion from mutual form, may declare or pay a cash dividend on its capital
stock in an amount in excess of 50% of the greater of (a) Home Savings' net
income for the most recent fiscal year end or (b) the average of Home Savings'
net income after dividends for the most recent fiscal year end and not more than
two of the immediately preceding fiscal year ends. These restrictions would
restrict Home Savings' ability to pay dividends to Capital Bank Corporation,
after consummation of the exchange, and
13
<PAGE>
accordingly would restrict Capital Bank Corporation's ability to pay dividends
to its stockholders after consummation of the exchange. There can be no
assurance that dividends would continue to be paid by Home Savings in the future
if the exchange is not consummated. The declaration, payment and amount of any
such future dividends would depend upon business conditions, operating results,
capital, reserve requirements, regulatory authorizations and the consideration
of other relevant factors by Home Savings' Board of Directors.
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
THIS SECTION PRESENTS SELECTED HISTORICAL FINANCIAL DATA OF CAPITAL BANK
AND HOME SAVINGS. YOU SHOULD READ CAREFULLY THE FINANCIAL STATEMENTS INCLUDED IN
THIS JOINT PROXY STATEMENT-PROSPECTUS, INCLUDING THE NOTES TO THE FINANCIAL
STATEMENTS. THE SELECTED DATA IN THIS SECTION IS NOT INTENDED TO REPLACE THE
FINANCIAL STATEMENTS.
SELECTED FINANCIAL DATA OF CAPITAL BANK
Capital Bank derived the operations data below for the period from June
20, 1997 to December 31, 1997 and the 11 day period ended June 30, 1997, and the
financial condition data below as of December 31, 1997, from the audited
financial statements in this Joint Proxy Statement-Prospectus. Those financial
statements were audited by PricewaterhouseCoopers LLP, independent auditors.
Capital Bank derived the operations data below for the nine month periods ended
September 30, 1997 and 1998, and the balance sheet data as of September 30, 1997
and 1998, from the unaudited financial statements included in this Joint Proxy
Statement-Prospectus. Capital Bank's management believes that the unaudited
historical financial statements contain all adjustments needed to present fairly
the information included in those statements, and that the adjustments made
consist only of normal recurring adjustments. You should not rely on the
nine-month information as necessarily indicative of results for the entire year.
AS OF AND FOR THE AS OF AND FOR
PERIODS ENDED PERIOD ENDED
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1998 1997 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER
SHARE AND RATIO DATA)
SELECTED FINANCIAL CONDITION DATA:
Total assets................... $100,064 $53,900 $ 68,904
Loans receivable, net.......... 63,359 17,736 26,638
Mortgage-backed securities..... 8,239 1,654 5,357
Investments.................... 8,309 12,163 14,175
Federal funds sold............. 11,810 16,667 16,787
Deposits....................... 75,095 27,988 43,386
Shareholders' equity........... 24,314 25,271 24,956
SELECTED OPERATING DATA:
Net interest income............ $2,339 $ 546 $1,147
Provision for loan loss........ 518 135 270
Other operating income......... 472 45 146
Other operating expense........ 3,106 866 1,746
Net income (loss).............. (813) (410) (722)
PER SHARE DATA:
Net income (loss), basic....... $(0.33) $(0.17) $ (0.29)
Net income (loss), diluted..... (0.33) (0.17) (0.29)
SELECTED RATIOS:
Return on average assets....... (1.32%) (3.06%) (2.61%)
Return on average equity....... (4.43%) (6.45%) (5.74%)
Equity to total assets......... 24.30% 46.88% 36.22%
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF HOME SAVINGS
Home Savings derived the operations data below for the years ended
September 30, 1996, 1997 and 1998, and the financial condition data as of
September 30, 1997 and 1998, from the audited financial statements in this Joint
Proxy Statement-Prospectus. Those financial statements were audited by
PricewaterhouseCoopers LLP, independent auditors. Home Savings derived the
operations data for the years ended September 30, 1994 and 1995, and the
financial condition data as of September 30, 1994, 1995 and 1996, from audited
financial statements that are not included in this Joint Proxy
Statement-Prospectus. Note that Home Savings' dividend payout ratio and
dividends declared per share for the year ended September 30, 1996 excludes a
special dividend of $4.80 per share paid in 1996. In addition, Home Savings' net
income (loss) per share (diluted) for the year ended September 30, 1996 was
calculated from the date of conversion. All averages presented have been
calculated on a monthly basis unless otherwise stated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets........ $59,709 $56,380 $52,514 $47,785 $43,969
Loans receivable, net 30,284 31,556 30,034 30,074 29,653
Mortgage-backed securities 4,029 4,985 5,640 1,719 1,888
Investments......... 10,650 12,510 13,450 5,997 1,642
Federal funds sold.. 11,750 5,050 975 1,750 3,350
Deposits............ 49,045 45,396 41,667 41,369 38,211
Stockholders' Equity 9,804 9,533 9,337 5,409 4,855
YEARS ENDED
SEPTEMBER 30,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except ratio data)
SELECTED OPERATING DATA:
Net interest income. 1,573 1,680 1,843 1,489 1,488
Provision for loan loss 30 --- --- --- ---
Other operating income 84 78 77 60 72
Other operating expense 1,258 1,167 1,594 683 1,733
Net income (loss)... $ 245 $399 $120 $553 ($20)
Net income (loss) per share
basic.......... $ .27 $ .45 $ .07 -- --
Net income (loss) per share
diluted........ $ .27 .44 .07 -- --
Dividends declared per
share.......... .40 .50 .40 -- --
SELECTED RATIOS:
Return on average assets 0.42% 0.73% 0.21% 1.22% (0.05)%
Return on average equity 2.51% 4.17% 0.97% 10.78% (0.49)%
Average equity to average assets 16.68% 17.62% 21.89% 11.33% 9.11%
Interest rate spread for period 1.99% 2.35% 2.36% 2.83% 3.13%
Net interest margin. 2.79% 3.20% 3.43% 3.38% 3.51%
</TABLE>
16
<PAGE>
RECENT DEVELOPMENTS
On February 5, 1999, Capital Bank issued a press release with respect to
its earnings for its fourth quarter and year ended December 31, 1998. On
February 3, 1999, Home Savings issued a press release with respect to its
earnings for its first quarter ended December 31, 1998. Certain operating and
balance sheet data for these periods for both Capital Bank and Home Savings, as
contained in the press releases, are set forth below.
<TABLE>
<CAPTION>
CAPITAL BANK HOME SAVINGS
------------ ------------
As of and for the As of and for
years ended the quarter ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Total assets............................ $120,831 $68,904 $ 59,458 $ 58,030
Loans receivable, net................... 80,295 26,638 29,026 31,684
Mortgage-backed securities.............. 9,739 5,357 8,665 4,922
Investments............................. 12,557 14,175 6,610 9,550
Federal funds sold...................... 4,500 16,787 11,900 9,700
Deposits................................ 88,603 43,386 48,740 46,972
Shareholders' equity.................... 23,939 24,956 9,864 9,751
Net interest income..................... $3,264 $1,147 $382 $360
Provision for loan loss................. 752 270 10 -
Other operating income.................. 1,084 146 15 27
Other operating expense................. 4,515 1,746 407 276
Net income (loss)....................... (1,124) (722) (10) 66
Net income (loss) per share, basic
and diluted............................. $(0.45) $(0.29) $(0.01) $.07
Return on average assets (annualized)... (1.25%) (2.61%) (0.07%) 0.46%
Return on average equity (annualized)... (4.60%) (5.74%) (0.41%) 2.74%
Equity to total assets.................. 19.81% 36.22% 16.60% 16.80%
</TABLE>
The 1997 operating results for Capital Bank only reflect the six month and
ten day period since the Bank opened for business on June 20, 1997. The results
for 1998, therefore, necessarily reflect increases in income and expenses, among
other things. Capital Bank reported a net loss of $106,000, or $.04 per share,
in the quarter ended December 31, 1998, which compares with a net loss of
$198,000, or $.08 per share, in Capital Bank's quarter ended September 30, 1998.
In the year ended December 31, 1998 for Capital Bank, net income (loss) per
share, basic and diluted, includes $205,000, or $.08 per share, for nonrecurring
expenses attributable to certain transactions, including the holding company
reorganization and the Home Savings share exchange.
In the 1998 fourth quarter, Capital Bank's provision for loan losses was
$234,000 and for the full 1998 year was $752,000. This compares with $135,000 in
the 1997 fourth quarter and $270,000 for the full 1997 year. This increase is
due principally to the 1998 full year of operations and significant growth in
loan activity in 1998 as compared with 1997.
Home Savings reported a net loss for its quarter ended December 31, 1998
of $10,130, or $.01 per share, which compares with net income of $66,354, or
$.07 per share, for its quarter ended December 31, 1997. The net loss in the
most recent quarter is primarily due to expenses associated with the pending
share exchange, compensation and employee benefit expenses relating to Home
Savings' ESOP and an increase in the provision for loan losses from a negligible
amount to $10,000.
17
<PAGE>
CAPITAL BANK AND HOME SAVINGS UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Set forth below are unaudited pro forma financial data of Capital Bank and
Home Savings combined. Information for Capital Bank has been derived from the
unaudited interim financial statements as of and for the nine months ended
September 30, 1998 included in this Joint Proxy Statement-Prospectus.
Information for Home Savings has been derived from the audited financial
statements, as of and for the year ended September 30, 1998, also included in
this Joint Proxy Statement-Prospectus. The proposed transaction with Home
Savings is reflected under the pooling of interests method of accounting. This
information is not necessarily indicative of the results that actually would
have occurred. All amounts have been derived based upon Home Savings' fiscal
year which ends on September 30 and Capital Bank's fiscal year which ends on
December 31; conforming Home Savings' year end to that of Capital Bank would not
materially impact the amounts set forth below.
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA COMBINED
HOME SAVINGS CAPITAL BANK AND HOME
BANK OF PRO FORMA SAVINGS
CAPITAL BANK SILER CITY ADJUSTMENTS BANK OF SILER CITY
------------ ---------- ----------- ------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks........ $ 3,382 $1,092 $ --- $4,474
Investment Securities.......... 16,548 14,678 --- 31,226
Federal Funds Sold............. 11,810 11,750 --- 23,560
Loans and Leases, net.......... 63,359 30,284 --- 93,643
Premises and Equipment......... 2,338 285 --- 2,623
Intangible Assets.............. 1,887 --- --- 1,887
Deferred Income Taxes.......... --- 246 --- 246
Other Assets................... 740 1,374 370(1) 2,484
-------- -------- ---- --------
Total Assets................... $100,064 $ 59,709 $370 $160,143
======== ======== ==== ========
LIABILITIES
Noninterest Bearing Demand..... $ 7,856 $ --- $ --- $7,856
Savings and Interest Bearing
Demand....................... 19,152 11,861 --- 31,013
Time Deposits.................. 48,087 37,184 --- 85,271
-------- -------- ---- --------
Total Deposits................. 75,095 49,045 --- 124,140
Other Liabilities.............. 655 861 1,137(2) 2,653
-------- -------- ---- --------
Total Liabilities.............. 75,750 49,906 1,137 126,793
-------- -------- ---- --------
SHAREHOLDERS' EQUITY
Common Stock................... 12,388 923 4,984(3) 18,295
Surplus........................ 13,285 8,176 (4,984)(3) 16,477
Retained Earnings.............. (1,535) 945 (981)(4) (1,571)
Unearned ESOP Shares........... --- (123) --- (123)
Deferred Stock Awards.......... --- (214) 214(5) ---
Accumulated other comprehensive
income...................... 176 96 --- 272
-------- -------- ---- --------
Total Shareholders' Equity..... 24,314 9,803 (767) 33,350
-------- -------- ---- --------
Total Liabilities and
Shareholders' Equity........... $100,064 $59,709 $ 370 $160,143
======== ======== ==== ========
</TABLE>
- ----------------------
(1) Adjustment for deferred tax benefit resulting from acceleration of Home
Savings' director and executive retirement plans in accordance with change in
control provisions. Such benefits will be recognized only if the combined entity
achieves profitable operations in future periods.
(2) Adjustment for Capital Bank's and Home Savings' investment advisor fees and
acceleration of Home Savings' director and executive retirement plans in
accordance with change in control provisions.
(3) Adjustment for issuance of Capital Bank Corporation shares.
18
<PAGE>
(4) The table below summarizes non-recurring charges (net of applicable tax
benefits) resulting from the Exchange and the acceleration of certain Home
Savings' director and executive benefit plans due to change in control
provisions.
Management recognition plan $ 132
Executive employment contract 310
Investment advisor fees 235
Health benefits 62
Other retirement liabilities 242
------
$ 981
======
(5) Acceleration of vesting of Home Savings' prior awards due to change in
control.
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (1)
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
CAPITAL BANK AND
HOME SAVINGS HOME SAVINGS
BANK OF SILER BANK OF SILER
CAPITAL BANK CITY CITY
------------ ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans.................... $3,083 $1,916 $4,999
Investment securities and
federal funds sold.. 1,293 1,138 2,431
----- ----- -----
Total interest income.... 4,376 3,054 7,430
INTEREST EXPENSE
Deposits................. 2,037 1,827 3,864
ESOP note................ --- 14 14
----- ----- -----
Total interest expense... 2,037 1,841 3,878
Net interest income before
provision for loan lossess. 2,339 1,213 3,552
Provision for loan losses... 518 30 548
----- ----- -----
Net interest income after
provision for loan losses... 1,821 1,183 3,004
----- ----- -----
Noninterest income.......... 472 55 527
Noninterest expenses........ 3,106 981 4,087
----- ----- -----
Net income (loss) before taxes (813) 257 (556)
Income taxes................ --- 79 79
----- ----- -----
Net income (loss)........... $ (813) $ 178 $ (635)
===== ===== =====
Net income (loss) per common
share, basic.............. $ (0.33) $ .20 $ (0.12)(2)
===== ===== =====
Net income (loss) per share,
assuming dilution......... $ (0.33) $ .20 $ (0.12)(2)
===== ===== =====
</TABLE>
- ---------------------
(1) The table below summarizes non-recurring charges (net of applicable tax
benefits) resulting from the Exchange and the acceleration of certain director
and executive benefit plans due to change in control provisions. These changes
have not been reflected in the above pro forma information.
Management recognition plan $ 132
Executive employment contract 310
Investment advisor fees 235
Health benefits 62
Other retirement liabilities 242
------
$ 981
======
(2) Adjusted for exchange ratio of 1.28 shares of Capital Bank Corporation stock
for each share of Home Savings stock.
20
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
CAPITAL BANK AND
HOME SAVINGS HOME SAVINGS
BANK OF SILER BANK OF SILER
CAPITAL BANK CITY(1) CITY
------------ ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans.............................................. $ 815 $ 2,485 $3,300
Investment securities and federal funds sold....... 1,002 1,380 2,382
Total interest income.............................. 1,817 3,865 5,682
INTEREST EXPENSE
Deposits........................................... 663 2,164 2,827
Borrowed funds..................................... 6 --- 6
ESOP note.......................................... -- 20 20
Total interest expense............................. 669 2,184 2,853
Net interest income before provision for loan losses.. 1,148 1,681 2,829
Provision for loan losses............................. 270 --- 270
Net interest income after provision for loan losses... 878 1,681 2,559
Noninterest income.................................... 146 78 224
Noninterest expenses.................................. 1,746 1,167 2,913
Net income before taxes............................... (722) 592 (130)
Income taxes.......................................... -- 193 193
Net income (loss).....................................$ (722) $ 399 $ (323)
Net income (loss) per common share, basic.............$ (0.29) $ 0.45 $ (0.09) (2)
Net income (loss) per common share, assuming
dilution..........................................$ (0.29) $ 0.44 $ (0.09) (2)
</TABLE>
- -----------------------
(1) Income statement amounts are presented for the period from June 20, 1997
(opening day) to December 31, 1997 for Capital Bank and for the year ended
September 30, 1997 for Home Savings.
(2) Adjusted for exchange ratio of 1.28 shares of Capital Bank Corporation stock
for each share of Home Savings stock.
21
<PAGE>
GENERAL INFORMATION
CAPITAL BANK SPECIAL MEETING
GENERAL. This Joint Proxy Statement-Prospectus is being furnished to the
shareholders of Capital Bank in connection with the solicitation by the Board of
Directors of Capital Bank of proxies for use at the Capital Bank special meeting
of Shareholders. The purposes of the Capital Bank special meeting are to
consider and vote on (a) the adoption and approval of the Agreement and Plan of
Reorganization and Share Exchange, dated as of August 12, 1998 (the "Holding
Company Agreement") pursuant to which Capital Bank will become a wholly-owned
subsidiary of Capital Bank Corporation and (b) the approval of the issuance of
shares of Capital Bank Corporation Common Stock to Home Savings shareholders, in
connection with Home Savings' proposed share exchange with Capital Bank
Corporation.
The principal executive offices of both Capital Bank Corporation and
Capital Bank are located at 4400 Falls of Neuse Road, Raleigh, North Carolina
27609. Their telephone number is (919) 878-3100.
This Joint Proxy Statement-Prospectus is first being mailed to
shareholders on or about February 17, 1999.
Record Date; Voting Rights. Capital Bank Shareholders of record at the
close of business on February 8, 1999 (the "Capital Bank Record Date") are
entitled to vote at the Capital Bank special meeting, or at any adjournment or
postponement. As of the Capital Bank Record Date, there were 2,477,651 shares of
Capital Bank Common Stock outstanding and entitled to vote held of record by 909
persons. Each share of Capital Bank Common Stock entitles the holder to one vote
on each matter submitted to a vote at the meeting. Pursuant to the Bylaws of
Capital Bank, a majority of the votes entitled to be cast by holders of Capital
Bank Common Stock, represented in person or by proxy, will constitute a quorum
for the transaction of business at the meeting.
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Capital Bank Common Stock is required by Article 11 of the
North Carolina Business Corporation Act (the "NCBCA") to approve the Holding
Company Agreement and the reorganization of Capital Bank into a holding company,
as provided in that agreement. The approval of the issuance of Capital Bank
Corporation stock to the Home Savings shareholders requires the affirmative vote
of a majority of the Capital Bank shareholders present, in person or by proxy,
at the Capital Bank special meeting.
The principal officers and directors of Capital Bank, together with their
affiliates, beneficially owned, directly or indirectly, as of September 30,
1998, an aggregate of 366,973 shares of Capital Bank Common Stock (excluding
54,550 shares subject to outstanding stock options) constituting approximately
14.8% of such shares outstanding and entitled to vote on that date. Of that
amount, non-employee directors own 352,173 shares of Capital Bank Common Stock
(excluding 43,750 shares subject to outstanding stock options), or approximately
14.2% of the total, and principal officers of Capital Bank own 14,800 of such
shares (excluding 10,800 shares subject to outstanding stock options), or less
than one percent of the total.
James A. Beck, currently the sole director and officer of Capital Bank
Corporation, owns one share of Capital Bank Corporation Common Stock, or 100% of
the total, with nominal value. We expect that Capital Bank Corporation will
cancel Mr. Beck's share after consummation of the holding company
reorganization. The result will be that the same persons who held Capital Bank
Common Stock before the transaction (except if anyone exercises dissenters'
rights) will own Capital Bank Corporation Common Stock after the transaction
without any change in the number of their shares.
22
<PAGE>
SOLICITATION, REVOCATION AND USE OF PROXIES. A proxy card is enclosed for
your use. YOU ARE SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CAPITAL BANK
TO COMPLETE, DATE, SIGN, AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE,
which is postage-paid if mailed in the United States.
You have three choices on each proposal to be voted at the Capital Bank
special meeting. By checking the appropriate box on the proxy card you may:
o vote "FOR" the Holding Company Agreement and the issuance of the
Capital Bank Corporation stock in the Home Savings acquisition;
o vote "AGAINST" the Holding Company Agreement and the issuance of the
Capital Bank Corporation stock in the Home Savings acquisition; or
o "ABSTAIN" from voting altogether.
Since we need a majority of all outstanding Capital Bank shares to vote
FOR the Holding Company Agreement, if you do not submit a proxy card or
alternatively, vote in person at the Capital Bank special meeting you will, in
effect, have voted AGAINST the Holding Company Agreement and the reorganization
of Capital Bank into a holding company. In addition, if you abstain, that will
also be, in effect, a vote AGAINST the proposal, although your shares would
still be counted toward the required quorum for the meeting.
To approve the issuance of Capital Bank Corporation stock in the Home
Savings acquisition, we need a majority of those voting, either in person or by
proxy, to vote FOR the proposal. Therefore, if you do not submit a proxy card or
vote in person, you will not be counted towards the quorum requirement, although
if a quorum is otherwise present at the meeting, in person or by proxy, your
failure to vote would have no outcome on the final vote. If you abstain from
voting on this proposal, that would have the effect of a vote against the
proposal.
You may revoke your proxy at any time before it is actually voted at the
Capital Bank special meeting by delivering written notice of revocation to the
Secretary of Capital Bank, Allen T. Nelson, Jr., 4400 Falls of Neuse Road,
Raleigh, NC 27609, by submitting a subsequently dated proxy, or by attending the
special meeting and withdrawing the proxy. Each unrevoked proxy card properly
executed and received prior to the close of the special meeting will be voted as
indicated. Where specific instructions are not indicated, the proxy will be
voted "FOR" the adoption of the Holding Company Agreement and the issuance of
shares to the Home Savings shareholders.
The expense of preparing, printing and mailing this Joint Proxy
Statement-Prospectus will be shared equally by Capital Bank and Home Savings. In
addition to the use of the mails, proxies may be solicited personally or by
telephone by regular employees of Capital Bank without additional compensation.
Capital Bank will reimburse banks, brokers and other custodians, nominees and
fiduciaries for their costs in sending the proxy materials to the beneficial
owners of Capital Bank Common Stock.
HOME SAVINGS' SPECIAL MEETING
GENERAL . This Joint Proxy Statement-Prospectus is being furnished to
shareholders of Home Savings as of February 17, 1999, and is accompanied by a
form of proxy which is solicited by the Board of Directors of Home Savings for
use at the Home Savings' special meeting to be held on March 29, 1999 and at any
adjournment or postponement thereof. At the Home Savings' special meeting, Home
Savings' shareholders will be asked to vote on a proposal to approve the
Agreement and Plan of Reorganization and Share Exchange
23
<PAGE>
(the "Exchange Agreement") with Capital Bank and Capital Bank Corporation, and
the share exchange between Home Savings and Capital Bank Corporation
shareholders (the "Exchange").
RECORD DATE; VOTING RIGHTS. Shareholders of record at the close of
business on February 12, 1999 (the "Home Savings Record Date") are entitled to
vote at the Home Savings special meeting or at any adjournment or postponement
thereof. On the Home Savings' Record Date there were 922,686 shares of Home
Savings' Common Stock outstanding which were held by approximately 260 holders
of record. Each share of Home Savings' Common Stock outstanding on the Home
Savings Record Date is entitled to one vote on the proposal regarding the
Exchange. Approval of the Exchange will require the affirmative vote of an
absolute majority of the shares of Home Savings' Common Stock entitled to vote
at the Home Savings' special meeting. Failure of the holder of Home Savings'
Common Stock to vote such shares, as well as abstentions and broker nonvotes
will have the same effect as a vote "AGAINST" the Exchange. As of the Home
Savings' Record Date, the directors and executive officers of Home Savings and
their affiliates owned a total of approximately 106,715 shares or 11.44% of Home
Savings' Common Stock, all of which are expected to be voted in favor of the
Exchange.
The shares of Home Savings' Common Stock represented by properly executed
proxies received at or prior to the Home Savings' special meeting will be voted
as directed by the shareholders, unless revoked as described below. If no
instructions are given, such proxies will be voted "FOR" the Exchange. Such vote
will constitute a waiver of the shareholders' right to dissent in any other
matters properly presented at the Home Savings' special meeting or any
adjournment or postponement thereof, that may be properly voted on. Home Savings
is not aware of any other matters to be presented at the Home Savings' special
meeting. This proxy is being solicited for the Home Savings' special meeting and
any adjournment or postponement thereof and will not be used for any other
meeting. The presence of a shareholder at the Home Savings' special meeting will
not automatically revoke such shareholders' proxy. A shareholder may, however,
revoke a proxy at any time prior to its exercise (a) by filing a written notice
of revocation with, or by delivering a duly executed proxy bearing a later date
to, Edwin E. Bridges, the President of Home Savings, at 300 East Raleigh Street,
Siler City, North Carolina 27344 prior to the Home Savings' special meeting or
(b) by attending the Home Savings' special meeting and voting in person. A proxy
will not be revoked by the death or incapacity of the shareholder executing it
unless, before the shares are voted, notice of death or incapacity is filed with
the President of Home Savings or other person authorized to tabulate votes.
Whether or not they plan to attend the Home Savings' special meeting, HOLDERS OF
HOME SAVINGS' COMMON STOCK ARE REQUESTED TO COMPLETE, DATE, AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE.
AUTHORIZATION TO VOTE ON ADJOURNMENT AND OTHER MATTERS
By signing a proxy, Capital Bank and Home Savings shareholders will be
authorizing the proxyholder to vote in his discretion regarding any procedural
motions which may come before the special meetings. For example, this authority
could be used to adjourn the special meetings if Capital Bank or Home Savings
believes it is desirable to do so. Adjournment or other procedural matters could
be used to obtain more time before a vote is taken in order to solicit
additional proxies or to provide additional information to shareholders.
However, proxies voted against the proposals will not be used to adjourn the
special meetings. Neither bank has any plans to adjourn the meetings at this
time, but intend to do so, if needed, to promote shareholder interests.
24
<PAGE>
REORGANIZATION OF CAPITAL BANK INTO A HOLDING COMPANY
THE FOLLOWING INFORMATION DESCRIBES MATERIAL ASPECTS OF THE PROPOSED
REORGANIZATION OF CAPITAL BANK INTO A HOLDING COMPANY NAMED CAPITAL BANK
CORPORATION. THE HOLDING COMPANY AGREEMENT IS ATTACHED AS APPENDIX I.
GENERAL
Capital Bank Corporation and Capital Bank entered into the Holding Company
Agreement pursuant to which Capital Bank Corporation will become a bank holding
company with Capital Bank as its wholly-owned subsidiary (the "Holding Company
Reorganization"). A copy of the Holding Company Agreement is attached as
Appendix I to this Joint Proxy Statement-Prospectus. Capital Bank Corporation is
a newly-formed North Carolina corporation that was organized by Capital Bank for
the purpose of effecting the Holding Company Reorganization and, therefore, has
no operating history. If the Holding Company Reorganization is approved by the
holders of Capital Bank Common Stock, and subject to the satisfaction of all
other conditions set forth in the Holding Company Agreement, including receipt
of all required regulatory approvals, all of the outstanding shares of Capital
Bank Common Stock (other than shares held by shareholders exercising dissenters'
rights, if any) will be converted into the right to receive an equal number of
shares of Capital Bank Corporation Common Stock in a one-for-one exchange.
After the effective date of the Holding Company Reorganization, Capital
Bank will continue its existing business and operations as a wholly-owned
subsidiary of Capital Bank Corporation. The consolidated assets, liabilities,
shareholders' equity and income of Capital Bank Corporation immediately
following the effective date will be the same as those of Capital Bank
immediately prior to the effective date. The Board of Directors of Capital Bank
Corporation is, and upon the Effective Date will continue to be, comprised of
the current members of the Board of Directors of Capital Bank. However, Edwin E.
Bridges and John F. Grimes will be appointed to the Board of Directors of
Capital Bank Corporation following consummation of the Exchange. The executive
officers of Capital Bank Corporation are, and upon the effective date of the
Holding Company Reorganization will continue to be, substantially the same as
the current executive officers of Capital Bank. Capital Bank will continue to
operate under the name "Capital Bank" and its deposit accounts will continue to
be insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The corporate existence of Capital Bank will continue
unaffected and unimpaired by the Holding Company Reorganization, except that all
of the outstanding shares of Capital Bank Common Stock (other than shares held
by shareholders exercising dissenters' rights, if any) will be owned by Capital
Bank Corporation. The current shareholders of Capital Bank will own all of the
outstanding shares of Capital Bank Corporation Common Stock after completion of
the Holding Company Reorganization.
VOTE REQUIRED
Approval of the Holding Company Agreement requires the approval of a
majority of the issued and outstanding shares of Capital Bank. The required vote
of shareholders is based upon the number of outstanding shares of Capital Bank
Common Stock, and not the number of those shares that are actually voted.
Accordingly, as we previously explained, anything but a vote "FOR" the proposal
will have the effect of a vote "AGAINST" the proposal. That is why your vote is
very important. The failure to submit a proxy card or to vote in person at the
special meeting or an abstention from voting will have the same effect as a "NO"
vote with respect to this proposal.
25
<PAGE>
THE CAPITAL BANK BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED
THE PROPOSED HOLDING COMPANY REORGANIZATION AND UNANIMOUSLY
RECOMMENDS A VOTE "FOR" APPROVAL AND ADOPTION
OF THE HOLDING COMPANY AGREEMENT
DESCRIPTION OF THE HOLDING COMPANY AGREEMENT
CAPITAL BANK
Capital Bank was incorporated under the laws of the State of North
Carolina on May 30, 1997, and commenced operations as a state-chartered banking
corporation on June 20, 1997. Capital Bank is not a member of the Federal
Reserve System and has no subsidiaries. As of September 30, 1998, Capital Bank
had assets of approximately $100 million, net loans outstanding of approximately
$63 million and deposits of approximately $75 million.
CAPITAL BANK CORPORATION
Capital Bank Corporation was incorporated on August 10, 1998 at the
direction of the Board of Directors of Capital Bank to become a bank holding
company with Capital Bank as its wholly-owned subsidiary. Capital Bank
Corporation, upon the approval by the Board of Governors of the Federal Reserve
System of Capital Bank Corporation's application for approval to become a bank
holding company, will be subject to regulation by the Federal Reserve. Upon
consummation of the Holding Company Reorganization, Capital Bank Corporation
will have no significant assets other than the shares of Capital Bank's capital
stock acquired in the Holding Company Reorganization, and will have no
significant liabilities. Initially, Capital Bank Corporation will neither own
nor lease any property, but will instead use the premises, equipment and
furniture of Capital Bank. At the present time, Capital Bank Corporation does
not intend to employ any persons other than certain executive officers, but will
utilize the support staff of Capital Bank from time to time. Additional
employees will be hired as appropriate, to the extent Capital Bank Corporation
expands its business in the future.
REASONS FOR THE REORGANIZATION
Capital Bank's Board of Directors believes that the formation of a holding
company creates a more flexible organizational structure that could provide
benefits such as more options for funding Capital Bank's growth, the ability to
accommodate distinct subsidiaries for additional lines of business and increased
efficiency with regard to acquisition activities. Capital Bank has no current
plans for additional lines of business, but might consider such options in the
future. Also, Capital Bank has no current plans for funding additional growth,
although it evaluates acquisition opportunities on a regular basis. Effecting
any such acquisition may necessitate additional capital funding. A holding
company structure would be consistent with Capital Bank's stated strategy of
positioning Capital Bank to seize opportunities that it expects to result from
the consolidation of the financial services industry.
HOLDING COMPANY EFFECTIVE DATE
The date and time on which the Holding Company Reorganization is effective
will be the first business day following the date on which Capital Bank
Corporation files Articles of Share Exchange in accordance with the NCBCA. We
refer to this date and time as the "Holding Company Effective Date."
26
<PAGE>
ACTIONS AT THE HOLDING COMPANY EFFECTIVE DATE
The Holding Company Reorganization will be accomplished through the
following steps:
o Capital Bank Corporation has been incorporated as a North Carolina
corporation. The primary purpose of Capital Bank Corporation is to
become the bank holding company for Capital Bank.
o At the Holding Company Effective Date, Capital Bank Corporation will
exchange shares of its Common Stock for all the shares of Capital
Bank Common Stock issued and outstanding immediately prior to the
Holding Company Effective Date on a one-for-one basis. As an
example, if a Capital Bank shareholder owned 100 shares of Capital
Bank stock before the Holding Company Effective Date, he or she
would receive 100 shares of Capital Bank Corporation in the Holding
Company Reorganization.
o Not more than 20 days following the Holding Company Effective Date,
Capital Bank Corporation will cause Wachovia Bank, N.A. (or its
successor, Boston Equiserve), the transfer agent for Capital Bank
Common Stock (the "Exchange Agent"), to mail to each former
shareholder of Capital Bank of record immediately prior to the
Holding Company Effective Date written instructions and transmittal
materials for use in surrendering shares of Capital Bank Common
Stock to the Exchange Agent.
o Upon the proper delivery to the Exchange Agent by a Capital Bank
shareholder of his or her Capital Bank share certificates, the
Exchange Agent will register in the name of such shareholder the
shares of Capital Bank Corporation Common Stock and deliver new
share certificates to the Capital Bank shareholder.
o Capital Bank shareholders have the right to dissent from the Holding
Company Reorganization if they follow the procedure in the NCBCA. We
have explained that procedure under "Dissenters' Rights" beginning
on page 60 and have also included a copy of the statute itself in
Appendix V to this Joint Proxy Statement-Prospectus.
CONDITIONS TO THE HOLDING COMPANY REORGANIZATION
The Holding Company Agreement provides that the obligations of Capital
Bank and Capital Bank Corporation to consummate the Holding Company
Reorganization are subject to the satisfaction of the following conditions:
o the approval of the Holding Company Agreement by the affirmative
vote of the holders of a majority of the issued and outstanding
shares of Capital Bank Common Stock;
o the approval by the Federal Reserve Board of Capital Bank
Corporation's application to become a holding company under the Bank
Holding Company Act of 1956 (the "BHC Act");
o the receipt of all other consents and approvals and the satisfaction
of all other requirements necessary to the consummation of the
Holding Company Reorganization;
o the receipt of a favorable opinion from Capital Bank's legal counsel
as to the federal income tax consequences of the Holding Company
Reorganization; and
o expiration of any waiting period required by any supervisory
authority to complete the transaction.
27
<PAGE>
Although we have received approval from the Federal Reserve Board under the BHC
Act, there are no assurances that all conditions will be satisfied and that the
Holding Company Reorganization will be consummated.
TERMINATION
The Holding Company Agreement may be terminated prior to the Holding
Company Effective Date if:
o any condition precedent to the Holding Company Reorganization has
not been fulfilled or waived;
o any action, suit, proceeding or claim has been instituted, made or
threatened relating to the Holding Company Agreement which makes
consummation of the transaction inadvisable in the opinion of the
Board of Directors of Capital Bank or Capital Bank Corporation;
o the number of shares of Capital Bank Common Stock owned by
dissenting shareholders, if any, makes consummation inadvisable in
the opinion of Capital Bank or Capital Bank Corporation; or
o for any other reason, consummation of the transaction is inadvisable
in the opinion of the Board of Directors of Capital Bank or Capital
Bank Corporation.
EXCHANGE OF STOCK CERTIFICATES
At the Holding Company Effective Date, a certificate representing one share of
Capital Bank Common Stock will represent the right to be exchanged for one share
of Capital Bank Corporation Common Stock, except for certificates representing
Capital Bank shares whose holders, if any, have exercised dissenters' rights.
After the Holding Company Effective Date, shareholders will exchange their
present certificates for new certificates representing shares of Capital Bank
Corporation Common Stock. Capital Bank shareholders will be notified by Capital
Bank Corporation as to the procedure for the exchange of Capital Bank Common
Stock certificates for Capital Bank Corporation Common Stock certificates. Your
present stock certificates will for all purposes after the Holding Company
Effective Date, until exchanged with the Transfer Agent, evidence only the
exchange rights for which the Holding Company Agreement provides or, if
applicable, the rights of a dissenting shareholder.
EFFECT OF THE HOLDING COMPANY REORGANIZATION ON CAPITAL BANK'S STOCK OPTION
PLANS
GENERAL. On June 19, 1997, the Board of Directors of Capital Bank adopted,
and on April 29, 1998, the Capital Bank shareholders approved, the Capital Bank
Incentive Stock Option Plan (the "ISO Plan") and the Capital Bank Nonqualified
Stock Option Plan (the "NQSO Plan") (individually, a "Plan" or collectively, the
"Plans"). On October 15, 1998 the Capital Bank Corporation Board of Directors
and sole shareholder approved the following actions:
o Capital Bank Corporation's assumption of the Plans;
o amendments to the Plans to eliminate restrictions applicable to bank
stock plans, but not holding company stock option plans, under the
North Carolina banking laws (for example, restrictions on the number
of shares allocable to any single optionee, restrictions on the
total number of shares that may be issued under the Plans,
restrictions relating to the cashless exercise of options, and, in
the case of the NQSO Plan, restrictions on the stock purchase
price); and
o the reservation of additional shares for issuance under the Plans.
28
<PAGE>
PURPOSES. The purposes of the Plans are to advance the interests of
Capital Bank Corporation by making shares of Capital Bank Corporation's stock
available for purchase by persons who are in a position to make significant
contributions to the success of Capital Bank Corporation. An effect of this
arrangement is to further align the interests of these persons with those of
Capital Bank Corporation's shareholders.
NUMBER OF SHARES. In conjunction with the Holding Company Reorganization,
Capital Bank Corporation will reserve additional shares for issuance under the
Plans so that a total of 200,000 shares of Common Stock will be available for
issuance under each Plan. If any option granted under a Plan expires or
terminates for any reason without having been exercised in full, the unpurchased
shares of Common Stock subject to the expired or terminated option will be
available for future options under that Plan.
ELIGIBLE RECIPIENTS. The ISO Plan permits grants of incentive stock
options to officers and employees designated by the committee administering the
Plan, while the NQSO Plan permits grants of nonqualified stock options to
officers, employees designated by the committee administering the Plan,
directors and local board members. In determining the eligibility of an employee
to receive options under each Plan, the committee may take into account the
position and responsibilities of the employee, the nature of the services
rendered by the employee, the employee's present and potential contributions to
the success of the acquisition, and such other factors as the committee deems
relevant.
ADMINISTRATION. Both Plans provide for administration by a Board-appointed
committee, consisting of two or more non-employee directors. The Compensation
Committee of Capital Bank Corporation's Board of Directors has assumed all
responsibilities with regard to administering the Plans. In general, the
Compensation Committee has broad discretionary authority regarding the Plans,
including the authority:
o to determine which persons shall be granted options and the amount
of such options,
o to determine and construe the terms and provisions of the agreements
and other documents by which options are granted and accepted, and
o to make all other determinations that the Compensation Committee
deems necessary or desirable for the administration of the Plans.
OPTIONS HELD BY CAPITAL BANK DIRECTORS AND OFFICERS. As of the Capital
Bank Record Date, directors and officers of Capital Bank held an aggregate of
54,550 shares of Capital Bank Common Stock subject to presently exercisable
stock options. An additional 45,200 shares of Capital Bank Common Stock, subject
to outstanding stock options that are not presently exercisable, are held by
executive officers of Capital Bank.
FEDERAL INCOME TAX CONSEQUENCES OF THE HOLDING COMPANY REORGANIZATION
Capital Bank expects to receive an opinion of Smith, Anderson, Blount,
Dorsett, Mitchell & Jernigan, L.L.P. to the effect that, among other things:
o The proposed Holding Company Reorganization will constitute a
reorganization within the meaning of Section 368(a)(1)(B) of the
Internal Revenue Code of 1986, as amended (the "Code").
o No gain or loss will be recognized by Capital Bank's shareholders on
the receipt of Capital Bank Corporation's Common Stock in exchange
for their Capital Bank Common Stock.
o The basis of each Capital Bank shareholder in Capital Bank
Corporation's Common Stock received by such shareholder will be the
same as the basis of Capital Bank Common Stock surrendered in
exchange therefor.
29
<PAGE>
o The holding period of Capital Bank Corporation's Common Stock
received by each Capital Bank shareholder will include the holding
period of the Capital Bank Common Stock surrendered in exchange
therefor, provided that the Capital Bank Common Stock is held as a
capital asset at the effective time of the Holding Company
Reorganization.
o If a Capital Bank shareholder dissents from the Holding Company
Reorganization and receives cash in exchange for his Capital Bank
Common Stock, the receipt of such cash will be a taxable transaction
and will be treated as a distribution and redemption of his shares,
subject to the provisions and limitations of Sections 301 and 302 of
the Code.
The opinion assumes, among other things, that the Holding Company
Reorganization will be consummated as described in the Holding Company
Agreement, and that payment to dissenters will not exceed the fair market value
of the Capital Bank Corporation Common Stock issued in the Holding Company
Reorganization as of the Effective Time.
The tax opinion will not address state or local tax consequences, and
shareholders are advised to consult their own tax advisors for advice on these
matters.
The tax opinion is not binding on the Internal Revenue Service.
ACCOUNTING TREATMENT OF THE HOLDING COMPANY REORGANIZATION
The Holding Company Reorganization is expected to be characterized as, and
treated similarly to, a "pooling of interests" (rather than a "purchase") for
financial reporting and related purposes, with the result that the accounts of
Capital Bank and Capital Bank Corporation will be combined.
30
<PAGE>
CAPITAL BANK CORPORATION'S SHARE EXCHANGE WITH
HOME SAVINGS BANK
THE FOLLOWING INFORMATION DESCRIBES MATERIAL ASPECTS OF THE PROPOSED
TRANSACTION BY WHICH CAPITAL BANK CORPORATION WOULD ACQUIRE ALL OF THE STOCK OF
HOME SAVINGS BANK OF SILER CITY, INC., SSB BY A SHARE EXCHANGE UNDER THE
EXCHANGE AGREEMENT. THE EXCHANGE AGREEMENT IS ATTACHED AS APPENDIX II.
GENERAL
The Exchange Agreement provides for the Exchange which, when effective,
will result in the conversion of each share of Home Savings Common Stock then
issued and outstanding (excluding shares held by Capital Bank or Capital Bank
Corporation or as to which Home Savings shareholders have exercised dissenters'
rights) into the right to receive 1.28 newly issued shares of Capital Bank
Corporation's no par value common stock for each Home Savings share, rounded up
or down to the nearest whole share.
As of the Home Savings Record Date, Home Savings had 922,686 shares of
Home Savings Common Stock outstanding. Based upon the exchange ratio, upon
consummation of the Exchange, Capital Bank Corporation will issue approximately
1,181,038 shares of Capital Bank Corporation Common Stock. Accordingly, Capital
Bank Corporation would then have outstanding approximately 3,658,689 shares of
Common Stock.
BACKGROUND OF AND REASONS FOR THE SHARE EXCHANGE
HOME SAVINGS
HISTORY. Home Savings was chartered in 1950 as a mutual savings and loan
association and since that time has grown to its present size of approximately
$60.0 million in assets as of September 30, 1998. Home Savings believes that the
lack of significant growth during its 48-year history is due primarily to the
historical slow growth of the economy of Chatham County, its primary service
area, although growth in this area has somewhat accelerated in recent years.
Chatham County is primarily an agricultural county with some light industry. The
financial crisis of the 1980s which affected savings and loan associations
throughout the country was weathered by Home Savings.
In the early 1990s, Home Savings' Board of Directors began to consider a
strategic long-term plan for Home Savings and considered an affiliation with a
commercial bank located in an adjoining county that had a small presence in
Chatham County. A transaction known as a conversion-acquisition was initiated on
December 30, 1993 when Home Savings entered into an agreement providing for its
conversion from mutual-to-stock form and its simultaneous acquisition by a
commercial bank. However, due to objections to this form of transaction by both
federal and state regulatory authorities, which objections culminated on
November 22, 1994 in a moratorium on such transactions declared by the Office of
Thrift Supervision ("OTS"), the agreement was ultimately terminated and
abandoned on March 31, 1995. Thereafter, the Board of Directors re-examined its
strategic alternatives, affirmed its earlier decision that, as a mutually-owned
institution, Home Savings' alternatives were limited and determined that a
conversion from mutual to stock form was the best alternative for Home Savings
to increase its capital base for lending and investment purposes. Accordingly,
on November 14, 1995, the conversion was effected after the sale of
approximately $9 million in common stock to the members and local community in
Chatham County.
ASSESSMENT OF ITS STRATEGY. As a shareholder owned institution, Home
Savings' Board of Directors continued to assess its strategic position, mindful
of its fiduciary duties to its shareholders. Faced with increasing competition
from other financial intermediaries in its market, Home Savings' Board of
Directors
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determined that the best manner of serving its customers and establishing a
positive financial influence in its market was to affiliate with a larger
financial institution. Home Savings was periodically contacted regarding its
interest in an affiliation by some independent financial institutions with a
presence in or adjacent to Chatham County but nothing definitive was proposed or
suggested by any such party and pursuant to OTS regulations, nothing definitive
could be proposed until twelve months had expired from the date of mutual to
stock conversion.
In the Spring of 1997, management of Home Savings entered into discussions
with a neighboring financial institution with which it had previously considered
the conversion-acquisition. One other financial institution, significantly
larger than both Home Savings and this third party financial institution and
with an existing presence in Home Savings' market, also indicated an interest
but did not follow with a specific proposal. During the prior discussions
between Home Savings and this third party financial institution, both parties
became familiar with the styles of operation and management teams of the other,
and Home Savings' management decided to begin private negotiations with this
third party financial institution beginning in April 1997, which negotiations
culminated in an Agreement and Plan of Merger dated June 13, 1997.
PRIOR TRANSACTION. That transaction was approved by the shareholders of
Home Savings and received all federal and state regulatory approvals and was
scheduled to close in January 1998. The transaction provided for the
shareholders of Home Savings to elect either stock in the acquiring third party
financial institution or cash or a combination of stock and cash. That
transaction permitted Home Savings to terminate it if the acquiring third party
financial institution's stock price exceeded certain predetermined parameters
which, management of Home Savings believed, would result in a significant
dilution in value to the Home Savings' shareholders electing to take stock in
the transaction should the transaction be consummated at such increased values.
It was deemed necessary to negotiate such parameters because the acquiror
offered, and Home Savings accepted, a value of $15.50 per share, payable in
cash, stock or a combination thereof, of the acquiring third party financial
institution.
Beginning in December 1997 and continuing into January 1998, during the
20-day period of time predetermined to price the value of the acquiror's stock,
prices in the acquiror's stock began to rise dramatically and resulted in a
20-day average price far in excess of the limitations deemed reasonable by
management of Home Savings and its financial advisors. Attempts were made to
renegotiate the exchange and to increase the number of shares to be received by
the shareholders of Home Savings but such attempts failed as the acquiror
refused to consider increasing the value for Home Savings' shareholders.
Accordingly, on January 28, 1998, Home Savings exercised its unilateral option
to terminate the transaction in light of the diluted value that would result
from the lesser number of shares to be received by Home Savings' shareholders
should it have elected to consummate the transaction. Home Savings had granted
the acquiror an option to purchase 19.9% of newly issued shares of Home Savings
and as a result of the unilateral termination of the transaction by Home
Savings, the Option Agreement, in accordance with its terms, expired with no
shares under option having been exercised by the acquiror.
RECONSIDERATION OF STRATEGY. After terminating the transaction with the
third party financial institution, the Board of Directors began to consider its
strategic alternatives. The growth and profitability of Home Savings continued
to lag and Home Savings incurred some nonrecurring expenses as a result of
attempting to effect the previous transaction with the third party financial
institution. These expenses negatively impacted earnings. Additionally, other
operational matters requiring significant amounts of capital needed attention.
Except for the infusion of capital from its mutual-to-stock conversion in 1995,
the strategic position of Home Savings had remained unchanged. Growth remained
slow and there was no lessening of the competitive factors affecting a small,
one office financial institution.
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ENGAGEMENT OF FINANCIAL ADVISOR. Accordingly, during April of 1998, Edwin
E. Bridges, the President of Home Savings, discussed with Baxter Fentriss &
Company, Richmond, Virginia ("Baxter Fentriss") the possibility of engaging
Baxter Fentriss to evaluate its alternatives and on May 1, 1998 the Board of
Directors decided to do so. Baxter Fentriss specializes in community-oriented
financial institutions and had served as Home Savings' financial advisor in both
its mutual-to-stock conversion and in its transaction with the other third party
financial institution. Home Savings asked Baxter Fentriss to study the strategic
position of Home Savings and to analyze its business, operations, financial
condition and prospects. Baxter Fentriss was also to assess various strategic
options available that would maximize shareholder value and advise Home Savings
regarding its likely value in a merger, acquisition, business combination or
reorganization. If a change of control of Home Savings was determined to be in
the shareholders' best interest, Baxter Fentriss was to assist Home Savings in
identifying potential acquirors, to initiate confidential discussions with
potential acquirors and assist potential acquirors in developing bids.
It was determined by the Board of Directors, after discussions with Baxter
Fentriss, that a change of control of Home Savings was in the shareholders' best
interest. Accordingly, Baxter Fentriss developed and prepared a confidential
offering memorandum and upon receipt of executed confidentiality agreements from
interested acquirors, distributed that memorandum in June 1998. Baxter Fentriss
had identified parties to contact based on its knowledge of parties who could
have an interest in acquiring Home Savings.
DISCUSSIONS ENSUE WITH POTENTIAL ACQUIRORS. Based upon that memorandum,
which required initial bids to be received by August 10, discussions ensued with
three independent financial institutions, one of which was the financial
institution with which Home Savings had previously entered into an agreement but
terminated such agreement in January 1998. Baxter Fentriss met with the Home
Savings Board on August 17 to go over the offers. Following that meeting, the
three parties were asked to increase their bids, two of whom did so. On August
28, 1998, Baxter Fentriss met with the Home Savings Board to update them on such
changes.
CAPITAL BANK OFFER RECOMMENDED. These discussions conducted by Baxter
Fentriss resulted in the proposal by Capital Bank as being the proposal that
would result in the greatest maximization of shareholder value since it provided
the highest financial offer based on the market value of its stock and the
exchange ratio provided. In addition, Baxter Fentriss provided information on
stock liquidity, trading volume and Capital Bank's lower market price to book
value (from which Baxter Fentriss concluded that Capital Bank had greater
potential for stock market appreciation) and considered the market of Capital
Bank (Wake and Lee Counties, North Carolina) as having greater growth potential
than that of the other two bidders who are located in rural markets outside of
the growth areas of Raleigh and the Research Triangle, North Carolina.
BOARD CONSIDERS AND NEGOTIATES CAPITAL BANK OFFER. The Board of Directors
acknowledged the expertise of Baxter Fentriss as a financial expert and
considered all factors presented by Baxter Fentriss in reaching its conclusion
that the proposal by Capital Bank was the one that maximized shareholder value.
However, the Board of Directors desired to learn more about the prospects of
Capital Bank and therefore appointed a committee to consider due diligence
issues of Capital Bank in light of the fact that it was a newly chartered
commercial bank and did not have a presence in Chatham County although it was
acknowledged that Chatham County was a logical extension of Capital Bank's
markets in Wake and Lee Counties.
Direct discussions between senior management of Home Savings and Capital
Bank then occurred. Following direct discussions between management of Home
Savings and Capital Bank, representatives of both parties entered into
discussions regarding a definitive agreement. The Board of Directors of Home
Savings considered all factors, including the lack of profitability and
dividends by Capital Bank and the fact that the pro forma net income per share
for Home Savings' shareholders would go from a positive to a negative number.
The discussions by the Board of Directors led them to the conclusion that a
combination with Capital Bank would greatly enhance future profitably and the
affiliation with a commercial bank franchise with an
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expanded market scope and line of products and services would better enhance
future prospects of the combined entity. The Board of Directors believed this
would eventually result in an increase in the price per share of the stock to be
received by the shareholders of Home Savings.
APPROVAL OF CAPITAL BANK OFFER. After a thorough review by the Home
Savings Board of the proposed definitive agreement at a meeting in which each
director had received a copy, on September 28, 1998 the Exchange Agreement was
unanimously approved by the Board of Directors of Home Savings. The Board
rejected the other two bids, both of which were also stock-for-stock exchanges,
since neither reached the market value of the Capital Bank offer. Each of these
other two bidders had been invited to increase their offer prior to the Board's
acceptance of the Capital Bank bid. One slightly increased its bid, while the
other refused to do so. Notwithstanding the one increased bid from the one
bidder, it still did not compare favorably with the Capital Bank offer.
CAPITAL BANK
The terms of the share exchange, including the exchange ratio, are the
result of arm's-length negotiations between representatives of Capital Bank and
Home Savings. In reaching its decision to approve the Exchange Agreement, the
Capital Bank Board consulted with its legal advisors regarding the terms of the
transaction, with its financial advisor regarding the financial aspects of the
proposed transaction and the fairness of the exchange ratio, and with management
of Capital Bank, and, without assigning any relative or specific weights,
considered a number of factors which the Capital Bank Board deemed material,
both from a short-term and long-term perspective, including the following:
o the information presented to the directors by the management of
Capital Bank concerning the business, operations, earnings, asset
quality, and financial condition of Home Savings, including the
composition of the earning assets portfolio of Home Savings;
o the financial terms of the share exchange, including the
relationship of the value of the consideration issuable in the share
exchange to the market value, tangible book value, and earnings per
share of Home Savings common stock;
o the nonfinancial terms of the share exchange, including the
treatment of the share exchange as a tax-free reorganization for
federal income tax purposes and arrangements relating to the
continued involvement of the management and the Home Savings Board
with Capital Bank Corporation;
o the likelihood of the share exchange being approved by applicable
regulatory authorities without undue conditions or delay;
o the attractiveness of the market position of Home Savings in the
market in which it operates;
o the report of Interstate/Johnson Lane Corporation ("IJL") reviewing
a comparison of Home Savings to selected peer bank thrifts and of
premiums paid in other transactions; and
o the opinion rendered by IJL as to the fairness, from a financial
point of view, of the exchange ratio to the holders of Capital Bank
Common Stock.
The foregoing discussion is not intended to be exhaustive but includes all
of the material factors considered by the Capital Bank Board in determining to
recommend that shareholders approve the Exchange
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Agreement, including the issuance of shares of Capital Bank Corporation Common
Stock pursuant to the Exchange Agreement. The Capital Bank Board did not
quantify or otherwise attempt to assign relative or specific weights to the
factors considered in reaching its determination that the Exchange Agreement,
the Exchange, and the issuance of shares of Capital Bank Corporation Common
Stock pursuant to the Exchange Agreement are in the best interests of
shareholders.
RECOMMENDATION OF THE HOME SAVINGS BOARD
The Board of Directors of Home Savings has unanimously approved the
Exchange Agreement and the Exchange contemplated thereby and believes that the
Exchange is fair to, and in the best interests of, Home Savings and its
shareholders. Home Savings' Board of Directors, therefore, unanimously
recommends that the holders of Home Savings Stock vote "FOR" approval of the
Exchange Agreement and the Exchange contemplated thereby. In making its
recommendations, the Board of Directors of Home Savings has considered, among
other things, the opinion of Baxter Fentriss that Capital Bank's proposal is
fair to Home Savings' shareholders from a financial point of view. See "Opinion
of Home Savings' Financial Advisor" below.
RECOMMENDATION OF THE CAPITAL BANK BOARD
The Board of Directors of Capital Bank has unanimously approved the
Exchange Agreement and believes that each transaction is fair to, and in the
best interests of, Capital Bank and its shareholders. Capital Bank's Board of
Directors, therefore, unanimously recommends that the holders of Capital Bank
stock vote "FOR" approval of the issuance of shares under the Exchange Agreement
and the Holding Company Reorganization. In making its recommendations, the Board
of Directors of Capital Bank has considered, among other things, the opinion of
IJL that the Exchange is fair to Capital Bank's shareholders from a financial
point of view.
OPINION OF HOME SAVINGS' FINANCIAL ADVISOR
Baxter Fentriss has acted as financial advisor to Home Savings in
connection with the Exchange. Baxter Fentriss assisted Home Savings in
identifying prospective acquirors. On September 29, 1998, Baxter Fentriss
delivered to Home Savings its opinion that as of such date, and on the basis of
matters referred to herein, the consideration to be paid to holders of Home
Savings Common Stock in the Exchange is fair, from a financial point of view, to
the holders of Home Savings Common Stock. In rendering its opinion, Baxter
Fentriss:
o consulted with the management of Home Savings and Capital Bank,
o reviewed the draft Exchange Agreement and certain publicly-available
information on the parties; and
o reviewed certain additional materials made available by the
management of the respective banks.
In addition, Baxter Fentriss discussed with the management of Home Savings
and Capital Bank their respective businesses and outlook. No limitations were
imposed by Home Savings' Board of Directors upon Baxter Fentriss with respect to
the investigation made or procedures followed by it in rendering its opinion.
The full text of Baxter Fentriss' written opinion is attached as Appendix III to
this Joint Proxy Statement-Prospectus and should be read in its entirety with
respect to the procedures followed, assumptions made, matters considered, and
qualifications and limitations on the review undertaken by Baxter Fentriss in
connection therewith.
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Baxter Fentriss' opinion is directed to Home Savings' Board of Directors,
and is directed only to the fairness, from a financial point of view, of the
consideration received. It does not address Home Savings' underlying business
decision to effect the Exchange, nor does it constitute a recommendation to any
Home Savings' shareholder as to how such shareholder should vote with respect to
the Exchange or as to any other matter.
Baxter Fentriss' opinion was one of many factors taken into consideration
by Home Savings' Board of Directors in making its determination to approve the
Exchange Agreement, and the receipt of Baxter Fentriss' opinion is a condition
precedent to Home Savings consummating the Exchange. The opinion of Baxter
Fentriss does not address the relative merits of the Exchange as compared to any
alternative business strategies that might exist for Home Savings or the effect
of any other business combination in which Home Savings might engage.
Baxter Fentriss, as part of its investment banking business, is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and valuations for
estate, corporate and other purposes. Baxter Fentriss is a nationally recognized
advisor to firms in the financial services industry on mergers and acquisitions.
Home Savings selected Baxter Fentriss as its financial advisor because Baxter
Fentriss is an investment banking firm focusing on bank and thrift transactions,
and because of the firm's extensive experience and expertise in transactions
similar to the Exchange. Baxter Fentriss is not affiliated with Capital Bank or
Home Savings.
In connection with rendering its opinion to Home Savings' Board of
Directors, Baxter Fentriss performed a variety of financial analyses. In
conducting its analyses and arriving at its opinion as expressed herein, Baxter
Fentriss considered such financial and other factors as it deemed appropriate
under the circumstances including:
o the historical and current financial condition and results of
operations of Capital Bank and Home Savings including interest
income, interest expense, interest sensitivity, noninterest income,
noninterest expense, earnings, book value, returns on assets and
equity, capitalization, the amount and type of non-performing
assets, the impact of holding certain non-earning real estate
assets, the reserve for loan losses and possible tax consequences
resulting from the transaction;
o the business prospects of Home Savings and Capital Bank;
o the economies of Home Savings' and Capital Bank's respective market
areas;
o the historical and current market for Home Savings and Capital Bank
Common Stock; and
o the nature and terms of certain other merger transactions that it
believed to be relevant.
Baxter Fentriss also considered:
o its assessment of general economic, market, financial and regulatory
conditions and trends;
o its knowledge of the financial institutions industry;
o its experience in connection with similar transactions;
o its knowledge of securities valuation generally; and
o its knowledge of merger transactions in North Carolina and South
Carolina (the "Carolinas").
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In connection with rendering its opinion, Baxter Fentriss reviewed:
o the Exchange Agreement;
o drafts of this Joint Proxy Statement-Prospectus;
o the Annual Reports to shareholders, including the audited financial
statements of Home Savings for the years ended September 30, 1995,
1996 and 1997;
o the Annual Reports to shareholders, including the audited financial
statements of Capital Bank for the period June 20, 1997 through
December 31, 1997;
o unaudited, condensed balance sheets and statements of income as of
June 30, 1998; and
o certain additional financial and operating information with respect
to the business, operations and prospects of Capital Bank and Home
Savings as it deemed appropriate.
Baxter Fentriss also:
o held discussions with members of the senior management of Capital
Bank and Home Savings regarding the historical and current business
operation, financial condition and future prospects of their
respective companies;
o reviewed the historical market prices and trading activity for the
common stock of Home Savings and Capital Bank;
o compared the results of operations of Home Savings and Capital Bank
with those of certain banking companies that it deemed to be
relevant;
o analyzed the pro forma financial impact of the Exchange on Capital
Bank; and
o analyzed the pro forma financial impact of the Exchange on Home
Savings.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the consideration to holders of Home Savings Common Stock was to some
extent a subjective one based on the experience and judgment of Baxter Fentriss
and not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors summarized below, Baxter
Fentriss believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Baxter
Fentriss' view of the actual value of Home Savings or Capital Bank.
In performing its analyses, Baxter Fentriss made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, including general market conditions, inflation rates, tax rates and
investor return expectations, many of which are beyond the control of Home
Savings or Capital Bank. The analyses performed by Baxter Fentriss are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
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Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold. In
rendering its opinion, Baxter Fentriss assumed that, in the course of obtaining
the necessary regulatory approvals for the Exchange, no conditions will be
imposed that will have a material adverse effect on the contemplated benefits of
the Exchange, on a pro forma basis, to Home Savings or Capital Bank.
The following is a summary of the material analyses performed by Baxter
Fentriss in connection with its opinion.
STOCK PRICE HISTORY. Baxter Fentriss studied the history of the trading
prices and volume for Home Savings and Capital Bank Common Stock and compared
that to publicly traded banks and thrifts in North Carolina and to the price
offered by Capital Bank. As of June 30, 1998, Home Savings' book value was
$10.64.
COMPARATIVE ANALYSIS. Baxter Fentriss compared the price to earnings
multiple, price to assets multiple and price to book multiple of the Capital
Bank offer with all other comparable financial (banking and thrift) merger
transactions in North and South Carolina for which data was publicly available.
The comparative multiples included 34 North and South Carolina financial
(banking and thrift) institutions involved in sale or merger transactions during
the last three years. Of the 34 transactions, the Exchange ranked third in price
to earnings multiple, 14th in price to assets multiple and 27th in price to book
multiple.
PRO FORMA IMPACT. Baxter Fentriss considered the pro forma impact of the
transaction on book value and earnings and concluded the transaction should have
an immediate positive impact on Capital Bank shareholders (including Home
Savings shareholders after the transaction) and would likely be approved by
banking regulators. Baxter Fentriss concluded that the transaction would likely
be accretive to book value per share for Home Savings shareholders, but would
result in a historical dilutive impact on earnings per share to Home Savings
shareholders as a result of Capital Bank's losses to date.
DISCOUNTED CASH FLOW ANALYSIS. Baxter Fentriss performed a discounted cash
flow analysis to determine hypothetical present values for a share of Home
Savings' common stock as a five and ten year investment. Under this analysis,
Baxter Fentriss considered various scenarios for the performance of Home
Savings' stock using (a) a range from 8% to 14% in the growth of Home Savings'
earnings and dividends and (b) a range from 14 times to 24 times earnings as the
terminal value for Home Savings' stock. A range of discount rates from 12% to
15% were applied to these alternative growth and terminal value scenarios. These
ranges of discount rates, growth alternatives and terminal values were chosen
based upon what Baxter Fentriss, in its judgment, considered to be appropriate
taking into account, among other things:
o Home Savings' past and current performance;
o the general level of inflation;
o rates of return for fixed income and equity securities in the
marketplace generally for companies with similar risk profiles.
In almost all of the scenarios considered, the present value of a share of
Home Savings' common stock was calculated at less than that of the Capital Bank
offer. For example, at a 12.5% discount rate, an after tax range of values that
could develop ranged from $5.04 to $13.08 per share. Thus, Baxter Fentriss'
discounted cash flow analysis indicated that Home Savings shareholders would be
in a better financial position by receiving the consideration offered in the
Exchange rather than continuing to hold Home Savings' Common Stock.
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Using publicly available information on Capital Bank and applying the
capital guidelines of banking regulators, Baxter Fentriss' analysis indicated
that the Exchange would not materially dilute the capital and earnings capacity
of Capital Bank and would, therefore, likely not be opposed by the banking
regulatory agencies from a capital perspective. Furthermore, Baxter Fentriss
considered the likely market overlap and the Federal Reserve Board guidelines
with regard to market concentration and did not believe there to be a
significant issue with regard to possible antitrust concerns.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates, including those as to possible
economies of scale and budgeted income, were reasonably prepared by management,
and reflect their best current judgments. Baxter Fentriss did not make an
independent appraisal of the assets or liabilities of either Home Savings or
Capital Bank, and has not been furnished such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to Home Savings, Capital Bank or the Exchange. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies used for comparison in the above analysis.
Baxter Fentriss has been, or will be, paid (a) a fairness opinion fee of
$15,000 at the time the opinion is rendered, (b) a fee, based on successful
completion of the proposed Exchange, equal to approximately $200,000, or 1.25%
of the aggregate consideration received by Home Savings or shareholders of Home
Savings (to be offset by the fairness opinion fee of $15,000) and (c) reasonable
out-of-pocket expenses for its services. Home Savings has agreed to indemnify
Baxter Fentriss against certain liabilities, including certain liabilities under
the federal securities laws.
Baxter Fentriss has previously served as financial advisor to Home Savings
during its mutual to stock conversion and its previously terminated transaction.
During 1997, Home Savings paid Baxter Fentriss fees equal to approximately
$20,000. Baxter Fentriss was engaged by Capital Bank in February 1998 to assist
in the acquisition of specific other banking entities or branches. Baxter
Fentriss was paid $7,500 by Capital Bank and reimbursed certain out of pocket
expenses during 1998. To date, no transactions have occurred under such separate
engagement.
OPINION OF CAPITAL BANK'S AND CAPITAL BANK CORPORATION'S FINANCIAL ADVISOR
IJL was engaged by Capital Bank Corporation to render an opinion with
respect to the fairness from a financial point of view to the holders of Capital
Bank Corporation Common Stock of the consideration proposed to be paid by
Capital Bank Corporation in the Exchange. IJL is a recognized investment banking
firm and, as part of its investment banking activities, is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Capital Bank Corporation
selected IJL to render its opinion on the basis of its experience and expertise
in merger transactions, and its reputation in the banking, thrift and investment
communities. In the ordinary course of its business, IJL trades the equity
securities of Capital Bank and Home Savings for its own account and for the
accounts of its customers, and, accordingly, may at any time hold a long or
short position in such securities.
IJL first discussed a possible role as a buy-side financial advisor to
Capital Bank on November 25, 1997 when IJL representatives presented the firm's
credentials and discussed strategy and potential targets with Capital Bank's
management. The presentation was general in nature, and Capital Bank did not
engage IJL at that time to contact any specific acquisition candidate(s).
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On or about July 1, 1998, Capital Bank management contacted IJL to discuss
the Home Savings Bank Confidential Information Memorandum received from Baxter
Fentriss. Capital Bank formally engaged IJL on July 16, 1998 to provide
financial advisory services and to render an opinion as to the fairness, from a
financial point of view, of the consideration to be paid by Capital Bank's
stockholders in the potential acquisition of Home Savings. In that regard, IJL's
role included the following:
o reviewing the financial condition and future prospects of Capital
Bank and Home Savings and any other matters which Capital Bank or
IJL deemed relevant in order to assist and advise Capital Bank
regarding the proposed transaction;
o analyzing the potential price, terms and other conditions of the
transaction;
o providing sensitivity analyses as to the price and structure of the
transaction;
o researching comparable public thrifts and the current mergers and
acquisitions environment for thrifts to evaluate the reasonableness
of an offer; and
o rendering a fairness opinion to Capital Bank's Board of Directors.
In connection with its engagement, a preliminary oral opinion dated
October 15, 1998 was delivered by IJL to the Capital Bank Corporation Board of
Directors (as used in this section, the "Board") to the effect that, as of such
date and based upon and subject to certain matters, the consideration to be paid
by Capital Bank Corporation in the Exchange with Home Savings was fair to the
holders of Capital Bank Corporation Common Stock from a financial point of view.
IJL has confirmed its preliminary oral opinion dated October 15, 1998, by
delivery of a written opinion attached as Appendix IV. IJL updated certain of
its analyses, as necessary, and reviewed the assumptions on which such analyses
were based and the factors considered in connection therewith.
THE FULL TEXT OF IJL'S WRITTEN OPINION TO THE BOARD WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF REVIEW BY IJL, IS
ATTACHED HERETO AS APPENDIX IV AND IS INCORPORATED HEREIN BY REFERENCE AND
SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS AGREEMENT.
THE FOLLOWING SUMMARY OF IJL'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE OPINION. IJL'S OPINION, WHICH IS ADDRESSED TO THE
CAPITAL BANK CORPORATION BOARD, IS DIRECTED ONLY TO THE FAIRNESS FROM A
FINANCIAL POINT OF VIEW TO THE HOLDERS OF CAPITAL BANK CORPORATION COMMON STOCK
OF THE CONSIDERATION TO BE PAID BY CAPITAL BANK CORPORATION IN THE EXCHANGE. IN
ADDITION, IJL'S OPINION DOES NOT ADDRESS ANY OTHER ASPECT OF THE EXCHANGE OR ANY
RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER
AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE CAPITAL BANK CORPORATION SPECIAL
MEETING.
In connection with its opinion, IJL, among other things:
o reviewed certain publicly available financial and other data with
respect to Capital Bank and Home Savings, including the consolidated
financial statements of Capital Bank and Home Savings for recent
fiscal years and interim periods as of September 30, 1998, and
certain other relevant financial and operating data relating to
Capital Bank and Home Savings made available to IJL from published
sources and from the internal records of Capital Bank and Home
Savings;
o reviewed a draft of this Joint Proxy Statement-Prospectus and the
Exchange Agreement;
o reviewed certain historical market prices and trading volumes of
Capital Bank and Home Savings as reported by the SmallCap Market of
The Nasdaq Stock Market and the OTC Bulletin Board;
o compared Home Savings from a financial point of view with certain
other public companies which IJL deemed to be relevant;
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o considered the financial terms, to the extent publicly available, of
selected business combinations in the bank and thrift industries;
o reviewed and discussed with representatives of management of Capital
Bank and Home Savings certain information regarding the business and
financial issues of the Exchange, including financial forecasts
relating to cost savings and other potential synergies anticipated
to result from the Exchange and related assumptions;
o made inquiries regarding and discussed the due diligence review of
Home Savings conducted by Capital Bank with senior executives of
Home Savings;
o made inquiries regarding and discussed the Exchange, the Exchange
Agreement and other matters related thereto with Capital Bank's
counsel; and
o performed such other analyses and examinations as IJL deemed
appropriate.
In connection with its review, IJL did not assume any obligation to verify
any of the foregoing information and relied on all such information being
complete and accurate in all material respects. With respect to the financial
forecasts for Capital Bank and Home Savings, IJL assumed, with Capital Bank's
consent, for purposes of its opinion that such forecasts were reasonably
prepared on bases reflecting at the time of preparation the best available
estimates and judgments of Capital Bank's management, as to the cost savings,
revenue enhancements and other potential synergies (including the timing, amount
and achievability thereof) anticipated to result from the Exchange, and that
such forecasts provided a reasonable basis upon which IJL could form its
opinion. IJL also assumed, with Capital Bank's consent, that:
o there were no material changes in Capital Bank's or Home Savings'
assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial
statements reviewed by IJL;
o off-balance sheet activities of Capital Bank and Home Savings will
not materially and adversely affect the future financial position or
results of operations of Capital Bank or Home Savings;
o in the course of obtaining the necessary regulatory and third party
consents for the Exchange, no restriction will be imposed that will
have a material adverse effect on the contemplated benefits of the
Exchange or the transactions contemplated thereby;
o the Exchange will be consummated in accordance with the terms and
provisions of the Exchange Agreement, without any amendments to, and
without any waiver by Capital Bank of, any of the material
conditions to its obligations thereunder.
IJL noted that it is not an expert in the evaluation of loan portfolios for
purposes of assessing the adequacy of the allowances for losses with respect
thereto and IJL assumed, with Capital Bank's consent, that such allowances for
each of Capital Bank and Home Savings are in the aggregate adequate to cover
such losses. In addition, IJL did not assume responsibility for reviewing any
individual credit files or making an independent evaluation, appraisal or
physical inspection of the assets or individual properties of Capital Bank or
Home Savings, nor was IJL furnished with any such evaluations or appraisals.
Finally, IJL's opinion was based on economic, monetary and market and other
conditions as in effect on, and the information made available to IJL as of, the
date thereof. These conditions included, but were not limited to, Capital Bank's
status as a financial institution in existence less than two years and with
assets less than $100 million. IJL also noted that, as a start-up financial
institution, Capital Bank has yet to record a profit. Furthermore, due to their
small capital
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base and relative illiquidity, start-up financial institutions have not been
active acquirors of other financial institutions. Although IJL evaluated the
consideration to be paid by Capital Bank in the Exchange to the holders of Home
Savings from a financial point of view, IJL was not requested to, and did not,
recommend the specific consideration payable in the Exchange. No other
limitations were imposed by Capital Bank on IJL with respect to the
investigations made or procedures followed by IJL in rendering its opinion.
Set forth below is a summary of the material analyses performed by IJL in
connection with its opinion delivered to the Capital Bank Corporation Board on
October 15, 1998.
PRO FORMA DILUTION ANALYSIS. Using management's earnings per share ("EPS")
estimates for Capital Bank of $0.08 in 1999 and $0.51 in 2000 and using EPS
estimates prepared by Capital Bank management and IJL for Home Savings of $0.49
in 1999 and $0.75 in 2000 reflecting ongoing operations and estimates as to the
cost savings and other potential synergies anticipated to result from the
Exchange prepared by Capital Bank's management, IJL compared estimated EPS for
Capital Bank on a stand-alone basis to the estimated EPS for Capital Bank on a
pro forma combined basis for calendar years 1999 and 2000. In addition, IJL
prepared a pro forma balance sheet, for the periods ending at the transaction
close, originally estimated December 1998, and for calendar years 1999 and 2000.
IJL noted that, based upon estimates of Capital Bank's management of cost
savings, revenue enhancements and operating synergies and after giving effect to
certain assumptions as to, among other things, the number of shares outstanding
in each respective period, and assuming a transaction closing by March 31, 1999,
the Exchange could be expected to be accretive to Capital Bank's EPS in calendar
year 1999 by approximately 175%, and to Capital Bank's EPS in calendar year 2000
by approximately 16.2%. In calculating Capital Bank's EPS, IJL did not assume
that any shares would be repurchased by Capital Bank in calendar years 1999 and
2000.
COMPARABLE COMPANY ANALYSIS. Based on publicly available information and
earnings estimates, IJL reviewed and compared actual and estimated selected
financial, operating and stock market information and financial ratios of Home
Savings and a group of six thrifts consisting of:
o AF Bankshares, Inc.;
o Anson Bancorp, Inc.;
o Mitchell Bancorp, Inc.;
o Mutual Community Savings Bank, Inc.;
o Scotland Bancorp, Inc.; and
o Wake Forest Federal Savings & Loan Association (the "Comparable
Thrifts").
The Comparable Thrifts were selected on the following criteria: thrifts located
in North Carolina, holding less than $100 million in assets, for which market
data and financial information were publicly available.
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IJL noted for Capital Bank's Board that, among other things:
o Home Savings had a common equity to total assets ratio of 16.4% at
September 30, 1998, as compared to the average for the Comparable
Thrifts of 24%;
o Home Savings had a return on average assets and a return on average
equity for the latest twelve months ended September 30, 1998 of
0.42% and 2.51%, respectively, as compared to the average for the
Comparable Thrifts of 0.87% and 4.71%, respectively;
o Home Savings had an efficiency ratio (defined as noninterest
expenses divided by net interest income plus noninterest income,
before taking into account any goodwill amortization) of 77.3% for
its fiscal year ended September 30, 1998, as compared to the average
for the Comparable Thrifts of 65.2%;
o Home Savings, as of November 24, 1998, had a price to book ratio and
a price to tangible book ratio implied from the Exchange of 1.39x
and 1.39x, respectively, based on the balance sheet at September 30,
1998, as compared to the average for the comparable Thrifts of 1.02x
and 1.03x, respectively; and
o Home Savings, as of November 24, 1998, had a price to earnings ratio
implied from the Exchange of 31.0x, adjusted for non-recurring items
and based on the EPS for the latest twelve months ended September
30, 1998, as compared to the average for the comparable Thrifts of
25.5x.
ANALYSIS OF SELECTED COMPARABLE BANK AND THRIFT EXCHANGE TRANSACTIONS. IJL
reviewed the consideration paid for 21 transactions in the Southeast (defined as
Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South
Carolina, Tennessee, Virginia and West Virginia) announced since 1996 with
seller total assets less than $100 million. In addition, IJL reviewed the
consideration paid in the following 6 transactions announced since 1996 in North
Carolina (Acquiror/Target):
o Centura Banks, Inc./Scotland Bancorp, Inc.;
o First Western Bank/Mitchell Bancorp;
o First Charter Corporation/HFNC Financial Corp.;
o Triangle Bancorp/United Federal Savings Bank;
o First Citizens BancShares, Inc./First Savings Financial Corporation;
and
o Clyde Savings Bank SSB/Tryon Federal Savings and Loan Association
(collectively, the "Comparable Transactions").
For each company merged or to be merged in such transactions, IJL compiled
figures illustrating, among other things, transaction price to latest 12 months
earnings per share, transaction price to book value, transaction price to
tangible book value, and the ratio of premium over tangible book value to core
deposits.
The figures for the Comparable Transactions represent announced deals in
North Carolina from January 1, 1996 through November 23, 1998. The ratios are as
follows:
o an average excluding high and low of transaction price to latest 12
months' earnings per share of 32.8x;
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o an average excluding high and low of transaction price to book value
of 1.39x;
o an average excluding high and low of transaction price to tangible
book value of 1.39x; and
o an average excluding high and low of premium over tangible book
value to core deposits of 20.8%.
The figures for the 21 Southeast transactions represent announced deals in the
Southeast from January 1, 1996 through November 23, 1998. The ratios are as
follows:
o an average excluding high and low of transaction price to latest 12
months' earnings per share of 27.9x;
o an average excluding high and low of transaction price to book value
of 1.68x;
o an average excluding high and low of transaction price to tangible
book value of 1.68x; and
o an average excluding high and low of premium over tangible book
value to core deposits of 9.1%.
In comparison, based upon an assumed exchange ratio of 1.28 shares of Capital
Bank for each share of Home Savings, representing shares of Capital Bank with a
value of $11.25 per share as of November 24, 1998, the consideration to be paid
to the holders of Home Savings represented a ratio of transaction price to
latest 12 months' earnings per share, adjusted for certain nonrecurring items,
of 31.0x, a ratio of transaction price to book value of 1.39x, a ratio of
transaction price to tangible book value of 1.39x and a ratio of tangible
premium to core deposits of 7.8%.
No other company or transaction used in the above analysis as a comparison
is identical to Capital Bank, Home Savings or the proposed Exchange.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the acquisition or public trading multiples of the companies
to which Capital Bank, Home Savings and the Exchange are being compared.
OTHER ANALYSES. In addition, IJL analyzed the historical financial
performance of Home Savings and analyzed its deposit market share, its loan
portfolio and a break-down of its lending activities, as well as a history of
its non-performing assets.
The foregoing is a summary of the material analyses performed by IJL in
connection with its preliminary oral opinion delivered to the Capital Bank
Corporation Board on October 15, 1998. The summary set forth above does not
purport to be a complete description of the analyses performed by IJL. The
preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. IJL believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of its
analyses and of the factors considered, without considering all analyses and
factors, would create an incomplete view of the process underlying the analyses.
In addition, IJL may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be IJL's view of the
actual values of Capital Bank, Home Savings or the combined company. The fact
that any specific analysis has been referred to in the summary above is not
meant to indicate that such analysis was given greater weight than any other
analysis.
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In performing its analyses, since it had no internal projections for Home
Savings or estimates from any independent third party, IJL made numerous
assumptions with respect to industry performance, regulatory, general business
and economic conditions and other matters, many of which are beyond the control
of Capital Bank and Home Savings. These changes could include new accounting
pronouncements, different reserve requirements or minimum capital levels, along
with interest rate changes or economic events. For example, IJL assumed that the
business environment in which Home Savings operates would not change materially
and would continue its general trend. IJL also made assumptions with respect to
potential cost savings, synergies, write-offs and Capital Bank's ability to
deploy capital. The analyses performed by IJL are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as part of IJL's analysis of the fairness of the consideration to be paid
by Capital Bank from a financial point of view in connection with the delivery
of IJL's opinion. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. IJL used
in its analyses estimates by Capital Bank management and estimates by IJL and
projections prepared by Capital Bank and Home Savings as to the cost savings and
other potential synergies anticipated to result from the Exchange. Such
projections and estimates are based on numerous variables and assumptions which
are inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those set
forth in such projections.
Pursuant to the terms of IJL's engagement, Capital Bank has agreed to pay
IJL a fee equal to approximately $50,000, or 3/8 of one percent of the total
consideration paid for Home Savings, of which $15,000 was payable upon the
execution of IJL's letter of engagement as financial advisor. Capital Bank also
has agreed to reimburse IJL for its reasonable out-of-pocket expenses, including
the fees and expenses of IJL's legal counsel. Capital Bank has agreed to
indemnify IJL, its affiliates, and their respective partners, directors,
officers, agents, consultants, employees and controlling persons against certain
liabilities, including liabilities under the federal securities laws.
IJL has performed various financial advisory and investment banking
services for Capital Bank in the past, for which IJL has received compensation,
and may provide such services to Capital Bank in the future. IJL received a
management fee of approximately $156,000 relating to the initial public offering
of Capital Bank's common stock in June 1997 and IJL's retail financial
consultants received aggregate commissions of approximately $554,000 in that
offering.
EFFECTIVE TIME OF THE EXCHANGE
Subject to the conditions to the obligations of the parties to effect the
Exchange (including, without limitation, the receipt of all required approvals
of governmental and regulatory authorities), the Exchange will become effective
(the "Exchange Effective Time") when Articles of Share Exchange are filed with
the North Carolina Secretary of State.
We cannot give any assurance that the necessary shareholder and regulatory
approvals can be obtained or that other conditions precedent to the Exchange can
or will be satisfied. Home Savings, Capital Bank Corporation and Capital Bank
anticipate that all conditions to consummation of the Exchange will be satisfied
so that the Exchange can be consummated in early March 1999.
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The Board of Directors of either Home Savings or Capital Bank Corporation
generally may terminate the Exchange Agreement if we do not complete the
Exchange on or before June 30, 1999, unless extended by the written mutual
agreement of Home Savings, Capital Bank Corporation and Capital Bank.
DISTRIBUTION OF CONSIDERATION
As soon as reasonably practicable, but in any event no more than 20 days
following the Exchange Effective Time, Capital Bank Corporation will cause the
Exchange Agent to mail to each former shareholder of Home Savings of record
immediately prior to the Exchange Effective Time ("Home Savings Record Holder")
written instructions and transmittal materials (including, without limitation, a
return mailing envelope addressed to the Exchange Agent (collectively, a
"Transmittal Letter") for use in surrendering certificates representing shares
of Home Savings Common Stock outstanding at the Exchange Effective Time to the
Exchange Agent).
HOME SAVINGS SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
UNTIL THEY RECEIVE THE TRANSMITTAL LETTER.
Upon surrender to the Exchange Agent of Certificates for Home Savings
Common Stock, together with a properly completed Transmittal Letter, there will
be issued and mailed to each Home Savings Record Holder a certificate or
certificates representing the number of shares of Capital Bank Corporation
Common Stock to which such holder is entitled. Capital Bank Corporation will not
be obligated to deliver the consideration to which any Home Savings Record
Holder is entitled as a result of the Exchange until the holder surrenders such
holder's Certificates representing the shares of Home Savings Common Stock
together with a properly completed Transmittal Letter. If a dividend or other
distribution is declared by Capital Bank Corporation on Capital Bank Corporation
Common Stock, the record date for which is at or after the Exchange Effective
Time, the declaration will include dividends or other distributions on all
shares of Capital Bank Corporation Common Stock issuable pursuant to the
Exchange Agreement. However, no dividend or other distribution payable after the
Exchange Effective Time with respect to Capital Bank Corporation Common Stock
will be paid to the holder of any unsurrendered Home Savings Common Stock
Certificate until the holder duly surrenders such Certificate. Upon surrender of
such Home Savings Common Stock Certificate, a Capital Bank Corporation Common
Stock certificate, together with all undelivered dividends or other
distributions, if any (without interest) will be delivered and paid with respect
to the shares represented by such Certificate. In the event any Home Savings
Common Stock Certificate has been lost, stolen, destroyed or is otherwise
missing, the Exchange Agent will issue in exchange for such lost, stolen, or
destroyed Certificate a certificate representing the shares of Capital Bank
Corporation Common Stock to which he or she is entitled in accordance with and
upon compliance with conditions imposed by the Exchange Agent or Capital Bank
Corporation pursuant to the provisions of applicable North Carolina law
(including, without limitation, a requirement that the shareholder provide a
lost instruments indemnity or surety bond in form, substance and amount
satisfactory to the Exchange Agent and Capital Bank Corporation.)
At the Exchange Effective Time, the stock transfer books of Home Savings
will be closed to holders of Home Savings Common Stock and no transfer of shares
of Home Savings Common Stock by such holder will thereafter be made or
recognized.
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CONDITIONS TO CONSUMMATION OF THE EXCHANGE
Consummation of the Exchange is subject to various conditions, including
o receipt of the approval of the shareholders of Home Savings of the
Exchange Agreement,
o receipt of certain regulatory approvals required for consummation of
the Exchange,
o receipt by Home Savings of a written legal opinion from Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. and by
Capital Bank Corporation and Capital Bank of a written legal opinion
from Moore and Van Allen, PLLC,
o receipt by Home Savings of a written opinion of Baxter Fentriss and
by Capital Bank Corporation and/or Capital Bank of a written opinion
of IJL as to the fairness of the Exchange from a financial point of
view,
o approval of the shares of Capital Bank Corporation Common Stock
issuable pursuant to the Exchange for listing on the Nasdaq SmallCap
Market,
o the registration statement with respect to the Capital Bank
Corporation Common Stock being issued to Home Savings shareholders
being declared effective under the Securities Act of 1933,
o the accuracy, as of the date of the Exchange Agreement and as of the
Exchange Effective Time, of the representations and warranties of
Home Savings and Capital Bank and Capital Bank Corporation as set
forth in the Exchange Agreement,
o the performance of all agreements and the compliance with all
covenants of Home Savings and Capital Bank Corporation as set forth
in the Exchange Agreement,
o receipt by Capital Bank Corporation of assurances, in a form
satisfactory to it, from PricewaterhouseCoopers LLP to the effect
that the Exchange will qualify for pooling-of-interests accounting
treatment,
o the absence of any law or order or any action taken by any court,
governmental, or regulatory authority of competent jurisdiction
prohibiting, restricting, or making illegal the consummation of the
transactions contemplated by the Exchange Agreement,
o receipt by Capital Bank Corporation and Capital Bank of agreements
from each affiliate of Home Savings, and
o satisfaction of certain other conditions, including the receipt of
various certificates from the officers of Home Savings and Capital
Bank Corporation and Capital Bank.
We are unable to provide assurance as to when or if all of the conditions
precedent to the Exchange can or will be satisfied or waived by the party
permitted to do so, although as of the date of this Joint Proxy
Statement-Prospectus, we have received all regulatory approvals. Except in
limited circumstances, in the event the Exchange is not effected on or before
June 30, 1999, the Exchange Agreement may be terminated and the Exchange
abandoned by the Board of Directors of either Home Savings or Capital Bank
Corporation and Capital Bank. If the Capital Bank shareholders do not approve
the Holding Company Reorganization, then it may be necessary to postpone or
adjourn the Home Savings special meeting without completing the Exchange
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at that time since it is a prerequisite to the Exchange that Capital Bank be
reorganized into Capital Bank Corporation.
REGULATORY APPROVAL
The Exchange may not proceed in the absence of receipt of the requisite
regulatory approvals. Applications for the approvals described below have been
submitted to the appropriate regulatory authorities and approvals have been
received.
Home Savings, Capital Bank Corporation and Capital Bank are not aware of
any material governmental approvals or actions that are required for
consummation of the Exchange, except as described in this Joint Proxy
Statement-Prospectus. Should any other approval or action be required, it
presently is contemplated that such approval or action would be sought.
The Exchange is subject to the prior approval of the Federal Reserve
Board, pursuant to Section 3 of the BHC Act which approval was granted on
November 30, 1998. In evaluating the Exchange, the Federal Reserve Board was
required to consider, among other factors, the financial and managerial
resources and future prospects of the institutions and the convenience and needs
of the communities to be served. The relevant statutes prohibited the Federal
Reserve Board from approving the Exchange if:
o it would result in a monopoly or be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any part of the United States; or
o its effect in any section of the country could be to substantially
lessen competition or to tend to create a monopoly, or if it would
result in a restraint of trade in any other manner, unless the
Federal Reserve Board should find that any anti-competitive effects
are outweighed clearly by the public interest and the probable
effect of the transaction in meeting the convenience and needs of
the communities to be served.
The Exchange may not be consummated until the 30th day (which the Federal
Reserve Board reduced, in accordance with applicable law, to 15 days) following
the date of the Federal Reserve Board approval, during which time the United
States Department of Justice is afforded the opportunity to challenge the
transaction on antitrust grounds. The commencement of any antitrust action would
stay the effectiveness of the approval of the agencies, unless a court of
competent jurisdiction should specifically order otherwise.
The Exchange is also subject to the prior approval of the Administrator of
the North Carolina Savings Institution Division (the "Administrator") pursuant
to Chapter 54C of the North Carolina General Statutes and the regulations
promulgated thereunder. The required application was submitted to the
Administrator on December 1, 1998, along with such other information, including
certain filings, documents and reports as requested by the Administrator. The
required filing fee in the amount of $3,000 was also submitted with the
application.
Any regulatory approval that imposes material changes to the Exchange
Agreement or other material conditions could necessitate a resolicitation of
shareholder approval.
WAIVER, AMENDMENT, AND TERMINATION
To the extent permitted by law, the Exchange Agreement may be amended by a
subsequent writing signed by each of the parties upon the approval of the Board
of Directors of each of the parties before or after approval of the matters
relating to the Exchange Agreement required to be approved by the Home Savings
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shareholders. However, no amendment may be made which modifies the number of
shares of Capital Bank Corporation Common Stock into which each share of Home
Savings Common Stock will be converted without the further approval of the Home
Savings shareholders. In addition, prior to or at the Exchange Effective Time,
either Home Savings or Capital Bank Corporation, or both, acting through their
respective Boards of Directors, may:
o waive any default in the performance of any term of the Exchange
Agreement by the other party,
o waive or extend the time for the compliance or fulfillment by the
other party of any and all of its obligations under the Exchange
Agreement, and
o waive any of the conditions precedent to the obligations of such
party under the Exchange Agreement,
except any condition that, if not satisfied, would result in the violation of
any applicable law or governmental regulation and provided that such waiver
would not adversely affect the interests of the waiving party or its
shareholders. No such waiver will be effective unless written and unless
executed by a duly authorized officer of Home Savings or Capital Bank
Corporation as the case may be.
The Exchange Agreement may be terminated and the Exchange abandoned at any
time prior to the Exchange Effective Time, notwithstanding the provisions of the
Exchange Agreement and the approval of the Exchange Agreement by the Home
Savings shareholders:
o by the mutual consent of the Boards of Directors of Home Savings,
Capital Bank Corporation, and Capital Bank,
o by the Home Savings Board, Capital Bank Board or Capital Bank
Corporation Board of Directors:
o in the event Home Savings has violated or failed to fully perform
any of its obligations, covenants or agreements contained in Article
IV or Article VI of the Exchange Agreement in any material respect
or in the event Capital Bank or Capital Bank Corporation has
violated or failed to fully perform any of its obligations,
covenants or agreements contained in Article V or VI of the Exchange
Agreement in any material respect and which has not been cured
within 30 days after giving written notice to the breaching party,
o in the event any representation or warranty of the other party
contained in the Exchange Agreement or in any other certificate or
writing delivered pursuant to the Exchange Agreement was false or
misleading in any material respect when made or has become false or
misleading in any material respect and which has not been cured
within 30 days after giving written notice to the breaching party,
o the Home Savings shareholders do not ratify and approve the Exchange
Agreement and the transactions contemplated therein,
o if any of the conditions of the obligations of Capital Bank
Corporation, Capital Bank or Home Savings as set forth in the
Exchange Agreement shall not have been satisfied or effectively
waived in writing, or
o if the Exchange is not consummated by June 30, 1999, unless such
date is extended by mutual written agreement, and
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o by the Capital Bank Board of Directors or Capital Bank Corporation
Board of Directors:
o in the event Capital Bank Corporation's shareholders do not approve
the Holding Company Reorganization,
o if the number of shares dissenting from the Exchange, when coupled
with any other shares of Capital Bank Common Stock, Capital Bank
Corporation Common Stock and Home Savings Common Stock deemed
tainted for pooling of interests purposes, precludes accounting for
the Exchange as a pooling of interests, or
o if the Home Savings Board of Directors:
o fails to convene a meeting of Home Savings shareholders to approve
the Exchange on or before December 31, 1998 or postpones the date
scheduled for the meeting of Home Savings shareholders to approve
the Exchange beyond December 31, 1998, except with the written
consent of Capital Bank Corporation or Capital Bank,
o fails to recommend the approval of the Exchange Agreement and the
Exchange to the Home Savings shareholders in accordance with the
Exchange Agreement, or
o withdraws or amends or modifies in a manner adverse to Capital Bank
or Capital Bank Corporation its recommendation or approval in
respect of the Exchange Agreement and the Exchange or fails to
reaffirm such recommendation within two business days of a written
request by Capital Bank or Capital Bank Corporation.
If the Exchange is terminated as described above, the Exchange Agreement
will become void and have no effect, except that certain provisions of the
Exchange Agreement, including those relating to the obligations to maintain the
confidentiality of certain information, and return all documents obtained from
the other party under the Exchange Agreement, will survive.
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CONDUCT OF BUSINESS PENDING THE EXCHANGE
Pursuant to the Exchange Agreement, Home Savings generally has agreed that
Home Savings will:
o operate its businesses only in the usual and regular course in
substantially the same manner as such businesses were previously
conducted;
o preserve intact its present business organization, keep available
its present officers and employees, and preserve its relationships
with customers, depositors, creditors, correspondents, suppliers,
and others having business relationships with it;
o maintain all of its properties and equipment in customary repair,
order, and condition, ordinary wear and tear excepted;
o maintain its books of account and records in the usual, regular, and
ordinary manner in accordance with sound business practices applied
on a consistent basis;
o comply in all material respects with all laws, rules, and
regulations applicable to it, its properties and to the conduct of
its business;
o continue to maintain in force insurance such as is described in the
Exchange Agreement, not modify any bonds or policies of insurance in
effect as of the date of the Exchange Agreement unless the same, as
modified, provides substantially equivalent coverage, and not
cancel, allow to be terminated or, to the extent available, fail to
renew, any such bond or policy of insurance unless the same is
replaced with a bond or policy providing substantially equivalent
coverage;
o provide to Capital Bank and Capital Bank Corporation on a monthly
basis Home Savings' market value report on investment portfolios and
hedging portfolios; and
o promptly provide to Capital Bank and Capital Bank Corporation such
information about Home Savings financial condition, results of
operations, prospects, business, assets, loan portfolios (including,
without limitation, changes in loan quality), investments,
properties, or operations, as Capital Bank or Capital Bank
Corporation reasonably requests.
Prior to the Exchange Effective Time, Home Savings may not:
o encourage, solicit or initiate any inquiries or the making of any
proposal with respect to any merger, consolidation, or other
business combination involving Home Savings or the acquisition of
all or any significant part of the assets or capital stock of Home
Savings (an "Acquisition Transaction"), or
o negotiate, explore, or otherwise engage in discussions with any
person (other than Capital Bank, Capital Bank Corporation and their
representatives) with respect to any Acquisition Transaction, or
which may reasonably be expected to lead to a proposal for an
Acquisition Transaction, or
o enter into any Exchange Agreement, arrangement, or understanding
with respect to any such Acquisition Transaction or which would
require it to abandon, terminate, or fail to consummate the Exchange
or any other transaction contemplated by this Exchange Agreement.
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MANAGEMENT AND OPERATIONS AFTER THE EXCHANGE
As soon as practicable following the Exchange and subject to any necessary
regulatory and shareholder approval, the Capital Bank Corporation Board will
take steps to appoint, or cause to be elected, Edwin E. Bridges and John Grimes,
as directors of Capital Bank Corporation. Messrs. Bridges and Grimes shall be
compensated in accordance with Capital Bank Corporation's standard arrangements
for the compensation of its directors. However, no such compensation shall be
paid for services as a director to any director who is at such time being
compensated for services as an employee of Capital Bank Corporation, Capital
Bank, or Home Savings.
After the Exchange Effective Time, the current members of Home Savings'
Board of Directors may serve as members of Capital Bank's local advisory board
for a minimum of five years, subject to satisfactory performance. For such
service, these individuals shall be compensated in accordance with Capital
Bank's standard arrangements for the compensation of local advisory board
members.
EFFECT ON CERTAIN EMPLOYEES AND BENEFIT PLANS
EFFECT OF THE EXCHANGE ON HOME SAVINGS OPTIONS. At the Exchange Effective
Time, each Home Savings Option granted by Home Savings under the Home Savings
Stock Plans (each as defined in the Exchange Agreement) that is outstanding at
the Exchange Effective Time, whether or not exercisable, will be converted into
and become a right with respect to Capital Bank Corporation Common Stock, and
Capital Bank Corporation will assume each Home Savings Option, in accordance
with the terms of the Home Savings Stock Plan and stock option agreement by
which it is evidenced. However, from and after the Exchange Effective Time:
o Capital Bank Corporation and its Compensation Committee will be
substituted for Home Savings and the committee of the Home Savings
Board (including, if applicable, the entire Board of Directors of
Home Savings) administering such Home Savings Stock Plan;
o each Home Savings Option assumed by Capital Bank Corporation may be
exercised solely for shares of Capital Bank Corporation Common
Stock;
o the number of shares of Capital Bank Corporation Common Stock
subject to such Home Savings Option will be equal to the number of
shares of Home Savings Common Stock subject to such Home Savings
Option immediately prior to the Exchange Effective Time multiplied
by 1.28 and rounding down to the nearest whole share; and
o the per share exercise price under each such Home Savings Option
will be adjusted by dividing the per share exercise price under each
such Home Savings Option by 1.28 and rounding to the nearest cent.
EMPLOYMENT OF HOME SAVINGS EMPLOYEES. Provided he remains employed as
President of Home Savings at the Exchange Effective Time, Home Savings will
enter into an amended and restated Employment Agreement with Edwin E. Bridges
for an initial term of five years. The employment term will be automatically
renewed on a monthly basis until written notification otherwise is given by the
Board of Directors of Home Savings or, upon a subsequent merger of Home Savings
with and into Capital Bank, by the Board of Directors of Capital Bank. Pursuant
to the Employment Agreement, Bridges is to serve as Home Savings' President
while Home Savings remains a wholly-owned subsidiary of Capital Bank Corporation
and as the Market Executive for Chatham County upon a merger of Home Savings
into Capital Bank. Mr. Bridges
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is to receive a base salary at least equal to $107,000 per annum with minimum
annual increases of not less than 6% during the term of the Employment
Agreement. Additionally, Mr. Bridges is to receive:
o health insurance coverage for the remainder of his natural life;
o five weeks of paid vacation per year;
o reimbursement for his civic and country club dues provided Mr.
Bridges is responsible for all personal expenses;
o reimbursement for all business expenses for him to attend two
conferences annually sponsored by either the American Bankers
Association, the North Carolina Bankers Association or the
Independent Bankers Association of America;
o reimbursement for all reasonable expenses incurred by him in the
performance of his duties for Home Savings and documented to the
reasonable satisfaction of Home Savings pursuant to established
policies;
o disability and life insurance and other benefits available generally
to employees of Home Savings pursuant to the employee benefit plans
and programs for all employees; and
o a monthly travel and mileage allowance in the amount of $250 per
month.
The Employment Agreement may be terminated prior to the expiration of its
term by Home Savings with or without cause or upon Mr. Bridges' death or
disability or voluntarily by Mr. Bridges upon 60 days written notice. If Mr.
Bridges' employment is terminated without cause and is not due to death, Home
Savings must give him 90 days written notice of such termination and he will
then be entitled to his compensation and benefits as if the agreement were in
effect for the remainder of the term. At any time during the term of the
Employment Agreement, either Mr. Bridges may elect, or Home Savings may elect to
cause Mr. Bridges, to perform such duties as may be customarily performed by
public relations/marketing consultants in the financial services industry. In
such event, Mr. Bridges would be entitled to receive for such services
equivalent benefits as provided in the Employment Agreement for the balance of
the then current term of the Employment Agreement; provided, however, that Mr.
Bridges' right to continued health insurance coverage shall not be affected by
such election. In addition to the foregoing, the Employment Agreement contains
certain confidentiality and noncompete provisions which impact Mr. Bridges'
ability, for three years after any termination of his employment with Home
Savings, to compete with Home Savings or to be in any way involved with the
management of a business that is engaged in the operation of a bank or similar
financial institution within a 60 mile radius of Siler City, North Carolina.
Provided they remain employed by Home Savings at the Exchange Effective
Time, Capital Bank will in good faith use its best efforts to locate suitable
positions for and offer employment to all other employees of Home Savings ("Home
Savings Employees") at an office of Capital Bank or Home Savings located within
a reasonable commuting distance from their respective job locations at the
Exchange Effective Time. The employment so offered by Capital Bank shall be at
such compensation as that of the Home Savings Employee at the Exchange Effective
Time. Notwithstanding the foregoing, or anything else in this Exchange
Agreement, Capital Bank shall have no obligation with respect to any specific
Home Savings Employee, except for obligations relating to severance payments and
the employee stock ownership plan. Each such Home Savings Employee's employment
shall be on an "at-will" basis. Nothing in the Exchange Agreement shall be
deemed: (a) to constitute an Employment Agreement with any such person, (b) to
obligate Capital Bank to employ any
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such person for any specific period of time or in any specific position, or (c)
to restrict Capital Bank's right to terminate the employment of any such person
at any time and for any reason satisfactory to Capital Bank.
EMPLOYEE SEVERANCE. Pursuant to the Exchange Agreement, Home Savings
Employees (other than Edwin E. Bridges whose severance benefits are provided for
in his written Employment Agreement) whose employment is terminated by Capital
Bank within one year of the Exchange Effective Time (unless termination of such
employment is for cause as determined in Capital Bank's absolute discretion)
will be entitled to a severance payment from Capital Bank equal in amount to one
week's regular salary for each year such employee was employed by Home Savings,
subject to a minimum of three weeks severance.
EMPLOYEE STOCK OWNERSHIP PLAN. Capital Bank Corporation intends to assume
the Home Savings Employee Stock Ownership Plan ("Home Savings ESOP"), and,
thereafter, to terminate the Home Savings ESOP at the earliest practicable time
permitted by applicable legal and accounting authority (including without
limitation the applicable requirements for the transactions contemplated by the
Exchange Agreement to be treated as a pooling of interests for accounting
purposes), all at Capital Bank Corporation's discretion. Capital Bank
Corporation intends to continue to make ESOP loan payments substantially
consistent with Home Savings' past practices, and Capital Bank Corporation will
not terminate the Home Savings ESOP until all loan balances due under the Home
Savings ESOP have been paid in full.
EMPLOYEE BENEFITS. Except as otherwise provided in the Exchange Agreement,
all Home Savings Employees shall be entitled to receive all employee benefits
and to participate in all benefit plans provided by Capital Bank Corporation and
Capital Bank on the same basis (including costs) and subject to the same
eligibility and vesting requirements, and to the same conditions, restrictions
and limitations, as generally are in effect and applicable to other newly hired
employees of Capital Bank Corporation and Capital Bank. However, each Home
Savings Employee shall be given credit for his or her full years of service with
Home Savings for purposes of entitlement to vacation and sick leave and for
purposes of eligibility and vesting (but not for benefit accrual purposes) under
any Capital Bank Corporation and Capital Bank benefit plans. There shall be no
exclusion from coverage under the Capital Bank Corporation and Capital Bank
health insurance plan as a result of pre-existing conditions to the extent such
conditions were covered under any health insurance plan maintained by Home
Savings prior to the Exchange Effective Time.
PENSION PLAN. At the Exchange Effective Time (a) Home Savings shall fund
any deficits existing in the Home Savings defined benefit pension plan ("Pension
Plan"), and (b) Home Savings' Board of Directors shall adopt a resolution to
terminate the Pension Plan, effective before the Exchange Effective Time or as
soon after the Exchange Effective Time as possible, in accordance with the terms
of the Pension Plan and the requirements of the Employee Retirement Income
Security Act of 1974 and the Code.
Home Savings had previously committed to providing continued health
insurance for Jack Tanner, a director and the former Managing Officer of Home
Savings, and Gayle Loggins, an employee of Home Savings, for the remainder of
their lives with coverage at least equivalent to the group health insurance
coverage generally provided to all active, full-time employees of Home Savings.
However, this obligation to provide or pay for health insurance coverage may be
partially or wholly fulfilled by any Medicare, employer or similar coverage for
which Tanner or Loggins is eligible in the future to the extent of any coverage
provided thereby at no cost thereto.
As of September 30, 1998, there were outstanding options to acquire 49,298
shares of Home Savings' Common Stock. Such options, to the extent not exercised
prior to the Exchange Effective Time, will be converted into and become rights
with respect to Capital Bank Corporation's Common Stock and Capital Bank
Corporation will assume each such stock option, in accordance with the terms of
the particular stock
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option plan under which it was issued and stock option agreement by which it is
evidenced. In addition, each share of Home Savings' Common Stock held by the
Trustee under the Home Savings Bank of Siler City, Inc., SSB 1995 Management
Recognition Plan (the "MRP") will be converted at the Exchange Effective Time
into shares of Capital Bank Corporation's Common Stock as provided therein. Such
shares will thereafter continue to be held and be subject to the MRP and
delivered to the respective participants at such times that the shares of
restricted stock as defined in the MRP, become vested and nonforfeitable under
the MRP. The Exchange Agreement contains provisions concerning other benefits to
be provided to employees and directors of Home Savings, including: (a) the
payment of severance payments for Home Savings' Employees whose employment is
terminated following the Exchange Effective Time, (b) employee benefits after
the Exchange Effective Time, and (c) the assumption of certain Home Savings'
benefit plans and agreements.
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE
The Exchange is intended to qualify as a reorganization for federal income
tax purposes under Section 368(a) of the Code. The obligation of the parties to
consummate the Exchange is conditioned on the receipt of an opinion in form and
substance reasonably satisfactory to Capital Bank Corporation and Home Savings
from PricewaterhouseCoopers LLP which serves as Capital Bank's and Home Savings'
independent public accountant, to the effect that the Exchange will constitute
such a reorganization. A copy of such opinion has been delivered to Capital Bank
Corporation and Home Savings. In delivering its opinion, PricewaterhouseCoopers
LLP, has received and relied upon certain representations contained in
certificates of officers of Home Savings and Capital Bank Corporation and
certain other information, data, documentation and other materials as it deems
necessary. The tax opinion is based upon customary assumptions contained
therein.
Neither Capital Bank nor Home Savings intends to seek a ruling from the
IRS as to the federal income tax consequences of the Exchange. Home Savings'
shareholders should be aware that the opinion of PricewaterhouseCoopers LLP will
not be binding on the IRS or the courts. Home Savings' shareholders also should
be aware that some of the tax consequences of the Exchange are governed by
provisions of the Code as to which there are no final regulations and little or
no judicial or administrative guidance. There can be no assurance that future
legislation, administrative rulings, or court decisions will not adversely
affect the accuracy of the statements contained herein.
The tax opinion states that, provided the assumptions stated therein are
satisfied, the Exchange will constitute a reorganization as defined in Section
368(a) of the Code, and the following federal income tax consequences will
result:
o No gain or loss will be recognized by the Home Savings shareholders
upon receipt of Capital Bank Corporation Common Stock;
o The aggregate federal income tax basis of Capital Bank Corporation
Common Stock received by each Home Savings shareholder will be the
same as the aggregate federal income tax basis of the Home Savings
Common Stock; and
o The holding period of the shares of the Capital Bank Corporation
Common Stock received by each Home Savings shareholder will include
the period for which the exchanged Home Savings Common Stock was
held as a capital asset by each Home Savings shareholder on the date
of the Exchange.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE EXCHANGE TO THE SHAREHOLDERS OF CAPITAL BANK
CORPORATION, TO CAPITAL BANK CORPORATION AND TO
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HOME SAVINGS AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF ALL POTENTIAL
TAX EFFECTS OF THE EXCHANGE. THE DISCUSSION DOES NOT ADDRESS THE TAX
CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR SHAREHOLDER SUBJECT TO SPECIAL
TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS:
o DEALERS IN SECURITIES,
o BANKS,
o INSURANCE COMPANIES,
o TAX-EXEMPT ORGANIZATIONS,
o NON-UNITED STATES PERSONS,
o SHAREHOLDERS WHO DO NOT HOLD THEIR SHARES OF CAPITAL BANK
CORPORATION COMMON STOCK AS CAPITAL ASSETS WITHIN THE MEANING OF
SECTION 1221 OF THE CODE, AND
o SHAREHOLDERS WHO ACQUIRED THEIR SHARES OF CAPITAL BANK CORPORATION
COMMON STOCK PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS
COMPENSATION.
IN ADDITION, THE DISCUSSION DOES NOT ADDRESS ANY CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCALITY OR FOREIGN JURISDICTION. MOREOVER, THE TAX
CONSEQUENCES TO HOLDERS OF CAPITAL BANK CORPORATION OPTIONS, IF ANY, ARE NOT
DISCUSSED. THE DISCUSSION IS BASED UPON THE CODE, TREASURY REGULATIONS
THEREUNDER AND ADMINISTRATIVE RULINGS AND COURT DECISIONS AS OF THE DATE HEREOF.
ALL OF THE FOREGOING IS SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE
CONTINUING VALIDITY OF THIS DISCUSSION. HOME SAVINGS SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE PARTICULAR FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE EXCHANGE TO THEM.
ACCOUNTING TREATMENT
It is anticipated that the Exchange will be accounted for as a pooling of
interests, and the parties will not consummate the Exchange if such accounting
treatment is not available. Under the pooling of interests method of accounting,
the recorded amounts of the assets and liabilities of Home Savings will be
carried forward at their previously recorded amounts, and current and prior
period financial statements will be restated for all periods as though Home
Savings and Capital Bank Corporation had been combined at the beginning of the
earliest period presented.
There are certain other criteria that must be satisfied in order for the
Exchange to qualify as a pooling of interests, some of which cannot be satisfied
until after the Exchange Effective Time. In addition, it is a condition to
closing that Capital Bank Corporation receive assurances, in a form satisfactory
to it, from PricewaterhouseCoopers LLP to the effect that the Exchange will
qualify for pooling of interests accounting treatment.
EXPENSES AND FEES
The Exchange Agreement provides that each of the parties will bear and pay
its own expenses in connection with the transactions contemplated by the
Exchange Agreement, including legal, accounting and financial advisory fees. All
expenses associated with the printing and mailing of this Joint Proxy
Statement-Prospectus will be shared by Capital Bank and Home Savings equally.
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RESALES OF CAPITAL BANK CORPORATION COMMON STOCK
Capital Bank Corporation Common Stock to be issued to shareholders of Home
Savings in connection with the Exchange will be registered under the Securities
Act of 1933, as amended. All shares of Capital Bank Corporation Common Stock
received by Home Savings Record Holders and all shares of Capital Bank
Corporation Common Stock issued and outstanding immediately prior to the
Exchange Effective Time as a result of the Holding Company Reorganization will
be freely transferable upon consummation of the Exchange by those shareholders
who were not "affiliates" of Home Savings or who are "affiliates" of Capital
Bank Corporation. "Affiliates" generally are defined as persons or entities who
control, are controlled by, or are under common control with Home Savings
(generally, this will include executive officers, directors, and 10% or greater
shareholders).
OPTION AGREEMENT
Capital Bank and Home Savings entered into a Stock Option Agreement, dated
as of September 29, 1998 (the "Option Agreement"), pursuant to which Capital
Bank was granted an option to purchase up to 183,615 shares of Home Savings
Common Stock (19.9% of the currently outstanding Home Savings Common Stock) at a
price per share equal to $11.75 (the "Option"). If the Option was exercised in
full, the shares subject to the Option would represent approximately 16.6% of
the currently outstanding Home Savings Common Stock (after giving effect to the
issuance of such option shares). The effect of the Option Agreement could be to
deter potential third party bidders from making offers to acquire Home Savings
since the issuance of the additional shares to Capital Bank upon exercise of the
Option could make it prohibitively expensive to a third party to acquire control
of Home Savings.
Subject to applicable law and regulatory restrictions, Capital Bank may
exercise the Option, in whole or in part, if, but only if a Purchase Event (as
defined below) has occurred, provided that written notice of such exercise as
required by the Option Agreement is provided within 60 days following such
Purchase Event (or such later period as provided in the Option Agreement).
As defined in the Option Agreement, "Purchase Event" means any of the
following events or transactions occurring after the date of signing the Option
Agreement:
(a) Home Savings or any subsidiary of Home Savings, without having
received Capital Bank's prior written consent, shall have entered
into an agreement with any person, whereby such person would (x)
merge or consolidate, or enter into any similar transaction, with
Home Savings or any Home Savings Subsidiary, (y) purchase, lease or
otherwise acquire all or substantially all of the assets of Home
Savings or any Home Savings Subsidiary or (z) purchase or otherwise
acquire (including by way of merger, consolidation, share exchange
or any similar transaction) securities representing 20% or more of
the voting power of Home Savings or any Home Savings Subsidiary;
(b) any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 20% or more of the outstanding
shares of the Home Savings Common Stock (the term "beneficial
ownership" for purposes of the Option Agreement having the meaning
assigned thereto in Section 13(d) of the Exchange Act and the
regulations promulgated thereunder);
(c) any corporation, person, partnership, trust, other entity or group
(as defined in Section 13(d)(3) of the Exchange Act) solicits, or
announces its intentions to solicit, proxies or
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consents of stockholders of Home Savings in opposition to any
recommendation of the Board of Directors of Home Savings;
(d) a "change of control" (as would be required to be reported in
response to Item 5(f) of Schedule 14A or Regulation 14A promulgated
under the Exchange Act) of Home Savings occurs;
(e) Home Savings breaches any of its obligations under the Exchange
Agreement; or
(f) any person (x) shall have made a bona fide proposal to Home Savings
by public announcement or written communication that is or becomes
the subject of public disclosure to acquire Home Savings or any Home
Savings Subsidiary by merger, consolidation, purchase of all or
substantially all of its assets or any other similar transaction,
(y) shall have commenced a bona fide tender or exchange offer to
purchase shares of Home Savings Common Stock such that upon
consummation of such offer such person would own or control 20% or
more of the outstanding shares of Home Savings Common Stock, or (z)
shall have filed an application or notice with any federal or state
regulatory agency for clearance or approval to engage in any
transaction described in clause (a) or (b) above, and thereafter the
holders of Home Savings Common Stock shall have not approved the
Exchange Agreement and the transactions contemplated thereby at the
meeting of such shareholders held for such purposes which shall have
not been held or shall have been canceled prior to termination of
the Exchange Agreement.
If more than one of the transactions giving rise to a Purchase Event under
the Option Agreement is undertaken or effected, then all such transactions shall
give rise only to one Purchase Event, which Purchase Event shall be deemed
continuing for all purposes under the Option Agreement until all such
transactions are abandoned. As used in the Option Agreement, "person" shall have
the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
As defined in the Option Agreement, "Exercise Termination Event" means
each of the following: (a) the time and date on which the Exchange becomes
effective; (b) termination of the Exchange in accordance with the provisions
thereof prior to the occurrence of the Purchase Event; or (c) the passage of six
months after termination of the Exchange Agreement if such termination follows
the occurrence of a Purchase Event or is due to a breach by Home Savings of any
covenant contained therein.
As provided in the Option Agreement, if Capital Bank is entitled to and
wishes to exercise the Option, it is obligated to send to Home Savings written
notice (the date of which being herein referred to as the "Notice Date")
specifying (a) the total number of shares it will purchase pursuant to such
exercise and (b) a place and date not earlier than three business days nor later
than 60 business days from the Notice Date for the closing of such purchase.
However, if prior notification to or approval of the Federal Reserve Board or
any other governmental authority, regulatory or administrative agency or
commission, domestic or foreign, is required in connection with such purchase,
Capital Bank is obligated to promptly file the required notice or application
for approval and expeditiously process the same. The period of time that
otherwise would run pursuant to the prior sentence, will run instead from the
later of (x) the date on which any required notification periods have expired or
been terminated and (y) the date on which such approvals have been obtained and
any requisite waiting period or periods shall have passed.
Certain regulatory approvals may be required before an acquisition of Home
Savings Common Stock pursuant to an exercise of the Option could be completed.
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Neither of the parties to the Option Agreement may assign any of its
rights or obligations under the Option Agreement or the Option created
thereunder to any other person, without the express written consent of the other
party. However, if a Purchase Event shall have occurred and be continuing,
Capital Bank may assign in whole or in part its rights and obligations
thereunder.
In the event of any change in the Home Savings Common Stock by reasons of
stock dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares or the like, the type and number
of shares of Home Savings Common Stock purchasable upon exercise of the Option
will be appropriately adjusted.
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DISSENTERS' RIGHTS
Article 13 (entitled "Dissenters' Rights") of the NCBCA sets forth the
rights of the Capital Bank shareholders who object to the Holding Company
Reorganization and the Home Savings shareholders who object to the Exchange. The
following is a summary of the material terms of the statutory procedures to be
followed by (a) a holder of Capital Bank Common Stock in order to dissent from
the Holding Company Reorganization and perfect dissenters' rights under the
NCBCA, and (b) a holder of Home Savings Common Stock in order to dissent from
the Exchange and perfect dissenters' rights under the NCBCA. A copy of Article
13 of the NCBCA is attached as Appendix V hereto. For purposes of this Summary,
"Company" shall refer to Capital Bank or Home Savings, as the case may be, and
"Transaction" shall refer to the Holding Company Reorganization or the Exchange,
as the case may be.
If either a Capital Bank shareholder or a Home Savings shareholder elects
to exercise such a right to dissent and demand appraisal, such shareholder must
satisfy each of the following conditions:
(a) such Shareholder must give to the Company and the Company must
actually receive, before the vote on approval or disapproval of the
Transaction is taken, written notice (the "Notice") of such Shareholder's
intent to demand payment for such Shareholder's shares if the Transaction
is effectuated (this Notice must be in addition to and separate from any
proxy or vote against the Transaction; neither voting against, abstaining
from voting, nor failing to vote on the Transaction will constitute a
Notice within the meaning of the NCBCA); and
(b) such Shareholder must not vote in favor of the Transaction (a
failure to vote will satisfy this requirement, but a vote in favor of the
Transaction, by proxy or in person, or the return of a signed proxy which
does not specify a vote against approval of the Transaction or direction
to abstain, will constitute a waiver of such Shareholder's Dissenters'
Rights).
If the requirements of (a) and (b) above are not satisfied and the
Transaction becomes effective, a Company Shareholder will not be entitled to
payment for such Shareholder's shares under the provisions of Article 13 of the
NCBCA.
Any Notices should be addressed if to Capital Bank, to Capital Bank, P.O.
Box 18949, Raleigh, North Carolina 27601, attention: Allen T. Nelson, Jr., and
if to Home Savings, to Home Savings Bank of Siler City, Inc., SSB, 300 East
Raleigh Street, Siler City, North Carolina 27344, attention: Edwin E. Bridges.
The Notice must be executed by the holder of record of shares of Company Common
Stock as to which Dissenters' Rights are to be exercised. A beneficial owner may
assert Dissenters' Rights only if he dissents with respect to all Company Common
Stock of which he is the beneficial owner. With respect to shares of Company
Common Stock which are owned of record by a voting trust or by a nominee, the
beneficial owner of such shares may exercise Dissenters' Rights if such
beneficial holder also submits to the Company the record holder's written
consent to such exercise not later than the time such beneficial holder asserts
the Dissenters' Rights. A record owner, such as a broker, who holds shares of
Company Common Stock as a nominee for others, may exercise Dissenters' Rights
with respect to the shares held for all or less than all beneficial owners of
shares as to which such person is the record owner, provided such record owner
dissents with respect to all Company Common Stock beneficially owned by any one
person. In such case, the Notice submitted by such broker as record owner must
set forth the name and address of the Shareholder who is objecting to the
Transaction and demanding payment for such person's shares.
If the Transaction creating Dissenter's Rights is approved, the Company
will be required to mail by registered or certified mail, return receipt
requested, a written notice (the "Dissenters' Notice") to all
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Shareholders who have satisfied the requirements of (a) and (b) above. The
Dissenters' Notice must be sent no later than ten days after the Shareholder
approval of the Transaction, and must:
o state where the payment demand must be sent and where and when
certificates for shares of Company Common Stock must be deposited;
o supply a form for demanding payment;
o set a date by which the Company must receive the payment demand (not
fewer than 30 days nor more than 60 days after the Dissenters'
Notice is mailed); and
o include a copy of Article 13 of the NCBCA.
A Shareholder who receives a Dissenters' Notice must demand payment and
deposit such Shareholder's share certificates in accordance with the terms of
the Dissenters' Notice. A Shareholder who demands payment and deposits such
Shareholder's share certificates retains all other rights of a Shareholder until
these rights are canceled or modified by the Transaction. A Shareholder who does
not demand payment or deposit such Shareholder's share certificates where
required, each by the date set in the Dissenters' Notice, is not entitled to
payment for their shares under the NCBCA.
Within 30 days after receipt of a demand for payment, the Company is
required to pay each dissenting Shareholder the amount the Company estimates to
be the fair value of such Shareholder's shares, plus interest accrued from the
effective date of the Transaction to the date of payment. The payment must be
accompanied by:
o the Company's most recent available balance sheet, income statement
and statement of cash flows as of the end of or for the fiscal year
ending not more than 16 months before the date of payment, and the
latest available interim financial statements, if any;
o an explanation of how the Company estimated the fair value of the
shares;
o an explanation of the interest calculation;
o a statement of the dissenters' right to demand payment (as described
below); and
o a copy of Article 13 of the NCBCA.
If the Transaction is not consummated within 60 days after the date set
for demanding payment and depositing share certificates, the Company must,
pursuant to the NCBCA, return the deposited certificates. If after returning the
deposited certificates the Transaction is consummated, the Company must send a
new Dissenters' Notice and repeat the payment demand procedure.
A Shareholder may, however, notify the Company in writing of such
Shareholder's own estimate of the fair value of his shares and amount of
interest due, and demand payment of the excess of such Shareholder's estimate of
the fair value of such Shareholder's shares over the amount previously paid by
the Company if: (a) the Shareholder believes that the amount paid is less than
the fair value of the Company Common Stock or that the interest is incorrectly
calculated; (b) the Company fails to make payment of its estimate of fair value
to a Shareholder within 30 days after receipt of a demand for payment; or (c)
the Exchange not having been consummated, the Company does not return the
deposited certificates within 60 days after the date set for demanding payment.
A Shareholder waives the right to demand payment unless
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such Shareholder notifies the Company of such Shareholder's demand in writing
within 30 days of the Company's payment of its estimate of fair value (with
respect to clause (a) above) or the Company's failure to perform (with respect
to clauses (b) and (c) in this paragraph). A Shareholder who fails to notify the
Company of his demand within such 30-day period shall be deemed to have
withdrawn such Shareholder's dissent and demand of payment.
If a demand for payment remains unsettled, the dissenting Shareholder may
commence a proceeding within 60 days after the earlier of (a) the date of his
payment demand or (b) the date payment is made, by filing a complaint with the
Superior Court Division of the North Carolina General Court of Justice to
determine the fair value of the shares and accrued interest. If the dissenting
Shareholder does not commence the proceeding within such 60-day period, the
dissenting Shareholder shall be deemed to have withdrawn the dissent and demand
for payment.
The court in such an appraisal proceeding will determine all costs of the
proceeding and assess the costs as it finds equitable. The proceeding is to be
tried as in other civil actions; however, the dissenting Shareholder will not
have the right to a trial by jury. The court may also assess the fees and
expenses of counsel and expenses for the respective parties, in the amounts the
court finds equitable: (a) against the Company if the court finds that it did
not comply with the statutes; or (b) against the Company or the dissenting
Shareholder, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith. If
the court finds that the services of counsel for any dissenting Shareholder were
of substantial benefit to other dissenting Shareholders, and that the fees for
those services should not be assessed against the Company, the court may award
to these counsel reasonable fees to be paid out of the amounts awarded the
dissenting Shareholders who were benefited.
THE SUMMARY SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF
THE PROVISIONS OF THE NCBCA RELATING TO THE RIGHTS OF DISSENTING SHAREHOLDERS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE APPLICABLE SECTIONS OF THE
NCBCA, WHICH ARE INCLUDED AS APPENDIX V TO THIS JOINT PROXY
STATEMENT-PROSPECTUS. SHAREHOLDERS INTENDING TO EXERCISE THEIR DISSENTERS'
RIGHTS ARE URGED TO REVIEW CAREFULLY APPENDIX V AND TO CONSULT WITH LEGAL
COUNSEL SO AS TO BE IN STRICT COMPLIANCE THEREWITH.
If the number of shares of Home Savings Common Stock held by Home Savings
Shareholders dissenting from the Exchange would preclude accounting for the
Exchange as a pooling-of-interests, Capital Bank Corporation will have no
obligation to consummate the Exchange. In that regard, Capital Bank Corporation
currently anticipates that if more than 92,268 shares of Home Savings Common
Stock dissent from the Exchange, Capital Bank Corporation would not consummate
the Exchange. The Exchange Agreement provides that Home Savings will establish
an escrow fund with an independent third party from which all payments to
dissenting Home Savings shareholders (if any) will be made. Neither Capital Bank
Corporation nor Capital Bank will contribute any funds to the escrow fund.
The Holding Company Agreement provides that if the Board of Directors of
Capital Bank determines that the holders of a sufficient number of shares of
Capital Bank Common Stock have dissented from the Holding Company Reorganization
so that consummation of the Holding Company Reorganization is inadvisable, the
Board of Directors of Capital Bank may terminate the Holding Company Agreement.
In that regard, Capital Bank currently anticipates that it would terminate the
Holding Company Agreement if more than 247,765 shares of Capital Bank Common
Stock dissent from the Holding Company Reorganization. To comply with the
requirements for a reorganization under Section 368(a)(1)(B) of the Code, the
Holding Company Agreement provides that Capital Bank will establish an escrow
fund from which all payments to dissenting Capital Bank shareholders (if any)
will be made. Capital Bank Corporation will not contribute any funds to the
escrow fund. Section 368(a)(1)(B) applies to the acquisition by one corporation,
in exchange solely for all or a part of its voting stock, of stock of another
corporation, and no cash consideration may be
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paid by the acquiror. Accordingly, it is necessary that all cash payments to
dissenters of the acquired corporation be paid from funds of the acquired
corporation, and not from funds of the acquiring corporation. The escrow fund
mechanism described above was included in the Holding Company Agreement to
ensure that any and all Capital Bank dissenters would be paid from Capital
Bank's funds and that the Holding Company Reorganization would remain eligible
for treatment as a reorganization under Section 368(a)(1)(B) of the Code.
DESCRIPTION OF CAPITAL BANK CORPORATION CAPITAL STOCK
The following is a summary of the material provisions of Capital Bank
Corporation's Articles of Incorporation and Bylaws.
GENERAL
The Articles of Incorporation of Capital Bank Corporation authorize the
issuance of capital stock consisting of 20,000,000 shares of common stock, no
par value per share. There is one share of Capital Bank Corporation Common Stock
currently issued and outstanding, which is owned by James A. Beck. There is
currently no established public trading market for Capital Bank Corporation
Common Stock.
On the Holding Company Effective Date, the currently outstanding share of
Capital Bank Corporation Common Stock will be redeemed and canceled, and there
will be, subject to the exercise of Dissenters' Rights, 2,477,651 shares
outstanding as a result of the exchange of shares of Capital Bank Corporation
Common Stock for shares of Capital Bank Common Stock. After consummation of the
Exchange, pursuant to which each share of Home Savings Common Stock will be
exchanged for 1.28 shares of Capital Bank Corporation Common Stock, Capital Bank
Corporation will have 3,658,689 shares outstanding, subject to the exercise of
Dissenters' Rights.
In the future, the authorized but unissued and unreserved shares of
Capital Bank Corporation Common Stock will be available for issuance for general
purposes, including, but not limited to, possible issuance as stock dividends or
stock splits, future mergers or acquisitions, or future private placements or
public offerings. Except as otherwise may be required to approve a merger or
other transaction in which the additional authorized shares of Capital Bank
Corporation Common Stock would be issued, no shareholder approval will be
required for the issuance of those shares. See page 65 for a discussion of the
rights of the holders of Capital Bank Corporation Common Stock as compared to
the holders of Capital Bank Common Stock and as compared to the holders of Home
Savings Common Stock.
COMMON STOCK
GENERAL. Each share of Capital Bank Corporation Common Stock has the same
relative rights as, and is identical in all respects to, each other share of
Capital Bank Corporation Common Stock.
DIVIDEND RIGHTS. As a North Carolina corporation, Capital Bank Corporation
will not be directly subject to the restrictions on the payment of dividends
applicable to Capital Bank or Home Savings. Holders of shares of Capital Bank
Corporation's Common Stock will be entitled to receive such cash dividends as
the Board of Directors of Capital Bank Corporation may declare out of funds
legally available therefor. However, the payment of dividends by Capital Bank
Corporation will be subject to the restrictions of North Carolina law applicable
to the declaration of dividends by a business corporation. Under such
provisions, cash dividends may not be paid if a corporation will not be able to
pay its debts as they become due in the usual course of business after making
such cash dividend distribution or the corporation's total assets would be less
than the
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sum of its total liabilities plus the amount that would be needed to satisfy
certain liquidation preferential rights. After the Holding Company
Reorganization and the Exchange are consummated, the ability of Capital Bank
Corporation to pay dividends to the holders of shares of Capital Bank
Corporation Common Stock will, at least initially, be completely dependent upon
the amount of dividends Capital Bank and Home Savings pays to Capital Bank
Corporation. In addition, it is not likely that Capital Bank Corporation will
declare or pay cash dividends in the foreseeable future since earnings, if any,
will be used to support growth in earning assets and the opening of branch
locations, should such action be pursued. See "Comparison of the Rights of
Shareholders - Comparison of the Rights of Holders of Capital Bank Common Stock
and Capital Bank Corporation Common Stock - Payment of Dividends" and
"Comparison of the Rights of Shareholders - Comparison of the Rights of Holders
of Home Savings Common Stock and Capital Bank Corporation Common Stock - Payment
of Dividends."
VOTING RIGHTS. Each share of Capital Bank Corporation Common Stock will
entitle the holder thereof to one vote on all matters upon which shareholders
have the right to vote. In addition, the Board of Directors of Capital Bank
Corporation is classified so that approximately one-third of the directors will
be elected each year. Shareholders of Capital Bank Corporation are not entitled
to cumulate their votes for the election of directors. See "Comparison of the
Rights of Shareholders - Comparison of the Rights of Holders of Capital Bank
Common Stock and Capital Bank Corporation Common Stock - Voting Rights" and
"Comparison of the Rights of Shareholders - Comparison of the Rights of Holders
of Home Savings Common Stock and Capital Bank Corporation Common Stock - Voting
Rights."
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of Capital Bank Corporation, the holders of shares of Capital Bank
Corporation Common Stock will be entitled to receive, after payment of all debts
and liabilities of Capital Bank Corporation, all remaining assets of Capital
Bank Corporation available for distribution in cash or in kind. In the event of
any liquidation, dissolution or winding up of Capital Bank or Home Savings,
Capital Bank Corporation, as the holder of all shares of Capital Bank Common
Stock upon completion of the Holding Company Reorganization and as the holder of
all shares of Home Savings Common Stock upon completion of the Exchange, would
be entitled to receive payment of all debts and liabilities of Capital Bank and
Home Savings (including all deposits and accrued interest thereon) and all
remaining assets of Capital Bank and Home Savings available for distribution in
cash or in kind.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of shares of Capital Bank
Corporation Common Stock will not be entitled to preemptive rights with respect
to any shares that may be issued. Capital Bank Corporation Common Stock is not
subject to call or redemption.
CERTAIN ARTICLES AND BYLAW PROVISIONS HAVING POTENTIAL ANTI-TAKEOVER EFFECTS
GENERAL. The following is a summary of the material provisions of Capital
Bank Corporation's Articles of Incorporation and Bylaws which address matters of
corporate governance and the rights of shareholders. Certain of these provisions
may delay or prevent takeover attempts not first approved by the Board of
Directors of Capital Bank Corporation (including takeovers which certain
shareholders may deem to be in their best interests). These provisions also
could delay or frustrate the removal of incumbent directors or the assumption of
control by shareholders. All references to the Articles of Incorporation and
Bylaws are to the Capital Bank Corporation's Articles of Incorporation and
Bylaws in effect as of the date of this Joint Proxy Statement-Prospectus.
CLASSIFICATION OF THE BOARD OF DIRECTORS. The Articles of Incorporation
provide that if the number of directors is greater than nine (the number of
directors is currently 17 and will be 19 after consummation of the Exchange),
the Board of Directors of Capital Bank Corporation shall be divided into three
classes, Class I, Class II and Class III, which shall be as nearly equal in
number as possible. Each director shall serve for a
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term ending on the date of the third annual meeting of shareholders following
the annual meeting at which the director was elected (except for the initial
directors of Capital Bank Corporation, whose terms may be shorter than three
years as necessary to effect the classification process). A director elected to
fill a vacancy shall serve for the remainder of the term of the present term of
office of the class to which he or she was elected. As a result of the
classification of the Board of Directors of Capital Bank Corporation,
approximately one-third of the members of the Board of Directors of Capital Bank
Corporation will be elected each year, and two annual meetings will be required
for Capital Bank Corporation's shareholders to change a majority of the members
constituting the Board of Directors of Capital Bank Corporation.
REMOVAL OF DIRECTORS; FILLING VACANCIES. Capital Bank Corporation's Bylaws
provide that (a) shareholders may remove one or more of the directors with or
without cause; (b) a director may be removed by the shareholders only if the
number of votes cast for the removal exceeds the number of votes cast against
the removal; and (c) a director may not be removed by the shareholders at a
meeting unless the notice of the meeting states that the purpose, or one of the
purposes, of the meeting is removal of the director. Vacancies occurring in the
Board of Directors of Capital Bank Corporation may be filled by the shareholders
or a majority of the remaining directors, even though less than a quorum, or by
the sole remaining director.
AMENDMENT OF BYLAWS. Subject to certain restrictions described below,
either a majority of the Board of Directors or the shareholders of Capital Bank
Corporation may amend or repeal the Bylaws. A bylaw adopted, amended or repealed
by the shareholders may not be readopted, amended or repealed by the Board of
Directors of Capital Bank Corporation. Generally, the shareholders of Capital
Bank Corporation may adopt, amend, or repeal the Bylaws in accordance with the
NCBCA.
SPECIAL MEETINGS OF SHAREHOLDERS. Capital Bank Corporation's Bylaws
provide that special meetings of shareholders may be called only by the Chief
Executive Officer, President, Secretary or Board of Directors of Capital Bank
Corporation, or by the shareholders of Capital Bank Corporation pursuant to the
written request of the holders of not less than 10% of all the shares entitled
to vote at the meeting. As a result, this provision would prevent shareholders
owning less than 10% of the voting power of the outstanding Capital Bank
Corporation Common Stock from compelling shareholder consideration of any
proposal (such as a proposal for a merger or business combination) over the
opposition of Capital Bank Corporation's Board of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Capital Bank Corporation Common
Stock is expected to be Boston Equiserve, successor to Wachovia Bank, N.A.
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
COMPARISON OF THE RIGHTS OF HOLDERS OF CAPITAL BANK COMMON STOCK AND CAPITAL
BANK CORPORATION COMMON STOCK
GENERAL. Upon consummation of the Holding Company Reorganization,
shareholders of Capital Bank, other than those shareholders who properly
exercise Dissenters' Rights, will become shareholders of Capital Bank
Corporation. Certain legal distinctions exist between owning Capital Bank
Corporation Common Stock and Capital Bank Common Stock. The shareholders of
Capital Bank Corporation will be governed by and subject to the Articles of
Incorporation and Bylaws of Capital Bank Corporation rather than the Articles of
Incorporation and Bylaws of Capital Bank. Capital Bank Corporation is a
corporation governed by the laws of the State of North Carolina applicable to
business corporations, while Capital Bank is
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a commercial bank governed by the banking laws of North Carolina, which
incorporate the corporate laws of North Carolina only to the extent they do not
conflict with the banking laws. NEITHER THE CAPITAL BANK COMMON STOCK NOR THE
CAPITAL BANK CORPORATION COMMON STOCK ARE INSURED BY THE FDIC OR GUARANTEED BY
THE ISSUER AND ARE BOTH SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS
OF VALUE.
The following is a summary of the material differences in the rights of
holders of Capital Bank Corporation Common Stock and those of holders of Capital
Bank Common Stock. Shareholders should consult with their own legal counsel with
respect to specific differences and changes in their rights as shareholders
which will result from the proposed Holding Company Reorganization.
CAPITAL STRUCTURE. Capital Bank's Articles of Incorporation authorize the
issuance of up to 20,000,000 shares of common stock, par value $5.00 per share,
and there are currently 2,477,651 shares issued and outstanding.
Capital Bank Corporation's Articles of Incorporation authorize the
issuance of up to 20,000,000 shares of no par value common stock. Because the
exchange of shares by virtue of the Holding Company Reorganization is to be
one-for-one (and Capital Bank Corporation will redeem and cancel the single
share previously issued by it for nominal consideration), Capital Bank
Corporation will have the same number of shares issued and outstanding
immediately after consummation of the Holding Company Reorganization as Capital
Bank did before, except to the extent that any shareholders of Capital Bank
perfect their appraisal rights of dissent and receive cash rather than Capital
Bank Corporation Common Stock.
VOTING RIGHTS. In general, each holder of Capital Bank Common Stock and
Capital Bank Corporation Common Stock is entitled to one vote per share on all
matters submitted to a vote of shareholders. In the election of directors, each
holder of Capital Bank Common Stock and of Capital Bank Corporation Common Stock
has the right to vote the number of shares owned by him or her on the record
date for as many persons as there are directors to be elected. Cumulative voting
is not available with respect to the election of directors of Capital Bank or
Capital Bank Corporation.
Under North Carolina banking law, Capital Bank may effect a merger with or
transfer of all of its assets and liabilities to another bank, or may dissolve,
only upon the affirmative vote of the holders of at least two-thirds of Capital
Bank's outstanding shares of Common Stock. Under North Carolina corporate law
(the effect of which is not altered by Capital Bank Corporation's Articles of
Incorporation or Bylaws), Capital Bank Corporation may effect a merger with or
transfer of all of its assets and liabilities to another corporation, or may
dissolve upon the affirmative vote of the holders of at least a majority of
Capital Bank Corporation's outstanding shares of Common Stock.
DIRECTORS. The Bylaws of both Capital Bank and Capital Bank Corporation
provide that the Board of Directors shall have from five to 25, and one to 25,
members, respectively. The Boards of Directors of both Capital Bank and Capital
Bank Corporation are currently comprised of the same 17 members. Upon
consummation of the Exchange, Edwin E. Bridges and John Grimes will be appointed
to the Board of Directors of Capital Bank Corporation. The Boards of Directors
of both Capital Bank and Capital Bank Corporation may fill vacancies arising in
their directorships.
The Articles of Incorporation of both Capital Bank and Capital Bank
Corporation provide that if the number of directors is at least nine, the terms
of the directors shall be staggered. Capital Bank and Capital Bank Corporation
both currently have staggered Boards of Directors. Pursuant to the Articles of
Incorporation, the directors are divided into three classes, each consisting of
approximately one-third of the total directors. Each year, one class of the
directors comes up for election, resulting in director terms of three years.
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ASSESSMENT. Section 53-42 of the General Statutes of North Carolina
provides for the pro rata assessment of holders of capital stock of a state bank
in the event that its capital becomes impaired. Such assessment is to be
enforced by the sale, to the extent necessary, of the bank stock of any
shareholder who fails to pay his or her assessment. Accordingly, the shares of
Capital Bank Common Stock are subject to assessment as provided by such statute.
All shares of Capital Bank Corporation's Common Stock will, upon
consummation of the Holding Company Reorganization, be fully paid and
non-assessable.
RIGHTS TO REPURCHASE STOCK. Under the North Carolina banking law, Capital
Bank may repurchase its stock only after approval by holders of two-thirds of
its outstanding Common Stock and by the North Carolina Banking Commission. Under
the BHC Act, no prior approval is required and, therefore, Capital Bank
Corporation will be allowed to purchase its own stock in the open market subject
to applicable law and the availability of funds therefor. Under certain
circumstances, stock repurchases by Capital Bank Corporation will require the
prior approval of the Federal Reserve Bank of Richmond. See page 70 for a
description of the restrictions on the repurchase by Capital Bank Corporation of
its stock. Capital Bank Corporation may consider repurchases of its stock in the
future, but there can be no assurance that Capital Bank Corporation will conduct
such repurchases.
PAYMENT OF DIVIDENDS. The ability of Capital Bank to pay dividends on its
Common Stock is restricted by North Carolina banking law and by tax
considerations related to state-chartered banks. North Carolina law imposes
restrictions on the ability of all banks chartered under North Carolina law to
pay dividends. Under North Carolina law, no dividend may be declared or paid
during Capital Bank's first three years of operations. In the future, Capital
Bank will only be able to pay dividends out of undivided profits as determined
pursuant to North Carolina General Statutes Section 53-87. In addition,
regulatory authorities may limit payment of dividends by any bank when it is
determined that such a limitation is in the public interest and is necessary to
ensure the financial soundness of the bank. Although Capital Bank Corporation's
ability to pay dividends will not be subject to these restrictions, such
restrictions will indirectly affect Capital Bank Corporation because dividends
from Capital Bank will be a source of funds of Capital Bank Corporation for the
payment of dividends to shareholders of Capital Bank Corporation.
Capital Bank Corporation will be limited by certain restrictions imposed
generally on North Carolina corporations. Subject to certain limitations and
exceptions, cash dividends may not be paid if a corporation will not be able to
pay its debts as they become due in the usual course of business after making
such cash dividend distribution or the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy certain liquidation preferential rights. It is not likely that Capital
Bank Corporation will declare or pay cash dividends in the foreseeable future
since earnings, if any, will be used to support growth in earnings assets and
the opening of branch locations, should such action be pursued.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS AND
EMPLOYEES. The Articles of Incorporation of both Capital Bank and Capital Bank
Corporation eliminate a director's personal liability for breach of duty as a
director to the fullest extent permitted by law. As required by North Carolina
banking law, the Articles of Incorporation of Capital Bank qualify the
elimination of liability for acts or omissions as to which the elimination of
liability would be inconsistent with the provisions of North Carolina banking
law or the business of banking.
The Bylaws of both Capital Bank and Capital Bank Corporation provide for
indemnification to the fullest extent permitted by law. Under the Federal
Deposit Insurance Act, as amended ("FDIA"), both Capital
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Bank and Capital Bank Corporation would be prohibited from paying any
indemnification with respect to any liability or legal expense incurred by a
director, officer, or employee as a result of an action or proceeding by a
federal banking agency resulting in a civil money penalty or certain other
remedies against such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Capital Bank
Corporation pursuant to the forgoing provisions, Capital Bank Corporation has
been informed that in the opinion of the Securities and Exchange Commission
("SEC"), such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CHANGE IN CONTROL REGULATION. Both Capital Bank and Capital Bank
Corporation have opted out of the North Carolina Shareholder Protection Act and
the North Carolina Control Share Acquisition Act, each of which, if applicable,
would hinder the ability of a third party to acquire control of either company.
See page 66 for a brief description of these Acts.
The acquisition of more than ten percent (10%) of either the outstanding
Capital Bank Corporation Common Stock or the outstanding Capital Bank Common
Stock may, in certain circumstances, be subject to the provisions of the Change
in Bank Control Act of 1978 (the "Change in Bank Control Act"). The FDIC has
also adopted a regulation pursuant to the Change in Bank Control Act which
generally requires persons who at any time intend to acquire control of an
FDIC-insured state-chartered non-member bank, either directly or indirectly
through an acquisition of control of its holding company, to provide 60 days'
prior written notice and certain financial and other information to the FDIC.
Control for the purpose of this Act exists in situations in which the acquiring
party has voting control of at least twenty-five percent (25%) of any class of
voting stock or the power to direct the management or policies of the bank or
the holding company. However, under FDIC regulations, control is presumed to
exist where the acquiring party has voting control of at least ten percent (10%)
of any class of voting securities if (a) the bank or holding company has a class
of voting securities which is registered under Section 12 of the Exchange Act,
or (b) the acquiring party would be the largest holder of a class of voting
shares of the bank or the holding company. The statute and underlying
regulations authorize the FDIC to disapprove a proposed acquisition on certain
specified grounds.
Prior approval of the Board of Governors of the Federal Reserve Board
would be required for any acquisition of control of Capital Bank or Capital Bank
Corporation by any bank holding company under the BHC Act. Control for purposes
of the BHC Act would be based on, among other things, a twenty-five percent
(25%) voting stock test or on the ability of the holding company otherwise to
control the election of a majority of the Board of Directors of Capital Bank or
Capital Bank Corporation. As part of such acquisition, the acquiring company
(unless already so registered) would be required to register as a bank holding
company under the BHC Act.
The Exchange Act requires that a purchaser of any class of a corporation's
securities registered under the Exchange Act notify the SEC and such corporation
within ten days after its purchases exceed five percent of the outstanding
shares of that class of securities. This notice must disclose the background and
identity of the purchaser, the source and amount of funds used for the purchase,
the number of shares owned and, if the purpose of the transaction is to acquire
control of the corporation, any plans to alter materially the corporation's
business or corporate structure. In addition, any tender offer to acquire a
corporation's securities is subject to the limitations and disclosure
requirements of the Exchange Act.
BYLAW CHANGES. The Bylaws of Capital Bank Corporation are substantially
the same as the Bylaws of Capital Bank. Certain differences exist because a few
provisions of Capital Bank's Bylaws are required of banks by Chapter 53 of the
North Carolina General Statutes and are not required of holding companies formed
under the NCBCA. Therefore, although these provisions remain in Capital Bank's
Bylaws, they were not
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incorporated into the Bylaws of Capital Bank Corporation. The provisions of
Capital Bank's Bylaws which were not incorporated into the Bylaws of Capital
Bank Corporation are that:
o not less than three-fourths of the directors shall be residents of
the State of North Carolina;
o all directors are required to own stock of Capital Bank;
o the Board of Directors has an option to establish and elect local
boards of directors for branch offices to serve in an advisory
capacity;
o every director be required to take an oath; and
o active officers and employees give bond.
In addition, Capital Bank Corporation's Bylaws do not include certain
bank-specific committees that are included in Capital Bank's Bylaws.
Upon request, Capital Bank will provide its shareholders with copies of
the Bylaws of both Capital Bank and Capital Bank Corporation free of charge.
Requests should be made to Allen T. Nelson, Jr., at (919) 874-6321 or mailed to
Capital Bank, P.O. Box 18949, Raleigh, North Carolina 27601, Attention: Allen
T. Nelson, Jr.
COMPARISON OF THE RIGHTS OF HOLDERS OF HOME SAVINGS COMMON STOCK AND CAPITAL
BANK CORPORATION COMMON STOCK
GENERAL. Upon consummation of the Exchange, shareholders of Home Savings,
other than those shareholders who properly exercise Dissenters' Rights, will
become shareholders of Capital Bank Corporation. Certain legal distinctions
exist between owning Capital Bank Corporation Common Stock and Home Savings
Common Stock. The shareholders of Capital Bank Corporation will be governed by
and subject to the Articles of Incorporation and Bylaws of Capital Bank
Corporation rather than the Amended and Restated Certificate of Incorporation
and Bylaws of Home Savings. Capital Bank Corporation is a corporation governed
by the laws of the State of North Carolina applicable to business corporations,
while Home Savings is a savings bank governed by the savings bank laws of North
Carolina, which incorporate the corporate laws of North Carolina only to the
extent they do not conflict with the savings bank laws. NEITHER THE HOME SAVINGS
COMMON STOCK NOR THE CAPITAL BANK CORPORATION COMMON STOCK ARE INSURED BY THE
FDIC OR GUARANTEED BY THE ISSUER AND ARE BOTH SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF VALUE.
The following is only a general summary of certain differences in the
rights of holders of Capital Bank Corporation Common Stock and those of Home
Savings Record Holders. Shareholders should consult with their own legal counsel
with respect to specific differences and changes in their rights as shareholders
which will result from the Exchange.
CAPITAL STRUCTURE. Home Savings' Amended and Restated Certificate of
Incorporation authorizes the issuance of up to 5,000,000 shares of common stock,
par value $1.00 per share, and there are currently 922,686 shares issued and
outstanding. Capital Bank Corporation's Articles of Incorporation authorize the
issuance of up to 20,000,000 shares of no par value common stock, and there will
be 2,477,651 shares issued and outstanding following the Holding Company
Reorganization, assuming no Dissenters' Rights are exercised. Because the
exchange of shares by virtue of the Exchange is to be effected at the rate of
1.28 shares of Capital Bank Corporation Common Stock for each share of Home
Savings Common Stock, Capital Bank Corporation will have 3,658,689 shares of
Common Stock issued and outstanding after consummation of the
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Exchange (except to the extent that any shareholders of Home Savings perfect
their appraisal rights of dissent and receive cash rather than Capital Bank
Corporation Common Stock in connection with the Exchange).
VOTING RIGHTS. In general, each holder of Home Savings Common Stock and
Capital Bank Corporation Common Stock is entitled to one vote per share on all
matters submitted to a vote of shareholders. However, for three years after the
effective date of Home Savings conversion from a state-chartered mutual savings
bank to a state-chartered stock-owned savings bank (the "Home Savings Conversion
Effective Date"), or until November 14, 1998, Home Savings' Amended and Restated
Certificate of Incorporation eliminates voting rights with respect to those
shares that are beneficially owned by any person in excess of 10% of the total
Home Savings Common Stock then outstanding.
In the election of directors, each holder of Home Savings Common Stock and
of Capital Bank Corporation Common Stock has the right to vote the number of
shares owned by him or her on the record date for as many persons as there are
directors to be elected. Cumulative voting is not available with respect to the
election of directors of Home Savings or Capital Bank Corporation.
Under North Carolina savings bank law, Home Savings may dissolve upon the
affirmative vote of the holders of at least two-thirds of its outstanding shares
of Common Stock. Under North Carolina corporate law, Capital Bank Corporation
may dissolve upon the affirmative vote of the holders of at least a majority of
Capital Bank Corporation's outstanding shares of Common Stock.
DIRECTORS. The Bylaws of Home Savings provide that the Board of Directors
of Home Savings shall have from seven to 20 members, and the Board of Directors
of Home Savings currently has eight members. The Bylaws of Capital Bank
Corporation provide that the Board of Directors of Capital Bank Corporation
shall have from one to 25 members, and the Board of Directors of Capital Bank
Corporation currently has 17 members. The Boards of Directors of both Home
Savings and Capital Bank Corporation may fill vacancies arising in their
directorships.
The Articles of Incorporation of Capital Bank Corporation provide that if
the number of directors is at least nine, the terms of the directors shall be
staggered. Capital Bank Corporation currently has a staggered Board of
Directors. Pursuant to the Articles of Incorporation, Capital Bank Corporation's
directors are divided into three classes, each consisting of approximately
one-third of the total directors. Each year, one class of the directors comes up
for election, resulting in director terms of three years. Home Savings does not
have a staggered Board of Directors.
RIGHTS TO REPURCHASE STOCK. For a period of five years from the Home
Savings Conversion Effective Date, Home Savings may not, without the approval of
the Administrator, repurchase any of its capital stock. Under the BHC Act, no
prior approval is required and, therefore, Capital Bank Corporation will be
allowed to purchase its own stock in the open market subject to applicable law
and the availability of funds therefor. Under certain circumstances, stock
repurchases by Capital Bank Corporation will require the prior approval of the
Federal Reserve Bank of Richmond. See page 67 for a description of the
restrictions on the repurchase by Capital Bank of its stock. Capital Bank
Corporation may consider repurchases of its stock in the future, but there can
be no assurance that Capital Bank Corporation will conduct such repurchases.
PAYMENT OF DIVIDENDS. Home Savings Record Holders are entitled to receive
dividends as may be declared by the Board of Directors of Home Savings out of
funds legally available therefor. Home Savings' ability to pay such dividends is
subject to different statutory and regulatory restrictions than those applicable
to Capital Bank Corporation. Although Capital Bank Corporation's ability to pay
dividends will not be subject to these restrictions, such restrictions will
indirectly affect Capital Bank Corporation because dividends from
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Home Savings will be a source of funds of Capital Bank Corporation for the
payment of dividends to shareholders of Capital Bank Corporation.
Capital Bank Corporation will be limited by certain restrictions imposed
generally on North Carolina corporations. Subject to certain limitations and
exceptions, cash dividends may not be paid if a corporation will not be able to
pay its debts as they become due in the usual course of business after making
such cash dividend distribution or the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy certain liquidation preferential rights. It is not likely that Capital
Bank Corporation will declare or pay cash dividends in the foreseeable future
since earnings, if any, will be used to support growth in earnings assets and
the opening of branch locations, should such action be pursued.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS AND
EMPLOYEES. The Articles of Incorporation of both Home Savings and Capital Bank
Corporation eliminate a director's personal liability for breach of duty as a
director to the fullest extent permitted by law.
The Bylaws of both Home Savings and Capital Bank Corporation provide for
indemnification to the fullest extent permitted by law. Under the FDIA, both
Home Savings and Capital Bank Corporation would be prohibited from paying any
indemnification with respect to any liability or legal expense incurred by a
director, officer, or employee as result of an action or proceeding by a federal
banking agency resulting in a civil money penalty or certain other remedies
against such person. Currently, there is no pending or threatened litigation
involving Capital Bank, Capital Bank Corporation or Home Savings for which
indemnification might be sought.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Capital Bank
Corporation pursuant to the forgoing provisions, Capital Bank Corporation has
been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Limitation of liability and indemnification provisions may discourage or
deter shareholders or management from bringing a lawsuit against former
directors for breach of duty, even though such action, if successful might
otherwise have benefitted the corporation and its shareholders.
CHANGE IN CONTROL REGULATION. Home Savings is subject to the protection of
the North Carolina Shareholder Protection Act and the North Carolina Control
Share Acquisition Act. As permitted thereby, Capital Bank Corporation has opted
out of both Acts.
Pursuant to the North Carolina Shareholder Protection Act, no business
combination (defined to include any merger, consolidation, share exchange or
sale of all or any substantial part of the corporation's assets) involving a
corporation which has a class of securities registered under the Exchange Act
and any entity that is the beneficial owner, directly or indirectly, of more
than 20% of the corporation's voting shares may be consummated unless the
holders of 95% of the outstanding voting shares approve the business
combination. This provision does not apply if the parties comply with certain
requirements relating to the value of the consideration paid in the business
combination, the composition of the corporation's board of directors, the
disclosure to shareholders regarding the business combination and other
procedural matters. Home Savings has not opted out of the Shareholder Protection
Act.
The North Carolina Control Share Acquisition Act applies to a corporation
that is incorporated in North Carolina and that has substantial assets in North
Carolina, its principal place of business or a principal office within North
Carolina, a class of securities registered under the Exchange Act and more than
10% of its shareholders resident in North Carolina or more than 10% of its
shares held by North Carolina residents. The
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<PAGE>
North Carolina Control Share Acquisition Act restricts the voting rights of a
person who acquires "control shares" in a subject corporation. Control shares
are shares that, when added to all other shares of the subject corporation
beneficially owned by a person, would entitle that person to voting power equal
to or greater than a stated percentage of all voting power. Without shareholder
approval by "disinterested shareholders," the shares acquired by the acquiror
have no voting rights. Disinterested shareholders are shareholders other than
the acquiror and the employee-directors of the subject corporation. If the
shares held by the acquiror are accorded voting rights pursuant to the procedure
described above and the acquiror beneficially holds more than 50% of the voting
power for the election of directors, each of the corporation's other
shareholders have the right to require that the corporation redeem their shares
at a price not less than the highest price per share paid by the acquiror for
any of its shares. Home Savings has not opted out of the Control Share
Acquisition Act.
The acquisition of more than ten percent of either the outstanding Capital
Bank Corporation Common Stock or the outstanding Home Savings Common Stock may,
in certain circumstances, be subject to the provisions of the Change in Bank
Control Act. The FDIC has also adopted a regulation pursuant to the Change in
Bank Control Act which generally requires persons who at any time intend to
acquire control of an FDIC-insured state-chartered non-member bank, either
directly or indirectly through an acquisition of control of its holding company,
to provide 60 days' prior written notice and certain financial and other
information to the FDIC. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least 25% of
any class of voting stock or the power to direct the management or policies of
the bank or the holding company. However, under FDIC regulations, control is
presumed to exist where the acquiring party has voting control of at least ten
percent (10%) of any class of voting securities if (a) the bank or holding
company has a class of voting securities which is registered under Section 12 of
the Exchange Act, or (b) the acquiring party would be the largest holder of a
class of voting shares of the bank or the holding company. The statute and
underlying regulations authorize the FDIC to disapprove a proposed acquisition
on certain specified grounds.
Prior approval of the Federal Reserve would be required for any
acquisition of control of Home Savings or Capital Bank Corporation by any bank
holding company under the BHC Act. Control for purposes of the BHC Act would be
based on, among other things, a twenty-five percent (25%) voting stock test or
on the ability of the holding company otherwise to control the election of a
majority of the Board of Directors of Home Savings or Capital Bank Corporation.
As part of such acquisition, the acquiring company (unless already so
registered) would be required to register as a bank holding company under the
BHC Act.
The Exchange Act requires that a purchaser of any class of a corporation's
securities registered under the Exchange Act notify the SEC and such corporation
within ten days after its purchases exceed 5% of the outstanding shares of that
class of securities. This notice must disclose the background and identity of
the purchaser, the source and amount of funds used for the purchase, the number
of shares owned and, if the purpose of the transaction is to acquire control of
the corporation, any plans to alter materially the corporation's business or
corporate structure. In addition, any tender offer to acquire a corporation's
securities is subject to the limitations and disclosure requirements of the
Exchange Act.
CERTAIN DIFFERENCES IN PROVISIONS OF INCORPORATION DOCUMENTS AND BYLAWS.
RESTRICTION ON ACQUISITION. Home Savings' Amended and Restated Certificate of
Incorporation provides that for three years after the Home Savings Conversion
Effective Date, or until November 14, 1998, no person may directly or indirectly
offer to acquire or acquire the beneficial ownership of more than 10% of any
class of equity security of Home Savings. This prohibition does not apply to,
among other things, the purchase of securities by underwriters in connection
with a public offering of Home Savings' securities, any employee stock benefit
plan of Home Savings, or any class or series of preferred stock or other
security, other than common stock, as
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to which, and to the extent, the Board of Directors of Home Savings determines
this provision shall not apply. Capital Bank Corporation's Articles of
Incorporation contain no such provisions.
CONSTITUENCY CLAUSE. Home Savings' Amended and Restated Certificate of
Incorporation provides that in determining what is in the best interests of Home
Savings, the Board of Directors of Home Savings may consider, among other
things, the social and economic effects of the matter to be considered
(including a change of control) on Home Savings and its employees, customers,
creditors and the community in which Home Savings operates. Capital Bank
Corporation's Articles of Incorporation contain no such provision.
BYLAWS. Certain differences exist between the Bylaws of Home Savings and
the Bylaws of Capital Bank Corporation. Upon request, Home Savings will provide
its shareholders with copies of the Bylaws of both Home Savings and Capital Bank
Corporation free of charge. Requests should be made to Edwin E. Bridges, at
(919) 742-4186 or mailed to Home Savings' main office, located at 300 East
Raleigh Street, Siler City, North Carolina 27344, Attention: Edwin E. Bridges.
PRO FORMA CONSOLIDATED CAPITALIZATION
The following table presents the pro forma consolidated capitalization of
Capital Bank Corporation and Capital Bank, as its subsidiary, at September 30,
1998, adjusted to give effect to the Holding Company Reorganization as described
in this Joint Proxy Statement-Prospectus. The authorized number of shares of
Common Stock of Capital Bank Corporation is 20,000,000 and 1,181,038 shares are
expected to be offered and sold to the Home Savings shareholders in the share
exchange.
<TABLE>
<CAPTION>
CAPITAL PRO FORMA
BANK CAPITAL CONSOLIDATED
CORPORATION BANK ADJUSTMENTS CAPITALIZATION
----------- ---- ----------- --------------
(in thousands)
<S> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY:
Common stock......................... $ 1 $12,388 $13,285 $25,674
Additional paid-in capital........... --- 13,285 (13,285) ---
Accumulated deficit.................. --- (1,535) --- (1,535)
Accumulated other comprehensive
income, net.......................... --- 176 --- 176
Total shareholders' equity........... $ 1 $24,314 $ --- $24,315(1)
</TABLE>
- --------------------------
(1) Does not include shares to be issued to Home Savings' shareholders in
connection with the share exchange.
INFORMATION ABOUT CAPITAL BANK AND CAPITAL BANK CORPORATION
CAPITAL BANK CORPORATION
GENERAL. Capital Bank Corporation is a business corporation incorporated
under the laws of the State of North Carolina on August 10, 1998. The only
office of Capital Bank Corporation, and its principal place of business, is
located at the administrative office of Capital Bank at 4400 Falls of Neuse
Road, Raleigh, North Carolina 27609. Capital Bank Corporation's telephone number
is (919) 878-3100.
Capital Bank Corporation was organized for the purpose of becoming the
holding company of Capital Bank. Pursuant to the Holding Company Reorganization,
Capital Bank will become a wholly-owned
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<PAGE>
subsidiary of Capital Bank Corporation, Capital Bank Corporation will become a
bank holding company, and each shareholder of Capital Bank will, subject to the
exercise of Dissenters' Rights, become a shareholder of Capital Bank Corporation
without any change in the number of shares owned or percentage ownership.
Capital Bank Corporation has not yet undertaken any operating business
activities and does not currently propose to do so. In the future, Capital Bank
Corporation may become an operating company or acquire other commercial banks or
bank holding companies, or engage in or acquire such other activities or
businesses as may be permitted by applicable law, although there are no present
plans or intentions to do so.
PROPERTY. Initially, Capital Bank Corporation will neither own nor lease
any real or personal property but will utilize the premises and property of
Capital Bank without the payment of any rental fees to Capital Bank.
COMPETITION. It is expected that for the near future the primary business
of Capital Bank Corporation will be the ongoing business of Capital Bank.
Therefore, the competitive conditions to be faced by Capital Bank Corporation
will be the same as those faced by Capital Bank. In addition, many banks and
financial institutions have formed, or are in the process of forming, holding
companies. It is likely that these holding companies will attempt to acquire
banks, thrift institutions or companies engaged in bank-related activities.
Thus, Capital Bank Corporation will face competition in undertaking any such
acquisitions and in operating subsequent to any such acquisitions.
EMPLOYEES. At the present time, Capital Bank Corporation does not intend
to have any employees other than its management. See "Management of Capital Bank
Corporation." It will utilize the support staff of Capital Bank from time to
time without the payment of any fees to Capital Bank. If Capital Bank
Corporation acquires other financial institutions or pursues other lines of
business, it may at such time hire additional employees.
CAPITAL BANK
GENERAL. Capital Bank was incorporated under the laws of the State of
North Carolina on May 30, 1997, and commenced operations as a state-chartered
banking corporation on June 20, 1997. Capital Bank is not a member of the
Federal Reserve System and has no subsidiaries. As of September 30, 1998,
Capital Bank had assets of approximately $100.0 million, net loans outstanding
of approximately $63.0 million and deposits of approximately $75.0 million.
Capital Bank's corporate and main office is located at 4400 Falls of Neuse Road,
Raleigh, North Carolina 27609, and its telephone number is (919) 878-3100. In
addition to the main office, Capital Bank has four branch offices in Cary and
Sanford, North Carolina. The two branch offices in Sanford, North Carolina are
currently located at 130 North Steele Street and 2800 Williams Street. The
Williams Street location and a branch located at 129 South Steele Street were
acquired from an existing banking institution immediately upon Capital Bank's
commencement of operations. The two branch offices in Cary, North Carolina are
currently located at 1201 Kildaire Farm Road and 915 North Harrison Avenue. The
branch at 915 North Harrison Avenue opened on March 23, 1998 and the branch at
1201 Kildaire Farm Road opened on September 14, 1998. Capital Bank may also
explore opportunities to add additional service points in the North Carolina
market, although no exchange agreements or understandings, written or oral,
currently exist other than pursuant to the Exchange Agreement.
Capital Bank is a community bank currently engaged in the general
commercial banking business in Wake and Lee Counties, North Carolina. Wake
County has a diversified economic base, comprised primarily of services, retail
trade, government and manufacturing and includes the City of Raleigh, the state
capital. Lee County is a significant center for various industries, including
manufacturing, lumber and tobacco.
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<PAGE>
Capital Bank offers a full range of banking services, including checking
accounts, savings accounts, NOW accounts, money market accounts and certificates
of deposit; loans for real estate, businesses, agriculture, personal uses, home
improvement and automobiles; equity lines of credit; credit cards; individual
retirement accounts; safe deposit boxes; bank money orders; electronic funds
transfer services including wire transfers; traveler's checks; and free notary
services to all Capital Bank customers. In addition, Capital Bank provides
automated teller machine access to its customers for cash withdrawals through
nationwide ATM networks. At present, Capital Bank does not provide the services
of a trust department.
LENDING ACTIVITIES AND DEPOSITS. Capital Bank makes a variety of loans,
including loans secured by real estate, loans for commercial purposes and loans
to individuals for personal and household purposes. There are no large
concentrations of credit to any particular industry. The economic trends of the
area served by Capital Bank are influenced by the significant industries within
the region. Virtually all Capital Bank's business activity is with customers
located in the Cary, Raleigh and Sanford areas. The ultimate collectibility of
Capital Bank's loan portfolio is susceptible to changes in the market conditions
of this geographic region.
Capital Bank uses a centralized risk management process to insure uniform
credit underwriting that adheres to bank policy. Lending policies are reviewed
on a regular basis to confirm that Capital Bank is prudent in setting its
underwriting criteria. Credit risk is managed through a number of methods
including loan grading of commercial loans, committee approval of larger loans,
and class and purpose coding of loans. Management believes that early detection
of credit problems through regular contact with Capital Bank's clients coupled
with consistent reviews of the borrowers' financial condition are important
factors in overall credit risk management.
The following table sets forth, as of September 30, 1998, the approximate
composition of Capital Bank's loan portfolio:
LOAN TYPE AMOUNT PERCENTAGE
- --------- ------ ----------
(IN THOUSANDS)
Real Estate............................ $10,065 16%
Commercial............................. 47,454 74
Consumer............................... 6,751 10
-------- ---
Total........................ $64,270 100%
======= ===
The majority of Capital Bank's customers are individuals and small to
medium-size businesses located in Wake and Lee Counties, North Carolina and
contiguous areas. Capital Bank's deposits and loans are well diversified, with
no material concentration in a single industry or group of related industries.
The management of Capital Bank does not believe that the deposits or the
business of Capital Bank in general are seasonal in nature. The deposits may,
however, vary with local and national economic conditions but not enough,
management believes, to have a material effect on planning and policy making.
Capital Bank attempts to control deposit flow through the pricing of deposits
and promotional activities. Management believes that Capital Bank's rates are
competitive with those offered by other institutions in Cary, Raleigh and
Sanford.
The following table sets forth the mix of depository accounts at Capital
Bank as a percentage of total deposits as of September 30, 1998:
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Non-interest bearing demand............... 10%
Interest checking......................... 6
Market rate investment.................... 17
Savings................................... 3
Time deposits
Under $100,000...................... 50
Equal to or over $100,000........... 14
---
100%
===
COMPETITION
Commercial banking in North Carolina is extremely competitive in large
part due to statewide branching. Capital Bank competes in its market areas with
some of the largest banking organizations in the state and the country and other
financial institutions, such as federally and state-chartered savings and loan
institutions and credit unions, as well as consumer finance companies, mortgage
companies and other lenders engaged in the business of extending credit. Many of
Capital Bank's competitors have broader geographic markets and higher lending
limits than Capital Bank and are also able to provide more services and make
greater use of media advertising.
The enactment of legislation authorizing interstate banking has caused
great increases in the size and financial resources of some of Capital Bank's
competitors. In addition, as a result of interstate banking, out-of-state
commercial banks may acquire North Carolina banks and heighten the competition
among banks in North Carolina.
Despite the competition in its market areas, Capital Bank believes that it
has certain competitive advantages that distinguish it from its competition.
Capital Bank believes that its primary competitive advantages are its strong
local identity and affiliation with the community and its emphasis on providing
specialized services to small and medium-sized business enterprises, as well as
professional and upper-income individuals. Capital Bank offers customers modern,
high-tech banking without forsaking community values such as prompt, personal
service and friendliness. Capital Bank offers many personalized services and
intends to attract customers by being responsive and sensitive to their
individualized needs. Capital Bank also relies on goodwill and referrals from
shareholders and satisfied customers, as well as traditional media to attract
new customers. To enhance a positive image in the community, Capital Bank
supports and participates in local events and its officers and directors serve
on boards of local civic and charitable organizations.
YEAR 2000 ISSUES
As the Year 2000 approaches, an important business issue has emerged
regarding whether or not existing computer systems and other operating systems
can process this date value properly. The problem is the result of computer
programs and related logic which use a two digit value to define a particular
calendar year (i.e. 99 for 1999). When this logic is used, computer systems
cannot recognize the two digit code "00" associated with the Year 2000 as coming
after 99. The issue is significant because many computer systems deployed
throughout the business world, not just in banks, use software which contain the
two digit date logic.
Before it opened in June 1997, Capital Bank's management made the
strategic decision to use an outside data processing company (service bureau) to
provide computer processing systems for its primary banking products including
loans, deposits, ATM's, check processing and general ledger. The computer
software used by the service bureau was developed and is maintained by a third
party vendor. This same
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<PAGE>
software is used by many banks throughout the country and uses a
five-digit date logic designed to avoid the problems associated with the two
digit logic discussed above.
In addition to the service bureau, Capital Bank utilizes personal
computers configured into five local area networks (LANS) which are, in turn,
connected to each other through a wide area network (WAN). All equipment was
purchased new in 1997 and has subsequently been tested for Year 2000 readiness
by an independent consultant. The test results indicate that all equipment will
function properly into the Year 2000.
In addition to the service bureau applications, Capital Bank uses software
distributed through the LAN/WAN network for functions such as word processing,
E-mail, spreadsheet, teller transactions, document preparation and new account
setup. All of these software products are purchased or licensed from third party
vendors. It should be noted that Capital Bank does not write or develop any of
its own computer applications and all third party vendors have provided Capital
Bank with written certification that their software is Year 2000 compliant.
In addition to receiving these assurances from third party vendors,
Capital Bank has instituted a Year 2000 compliance program whereby it is
reviewing the Year 2000 issue on a comprehensive, company-wide basis. This
program is administered by a project team consisting of executive and senior
management as well as a representative from the Board of Directors.
As of September 30, 1998, Capital Bank had completed its assessment of
existing computer systems and applications and had identified mission critical
applications. Where possible, Capital Bank is developing plans to test these
systems and is in the process of reviewing third party test results. However,
the Year 2000 is a global issue which extends beyond the control of Capital Bank
and may effect the providers of services such as power and telecommunications.
These services are critical to the ongoing operations of Capital Bank and in the
unlikely event of an interruption in these services, it is management's opinion
that such a failure will be quickly resolved.
As testing of Capital Bank's mission critical systems is completed,
Capital Bank will develop detailed contingency plans as necessary for each
system. Capital Bank has developed a general business resumption contingency
plan which provides for the implementation of manual processes on a temporary
basis should any computer application malfunction on or after January 1, 2000.
Capital Bank has budgeted $43,000 for the Year 2000 program and has spent
approximately $12,000 to date.
As a lending institution, Capital Bank is exposed to potential risk if
borrowers suffer Year 2000 related difficulties and are unable to repay their
loans. In July 1998, Capital Bank sent informational material and a Year 2000
questionnaire to all large borrowers which focused on their Year 2000 readiness.
During the third quarter 1998, Capital Bank's loan officers and account managers
met with these customers to personally review the answers to these
questionnaires and to discuss the impact of the Year 2000 on their operations.
Capital Bank is currently evaluating the information obtained from these
meetings in order to determine what impact, if any, the Year 2000 will have on
their financial performance and their ability to make loan payments. Thus far
none of Capital Bank's borrowers have reported the expectation of material
adverse impacts as a result of the Year 2000 issue.
Based on the information now available, Capital Bank anticipates that the
systems it uses will properly process dates in the Year 2000 and beyond and that
the costs incurred in achieving full Year 2000 compliance will not be material
to Capital Bank's business, financial condition or results of operation.
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<PAGE>
PROPERTIES
The following table sets forth the location and other related information
regarding Capital Bank's offices and other properties occupied as of September
30, 1998.
Offices Location Status
------- -------- ------
Main Office. 4400 Falls of Neuse Road Leased
Raleigh, North Carolina
Cary Office. 915 North Harrison Avenue Owned
Cary, North Carolina
Cary Office. 1201 Kildaire Farm Road Leased real property,
Cary, North Carolina owned improvements
Sanford Office 2800 Williams Street Leased
Sanford, North Carolina
Sanford Office 130 North Steele Street Leased
Sanford, North Carolina
EMPLOYEES
At September 30, 1998, Capital Bank had 46 full-time equivalent employees.
None of its employees is represented by any collective bargaining unit. Capital
Bank considers relations with its employees to be good.
LEGAL PROCEEDINGS
In the normal course of its operations, Capital Bank from time to time is
party to various legal proceedings. Based upon information currently available,
and after consultation with its counsel, management believes that such legal
proceedings, in the aggregate, will not have a material adverse effect on
Capital Bank's business, financial position or results of operations.
MANAGEMENT AND CERTAIN TRANSACTIONS
Set forth below are the names and other information pertaining to the
directors of Capital Bank:
YEAR FIRST
ELECTED
NAME POSITION WITH COMPANY AGE DIRECTOR
- ---- --------------------- --- --------
CLASS I
Charles F. Atkins (3)(5) Director 48 1997
James A. Beck(1)(3)(4) President, Chief 45 1997
Executive Officer, and
Director
Carolyn W. Grant (3)(6) Director 47 1997
Oscar A. Keller, Jr. Director 76 1997
(1)(3)
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Don W. Perry (2)(5) Director 39 1997
CLASS II
L.I. Cohen, Jr. (3)(6) Director 60 1997
Robert L. Jones (1)(3)(6) Director 61 1997
Vernon Malone (3)(5) Director 66 1997
J. Rex Thomas (3)(5) Director 52 1997
Bruce V. Wainwright (4) Director 51 1997
Samuel J. Wornon, III Director 55 1997
(1)(4)(6)
CLASS III
Lamar Beach (3) Director 69 1997
William C. Burkhardt Director 60 1997
(1)(2)(6)
David J. Gospodarek (2)(3) Director 51 1997
Darleen M. Johns (4)(5) Director 50 1997
O.A. Keller, III (1)(3) Chairman of the Board 53 1997
of Directors
George R. Perkins, III Director 30 1997
(2)(4)
- --------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Loan Committee
(4) Member of Asset and Liability Committee
(5) Member of Community Reinvestment Committee
(6) Member of the Compensation Committee
CLASS I
CHARLES F. ATKINS has served as a director since the Bank's inception. He
is currently and has been for the past five years President of CAM-L
Corporation, a real estate development/procurement company located in Sanford,
North Carolina.
JAMES A. BECK has served as a director since the Bank's inception. He is
currently President and Chief Executive Officer of the Bank, a position he has
held since the Bank commenced operations. Mr. Beck served as Chairman,
President and Chief Executive Officer of SouthTrust Bank of North Carolina, N.A.
from January 1991 until June 1996 when it was merged into the SouthTrust
Charlotte-based bank. Mr. Beck served as President and a director of the
combined bank until January 1997, when he resigned to join the Bank.
CAROLYN W. GRANT has served as a director since the Bank's inception. She
is currently the Vice President, International Business Development, of
Longistics Corp., a privately-held logistics business that operates the foreign
trade zone in the Raleigh-Durham area of North Carolina. From 1996 through 1997,
Ms. Grant was the Southeast Regional Manager for Plants by
Grant-TruGreen/Chemlawn and from 1976 to 1996
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<PAGE>
was the President and owner of Plants by Grant, Inc., Raleigh, North Carolina.
Ms. Grant is a Commissioner of the North Carolina Board of Transportation and a
member of the Executive Committee of the Board of Directors of the Greater
Raleigh Chamber of Commerce.
OSCAR A. KELLER, JR. has served as a director since the Bank's inception.
He is currently and has been for the past five years President and CEO of
Parkview Retirement Home, a retirement facility located in Sanford, North
Carolina. Mr. Keller is the father of Oscar A. Keller, III.
DON W. PERRY has served as a director since the Bank's inception. He is
currently and has been for the past five years Assistant Vice President of Lee
Brick and Tile, a brick manufacturing company located in Sanford, North
Carolina.
CLASS II
L.I. COHEN, JR. has served as a director since the Bank's inception. He
is currently and has been for the past five years Chief Executive Officer of Lee
Iron and Metal Co., Inc., a recycling business located in Sanford, North
Carolina.
ROBERT L. JONES has served as a director since the Bank's inception. He is
currently and has been for the past five years Chairman of the construction firm
Davidson, Jones & Beers Company or its subsidiary, Davidson & Jones Construction
Company, each of which is located in Raleigh, North Carolina. Mr. Jones is also
a director of Carolina Power & Light Company, a public utility company based in
Raleigh, North Carolina.
VERNON MALONE has served as a director since the Bank's inception. He is a
retired educator and serves on the Wake County, North Carolina, Board of
Commissioners. Prior thereto, he served as chairman of such board.
J. REX THOMAS has served as a director since the Bank's inception. He is
currently the President of Thomas Commercial Inc., a commercial real estate
company located in Raleigh, North Carolina. Prior thereto, Mr. Thomas was for 17
years a partner with Highwoods Properties, a real estate development company
located in Raleigh, North Carolina.
BRUCE V. WAINRIGHT has served as a director since the Bank's inception. He
is currently and has been for the past five years President and Owner of Dr.
Bruce V. Wainright, D.D.S. P.A.
SAMUEL J. WORNOM, III has served as a director since the Bank's inception.
He is currently and has been for the past five years President of Nouveau
Properties, an investment company located in Sanford, North Carolina.
CLASS III
LAMAR BEACH has served as a director since the Bank's inception. In
November 1997, Mr. Beach retired after selling his interests in Spanco
Corporation, a textiles corporation located in Sanford, North Carolina, of which
he had been President and Chief Executive Officer for more than the past five
years.
WILLIAM C. BURKHARDT has served as a director since the Bank's inception.
He is currently and has been for the past ten years President and Chief
Executive Officer of Austin Quality Foods, a snack foods company located in
Cary, North Carolina. Mr. Burkhardt has also been a member of the Board of
Directors of Public Service Company of North Carolina since 1989.
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DAVID J. GOSPODAREK has served as a director since the Bank's inception.
He is a Certified Public Accountant and has been a principal in the accounting
office of Gospodarek, Lunsford & Associates, Raleigh, North Carolina, for the
past five years.
DARLEEN M. JOHNS has served as a director since the Bank's inception. She
is currently and has been for the past five years President and Chief Executive
Officer of Alphanumeric Systems, Inc., a computer integration company located in
Raleigh, North Carolina.
O.A. KELLER, III has served as a director and as Chairman of the Board of
Directors since the Bank's inception. He is currently and has been for the past
five years President and Chief Executive Officer of Earthtec Environmental
Corp., an environmental services company located in Sanford, North Carolina and
Columbus, Ohio, and Chief Executive Officer of Global Contracting Services,
Inc., Columbus, Ohio.
GEORGE R. PERKINS, III has served as a director since the Bank's
inception. He is currently Vice President of Sales for Frontier Spinning Mills,
a textiles company, located in Sanford, North Carolina. Between 1993 and 1996,
Mr. Perkins was a sales representative for Unifi, Inc., a textile company,
headquartered in Greensboro, North Carolina.
DIRECTOR COMPENSATION
Directors who are also employees of the Bank receive no compensation in
their capacities as directors. However, outside directors receive an annual fee
of $5,000 ($7,500 in the case of the Chairman of the Board), as long as they
attend at least 75% of the meetings of the Board and the Committees on which
they serve. Directors of the Bank who are not also employees of the Bank are
eligible, pursuant to the Bank's Deferred Compensation Plan for Outside
Directors (the "Deferred Compensation Plan"), to defer receipt of any
compensation paid to them for their services as a director, including retainer
payments, if any, and amounts paid for attendance at meetings. The amount of
compensation deferred under the Deferred Compensation Plan by each participating
director is increased by 25% and credited to such director's account in the form
of shares of Common Stock based on the value per share of the Common Stock on
December 31 of each year. Upon the director's death, disability or retirement,
or upon a change in control of the Bank, the director will be entitled to
withdraw the amounts in his or her account in cash or stock in the Bank's sole
discretion.
EXECUTIVE COMPENSATION. The following tables set forth a summary of
compensation of Capital Bank's Chief Executive Officer ("CEO") in fiscal year
1997. No other executive officer earned in excess of $100,000 in salary and
bonus during Capital Bank's first fiscal year. Capital Bank began operations in
June 1997, although prior thereto (commencing in late January 1997) the CEO
performed services for Capital Bank's predecessor in interest from whom he
received compensation which was reimbursed by Capital Bank to its predecessor;
accordingly, the compensation recorded below is not for a full fiscal year.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------- ------------ ------------
NO. OF
SECURITIES
NAME AND OTHER UNDERLYING
PRINCIPAL ANNUAL OPTIONS
POSITION YEAR SALARY BONUS COMPENSATION
- -------- ---- ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
James A. Beck, 1997 $121,875 $50,000 (1) 25,000 (2) $8,011(3)
President and CEO
</TABLE>
- ------------------
(1) Perquisites and other personal benefits received did not exceed the lesser
of $50,000 or 10% of salary and bonus compensation.
(2) On January 27, 1997, Mr. Beck was granted an option to acquire up to
25,000 shares of Common Stock at $11.00 per share, 9,000 shares of which
are currently vested, with the balance vesting in increments of 4,000
shares per year over the ensuing four years. Such options were granted
under Capital Bank's ISO Plan.
(3) Includes $3,311 for health, life and long-term disability insurance,
$2,600 in 401(k) contributions and $2,100 in membership dues.
OPTION GRANTS IN THE 1997 FISCAL YEAR
The following table reflects the stock options granted to date by Capital
Bank to the named executive officer pursuant to Capital Bank's ISO Plan in 1997,
which is the first fiscal year of Capital Bank's operations. The table sets
forth the hypothetical potential realizable values that would exist for the
options at the end of their ten-year terms, at assumed rates of stock price
appreciation of 5% and 10%. The amounts shown as potential realizable values
represent the corresponding increases in the market value of all outstanding
shares of Capital Bank Common Stock. The actual value of the options will depend
on the market value of Capital Bank's Common Stock. No gain to the option holder
is possible without an increase in the stock price, which will benefit all
shareholders proportionately. These potential realizable values, based on 5% and
10% appreciation rates prescribed by the FDIC, are not intended to forecast
possible future appreciation, if any, of Capital Bank's stock price.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
---------------
VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF
STOCK PRICE
APPRECIATION
FOR
OPTION TERM (1)
-------------------------------------------------- -------------------
% OF TOTAL
NO. OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR PER SHARE DATE 5% 10%
- ---- ------- ---- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
James A. Beck 25,000 (2) 59.5% $11.00 2007 $412,500 $550,000
</TABLE>
- ---------------
(1) Potential realizable value of each grant is calculated assuming that the
market price of the underlying security appreciates at annualized rates of
5% and 10%, respectively, over the ten-year term of the grant. The assumed
annual rates of appreciation of 5% and 10% would result in the value of
the Capital Bank Common Stock increasing to $16.50 and $22.00 per share.
(2) See footnote (2) to the Summary Compensation Table above.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
The following table sets forth certain information concerning options to
purchase Capital Bank Common Stock held by Mr. Beck during the year ended
December 31, 1997 and the value of unexercised options as of December 31, 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY" OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END (2)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- -------------------------- ---------------------------
James A. Beck 9,000/16,000 $18,000/$32,000
- ---------------
(1) No options were exercised by the CEO in the last fiscal year.
(2) Options are "In-The-Money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The value of the
options is calculated by subtracting the exercise price from $13.00, the
closing market price of the underlying Capital Bank Common Stock as of
December 31, 1997, and multiplying the difference by the number of
securities underlying the options.
EMPLOYMENT AGREEMENT. Under an employment agreement effective January 27,
1997, James A. Beck agreed to serve as President and CEO of Capital Bank at an
annual salary of $130,000, subject to increase in an amount to be determined by
Capital Bank's Board of Directors. Mr. Beck received a cash bonus of $50,000
upon signing his employment agreement. Pursuant to the terms of his employment
agreement, Mr. Beck was granted an option to acquire up to 25,000 shares of
Capital Bank Common Stock at $11.00 per share, 9,000 shares of which are
currently vested, with the balance vesting in increments of 4,000 shares per
year over the next four years. Mr. Beck will be eligible for performance bonuses
and other benefits available to executives of Capital Bank. The term of his
employment is three years, annually renewable for successive three year periods
unless Capital Bank furnishes 60 days prior written notice to Mr. Beck before an
anniversary date of the agreement, in which event Mr. Beck would be entitled to
his salary and bonus for the remaining term. Capital Bank may terminate Mr.
Beck's employment for cause, in which event Capital Bank would be required to
pay only Mr. Beck's compensation due at termination. Upon a change in control of
Capital Bank, Mr. Beck is entitled to compensation equal to three years' salary
and bonus. The change in control provision could deter potential third party
bidders from making offers to acquire Capital Bank. Mr. Beck has also agreed
that during his employment and for two years (or longer in certain cases)
thereafter, he will not compete with Capital Bank within its then existing areas
of operation.
CERTAIN TRANSACTIONS. Certain of the directors and executive officers of
Capital Bank are customers of and borrowers from Capital Bank in the ordinary
course of business. As of December 31, 1997, loans outstanding to directors and
executive officers of Capital Bank, and their associates as a group, equaled
approximately $3.2 million (approximately 12.83% of equity capital as of that
date) and during 1997 did not exceed $5.0 million (or approximately 20% of
equity capital) at any time. Total individual and corporate obligations, direct
and indirect, for any one director did not exceed 10% of the equity capital of
Capital Bank at any time during fiscal 1997. All outstanding loans and
commitments included in such transactions are made substantially on the same
terms, including rate and collateral, as those prevailing at the time in
comparable transactions with other customers. In the opinion of management,
these loans do not involve more than normal risk of collectibility, or contain
other unfavorable features.
Capital Bank has had, and expects to have in the future, banking
transactions in the ordinary course of its business with directors, officers and
principal shareholders of Capital Bank, and their associates, on the
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same terms including interest rates and collateral on loans, as those prevailing
at the same time for comparable transactions with others.
Capital Bank reimbursed certain members of the Capital Bank Board of
Directors for the expenses incurred by them in connection with the organization
of Capital Bank in June 1997. The directors were the guarantors under a line of
credit in the amount of $600,000 from Centura Bank to NB Acquisition Corp., an
entity established by one of the directors prior to the formation of Capital
Bank. NB Acquisition Corp., in turn, loaned such funds to Capital Bank for the
payment of organizational expenses. Capital Bank has repaid NB Acquisition Corp.
and NB Acquisition Corp. has, in turn, repaid the loan from Centura Bank, in
accordance with its terms. The directors have also been released as guarantors.
Capital Bank purchased a computer network, which consists of hardware and
software, from Alphanumeric Systems, Inc., a company owned and operated by
Darleen Johns, a member of the Board of Directors. Prior to the purchase,
Capital Bank reviewed proposals from Alphanumeric Systems, Inc. and two other
competitors and selected Alphanumeric Systems, Inc.'s proposal based on
competitive factors. Alphanumeric Systems, Inc. also provides maintenance for
Capital Bank's computer network and Capital Bank anticipates purchasing on a
competitive basis additional hardware and software from time to time. The
aggregate amount of all payments made by Capital Bank to Alphanumeric Systems in
1997 equaled approximately $248,000.
Davidson, Jones & Beers Company, a construction firm located in Raleigh,
North Carolina, of which Robert L. Jones, a director of Capital Bank, is
Chairman of the Board, has been engaged by Capital Bank to construct
improvements to certain of Capital Bank's offices. In 1997, Capital Bank paid
Davidson, Jones & Beers Company approximately $64,000 for such services. Capital
Bank believes that the fees paid to Davidson, Jones & Beers Company are
comparable to market rates charged in arms-length transactions, based on
management's knowledge of, and familiarity with, the construction markets in its
areas of operation.
O.A. Keller, III, the Chairman of the Board of Capital Bank, is the
father-in-law of Stephen T. Parascandola, who is an associate at the law firm
that serves as principal outside counsel to Capital Bank. In 1997, Capital Bank
paid legal fees to such firm for services rendered in 1996 and 1997 in the
aggregate amount of approximately $115,000, net of expenses associated with
Capital Bank's initial public offering of Capital Bank Common Stock paid from
the proceeds of such offering.
SECURITY OWNERSHIP OF MANAGEMENT
The following table set forth certain information as of September 30, 1998
regarding shares of Common Stock of Capital Bank owned of record or known by
Capital Bank to be owned beneficially by (a) each director, (b) each executive
officer named in the Summary Compensation Table on page 82 and (c) all directors
and executive officers as a group. Except as set forth in the footnotes, the
persons listed below have sole voting and investment power with respect to all
shares of Capital Bank Common Stock owned by them, except to the extent that
such power may be shared with a spouse. The mailing address of each of the
directors and executive officers is in care of Capital Bank's address. There are
no shareholders known to Capital Bank who own in excess of five percent of
Capital Bank Common Stock as of September 30, 1998.
Beneficial Ownership (1)
Name No. of Shares Percent of Class
- ---- ------------------------ ----------------
Charles F. Atkins (2) 64,500 2.6%
Lamar Beach (3) 11,300 *
James A. Beck(4) 22,500 *
William C. Burkhardt(5) 28,000 1.1%
L. I. Cohen, Jr. (6) 51,000 2.0%
David J. Gospodarek 5,500 *
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Carolyn W. Grant (7) 9,600 *
Darleen M. Johns 7,500 *
Robert L. Jones 12,500 *
O. A. Keller, III (8) 47,500 1.9%
Oscar A. Keller, Jr. (9) 47,750 1.9%
Vernon Malone 2,650 *
George R. Perkins, III (10) 43,773 1.8%
Donald W. Perry (11) 14,800 *
J. Rex Thomas (12) 6,500 *
Bruce V. Wainright (13) 12,600 *
Samuel J. Wornom, III (14) 30,500 1.2%
All directors and
executive officers as a 424,523 16.8%
group (21 persons) (15)
- ----------
*Less than one percent
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the FDIC. Accordingly, they may include securities owned
by or for, among others, the spouse and/or minor children of the
individual and any other relative who has the same home as such
individual, as well as other securities as to which the individual has or
shares voting or investment power or has the right to acquire under
outstanding stock options within 60 days of September 30, 1998.
Beneficial ownership may be disclaimed as to certain of the securities.
In the case of each director named in the table above, the number of
shares shown as beneficially owned includes 2,500 shares of Capital Bank
subject to presently exercisable stock options, except for Mr. Keller, III
and Mr. Keller, Jr., who hold 5,000 and 3,750 shares subject to presently
exercisable options, respectively.
(2) Includes 61,000 shares of Capital Bank Common Stock held by entities for
which Mr. Atkins is an officer and the principal shareholder.
(3) Includes 800 shares of Capital Bank Common Stock held by Mr. Beach's wife.
(4) Includes 500 shares of Capital Bank Common Stock held by Mr. Beck's wife
and 12,000 shares held in an Individual Retirement Account. Also includes
9,000 shares of Capital Bank Common Stock subject to options.
(5) Includes 500 shares of Capital Bank Common Stock held by Mr. Burkhardt's
wife.
(6) Includes 22,250 shares of Capital Bank Common Stock held by Mr. Cohen's
wife and 4,500 shares held in the Profit Sharing Plan of Lee Iron & Metal
Co., a company in which Mr. Cohen is the principal shareholder. Mr. Cohen
and his wife serve as co-trustees of such Profit Sharing Plan.
(7) Includes 100 shares of Capital Bank Common Stock held by Ms. Grant's child
and 3,875 shares held in an Individual Retirement Account.
(8) Includes 18,000 shares of Capital Bank Common Stock held jointly with Mr.
Keller's wife, 20,000 shares held in Individual Retirement Accounts and
4,000 shares held by Mr. Keller's children and grandchildren. Oscar A.
Keller, Jr. is the father of O. A. Keller, III.
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<PAGE>
(9) Includes 21,500 shares of Capital Bank Common Stock held jointly with Mr.
Keller's wife and 21,500 held by an entity in which Mr. Keller is an
officer and principal shareholder.
(10) Includes 14,000 shares owned by Mr. Perkins' father over which Mr.
Perkins, III has voting and investment power.
(11) Includes 9,000 shares held jointly with Mr. Perry's wife and 2,300 shares
held by his children.
(12) Includes 1,000 shares of Capital Bank Common Stock held by a child of Mr.
Thomas.
(13) Includes 100 shares of Capital Bank Common Stock held by Dr. Wainright's
wife.
(14) Includes 1,000 shares of Capital Bank Common Stock held in a trust for the
benefit of Mr. Wornom's grandchild, for which Mr. Wornom serves as a
trustee, and 1,000 shares held by a child of Mr. Wornom.
(15) Includes the shares of Capital Bank Common Stock beneficially owned by the
directors of Capital Bank and by four executive officers of Capital Bank
who are not also directors. Also includes 54,550 shares of Capital Bank
Common Stock subject to options.
INFORMATION ABOUT HOME SAVINGS
Home Savings was organized as a North Carolina mutual savings and loan
association in 1950 under the name Home Savings and Loan Association and
converted from mutual to stock form on November 14, 1995. Deposits in Home
Savings are insured by the FDIC. Home Savings is engaged primarily in the
business of attracting deposits from the general public and using such deposits
to make mortgage loans secured by residential real estate. Home Savings also
makes second mortgage loans secured by the equity in a home, commercial real
estate loans, savings account loans and other loans. Home Savings' primary
sources of revenue are interest income from its real estate lending activities,
consisting primarily of making first mortgage loans for the purchase and
refinancing of residential real property. Substantially all of Home Savings'
lending and deposit activities are conducted in eastern Randolph County and
Chatham County out of its home office.
At September 30, 1998, Home Savings had total assets of approximately $60
million, total deposits of approximately $49 million and total shareholders'
equity of approximately $10 million.
ADDRESS. The principal and only office of Home Savings is located at 300
East Raleigh Street, Siler City, North Carolina 27344. Its telephone number is
(919) 742-4186.
BUSINESS. Home Savings is engaged primarily in the business of attracting
deposits from the general public and using such deposits to make mortgage loans
secured by residential real estate. Home Savings also makes second mortgage
loans secured by the equity in a home, commercial real estate loans, savings
account loans and other loans. Home Savings' primary sources of revenue are
interest income from its real estate lending activities, consisting primarily of
making first mortgage loans for the purchase or refinancing of residential real
property located primarily in Chatham County and eastern Randolph County, North
Carolina. Home Savings also earns revenues from interest on other loans,
interest and dividend income from investments, and fees from lending and deposit
activities. The major expenses of Home Savings are interest on deposits and
general administrative expenses such as salaries, employee benefits, federal
deposit insurance premiums and office occupancy and related expenses.
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Home Savings' market area can be characterized as primarily rural in
nature. The economy in its service area is diverse, with such major industries
as textiles, furniture, food processing, hosiery and agriculture. Because no one
industry dominates the local economy, it can be classified as relatively stable.
Consistent with Home Savings' emphasis on being a community-oriented financial
institution, management estimates that substantially all of Home Savings'
deposits were provided by residents in this two-county area and substantially
all of its loans were secured by property located in the same area.
Home Savings operates one full-service office which is located at 300 East
Raleigh Street in Siler City. There are no plans for expansion.
Home Savings has one subsidiary, Home S&L Service Corporation (the
"Subsidiary"), established in 1983 for the purpose of offering discount
brokerage services. The Subsidiary is presently inactive, and Home Savings
presently does not offer such services.
The business of banking in Chatham County, and in North Carolina as a
whole, is extremely competitive with the state laws permitting state-wide
branching. Home Savings competes directly for deposits in its market area with
other savings institutions, commercial banks, credit unions, brokerage firms and
all other organizations and institutions engaged in money market transactions.
In its lending activities, Home Savings competes with all other financial
institutions, as well as consumer finance companies, mortgage companies and
other lenders engaged in the business of extending credit.
Interest rates, both on loans and deposits, and prices of services are
significant competitive factors among financial institutions. Office locations,
office hours, customer service, community reputation and continuity of personnel
are also important competitive factors. Home Savings' predominant competitors
have greater resources, broader geographic markets and higher lending limits.
They can offer more products, and can better afford and make more effective use
of media advertising, support services and electronic technology than Home
Savings. Home Savings depends on its reputation as a community bank in its local
market, direct customer contact, its ability to make credit and other business
decisions locally, and personalized service to counter these competitive
disadvantages. With respect to deposits, Home Savings' primary competitors are
four of North Carolina's largest commercial banks, each with a significant
state-wide presence. The market share of deposits of Home Savings during the
three years ended September 30, 1996 has steadily decreased. Home Savings is
predominately a mortgage lending financial institution that funds its loans with
savings deposits and finds it difficult to compete with larger commercial
banking institutions in its market that offer similar products as well as a full
range of commercial and retail banking products.
Home Savings is periodically assessed insurance premiums by the FDIC in
connection with the insurance of deposits. Home Savings is required under North
Carolina law to maintain deposit insurance with the FDIC. Home Savings'
assessment for the fiscal year ended September 30, 1998 was approximately
$28,000. This insurance assessment may be increased within certain parameters
established by FDIC's bank rating system.
As of September 30, 1998, Home Savings employed 10 full-time employees.
Home Savings is not a party to a collective bargaining agreement, and considers
its relations with employees to be good.
PROPERTIES. Home Savings owns its office building, which is located at 300
East Raleigh Street, Siler City, North Carolina. The net book value of the
property at September 30, 1998 was $285,930.
LEGAL PROCEEDINGS. There are no material pending legal proceedings to
which Home Savings is a party or of which any of its property is the subject,
other than ordinary routine litigation incidental to its business.
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REGULATION AND SUPERVISION
REGULATION OF CAPITAL BANK
Capital Bank is extensively regulated under both federal and state law.
Generally, these laws and regulations are intended to protect depositors and
borrowers, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulation may have a material effect on the business of
Capital Bank Corporation, Capital Bank and/or Home Savings.
STATE LAW. Capital Bank is subject to extensive supervision and regulation
by the North Carolina Commissioner of Banks (the "Commissioner"). The
Commissioner oversees state laws that set specific requirements for bank capital
and regulate deposits in, and loans and investments by, banks, including the
amounts, types, and in some cases, rates. The Commissioner supervises and
performs periodic examinations of North Carolina-chartered banks to assure
compliance with state banking statutes and regulations, and Capital Bank is
required to make regular reports to the Commissioner describing in detail the
resources, assets, liabilities and financial condition of Capital Bank. Among
other things, the Commissioner regulates mergers and consolidations of
state-chartered banks, the payment of dividends, loans to officers and
directors, record keeping, types and amounts of loans and investments, and the
establishment of branches.
DEPOSIT INSURANCE. As a member institution of the FDIC, Capital Bank's
deposits are insured up to a maximum of $100,000 per depositor through the BIF,
administered by the FDIC, and each member institution is required to pay
semi-annual deposit insurance premium assessments to the FDIC. The BIF
assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. Banks with no premium are subject to an annual statutory
minimum assessment.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, qualifying noncumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
September 30, 1998, Capital Bank was classified as "well-capitalized" with Tier
1 and Total Risk - Based Capital of 31.0% and 32.2% respectively.
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The federal banking agencies have adopted regulations specifying that they
will include, in their evaluations of a bank's capital adequacy, an assessment
of the bank's interest rate risk ("IRR") exposure. The standards for measuring
the adequacy and effectiveness of a banking organization's IRR management
include a measurement of board of director and senior management oversight, and
a determination of whether a banking organization's procedures for comprehensive
risk management are appropriate for the circumstances of the specific banking
organization.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of Capital Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the shareholders.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA
provides for, among other things:
o publicly available annual financial condition and management reports
for certain financial institutions, including audits by independent
accountants,
o the establishment of uniform accounting standards by federal banking
agencies,
o the establishment of a "prompt corrective action" system of
regulatory supervision and intervention, based on capitalization
levels, with greater scrutiny and restrictions placed on depository
institutions with lower levels of capital,
o additional grounds for the appointment of a conservator or receiver,
and
o restrictions or prohibitions on accepting brokered deposits, except
for institutions which significantly exceed minimum capital
requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may
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include the termination of deposit insurance by the FDIC or the appointment of a
receiver or conservator for the institution. FDICIA also limits the
circumstances under which the FDIC is permitted to provide financial assistance
to an insured institution before appointment of a conservator or receiver.
MISCELLANEOUS. The dividends that may be paid by Capital Bank are subject
to legal limitations. In accordance with North Carolina banking law, dividends
may not be paid unless Capital Bank's capital surplus is at least 50% of its
paid-in capital. In addition, Capital Bank may not, in any case, pay any
dividends during its first three years of operation. See "Comparison of the
Rights of Shareholders - Comparison of the Rights of Holders of Capital Bank
Common Stock and Capital Bank Corporation Common Stock - Payment of Dividends."
Shareholders of banks may be compelled by bank regulatory authorities to
invest additional capital in the event their bank's capital shall have become
impaired by losses or otherwise. Failure to pay such an assessment could result
in a forced sale of a shareholder's bank stock.
The earnings of Capital Bank will be affected significantly by the
policies of the Federal Reserve, which is responsible for regulating the United
States money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market transactions in United States government securities, changes in the rate
paid by banks on bank borrowings, and changes in reserve requirements against
bank deposits. These techniques are used in varying combinations to influence
overall growth and distribution of bank loans, investments, and deposits, and
their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and money markets, as well as the effect of actions by monetary and
fiscal authorities, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of
Capital Bank.
Capital Bank cannot predict what legislation might be enacted or what
regulations might be adopted, or if enacted or adopted, the effect thereof on
Capital Bank's operations.
REGULATION OF CAPITAL BANK CORPORATION
FEDERAL REGULATION. Following consummation of the Holding Company
Reorganization, Capital Bank Corporation will be subject to examination,
regulation and periodic reporting under the BHC Act, as administered by the
Federal Reserve. The Federal Reserve has adopted capital adequacy guidelines for
bank holding companies on a consolidated basis.
Capital Bank Corporation will be required to obtain the prior approval of
the Federal Reserve to acquire all, or substantially all, of the assets of any
bank or bank holding company. Prior Federal Reserve approval will be required
for Capital Bank Corporation to acquire direct or indirect ownership or control
of any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, it would, directly or indirectly, own or control
more than five percent of any class of voting shares of such bank or bank
holding company.
Capital Bank Corporation will be required to give the Federal Reserve
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of Capital Bank
Corporation's consolidated net worth. The
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Federal Reserve may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, Federal Reserve order or directive, or any
condition imposed by, or written agreement with, the Federal Reserve. Such
notice and approval is not required for a bank holding company that would be
treated as "well capitalized" under applicable regulations of the Federal
Reserve, that has received a composite "1" or "2" rating at its most recent bank
holding company inspection by the Federal Reserve, and that is not the subject
of any unresolved supervisory issues.
The status of Capital Bank Corporation as a registered bank holding
company under the BHC Act will not exempt it from certain federal and state laws
and regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging
in, or acquiring five percent or more of any class of voting securities of any
company engaged in, non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve has
determined by regulation to be so closely related to banking as to be a proper
incident thereto are:
o making or servicing loans;
o performing certain data processing services;
o providing discount brokerage services;
o acting as fiduciary, investment or financial advisor;
o leasing personal or real property;
o making investments in corporations or projects designed primarily to
promote community welfare; and
o acquiring a savings and loan association.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would be applicable to the extent
that Capital Bank Corporation maintains as a separate subsidiary a depository
institution, such as Home Savings, in addition to Capital Bank.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and Federal Reserve regulations limit the amounts of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of
Capital Bank, Capital Bank Corporation, any subsidiary of Capital Bank
Corporation and related interests of such persons. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in connection
with any extension of credit, lease or sale of property or furnishing of
services.
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REGULATION OF HOME SAVINGS
STATE SAVINGS BANK REGULATION. As a state-chartered savings bank whose
deposits are insured by the FDIC, Home Savings is subject to supervision,
examination and regulation by the Administrator and the FDIC. While Home Savings
is not a member of the Federal Reserve System, Home Savings is also subject to
certain regulations of the Federal Reserve. The regulations of these agencies
govern most aspects of Home Savings' business, including capital adequacy
ratios, reserves against deposits, restrictions on the rate of interest which
may be paid on some deposit instruments, limitations on the nature and amount of
borrowings, dividends, loans that may be made, the location of branch offices
and the nature and scope of Home Savings' activities. Supervision, regulation
and examination of Home Savings by the regulatory agencies are generally
intended to protect depositors and are not intended for the protection of Home
Savings' shareholders.
BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle Act"), the Federal Reserve may approve bank holding company
acquisitions of banks in other states, subject to certain aging and deposit
concentration limits. As of June 1, 1997, banks in one state may merge with
banks in another state, unless the other state has chosen not to implement this
section of the Riegle Act. These mergers are also subject to similar aging and
deposit concentration limits.
North Carolina "opted-in" to the provisions of the Riegle Act. Since July
1, 1995, an out-of-state bank that did not already maintain a branch in North
Carolina was permitted to establish and maintain a DE NOVO branch in North
Carolina, or acquire a branch in North Carolina, if the laws of the home state
of the out-of-state bank permit North Carolina banks to engage in the same
activities in that state under substantially the same terms as permitted by
North Carolina. Also, North Carolina banks may merge with out-of-state banks,
and an out-of-state bank resulting from such an interstate merger transaction
may maintain and operate the branches in North Carolina of a merged North
Carolina bank, if the laws of the home state of the out-of-state bank involved
in the interstate merger transaction permit interstate merger.
RECENT LEGISLATIVE DEVELOPMENTS
On September 30, 1996, President Clinton signed the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Growth Act"), which contained a
comprehensive approach to recapitalize the FDIC's Savings Association Insurance
Fund (the "SAIF") and to assure payment of the Financing Corporation (the
"FICO") obligations. Most of Capital Bank's deposits are insured by the FDIC's
BIF. Under the Growth Act, banks with deposits that are insured under the BIF
are required to pay a portion of the interest due on bonds that were issued by
FICO to help shore up the ailing Federal Savings and Loan Insurance Corporation
in 1987. The Growth Act stipulates that the BIF assessment rate to contribute
toward the FICO obligations must be equal to one-fifth the SAIF assessment rate
through year-end 1999, or until the insurance funds are merged, whichever occurs
first. The amount of FICO debt service to be paid by all BIF-insured
institutions is approximately $0.0126 per $100 of BIF-insured deposits for each
year from 1997 through 1999 when the obligation of BIF-insured institutions
increases to approximately $0.0240 per $100 of BIF-insured deposits per year
through the year 2019, subject in all cases to adjustments by the FDIC on a
quarterly basis. The Growth Act also contained provisions protecting banks from
liability for environmental clean-up costs; prohibiting credit unions sponsored
by Farm Credit System banks; easing application requirements for most bank
holding companies when they acquire a thrift or a permissible non-bank
operation; easing Fair Credit Reporting Act restrictions between bank holding
company affiliates; and reducing the regulatory burden under the Real Estate
Settlement Procedures Act, the Truth-in-Savings Act, the Truth-in-Lending Act
and the Home Savings Mortgage Disclosure Act.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CAPITAL BANK
OVERVIEW
Capital Bank was incorporated under the laws of North Carolina on May 30,
1997 and commenced banking operations on June 20, 1997. Its initial stock
offering resulted in gross proceeds to Capital Bank of more than $27 million. On
June 20, 1997, Capital Bank opened its main office in Raleigh, North Carolina,
and acquired two branch locations in Sanford, North Carolina from another
financial institution, including the deposits and selected loans of those
branches. On December 1, 1997, Capital Bank announced an agreement in principle
to purchase two branch facilities in Cary, North Carolina from Branch Banking
and Trust Company ("BB&T"). In March 1998, Capital Bank purchased the real
property and improvements associated with one of these facilities and opened it
for business on March 23, 1998. On June 5, 1998 Capital Bank assumed the land
lease and purchased the improvements associated with the other facility, which
opened for business in September 1998. There were no deposits or loans acquired
by Capital Bank in connection with these facilities.
Capital Bank is a full-service community bank. Its profitability depends
principally upon its net interest income, provision for loan losses, noninterest
income and noninterest expenses.
INTERIM PERIOD ENDED SEPTEMBER 30, 1998
FINANCIAL CONDITION
Total assets of Capital Bank for the quarter ended September 30, 1998 were
$100.1 million, an increase of 45% compared to December 31, 1997. On September
30, 1998, loans were $64.3 million, up $37.2 million or 137% compared to
December 31, 1997. Investment securities were $16.6 million, and Federal funds
sold were $11.8 million at period end. During the first nine months, Federal
Funds sold declined by $5.0 million as this asset category was redeployed into
higher yielding loans and securities. The allowance for loan losses on September
30, 1998 was $909,000 and stood at 1.41% of total loans. Management believes
that the amount of the allowance is adequate at this time.
Deposits on September 30, 1998 were $75.1 million, an increase of $31.7
million or 73% from December 31, 1997. Earning assets represented 92% of total
assets on both September 30, 1998 and December 31, 1997. Total stockholders'
equity was $24.3 million at September 30, 1998.
RESULTS OF OPERATIONS
Third Quarter 1998 VS. Third Quarter 1997
Capital Bank incurred a net loss for the quarter ended September 30, 1998
of $198,000 or $.08 per share compared to a loss of $382,000 or $.15 per share
in the third quarter of 1997.
Net interest income in the third quarter was $905,000, up 21% compared to
$513,000 in the third quarter of 1997. Capital Bank's net interest margin (net
interest income as a percent of average earning assets) was 4.21% in the third
quarter of 1998 compared to 4.32% in the third quarter of 1997.
The provision for loan losses was $173,000 for the third quarter of 1998.
This provision was used to build the allowance for loan losses to a prudent
level to support Capital Bank's actual and anticipated loan
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<PAGE>
growth. At September 30, 1998, the allowance for loan losses was 1.41% of total
loans. Loans 30 days or more past due totaled $281,000 and represented .43% of
total loans on September 30, 1998.
Non-interest income for the third quarter of 1998 was $288,000 compared to
$44,000 in the third quarter of 1997. The increase in non-interest income is
attributable to mortgage origination fees and loan servicing fees associated
with accounts receivable financing. These two business activities were new
revenue sources in 1998. Also included in noninterest income for the third
quarter of 1998 was $60,000 in profits on the sale of securities.
Non-interest expense was $1,218,000 for the third quarter of 1998 compared
with $804,000 in the third quarter of 1997. Salaries and employee benefits
represented the largest expense category as Capital Bank must maintain adequate
staffing levels in order to meet customer needs and to keep pace with its
expected growth. As of September 30, 1998 the Capital Bank had 45 full-time and
2 part-time employees. The increase in third quarter operating expense is
primarily associated with opening of two new branches in 1998 and starting a
mortgage origination department in April. Although management expects
noninterest expense to increase on an absolute basis as Capital Bank continues
its growth, these expenses as a percentage of asset size and operating revenue
are anticipated to decrease over time.
Year-to-date 1998 VS. Year-to-date 1997
It should be noted that Capital Bank opened for business on June 20, 1997
and that the 1997 year-to-date results of operations only reflect the 101 day
period from June 20 through September 30, 1997. Therefore, all 1998 year-to-date
figures reflect a much longer operating period and comparisons to 1997
year-to-date figures are not necessarily indicative of performance trends.
Capital Bank incurred a net loss for the nine month period ended September
30, 1998 of $813,000 or $.33 per share compared to a loss of $410,000 or $.17
per share in 1997. Net interest income on a year-to-date basis was $2,339,000 in
1998, up 328% when compared to $546,000 in 1997. The provision for loan losses
was $518,000 for 1998 compared to $135,000 in 1997. Non-interest income
year-to-date was $472,000 in 1998 compared to $45,000 in 1997. The increase in
non-interest income is attributable to mortgage origination fees, accounts
receivable financing fees, and third quarter profits on the sale of securities.
Non-interest expenses for the nine month period ended September 30, 1998 was
$3,106,000 compared to $866,000 in 1997. The largest expense category was
salaries and employee benefits, which reflects the growth in staffing necessary
to generate additional business and revenue and provide quality customer
service. Also included is the effect of the initial expenditures for the
facilities and equipment for two new branches which opened in 1998. These costs
will not be recovered until the branches can produce the level of deposits and
loans necessary to contribute to the profitability of Capital Bank.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity management involves planning to meet Capital Bank's
anticipated funding needs at a reasonable cost. Liquidity management is guided
by policies formulated by Capital Bank's senior management and the
Asset/Liability Management Committee of the Board of Directors of Capital Bank.
Capital Bank had $15.2 million in its most liquid assets, cash and cash
equivalents at quarter end. Capital Bank's principal sources of funds are
deposits, short term borrowings and capital. Core deposits (total deposits less
certificates of deposits in the amount of $100,000 or more), one of the most
stable sources of liquidity, together with equity capital funded 88.8% of total
assets at September 30, 1998. In addition, Capital Bank has a $7.4 million line
of credit with Federal Home Loan Bank of Atlanta and has the ability to take
advantage of various funding programs available from that resource.
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Stockholder's equity was $24.3 million or $9.81 per share at September 30,
1998. Management believes this level of shareholders' equity provides adequate
capital to support Capital Bank's growth for the next 12 months and to maintain
a well-capitalized position. At September 30, 1998, Capital Bank had a leverage
ratio of 24.2%, a Tier 1 capital ratio of 30.9%, and a total risk-based capital
ratio of 32.2%. These ratios far exceed the federal regulatory minimum
requirements for a "well-capitalized" bank. Management's challenge is to use
this capital to implement a prudent growth strategy of branch and bank
acquisitions while growing the existing branch structure through quality service
and responsiveness to its customers' needs, although there is no assurance that
Capital Bank will meet these objectives.
PERIOD ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
Capital Bank reported a net loss from operations of $722,000 or $.29 per
share in 1997. It is generally expected that a new bank in its start-up phase
will operate at a loss and that the amount of the loss should moderate over time
as the bank continues to grow. The amount of the 1997 operating loss was in line
with management expectations. The operating loss in the third quarter ended
September 30, 1997 was $382,000, or $.15 per share and the operating loss in the
fourth quarter ended December 31, 1997 was $312,000, or $.13 per share. Both of
these quarterly amounts were also in line with management expectations.
NET INTEREST INCOME. Net interest income is the difference between total
interest income and total interest expense and is Capital Bank's principal
source of earnings. The amount of net interest income is determined by the
volume of interest-earning assets, the level of rates earned on those assets,
and the cost of supporting funds. The difference between rates earned on
interest earning assets and the cost of supporting funds is measured by the net
interest margin. During 1997, average assets were $50,951,000 and the net
interest margin was 4.24%.
PROVISION FOR LOAN LOSSES. The provision for loan losses is the amount
charged against earnings for the purpose of establishing an adequate allowance
for loan losses. Loan losses are, in turn, charged to this allowance rather than
being reported as a direct expense. In 1997, $270,000 was expensed as a loan
loss provision. The amount of the allowance for loan losses is established based
on management's estimate of the inherent risks associated with lending
activities and is regularly reviewed and modified, as necessary. Due to Capital
Bank's limited operating history, this estimate is primarily based on industry
practices and consideration of local economic factors. The allowance for loan
losses was $427,000 on December 31, 1997 and represented approximately 1.58% of
total loans outstanding on that date.
NON-INTEREST INCOME. Non-interest income totaled $146,000 in 1997. Of
this amount, $100,000 was associated with service charges on deposit accounts.
There were no securities gains or losses taken in 1997.
NON-INTEREST EXPENSE. Non-interest expense represents the overhead
expenses of Capital Bank. Management monitors all categories of non-interest
expense in an attempt to improve productivity and operating performance.
Non-interest expense was $1,746,000 for the year ended December 31, 1997. Of
this amount, $816,000 was salary and benefit expense, $161,000 was occupancy
expense, and $328,000 was other operating expenses.
PROVISION FOR INCOME TAXES. No federal or state income tax expense
resulted from the current period due to the generation of net operating losses
and the establishment of a valuation allowance against deferred tax assets.
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FINANCIAL CONDITION
On December 31, 1997 total assets were $68,904,000. Capital Bank's
financial condition is measured in terms of its asset and liability composition,
asset quality, capital resources, and liquidity. The growth and composition of
assets and liabilities in the second half of 1997 reflected generally favorable
economic conditions. Capital Bank is not engaged in investment strategies
involving derivative financial instruments. Asset and liability management is
conducted without the use of forward-based contracts, options, swap agreements
or other synthetic financial instruments derived from the value of an underlying
asset, reference rate, or index.
LOAN PORTFOLIO. Total loans were $27,066,000 as of December 31, 1997.
Continued low interest rates during 1997, coupled with strong economic growth in
the greater Raleigh (including Wake County) and Sanford areas, were key factors
in the $15.8 million growth of the loan portfolio in the second half of 1997. At
year end, commercial loans, real estate loans, and consumer loans were $14.7
million, $2.3 million, and $10.0 million, respectively. The commercial loan
portfolio is comprised mainly of loans to small businesses and there were no
significant concentrations of credit.
Although there were no concentrations of credit to any particular
industry, the economic trends of the area served by Capital Bank are influenced
by the significant industries within the region. Virtually all Capital Bank's
business activity is with customers located in the Raleigh and Sanford areas.
The ultimate collectibility of Capital Bank's loan portfolio is susceptible to
changes in the market conditions of this geographic region.
Capital Bank uses a centralized risk management process to insure uniform
credit underwriting that adheres to Capital Bank policy. Lending policies are
reviewed on a regular basis to confirm that Capital Bank is prudent in setting
its underwriting criteria. Credit risk is managed through a number of methods
including loan grading of commercial loans, committee approval of larger loans,
and class and purpose coding of loans. Management believes that early detection
of credit problems through regular contact with Capital Bank's clients coupled
with consistent reviews of the borrowers' financial condition are important
factors in overall credit risk management.
During 1997, the management charged off $6,000 of loans as uncollectible.
At December 31, 1997 the allowance for loan losses as a percentage of total
loans was 1.58%. Management believes the allowance for loan losses of $427,000
provides adequate coverage of the potential loss exposure in the loan portfolio.
INVESTMENT SECURITIES. Investment securities represent the second largest
component of earning assets. On December 31, 1997, investments, including
securities available for sale and securities held to maturity, totaled
$19,532,000. Of this amount, 58% was classified as "available for sale" with the
remaining 42% classified as "held to maturity." This distribution allows
flexibility in the management of interest rate risk, liquidity, and loan
portfolio growth.
MONEY MARKET INVESTMENTS. At year-end 1997, Capital Bank had $16,787,000
in short-term money market investments.
LIABILITIES. During 1997, Capital Bank relied on deposits and excess
liquidity to fund its earning assets.
DEPOSITS. Total deposits on December 31, 1997 were $43,386,000. Of this
amount, $6,118,000 was in the form of non-interest bearing demand deposits and
$37,268,000 in interest bearing deposits. Balances in certificates of deposit
$100,000 and over were $3,889,000 at year-end.
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DEBT. Capital Bank had no short-term or long-term borrowings on December
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, Capital Bank completed its initial public offering of
common stock. The offering, net of issuance costs, raised $26,042,000. At
year-end total shareholders' equity, excluding unrealized gains (losses) on
securities of $5,000 (net of taxes), was $24,951,000. The North Carolina Banking
Commission and the FDIC prohibit the payment of any dividends during Capital
Bank's first three years of operation. Capital Bank did not pay any dividends to
its shareholders in 1997. It is not likely Capital Bank will declare or pay cash
dividends in the foreseeable future since earnings, if any, would be used to
support growth in earning assets and the opening of branch locations, should
such action be pursued. Within the framework established by federal banking law
for regulatory capital requirements, Capital Bank is categorized as "well
capitalized" which is the highest regulatory classification.
ASSET/LIABILITY MANAGEMENT
Asset/liability management functions to maximize profitability within
established guidelines for interest rate risk, liquidity, and capital adequacy.
Measurement and monitoring of liquidity, interest rate risk, and capital
adequacy are performed centrally through the Asset/Liability Management
Committee, and reported under guidelines established by management, the Board of
Directors and regulators. Oversight on asset/liability management matters is
provided by the Board of Directors of Capital Bank through its Asset/Liability
Management Committee.
At December 31, 1997, Capital Bank had $19,428,000, or 28% of total
assets, in its most liquid assets, cash and short-term investments. Capital
Bank's principal sources of funds are deposits and capital. Core deposits (total
deposits less certificates of deposit in denominations of $100,000 or more)
together with equity capital funded 94% of total assets at December 31, 1997.
The tables below shows the major categories of interest earning assets,
and interest bearing liabilities, the average balance and interest earned or
paid, the average yield/rate on daily average balances outstanding, net interest
earnings and net yields on interest earning assets for the period beginning June
20, 1997 and ending December 31, 1997 and for the period beginning January 1,
1998 and ending September 30, 1998.
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Average Balances, Interest Earned or Paid, and Interest Yields/Rates
(in thousands)
<TABLE>
<CAPTION>
Period from June 20, 1997 to Period from January 1, 1998 to
December 31, 1997 September 30, 1998
Average Yield/ Average Yield/
Balance (1) Interest Rate (2) Balance (1) Rate (2) Interest
----------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Investment securities.... $11,542 $ 393 6.43% $20,584 $ 950 6.15%
Commercial loans......... 9,282 435 8.82% 31,910 2,100 8.77%
Consumer loans........... 6,574 296 8.47% 12,862 848 8.79%
Residential mortgages.... 1,785 84 8.86% 2,172 135 8.29%
Federal funds sold....... 20,211 594 5.31% 8,460 343 5.41%
Other ................... 1,557 14 4.59% -- -- --
----- -- ---- ----- --- ----
Total interest earning
assets.............. 50,951 1,816 6.71% 75,988 4,376 7.68%
----- ---- ----- ----
Cash and due from banks.. 1,777 2,127
Other assets............. 2,895 4,543
Reserve for loan losses.. (271) (654)
----- -----
Total assets......... $55,352 $82,005
======= =======
Savings and interest
bearing demand deposits
and other.............. $ 8,865 166 3.52% $15,756 465 3.94%
Time deposits less than
$100,000............... 14,553 440 5.69% 29,644 1,286 5.78%
Time deposits $100,000
and greater............ 2,242 63 5.29% 6,596 286 5.78%
----- -- ---- ----- --- ----
Total interest bearing
liabilities......... 25,660 669 4.91% 51,996 2,037 5.22%
----- ---- ----- ----
Demand deposits.......... 3,842 4,720
Other liabilities........ 711 810
------ ------
Total liabilities.... 30,213 57,526
Shareholders' equity..... 25,139 24,479
------ ------
Total liabilities and
shareholders equity..... $55,352 $82,005
======= =======
Net interest spread...... $ 1,147 1.80% $ 2,339 2.45%
======== =======
Net interest margin...... 4.24% 4.10%
</TABLE>
Notes:
(1) Average balances for loans includes any non-performing loans.
(2) All yield/rate information has been annualized.
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(3) Net interest spread represents the difference between the average yield
on interest earning assets and the average cost of interest bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest earning assets.
Investment Portfolio
The following table shows the maturities of securities available for sale and
securities held to maturity as of December 31, 1997 and September 30, 1998.
Mortgage backed securities are included in each of the categories based on
forecasted average life. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay these
obligations.
At September 30, 1998
Securities Available For Sale Portfolio Data
(in thousands)
<TABLE>
<CAPTION>
1 Year or Less 1 - 5 Years 5 - 10 Years Total
Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Obligations of US Government
Agencies.............. $ - - $ 6,102 6.05% $ - - $ 6,102
Mortgage Backed Securities - - 557 6.35% 7,682 5.96% 8,239
------- ------- ------- -------
$ - $ 6,659 $ 7,682 $14,341
======= ======= ======= =======
Securities Held To Maturity Portfolio Data
(in thousands)
Obligations of US Government
Agencies.............. $ - - $2,000 6.35% $ - - $2,000
======= ======= ======= =======
At December 31, 1997
Securities Available For Sale Portfolio Data
(in thousands)
1 Year or Less 1 - 5 Years 5 - 10 Years Total
Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------
US Treasury Securities.. $ - - $3,014 6.03% $ - - $ 3,014
Obligations of US Government
Agencies.............. - - 3,006 6.26% - - 3,006
Mortgage Backed Securities - - - - 5,357 6.55% 5,357
------- ------- ------- -------
$ - $6,020 $ 5,357 $ 11,377
======= ======= ======= =======
Securities Held To Maturity Portfolio Data
(in thousands)
Obligations of US Government
Agencies.............. $ - - $8,002 6.24% $ - - $ 8,002
======= ======= ======= =======
</TABLE>
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Loans Portfolio
(in thousands)
The following table shows significant loan categories as of September 30, 1998
and December 31, 1997.
September 30, December 31,
1998 1997
---- ----
Commercial......................... $ 47,398 $ 14,715
Consumer........................... 14,910 10,054
Residential mortgages.............. 1,960 2,296
----------- ----------
................................... 64,268 27,065
Less allowance for loan losses..... 909 427
----------- ----------
Loans, net......................... $ 63,359 $ 26,638
=========== ==========
The following tables show the amount of commercial loans outstanding as of
September 30, 1998 and December 31, 1997, which mature or reprice within the
time frames shown below.
September 30, December 31,
1998 1997
---- ----
Commercial loans:
Due within one year................ $ 30,377 $ 8,812
Due one through five years......... 14,117 5,251
Due after five years............... 2,904 652
----------- ----------
$ 47,398 $ 14,715
=========== ==========
Commercial loans:
Interest rates are floating or
adjustable....................... $ 36,120 $ 8,309
Interest rates are fixed or
predetermined.................... 11,278 6,406
--------- ---------
$ 47,398 $ 14,715
========= =========
On December 31, 1997, there were no non-accruals, past due or restricted loans.
There were no potential problem loans, impaired loans, or foreign loans
outstanding.
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Summary of Loan Loss Experience
The following table shows changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off by loan
category and additions to the allowance which have been charged to operating
expenses.
<TABLE>
<CAPTION>
Period from Period from
June 20, 1997 to January 1, 1998 to
December 31, 1997 September 30, 1998
(in thousands)
<S> <C> <C>
Average amount of loans outstanding during the year.....$ 17,641 $ 46,944
=========== ============
Allowance for loan loss balance at beginning of period..$ -- $ 427
Adjustment for loans acquired........................... 163 --
Loans charged off:
Commercial.......................................... -- (35)
Consumer............................................ (6) (9)
Residential mortgages............................... -- --
----------- ------------
Total loans charged off................................. (6) (44)
Recoveries of loans previously charged off.............. -- 8
----------- ------------
Net loans charged off................................... (6) (36)
Additions to allowance charged to operating expense..... 270 518
----------- ------------
Balance at end of period................................$ 427 $ 909
=========== ============
Ratio of net chargeoffs during period to average loans..
outstanding............................................. 0.03% 0.08%
=========== ============
</TABLE>
Management has allocated the allowance for loan losses by loan category. This
allocation is based on management's assessment of the risk associated with the
different types of lending activities and is not intended to be management's
judgment as to future loan losses by loan type.
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Allocation of Allowance for Loan Losses
September 30, 1998 December 31, 1997
------------------ -----------------
(In thousands)
% to % to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Commercial............ $616 74% $125 54%
Consumer.............. 149 23% 50 37%
Residential mortgage.. 6 3% 25 9%
Unallocated........... 138 -- 227 --
---- --- --- ---
$909 100% $427 100%
==== ==== ==== ====
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Deposits
Capital Bank has a base of time deposits, principally certificates of deposits
and money market investment accounts, primarily obtained from customers in North
Carolina. The following table shows the maturities of certificates of deposit in
amounts of $100,000 or more.
September 30, December 31,
1998 1997
---- ----
Maturity (In thousands)
- --------
Three months or less................ $ 972 $ 966
Over three months to twelve months.. 8,028 1,091
Over twelve months.................. 1,641 1,832
-------- --------
$ 10,641 $ 3,889
======== ========
The ratio of net income to average shareholders' equity and to average total
assets, and certain other ratios is presented below.
September 30, December 31,
1998 1997
---- ----
Return on average assets.......... -1.32% -1.30%
Return on average shareholders'
equity.......................... -4.43% -2.87%
Avg. Shareholders' equity to
average assets.................. 29.85% 45.42%
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Capital Bank utilizes an outside asset liability management advisory firm
to help management evaluate interest rate risk and develop asset liability
management strategies. One tool which is used is a computer simulation model
which projects Capital Bank's performance under different interest rate
scenarios. Analyses are prepared quarterly which evaluate Capital Bank's
performance in a base strategy which reflects its 1998 and 1999 operating plan.
Three interest rate scenarios (FLAT, RISING and DECLINING) are applied to the
base strategy to determine the effect of changing interest rates on net interest
income. The September 30, 1998 analysis of Capital Bank shows it to be "asset
sensitive".
For the upcoming twelve month period in the FLAT rate scenario, Capital
Bank is projected to earn $5.1 million in net interest income. In the RISING
rate scenario, which contemplates a 300 basis point increase in interest rates
over a twelve month period, the Bank is expected to see its annualized net
interest income improve by $319 thousand, or 6.24%. Conversely, the Bank will
see a decline in earnings of $345 thousand, or 6.76%, if rates declined 300
basis points.
The assumptions and parameters used in the simulation include the
following:
o September 30, 1998 balance sheet data and October 1998 interest rate
forecasts from SunTrust Banks, Inc. Office of the Economist.
o Spreads on all loan, investment and deposit products were based on
actual spreads as of September 30, 1998 and are assumed to remain
constant throughout the analysis.
o Prepayment speeds of mortgage whole loans and mortgage-backed
securities are consistent with "consensus" Wall Street expectations
for all rate environments modeled.
o NOW and Savings accounts are assumed to be fixed rate and pay off
per an eight year decay schedule. This methodology produces pricing
changes of only 1-2 basis points per month in these accounts in the
RISING and DECLINING rate environments. Money Market accounts are
variable rate but do not change more than 12.5 basis points monthly.
NOW and Savings are subject to a maximum rate of 5.50%.
o Monthly changes in loans and deposits are per Capital Bank's 1998
budget adjusted for year-to-date actual performance.
o Securities are assumed to run off with all called and matured
securities assumed to be reinvested in the same product.
EFFECTS OF INFLATION
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on Capital Bank's growth,
earnings and total assets, and on its need to closely monitor capital levels.
Interest rates are significantly affected by inflation, but it is
difficult to assess the impact, since neither the timing nor the magnitude of
the changes in the various inflation indices coincides with changes in interest
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rates. Inflation does impact the economic value of longer-term interest-bearing
assets and liabilities, but Capital Bank attempts to limit its long-term assets
and liabilities.
YEAR 2000
See page 76 for a discussion of concerns relating to Year 2000 matters.
RECENT ACCOUNTING DEVELOPMENTS
Capital Bank adopted SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The 1997 financial statements have been
restated to reflect this adoption.
Capital Bank adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" on January 1, 1998. SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed.
Capital Bank will adopt the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" effective with the fiscal quarter
beginning July 1, 1999. Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued in June
1998. This Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized as either assets or liabilities in the statement of financial
position and be measured at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and whether
or not the derivative is designated as a hedging instrument. This Statement is
effective for fiscal years beginning after June 15, 1999 with initial
application in the first quarter of the fiscal year. SFAS No. 133 is not
expected to have a material effect on Capital Bank's financial statements.
Capital Bank will adopt the provisions of SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" on January 1, 1999. The adoption
of this statement is not expected to have a material effect on Capital Bank's
financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OF HOME SAVINGS BANK OF SILER CITY, INC., SSB
OVERVIEW
The principal business of Home Savings consists of attracting deposits
from the local public and investing these funds in real estate loans primarily
collateralized by one-to-four family residences located in Chatham and eastern
Randolph Counties in North Carolina. Home Savings' profitability depends
primarily on net interest income, which is the difference between the interest
income it earns on its loan and investment portfolios and the interest expense
it pays on deposits. Home Savings' profitability, to a lesser extent, is also
affected by other operating income and expenses. Other operating income consists
of fees earned on loan originations and customer deposit account service
charges. Other operating expense consists of compensation and employee benefits,
federal deposit insurance premiums, occupancy and equipment, data processing and
other expenses.
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
FINANCIAL CONDITION
Consolidated assets of Home Savings increased to $59,709,000 at September
30, 1998, an increase of $3,329,000 or 5.9% from September 30, 1997.
Consolidated assets were $56,380,000 at September 30, 1997, an increase of
$3,866,000 or 7.4% from September 30, 1996. The increases in total consolidated
assets in 1998, 1997 and 1996 were primarily due to Home Savings investing new
funds received from depositors and investors into federal funds sold.
Net loans receivable amounted to $30,284,000 at September 30, 1998, a 4.0%
decrease from September 30, 1997. Net loans receivable were $31,556,000 at
September 30, 1997, which was an increase of $1,522,000 from September 30, 1996.
Investment and mortgage-backed securities totaled $14,678,000, $17,495,000
and $19,090,000 at September 30, 1998, 1997 and 1996, respectively. The
decreases in 1998 and 1997 were a result of calls and maturities of investments.
Deposits increased to $49,000,000 at September 30, 1998 from $45,400,000
at September 30, 1997, a 7.9% increase. This growth was fueled by competitive
pricing on nine-month certificates of deposit. Deposits increased $3,729,000 or
8.9% from September 30, 1996 to September 30, 1997. This growth was also driven
by competitive pricing offered on certificates of deposit.
Retained income amounted to $945,000 at September 30, 1998, $1,062,000 at
September 30, 1997 and $1,109,000 at September 30, 1996. From September 30, 1997
to September 30, 1998 retained income was increased by income of $245,000 and
decreased by $362,000 in dividends. Retained income as a percentage of Home
Savings' total consolidated assets at September 30, 1998 was 1.6%. Shareholders'
equity increased to $9,804,000 from $9,533,000 in 1997.
OPERATING RESULTS
NET INCOME. Net income for the year ended September 30, 1998 was $245,000
compared to net income of $400,000 and $120,000 for the years ended September
30, 1997 and 1996, respectively. The decrease in net income in 1998 is primarily
attributable to the decrease in net interest income and increases in the
provision for loan losses and other operating expenses. The increase in net
income in 1997 as compared to
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1996 is primarily attributable to the fact that $584,000 of compensation expense
on ESOP shares and a special SAIF assessment of approximately $256,000 were
recognized in 1996.
NET INTEREST INCOME. Net interest income decreased $139,000 to $1,542,000
from $1,681,000 in 1997. This decrease was the result of a decrease in the yield
on interest earning assets coupled with an increase in, and rate paid on,
interest earning liabilities. The overall decrease was partially offset by an
increase in average interest bearing assets. There was a decrease in net
interest income of $162,000 in 1997 from $1,843,000 in 1996. The decrease was
the result of decreases in both the interest earning assets and the yield on
those assets coupled with an increase in interest bearing liabilities. Overall
decrease in net interest margin from 3.43% to 2.79% for the years ended
September 30, 1996 to September 30, 1998 was due to a $9.3 million increase in
average balance of federal funds which have lower yields than loans receivable.
Loans receivable did not have a significant increase in average balances from
1996 to 1998. In addition, there has been a $5.7 million increase in average
balances of Certificates of Deposits which are a higher cost liability than
savings and NOW accounts which have not increased significantly during the
period.
INTEREST INCOME. Interest income amounted to $4,024,000 in 1998,
$3,865,000 in 1997 and $3,992,000 in 1996. Home Savings has experienced
fluctuations in its average interest-earning assets and its yields have
decreased from 7.43% in 1996 to 7.36% in 1997 and 7.14% in 1998. The
fluctuations reflect the changes in prevailing market interest rates over the
three year period.
INTEREST EXPENSE. Interest expense amounted to $2,451,000 in 1998,
$2,184,000 in 1997 and $2,149,000 in 1996. The increase in 1998 can be
attributed to a $3,977,000 increase in interest-bearing liabilities coupled with
a 13 basis point increase in the average rate on those liabilities. The increase
in expense for 1997 can be attributed to a $1,232,000 increase in
interest-bearing liabilities offset by a 6 basis points decrease in the average
rate paid.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $30,000 in
1998 due to a significant increase in the number of loans past due 90 days or
more. Home Savings made no provision for loan losses during the two years ended
September 30, 1997. Management's decision to make limited or no provisions is
due to overall portfolio quality and current economic conditions.
OTHER OPERATING INCOME. Other operating income amounted to $84,000 in
1998 and $78,000 in 1997 and 1996.
OTHER OPERATING EXPENSES. Other operating expenses amounted to $1,257,842
in 1998, $1,167,000 in 1997 and $1,595,000 in 1996. The increase in 1998 was
primarily due to increases in ESOP compensation and data processing fees. Data
processing fees increased primarily as a result of Year 2000 related systems
upgrades. The decrease in 1997 was primarily attributable to Home Savings'
nonrecurring assessment of approximately $256,000 to recapitalize the SAIF and
$584,000 in compensation expense recorded on ESOP shares recognized in 1996.
INCOME TAXES. Home Savings' effective income tax rate was 33.6% for the
year ended September 30, 1998, 32.5% for the year ended September 30, 1997 and
63.2% for the year ended September 30, 1996. The high rate in 1996 is primarily
related to the tax effect of the difference between the average fair value and
cost of ESOP shares released.
CAPITAL RESOURCES AND LIQUIDITY
At September 30, 1998, Home Savings had total tangible capital to total
tangible assets of 16%, which is in excess of the 5% required under regulations
promulgated by the Administrator (the "Administrator's
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Regulations"). At September 30, 1998, Home Savings had total risk based capital
of $9,995,000 and leverage capital and Tier 1 risk-based capital of $9,708,000,
all of which were in excess of each regulatory requirement.
The Administrator's Regulations require savings banks to maintain liquid
assets equal to at least 10% of total assets. The computation of liquidity under
the Administrator's Regulations allows the inclusion of investments with readily
marketable value, including investments with maturities in excess of five years.
Home Savings' liquidity ratio at September 30, 1998, as computed under the
Administrator's Regulations, was 55.74%.
Home Savings' primary sources of internally generated funds are principal
and interest payments on loans receivable, cash flows generated by operations
and principal payments on investment and mortgage-backed securities. External
sources of funds through September 30, 1998, have been solely from increases in
deposits. Home Savings completed its conversion from mutual to stock form on
November 15, 1995, and received approximately $8,515,000 in net proceeds. Home
Savings has invested these funds in U.S. Government and agency obligations of
varying maturities. Home Savings believes that it will have sufficient funds
available to meet its anticipated future loan commitments.
ASSET/LIABILITY MANAGEMENT
Home Savings strives to achieve consistent net interest income and reduce
its exposure to adverse changes in interest rates by matching the terms to
repricing of its interest-sensitive assets and liabilities. Factors beyond Home
Savings' control, such as market interest rates and competition, may also have
an impact on Home Savings' interest income and interest expense.
In the absence of any other factors, the overall yield or return
associated with Home Savings' earning assets generally will increase from
existing levels when interest rates rise over an extended period of time, and
conversely interest income will decrease when interest rates decrease. In
general, interest expense will increase when interest rates rise over an
extended period of time, and conversely interest expense will decrease when
interest rates decrease. Therefore, by controlling the increases and decreases
in its interest income and interest expense which are brought about by changes
in market interest rates, Home Savings can significantly influence its net
interest income.
Home Savings' asset/liability management may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive. Interest
rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "gap," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities, and is considered negative
when the amount of interest-rate sensitive liabilities exceed the amount of
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in
an increase in net interest income, and during a period of falling interest
rates, a negative gap within shorter maturities would result in an increase in
net interest income while a positive gap within shorter maturities would result
in a decrease in net interest income. Also, changes in interest rates could have
a significant effect on Home Savings' liquidity.
At September 30, 1998, Home Savings' one year cumulative interest
sensitivity gap as a percentage of total interest-earning assets was a negative
32.50%. At September 30, 1998, Home Savings' five year cumulative interest
sensitivity gap as a percentage of total interest-earning assets was 21.34%. The
negative interest sensitivity gap through five years presently exists in an
interest rate environment that is experiencing downward pressure on interest
rates. Accordingly, Home Savings has benefitted from the negative gap. If
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rates should increase in the period subsequent to 1999, Home Savings would need
to manage its cost of funds through longer terms for interest bearing
liabilities and alternative sources. Home Savings would also need to look for
interest earning assets with higher rates, such as adjustable rate mortgages. If
Home Savings is unable to satisfactorily manage its interest earning assets and
interest bearing liabilities, it could experience reduced net interest income
and net income during the five year period.
A static interest rate "gap" analysis may not be an accurate indicator of
how net interest income will react to changes in interest rates. Income
associated with interest-earning assets and costs associated with
interest-bearing liabilities may not react uniformly to changes in interest
rates. In addition, the magnitude and duration of changes in interest rates may
have a significant impact on net interest income. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Interest
rates on certain types of assets and liabilities typically fluctuate in advance
of changes in general market interest rates, while interest rates on other types
may lag behind changes in general market rates. As an example, certain assets,
such as adjustable rate mortgage loans, have features (generally referred to as
"interest rate caps") which limit changes in interest rates on a short-term
basis over the life of the asset. In the event of a change in interest rates,
prepayment and early withdrawal levels could also deviate significantly from
those assumed in calculating the interest rate gap. The ability of many
borrowers to service their debt may also decrease in the event of an interest
rate increase.
The following table sets forth the amounts of interest-earnings assets and
interest-bearing liabilities outstanding at September 30, 1998, which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the asset or liability. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts, money market deposit accounts, and NOW or other transaction accounts
are assumed to be subject to immediate repricing and depositor availability and
have been placed in the shortest period. No prepayment assumptions have been
utilized for any other interest-earning assets or interest-bearing liabilities.
The interest rate sensitivity of Home Savings' assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used or if actual experience differs from that indicated by
such assumptions.
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AS OF SEPTEMBER 30, 1998
GAP ANALYSIS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
3 MONTHS 4 TO 12 1 TO 5
OR LESS MONTHS YEARS >5 YEARS TOTALS
------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Real estate loans:
Fixed rate $ 67 $ 4,069 $ 1,826 $19,041 $ 25,003
Adjustable rate --- 4,122 --- --- 4,122
Loans secured by deposits -
adjustable --- 222 --- --- 222
Interest-bearing deposits 534 --- --- --- 534
Federal funds sold 11,750 --- --- --- 11,750
Investment and mortgage-backed
securities --- --- 10,707 4,984 15,691
------ ----- ------ ------ ------
Total interest earning assets 12,351 8,413 12,533 24,025 57,322
====== ===== ====== ====== ======
Interest bearing liabilities:
Deposits
Passbook savings 3,153 --- --- --- 3,153
NOW and money market 8,708 --- --- --- 8,708
accounts
Fixed maturity deposits 8,750 18,721 5,635 --- 33,106
ESOP Loan 58 --- 58 7 123
------ ----- ------ ------ ------
Total interest bearing liabilities 20,669 18,721 5,693 7 45,090
------ ------ ----- ------- ------
Interest sensitivity gap per period $(8,318) $(10,308) $6,840 $24,018 $12,232
======== ========= ====== ======= =======
Cumulative gap $(8,318) $(18,626) $(11,787 $12,232
Cumulative gap as a % of interest -14.51% -32.50% -20.56% 21.34%
earning assets
Cumulative gap as a % of total assets -13.93% -31.20% -19.74% 20.48%
</TABLE>
NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and the interest expense on interest-bearing
liabilities. Net interest income is affected by both (a) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (b) the relative
amounts of interest-earning assets and interest-bearing liabilities, which is
sometimes referred to as the "net earning balance."
The following table sets forth information relating to average balances of
Home Savings' assets and liabilities for the years ended September 30, 1998,
1997, and 1996. The tables reflect the average yield on assets and the average
cost of liabilities for the periods indicated (derived by dividing income or
expense by the monthly average balance of assets or liabilities, respectively)
as well as the "net interest margin" (which reflects the impact of the net
earning balance) for the periods shown.
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<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997 1996
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
ASSETS:
Interest-earning assets:
Interest-bearing deposits $ 496 $ 26 5.19% $ 537 $ 30 5.60% $5,238 $307 5.86%
Federal funds sold 11,207 593 5.29 3,546 176 4.97 1,910 100 5.24
Investment and mortgage-
backed-securities 13,489 869 6.44 17,781 1,174 6.60 16,394 1,093 6.67
Loans receivable,
net3, 4 31,155 2,536 8.14 30,671 2,485 8.10 30,171 2,492 8.26
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-earning 56,346 4,024 7.14 52,535 3,865 7.36 53,713 3,992 7.43
assets
Non-interest earning assets 2,005 1,772 2,673
------- ------- -------
TOTAL $58,352 $54,307 $56,388
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Certificates of deposits $35,721 $2,009 5.62 $31,652 $1,743 5.51 $29,989 $1,699 5.67
Savings accounts 3,183 96 3.01 3,306 99 3.01 3,573 105 2.94
NOW accounts 8,458 326 3.86 8,338 315 3.78 8,200 298 3.63
ESOP note payable and other 251 20 8.07 340 27 7.92 643 47 7.31
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities 47,613 2,451 5.15 43,636 2,184 5.01 42,404 2,149 5.07
Non-interest-bearing
liabilities 1,007 1,102 1,638
Stockholders' equity 9,732 9,569 12,345
------- ------- -------
TOTAL $58,352 $54,307 $56,388
======= ======= =======
Net interest income
and interest rate spread(1) $1,573 1.99% $1,681 2.35% $1,843 2.36%
====== ==== ====== ==== ====== ====
Net interest-earning assets
and net interst margin(2) $8,733 2.79% $8,899 3.20% $11,309 3.43%
====== ==== ====== ==== ======= ====
</TABLE>
(1) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(2) Net interest margin represents income divided by average interest-earning
assets.
(3) Nonperforming loans are included in the calculation of average balances.
(4) Interest income for loans receivable includes loan fees.
RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (a) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), and (b) changes attributable to rate (changes in rate multiplied by the
prior period's volume). The rate/volume changes (changes in rate multiplied by
changes in volume) have been allocated to the rate and volume columns using the
absolute values of the rate and volumes columns.
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Year Ended September 30,
1998 vs. 1997 1997 vs. 1996
------------- -------------
Increase (Decrease) Increase (Decrease)
Attributable to Attributable to
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
INTEREST INCOME ON:
Interest-bearing $ (2) $ (2) $ (4) $(264) $(13) $(277)
deposits
Federal funds 405 12 417 81 (5) 76
Investments (277) (28) (305) 92 (11) 81
Loans Receivable 39 12 51 41 (48) (7)
-- -- -- -- ---- ---
Total interest income on
interest-earning assets 165 (6) 159 (50) (77) (127)
--- --- --- ---- ---- -----
INTEREST EXPENSES ON:
Certificates of deposit 228 37 265 92 (48) 44
Savings accounts (4) 0 (4) (9) 3 (6)
NOW and money market
accounts 5 8 13 5 12 17
ESOP note payable (7) 0 (7) (23) 3 (20)
--- - --- ---- - ----
Total interest expense
on interest- bearing
liabilities 222 45 267 65 (30) 35
--- -- --- -- ---- --
Increase (decrease) in
net interest income $(57) $(51) $(108) $(115) $(47) $(162)
===== ===== ====== ====== ===== ======
LOAN PORTFOLIO
The following table sets forth the composition of Home Savings' loan portfolio
by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996
------------------ ----------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
Residential:
Owner occupied $25,947 84.12% $26,189 81.15% $24,977 80.31%
Nonowner occupied 2,797 9.07 3,401 10.54 3,800 12.22
Commercial real estate 1,670 1.97 1,645 5.10 712 2.29
Residential construction 210 0.68 719 2.23 1,230 3.95
Total real estate 30,624 99.28 31,954 99.02 30,719 98.77
loans
------ ------ ------ ------- ------ -------
Other:
Savings account 223 0.72 318 0.98 383 1.23
------ ------ --- ------- --- -------
Total gross loans 30,847 100.00% 32,272 100.00% 31,102 100.00%
------ ------- ------ -------- ------ --------
Less:
Unearned fees and (206) (215) (196)
-----
discounts
Loans in process (148) (223) (593)
Allowance for losses (309) (278) (280)
----- ----- -----
Total reductions (563) (716) (1,068)
----- ----- -------
Total loans $30,284 $31,556 $30,034
receivable, net ======= ======= =======
</TABLE>
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<PAGE>
The following table sets forth the contractual maturities or repricings of
Home Savings' commercial and construction loan portfolio at September 30, 1998.
The table does not include prepayments or scheduled principal repayments.
Amounts in the table are net of loans in process, and in thousands.
2003 AND
1999 2000-2003 THEREAFTER TOTAL
---- --------- ---------- -----
Commercial Real Estate $11 $117 $1,541 $1,669
Construction/permanent loans 210 210
The following table sets forth the dollar amount at September 30, 1997 of
certain loans maturing or repricing on or after September 30, 1998 by type of
interest rate calculation.
FIXED ADJUSTABLE
----- ----------
(In Thousands)
Commercial Real Estate $492 $1,166
Construction/permanent loans 210
The following table sets forth information with respect to non-performing
assets identified by Home Savings, including accruing loans 90 days past due,
nonaccrual loans and foreclosed assets at the dates indicated.
AT SEPTEMBER 30,
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Total delinquent 90 days or more $418 $343 $525
Nonaccrual loans --- 45 45
---- ---- ----
Total nonperforming assets $418 $388 $570
==== ==== ====
Nonperforming loans to
total loans 1.37% 1.22% 1.88%
Nonperforming assets to
total assets .70% 0.69% 1.09%
Total assets $59,709 $56,380 $52,514
Total loans, gross $30,592 $31,834 $30,314
As of September 30, 1998 management of Home Savings is not aware of any
loans which are not disclosed above where known information about possible
credit problems causes management to have serious doubts as to the ability of
the borrower to comply with the present loan repayment terms.
At September 30, 1998 and during the year then ended, there were no
material loans that management of Home Savings considered impaired.
YEAR 2000
Home Savings is nearing the completion of its Year 2000 assessment. This
assessment included confirming with all significant vendors their state of
preparedness, as well as evaluating the potential risks associated with its
major customers. Management has received assurances from all vendors except Home
Savings' public utility company that they will be compliant and Home Savings
estimates that no material
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exposure exists relating to its customer base. However, these assurances are not
legally enforceable. Management is actively seeking assurance from the public
utility company that has yet to respond to any similar inquiries. Since Home
Savings is almost exclusively a home mortgage lender and has no major commercial
loan customers, Home Savings does not believe it is necessary to contact
individual mortgagees in connection with the Year 2000 issue. Management
believes that due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers, Home Savings is unable to fully determine at this time whether the
consequences of Year 2000 failures will have a material impact on the results of
its operations, liquidity or financial condition.
Home Savings estimates total costs of becoming Year 2000 compliant to be
$50,000. As of November 1, 1998 costs of approximately $31,000 have been
incurred. This amount includes most of the equipment needed to be compliant,
along with the related software, training and assessments from the service
bureau. Management estimates that the remainder of the initial estimate will be
used for final preparations for the Year 2000. All equipment is scheduled to be
installed by December 31, 1998 and it is expected that testing will be completed
by the end of the first calendar quarter in 1999.
In the event of a worst case scenario, Home Savings has developed a
contingency plan. This plan includes having a portable generator and the ability
to operate without access to the service bureau. Management plans to gather
sufficient information from the service bureau prior to January 1, 2000 to serve
as the base for manual operations. Management believes manual operations are
feasible for a limited amount of time given the size of the institution and the
nature of their customers.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles ("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 Home
Savings are primarily monetary in nature and changes in interest rates have a
greater impact on Home Savings' performance than do the effects of inflation.
IMPACT OF RECENT ACCOUNTING STANDARDS
Home Savings adopted SFAS No. 128 "Earnings Per Share", on October 1,
1997. SFAS No. 128 requires Home Savings to change its method of computing,
presenting and disclosing earnings per share information. Upon adoption, all
prior period data presented was restated to conform to the provisions of SFAS
No. 128.
Home Savings adopted SFAS No. 130, "Reporting Comprehensive Income" on
October 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements.
Home Savings adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" on October 1, 1998. SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed.
Home Savings will adopt the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" effective with the fiscal quarter
beginning July 1, 1999. Home Savings has not historically participated in any
hedging or derivative instruments, and the impact of adoption is not expected to
be material.
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Home Savings will adopt the provisions of SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" on January 1, 1999. The adoption
of this statement is not expected to have a material effect on Home Savings'
financial statements.
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LEGAL MATTERS
The validity of the shares of Capital Bank Corporation's Common Stock
offered hereby has been passed upon for Capital Bank Corporation by Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, North Carolina.
Certain legal matters related to this offering have been passed upon for Home
Savings by Moore & Van Allen, PLLC, Raleigh, North Carolina.
EXPERTS
The financial statements of Capital Bank as of December 31, 1997 and for
the period then ended have been included herein and in the Registration
Statement in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of Home Savings as of September 30,
1998 and 1997 and for each of the years in the three-year period ended September
30, 1998, have been included herein and in the Registration Statement in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
FORWARD LOOKING STATEMENTS
We have made forward looking statements in this Joint Proxy
Statement-Prospectus about the financial condition, results of operations, and
business of Capital Bank Corporation following the consummation of the Exchange
and the Holding Company Reorganization that are subject to risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward looking statements include, among other
things, the following possibilities:
o deposit attrition, customer loss, or revenue loss following the
Exchange and the Holding Company Reorganization is greater than
expected;
o competitive pressure in the banking industry increases
significantly;
o costs or difficulties related to the integration of the business of
Capital Bank Corporation and Home Savings are greater than expected;
o changes in the interest rate environment reduce margins;
o general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a
deterioration in credit quality;
o changes occur in the regulatory environment; and
o changes occur in business conditions and the rate of inflation.
When used in this Joint Proxy Statement-Prospectus, the words "believes,"
"estimates," "plans," "expects," "should," "may," "might," "outlook," and
"anticipates," and similar expressions as they relate to Capital Bank
Corporation, or its management are intended to identify forward looking
statements.
WHERE YOU CAN GET MORE INFORMATION
Each of Capital Bank and Home Savings files reports under the Exchange Act
with the FDIC. These reports include Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K. These reports, as well as
annual proxy statements mailed to shareholders and other information are
available for you to inspect and copy, after paying a prescribed fee, at the
FDIC's public reference facilities at
116
<PAGE>
the Registration, Disclosure and Securities Operations Unit, 550 17th Street,
N.W., Room 6043, Washington, DC 20429. The Registration, Disclosure and
Securities Operations Unit telephone number is (202) 898-8908 and their fax
number is (202) 898-3909. After the Holding Company Reorganization and the
Exchange are completed, Capital Bank and Home Savings will no longer file these
reports with the FDIC. Instead, Capital Bank Corporation will begin filing such
reports with the SEC.
Capital Bank Corporation has filed with the SEC a Registration Statement
under the Securities Act regarding the shares of Capital Bank Corporation's
Common Stock to be issued in the Holding Company Reorganization and the
Exchange. This Joint Proxy Statement-Prospectus is part of that registration
statement and does not contain all of the information contained in the
Registration Statement since certain portions have been omitted as the SEC
permits. If you would like more information about Capital Bank Corporation and
the Capital Bank Corporation stock being issued, please refer to the
Registration Statement and its exhibits which you may read, without charge, at
the SEC's public reference facility at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. You can make copies of all or any part of
the Registration Statement at the SEC's office in Washington, D.C. upon payment
of prescribed SEC fees. In addition, copies of the exhibits to the Registration
Statement may be obtained from Allen T. Nelson, Jr., Secretary of Capital Bank,
4400 Falls of Neuse Road, Raleigh, North Carolina 27609 (919) 878-3100.
We expect Capital Bank Corporation to be subject to the informational
requirements of the Exchange Act and to file reports, proxy statements and other
information with the SEC. You can inspect and copy these materials, after they
have been filed, at the SEC's Public Reference Section, Room 1204, 450 Fifth
Street, N.W., Washington, DC 20549, and at the following Regional Offices of the
SEC: New York Regional Office, Room 1028, Federal Building, 26 Federal Plaza,
New York, New York 10006; and Chicago Regional Office, Room 1204, Everett
McKinley Dirksen Building, 219 South Dearborn Street, Chicago, Illinois 60604.
You may also copy this material at the Public Reference Section of the SEC, 450
Fifth Street, N.W. Washington, DC 20549 at prescribed rates. The SEC maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants, such as Capital Bank Corporation, that file
electronically with the SEC. The address of the SEC's Web site is
(http://www.sec.gov).
117
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to incorporate by reference information into this Joint
Proxy Statement-Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC or FDIC. The information incorporated by reference is deemed to be part
of this Joint Proxy Statement-Prospectus, except for any information superseded
by information in this Joint Proxy Statement-Prospectus. This Joint Proxy
Statement-Prospectus incorporates by reference: (i) Home Savings' Annual Report
on Form 10-KSB for the year ended September 30, 1998, and (ii) Home Savings'
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998, each of
which has been filed with the FDIC and is included as an exhibit to the
Registration Statement of which this Joint Proxy Statement-Prospectus is a part.
Documents incorporated by reference are available from Home Savings
without charge, excluding all exhibits, unless we have specifically incorporated
by reference such an exhibit in this Joint Proxy Statement-Prospectus. Home
Savings shareholders may obtain documents incorporated by reference in this
Joint Proxy Statement-Prospectus by requesting them in writing or by telephone
from Edwin E. Bridges, Home Savings Bank of Siler City, Inc., SSB, 300 East
Raleigh Street, Siler City, North Carolina 27344. If you would like to request
documents from Home Savings, please do so by March 15, 1999 to receive them
before the special meetings.
---------------------
WHEN DECIDING HOW TO CAST YOUR VOTE, YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT-PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS. THIS JOINT PROXY STATEMENT-PROSPECTUS IS DATED FEBRUARY
17, 1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT
PROXY STATEMENT-PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING OF THE JOINT PROXY STATEMENT-PROSPECTUS TO SHAREHOLDERS NOR
THE ISSUANCE OF CAPITAL BANK CORPORATION COMMON STOCK SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
118
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
CAPITAL BANK
ANNUAL FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants................................................................ F-2
Balance Sheet as of December 31, 1997............................................................ F-3
Statement of Operations for the period from June 20, 1997 (opening) to December 31, 1997......... F-4
Statement of Changes in Shareholders' Equity for the period from June 20, 1997 (opening) to
December 31, 1997......................................................................... F-5
Statement of Cash Flows for the period from June 20, 1997 (opening) to December 31, 1997......... F-5
Notes to Financial Statements.................................................................... F-6
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997........................ F-14
Statements of Operation for the nine months ended September 30, 1998 (unaudited)
and the period from June 20, 1997 (opening) to December 31, 1997.......................... F-15
Statements of Cash Flows for the nine months ended September 30, 1998 (unaudited)
and the period from June 20, 1997 (opening) to December 31, 1997.......................... F-16
Notes to Financial Statements.................................................................... F-17
HOME SAVINGS BANK OF SILER CITY, INC., SSB
ANNUAL FINANCIAL STATEMENTS
Report of Independent Accountants................................................................ F-18
Consolidated Statements of Financial Condition as of September 30, 1998 and 1997................. F-19
Consolidated Statements of Operations for the years ended September 30, 1998,
1997 and 1996............................................................................. F-20
Consolidated Statements of Changes in Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996......................................................... F-21
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
1997 and 1996............................................................................. F-22
Notes to Consolidated Financial Statements....................................................... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Capital Bank
We have audited the accompanying balance sheet of Capital Bank as of December
31, 1997 and the related statements of operations, changes in shareholders'
equity and cash flows for the period from June 20, 1997 to December 31, 1997.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides 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 Capital Bank as of December 31,
1997 and results of its operations and its cash flows for the period from June
20, 1997 to December 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
By: /s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 27, 1998, except for Notes 8 and 13, for which the date is September
29, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK
BALANCE SHEET
DECEMBER 31, 1997
<S> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 2,641,244
Federal funds sold 16,787,000
--------------
Total cash and cash equivalents 19,428,244
Securities:
Available for sale 6,020,050
Held to maturity (estimated market value of $8,003,590) 8,001,646
Mortgage-backed securities available for sale 5,356,612
Federal Home Loan Bank Stock 153,300
Loans:
Commercial 14,715,200
Consumer 10,054,387
Residential mortgages 2,296,088
--------------
27,065,675
Less allowance for loan losses (427,272)
--------------
Net loans 26,638,403
--------------
Accrued interest receivable 452,879
Premises and equipment:
Furniture and equipment 425,665
Automobiles 40,572
Leasehold improvements 107,809
Construction in progress 153,862
--------------
727,908
Less accumulated depreciation (62,594)
--------------
665,314
--------------
Deposit premium and goodwill, net 2,049,518
Other assets 138,281
--------------
Total assets $ 68,904,247
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 6,118,274
Savings and interest bearing demand deposits 11,955,612
Time deposits less than $100,000 21,422,779
Time deposits $100,000 and greater 3,889,392
--------------
Total deposits 43,386,057
Accrued interest payable 211,478
Other liabilities 351,027
--------------
Total liabilities 43,948,562
--------------
Commitments and contingencies (Notes 7, 8, 9, 10 and 13)
Shareholders' equity:
Common stock, $5 par value; 20,000,000 shares authorized, 2,477,651 shares
issued and outstanding 12,388,255
Surplus 13,284,673
Accumulated other comprehensive income 4,963
Accumulated deficit (722,206)
--------------
Total shareholders' equity 24,955,685
--------------
$ 68,904,247
==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
CAPITAL BANK
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 20, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Interest income:
Loans and fees on loans $ 815,199
Federal funds sold 594,405
Securities 407,172
--------------
Total interest income 1,816,776
--------------
Interest expense:
Short-term borrowings 6,436
Deposits 662,957
--------------
Total interest expense 669,393
--------------
Net interest income 1,147,383
Provision for loan losses 270,000
--------------
Net interest income after provision for loan losses 877,383
--------------
Other operating income:
Service charges and fees 100,401
Other fees and income 46,070
--------------
Total other operating income 146,471
--------------
Other operating expenses:
Personnel 816,469
Advertising 101,609
Occupancy 161,299
Data processing 43,795
Legal 94,049
Director fees 86,384
Amortization of intangibles 114,108
Other 328,347
--------------
Total other operating expenses 1,746,060
--------------
Net loss (722,206)
Other Comprehensive income:
Unrealized gains on securities available for sale 4,963
--------------
Comprehensive loss $ (717,243)
==============
Net loss per share - basic and diluted $ (0.29)
==============
Comprehensive loss per share - basic and diluted $ (0.29)
==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
CAPITAL BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 20, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Accumulated
Other Stock
Common Comprehensive Subscriptions Accumulated
Stock Surplus Income Receivable Deficit Total
-------------- ------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 19,
1997 $ 12,234,335 $ 13,175,035 $ - $ (982,800) $ - $ 24,426,570
Issuance of stock 153,920 184,704 - - - 338,624
Proceeds from stock
subscriptions - - - 982,800 - 982,800
Commissions paid on
issuance of stock - (75,066) - - - (75,066)
Change in unrealized
gain
on available for
sale
securities, net of
taxes - - 4,963 - - 4,963
Net loss during period - - - - (722,206) (722,206)
------------ ------------ ------------- ----------- ----------- -----------
Balance at December 31,
1997 $ 12,388,255 $ 13,284,673 $ 4,963 $ - $ (722,206) $ 24,955,685
============ ============ ============= =========== =========== ===========
</TABLE>
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 20, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows used in operating activities $ (2,080,826)
--------------
Cash flows from investing activities:
Net increase in loans (16,163,645)
Additions to premises and equipment (478,501)
Purchase of Federal Home Loan Bank stock (153,300)
Purchase of securities available for sale (11,528,184)
Purchase of securities held-to-maturity (8,004,531)
Proceeds from maturities of securities available for sale 155,255
Net cash received from branch acquisitions 10,289,408
--------------
Net cash used by investing activities (25,883,498)
--------------
Cash flows from financing activities:
Net increase in deposits 20,091,837
Net decrease in short-term borrowings (525,000)
Proceeds received from sale of stock, net of costs 263,558
Proceeds received from stock subscriptions 982,800
--------------
Net cash provided by financing activities 20,813,195
--------------
Net change in cash and cash equivalents (7,151,129)
Cash and cash equivalents at beginning of period 26,579,373
--------------
Cash and cash equivalents at end of period $ 19,428,244
==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Capital Bank (the "Bank") was incorporated under the laws
of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. The
Bank operates through its corporate office in Raleigh, North Carolina and two
branches in Sanford, North Carolina. The Bank is a locally-owned community bank
engaged in general commercial banking, providing a full range of banking
services. The majority of the Bank's customers are expected to be individuals
and small to medium-size businesses. The Bank's primary source of revenue is
interest earned from loans to customers and from invested cash and securities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS AND CERTAIN
SIGNIFICANT ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include demand and time
deposits (with original maturities of 90 days or less) at other institutions and
Federal funds sold. Generally, Federal funds are purchased and sold for one-day
periods.
SECURITIES - Investments in certain securities are classified into three
categories and accounted for as follows:
1. Debt securities that the institution has the positive intent and
ability to hold to maturity are classified as held to maturity and
reported at amortized cost;
2. Debt and equity securities that are bought and held principally for
the purpose of selling in the near term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in earnings;
3. Debt and equity securities not classified as either held to
maturity securities or trading securities are classified as
available for sale securities and reported at fair value, with
unrealized gains and losses reported as a separate component of
shareholders' equity.
The classification of securities is generally determined at the date of
purchase. Gains and losses on sales of securities, computed based on specific
identification of the adjusted cost of each security, are included in other
income at the time of the sales.
Premiums and discounts on debt securities are recognized in interest income on
the level interest yield method over the period to maturity.
LOANS AND ALLOWANCE FOR LOAN LOSSES - Loans are stated at the amount of unpaid
principal, reduced by an allowance for loan losses. Interest on loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding.
A loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
At December 31, 1997, and during the period then ended, there were no loans
material to the financial statements considered to be impaired.
The Bank uses several factors in determining if a loan is impaired. The internal
asset classification procedures include a thorough review of significant loans
and lending relationships and include the accumulation of related data. This
data includes loan payment status, borrowers' financial data and borrowers'
operating factors such as cash flows, operating income or loss, etc.
F-6
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) - The allowance for loan losses
is established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions and trends that may affect the borrowers' ability to pay. Significant
loan origination and commitment fees and certain direct origination costs are
deferred and are amortized over the contractual life of the related loans using
the level yield method.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS - Loans, including impaired
loans, are generally classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well-secured and in the process of collection. If a loan
or a portion of a loan is classified as doubtful or as partially charged off,
the loan is generally classified as nonaccrual. Loans that are on a current
payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to the principal outstanding, except in the
case of loans with scheduled amortizations where the payment is generally
applied to the oldest payment due. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially charged-off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate.
Receipts in excess of that amount are recorded as recoveries to the allowance
for loan losses until prior charge-offs have been fully recovered.
FORECLOSED ASSETS - Any assets acquired as a result of foreclosure are valued at
the lower of the recorded investment in the loan or fair value less estimated
costs to sell. The recorded investment is the sum of the outstanding principal
loan balance and foreclosure costs associated with the loan. Any excess of the
recorded investment over the fair value of the property received is charged to
the allowance for loan losses. Valuations will be periodically performed by
management and any subsequent write-downs due to the carrying value of a
property exceeding its estimated fair value less estimated costs to sell are
charged against other expenses.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed by the straight-line method based on estimated service lives of assets.
Useful lives range from 5 to 7 years for furniture and equipment. The cost of
leasehold improvements is being amortized using the straight-line method over
the terms of the related leases. Repairs and maintenance are charged to expense
as incurred.
Upon disposition, the asset and related accumulated depreciation or amortization
are relieved and any gains or losses are reflected in operations.
INTANGIBLE ASSETS - Deposit premium and goodwill arising from the branch
acquisition completed on June 20, 1997 of $2,000,000 and $163,626, respectively,
before accumulated amortization of $114,108 at December 31, 1997, are being
amortized on a straight-line basis over ten years. These lives were estimated by
management at the time the assets were acquired using information available at
that time and are subject to re-evaluation as new information becomes available.
Amortization expense recognized during the period ended December 31, 1997 was
$114,108.
F-7
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED) The Bank evaluates intangible assets for potential
impairment by analyzing the operating results, trends and prospects of the Bank.
The Bank also takes into consideration recent acquisition patterns within the
banking industry and any other events or circumstances which might indicate
potential impairment.
INCOME TAXES - Deferred tax asset and liability balances are determined by
application to temporary differences of the tax rate expected to be in effect
when taxes will become payable or receivable. Temporary differences are
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. A
valuation allowance is recorded for deferred tax assets if the Bank cannot
determine that the benefits will more likely than not be realized.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES - In June 1996, the Financial Accounting Standards Board issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities ("SFAS No. 125"). This Statement establishes
new criteria for determining whether a transfer of financial assets should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
This Statement also establishes new accounting requirements for pledged
collateral. The Statement is effective for certain transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. Statement of Financial Accounting Standards No. 127 defers the effective
date of certain provisions of SFAS No. 125 until January 1, 1998. The Bank does
not anticipate a significant effect on operations or its financial position from
the adoption of these Statements.
NET LOSS PER SHARE - Net loss per share is computed on the weighted average
number of shares outstanding during the period. The weighted average number of
shares outstanding was 2,475,546 for the period ended December 31, 1997.
As of December 31, 1997, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". In accordance with SFAS 128,
the Bank has presented both basic and diluted EPS on the face of the Statement
of Operations. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. For loss periods, diluted EPS is the same as basic
EPS due to the fact that including common stock equivalents in the calculation
of diluted EPS would be anitdilutive.
COMPREHENSIVE INCOME - As of December 31, 1997 the Bank adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." As
required by the SFAS No. 130, prior year information has been modified to
conform with the new presentation. Comprehensive income includes net income and
all other changes to the Bank's equity, with the exception of transactions with
shareholders ("Other Comprehensive Income"). The Bank's only component of
comprehensive income relates to unrealized gains and losses on securities
available for sale. The Bank's total comprehensive income (loss) for the period
ended December 31, 1997 was $(717,243).
NEW PRONOUNCEMENTS - The Financial Accounting Standards Board has recently
issued Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information". This statement will be adopted effective January 1, 1998,
with appropriate restatements or disclosures for prior periods. The adoption of
this statement is not expected to have a significant effect on operations or
financial position.
2. ORGANIZATION AND SIGNIFICANT ACTIVITIES
The Bank was organized on December 12, 1996 and commenced a public subscription
offering on February 17, 1997. The offering resulted in gross proceeds of
$27,254,161 from the sale of 2,477,651 shares.
On June 20, 1997, the Bank acquired the two branches located in Sanford, North
Carolina from a large community bank. A summary of the acquisition is as
follows:
Deposits assumed $ 23,294,220
Deposit premium paid (2,000,000)
Loans acquired (10,908,384)
Goodwill recorded 163,626
Net other assets acquired (260,054)
--------------
Net cash received $ 10,289,408
==============
F-8
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
2. ORGANIZATION AND SIGNIFICANT ACTIVITIES (CONTINUED)
In accordance with the rules and regulations of the North Carolina Commissioner
of Banks, all expenditures of the Bank prior to commencing operations are
charged against surplus. The operating expenses, principally personnel and
occupancy, amounted to $437,017, and expenses related to the offering aggregated
$1,069,150.
3. SECURITIES
Securities at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- -------------- --------------- ---------------
<S> <C> <C> <C>
U.S. Government and agency securities:
Held to maturity $ 8,001,646 $ 1,944 $ - $ 8,003,590
Available for sale 5,993,458 26,592 - 6,020,050
------------- ------------- -------------- -------------
13,995,104 28,536 - 14,023,640
Mortgage backed securities:
Available for sale 5,378,241 - 21,629 5,356,612
------------- ------------- -------------- -------------
Total $ 19,373,345 $ 28,536 $ 21,629 $ 19,380,252
============= ============= ============== =============
</TABLE>
All U.S. Government and agency securities mature after one year and within five
years as of December 31, 1997. Expected maturities for mortgage-backed
securities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties.
4. FEDERAL HOME LOAN BANK STOCK
The Company, as member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the FHLB in an amount equal to the
greater of 1% of its outstanding home loans or 5% of its outstanding FHLB
advances. No ready market exists for the FHLB stock, and it has no quoted market
value. The balance of Federal Home Loan Bank Stock held at December 31, 1997 was
$153,300.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the period ended
December 31, 1997 is as follows:
Balance at beginning of period $ -
Adjustment for loans acquired 163,626
Provision for loan losses 270,000
Loans charged-off, net of $0 recoveries (6,354)
--------------
Balance at end of period $ 427,272
==============
At December 31, 1997 there were no nonperforming assets.
In the normal course of business certain directors and executive officers of the
Bank, including their immediate families and companies in which they have an
interest, may be loan customers. Total loans to such groups at December 31,
1997, and activity during the period ended December 31, 1997, is summarized as
follows:
Beginning balance $ 1,538,062
New loans 3,412,570
Principal repayments (1,741,276)
--------------
Ending balance $ 3,209,356
==============
F-9
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
In addition, such groups had available lines of credit in the amount of $250,000
at December 31, 1997. The Bank paid an aggregate of approximately $312,000 to
companies owned by members of the board of directors for equipment and
construction and consulting services.
6. INCOME TAXES
No federal or state income tax expense resulted from the current period due to
the generation of net operating losses and the establishment of a valuation
allowance against deferred tax assets.
The difference between income tax and the amount computed by applying the
statutory federal income tax rate of 34% was primarily a result of the
establishment of the valuation allowance on the net deferred tax assets for the
period ended December 31, 1997.
Significant components of deferred tax assets and liabilities at December 31,
1997 are as follows
Deferred tax assets (liabilities):
Preopening expenditures $ 178,000
Reserve for bad debts 105,000
Amortization 14,000
Directors fees 34,000
Net operating loss 161,000
-------------
Total deferred tax assets 492,000
Valuation allowance (479,000)
Depreciation (13,000)
-------------
Net deferred tax assets $ -
=============
The net operating losses expire in 2012 for federal tax purposes and in 2002 for
state tax purposes.
7. LEASES
The Bank has noncancelable operating leases for its corporate office, branch
locations, and an automobile that expire at various times through 2007. Future
minimum lease payments under the leases for years subsequent to December 31,
1997 are $148,863 for 1998, $137,751 for 1999, $85,497 for 2000, $31,200 for
2001 and 2002, and $153,400 thereafter.
8. REGULATORY MATTERS AND RESTRICTIONS
The Bank is subject to various regulatory capital requirements administered by
the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios, as set forth in the table below. Management
believes, as of December 31, 1997 that the Bank meets all capital adequacy
requirements to which it is subject. As of March 31, 1998, the date of the most
recent regulatory exam, the Bank was categorized as "well capitalized".
The Bank, as a North Carolina banking corporation, may pay dividends only out of
undivided profits as determined pursuant to North Carolina General Statues
Section 53-87. However, regulatory authorities may limit payment of dividends by
any bank when it is determined that such a limitation is in the public interest
and is necessary to ensure financial soundness of the Bank.
F-10
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
8. REGULATORY MATTERS AND RESTRICTIONS (CONTINUED)
To be categorized as well capitalized the Bank must maintain minimum amounts and
ratios. The Bank's actual capital amounts and ratios as of December 31, 1997 and
the minimum requirements are presented in the table below.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ -------- --------------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) $ 23,328 68.80% $ 2,713 8.00% $ 3,391 10.00%
Tier I Capital (to Risk Weighted
Assets) 22,901 67.54 1,356 4.00 2,034 6.00
Tier I Capital (to Average Assets) 22,901 42.12 2,175 4.00 2,719 5.00
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Bank's Board of Directors has approved an incentive stock option plan and a
nonqualified stock option plan for the benefit of its employees and its
employees and directors, respectively. The plans are pending shareholder and
regulatory approval. The Board has reserved 122,500 and 122,500 shares,
respectively, under the aforementioned plans.
Grants of options will be made by the Board or the Compensation Committee. All
grants must be at no less than fair market value on the date of grant, must be
exercised no later than 10 years from the date of grant, and may be subject to
some vesting provisions.
For the period ended December 31, 1997, there were 42,000 options granted. At
December 31, 1997 there were 42,000 options outstanding, of which 13,000 will be
exercisable upon approval of the plans by the shareholders and regulators. The
weighted average exercise price of options granted, forfeited, outstanding and
exercisable was $11.00 at December 31, 1997.
The Bank instituted a 401(k) plan for the benefit of its employees, which
includes provisions for employee contributions, subject to limitation under the
Internal Revenue Code, with the Company to match contributions up to 6% of the
employee's salary. The Plan provides that employees' contributions are 100%
vested at all times and the Bank's contributions vest 25% during the third year
of service, an additional 25% during the fourth year of service and the
remaining 50% during the fifth year of service. Further, the Bank may make
additional contributions on a discretionary basis. Aggregate contributions for
1997 were $18,595.
The Bank intends to account for its Plans under the provisions of APB Opinion
No. 25. However, the Bank is required to disclose the pro forma effects on net
income regarding the new fair value based method. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants in 1997: dividend yield,
zero; expected volatility of 15%; risk free interest rate of 5.75%; and expected
life of 6 years. Had compensation cost for the Bank's stock-based compensation
plans, as described above, been determined consistent with SFAS No. 123, the
Bank's net loss and loss per share would have been increased by $28,119 or $.01
per share. The compensation costs disclosed here may not be representative of
the effects of pro forma net income in future years.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. At
December 31, 1997, these financial instruments were comprised entirely of unused
lines of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet.
F-11
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
The Bank's exposure to credit loss in the event of nonperformance by the other
party is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making these commitments as they do for
on-balance sheet instruments. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit is based on management's credit
evaluation of the borrower. Collateral held varies but may include trade
accounts receivable, property, plant, and equipment and income-producing
commercial properties. Since many unused lines of credit expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Unused lines of credit and outstanding letters of credit were $5,634,000 and
$239,000, respectively, at December 31, 1997. The Bank does not anticipate any
losses as a result of these transactions.
The Bank's lending in concentrated primarily in Wake and Lee counties in North
Carolina. Credit has been extended to certain of the Bank's customers through
multiple lending transactions.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires the disclosure of
estimated fair values for financial instruments. Quoted market prices, if
available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of the
Bank's financial instruments, the fair value of such instruments has been
derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net amounts ultimately collected could be materially different
from the estimates presented below. In addition, these estimates are only
indicative of the values of individual financial instruments and should not be
considered an indication of the fair value of the Bank taken as a whole.
The fair values of cash and due from banks, Federal funds sold, interest bearing
deposits in banks and accrued interest receivable/payable are equal to the
carrying value due to the nature of the financial instruments. The fair value of
the Bank's loans is determined by discounting the scheduled cash flows through
the loan's estimated maturity using estimated market discount rates that most
reflect the credit and interest rate risk inherent in the loan. The fair value
of the Bank's loan portfolio at December 31, 1997 was $27,118,231, while the
carrying value was $27,065,675.
The fair value of deposits with no stated maturities, such as savings deposits,
and interest bearing demand deposits, are equal to the amount payable. The fair
value of time deposits, such as certificates of deposit and Individual
Retirement Accounts, are based on the discounted contractual cash flows. The
discount rate is estimated using rates currently offered for deposits of similar
maturities. The fair value of certificates of deposit and individual retirement
accounts was $25,381,574 at December 31, 1997, compared to a carrying value of
$25,312,171.
There is no material difference between the carrying amount and estimated fair
value of off-balance sheet items totaling $5,873,000 at December 31, 1997.
The Bank's remaining assets and liabilities are not considered financial
instruments.
F-12
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
12. STATEMENT OF CASH FLOWS - INFORMATION
The following is a reconciliation of net loss with the cash flows used in
operating activities:
<TABLE>
<CAPTION>
<S> <C>
Net loss $ (722,206)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deposit premium and goodwill 114,108
Depreciation 62,595
Amortization of premium on securities, net 4,115
Provision for loan losses 270,000
Changes in assets and liabilities:
Accrued interest receivable (390,014)
Accrued interest payable (22,683)
Other assets (128,034)
Other liabilities (1,268,707)
----------------
Cash flows used in operating activities $ (2,080,826)
================
</TABLE>
The Bank paid interest expense aggregating $457,915 during the period ending
December 31, 1997.
13. SUBSEQUENT EVENT
On September 29, 1998, Capital Bank signed an Agreement and Plan of
Reorganization and Share Exchange with Home Savings Bank of Siler City, Inc.,
SSB (Home Savings). The Plan calls for the issuance of approximately 1,180,000
shares of Capital Bank stock in exchange for all the outstanding shares of Home
Savings. The exchange will be accounted for as a pooling of interests and is
expected to be completed by March 31, 1999.
14. DEPOSITS
The following table shows the maturities of all time deposits in each of the
next five year periods (in thousands):
Year Amount
---- ------
1998 $ 11,055
1999 13,940
2000 311
2001 6
2002 -
--------
Total $ 25,312
========
F-13
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK
BALANCE SHEET
September 30, 1998 and December 31, 1997
(Dollars In thousands)
September 30, 1998 December 31, 1997
----------------- --------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks $ 3,382 $ 2,641
Federal funds sold 11,810 16,787
----------------- ----------------
Total cash and cash equivalents 15,192 19,428
Securities
Available for sale, at fair value 14,341 11,377
Held-to-maturity, at amortized cost (market value
$2,230 at September 30, 1998) 2,207 8,155
----------------- ----------------
Total Securities 16,548 19,532
Loans-net of unearned income 64,268 27,065
Allowance for loan losses (909) (427)
----------------- ----------------
Net loans 63,359 26,638
Premises and equipment, net 2,338 665
Accrued interest receivable 544 453
Deposit premium and goodwill, net 1,887 2,050
Other assets 196 138
----------------- ----------------
Total assets $ 100,064 $ 68,904
================= ================
LIABILITIES
Deposits
Demand, non-interest bearing $ 7,856 $ 6,118
Savings and interest bearing demand deposits 19,152 11,956
Time deposits 48,087 25,312
----------------- ----------------
Total deposits 75,095 43,386
Accrued interest payable 234 211
Other liabilities 421 351
----------------- ----------------
Total liabilities 75,750 43,948
STOCKHOLDERS' EQUITY
Common stock, par value $5; 20,000,000 shares
authorized; 2,477,651 shares issued and outstanding 12,388 12,388
Surplus 13,285 13,285
Accumulated deficit (1,535) (722)
Accumulated other comprehensive income 176 5
----------------- ----------------
Total stockholders' equity 24,314 24,956
----------------- ----------------
Total liabilities and stockholders' equity $ 100,064 $ 68,904
================= ================
</TABLE>
F-14
<PAGE>
CAPITAL BANK
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for per share data)
<TABLE>
<CAPTION>
Three Three
months ended months ended Nine months ended From June 20, 1997 to
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Loans and fees on loans $ 1,319 $ 310 $ 3,083 $ 332
Securities 300 117 950 117
Federal funds 92 367 343 407
----------------- ---------------- ----------------- -----------------
Total interest income 1,711 794 4,376 856
----------------- ---------------- ----------------- -----------------
Interest expense:
Deposits 806 274 2,037 303
Short-term borrowings - 7 - 7
----------------- ---------------- ----------------- -----------------
Total interest expense 806 281 2,037 310
----------------- ---------------- ----------------- -----------------
Net interest income 905 513 2,339 546
Provision for loan losses 173 135 518 135
----------------- ---------------- ----------------- -----------------
Net interest income after provision
for loan losses 732 378 1,821 411
----------------- ---------------- ----------------- -----------------
Noninterest income:
Service charges and fees 94 43 201 44
Other fees and income 134 1 211 1
Gain on sale of securities 60 - 60 -
----------------- ---------------- ----------------- -----------------
Total other income 288 44 472 45
----------------- ---------------- ----------------- -----------------
Noninterest expenses:
Salaries and employee benefits 635 381 1,684 407
Occupancy 94 46 241 47
Equipment expense 55 35 180 35
Advertising 54 72 154 83
Office expense 20 31 76 31
Professional fees 56 45 112 45
Communications and data processing 74 39 158 46
Amortization of intangibles 54 54 162 54
Other 176 101 339 118
----------------- ---------------- ----------------- -----------------
Total other expenses 1,218 804 3,106 866
----------------- ---------------- ----------------- -----------------
Income (loss) before income tax
expense (198) (382) (813) (410)
Income tax expense - - - -
----------------- ---------------- ----------------- -----------------
Net income (loss) $ (198) $ (382) $ (813) $ (410)
================= ================ ================= =================
Weighted average shares outstanding 2,478 2,478 2,478 2,471
================= ================ ================= =================
Net loss per share-basic and diluted $ (0.08) $ (0.15) $ (0.33) $ (0.17)
================= ================ ================= =================
</TABLE>
F-15
<PAGE>
CAPITAL BANK
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended From June 20, 1997 to
September 30, 1998 September 30, 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (813) $ (410)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Amortization of deposit premium and goodwill 162 60
Depreciation 175 30
Amortization of securities premium
(discount), net 15 2
Provision for loan losses 518 136
Changes in assets and liabilities:
Accrued interest receivable (91) (211)
Accrued interest payable 23 (21)
Other assets (58) (6)
Other liabilities 70 (379)
--------- --------
Net cash used in operating activities 1 (799)
Cash flows from investing activities:
Purchases of securities available-for-sale (7,246) (5,653)
Purchases of securities held-to-maturity - (8,005)
Net increase in loans (37,238) (7,226)
Additions to premises and equipment (1,848) (465)
Proceeds from maturities of securities available for sale 1,445 -
Proceeds from maturities of securities held to maturity 6,000 -
Proceeds from sale of securities available for sale 2,995 -
Purchase of Federal Home Loan Bank stock (54) -
--------- --------
Net cash used in investing activities (35,946) (21,349)
Cash flows from financing activities
Net increase in deposits 31,709 4,694
Net decrease in short-term borrowings - (525)
Proceeds received from stock subscriptions - 606
--------- --------
Net cash provided by financing activities 31,709 4,775
Net change in cash and cash equivalents (4,236) (17,373)
--------- --------
Cash and cash equivalents at beginning of period 19,428 36,869
--------- --------
Cash and cash equivalents at end of period $ 15,192 $19,496
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period of interest $ 2,014 $ 282
========= ========
</TABLE>
F-16
<PAGE>
CAPITAL BANK
Notes to the Financial Statements
1. Significant Accounting Policies and Interim Reporting
The significant accounting policies followed by the Bank for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, and in management's
opinion, all adjustments necessary for a fair presentation (all of which were of
a normal recurring nature) have been included. The accompanying financial
statements do not purport to contain all the necessary financial disclosures
that might otherwise be necessary in the circumstances and should be read in
conjunction with the financial statements and notes thereto for the period from
June 20, 1997 to December 31, 1997. The results of operations for the six-month
period ended September 30, 1998 are not necessarily indicative of the results to
be expected for the full year.
2. Operations
Capital Bank (the "Bank") was incorporated under the laws of North Carolina on
May 30, 1997 and commenced operations on June 20, 1997. The Bank operates
through its corporate office in Raleigh, North Carolina, one branch in Cary,
North Carolina and two branches in Sanford, North Carolina. The Bank is a
locally-owned community bank engaged in general commercial banking, providing a
full range of banking services. The majority of the Bank's customers are
individuals and small to medium-size businesses. The Bank's primary source of
revenue is interest earned from loans to customers and from invested cash and
securities.
3. Changes in Accounting Principles
As of December 31, 1997, the Bank adopted statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." In accordance with SFAS 128,
the Bank has presented both basic and diluted EPS on the face of the Statement
of Operations. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. For loss periods, diluted EPS is the same as basic
EPS due to the fact that including common stock equivalents in the calculation
of diluted EPS would be antidilutive.
On January 1, 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." As required by the SFAS No.
130, prior year information will be modified to conform with the new
presentation. Comprehensive income includes net income and all other changes to
the Bank's equity, with the exception of transactions with shareholders ("Other
Comprehensive Income"). The Bank's only components of other comprehensive income
relate to unrealized gains and losses on securities available for sale. The
Bank's total comprehensive income (loss) for the three and nine month periods
ended September 30, 1998 was $(72,000) and $(642,000), respectively, and
$(402,000) and $(374,000) for the three months ended September 30, 1997 and the
period from June 20 to September 30, 1997, respectively. Information concerning
the Bank's other comprehensive income for the periods ended September 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
Nine months Three months
ended September 30 ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Unrealized gains/(losses) on securities available for sale $171,000 $8,000 $126,000 $8,000
Reclassification of gains recognized in net income 0 0 0 0
Income tax expense (benefit) relating to unrealized gains
on available for sale securities 0 0 0 0
-------- ------ -------- ------
Other comprehensive income $171,000 $8,000 $126,000 $8,000
======== ====== ======== ======
</TABLE>
On January 1, 1998, the Bank adopted SFAS 131, "Disclosure about Segments of an
Enterprises and Related Information." SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed in both annual and interim financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. No changes were made to the financial
statements or related disclosures as a result of adopting SFAS 131.
Statement of Financial Accounting standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998. This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that derivatives be recognized as either
assets or liabilities in the statement of financial position and be measured at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and whether or not the derivative is
designed as a hedging instrument. This Statement is effective for fiscal years
beginning after June 15, 1999 with initial application in the first quarter of
the Bank's financial statements.
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, was issued in October 1998. This
Statement amends existing classification and accounting treatment of
mortgage-backed securities, retained after mortgage loans held for sale are
securitized, for entities engaged in mortgage banking activities. These
securities previously were classified and accounted for as trading and now may
be classified as held-to-maturity or available-for-sale, also. This statement is
effective for the first fiscal quarter beginning after December 15, 1998. SFAS
No. 134 is not expected to have material effect on the Bank's financial
statements.
F-17
<PAGE>
Report of Independent Accountants
October 16, 1998
The Board of Directors
Home Savings Bank of Siler City, Inc., SSB
Siler City, North Carolina
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Home Savings Bank of Siler City, Inc., SSB and Subsidiary at
September 30, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Savings Bank's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
By: /s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
F-18
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Consolidated Statements of Financial Condition
September 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1998 1997
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 558,002 $ 498,641
Interest-bearing deposits 534,187 459,862
Federal funds sold 11,750,000 5,050,000
------------------ -------------------
Total cash and cash equivalents 12,842,189 6,008,503
Investment securities - available for sale 7,089,625 6,950,296
Mortgage backed securities - available for sale 4,028,830 4,985,300
Investment securities held-to-maturity, estimated market values of
$3,578,800 and $5,530,000 in 1998 and 1997, respectively 3,560,000 5,560,000
Loans receivable, less allowance for loan losses of $308,725 and
$278,490 in 1998 and 1997, respectively 30,284,208 31,555,709
Premises and equipment, net 284,930 293,627
Federal Home Loan Bank of Atlanta stock, at cost which
approximates market 355,000 346,500
Deferred income taxes 246,311 433,484
Accrued interest and dividends receivable 182,014 198,695
Prepaid expenses and other assets 836,012 47,626
------------------ -------------------
$ 59,709,119 $ 56,379,740
================== ===================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 49,045,252 $ 45,395,847
Accrued interest payable 237,151 130,278
Other liabilities 500,212 1,075,932
ESOP note payable 122,970 244,570
------------------ -------------------
Total liabilities 49,905,585 46,846,627
------------------ -------------------
Commitments (Note 12)
Stockholders' equity:
Common stock, $1 par value, 5,000,000 shares authorized, 922,686
shares issued and outstanding 922,686 922,686
Additional paid-in capital 8,176,384 8,144,111
Retained income, substantially restricted 945,372 1,062,008
Unearned ESOP shares (122,970) (244,570)
Deferred stock awards (213,635) (292,771)
Unrealized gain (loss) on available for sale securities, net of taxes 95,697 (58,351)
------------------ -------------------
Total stockholders' equity 9,803,534 9,533,113
------------------ -------------------
$ 59,709,119 $ 56,379,740
================== ===================
</TABLE>
Theaccompanying notes are an integral part of these
consolidated financial statements.
F-19
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Consolidated Statements of Operations
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest and dividend income:
Loans receivable $ 2,535,817 $ 2,485,164 $ 2,491,791
Investment securities and bank deposits 1,197,110 1,028,726 1,189,629
Mortgage-backed securities 290,631 351,464 310,088
---------------------- --------------------- ----------------------
Total interest and dividend income 4,023,558 3,865,354 3,991,508
Interest expense:
Deposits 2,430,739 2,157,731 2,102,145
ESOP note payable 14,417 20,462 46,490
Other 5,846 6,484 -
---------------------- --------------------- ----------------------
Total interest expense 2,451,002 2,184,677 2,148,635
---------------------- --------------------- ----------------------
Net interest income 1,572,556 1,680,677 1,842,873
Provision for loan losses 30,235 - -
---------------------- --------------------- ----------------------
Net interest income after provision for loan losses 1,542,321 1,680,677 1,842,873
---------------------- --------------------- ----------------------
Other operating income:
Loan fees and charges 13,783 17,780 18,560
Deposit fees and charges 35,219 38,409 32,342
Other 35,121 22,298 26,675
---------------------- --------------------- ----------------------
Total other operating income 84,123 78,487 77,577
---------------------- --------------------- ----------------------
Other operating expenses:
Compensation and employee benefits 493,222 491,603 330,930
Compensation expense on ESOP shares 117,414 72,386 584,223
Directors' fees 38,807 40,168 42,883
Amortization of MRP deferred compensation 79,136 75,000 -
Conversion/acquisition expenses 95,724 116,465 -
Occupancy and equipment 45,618 40,642 36,239
Federal deposit insurance premiums 28,426 19,829 349,219
Data processing 115,195 77,998 67,577
Other 244,300 232,787 183,527
---------------------- --------------------- ----------------------
Total other operating expenses 1,257,842 1,166,878 1,594,598
---------------------- --------------------- ----------------------
Income before income taxes 368,602 592,286 325,852
Income tax expense 123,948 192,704 205,824
---------------------- --------------------- ----------------------
Net income $ 244,654 $ 399,582 $ 120,028
====================== ===================== ======================
Net income per common share:
Basic $ .27 $ .45 $ .07 (1)
====================== ===================== ======================
Assuming dilution $ .27 $ .44 $ .07 (1)
====================== ===================== ======================
</TABLE>
(1) Calculated from date of conversion, see Note 14.
Theaccompanying notes are an integral part of these
consolidated financial statements.
F-20
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Additional Income- Unearned Deferred
Common Paid-in Substantially ESOP Stock
Stock Capital Restricted Shares Awards
----------------- ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance September 30, 1995 $ - $ - $ 5,408,573 $ - $ -
Issuance of shares of common stock 896,339 7,618,578 - (717,070) -
Net income for the year ended
September 30, 1996 - - 120,028 - -
Change in unrealized loss on available
for sale securities, net of taxes - - - - -
Cash dividends paid ($5.20 per share) - - (4,419,822) - -
Release of ESOP shares - 166,921 - 417,302 -
Issuance of deferred stock awards 26,347 355,685 - - (382,032)
Change in market value of deferred
stock awards - (14,261) - - 14,261
----------------- ----------------- ---------------- ---------------- ---------------
Balance September 30, 1996 922,686 8,126,923 1,108,779 (299,768) (367,771)
Net income for the year ended
September 30, 1997 - - 399,582 - -
Change in unrealized loss on available
for sale securities, net of taxes - - - - -
Cash dividends paid ($.50 per share) - - (446,353) - -
Release of ESOP shares - 17,188 - 55,198 -
MRP Amortization - - - - 75,000
----------------- ----------------- ---------------- ---------------- ---------------
Balance September 30, 1997 922,686 8,144,111 1,062,008 (244,570) (292,771)
Net income for the year ended
September 30, 1998 - - 244,654 - -
Change in unrealized loss on available
for sale securities, net of taxes - - - - -
Cash dividends paid ($.40 per share) - - (361,290) - -
Release of ESOP shares - 32,273 - 121,600 -
MRP Amortization - - - - 79,136
----------------- ----------------- ---------------- ---------------- ---------------
Balance September 30, 1998 $ 922,686 $ 8,176,384 $ 945,372 $ (122,970) $ (213,635)
================= ================= ================ ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Available
for Sale
Securities Total
------------------ -------------------
<S> <C> <C>
Balance September 30, 1995 $ - $ 5,408,573
Issuance of shares of common stock - 7,797,847
Net income for the year ended
September 30, 1996 - 120,028
Change in unrealized loss on available
for sale securities, net of taxes (153,681) (153,681)
Cash dividends paid ($5.20 per share) - (4,419,822)
Release of ESOP shares - 584,223
Issuance of deferred stock awards - -
Change in market value of deferred
stock awards - -
------------------ -------------------
Balance September 30, 1996 (153,681) 9,337,168
Net income for the year ended
September 30, 1997 - 399,582
Change in unrealized loss on available
for sale securities, net of taxes 95,330 95,330
Cash dividends paid ($.50 per share) - (446,353)
Release of ESOP shares - 72,386
MRP Amortization - 75,000
------------------ -------------------
Balance September 30, 1997 (58,351) 9,533,113
Net income for the year ended
September 30, 1998 - 244,654
Change in unrealized loss on available
for sale securities, net of taxes 154,048 154,048
Cash dividends paid ($.40 per share) - (361,290)
Release of ESOP shares - 153,873
MRP Amortization - 79,136
------------------ -------------------
Balance September 30, 1998 $ 95,697 $ 9,803,534
================== ===================
</TABLE>
Theaccompanying notes are an integral part of these
consolidated financial statements.
F-21
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 244,654 $ 399,582 $ 120,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 20,362 22,213 15,816
ESOP compensation 117,414 72,386 584,223
Provision for loan losses 30,235 - -
Net accretion and amortization of discount and premium on investments
and mortgage-backed securities (9,846) (13,005) (10,659)
MRP amortization 79,136 75,000 -
Net gain on sale of loans (2,395) - -
Deferred income tax provision (benefit) 89,008 (80,002) 45,600
Changes in operating assets and liabilities:
Accrued interest and dividends receivable 16,681 9,295 (114,296)
Prepaid expenses and other assets (788,386) 109,701 89,905
Accrued interest payable 106,873 29,690 (38,915)
Other liabilities (575,720) (40,312) 247,966
------------------ ------------------ ------------------
Net cash (used in) provided by operating activities (671,984) 584,548 939,668
------------------ ------------------ ------------------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank of Atlanta stock (8,500) (29,600) (4,200)
Maturity of certificate of deposit - 200,000 100,000
Purchase of certificate of deposit - - (100,000)
Maturities of investment securities available-for-sale 6,000,000 1,000,000 2,000,000
Purchases of investment securities available-for-sale (5,999,375) (999,688) (2,966,035)
Maturities of investment securities held-to-maturity 2,000,000 2,000,000 -
Purchases of investment securities held-to-maturity - (1,000,000) (6,559,375)
Purchases of mortgage-backed securities available-for-sale - - (3,577,281)
Purchases of mortgage-backed securities held-to-maturity - - (1,105,590)
Principal payments received on mortgage-backed securities available
for sale 1,078,575 769,855 548,276
Principal payments received on mortgage-backed securities held-to-
maturity - - 45,713
Loan originations, net of principal repayments 1,243,661 (1,521,343) 39,494
Purchases of equipment (11,665) (1,215) (10,184)
------------------ ------------------ ------------------
Net cash provided by (used in) investing activities 4,302,696 418,009 (11,589,182)
------------------ ------------------ ------------------
Cash flows from financing activities:
Net change in deposits 3,649,405 3,728,904 297,521
Net proceeds from issuance of stock - - 8,514,917
Cash dividends paid (361,290) (446,353) (4,419,822)
Principal payments on ESOP note payable (85,141) (55,198) (417,302)
------------------ ------------------ ------------------
Net cash provided by financing activities 3,202,974 3,227,353 3,975,314
Net increase (decrease) in cash and cash equivalents 6,833,686 4,229,910 (6,674,200)
Cash and cash equivalents, beginning of year 6,008,503 1,778,593 8,452,793
------------------ ------------------ ------------------
Cash and cash equivalents, end of year $ 12,842,189 $ 6,008,503 $ 1,778,593
================== ================== ==================
</TABLE>
Theaccompanying notes are an integral part of these
consolidated financial statements.
F-22
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Consolidated Statements of Cash Flows (Continued)
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Supplemental disclosusres of cash flow information:
Cash paid during the year for:
Interest $ 2,344,129 $ 2,154,987 $ 2,187,550
Income taxes 484,839 77,371 245,821
Supplemental schedule of noncash investing and financing: activities:
Funding of MRP plan - - 367,771
Transfer of securities to available for sale:
Investment securities - - 2,779,233
Mortgage-backed securities - - 6,000,000
Issuance of deferred stock awards - - 382,032
Reduction of ESOP note payable from dividends on allocated shares 36,459 - -
</TABLE>
Theaccompanying notes are an integral part of these
consolidated financial statements.
F-23
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Home Savings Bank of Siler City, Inc., SSB (the "Savings Bank") operates
one office in central North Carolina. The Savings Bank's principal
business activity is to accept deposits from the general public and to
make conventional first mortgage loans for the purchase of real estate or
for the refinancing of loans secured by real estate. These loans, and the
securities portfolio, are the Savings Bank's primary source of revenue.
Substantially all of the Savings Bank's lending activity is with customers
located in Chatham, Randolph, Guilford and Orange counties in central
North Carolina.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at September 30, 1998 and
1997 and the reported amounts of revenues and expenses during the years
ended September 30, 1998, 1997 and 1996. Actual results could differ from
those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of the Savings
Bank and its wholly-owned subsidiary, Home S&L Service Corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include demand and time deposits (with original
maturities of ninety days or less) at other institutions and Federal funds
sold. Generally, Federal funds are purchased and sold for one-day periods.
Investment and Mortgage-Backed Securities
Investments in certain securities are classified into three categories and
accounted for as follows: (1) debt securities that the Savings Bank has
the positive intent and the ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (2) debt and equity
securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings; (3)
debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available for sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of equity.
Premiums and discounts on debt securities are recognized in interest
income on the level interest yield method over the period to maturity.
F-24
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans Receivable and Allowance for Loan Losses
Loans receivable are stated at the amount of unpaid principal, reduced by
an allowance for loan losses and net deferred loan origination fees.
Interest is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Deferred loan fees and costs
are amortized to interest income over the contractual life of the loan
using the interest method.
A loan is considered impaired, based on current information and events, if
it is probable that the Savings Bank will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement. Uncollateralized loans are
measured for impairment based on the present value of expected future cash
flows discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral.
The Savings Bank uses several factors in determining if a loan is
impaired. The internal asset classification procedures include a thorough
review of significant loans and lending relationships and the accumulation
of related data. This data includes loan payment status, borrowers'
financial data and borrowers' operating factors such as cash flows,
operating income or loss, etc. At September 30, 1998 and 1997 and during
the years then ended, there were no loans material to the consolidated
financial statements that were considered impaired as defined.
The allowance for loan losses is established through a provision for loan
losses charged to expense to reduce the recorded balance of loans to their
estimated net realizable value or fair value, as applicable. Loans are
charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible losses
on existing loans that may become uncollectible, based on the evaluations
of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature,
quality and volume of the loan portfolio, review of specific problem
loans, and current economic conditions and trends that may affect the
borrowers' ability to pay. Accrual of interest is discontinued on loans
(1) which are past due 90 days or more if collateral is inadequate to
cover principal and interest, or (2) immediately if management believes,
after considering economic and business conditions and collection efforts,
that the borrowers' financial condition is such that collection is
doubtful.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
The provision for depreciation is computed using the straight-line method
over the estimated useful lives of the various classes of assets. Useful
lives range from 10 to 30 years for buildings and 5 to 10 years for
furniture and equipment. Repairs and maintenance are charged to expense as
incurred.
F-25
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Foreclosed Assets
Assets acquired as a result of foreclosure are valued at the lower of the
recorded investment in the loan or fair value less estimated costs to
sell. The recorded investment is the sum of the outstanding principal loan
balance and foreclosure costs associated with the loan. Any excess of the
recorded investment over the fair value of the property received is
charged to the allowance for loan losses. Valuations are periodically
performed by management and any subsequent write-downs due to the carrying
value of a property exceeding its estimated fair value are recorded as a
valuation allowance with a corresponding charge to other operating
expenses.
Income Taxes
Deferred tax asset and liability balances are determined by application to
temporary differences of the tax rate expected to be in effect when taxes
will become payable or receivable. Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements that will result in taxable or
deductible amounts in future years.
New Accounting Pronouncements
The Savings Bank adopted SFAS No. 130, "Reporting Comprehensive Income" on
October 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements.
The Savings Bank adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" on October 1, 1998. SFAS No. 131
specifies revised guidelines for determining an entity's operating
segments and the type and level of financial information to be disclosed.
The Savings Bank will adopt the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" effective with the fiscal
quarter beginning July 1, 1999. This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.
It requires that derivatives be recognized as either assets or liabilities
in the statement of financial position and be measured at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and whether or not the derivative is
designated as a hedging instrument. This Statement is effective for fiscal
years beginning after June 15, 1999 with initial application in the first
quarter of the fiscal year. SFAS No. 133 is not expected to have a
material effect on the Savings Bank's financial statements.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise", was issued in
October 1998. This Statement amends existing classification and accounting
treatment of mortgage-backed securities, retained after mortgage loans
held for sale are securitized, for entities engaged in mortgage banking
activities. These securities previously were classified and accounted for
as trading and now may be classified as held-to-maturity or
available-for-sale, also. This Statement is effective for the first fiscal
quarter beginning after December 15, 1998. SFAS No. 134 is not expected to
have material effect on the Bank's financial statements.
F-26
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Investment and Mortgage-Backed Securities
A summary of investment and mortgage-backed securities at September 30,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
1998:
Held-to-maturity:
Federal Home Loan Bank bonds:
Due after one through five years $ 3,560,000 $ 18,800 $ - $ 3,578,800
----------------- ------------------ ---------------- -------------------
Available for sale:
Federal Farm Credit Bank Note:
Due after on through five years $ 1,000,000 $ 9,400 $ - $ 1,009,400
Federal Home Loan Bank bonds:
Due after one through five years 6,000,000 80,225 - 6,080,225
----------------- ------------------ ---------------- -------------------
$ 7,000,000 $ 89,625 $ - $ 7,089,625
----------------- ------------------ ---------------- -------------------
Mortgage-backed securities:
GNMA Certificates $ 528,236 $ 19,216 $ - $ 547,452
FNMA Certificates 931,778 18,279 - 950,057
FHLMC Certificates 2,501,560 33,038 3,277 2,531,321
----------------- ------------------ ---------------- -------------------
$ 3,961,574 $ 70,533 $ 3,277 $ 4,028,830
----------------- ------------------ ---------------- -------------------
F-27
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------------ ---------------- -------------------
1997:
Held-to-maturity:
Federal Home Loan Bank bonds:
Due after one through five years $ 3,560,000 $ - $ 20,000 $ 3,540,000
Due after five through ten years 1,000,000 - - 1,000,000
Due after ten years 1,000,000 - 10,000 990,000
----------------- ------------------ ---------------- -------------------
$ 5,560,000 $ - $ 30,000 $ 5,530,000
----------------- ------------------ ---------------- -------------------
Available for sale:
U.S. Treasury notes:
Due within one year $ 1,989,092 $ - $ 8,983 $ 1,980,109
Federal Home Loan Bank bonds:
Due within one year 999,688 312 - 1,000,000
Due after one through five years 4,000,000 - 29,813 3,970,187
----------------- ------------------ ---------------- -------------------
$ 6,988,780 $ 312 $ 38,796 $ 6,950,296
----------------- ------------------ ---------------- -------------------
Mortgage-backed securities:
GNMA Certificates $ 666,603 $ 18,075 $ -- $ 684,678
FNMA Certificates 1,361,271 -- 15,976 1,345,295
FHLMC Certificates 3,014,275 -- 58,948 2,955,327
----------------- ------------------ ---------------- -------------------
$ 5,042,149 $ 18,075 $ 74,924 $ 4,985,300
----------------- ------------------ ---------------- -------------------
</TABLE>
Expected maturities for mortgage-backed securities will differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
F-28
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Loans Receivable
Loans receivable at September 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate loans:
Residential owner occupied $ 25,947,306 $ 26,189,421
Residential non-owner occupied 2,796,681 3,401,412
Commercial 1,669,845 1,645,086
Construction loans 210,413 718,681
Loans collateralized by deposits 222,956 317,593
---------------- ---------------
30,847,201 32,272,193
Less:
Undisbursed portion of construction loans (47,922) (223,212)
Net deferred loan origination fees (206,346) (214,782)
Allowance for loan losses (308,725) (278,490)
---------------- ---------------
Loans receivable, net $ 30,284,208 $ 31,555,709
================ ===============
</TABLE>
The Savings Bank originates both adjustable and fixed interest rate loans.
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed to the current market rate at the date of
adjustment. Future market factors may affect the correlation of the
interest rate adjustment with the rates the Savings Bank pays on the
short-term deposits that have been primarily utilized to fund these loans.
The Savings Bank does not originate or purchase specifically for resale,
material amounts of loans. There were no loans held for sale at September
30, 1998 and 1997.
A summary of the allowance for loan losses for the years ended September
30, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 278,490 $ 279,659 $ 279,659
Provision charged against income 30,235 - -
Loans charged off, net of recoveries - (1,169) -
----------- ----------- ----------
Balance, end of year $ 308,725 $ 278,490 $ 279,659
=========== =========== ==========
</TABLE>
F-29
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following is a summary of nonperforming loans at September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Loans 90 days past due and still accruing interest $ 417,979 $ 343,000
Nonaccrual loans - 45,000
---------- -----------
$ 417,979 $ 388,000
========== ===========
</TABLE>
During the years ended September 30, 1998, 1997 and 1996, the Savings Bank
sold loans with principal balance of $ 19,635, $0 and $0, respectively.
There were no loans held for sale as of September 30, 1998 and 1997.
4. Premises and Equipment
Premises and equipment at September 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 44,000 $ 44,000
Building and improvements 368,605 368,605
Furniture, fixtures and equipment 256,995 245,330
------------- -------------
669,600 657,935
Less accumulated depreciation (384,670) (364,308)
------------- -------------
$ 284,930 $ 293,627
============= =============
</TABLE>
F-30
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Deposits
A summary of deposits at September 30, 1998 and 1997 follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
Rate Balance Rate Balance
---- ------- ---- -------
<S> <C> <C> <C> <C>
NOW and money market accounts includes
noninterest-bearing deposits of $74
and $85 at September 30, 1998 and 1997,
respectively 3.84% $ 8,708 4.11% $ 8,308
Passbook savings 3.06% 3,153 3.04% 3,196
Certificates of deposit (by upcoming
maturities):
3 months 5.43% 8,750 5.56% 9,341
4 months 5.42% 3,038 5.44% 3,276
6 months 5.50% 6,471 5.77% 5,505
9 months 5.60% 6,610 5.96% 7,058
12 months 5.23% 2,752 5.55% 3,077
18 months 5.44% 2,602 5.73% 2,594
36 months 5.94% 6,961 5.74% 3,041
------------ ------------ ------------
Total certificates of deposit 5.55% 37,184 5.70% 33,892
------------ ------------ ------------
Total deposits 5.09% $ 49,045 5.22% $ 45,396
============ ============
</TABLE>
Home Savings Bank of Siler City
Footnote 5 - Deposits
At September 30, 1998, the scheduled maturities of time deposits are as follows
(dollars in thousands):
1999 $27,621
2000 2,602
2001 6,961
2002 -
2003 -
-------
$37,184
=======
The aggregate amount of certificates of deposit $100,000 or greater at
September 30, 1998 by scheduled maturities follows:
<TABLE>
<CAPTION>
<S> <C>
Less than 3 months through 12 months $ 2,540,180
In excess of 12 months 1,083,904
-------------
$ 3,624,084
=============
</TABLE>
F-31
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Interest on deposits for the years ended September 30, 1998, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NOW and money market accounts $ 326,233 $ 314,927 $ 298,213
Passbook savings 95,769 99,435 104,600
Certificates of deposit 2,008,737 1,743,369 1,699,332
-------------- ------------- --------------
$ 2,430,739 $ 2,157,731 $ 2,102,145
============== ============= ==============
</TABLE>
6. Regulatory Capital Requirements
The Savings Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Savings Bank's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios, as set
forth in the table below. Management believes, as of September 30, 1998,
that the Savings Bank meets all capital adequacy requirements to which it
is subject.
As of September 30, 1998, the most recent notification from the FDIC
categorized the Savings Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Savings Bank must maintain minimum amounts and ratios, as
set forth in the table below. There are no conditions or events since that
notification that management believes have changed the Savings Bank's
category.
The Savings Bank's actual capital amounts and ratios are also presented in
the table below (dollars in thousands).
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Actual Adequacy Action Provisions
------------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital ( to Risk Weighted Assets) $ 9,995 43.6% $ 1,835 8.0% $ 2,294 10.0%
Tier I Capital ( to Risk Weighted Assets) 9,708 42.3% 918 4.0% 1,376 6.0%
Tier I Capital ( to Average Assets) 9,708 16.5% 2,353 4.0% 2,941 5.0%
Total Tangible Capital (to Total
Tangible Assets) 9,708 16.3% 2,986 5.0% 2,986 5.0%
</TABLE>
F-32
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Actual Adequacy Action Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Total Capital ( to Risk Weighted Assets) $9,879 45.2% $ 1,706 8.0% $ 2,134 10.0%
Tier I Capital ( to Risk Weighted Assets) 9,606 43.9% 853 4.0% 1,280 6.0%
Tier I Capital ( to Average Assets) 9,606 17.3% 2,223 4.0% 2,779 5.0%
Total Tangible Capital (to Total
Tangible Assets) 9,606 18.0% 2,815 5.0% 2,815 5.0%
</TABLE>
On September 30, 1996, Congress passed into law a recapitalization plan
for the Savings Association Insurance Fund (the "SAIF"), the insurance
fund covering deposits of savings institutions. The approved plan provided
for a special assessment of 0.66% on certain deposits as of March 31,
1995. The Savings Bank's assessment amounted to approximately $256,000 and
is included in Federal deposit insurance premiums in the statement of
operations for the year ended September 30, 1996.
7. Income Taxes
Income taxes charged to operations for the years ended September 30, 1998,
1997 and 1996 consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 35,170 $ 262,406 $ 154,824
State (230) 10,300 5,400
----------- ---------- -----------
34,940 272,706 160,224
----------- ---------- -----------
Deferred:
Federal 76,704 (62,700) 35,800
State 12,304 (17,302) 9,800
----------- ---------- -----------
89,008 (80,002) 45,600
----------- ---------- -----------
$ 123,948 $ 192,704 $ 205,824
=========== ========== ===========
</TABLE>
F-33
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The components of the net deferred income tax asset at September 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred income tax assets:
MRP and deferred compensation $ 161,700 $ 357,900
Deferred loan origination fees and costs 80,800 84,000
Bad debt reserve 54,900 43,500
Unrealized securities losses - 36,982
Other accrued liabilities and expenses 22,994 16,302
Net operating loss 91,900 -
-------------- ---------------
412,294 538,684
-------------- ---------------
Deferred income tax liabilities:
Depreciation (53,300) (53,700)
FHLB stock dividends (51,500) (51,500)
Unrealized securities gains (61,183) -
-------------- ---------------
(165,983) (105,200)
-------------- ---------------
Net deferred income tax asset $ 246,311 $ 433,484
============== ===============
</TABLE>
A reconciliation of income taxes computed at the statutory federal income
tax rate (34%) to the income tax expense for the years ended September 30,
1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income tax expense at the statutory
federal rate $ 125,325 $ 201,377 $ 110,790
Increases (decreases) resulting from:
State tax, net of federal benefit 18,246 (4,603) 9,986
Effect of difference between average fair
value and cost of released ESOP shares 12,624 7,055 56,187
Abandonment loss (45,555) - -
Other 13,308 (11,125) 28,861
--------------- --------------- ----------------
$ 123,948 $ 192,704 $ 205,824
=============== =============== ================
</TABLE>
F-34
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Retained income at September 30, 1998, includes approximately $1,550,000
for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for
income tax purposes only. Reductions of the amount so allocated for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes
only, which would be subject to the then current corporate income tax
rate.
At September 30, 1998, the Company had federal net operating loss
carryforwards of approximately $235,000. The net operating loss
carryforward expires in 2018. Additionally, the Company has net economic
loss carryforwards of approximately $235,000 for state income tax purposes
which expire in 2003.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on pre-1987 bad debt reserves. The Savings
Bank will be recapturing a portion of its post-1987 bad debt reserve
created by using the percentage of taxable income method. The Savings Bank
has previously recorded deferred tax liabilities related to these excess
reserves. Additionally, the Savings Bank is now required to use the
experience method.
8. Pension and Retirement Plans
The Savings Bank has a noncontributory defined benefit pension plan
covering substantially all its employees. The Savings Bank's policy is to
fund current normal pension costs.
Net periodic pension cost for the years ended September 30, 1998, 1997 and
1996 included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost for benefits earned $ 50,465 $ 43,815 $ 38,953
Interest cost on projected benefit obligation 16,753 12,408 9,196
Actual return on plan assets (20,718) (11,034) (15,163)
Net amortization and deferral 9,526 1,503 7,703
--------------- -------------- --------------
$ 56,026 $ 46,692 $ 40,689
=============== ============== ==============
</TABLE>
F-35
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following schedule sets forth the plan's funded status at September
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Vested benefit obligation $ 170,131 $ 133,189
=============== ===============
Accumulated benefit obligation $ 170,711 $ 134,085
=============== ===============
Projected benefit obligation $ 306,540 $ 233,473
Plan assets at fair value (203,632) (159,507)
--------------- ---------------
Projected benefit obligation in excess of plan assets 102,908 73,966
Unrecognized net obligation (15,479) (16,423)
Unrecognized prior service cost 26,371 28,483
Unrecognized net loss (73,761) (59,709)
--------------- ---------------
Accrued pension liability recognized in other liabilities $ 40,039 $ 26,317
=============== ===============
</TABLE>
The assumed discount rate used in the determination of the actuarial
present value of accumulated plan benefits was 7% at September 30, 1998
and 1997. The assumed long-term rate of return on plan assets was 7%, and
the assumed rate of compensation increase was 6%, for the years ended
September 30, 1998 and 1997.
Total pension plan expense charged to operations for the years ended
September 30, 1998, 1997 and 1996 was $61,843, $49,938 and $44,177,
respectively.
During 1997 the Savings Bank agreed to pay health insurance premiums for
certain employees for the remainder of their lives. Coverage to be
obtained with these premiums is to be at least equal to coverage afforded
active full time employees. The Savings Bank is accruing the estimated
cost of these benefits over the expected periods of service. Included in
other liabilities is $55,000 related to this Plan.
F-36
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Employee Stock Ownership Plan
On November 15, 1995 the Savings Bank established an Employee Stock
Ownership Plan ("ESOP"), under which the Savings Bank makes annual
contributions to a trust for the benefit of eligible employees. To be
eligible, an employee must be 18 years of age and have completed 1,000 or
more hours of service during the consecutive twelve month period following
employment commencement. The contributions may be in the form of cash or
common shares of the Savings Bank. Allocations to participants' accounts
occur annually on September 30 (the plan valuation date). Shares are
committed to be released for financial statement purposes when the Savings
Bank makes scheduled payments on the ESOP note payable and will be
allocated to employees for services rendered in the current accounting
period. Employees vest in their allocated ESOP shares over six years. The
number of shares legally released and allocated is based on the ratio of
the actual principal payments amount to the remaining principal balance
for the ESOP note payable. As required by current regulations, the ESOP
includes a provision allowing participants to require that allocated
shares be distributed in cash upon withdrawal. The amount of the annual
contribution is at the discretion of the Board of Directors of the Savings
Bank, but must be sufficient to enable the trust to pay principal and
interest on the related ESOP note payable. Additionally, the contribution
is limited by Federal tax regulations.
Initially, the ESOP acquired 71,707 shares of the Savings Bank's common
stock financed by $717,070 in borrowings by the ESOP. At September 30,
1998 and 1997, respectively approximately 59,410 and 47,250 shares had
been allocated to participants' accounts and 12,297 and 24,457 shares with
an estimated market value of $156,630 and $330,170, remained unallocated.
All allocated shares are considered outstanding for earning per share
purposes, while the unallocated shares are not included in the
calculation.
The principal balance of the ESOP loan at September 30, 1998 and 1997, was
$122,970 and $244,570, respectively. The Savings Bank is using the
dividends declared on shares held by the ESOP to reduce the outstanding
debt. Dividends on allocated shares are treated as a reduction of retained
earnings. During the current year, Plan participants approved using
$36,459 of dividends on allocated shares for debt service. Dividends on
unallocated shares are treated only as debt service, and there is no
reduction of retained earnings. Compensation expense related to the plan
is based on the fair market value of the Savings Bank's stock on the date
shares are committed to be released. The financial statements for the
years ended September 30, 1998, 1997 and 1996 include compensation expense
of $117,414, $72,386 and $584,223 and interest expense of $14,417, $20,462
and $43,686, respectively, related to the ESOP.
The Savings Bank guarantees the repayment of the ESOP debt to the outside
lender and, accordingly, has recorded the debt on its balance sheet with a
corresponding contra-equity account.
F-37
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Future minimum principal payments related to the ESOP obligation are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 62,500
2000 62,500
2001 7,940
-----------
132,940
Less amounts representing interest at 7.5% 9,970
-----------
$ 122,970
===========
</TABLE>
10. Stock Option and Award Plans
Management Recognition Plan (MRP)
The Savings Bank adopted the MRP Plan on July 17, 1996 and committed to
provide funding to the MRP Plan to purchase 35,854 shares of common stock
to the plan on that date. On July 17, 1996, 26,347 shares, with a market
value of $382,032, were issued to the MRP Plan and awarded to certain
officers and employees as restricted stock which will vest 20% per year
over the five year period ending July 17, 2001. The remaining 9,507 shares
may be purchased and awarded at the discretion of the Board of Directors
to participants in the future by Trustees of the MRP Plan. The plan
contains provisions providing for forfeiture of unvested shares in the
event of termination of employment, and vesting in the event of death or
disability.
The shares issued to the MRP plan have been recorded as outstanding
shares, and the unvested portion has been recorded as unearned
compensation through a contra equity account. The consolidated statements
of operations for the years ended September 30, 1998 and 1997 include
compensation expense of $79,136 and $75,000, respectively, relating to the
scheduled vesting of MRP shares.
Incentive and Non-Statutory Stock Option Plans
On July 17, 1996, the shareholders of the Savings Bank approved the
Incentive and Non-Statutory Stock Option Plans ("ISO" and "NSSO"). The
number of shares authorized and awarded by the ISO and NSSO are 22,408 and
26,890, respectively. The options were granted on September 12, 1996. On
that date the exercise price was set at $11.50, the fair market value of
the shares as established by the Board of Directors. The options for both
plans become exercisable at 20% per year over the five year period
following the grant date.
F-38
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On October 1, 1996 the Savings Bank adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123). As permitted by SFAS 123, the Savings Bank has chosen to
continue to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its
option plans. Accordingly, no compensation cost has been recognized for
options granted under the plans. Had compensation cost for the plans been
determined based on the fair value at the grant dates for awards under the
plans consistent with the method of SFAS 123, the impact on the Savings
Bank's net income and net income per share would not have been material.
The exercise price for options outstanding is $11.50. The number of shares
exercisable at September 30, 1998 and 1997 are 19,720 and 9,860,
respectively. The remaining contractual maturity for all options at
September 30, 1998 is 8.01 years. No options were granted during the years
ended September 30, 1998 and 1997. No options were exercised, forfeited or
expired during the years ended September 30, 1998, 1997 and 1996.
Modification of the Management Recognition and Stock Option Plans
On April 1, 1998 the shareholders of the Savings Bank approved amendments
to the 1995 Management Recognition Plan and the 1995 Non-Qualified and
Incentive Stock Option Plans. The amendments provide for accelerated
vesting of the awards in the event of a director's retirement or a change
in control of the Savings Bank. These provisions were omitted from the
original plans because of regulatory restrictions on such provisions and
have been made to ensure that the Savings Bank's plans are similar to
other community financial instructions.
11. Earning Per Share
The Company adopted SFAS No. 128 "Earnings Per Share" on October 1, 1997.
As required, all prior period earnings per share have been restated to
conform with the provisions of the statement.
The following table provides a reconciliation of income available to
common stockholders and the average number of shares outstanding (less
unearned ESOP shares) for the years ended September 31, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net income (numerator) $ 244,654 $ 399,582 $ 58,678 (1)
============== =============== ==============
Shares for basic EPS (denominator) 902,120 896,017 838,257
Dilutive effect of stock options 2,908 2,647 -
-------------- --------------- --------------
Adjusted shares for diluted EPS 905,028 898,664 838,257
============== =============== ==============
</TABLE>
(1) Calculated from date of conversion, November 15, 1995
F-39
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Commitments
The Savings Bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist of the unfunded portion of
construction loans. All construction loans are subject to the Savings
Bank's underwriting criteria and are secured by first deeds of trust,
however, these instruments involve elements of credit risk in excess of
amounts recognized in the accompanying financial statements.
The Savings Bank's risk of loss in the event of nonperformance by the
other party to the unfunded loan is represented by the contractual amount
of these instruments. The Savings Bank uses the same credit policies in
making commitments under such instruments as it does for on-balance sheet
instruments. The amount of collateral obtained, if any, is based on
management's credit evaluation of the counterparty. Collateral held
includes a first mortgage on the underlying single family home under
construction. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. At September 30, 1998 and 1997, the
Savings Bank had outstanding loan commitments totaling approximately
$310,000 and $580,000, respectively.
13. Fair Value of Financial Instruments
Quoted market prices, if available, are utilized as an estimate of the
fair value of financial instruments. Because no quoted market prices exist
for a significant part of the Savings Bank's financial instruments, the
fair value of such instruments has been derived based on management's
assumptions with respect to future economic conditions, the amount and
timing of future cash flows and estimated discount rates. Different
assumptions could significantly affect these estimates. Accordingly, the
net realizable value could be materially different from the estimates
presented below. In addition, the estimates are only indicative of
individual financial instruments' values and should not be considered an
indication of the fair value of the Savings Bank taken as a whole.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument.
Cash and Due from Banks and Federal Funds Sold
Cash and due from banks and Federal funds sold are equal to the fair value
due to the liquid nature of the financial instruments.
Securities
Fair values of securities available for sale and held to maturity are
based on quoted market prices. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
Federal Home Loan Bank of Atlanta Stock
The carrying amount of the investment in Federal Home Loan Bank stock
approximates market.
F-40
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans Receivable
For variable-rate loans that reprice frequently and have no significant
credit risk, fair values are based on carrying values. The fair values of
fixed rate loans are estimated by discounting the future cash flows using
the current rates at which loans with similar terms would be made to
borrowers with similar credit ratings and for the same remaining
maturities. The Savings Bank has assigned no fair value to off-balance
sheet financial instruments since they are either short term in nature or
subject to immediate repricing.
Deposits
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at year end. Fair value of
certificates of deposit is estimated by discounting the future cash flows
using the current rate offered for similar deposits with the same
maturities.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest approximates market.
F-41
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table presents information for financial assets and
liabilities as of September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 1,092 $ 1,092 $ 959 $ 959
Federal funds sold 11,750 11,750 5,050 5,050
Securities available for sale 7,090 7,090 6,950 6,950
Mortgage backed securities
available for sale 4,028 4,028 4,985 4,985
Investment securities held to
maturity 3,560 3,560 5,560 5,530
Federal Home Loan Bank of
Atlanta stock 355 355 347 347
Interest receivable 182 182 199 199
Loans, less allowance for loan
losses 30,284 31,232 31,556 31,754
------------ ------------- ------------- ------------
Total financial assets $ 58,341 $ 59,289 $ 55,606 $ 55,774
============ ============= ============= ============
Financial liabilities:
Deposits 49,045 49,132 45,396 45,409
Interest payable 237 237 130 130
ESOP note payable 123 123 245 245
------------ ------------- ------------- ------------
Total financial liabilities $ 49,405 $ 49,492 $ 45,771 $ 45,784
============ ============= ============= ============
</TABLE>
The Savings Bank's remaining assets and liabilities are not considered
financial instruments.
14. Conversion to Stock Savings Bank
On November 14, 1995, the Savings Bank converted from a North
Carolina-chartered mutual savings bank to a North Carolina capital stock
savings bank. In connection with the conversion the Savings Bank issued
896,339 shares of common stock, including 7,707 issued to the Employee
Stock Ownership Plan ("ESOP"), for $10 per share. The sale of common stock
generated proceeds of $8,514,917, net of conversion costs of $457,473.
F-42
<PAGE>
Home Savings Bank of Siler City, Inc., SSB and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At the time of the conversion, the Savings Bank established a liquidation
account in an amount equal to the Savings Bank's net worth, or
approximately $5,467,000, for the benefit of eligible account holders at
that time. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their eligible deposits, shall
cease upon the closing of the accounts, and shall never be increased. In
the event of the liquidation of the Savings Bank, all remaining eligible
deposit account holders shall be entitled, after all payment to creditors,
to a distribution from the liquidation account before any distribution to
stockholders. Dividends paid by the Savings Bank cannot be paid from the
liquidation account.
The Savings Bank may not declare or pay a cash dividend on, or repurchase
any of, its capital stock if its regulatory capital would thereby be
reduced below either the aggregate requirements imposed by federal and
state regulations.
15. Pending Merger
On September 29, 1998, the Savings Bank entered into an Agreement and Plan
of Reorganization and Share Exchange with Capital Bank. The transaction
will be accounted for as a pooling of interests, with the holders of the
Savings Bank receiving approximately 1,180,000 shares of Capital Bank
common stock. If approved by the shareholders, management expects the
transaction to be completed by March 31, 1999.
F-43
<PAGE>
APPENDIX I
EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION AND SHARE EXCHANGE
FOR HOLDING COMPANY REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND SHARE EXCHANGE (this
"Agreement"), made and entered into as of August 12, 1998, by and between
Capital Bank, a banking corporation organized under the laws of the State of
North Carolina and having its principal place of business in the City of
Raleigh, North Carolina (the "Bank"), and Capital Bank Corporation, a North
Carolina business corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of the Bank and the Holding Company
believe that it is in the best interests of their respective shareholders that
the Bank be reorganized into a bank holding company structure pursuant to which
the shareholders of the Bank (collectively, the "Shareholders" and individually,
a "Shareholder") would receive shares of the common stock of the Holding Company
in exchange for their shares of Bank common stock.
NOW, THEREFORE, in consideration of the mutual promises and conditions
herein contained, the Bank and the Holding Company hereby mutually agree to an
exchange of shares on the terms and conditions and in the manner and on the
basis hereinafter provided:
1. The Exchange.
(a) The name of the corporation whose shares will be acquired
is "Capital Bank" and the name of the acquiring corporation is "Capital Bank
Corporation."
(b) At the Effective Time (as defined in Section 2 below),
upon the terms and subject to the conditions set forth in this Agreement, and in
accordance with Article 11 of the North Carolina Business Corporation Act, as
amended (the "NCBCA"), each share of the $5 par value common stock of Bank
("Bank Stock") shall be exchanged (the "Exchange") for one (1) share of the no
par value common stock of the Holding Company (all such shares of Holding
Company common stock issued to the Shareholders, collectively, the "Shares").
(c) As soon as possible after the Effective Time, the Holding
Company shall furnish to each Shareholder transmittal forms and written
instructions with respect to the Exchange. Until shares of the Bank Stock are
surrendered for exchange in accordance with this Agreement, each outstanding
certificate which, prior to the Effective Time, represented shares of Bank
Stock, shall for all purposes evidence only the exchange rights established
pursuant to this Agreement or, if applicable, the rights described in Paragraph
3 of this Agreement. The Holding Company may in its discretion elect not to
treat any such unsurrendered shares as shares of common stock of the Holding
Company for purposes of the payment of dividends or other distributions. If the
Holding Company in its discretion so elects, then unless and until any
outstanding certificate evidencing Bank Stock shall be so surrendered, no
dividends payable to the holders of common stock of the Holding Company shall be
paid to the holder of the unsurrendered Bank Stock certificate; provided,
however, upon surrender and exchange of each
<PAGE>
outstanding certificate evidencing Bank Stock for a certificate evidencing
outstanding common stock of the Holding Company, there shall be paid to the
holder thereof the amount, without interest, of all dividends and other
distributions, if any, which theretofore were declared and became payable, but
were not paid, with respect to said shares.
(d) At the Effective Time, all shares of common stock of the
Holding Company outstanding immediately prior to the Effective Time shall be
redeemed from the holder(s) thereof for the sum of $1.00 per share.
2. Closing; Effective Time. Consummation of the Exchange and the other
transactions contemplated by this Agreement shall take place at 10:00 a.m. at
the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. on
November 30, 1998, or at such other time and date as the Holding Company and the
Bank shall determine (such specified or other time and date, the "Closing"). The
Exchange shall become effective at the time specified in articles of share
exchange to be filed with the Secretary of State of North Carolina (the
"Effective Time").
3. Rights of Dissenting Shareholders. Any Shareholder who has not voted
for the Exchange at the meeting of Shareholders for consideration of the
Exchange, and who has given notice in writing at or prior to such meeting that
he or she dissents from the Exchange, and who complies with the provisions of
Part 2 of Article 13 of the North Carolina Business Corporation Act ("NCBCA"),
shall be entitled to receive the fair value of the shares held by him or her.
Upon its receipt of any notice of a Shareholder's intent to assert dissenters
rights pursuant to the NCBCA, the Bank shall establish an escrow fund (the
"Escrow Fund") from which all payments, whether before or after the Effective
Time, necessary with respect to the exercise of such dissenters rights shall be
made. The Holding Company shall not directly or indirectly contribute any funds
to the Escrow Fund. The Bank shall deposit in the Escrow Fund an amount that it
reasonably believes is sufficient to pay fully the claims of all Shareholders
asserting dissenters rights, and shall make additional deposits to the Escrow
Fund as it may reasonably determine to be necessary to satisfy such claims. In
the event funds remain in the Escrow Fund after all claims for payment pursuant
to dissenters rights have finally expired, terminated, or have been finally
satisfied or settled, then any balance remaining in the Escrow Fund shall be
returned to the Bank.
4. Lost, Destroyed, or Stolen Certificates. Shareholders whose
certificates evidencing shares of Bank Stock have been lost, destroyed or stolen
shall be entitled to receive certificates evidencing shares of Holding Company
common stock for which such shares of Bank Stock were exchanged pursuant to this
Agreement in compliance with the provisions of the Holding Company's bylaws.
5. Stock Option and Other Plans. At the Effective Time, all outstanding
options under the Bank's existing stock option plans ("Plans") shall be
converted into options to acquire the number of shares of common stock of the
Holding Company that the holders of such options were entitled to acquire of
Bank Stock immediately prior to the Exchange on the same terms and conditions as
set forth in the Plans.
2
<PAGE>
6. Obligations of the Parties Pending the Effective Time. The Bank and
the Holding Company shall, as soon as practicable take the following action:
(a) This Agreement shall be duly submitted to the Shareholders
of the Bank and the sole shareholder of the Holding Company for the purpose of
considering and acting upon the Exchange in the manner required by law and their
respective articles of incorporation and bylaws. The Bank and the Holding
Company shall use their best efforts to obtain the requisite approval of their
shareholders of the Exchange and the transactions contemplated by this
Agreement, and the Bank and the Holding Company shall, through their respective
officers, execute and file with the appropriate regulatory authorities,
including the Board of Governors of the Federal Reserve System, such
applications, exhibits, documents and papers as shall be necessary or
appropriate to secure approval of this Agreement, the Exchange and the other
transactions contemplated hereby, as required by applicable statutes, rules and
regulations;
(b) The Holding Company shall use its best efforts to cause
the issuance of common stock of the Holding Company made pursuant to this
Agreement and the Exchange to be qualified or exempted under the Securities Act
of 1933 and the Blue Sky Laws of each state in which it deems such qualification
or exemption to be required;
(c) Until the Effective Time, neither the Bank nor the Holding
Company shall dispose of its assets except in the ordinary and normal course of
business.
7. Conditions Precedent to the Exchange. The Exchange shall be subject
to the satisfaction of the following conditions:
(a) Ratification and confirmation of this Agreement by
approval of a majority of the Shareholders and by approval of the sole
shareholder of the Holding Company as required by law;
(b) Approval by the Board of Governors of the Federal Reserve
System to the Exchange and the transactions related thereto;
(c) Approval, to the extent required, of any other
governmental or regulatory authority;
(d) Receipt of a favorable opinion with respect to the tax
consequences of the proposed Exchange from the Bank's independent auditors; and
(e) Expiration of any waiting period required by any
supervisory authority.
8. Termination. This Agreement may be terminated prior to the Effective
Time for any of the following reasons by written notice by either the Bank or
the Holding Company to the other upon authorization by resolution adopted by
either Board of Directors:
3
<PAGE>
(a) Any condition precedent contained in Paragraph 7 has not
been fulfilled or waived;
(b) Any action, suit, proceeding, or claim has been
instituted, made or threatened, relating to the proposed Exchange that makes
consummation of the Exchange inadvisable in the opinion of the Board of
Directors of either the Bank or the Holding Company;
(c) The Board of Directors of the Bank determines that the
holders of a sufficient number of shares of Bank Stock have dissented from the
Exchange so that consummation of the Exchange is not in the best interests of
the Bank;
(d) A determination by the Board of Directors of either the
Bank or the Holding Company that consummation of the Exchange is inadvisable in
the opinion of such Board of Directors.
9. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the transactions contemplated hereby.
10. Effect of Agreement. The terms and conditions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
11. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina.
[remainder of page intentionally left blank; signatures appear on next page]
4
<PAGE>
IN WITNESS WHEREOF, the Bank and the Holding Company have caused this
Agreement to be executed by their duly authorized officers and their corporate
seals to be affixed hereto as of the date first above written.
CAPITAL BANK
By: /s/ James A. Beck
--------------------------------------
James A. Beck
President and Chief Executive Officer
ATTEST:
By: /s/ Allen T. Nelson, Jr.
-------------------------------
, Secretary
-------------------
[CORPORATE SEAL]
CAPITAL BANK CORPORATION
By: /s/ James A. Beck
------------------------------------
James A. Beck
President and Chief Executive Officer
ATTEST:
By: /s/ Allen T. Nelson, Jr.
-----------------------------
, Secretary
------------------
[CORPORATE SEAL]
5
<PAGE>
<PAGE>
APPENDIX II
AGREEMENT AND PLAN
OF REORGANIZATION AND SHARE EXCHANGE
BY AND AMONG
CAPITAL BANK,
CAPITAL BANK CORPORATION
AND
HOME SAVINGS BANK OF SILER CITY, INC., SSB
September 29, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I - THE EXCHANGE..........................................................................................2
1.01 Names Of Exchanging Corporations..........................................................................2
1.02 The Exchange..............................................................................................2
1.03 Exchange Of Shares........................................................................................2
A. Closing Of Home's Stock Transfer Books...................................................................2
B. Exchange Procedures......................................................................................2
C. Treatment Of Fractional Shares...........................................................................3
D. Surrender Of Certificates................................................................................3
E. Anti-Dilutive Adjustments................................................................................3
F. Dissenters...............................................................................................4
G. Lost Certificates........................................................................................4
H. Treatment Of Home's Stock Options........................................................................4
1.04 Closing; Articles Of Share Exchange; Effective Time.......................................................5
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF HOME...............................................................6
2.01 Organization; Standing; Power.............................................................................6
2.02 Home's Capital Stock......................................................................................6
2.03 Subsidiaries..............................................................................................7
2.04 Convertible Securities, Options, Etc......................................................................7
2.05 Authorization And Validity Of Agreement...................................................................8
2.06 Validity Of Transactions; Absence Of Required Consents Or Waivers.........................................8
2.07 Home's Books And Records..................................................................................9
2.08 Home Reports..............................................................................................9
2.09 Home Financial Statements.................................................................................9
2.10 Tax Returns And Other Tax Matters........................................................................10
2.11 Absence Of Material Adverse Changes Or Certain Other Events..............................................10
2.12 Absence Of Undisclosed Liabilities.......................................................................10
2.13 Compliance With Existing Obligations.....................................................................11
2.14 Litigation And Compliance With Law.......................................................................11
2.15 Real Properties..........................................................................................12
2.16 Loans, Accounts, Notes And Other Receivables.............................................................12
2.17 Securities Portfolio And Investments.....................................................................13
2.18 Personal Property And Other Assets.......................................................................14
2.19 Environmental Matters....................................................................................14
2.20 Absence Of Brokerage Or Finders Commissions..............................................................15
2.21 Material Contracts.......................................................................................16
2.22 Employment Matters; Employee Relations...................................................................16
2.23 Employment Agreements; Employee Benefit Plans............................................................17
2.24 Insurance................................................................................................18
2.25 Insurance Of Deposits....................................................................................18
2.26 Affiliates...............................................................................................19
2.27 Obstacles To Regulatory Approval, Accounting Treatment, Or Tax Treatment.................................19
</TABLE>
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2.28 Year 2000 Readiness......................................................................................19
2.29 Disclosure...............................................................................................19
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF CAPITAL AND CBC..................................................19
3.01 Organization; Standing; Power............................................................................19
3.02 Capital Stock............................................................................................20
3.03 Authorization And Validity Of Agreement..................................................................20
3.04 Validity Of Transactions; Absence Of Required Consents Or Waivers........................................20
3.05 Capital's And CBC's Books And Records....................................................................21
3.06 Capital Reports..........................................................................................21
3.07 Capital Financial Statements.............................................................................21
3.08 Tax Returns And Other Tax Matters........................................................................22
3.09 Absence Of Material Adverse Changes......................................................................22
3.10 Absence Of Undisclosed Liabilities.......................................................................22
3.11 Compliance With Existing Obligations.....................................................................22
3.12 Litigation And Compliance With Law.......................................................................23
3.13 Obstacles To Regulatory Approval, Accounting Treatment, Or Tax Treatment.................................24
3.14 Disclosure...............................................................................................24
ARTICLE IV - COVENANTS OF HOME...................................................................................24
4.01 Affirmative Covenants Of Home...........................................................................24
A. "Affiliates" Of Home....................................................................................24
B. Conduct Of Business Prior To Effective Time.............................................................24
C. Periodic Information Regarding Loans....................................................................25
D. Notice Of Certain Changes Or Events.....................................................................26
E. Consents To Assignment Of Leases........................................................................27
F. Further Action; Instruments Of Transfer, Etc............................................................27
4.02. Negative Covenants Of Home..............................................................................27
A. Amendments To Articles Of Incorporation Or Bylaws.......................................................27
B. Change In Capital Stock.................................................................................27
C. Options, Warrants, And Rights...........................................................................27
D. Dividends..............................................................................................27
E. Employment, Benefit, Or Retirement Agreements Or Plans..................................................28
F. Increase In Compensation; Additional Compensation.......................................................28
G. Accounting Practices....................................................................................28
H. Acquisitions; Additional Branch Offices.................................................................28
I. Changes In Business Practices...........................................................................29
J. No Solicitation.........................................................................................29
K. Acquisition Or Disposition Of Assets....................................................................30
L. Debt; Liabilities.......................................................................................31
M. Liens; Encumbrances.....................................................................................31
N. Waiver Of Rights........................................................................................31
O. Other Contracts.........................................................................................31
</TABLE>
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ARTICLE V - COVENANTS OF CAPITAL AND CBC.........................................................................32
5.01 Notice Of Certain Changes Or Events......................................................................32
5.02 Indemnification; Directors' And Officers' Insurance......................................................32
5.03. Further Action..........................................................................................33
5.04 Board Of Directors.......................................................................................33
5.05 Advisory Board Of Directors..............................................................................33
ARTICLE VI - MUTUAL AGREEMENTS...................................................................................34
6.01 Shareholders' Approvals; Registration Statement; Proxy Statement/Prospectus; Listing Application........34
A. Meetings Of Shareholders................................................................................34
B. Registration Statement..................................................................................34
C. Preparation And Distribution Of Joint Proxy Statement/Prospectus........................................34
D. Recommendation Of Home's Board Of Directors.............................................................35
E. Information For Proxy Statement/Prospectus And Registration Statement...................................35
F. Listing Application.....................................................................................35
6.02 Regulatory Approvals.....................................................................................35
6.03 Access...................................................................................................36
6.04 Costs....................................................................................................36
6.05 Announcements............................................................................................36
6.06 Environmental Studies....................................................................................37
A. Environmental Surveys...................................................................................37
B. Results Of Environmental Surveys Conducted By Capital Or CBC............................................37
C. Results Of Environmental Surveys Conducted By Home......................................................38
6.07 Employees; Severance Payments; Employee Benefits.........................................................38
A. Employment Agreements...................................................................................38
B. Employment Of Other Home Employees......................................................................38
C. Severance Payment.......................................................................................39
D. Employee Benefits.......................................................................................39
E. Employee Stock Ownership Plan...........................................................................39
F. Pension Plan............................................................................................39
G. Stock Plans.............................................................................................39
6.08 Confidentiality..........................................................................................40
6.09 Reorganization For Tax Purposes..........................................................................40
6.10 Accounting Treatment.....................................................................................40
6.11 Other Permissible Transactions...........................................................................41
ARTICLE VII - CONDITIONS PRECEDENT TO EXCHANGE...................................................................41
7.01 Conditions To All Parties' Obligations...................................................................41
A. Approval By Governmental Or Regulatory Authorities; No Disadvantageous
Conditions.................................................................................................41
B. Effectiveness Of Registration Statement; Compliance With Securities And Other "Blue Sky" Requirements...41
C. Adverse Proceedings, Injunction, Etc....................................................................42
D. Approval By Board Of Directors And Shareholders.........................................................42
</TABLE>
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E. Fairness Opinions.......................................................................................42
F. Tax Opinion.............................................................................................42
G. Listing Of CBC's Stock..................................................................................43
H. No Termination Or Abandonment...........................................................................43
7.02 Additional Conditions To Home's Obligations..............................................................43
A. Material Adverse Change.................................................................................43
B. Compliance With Laws....................................................................................43
C. Capital's And CBC's Representations And Warranties And Performance Of Agreements; Officers' Certificate.43
D. Legal Opinion Of Capital's And CBC's Counsel............................................................44
E. Other Documents And Information From Capital And CBC....................................................44
F. Acceptance By Home's Counsel............................................................................44
7.03 Additional Conditions To Capital's And CBC's Obligation..................................................44
A. Material Adverse Change.................................................................................44
B. Compliance With Laws....................................................................................44
C. Home's Representations And Warranties And Performance Of Agreements; Officers' Certificate..............44
D. Legal Opinion Of Home's Counsel.........................................................................45
E. Other Documents And Information From Home...............................................................45
F. Consents To Assignment Of Leases........................................................................45
G. Acceptance By Capital's And CBC's Counsel...............................................................45
H. Exercise Of Dissenters Rights...........................................................................45
I. Employment And Non-Compete Agreements...................................................................45
J. Capital Reorganization Into A Holding Company Structure.................................................45
K. Accounting Treatment....................................................................................46
L. Resignations............................................................................................46
M. Affiliates' Agreements..................................................................................46
ARTICLE VIII - TERMINATION; BREACH...............................................................................46
8.01 Mutual Termination.......................................................................................47
8.02 Unilateral Termination...................................................................................47
A. Termination By Capital Or CBC...........................................................................47
B. Termination By Home.....................................................................................48
ARTICLE IX - MISCELLANEOUS PROVISIONS............................................................................49
9.01 "Previously Disclosed" Information; "Material Adverse Effect" And "Material Adverse Change"..............49
9.02 Waiver...................................................................................................49
9.03 Amendment................................................................................................50
9.04 Notices..................................................................................................50
9.05 Further Assurances.......................................................................................50
9.06 Headings And Captions....................................................................................51
9.07 Entire Agreement.........................................................................................51
9.08 Severability Of Provisions...............................................................................51
9.09 Assignment...............................................................................................51
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9.10 Enforcement..............................................................................................51
9.11 Counterparts.............................................................................................51
9.12 Governing Law............................................................................................51
9.13 Inspection...............................................................................................51
9.14 Survival Of Representations, Warranties, Indemnification And Other Agreements............................51
A. Representations, Warranties And Other Agreements........................................................52
B. Indemnification And Other Agreements....................................................................52
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION AND SHARE EXCHANGE
BY AND AMONG CAPITAL BANK, CAPITAL BANK CORPORATION
AND HOME SAVINGS BANK OF SILER CITY, INC., SSB
THIS AGREEMENT AND PLAN OF REORGANIZATION AND SHARE EXCHANGE
(hereinafter called "Agreement") entered into as of the 29th day of September,
1998, by and among Capital Bank ("Capital"), Capital Bank Corporation ("CBC")
and Home Savings Bank of Siler City, Inc., SSB ("Home").
WHEREAS, Capital is a North Carolina commercial bank with its principal
office and place of business located in Raleigh, North Carolina; and,
WHEREAS, CBC is a North Carolina corporation with its principal office
and place of business located in Raleigh, North Carolina; and,
WHEREAS, Home is a North Carolina savings bank with its principal
office and place of business located in Siler City, North Carolina; and,
WHEREAS, CBC has been formed to become, and Capital and CBC intend for
CBC to become, the holding company of Capital; and,
WHEREAS, CBC, Capital and Home have agreed that it is in their mutual
best interests and in the best interests of their respective shareholders for
CBC and Home to consummate a share exchange whereby each of the outstanding
shares of Home's common stock would be exchanged for shares of CBC's common
stock, all in the manner and upon the terms and conditions contained in this
Agreement; and,
WHEREAS, to effectuate the foregoing, CBC, Capital and Home desire to
adopt this Agreement as a plan of reorganization in accordance with the
provisions of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as
amended (the "Code"); and,
WHEREAS, the parties intend that the transactions contemplated herein
qualify for treatment as a pooling of interests pursuant to APB Opinion No. 16;
and,
WHEREAS, the respective Boards of Directors of each of Home, CBC and
Capital have determined that it is in the best interests of their respective
companies and their shareholders to consummate the transactions provided for
herein; and,
WHEREAS, as further inducement and as a condition to CBC's and
Capital's entering into this Agreement, Home and Capital have entered into a
certain Stock Option Agreement (the "Stock Option Agreement"), dated of even
date herewith, whereby Capital has the option to acquire certain shares of
Home's common stock under certain conditions.
NOW, THEREFORE, in consideration of the premises, the mutual benefits
to be derived from this Agreement, and of the representations, warranties,
conditions, covenants, and promises
<PAGE>
herein contained, and subject to the terms and conditions hereof, Home, CBC and
Capital hereby adopt and make this Agreement and mutually agree as follows:
ARTICLE I
THE EXCHANGE
1.01 NAMES OF EXCHANGING CORPORATIONS. The name of the corporation
whose shares will be acquired is "Home Savings Bank of Siler City, Inc., SSB"
and the name of the acquiring corporation is "Capital Bank Corporation."
1.02 THE EXCHANGE. At the "Effective Time" (as defined in Paragraph
1.07 below), upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with Article 11 of the North Carolina Business
Corporation Act, as amended (the "NCBCA"), each share of the $1.00 par value
common stock of Home ("Home Stock") (other than any shares held by Capital or
CBC or as to which rights of dissent and appraisal are properly exercised as
provided below) shall be exchanged (the "Exchange") for 1.280 (the "Exchange
Rate") newly issued shares of CBC's no par value common stock, rounded to the
nearest whole share ("CBC Stock"). The Exchange shall have the effects set forth
in Section 55-11-06 of the NCBCA.
1.03 EXCHANGE OF SHARES.
A. CLOSING OF HOME'S STOCK TRANSFER BOOKS. At the Effective
Time, and without any action by Home or CBC, Home's stock transfer books shall
be closed as to holders of Home Stock immediately prior to the Effective Time
and, thereafter, no transfer of Home Stock by any such holder may be made or
registered; and the holders of shares of Home Stock shall cease to be, and shall
have no further rights as, shareholders of Home other than as provided herein.
Following the Effective Time, certificates representing shares of Home Stock
outstanding at the Effective Time (herein sometimes referred to as "Old
Certificates") shall evidence only the right of the registered holder thereof to
receive, and may be exchanged for, (i) certificates for the number of whole
shares of CBC Stock to which such holders shall have become entitled on the
basis set forth above (herein sometimes referred to as "New Certificates"), or
(ii) in the case of shares as to which rights of dissent and appraisal are
properly exercised (as provided below), cash as provided in Article 13 of the
NCBCA.
B. EXCHANGE PROCEDURES. As soon as reasonably practicable, but
in any event no more than twenty (20) days following the Effective Time, CBC
shall cause Wachovia Bank, N.A., the transfer agent for CBC Stock (the "Exchange
Agent"), to mail to each former shareholder of Home of record immediately prior
to the Effective Time ("Home Record Holder") written instructions and
transmittal materials (including, without limitation, a return mailing envelope
addressed to the Exchange Agent (collectively, a "Transmittal Letter") for use
in surrendering Old Certificates to the Exchange Agent. All Transmittal Letters
shall be sent by United States mail to the Home Record Holders at the addresses
set forth on a certified shareholder list to be delivered by Home to CBC at the
Closing and shall also be made available
2
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at the offices of the Exchange Agent. As soon as reasonably practicable
thereafter, the Home Record Holders of all of the outstanding shares of Home
Stock, shall deliver, or cause to be delivered, by United States Postal Service,
hand delivery or any other means of delivery selected by such Home Record
Holders, to the Exchange Agent, pursuant to the Transmittal Letters, the Old
Certificates, and the Exchange Agent shall take prompt action to process such
Old Certificates received by it (including the prompt return of any defective
submissions with instructions as to those actions which may be necessary to
remedy any defects). Upon the proper delivery to the Exchange Agent (in
accordance with the above instructions, and accompanied by a properly completed
Transmittal Letter) by a Home Record Holder of his or her Old Certificates, the
Exchange Agent shall register in the name of such Home Record Holder the shares
of CBC Stock and deliver New Certificates to the Home Record Holder entitled
thereto upon and in exchange for the surrender and delivery to the Exchange
Agent by said individual Home Record Holder of his or her Old Certificates.
C. TREATMENT OF FRACTIONAL SHARES. No scrip or certificates
representing fractional shares of CBC Stock will be issued in connection with
the Exchange, and Home's former shareholders shall have no right to vote or
receive any dividend or other distribution on, or any other right with respect
to, any fraction of a share of CBC Stock resulting from the Exchange.
D. SURRENDER OF CERTIFICATES. Subject to Paragraph 1.03.F.
below, no certificate for any shares of CBC Stock shall be delivered to any
former shareholder of Home unless and until such shareholder shall have properly
surrendered to the Exchange Agent the Old Certificate(s) formerly representing
his or her shares of Home Stock, together with a properly completed Transmittal
Letter in such form as shall be provided to the shareholder by the Exchange
Agent for that purpose. Further, until such Old Certificate(s) are so
surrendered, no dividend or other distribution payable to holders of record of
CBC Stock as of any date subsequent to the Effective Time shall be delivered to
the holder of such Old Certificate(s). However, upon the proper surrender of
such Old Certificate(s) the Exchange Agent shall pay to the registered holder of
the shares of CBC Stock represented by such Old Certificate(s) the amount of any
such cash, dividends or distributions which have accrued but remain unpaid with
respect to such shares. Neither CBC, Home, nor the Exchange Agent, shall have
any obligation to pay any interest on any such cash, dividends or distributions
for any period prior to such payment. Further, and notwithstanding any other
provision of this Agreement, neither CBC, Home, nor the Exchange Agent shall be
liable to a former holder of Home Stock for any amount paid or property
delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat, or similar law.
E. ANTI-DILUTIVE ADJUSTMENTS. If, following the date of this
Agreement, CBC shall change the number of outstanding shares of CBC Stock as a
result of a dividend payable in shares of CBC Stock, a stock split, a
reclassification or other subdivision or combination of outstanding shares, and
if the record date of such event occurs prior to the Effective Time, then an
appropriate and proportionate adjustment shall be made to the Exchange Rate so
as to appropriately and proportionately increase or decrease the number of
shares of CBC Stock to be issued in exchange for each of the shares of Home
Stock.
3
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F. DISSENTERS.
(i) Any shareholder of Home who has and properly
exercises the right of dissent and appraisal with respect to the Exchange as
provided in Article 13 of the NCBCA ("Dissenters Rights") shall be entitled to
receive cash payment of the fair value of all of his or her shares of Home Stock
from the Escrow Fund (defined below) in the manner and pursuant to the
procedures provided therein, subject further to the conditions set forth in
Paragraph 7.03.H. Shares of Home Stock held by persons who exercise Dissenters
Rights shall not be exchanged for CBC Stock as provided in Paragraph 1.03.A.
above. However, if any shareholder of Home who exercises Dissenters Rights shall
fail to perfect his or her right to receive cash payment as provided above, or
effectively shall waive or lose such right, then each of his or her shares of
Home Stock, at CBC's sole option, shall be deemed to have been converted into
the right to receive CBC Stock as of the Effective Time as provided in Paragraph
1.03.A. above.
(ii) Upon its receipt of any notice of a Home
shareholder's intent to assert Dissenters Rights pursuant to the NCBCA, Home
shall establish an escrow fund (the "Escrow Fund") with an independent third
party reasonably satisfactory to Capital and CBC (the "Escrow Agent"), from
which the Escrow Agent shall make all payments, whether before or after the
Effective Time, necessary with respect to the exercise of such Dissenters
Rights. Neither CBC nor Capital shall, directly or indirectly, contribute any
funds to the Escrow Fund. Home shall deposit in the Escrow Fund an amount,
subject to Capital's and CBC's approval, that Home reasonably believes is
sufficient to pay fully the claims of all Home shareholders asserting Dissenters
Rights, and shall make additional deposits to the Escrow Fund as Home, Capital
or CBC may reasonably determine to be necessary to satisfy such claims. In the
event funds remain in the Escrow Fund after all claims for payment pursuant to
Dissenters Rights have finally expired, terminated, or have been finally
satisfied or settled, then any balance remaining in the Escrow Fund shall be
returned to Home.
G. LOST CERTIFICATES. Any Home shareholder whose certificate
evidencing shares of Home Stock has been lost, destroyed, stolen or otherwise is
missing shall be entitled to receive a certificate representing the shares of
CBC Stock to which he or she is entitled in accordance with and upon compliance
with conditions imposed by the Exchange Agent or CBC pursuant to the provisions
of N.C. Gen. Stat. ss. 25-8-405 and N.C. Gen. Stat. ss. 25-8-104 (including
without limitation a requirement that the shareholder provide a lost instruments
indemnity or surety bond in form, substance and amount satisfactory to the
Exchange Agent and CBC).
H. TREATMENT OF HOME'S STOCK OPTIONS.
(i) At the Effective Time, each option or other right
to purchase shares of Home Stock pursuant to stock options ("Home Options")
granted by Home under its 1995 Nonqualified Stock Option Plan and its 1995
Incentive Stock Option Plan (as amended, collectively referred to herein as the
"Home Stock Plan"), which are outstanding at the Effective Time, whether or not
exercisable, shall be converted into and become rights with respect to CBC
4
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Stock, and CBC shall assume each Home Option, in accordance with the terms of
the Home Stock Plan and stock option agreement by which it is evidenced, except
that from and after the Effective Time (A) CBC and its Compensation Committee
shall be substituted for Home and the Committee of Home's Board of Directors
(including, if applicable, the entire Board of Directors of Home) administering
the Home Stock Plan, (B) each Home Option assumed by CBC may be exercised solely
for shares of CBC Stock, (C) the number of shares of CBC Stock subject to such
Home Option shall be equal to the number of shares of Home Stock subject to such
Home Option immediately prior to the Effective Time multiplied by the Exchange
Rate and rounding to the nearest whole share, and (D) the per share exercise
price under each such Home Option shall be adjusted by dividing the per share
exercise price under each such Home Option by the Exchange Rate and rounding to
the nearest cent.
(ii) As soon as practicable after the Effective Time,
CBC shall deliver to the participants in the Home Stock Plan an appropriate
notice setting forth such participant's rights pursuant thereto and the grants
pursuant to the Home Stock Plan shall continue in effect on the same terms and
conditions (subject to the adjustments required by Paragraph 1.03.H(i) after
giving effect to the Exchange). At or prior to the Effective Time, CBC shall
take all corporate action necessary to reserve for issuance sufficient shares of
CBC Stock for delivery upon exercise of Home Options assumed by it in accordance
with this Paragraph 1.03.H. As soon as practicable after the Effective Time, CBC
shall file a registration statement on Form S-3 or Form S-8, as the case may be
(or any successor or other appropriate forms), with respect to the shares of CBC
Stock subject to such options and shall use its reasonable efforts to maintain
the effectiveness of such registration statement (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding.
(iii) All restrictions or limitations on transfer
with respect to Home Stock awarded under the Home Stock Plan or any other plan,
program, or arrangement of Home, to the extent that such restrictions or
limitations shall not have already lapsed, and except as otherwise expressly
provided in such plans, program, or arrangement, shall remain in full force and
effect with respect to shares of Home Stock into which such restricted stock is
converted pursuant to this Agreement.
(iv) Home agrees to cooperate with CBC to insure the
implementation of this Paragraph 1.03.H.
(v) Notwithstanding anything to the contrary in this
Agreement, CBC and Capital agree that Home may, prior to the Effective Time,
amend Home's 1995 Nonqualified Stock Option Plan to provide that continued
service as an advisory director of either Home or Capital by any optionee under
such Plan shall qualify such optionee to continue to hold options under such
Plan; provided, however, that any such amendment shall be subject to Capital's
and CBC's prior approval, which approval shall not be unreasonably withheld.
1.04 CLOSING; ARTICLES OF SHARE EXCHANGE; EFFECTIVE TIME. The closing
of the transactions contemplated by this Agreement (the "Closing") shall take
place at the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P. in Raleigh, North
5
<PAGE>
Carolina, or at such other place as CBC shall designate, on a date specified by
CBC (the "Closing Date") after the expiration of any and all required waiting
periods following the effective date of required approvals of the Exchange by
governmental or regulatory authorities. At the Closing, Home, CBC and Capital
shall take such actions (including, without limitation, the delivery of certain
closing documents) as are required herein and as shall otherwise be required by
law to consummate the Exchange and cause it to become effective, and shall
execute Articles of Share Exchange under North Carolina law which shall contain
a "Plan of Exchange" substantially in the form attached as Exhibit A hereto.
Subject to the terms and conditions set forth herein (including,
without limitation, the receipt of all required approvals of governmental and
regulatory authorities), the Exchange shall be effective on the date and at the
time (the "Effective Time") the Articles of Share Exchange are filed with the
North Carolina Secretary of State in accordance with law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HOME
Except as otherwise specifically provided herein or as "Previously
Disclosed" (as defined in Paragraph 9.01 below) to Capital and CBC, Home hereby
makes the following representations and warranties to Capital and CBC:
2.01 ORGANIZATION; STANDING; POWER. Home (i) is duly organized and
incorporated, validly existing, and in good standing under the laws of North
Carolina; (ii) has all requisite power and authority (corporate and other) to
own, lease, and operate its properties and to carry on its business as now being
conducted; (iii) is duly qualified to do business and is in good standing in
each other jurisdiction in which the character of the properties owned, leased,
or operated by it therein or in which the transaction of its business makes such
qualification necessary, except where failure so to qualify would not have a
Material Adverse Effect on Home; and (iv) is not transacting business or
operating any properties owned or leased by it in violation of any provision of
federal or state law or any rule or regulation promulgated thereunder, which
violation would have a material adverse affect on Home.
2.02 HOME'S CAPITAL STOCK. Home's authorized capital stock consists of
5,000,000 shares of common stock, $1.00 par value per share. As of August 31,
1998, 922,686 shares of Home Stock were issued and outstanding, which constitute
Home's only issued and outstanding securities.
Each outstanding share of Home Stock (i) has been duly authorized and
is validly issued and outstanding, and is fully paid and nonassessable, (ii) has
not been issued in violation of the preemptive rights of any shareholder, and
(iii) has been issued pursuant to and in compliance with the requirement of a
registration statement or an applicable exemption from registration requirements
under the Securities Act of 1933, as amended (the "1933 Act").
6
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2.03 SUBSIDIARIES.
A. (i) Schedule 2.03 hereto is a list of all of Home's
Subsidiaries (defined below) together with the jurisdiction of organization of
each such Subsidiary, (ii) except as Previously Disclosed, Home owns, directly
or indirectly, all the issued and outstanding equity securities of each of its
Subsidiaries, (iii) no equity securities of any of its Subsidiaries are or may
become required to be issued (other than to it or its wholly-owned Subsidiaries)
by reason of any contractual right or obligation or otherwise, (iv) there are no
contracts, commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
securities of any such Subsidiaries (other than to it or its wholly-owned
Subsidiaries), (v) there are no contracts, commitments, understandings, or
arrangements relating to its rights to vote or to dispose of such securities;
(vi) all of the equity securities of each Subsidiary held by Home or its
Subsidiaries are fully paid and nonassessable, are owned by Home or its
Subsidiaries free and clear of any liens, charges, encumbrances or security
interests, have been duly authorized, and are validly issued and outstanding;
(vii) none of the equity securities of any Subsidiary held by Home have been
issued in violation of the preemptive rights of any shareholder, and all such
securities have been issued pursuant to a valid and effective registration
statement or pursuant to and in compliance with the requirement of an applicable
exemption from the registration requirements under the 1933 Act.
B. As used in this Agreement, "Subsidiary" shall have the
meaning ascribed to that term in Rule 1-02 of Regulation S-X of the Securities
and Exchange Commission ("SEC").
C. Home does not own beneficially, directly or indirectly, any
equity securities or similar interests of any entity, or any interest in a
partnership or joint venture of any kind, other than its Subsidiaries.
D. Each of Home's Subsidiaries is duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization, and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified, except where the failure to so qualify
would not have a Material Adverse Effect on Home.
E. The representations of Home contained in Paragraphs 2.04
through 2.08, 2.10 through 2.24, and 2.27 through 2.29 hereof shall be deemed to
have been made by each Subsidiary of Home as well.
2.04 CONVERTIBLE SECURITIES, OPTIONS, ETC. With the exception of
options to purchase an aggregate of 49,295 shares of Home Stock which have been
issued and are outstanding under the Home Stock Plan (22,408 shares under the
1995 Incentive Stock Option Plan and 26,887 shares under the 1995 Nonqualified
Stock Option Plan), and the option granted pursuant to the Stock Option
Agreement, Home does not have any outstanding (i) securities or other
obligations (including debentures or other debt instruments) which are
convertible into shares of Home Stock or any other securities of Home; (ii)
options, warrants, rights, calls, or
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other commitments of any nature which entitle any person to receive or acquire
any shares of Home Stock or any other securities of Home; or (iii) plan,
agreement or other arrangement pursuant to which shares of Home Stock or any
other securities of Home, or options, warrants, rights, calls, or other
commitments of any nature pertaining thereto, have been or may be issued.
2.05 AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been
duly and validly approved by Home's Board of Directors in the manner required by
law and subject only to approval of this Agreement by the shareholders of Home
in the manner required by law (as contemplated by Paragraph 6.01.A. below) and
by the applicable regulatory authorities (as contemplated by Paragraph 6.02
below), (i) Home has the corporate power and authority to execute and deliver
this Agreement and to perform its obligations and agreements and carry out the
transactions described herein, (ii) all corporate action required to authorize
Home to enter into this Agreement and to perform its obligations and agreements
and carry out the transactions described herein has been duly and properly
taken, and (iii) this Agreement has been duly executed on behalf of Home, and
(assuming due authorization, execution and delivery by CBC and Capital)
constitutes a valid and binding agreement of Home, enforceable in accordance
with its terms (except to the extent enforceability may be limited by (a)
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
from time to time in effect which affect creditors' rights generally; and (b) by
legal and equitable limitations on the availability of injunctive relief,
specific performance, and other equitable remedies), and (c) general principles
of equity and applicable laws or court decisions limiting the enforceability of
indemnification provisions).
2.06 VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR WAIVERS.
Except where the same would not have a Material Adverse Effect on Home, neither
the execution and delivery of this Agreement, nor the consummation of the
transactions described herein, nor compliance by Home with any of its
obligations or agreements contained herein, will: (i) conflict with or result in
a breach of the terms and conditions of, or constitute a default or violation
under any provision of, Home's Articles of Incorporation or Bylaws, or any
contract, agreement, lease, mortgage, note, bond, indenture, license, or
obligation or understanding (oral or written) to which Home is bound or by which
it, its business, capital stock, or any properties or assets may be affected;
(ii) result in the creation or imposition of any lien, claim, interest, charge,
restriction, or encumbrance upon any of Home's properties or assets; (iii)
violate any applicable federal or state statute, law, rule, or regulation, or
any judgment, order, writ, injunction, or decree of any court, administrative or
regulatory agency, or governmental body; (iv) result in the acceleration of any
obligation or indebtedness of Home; or (v) interfere with or otherwise adversely
affect Home's or Home's ability to carry on its business as presently conducted.
No consents, approvals, or waivers are required to be obtained from any
person or entity in connection with Home's execution and delivery of this
Agreement, or the performance of its obligations or agreements or the
consummation of the transactions described herein, except for required approvals
of Home's shareholders as described in Paragraph 7.01.D. below and of
governmental or regulatory authorities as described in Paragraph 7.01.A. below,
and other
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consents or approvals, the failure of which to obtain would not have a Material
Adverse Effect on Home or its ability to consummate the Exchange.
2.07 HOME'S BOOKS AND RECORDS. Home's books of account and business
records have been maintained in material compliance with all applicable legal
and accounting requirements and in accordance with good business practices, and
such books and records are complete and reflect accurately in all material
respects Home's items of income and expense and all of its assets, liabilities,
and stockholders' equity. The minute books of Home accurately reflect in all
material respects the corporate actions which its shareholders and Boards of
Directors, and all committees thereof, have taken during the time periods
covered by such minute books. All such minute books have been or will be made
available to Capital, CBC and their representatives.
2.08 HOME REPORTS. Home has filed all reports, registrations, and
statements, together with any amendments required to be made with respect
thereto, that were required to be filed with (i) the Federal Deposit Insurance
Corporation ("FDIC"), (ii) the Administrator, Savings Institutions Division,
North Carolina Department of Commerce (the "Administrator"), and (iii) any other
governmental or regulatory authorities having jurisdiction over Home. All such
reports, registrations, and statements filed by Home with the FDIC, the
Administrator, or other such regulatory authority are collectively referred to
herein as the "Reports." As of their respective dates, each Report complied in
all material respects with all the statutes, rules, and regulations enforced or
promulgated by the regulatory authority with which it was filed and did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and Home
has not been notified by any such governmental or regulatory authority that any
such Report was deficient in any material respect as to form or content.
Following the date of this Agreement, Home shall deliver to CBC, simultaneous
with the filing thereof, a copy of each report, registration, statement or other
regulatory filing made by it with the FDIC, the Administrator, or any other such
regulatory authority.
2.09 HOME FINANCIAL STATEMENTS. Home has delivered to CBC (i) a copy of
its audited consolidated balance sheets as of December 31, 1997 and 1996, and
its audited consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1997 and 1996, together
with notes thereto (the "Home Financial Statements"), and (ii) a copy of its
unaudited consolidated balance sheet as of June 30, 1998 and its unaudited
statement of operations for the nine months ended June 30, 1998 (the "Home
Interim Financial Statements"). Following the date of this Agreement, Home
promptly will deliver to CBC and Capital all other annual or interim financial
statements prepared by or for Home. The Home Financial Statements and the Home
Interim Financial Statements (including any related notes and schedules thereto)
(i) are in accordance with Home's books and records, and (ii) were prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods indicated and present fairly in all
material respects Home's financial condition, assets and liabilities, results of
operations, changes in stockholders' equity, and changes in cash flows as of the
dates indicated and for the periods
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specified therein. The Home Financial Statements have been audited and certified
by Home's independent certified public accountants, PricewaterhouseCoopers LLP.
2.10 TAX RETURNS AND OTHER TAX MATTERS. (i) Home has timely filed or
caused to be filed all federal, state, and local tax returns and reports which
are required by law to have been filed, and to the best knowledge of management
of Home, all such returns and reports were true, correct, and complete in all
material respects and contained all material information required to be
contained therein; (ii) all federal, state, and local income, profits,
franchise, sales, use, occupation, property, excise, and other taxes (including
interest and penalties), charges and assessments which have become due from or
been assessed or levied against Home or its property have been fully paid, and,
to the best knowledge of management of Home, with respect to any such taxes to
become due from Home for any period or periods through and including June 30,
1998, adequate provision has been made for the payment of all such taxes and
such provision is reflected in the Home Financial Statements; (iii) Home's tax
returns and reports have been examined or closed by applicable statutes of
limitations through the tax year ended September 30, 1995, and Home has not
received any indication of the pendency of any audit or examination in
connection with any tax return or report and has no knowledge that any such
return or report is subject to adjustment; and (iv) Home has not executed any
waiver or extended the statute of limitations (or been asked to execute a waiver
or extend a statute of limitation) with respect to any tax year, the audit of
any tax return or report or the assessment or collection of any tax. Any
deferred taxes of Home have been provided for in the Home Financial Statements
in all material respects.
2.11 ABSENCE OF MATERIAL ADVERSE CHANGES OR CERTAIN OTHER EVENTS.
(i) Since June 30, 1998, Home has conducted its business only
in the ordinary course, and there has been no Material Adverse Change, and there
has occurred no event or development and there currently exists no condition or
circumstance to the best knowledge of management of Home which, with the lapse
of time or otherwise, is reasonably likely to cause, create, or result in a
Material Adverse Change, in or affecting Home's consolidated financial condition
or results of operations, prospects, business, assets, loan portfolio,
investments, properties, or operations.
(ii) Since June 30, 1998, and other than in the ordinary
course of its business including its normal salary review for 1998, all as
Previously Disclosed to CBC and Capital, Home has not incurred any material
liability or engaged in any material transaction or entered into any material
agreement, increased the salaries, compensation, or general benefits payable to
its employees, suffered any loss, destruction, or damage to any of its
properties or assets, or made a material acquisition or disposition of any
assets or entered into any material contract or lease.
2.12 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on
Schedule 2.12, Home has no liabilities or obligations, whether known or unknown,
matured or unmatured, accrued, absolute, contingent, or otherwise, whether due
or to become due (including, without limitation, tax liabilities or unfunded
liabilities under employee benefit plans or arrangements),
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other than (i) those reflected in the Home Financial Statements or the Home
Interim Financial Statements, or (ii) obligations or liabilities incurred in the
ordinary course of its business since June 30, 1998, and which are not
reasonably likely to, individually or in the aggregate, cause a Material Adverse
Change in Home.
2.13 COMPLIANCE WITH EXISTING OBLIGATIONS. Home has performed in all
material respects all obligations required to be performed by it under, and it
is not in default in any material respect under, or in violation in any material
respect of, the terms and conditions of its Articles of Incorporation or Bylaws,
and/or any contract, agreement, lease, mortgage, note, bond, indenture, license,
obligation, understanding, or other undertaking (whether oral or written) to
which Home is bound or by which it, its business, capital stock, or any of its
properties or assets may be affected, which default or violation would have a
Material Adverse Effect on Home.
2.14 LITIGATION AND COMPLIANCE WITH LAW.
(i) There are no actions, suits, arbitrations, controversies,
or other proceedings or investigations (or, to the best knowledge and belief of
management of Home, any facts or circumstances which reasonably could result in
such), including, without limitation, any such action by any governmental or
regulatory authority, which currently exists or is ongoing, pending, or, to the
best knowledge and belief of management of Home, threatened, contemplated, or
probable of assertion, against, relating to, or otherwise affecting Home or any
of its properties or assets which, if determined adversely, could result in
liability on the part of Home for, or subject it to, monetary damages, fines, or
penalties, or an injunction, and which could have a Material Adverse Effect on
Home's financial condition, results of operations, prospects, business, assets,
loan portfolio, investments, properties, or operations or on the ability of Home
to consummate the Exchange;
(ii) Home has all licenses, permits, orders, authorizations,
or approvals ("Permits") of any federal, state, local, or foreign governmental
or regulatory body that are material to or necessary for the conduct of its
business or to own, lease, and operate its properties; all such Permits are in
full force and effect, except where the failure to be in force and effect would
not have a Material Adverse Effect on Home; no violations are or have been
recorded in respect of any such Permits; and no proceeding is pending or, to the
best knowledge of management of Home, threatened or probable of assertion to
suspend, cancel, revoke, or limit any Permit;
(iii) Home is not subject to any supervisory agreement,
enforcement order, writ, injunction, capital directive, supervisory directive,
memorandum of understanding, or other similar agreement, order, directive,
memorandum, or consent of, with or issued by any regulatory or other
governmental authority (including, without limitation, the FDIC or the
Administrator) relating to its financial condition, directors or officers,
operations, capital, regulatory compliance, or otherwise; there are no
judgments, orders, stipulations, injunctions, decrees, or awards against Home
which in any manner limit, restrict, regulate, enjoin, or prohibit any present
or past business or practice of Home; and Home has not been advised and has no
reason to believe that
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any regulatory or other governmental authority or any court is contemplating,
threatening, or requesting the issuance of any such agreement, order,
injunction, directive, memorandum, judgment, stipulation, decree, or award; and,
(iv) Home is not in violation or default in any material
respect under, and Home has complied in all material respects with, all laws,
statutes, ordinances, rules, regulations, orders, writs, injunctions, or decrees
of any court or federal, state, municipal, or other governmental or regulatory
authority having jurisdiction or authority over it or its business operations,
properties, or assets (including, without limitation, all provisions of North
Carolina law relating to usury, the Consumer Credit Protection Act, and all
other laws and regulations applicable to extensions of credit by Home) and, to
the best knowledge of management of Home, there is no basis for any claim by any
person or authority for compensation, reimbursement, or damages or otherwise for
any violation of any of the foregoing that would have any Material Adverse
Effect on the financial condition of Home.
2.15 REAL PROPERTIES. Home has Previously Disclosed to Capital and CBC
a listing of all real property owned or leased by Home and its Subsidiaries
(including, without limitation, banking facilities and all other real estate or
foreclosed properties owned by Home) (the "Real Property") and all leases, if
any, pertaining to any such Real Property to which Home is a party (the "Real
Property Leases"). With respect to all Real Property owned by Home, Home has
good and marketable title to such Real Property and owns the same free and clear
of all mortgages, liens, leases, encumbrances, title defects, and exceptions to
title other than (i) the lien of current taxes not yet due and payable, and (ii)
such imperfections of title and restrictions, covenants and easements (including
utility easements) which do not affect materially and adversely affect the value
of the Real Property and which do not and will not materially detract from,
interfere with, or restrict the present or future use of the properties subject
thereto or affected thereby. With respect to each Real Property Lease (i) such
lease is valid and enforceable in accordance with its terms, (ii) there
currently exists no circumstance or condition which constitutes an event of
default by Home or their lessor or which, with the passage of time or the giving
of required notices will or could constitute such an event of default, and (iii)
subject to any required consent of Home's lessor, each such Real Property Lease
may be assigned to CBC and the execution and delivery of this Agreement does not
constitute an event of default thereunder.
To the best knowledge of management of Home, the Real Property complies
in all material respects with all applicable federal, state, and local laws,
regulations, ordinances, or orders of any governmental authority, including
those relating to zoning, building and use permits, and the Real Property may be
used under applicable zoning ordinances for commercial banking facilities as a
matter of right rather than as a conditional or nonconforming use.
All improvements and fixtures included in or on the Real Property are
in good condition and repair, ordinary wear and tear excepted, and, except as
may have been Previously Disclosed pursuant to Paragraph 2.19 below, there does
not exist any condition which materially interferes with Home's use or
materially and adversely affects the economic value thereof.
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2.16 LOANS, ACCOUNTS, NOTES AND OTHER RECEIVABLES.
(i) All loans, accounts, notes and other receivables reflected
as assets on Home's books and records (a) have resulted from bona fide business
transactions in the ordinary course of Home's operations, (b) in all material
respects were made in accordance with Home's customary loan policies and
procedures, and (c) are owned by Home free and clear of all liens, encumbrances,
assignments, participation or repurchase agreements, or other exceptions to
title or to the ownership or collection rights of any other person or entity.
(ii) All records of Home regarding all outstanding loans,
accounts, notes, and other receivables, and all other real estate owned, are
accurate in all material respects, and, with respect to each loan which Home's
loan documentation indicates is secured by any real or personal property or
property rights ("Loan Collateral"), such loan is secured by valid, perfected,
and enforceable liens on all such Loan Collateral having the priority described
in Home's records of such loan.
(iii) Each loan reflected as an asset on Home's books, and
each guaranty therefor, is the legal, valid, and binding obligation of the
obligor or guarantor thereon, and to the best knowledge of management of Home no
defense, offset, or counterclaim has been asserted with respect to any such loan
or guaranty.
(iv) Home has Previously Disclosed to CBC a listing of (a)
each loan, extension of credit, or other asset of Home which, as of June 30,
1998, is classified by the FDIC, the Administrator, or by Home as "Loss,"
"Doubtful," "Substandard," or "Special Mention" (or otherwise by words of
similar import), or which Home has designated as a special asset or for special
handling or placed on any "watch list" because of concerns regarding the
ultimate collectibility or deteriorating condition of such asset or any obligor
or Loan Collateral therefor, and (b) each loan or extension of credit of Home
which, as of June 30, 1998, was past due thirty (30) days or more as to the
payment of principal and/or interest, or as to which any obligor thereon
(including the borrower or any guarantor) otherwise was in default, is the
subject of a proceeding in bankruptcy, or otherwise has indicated any inability
or intention not to repay such loan or extension of credit. Each such listing is
accurate and complete as of the date indicated.
(v) To the best knowledge of management of Home, each of
Home's loans and other extensions of credit (with the exception of those loans
and extensions of credit specified in the written listings described in
Subparagraph (iv) above) is collectible in the ordinary course of Home's
business in an amount which is not less than the amount at which it is carried
on Home's books and records.
2.17 SECURITIES PORTFOLIO AND INVESTMENTS. All securities owned by Home
(whether owned of record or beneficially) are held free and clear of all
mortgages, liens, pledges, encumbrances, or any other restriction or rights of
any other person or entity, whether contractual or statutory, which would
materially impair the ability of Home to dispose freely of any such security
and/or otherwise to realize the benefits of ownership thereof at any time (other
than pledges of securities in the ordinary course of Home's business to secure
public funds
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deposits and in connection with repurchase agreements with customers and Federal
Home Loan Bank borrowings). There are no voting trusts or other agreements or
undertakings to which Home is a party with respect to the voting of any such
securities.
Except for fluctuations in the market values of United States Treasury
and agency, municipal securities, or other debt securities since June 30, 1998,
there has been no material deterioration or Material Adverse Change in the
quality, or any material decrease in the value, of Home's securities portfolio.
2.18 PERSONAL PROPERTY AND OTHER ASSETS. All assets of Home (including,
without limitation, all banking equipment, data processing equipment, vehicles,
and all other personal property located in or used in the operation of each
office of Home or otherwise used by Home in the operation of its business) are
owned by Home free and clear of all liens, leases, encumbrances, title defects,
or exceptions to title. All of Home's banking and other equipment is in good
operating condition and repair, ordinary wear and tear excepted.
2.19 ENVIRONMENTAL MATTERS. Home has Previously Disclosed and provided
to Capital and CBC copies of all written reports, correspondence, notices, or
other materials, if any, in its possession pertaining to environmental reports,
surveys, assessments, notices of violation, notices of regulatory requirements,
penalty assessments, claims, actions, or proceedings, past or pending, of the
Real Property or any of its Loan Collateral and any improvements thereon, or to
any violation of Environmental Laws (as defined below) on, affecting or
otherwise involving the Real Property, any Loan Collateral, or otherwise
involving Home.
To the best knowledge of management of Home:
(i) There has been no presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
reporting, testing, processing, emission, discharge, release, threatened
release, control, or clean-up, in a reportable or regulated quantity, of any
hazardous, toxic, or otherwise regulated materials, substances, or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants, toxic
chemicals, oil or other petroleum products or byproducts, asbestos or materials
containing (or presumed to contain) asbestos, polychlorinated biphenyls, or
radioactive materials, and/or any hazardous, toxic, regulated or dangerous
waste, substance, or material defined as such by the United States Environmental
Protection Agency or any other federal, state, or local government or agency or
political subdivision thereof, or for the purpose of any Environmental Laws (as
defined herein), as may now or hereafter (through the Effective Time) be defined
or in effect ("Hazardous Substances") by any person on, from, or relating to any
parcel of the Real Property;
(ii) Home has not violated any federal, state, or local law,
rule, regulation, order, permit, or other requirement relating to health,
safety, or the environment or imposing liability, responsibility, or standards
of conduct applicable to environmental conditions (all such laws, rules,
regulations, orders, and other requirements being herein collectively referred
to as "Environmental Laws"), and, there has been no violation of any
Environmental Laws (including
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any violation with respect to or relating to any Loan Collateral) by any other
person or entity for whose liability or obligation with respect to any
particular matter or violation Home is or may be responsible or liable;
(iii) Home is not subject to any pending claims, demands,
causes of action, suits, proceedings, losses, damages, penalties, liabilities,
obligations, costs, or expenses of any kind and nature which arise out of,
under, or in connection with, or which result from or are based upon the
presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, reporting, testing, processing,
emission, discharge, release, threatened release, control, or clean-up of any
Hazardous Substances on, from, or relating to the Real Property or any Loan
Collateral, by Home or any other person or entity; and,
(iv) No facts, events, or conditions relating to the Real
Property or any Loan Collateral, or the operations of Home at any of their
respective office locations, will prevent, hinder or limit continued compliance
with Environmental Laws, or give rise to any investigatory, remedial, or
corrective actions, obligations, or liabilities (whether accrued, absolute,
contingent, unliquidated, or otherwise) pursuant to Environmental Laws.
For purposes of this Agreement, "Environmental Laws" shall include:
(i) all federal, state, and local statutes, regulations,
ordinances, orders, decrees, and similar provisions having the force or effect
of law,
(ii) all contractual agreements, and
(iii) all common law concerning public health and safety,
worker health and safety, and pollution or protection of the environment,
including, without limitation, all standards of conduct and bases of obligations
relating to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, reporting, testing,
processing, discharge, release, threatened release, control, or clean-up of any
Hazardous Substances (including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, the Superfund Amendment
and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Hazardous Materials Transportation Act, the Resource Conservation and
Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances
Control Act, the Oil Pollutant Act, the Coastal Zone Management Act, any
"Superfund" or "Superlien" law, the North Carolina Oil Pollution and Hazardous
Substances Control Act, the North Carolina Water and Air Resources Act, and the
North Carolina Occupational Safety and Health Act, including any amendments
thereto from time to time) as such may now or hereafter (through the Effective
Time) be defined or in effect.
2.20 ABSENCE OF BROKERAGE OR FINDERS COMMISSIONS. Except as set forth
on Schedule 2.20 hereto, (i) all negotiations relative to this Agreement and the
transactions described herein have been carried on by Home directly with Capital
and CBC; (ii) no person or firm has been retained by or has acted on behalf of,
pursuant to any agreement, arrangement or understanding with, or under the
authority of, Home or its Board of Directors, as a broker, finder,
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or agent or has performed similar functions or otherwise is or may be entitled
to receive or claim a brokerage fee or other commission in connection with the
transactions described herein; and (iii) Home has not agreed to pay any
brokerage fee or other commission to any person or entity in connection with the
transactions described herein.
2.21 MATERIAL CONTRACTS. Except as set forth in Schedule 2.21 hereto,
Home is not a party to or bound by any agreement involving money or other
property in an amount or with a value in excess of $10,000 (i) which is not to
be performed in full prior to the Effective Time, (ii) which calls for the
provision of goods or services to Home and cannot be terminated without material
penalty upon written notice to the other party thereto, (iii) which is material
to Home and was not entered into in the ordinary course of business, (iv) which
involves hedging, options, or any similar trading activity, or interest rate
exchanges or swaps, (v) which commits Home to extend any loan or credit (with
the exception of letters of credit, lines of credit, and loan commitments
extended in the ordinary course of Home's business), (vi) which involves the
purchase or sale of any assets of Home, or the purchase, sale, issuance,
redemption, or transfer of any capital stock or other securities issued by Home,
or (vii) with any director or officer of Home (including, without limitation,
any employment or consulting agreement, but not including any agreement relating
to loans or other banking services which were made in the ordinary course of
Home's business and on substantially the same terms and conditions as were
prevailing at that time for similar agreements with unrelated persons).
Home is not in default in any material respect, and there has not
occurred any event which with the lapse of time or giving of notice or both
would constitute a default, under any contract, lease, insurance policy,
commitment, or arrangement to which it is a party or by which it or its property
is or may be bound or affected or under which it or its property receives
benefits, where the consequences of such default would have a Material Adverse
Effect on the financial condition, results of operations, prospects, business,
assets, loan portfolio, investments, properties, or operations of Home.
2.22 EMPLOYMENT MATTERS; EMPLOYEE RELATIONS. Home (i) has paid in full
to or accrued on behalf of all its directors, officers, and employees all wages,
salaries, commissions, bonuses, fees, sick pay, severance pay, all other amounts
promised to the extent required by law or when Home has a policy of making such
payments and other direct compensation for all services performed by them to the
date of this Agreement and (ii) is in compliance with all federal, state, and
local laws, statutes, rules, and regulations with regard to employment and
employment practices, terms and conditions, and wages and hours, and other
compensation matters; and no person has, to the best knowledge of management of
Home, asserted that Home is liable in any amount for any arrearages in wages or
employment taxes or for any penalties for failure to comply with any of the
foregoing.
There is no action, suit, or proceeding by any person pending or, to
the best knowledge of management of Home, threatened, against Home (or any of
its employees), involving employment discrimination, sexual harassment, wrongful
discharge, or similar claims.
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Home is not a party to or bound by any collective bargaining agreement
with any of its employees, any labor union, or any other collective bargaining
unit or organization. There is no pending or threatened labor dispute, work
stoppage, or strike involving Home and any of its employees, or any pending or
threatened proceeding in which it is asserted that Home has committed an unfair
labor practice; and management of Home is not aware of any activity involving it
or any of its employees seeking to certify a collective bargaining unit or
engaging in any other labor organization activity.
2.23 EMPLOYMENT AGREEMENTS; EMPLOYEE BENEFIT PLANS
(i) Neither Home nor any its Subsidiaries is a party to or
bound by any employment agreements with any of their respective directors,
officers, or employees, except for the employment agreement between Home and
Edwin E. Bridges ("Bridges"), dated April 27, 1998.
(ii) Home has Previously Disclosed and has delivered or made
available to Capital and CBC prior to the execution of this Agreement copies, in
each case, of all pension, stock ownership, severance pay, vacation, bonus, or
other incentive plans, all other written employee programs, arrangements, or
agreements, all medical, vision, dental, or other health plans, programs,
arrangements or agreements, all life insurance plans, and all other employee
benefit plans or fringe benefit plans, including "employee benefit plans" as
that term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by Home for the benefit of employees,
retirees, dependents, spouses, directors, independent contractors, or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, the "Benefit Plans"). Schedule 2.23 identifies each
such Benefit Plan, and further identifies each person who receives benefits
under, or is or may become eligible to receive benefits under, each such Benefit
Plan. Without limiting the foregoing, Schedule 2.23 also identifies each person
for whom Home has agreed to provide "lifetime" health benefits and describes the
extent of Home's obligations in that regard. Any of the Benefit Plans which is
an "employee pension benefit plan," as that term is defined in Section 3(2) of
ERISA, is referred to herein as an "ERISA Plan." No ERISA Plan is also a
"defined benefit plan" (as defined in Section 414(j) of the Code) or is or has
been a multi-employer plan within the meaning of Section 3(37) of ERISA, except
as described on Schedule 2.23. Neither Home nor any affiliate of Home has ever
been required to contribute to a multi-employer plan, as defined in Section
3(37) of ERISA.
(iii) All Benefit Plans are in compliance in all material
respects with the applicable terms of ERISA, the Code, and any other applicable
laws, rules, or regulations, the breach or violation of which are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Home. Each ERISA Plan which is intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the Internal Revenue
Service, and management of Home is not aware of any circumstances likely to
result in revocation of any such favorable determination letter. To the best
knowledge of management of Home, Home has not engaged in a transaction with
respect to any Benefit Plan that, assuming the
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taxable period of such transaction expired as of the date hereof, would subject
Home to a tax imposed by either Section 4975 of the Code or Section 502(i) of
ERISA in amounts which are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Home.
(iv) Home has no liability for retiree health and life
benefits under any of the Benefit Plans and there are no restrictions on the
rights of Home to amend or terminate any such Plan without incurring any
liability thereunder, except as set forth on Schedule 2.23.
(v) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (a) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of Home from Home under
any Benefit Plan or otherwise, (b) increase any benefits otherwise payable under
any Benefit Plan or otherwise, or (c) result in any acceleration of the time of
payment or vesting of any such benefit, except as set forth on Schedule 2.23.
(vi) The actuarial present values of all accrued deferred
compensation entitlements (including entitlements under any executive
compensation, supplemental retirement, or employment agreement) of employees and
former employees of Home and its beneficiaries have been fully reflected on the
Home Financial Statements to the extent required by and in accordance with GAAP.
Any adjustments necessary will be made prior to the earlier of Closing and
December 31, 1998.
2.24 INSURANCE. Home has in effect such policies of general liability,
casualty, directors and officers liability, employee fidelity, errors and
omissions, and other property and liability insurance (including without
limitation a "banker's blanket bond") as have been Previously Disclosed to
Capital and CBC (the "Policies"). The Policies provide coverage in such amounts
and against such liabilities, casualties, losses, or risks as is customary or
reasonable for entities engaged in Home's businesses or as is required by
applicable law or regulation; and, in the reasonable opinion of management of
Home, the insurance coverage provided under the Policies is reasonable and
adequate in all respects for Home. Each of the Policies is in full force and
effect and is valid and enforceable in accordance with its terms, and is
underwritten by an insurer of recognized financial responsibility and which is
qualified to transact business in North Carolina; and Home has taken all
requisite actions (including the giving of required notices) under each such
Policy in order to preserve all rights thereunder with respect to all matters.
Home is not in default under the provisions of, has received notice of
cancellation or nonrenewal of or any material premium increase on, or has any
knowledge of any failure to pay any premium on or any inaccuracy in any
application for any Policy. There are no pending claims with respect to any
Policy (and there are no facts which would form the basis of any such claim),
and Home has no knowledge of any state of facts or of the occurrence of any
event that is reasonably likely to form the basis for any such claim.
2.25 INSURANCE OF DEPOSITS. All deposits of Home are insured by the
Savings Association Insurance Fund of the FDIC to the maximum extent permitted
by law, all deposit insurance premiums due from Home to the FDIC have been paid
in full in a timely fashion, and
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no proceedings have been commenced or, to the best knowledge of management of
Home, are contemplated by the FDIC or otherwise to terminate such insurance.
2.26 AFFILIATES. Home has Previously Disclosed to Capital and CBC a
listing of those persons deemed by Home as of the date of this Agreement to be
"Affiliates" of Home (as that term is defined in Rule 405 promulgated under the
1933 Act), including persons, trusts, estates, corporations, or other entities
related to persons deemed to be Affiliates of Home.
2.27 OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT, OR TAX
TREATMENT. To the best knowledge of management of Home, there exists no fact or
condition (including Home's record of compliance with the Community Reinvestment
Act) relating to Home that may reasonably be expected to (i) prevent or
materially impede or delay Capital, CBC or Home from obtaining the regulatory
approvals required in order to consummate transactions described herein, (ii)
prevent the Exchange from qualifying to be a reorganization under Section
368(a)(1)(B) of the Code, or (iii) prevent the Exchange from being treated as a
"pooling-of-interests" for accounting purposes; and, if any such fact or
condition becomes known to Home, Home shall promptly (and in any event within
three days after obtaining such knowledge) communicate such fact or condition to
Capital and CBC in writing.
2.28 YEAR 2000 READINESS. To the best knowledge of management of Home,
Home is in compliance with the FDIC's guidelines on Year 2000 readiness.
2.29 DISCLOSURE. To the best knowledge of management of Home, no
written statement, certificate, schedule, list, or other written information
furnished by or on behalf of Home at any time to Capital or CBC in connection
with this Agreement (including, without limitation, information "Previously
Disclosed" by Home), when considered as a whole, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading. Each document
delivered or to be delivered by Home to Capital or CBC is or will be a true and
complete copy of such document, unmodified except by another document delivered
by Home.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CAPITAL AND CBC
Except as otherwise specifically described herein or as "Previously
Disclosed" (as defined in Paragraph 9.01 below) to Home, Capital and CBC hereby
make the following representations and warranties to Home.
3.01 ORGANIZATION; STANDING; POWER. Each of Capital and CBC (i) is duly
organized and incorporated, validly existing, and in good standing under the
laws of North Carolina, (ii) has all requisite power and authority (corporate
and other) to own, lease and operate its properties and to carry on its business
as now being conducted, (iii) is duly qualified to do business and is in good
standing in each other jurisdiction in which the character of the properties
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owned, leased or operated by it therein or in which the transaction of its
business makes such qualification necessary, except where failure so to qualify
would not have a Material Adverse Effect on Capital or CBC, and (iv) is not
transacting business, or operating any properties owned or leased by it, in
violation of any provision of federal or state law or any rule or regulation
promulgated thereunder, which violation would have a Material Adverse Effect on
Capital or CBC.
3.02 CAPITAL STOCK. CBC's authorized capital stock consists of
20,000,000 shares of common stock, no par value per share. As of August 31,
1998, one (1) share of CBC Stock was issued and outstanding. CBC's outstanding
capital stock has been duly authorized and validly issued, and is fully paid and
nonassessable, and the shares of CBC Stock issued to shareholders of Home
pursuant to this Agreement, when issued as described herein, will be duly
authorized, validly issued, fully paid, and nonassessable. Capital's authorized
capital stock consists of 20,000,000 shares of common stock, $5.00 par value per
share. As of June 30, 1998, 2,477,651 shares of Capital's common stock ("Capital
Stock") were issued and outstanding. Capital's outstanding capital stock has
been duly authorized and validly issued, and is fully paid and nonassessable
(except to the extent assessable under applicable North Carolina banking laws).
3.03 AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been
duly and validly approved by each of Capital's and CBC's Board of Directors and
duly executed on Capital's and CBC's behalf. Subject only to approval of this
Agreement by all applicable regulatory authorities (as contemplated by Paragraph
6.02 below), (i) Capital and CBC each has the corporate power and authority to
execute and deliver this Agreement and to perform its obligations and agreements
and carry out the transactions described herein, (ii) all corporate action
required to be taken to authorize Capital and CBC to enter into this Agreement
and to perform their respective obligations and agreements and carry out the
transactions described herein has been duly and properly taken, and (iii) this
Agreement has been executed on behalf of each of CBC and Capital and, assuming
due authorization, execution and delivery by Home, constitutes the valid and
binding agreement of Capital and CBC, enforceable in accordance with its terms
(except to the extent enforceability may be limited by (a) applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to
time in effect which affect creditors' rights generally; (b) by legal and
equitable limitations on the availability of injunctive relief, specific
performance, and other equitable remedies, and (c) general principles of equity
and applicable laws or court decisions limiting the enforceability of
indemnification provisions).
3.04 VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR WAIVERS.
Except where the same would not have a Material Adverse Effect on Capital or
CBC, neither the execution and delivery of this Agreement, nor the consummation
of the transactions described herein, nor compliance by Capital or CBC with any
of their respective obligations or agreements contained herein, will: (i)
conflict with or result in a breach of the terms and conditions of, or
constitute a default or violation under any provision of, Capital's or CBC's
Articles of Incorporation or Bylaws, or any contract, agreement, lease,
mortgage, note, bond, indenture, license, or obligation or understanding (oral
or written) to which Capital or CBC is bound or by which it, its business,
capital stock or any of its properties or assets may be
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affected; (ii) result in the creation or imposition of any lien, claim,
interest, charge, restriction, or encumbrance upon any of Capital's or CBC's
properties or assets; (iii) violate any applicable federal or state statute,
law, rule or regulation, or any order, writ, injunction, or decree of any court,
administrative or regulatory agency or governmental body; (iv) result in the
acceleration of any obligation or indebtedness of Capital or CBC; or (v)
interfere with or otherwise materially and adversely affect Capital's or CBC's
ability to carry on its business as presently conducted.
No consents, approvals, or waivers are required to be obtained from any
person or entity in connection with Capital's or CBC's execution and delivery of
this Agreement, or the performance of its obligations or agreements or the
consummation of the transactions described herein, except for the required
approvals of governmental or regulatory authorities described in Paragraph
7.01.A. below, and other consents or approvals, the failure of which to obtain
would not have a Material Adverse Effect on Capital or CBC or their respective
abilities to consummate the Exchange.
3.05 CAPITAL'S AND CBC'S BOOKS AND RECORDS. Capital's and CBC's
respective books of account and business records have been maintained in
material compliance with all applicable legal and accounting requirements and in
accordance with good business practices, and such books and records are complete
and reflect accurately in all material respects Capital's and CBC's respective
items of income and expense and all of their respective assets, liabilities, and
stockholders' equity. The minute books of Capital and CBC accurately reflect in
all material respects the corporate actions which their respective shareholders
and Boards of Directors, and all committees thereof, have taken during the time
periods covered by such minute books. All such minute books have been or will be
made available to Home and its representatives.
3.06 CAPITAL REPORTS. Capital and CBC have filed all reports,
registrations, and statements, together with any amendments that were required
to be made with respect thereto, that were required to be filed with any
governmental or regulatory authorities having jurisdiction over Capital or CBC.
All such reports and statements filed with such regulatory authorities are
collectively referred to herein as the "Capital Reports." As of their respective
dates, the Capital Reports complied in all material respects with all the
statutes, rules, and regulations enforced or promulgated by the regulatory
authority with which they were filed and did not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; and neither Capital
nor CBC has been notified that any of the Capital Reports were deficient in any
material respect as to form or content.
3.07 CAPITAL FINANCIAL STATEMENTS. Capital has delivered to Home (i) a
copy of Capital's balance sheet as of December 31, 1997, and its statement of
operations, changes in shareholders' equity, and cash flows for the period June
20, 1997 through December 31, 1997 (the "Capital Financial Statements"), and
(ii) a copy of Capital's unaudited balance sheet as of June 30, 1998 and its
unaudited statement of operations for the six months ended June 30, 1998 (the
"Capital Interim Financial Statements"). The Capital Financial Statements and
the Capital Interim Financial Statements were prepared in accordance with GAAP
applied on a
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consistent basis throughout the periods indicated and present fairly in all
material respects Capital's financial condition, assets and liabilities, results
of operations, changes in shareholders' equity and changes in cash flows as of
the dates and for the periods specified therein. The Capital Financial
Statements for 1997 have been audited by Capital's independent accountants,
PricewaterhouseCoopers LLP.
3.08 TAX RETURNS AND OTHER TAX MATTERS. (i) Capital has timely filed or
caused to be filed all federal, state, and local tax returns and reports which
are required by law to have been filed, and to the best knowledge of management
of Capital, all such returns and reports were true, correct, and complete in all
material respects and contained all material information required to be
contained therein; (ii) all federal, state, and local income, profits,
franchise, sales, use, occupation, property, excise, and other taxes (including
interest and penalties), charges and assessments which have become due from or
been assessed or levied against Capital or its property have been fully paid,
and, to the best knowledge of management of Capital, with respect to any such
taxes to become due from Capital for any period or periods through and including
December 31, 1997, adequate provision has been made for the payment of all such
taxes and such provision is reflected in the Capital Financial Statements; (iii)
Capital has not received any indication of the pendency of any audit or
examination in connection with any tax return or report and has no knowledge
that any such return or report is subject to adjustment; and (iv) Capital has
not executed any waiver or extended the statute of limitations (or been asked to
execute a waiver or extend a statute of limitation) with respect to any tax
year, the audit of any tax return or report or the assessment or collection of
any tax. Any deferred taxes of Capital have been provided for in the Capital
Financial Statements in all material respects.
3.09 ABSENCE OF MATERIAL ADVERSE CHANGES. Since June 30, 1998 there has
been no Material Adverse Change, and there has occurred no event or development
and, to the best knowledge of management of Capital, there currently exists no
condition or circumstance which, with the lapse of time or otherwise, is
reasonably likely to cause, create or result in a Material Adverse Change, in or
affecting Capital's or CBC's financial condition or results of operations, or in
its assets, loan portfolio, investments, properties, or operations.
3.10 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Capital nor CBC has
any liabilities or obligations, whether known or unknown, matured or unmatured,
accrued, absolute, contingent, or otherwise, whether due or to become due
(including, without limitation, tax liabilities or unfunded liabilities under
employee benefit plans or arrangements), other than (i) those reflected in the
Capital Financial Statements or the Capital Interim Financial Statements, or
(ii) obligations or liabilities incurred in the ordinary course of its business
since June 30, 1998, and which are not reasonably likely to, individually or in
the aggregate, cause a Material Adverse Change in Capital or CBC.
3.11 COMPLIANCE WITH EXISTING OBLIGATIONS. Capital and CBC have
performed in all material respects all obligations required to be performed by
them under, and they are not in default in any material respect under, or in
violation in any material respect of, the terms and conditions of their
respective Articles of Incorporation or Bylaws, and/or any contract, agreement,
lease, mortgage, note, bond, indenture, license, obligation, understanding, or
other
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undertaking (whether oral or written) to which Capital or CBC is bound or by
which it, its business, capital stock, or any of its properties or assets may be
affected, which default or violation would have a Material Adverse Effect on
Capital or CBC.
3.12 LITIGATION AND COMPLIANCE WITH LAW.
(i) There are no actions, suits, arbitrations, controversies
or other proceedings or investigations (or, to the best knowledge and belief of
management of Capital or CBC, any facts or circumstances which reasonably could
result in such), including, without limitation, any such action by any
governmental or regulatory authority, which currently exists or is ongoing,
pending or, to the best knowledge and belief of management of Capital or CBC,
threatened, contemplated, or probable of assertion, against, relating to, or
otherwise affecting Capital or CBC or any of its or their respective properties
or assets which, if determined adversely, could result in liability on the part
of Capital or CBC for, or subject Capital or CBC to, monetary damages, fines or
penalties, or an injunction, and which could have a Material Adverse Effect on
Capital's or CBC's financial condition, results of operations, or in Capital's
or CBC's assets, loan portfolio, investments, properties, or operations or on
the ability of Capital or CBC to consummate the Exchange;
(ii) Capital and CBC have all licenses, permits, orders,
authorizations, or approvals ("Capital Permits") of any federal, state, local,
or foreign governmental or regulatory body that are material to or necessary for
the conduct of their respective businesses or to own, lease, and operate their
respective properties; all such Capital Permits are in full force and effect,
except where the failure to be in force and effect would not have a Material
Adverse Effect on Capital or CBC; no violations are or have been recorded in
respect of any such Capital Permits; and no proceeding is pending or, to the
best knowledge of management of Capital or CBC, threatened or probable of
assertion to suspend, cancel, revoke, or limit any Capital Permit;
(iii) Neither Capital nor CBC is subject to any supervisory
agreement, enforcement order, writ, injunction, capital directive, supervisory
directive, memorandum of understanding, or other similar agreement, order,
directive, memorandum, or consent of, with or issued by any regulatory or other
governmental authority (including, without limitation, the FDIC or the North
Carolina Banking Commissioner (the "Commissioner")) relating to its financial
condition, directors or officers, operations, capital, regulatory compliance, or
otherwise; there are no judgments, orders, stipulations, injunctions, decrees,
or awards against Capital or CBC which in any manner limit, restrict, regulate,
enjoin, or prohibit any present or past business or practice of Capital or CBC;
and neither Capital nor CBC has been advised or have reason to believe that any
regulatory or other governmental authority or any court is contemplating,
threatening, or requesting the issuance of any such agreement, order,
injunction, directive, memorandum, judgment, stipulation, decree, or award; and,
(iv) Neither Capital nor CBC is in violation or default in any
material respect under, and each of Capital and CBC has complied in all material
respects with, all laws, statutes, ordinances, rules, regulations, orders,
writs, injunctions, or decrees of any court or federal, state, municipal, or
other governmental or regulatory authority having jurisdiction or authority over
it
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or its business operations, properties, or assets (including, without
limitation, all provisions of North Carolina law relating to usury, the Consumer
Credit Protection Act, and all other laws and regulations applicable to
extensions of credit by Capital or CBC) and to the best knowledge of management
of Capital or CBC there is no basis for any claim by any person or authority for
compensation, reimbursement, or damages or otherwise for any violation of any of
the foregoing that would have any Material Adverse Effect on the financial
condition of Capital or CBC.
3.13 OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT, OR TAX
TREATMENT. To the best of the knowledge and belief of the executive officers of
Capital and CBC, no fact or condition (including Capital's record of compliance
with the Community Reinvestment Act) relating to Capital or CBC exists that may
reasonably be expected to (i) prevent or materially impede or delay the Capital
or CBC regulatory approvals required in order to consummate the transactions
described herein, including, without limitation, the Reorganization (as defined
in Paragraph 7.03.J.), (ii) prevent the Exchange from qualifying to be a
reorganization under Section 368(a)(1)(B) of the Code, or (iii) prevent the
Exchange from being treated as a "pooling-of-interests" for accounting purposes;
and, if any such fact or condition becomes known to the executive officers of
Capital or CBC, they promptly (and in any event within three days after
obtaining such knowledge) shall communicate such fact or condition to Home.
3.14 DISCLOSURE. To the best knowledge of Capital and CBC, no written
statement, certificate, schedule, list, or other written information furnished
by or on behalf of Capital or CBC at any time to Home in connection with this
Agreement (including, without limitation, information "Previously Disclosed" by
Capital or CBC), when considered as a whole, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. Each document
delivered or to be delivered by Capital or CBC to Home is or will be a true and
complete copy of such document, unmodified except by another document delivered
by Capital or CBC.
ARTICLE IV
COVENANTS OF HOME
4.01 AFFIRMATIVE COVENANTS OF HOME. Home hereby covenants and agrees as
follows with Capital and CBC:
A. "AFFILIATES" OF HOME. Home will use its best efforts to
cause each person who is an Affiliate of Home (as defined in Paragraph 2.26
above), to execute and deliver to Capital and CBC at least five (5) days prior
to the Closing a written agreement (the "Affiliates' Agreement") relating to
restrictions on shares of CBC Stock to be received by such Affiliates pursuant
to this Agreement and which Affiliates' Agreement shall be in form and content
reasonably satisfactory to Capital and CBC. Certificates for the shares of CBC
Stock issued to Affiliates of Home shall bear a restrictive legend
(substantially in the form as shall be set forth in the Affiliates' Agreement)
with respect to the restrictions applicable to such shares.
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B. CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME. While the
parties recognize that the operation of Home and its Subsidiaries until the
Effective Time is the responsibility of Home and its Subsidiaries and their
respective Boards of Directors and officers, Home agrees that, between the date
of this Agreement and the Effective Time, Home will carry on, and cause its
Subsidiaries to carry on, their respective businesses in and only in the regular
and usual course in substantially the same manner as such businesses heretofore
were conducted and Home agrees that it will, and will cause each of its
Subsidiaries to:
(i) preserve intact its present business
organization, keep available its present officers and employees, and preserve
its relationships with customers, depositors, creditors, correspondents,
suppliers, and others having business relationships with it;
(ii) maintain all its properties and equipment in
customary repair, order, and condition, ordinary wear and tear excepted;
(iii) maintain its books of account and records in
the usual, regular, and ordinary manner in accordance with sound business
practices applied on a consistent basis;
(iv) comply in all material respects with all laws,
rules, and regulations applicable to it, its properties and to the conduct of
its business;
(v) continue to maintain in force insurance such as
is described in Paragraph 2.24 above; not modify any bonds or policies of
insurance in effect as of the date hereof unless the same, as modified, provides
substantially equivalent coverage; and not cancel, allow to be terminated or, to
the extent available, fail to renew, any such bond or policy of insurance unless
the same is replaced with a bond or policy providing substantially equivalent
coverage;
(vi) provide to Capital and CBC on a monthly basis
Home's and each Home Subsidiary's market value report on their respective
investment portfolios and hedging portfolios; and,
(vii) promptly provide to Capital and CBC such
information about Home and each of its Subsidiaries and their respective
financial conditions, results of operations, prospects, businesses, assets, loan
portfolios (including, without limitation, changes in loan quality),
investments, properties, or operations, as Capital or CBC shall reasonably
request.
C. PERIODIC INFORMATION REGARDING LOANS. All proposed new
extensions of unsecured credit by Home, and all proposed new extensions of
secured credit in excess of $150,000 by Home will be submitted by Home to
Capital and CBC at least three days prior to approval by Home of such extension
of credit for Capital's and CBC's review.
Additionally, Home agrees to make available and provide to
Capital and CBC the following information with respect to Home's loans and other
extensions of credit (such
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assets herein referred to as "Loans") as of August 31, 1998, and each month
thereafter until the Effective Time, such information for each month to be in
form and substance as is usual and customary in the conduct of Home's business
and to be furnished within ten (10) business days of the end of each month
ending after the date hereof:
(i) a list of Loans past due for thirty (30)
days or more as to principal or interest;
(ii) an analysis of all classified or "watch
list" Loans, along with the outstanding balance for each such classified or
"watch list" Loan;
(iii) a list of Loans on nonaccrual status;
(iv) a list of all Loans without principal
reduction for a period of longer than one year;
(v) a list of all foreclosed real property
or other real estate owned and all repossessed personal property;
(vi) a list of reworked or restructured
Loans over $10,000 and still outstanding, including original terms, restructured
terms, and status; and
(vii) a list of any actual or threatened
litigation by or against Home pertaining to any Loans or credits, which list
shall contain a description of circumstances surrounding such litigation, its
present status, and management's evaluation of such litigation.
All writedowns of Loans and foreclosed properties
prior to the Effective Time shall be satisfactory to CBC in its sole discretion.
Home shall use its best efforts to effect all writedowns that it anticipates
making prior to Closing before December 31, 1998, if that date is, or is
expected to be, prior to the Closing Date.
Prior to the earlier of December 31, 1998 or the
Effective Time, Home shall increase its loan loss reserve to an amount
satisfactory to Capital in its sole discretion, provided, however, that such
action is not prohibited by any applicable law or regulation and provided
further that such action by Home shall not be deemed a default by Home of any
provision of this Agreement.
D. NOTICE OF CERTAIN CHANGES OR EVENTS. Following the
execution of this Agreement and up to the Effective Time, Home promptly will
notify Capital and CBC in writing of and provide to them such information as
either of them shall request regarding (i) any Material Adverse Change in Home's
and each Home Subsidiary's financial condition, results of operations,
prospects, business, assets, loan portfolio, investments, properties, or
operations, or of the actual or prospective occurrence of any
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condition or event which, with the lapse of time or otherwise, is reasonably
likely to cause, create or result in any such Material Adverse Change, or (ii)
the actual or prospective existence or occurrence of any condition or event
which, with the lapse of time or otherwise, has caused or may or could cause any
statement, representation, or warranty of Home herein, or any information that
has been Previously Disclosed by Home to Capital or CBC, to be or become
materially inaccurate, misleading, or incomplete, or which has resulted or may
or could cause, create, or result in the material breach or violation of any of
Home's covenants or agreements contained herein or in the failure of any of the
conditions described in Paragraphs 7.01 or 7.03 below.
E. CONSENTS TO ASSIGNMENT OF LEASES. Home will obtain all
consents of its and its Subsidiary's respective landlords and lessors to the
acquisition of Home by CBC as may be required under the Real Property Leases and
all other leases, each of which consents shall be in form and substance
satisfactory to Capital and CBC.
F. FURTHER ACTION; INSTRUMENTS OF TRANSFER, ETC. Home
covenants and agrees with Capital and CBC that it (i) will use its reasonable
best efforts in good faith to take or cause to be taken all action reasonably
required of it hereunder as promptly as practicable so as to permit the
consummation of the transactions described herein at the earliest possible date,
(ii) shall perform all acts and execute and deliver to Capital and CBC all
documents or instruments reasonably required herein or as otherwise shall be
reasonably necessary or useful to or reasonably requested by either of them in
consummating such transactions, and, (iii) will cooperate with Capital and CBC
in every reasonable way in carrying out, and will pursue diligently the
expeditious completion of, such transactions.
4.02. NEGATIVE COVENANTS OF HOME. Home hereby covenants and agrees
that, between the date hereof and the Effective Time, neither Home nor any Home
Subsidiary will do any of the following things or take any of the following
actions without the prior written consent and authorization of Capital and CBC:
A. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS.
Neither Home nor any of its Subsidiaries will amend its Articles of
Incorporation or Bylaws (except as may be required by applicable law or
regulation).
B. CHANGE IN CAPITAL STOCK. Neither Home nor any of its
Subsidiaries will (i) make any change in its authorized capital stock, or create
any other or additional authorized capital stock or other securities, or (ii)
issue, sell, purchase, redeem, retire, reclassify, combine, or split any shares
of its capital stock or other securities issued by Home or any Home Subsidiary,
other than the issuance of shares upon the exercise of stock options which are
outstanding as of the date of this Agreement (including securities convertible
into capital stock), or enter into any agreement or understanding with respect
to any such action.
C. OPTIONS, WARRANTS, AND RIGHTS. Neither Home nor any of its
Subsidiaries will grant or issue any options, warrants, calls, puts, or other
rights of any kind relating to the purchase, redemption, or conversion of shares
of its capital stock or any other securities (including securities convertible
into capital stock) or enter into any agreement or understanding with respect to
any such action, other than the Stock Option Agreement.
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D. DIVIDENDS. Neither Home nor any Home Subsidiary will
declare or pay any dividends or make any other distributions on or in respect of
any shares of its capital stock or otherwise to its shareholders; provided,
however, Home may declare a semi-annual dividend prior to March 31, 1999, in
accordance with its customary prior practices, in an amount not to exceed $.20
prorated for that portion of the six-month period commencing on October 1, 1998
which will have elapsed on the date that the parties agree, as of the time such
dividend is declared, will be the Closing Date. By way of example, if Home
declares a dividend in January of 1999, and the parties agree that the Closing
date will be February 1, 1999, the amount of the dividend that Home may declare
in January of 1999 would be $.20 multiplied by 4/6, or $.133 per share. Should
the Closing take place after April 1, 1999 and before September 30, 1999, Home
shall be entitled to declare and pay a dividend in an amount not to exceed $.20
per share prorated for that portion of the six-month period commencing April 1,
1999 which will have elapsed on the date that the parties agree, as of the time
such dividend is declared, will be the Closing Date.
E. EMPLOYMENT, BENEFIT, OR RETIREMENT AGREEMENTS OR PLANS.
Except as required by law, neither Home nor any Home Subsidiary will (i) enter
into or become bound by any contract, agreement, or commitment for the
employment or compensation of any officer, employee, or consultant which is not
immediately terminable by Home or such Subsidiary without cost or other
liability on no more than thirty (30) days notice; (ii) adopt, enter into, or
become bound by any new or additional profit-sharing, bonus, incentive, change
in control, or "golden parachute," stock option, stock purchase, pension,
retirement, insurance (hospitalization, life, or other), or similar contract,
agreement, commitment, understanding, plan, or arrangement (whether formal or
informal) with respect to or which provides for benefits for any of its current
or former directors, officers, employees, or consultants; or (iii) enter into or
become bound by any contract with or commitment to any labor or trade union or
association or any collective bargaining group.
F. INCREASE IN COMPENSATION; ADDITIONAL COMPENSATION. Except
as otherwise provided herein or with the prior written consent of Capital and
CBC, neither Home nor any Home Subsidiary will increase the compensation or
benefits of, or pay any bonus or other special or additional compensation to,
any of Home's or any of any Home Subsidiary's directors, officers, employees, or
consultants. Notwithstanding anything contained herein to the contrary, this
Paragraph 4.02.F. shall not prohibit annual merit increases in the salaries of
Home's employees or other payments, including Home's usual and customary annual
"Christmas" bonus (in an amount not to exceed 5% of any employee's base salary),
for any employee or director made in the ordinary course of business, consistent
with Home's past practices, in connection with existing compensation or benefit
plans, so long as such increases or payments, including bonuses, are effected at
such times and in such manner and amounts, and so long as Home provides Capital
and CBC with reasonable advance notice of any such increase or payment.
G. ACCOUNTING PRACTICES. Neither Home nor any Home Subsidiary
will make any changes in its accounting methods, practices, or procedures or in
depreciation or
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amortization policies, schedules, or rates heretofore applied (except as
required by GAAP or governmental regulations).
H. ACQUISITIONS; ADDITIONAL BRANCH OFFICES. Neither Home nor
any Home Subsidiary will directly or indirectly (i) acquire or merge with, or
acquire any branch or all or any significant part of the assets of, any other
person or entity, (ii) open any new branch office, or (iii) enter into or become
bound by any contract, agreement, commitment or letter of intent relating to, or
otherwise take or agree to take any action in furtherance of, any such
transaction or the opening of a new branch office.
I. CHANGES IN BUSINESS PRACTICES. Except as may be required by
the FDIC, the Administrator, or any other governmental or other regulatory
agency or as shall be required by applicable law, regulation, or this Agreement,
neither Home nor any Home Subsidiary will (i) change in any material respect the
nature of its business or the manner in which it conducts its business, (ii)
discontinue any material portion or line of its business, or (iii) change in any
material respect its lending, investment, asset-liability management, or other
material banking or business policies (except to the extent required by
Paragraph 4.01.C. above).
J. NO SOLICITATION. (i) Prior to the Effective Time, neither
Home nor any Home Subsidiary, nor any of their respective affiliate entities,
directors, officers, employees, agents, or representatives, shall, directly or
indirectly, (1) encourage, solicit or initiate (including by way of furnishing
or disclosing non-public information) any inquiries or the making of any
proposal with respect to any merger, consolidation, or other business
combination involving Home or any Home Subsidiary or the acquisition of all or
any significant part of the assets or capital stock of Home or any Home
Subsidiary (including, without limitation, any branch office) (an "Acquisition
Transaction") or (2) negotiate, explore, or otherwise engage in discussions with
any person (other than Capital, CBC and their representatives) with respect to
any Acquisition Transaction, or which may reasonably be expected to lead to a
proposal for an Acquisition Transaction or enter into any agreement,
arrangement, or understanding with respect to any such Acquisition Transaction
or which would require it to abandon, terminate, or fail to consummate the
Exchange or any other transaction contemplated by this Agreement.
(ii) Except as may be reasonably necessary to comply
with the legal duties of Home's Board of Directors under applicable law,
including, without limitation, the NCBCA (based on the advice of outside
counsel), Home agrees that, as of the date hereof, it, each Home Subsidiary and
any affiliate entities, and the respective directors, officer, employees,
agents, and representatives of the foregoing, shall immediately cease and cause
to be terminated any existing activities, discussions, and negotiations with any
person (other than Capital, CBC and their representatives) conducted heretofore
with respect to any Acquisition Transaction. Home agrees to promptly advise
Capital and CBC of any inquiries or proposals received by, any such information
requested from, and any requests for negotiations or discussions sought to be
initiated or continued with, Home, any Home Subsidiary, or any affiliate
entities, or any of the respective directors, officers, employees, agents, or
representatives of the foregoing, in each case from a person (other than
Capital, CBC or their representatives) with respect to an Acquisition
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Transaction. In addition, Home shall promptly advise Capital and CBC of the
substance and content of any such inquiry, proposal, information request,
negotiations, or discussions.
(iii) Nothing contained in this Paragraph 4.02.J.
shall prohibit Home from (1) filing with the FDIC a report on Form 8-K with
respect to this Agreement (2) taking and disclosing to its shareholders a
position contemplated by Rule 14d-9 or 14e-2 promulgated under the Securities
Exchange Act of 1934 (if applicable), or (3) making any disclosure to its
shareholders if, in the good faith judgment of the Board of Directors of Home,
upon the advice of outside counsel, failure to so disclose would be inconsistent
with any applicable law, including, without limitation, the NCBCA, or any duty
of the Board of Directors.
K. ACQUISITION OR DISPOSITION OF ASSETS. Unless required to do
so by any regulatory authority having jurisdiction over Home (in which event,
Home shall provide CBC and Capital with prompt written notice of such
requirement), neither Home nor any Home Subsidiary will, without the prior
written consent of Capital and CBC:
(i) sell or lease (as lessor), or enter into or
become bound by any contract, agreement, option, or commitment relating to the
sale, lease (as lessor), or other disposition of any real estate; or sell or
lease (as lessor), or enter into or become bound by any contract, agreement,
option, or commitment relating to the sale, lease (as lessor), or other
disposition of any equipment or any other fixed or capital asset having a value
on Home's or such Subsidiary's books or a fair market value, whichever is
greater, of more than $10,000 in the aggregate for all such items or assets;
(ii) purchase or lease (as lessee), or enter into or
become bound by any contract, agreement, option, or commitment relating to the
purchase, lease (as lessee), or other acquisition of any real property; or
purchase or lease (as lessee), or enter into or become bound by any contract,
agreement, option, or commitment relating to the purchase, lease (as lessee), or
other acquisition of any equipment or any other fixed assets having a purchase
price, or involving aggregate lease payments, in excess of $10,000 in the
aggregate for all such items or assets;
(iii) enter into any purchase commitment for supplies
or services which calls for prices of goods or fees for services materially
higher than current market prices or fees or which obligates Home or any Home
Subsidiary for a period longer than six (6) months;
(iv) other than in the ordinary course of business
and at a level consistent with past practice, sell, purchase, or repurchase, or
enter into or become bound by any contract, agreement, option, or commitment to
sell, purchase, or repurchase, any loan or other receivable or any participation
in any loan or other receivable; or
(v) other than in the ordinary course of business and
at a level consistent with past practice, sell or dispose of, or enter into or
become bound by any contract, agreement, option, or commitment relating to the
sale or other disposition of, any other asset of Home or any Home Subsidiary
(whether tangible or intangible, and including, without limitation, any trade
name, copyright, service mark, or intellectual property right or license); or
assign its
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right to or otherwise give any other person its permission or consent to use or
do business under Home's or any Home Subsidiary's corporate name or any name
similar thereto; or release, transfer, or waive any license or right granted to
it by any other person to use any trademark, trade name, copyright, or
intellectual property right.
L. DEBT; LIABILITIES. Except in the ordinary course of its
business consistent with its past practices, including routine borrowings from
the Federal Home Loan Bank of Atlanta and other corresponding Banks, neither
Home nor any Home Subsidiary will (i) enter into or become bound by any
promissory note, loan agreement, or other agreement or arrangement pertaining to
its borrowing of money, (ii) assume, guarantee, endorse, or otherwise become
responsible or liable for any obligation of any other person or entity, or (iii)
incur any other liability or obligation (absolute or contingent).
M. LIENS; ENCUMBRANCES. Neither Home nor any Home Subsidiary
will mortgage, pledge, or subject any of its assets to, or permit any of its
assets to become or (except as Previously Disclosed) remain subject to, any lien
or any other encumbrance (other than in the ordinary course of business
consistent with its past practices in connection with securing of public funds
deposits, securities repurchase agreements, or other similar operating matters).
N. WAIVER OF RIGHTS. Neither Home nor any Home Subsidiary will
waive, release, or compromise any material rights in its favor (except in the
ordinary course of business) except in good faith for fair value in money or
money's worth, nor waive, release, or compromise any rights against or with
respect to any of its officers, directors, or shareholders or members of
families of officers, directors, or shareholders.
O. OTHER CONTRACTS. Neither Home nor any Home Subsidiary will
enter into or become bound by any contracts, agreements, commitments, or
understandings (i) for or with respect to any charitable contributions greater
than $5,000 in the aggregate; (ii) with any governmental or regulatory agency or
authority (except as may be reasonably required by applicable law or
regulation); (iii) pursuant to which Home or such Subsidiary would assume,
guarantee, endorse, or otherwise become liable for the debt, liability, or
obligation of any other person (except in the ordinary course of business
consistent with past practices); (iv) which is entered into other than in the
ordinary course of its business; and (v) which, in the case of any one contract,
agreement, commitment, or understanding and whether or not in the ordinary
course of its business, would obligate or commit Home or such Subsidiary to make
expenditures of more than $5,000.
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ARTICLE V
COVENANTS OF CAPITAL AND CBC
Capital and CBC hereby covenant and agree as follows with Home:
5.01 NOTICE OF CERTAIN CHANGES OR EVENTS. Following the execution of
this Agreement and up to the Effective Time, Capital or CBC promptly will notify
Home in writing of and provide to it such information as it shall reasonably
request regarding (i) any Material Adverse Change (other than changes relating
to or resulting from changes affecting the banking industry generally, but
excluding movements in interest rates in the economy) in Capital's financial
condition, results of operations, prospects, business, assets, loan portfolio,
investments, properties or operations, or of the actual or prospective
occurrence of any condition or event which, with the lapse of time or otherwise,
is reasonably likely to cause, create or result in any such Material Adverse
Change, or (ii) the actual or prospective existence or occurrence of any
condition or event which, with the lapse of time or otherwise, has caused or may
or could cause any statement, representation or warranty of Capital or CBC
herein, or any information that has been Previously Disclosed by Capital or CBC
to Home, to be or become materially inaccurate, misleading or incomplete, or
which has resulted or may or could cause, create or result in the material
breach or violation of any of Capital's or CBC's covenants or agreements
contained herein or in the failure of any of the conditions described in
Paragraphs 7.01 or 7.02 below.
5.02 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
A. Following the Effective Time and for a period of five years
thereafter, CBC shall indemnify, defend and hold harmless the present directors
and officers of Home and its Subsidiaries (each, an "Indemnified Party") against
all costs or expenses (including reasonable attorneys' fees), judgments, amounts
paid in settlement, fines, losses, claims, damages or liabilities (collectively,
"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this Agreement)
to the fullest extent that CBC is permitted to indemnify (and advance expenses
to) its directors and officers under the NCBCA, the CBC Articles of
Incorporation, and the CBC Bylaws as in effect on the date hereof, including
provisions relating to the advancement of expenses incurred in the defense of
any investigation, suit or proceeding; provided, any determination required to
be made with respect to whether an officer's or director's conduct complies with
the standards set forth under the NCBCA, the CBC Articles of Incorporation and
the CBC Bylaws shall be made by independent counsel selected by CBC and Home;
and provided, further, in no circumstance, shall CBC be required to indemnify
any Indemnified Party for intentional misconduct or fraud.
B. Prior to the Effective Time, Home may obtain a three year
director's and officer's tail liability insurance policy, in a coverage amount
equal to the director's and officer's insurance policy that Home currently has
in place, for the benefit of the present officers and directors of Home or any
of its Subsidiaries.
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C. Any Indemnified Party wishing to claim indemnification
under Paragraph 5.02.A., upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify CBC thereof in accordance
with Paragraph 9.04; provided that the failure so to notify shall not affect the
obligations of CBC under Section 5.02.A. unless and to the extent that CBC is
actually prejudiced as a result of such failure.
D. If, after the Effective Time, CBC or any of its successors
or assigns shall consolidate with or merge into any other entity and shall not
be the continuing or surviving entity of such consolidation or merger or shall
transfer all or substantially all of its assets to any other entity, then and in
each case, proper provision shall be made so that the successors and assigns of
CBC shall assume the obligations set forth in this Paragraph 5.02.
5.03. FURTHER ACTION. Capital and CBC covenant and agree with Home that
they (i) will use their reasonable best efforts in good faith to take or cause
to be taken all action reasonably required of them hereunder as promptly as
practicable so as to permit the consummation of the transactions described
herein at the earliest possible date, (ii) shall perform all acts and execute
and deliver to Home all documents or instruments reasonably required herein or
as otherwise shall be reasonably necessary or useful to or reasonably requested
by it in consummating such transactions, and, (iii) will cooperate with Home in
every reasonable way in carrying out, and will pursue diligently the expeditious
completion of, such transactions.
5.04 BOARD OF DIRECTORS. Subject to any necessary regulatory and
shareholder approval, as soon as practicable following the Effective Time (or,
in CBC's sole discretion, prior to the Effective Time), CBC shall take such
steps as appropriate to appoint Edwin E. Bridges and John Grimes, or cause them
to be elected, as members of CBC's Board of Directors, and, for such service,
Messrs. Bridges and Grimes shall be compensated in accordance with CBC's
standard arrangements for the compensation of its directors; provided, however,
no such compensation shall be paid for services as a director to any director
who is at such time being compensated for services as an employee of CBC,
Capital or Home.
5.05 ADVISORY BOARD OF DIRECTORS. After the Effective Time, the current
members of Home's Board of Directors shall serve as members of Capital's (or
Home's, as the case may be) local advisory board for a minimum of five (5)
years, subject to satisfactory performance, and for such service, such
individuals shall be compensated in accordance with Capital's standard
arrangements for the compensation of local advisory board members.
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ARTICLE VI
MUTUAL AGREEMENTS
6.01 SHAREHOLDER APPROVALS; REGISTRATION STATEMENT; PROXY
STATEMENT/PROSPECTUS; LISTING APPLICATION.
A. MEETINGS OF SHAREHOLDERS. Home shall cause a meeting of its
shareholders (the "Home Shareholder Meeting") to be held for the purpose of
Home's shareholders voting on the approval of this Agreement and the
transactions contemplated hereby. Capital shall cause a special meeting of its
shareholders (the "Capital Shareholder Meeting") to be held for the purposes of
voting on the Reorganization (as defined in Paragraph 7.03.J.). In connection
with the call and conduct of and all other matters relating to the Home
Shareholder Meeting and the Capital Shareholder Meeting (including the
solicitation of proxies), Home and Capital shall fully comply with all
provisions of applicable law and regulations and with their respective Articles
of Incorporation and Bylaws.
B. REGISTRATION STATEMENT. As soon as practicable following
the execution of this Agreement, Capital, CBC and Home shall in consultation
with each other prepare, and CBC shall file with the SEC, a registration
statement on Form S-4 (or on such other form as Capital and CBC shall determine
to be appropriate) (the "Registration Statement") covering (i) the CBC Stock to
be issued to shareholders of Home pursuant to this Agreement, and (ii) the CBC
Stock to be exchanged in the Reorganization, and will use their respective
reasonable best efforts in good faith to see that the Registration Statement is
declared effective by the SEC under the 1933 Act. Additionally, Capital, CBC and
Home shall in consultation with each other take all such other actions, if any,
as shall be required by applicable state securities or "blue sky" laws (i) to
cause the CBC Stock to be issued upon consummation of the Exchange, at the time
of the issuance thereof, to be duly qualified or registered (unless exempt)
under such laws, (ii) to cause all conditions to any exemptions from
qualification or registration under such laws to have been satisfied, and (iii)
to obtain any and all required approvals or consents to the issuance of such
stock.
C. PREPARATION AND DISTRIBUTION OF PROXY STATEMENT/PROSPECTUS.
Capital and Home jointly will prepare a "Proxy Statement/Prospectus" for
distribution to Home's shareholders as the proxy statement relating to its
solicitation of proxies for use at the Home Shareholder Meeting and as CBC's
prospectus relating to the offer and distribution of CBC Stock as described
herein. The Proxy Statement/Prospectus shall be in such form and shall contain
or be accompanied by such information regarding the Home Shareholder Meeting and
this Agreement, the parties hereto, and the transactions described or
contemplated herein as is required by applicable law and regulations and
otherwise as shall be agreed upon by Home and Capital. CBC shall include the
Proxy Statement/Prospectus as the prospectus in the Registration Statement.
Capital and Home shall cause the Proxy Statement/Prospectus to be filed with the
FDIC and, to the extent required or deemed advisable or appropriate by Capital's
counsel, the SEC for review; and each party hereto will cooperate with the
others in good faith and will use its respective reasonable best efforts in good
faith to respond to any comments of the FDIC or the SEC thereon.
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Home will mail the Proxy Statement/Prospectus to its
shareholders as soon as practicable following the date on which it is cleared by
the SEC and the Registration Statement is declared effective.
D. RECOMMENDATION OF HOME'S BOARD OF DIRECTORS. Unless, due to
a material change in circumstances or for any other reason Home's Board of
Directors reasonably believes, based on a written opinion of outside counsel,
that such a recommendation would violate the directors' duties or obligations as
such to Home or to its shareholders under applicable law, including, without
limitation, the NCBCA, Home's Board of Directors will recommend to and actively
encourage Home's shareholders that they vote their shares of Home Stock at the
Home Shareholder Meeting to approve and adopt this Agreement and the Exchange,
and the Proxy Statement/Prospectus mailed to Home's shareholders will so
indicate and state that Home's Board of Directors considers the Exchange to be
advisable and in the best interests of Home and its shareholders.
E. INFORMATION FOR PROXY STATEMENT/PROSPECTUS AND REGISTRATION
STATEMENT. CBC, Capital and Home each agrees to respond promptly, and to use its
reasonable best efforts to cause its directors, officers, counsel, accountants,
and affiliates to respond promptly to requests by any other party or its counsel
for information for inclusion in the various applications for regulatory
approvals and in the Proxy Statement/Prospectus and the Registration Statement.
CBC, Capital and Home each hereby covenant that none of the information provided
by it for inclusion in the Proxy Statement/Prospectus will, at the time of its
mailing, contain any untrue statement of a material fact or omit any material
fact required to be stated therein or necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
false or misleading; and, at all times following such mailing up to and
including the Effective Time, none of such information contained in the Proxy
Statement/Prospectus, as it may be amended or supplemented, will contain an
untrue statement of a material fact or omit any material fact required to be
stated therein or necessary in order to make the statements contained therein,
in light of the circumstances under which they were made, not false or
misleading.
In addition, Home shall cooperate with Capital and CBC, and
shall provide such information as Capital or CBC may reasonably request, in
connection with the preparation of Capital's proxy statement relating to the
Reorganization (as defined in Paragraph 7.03.J.), and the provisions of the
immediately preceding paragraph shall apply with respect to such information
provided by Home.
F. LISTING APPLICATION. Capital and CBC shall use their
reasonable best efforts to cause the shares of CBC Stock to be issued pursuant
to this Agreement in the Exchange to be listed for trading on the Nasdaq
SmallCap Market or on any securities exchange on which shares of CBC Stock shall
be listed at the Effective Time.
6.02 REGULATORY APPROVALS. Promptly following the date of this
Agreement, CBC, Capital and Home each shall use their respective reasonable best
efforts in good faith to (i)
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prepare and file, or cause to be prepared and filed, all applications for
regulatory approvals and actions as may be required of them, respectively, by
applicable law and regulations with respect to the transactions described herein
(including applications to the FDIC, the Commissioner, the Administrator, the
North Carolina State Banking Commission, the Board of Governors of the Federal
Reserve ("Federal Reserve"), and to any other applicable federal or state
banking, securities, or other regulatory authority as may be required), and (ii)
obtain all necessary regulatory approvals required for consummation of the
transactions described herein. The parties shall cooperate in the preparation of
all applications to regulatory authorities and, upon request, promptly shall
furnish all documents, information, financial statements, or other material that
may be required by the other party to complete any such application; and, before
the filing thereof, each party to this Agreement (and its counsel) shall have
the right to review and comment on the form and content of any such application
to be filed by the other party. Should the appearance of any of the officers,
directors, employees, or counsel of any of the parties hereto be requested by
any other party or by any governmental agency at any hearing in connection with
any such application, such party shall promptly use its best efforts to arrange
for such appearance.
6.03 ACCESS. Following the date of this Agreement and to and including
the Effective Time, Home shall provide, and shall cause each of its Subsidiaries
to provide, Capital, CBC and their employees, accountants, and counsel, access
to all their respective books, records, files, and other information (whether
maintained electronically or otherwise), to all their respective properties and
facilities, and to all their respective employees, accountants, counsel, and
consultants, for purposes of the conduct of such reasonable investigation and
review as Capital, CBC and their employees, accountants, and counsel shall, in
their sole discretion, consider to be necessary or appropriate; provided,
however, that any such review conducted by CBC shall be performed in such a
manner as will not interfere unreasonably with Home's normal operations, or with
Home's relationship with its customers or employees, and shall be conducted in
accordance with procedures established by the parties having due regard for the
foregoing.
6.04 COSTS. Whether or not this Agreement shall be terminated or the
Exchange shall be consummated, Home, CBC and Capital each shall pay its own
legal, accounting, and financial advisory fees and all its other costs and
expenses incurred or to be incurred in connection with the execution and
performance of its obligations under this Agreement or otherwise in connection
with this Agreement and the transactions described herein (including, without
limitation, all accounting fees, legal fees, filing fees, printing costs, travel
expenses, and, in the case of Home, all fees owed to Baxter Fentriss and Company
for the cost of Home's fairness opinion described in Paragraph 7.01.E. below,
and, in the case of Capital, all fees owed to Interstate Johnson Lane for the
cost of Capital's and/or CBC's fairness opinion described in Paragraph 7.01.E.
below). All costs incurred in connection with the printing and mailing of the
Proxy Statement/Prospectus shall be deemed to be incurred and shall be paid
fifty percent (50%) by Home and fifty percent (50%) by Capital.
6.05 ANNOUNCEMENTS. Home, CBC and Capital each agrees that no person
other than the parties to this Agreement is authorized to make any public
announcement or statement about this Agreement or any of the transactions
described herein, and that, without the prior
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review and consent of the other (which consent shall not unreasonably be denied
or delayed), no party hereto (or any affiliates of such parties) may make any
public announcement, statement, or disclosure as to the terms and conditions of
this Agreement or the transactions described herein, except for such disclosures
as may be required incidental to obtaining the prior approval of any regulatory
agency or official, or the consent of any lessor or landlord of Home or any Home
Subsidiary to the consummation of the transactions described herein. However,
notwithstanding anything contained herein to the contrary, prior review and
consent shall not be required if in the good faith opinion of counsel to
Capital, CBC or Home, such disclosure by such entity is required by law or
otherwise is prudent. Capital, CBC and Home agree that they shall make a joint
public announcement of this Agreement and the transactions described herein
after execution of this Agreement. The timing and content of such announcement
shall be approved by Capital, CBC and Home prior to such announcement.
6.06 ENVIRONMENTAL STUDIES.
A. ENVIRONMENTAL SURVEYS At their option and expense Capital
and CBC may cause to be conducted Phase I environmental assessments of the Real
Property, the real estate subject to any Real Property Lease, or the Loan
Collateral, or any portion thereof, together with such other studies, testing,
and intrusive sampling and analyses as Capital or CBC shall deem necessary or
desirable, and at its option and expense Home may cause to be conducted Phase I
environmental assessments of Capital's real property or real property that
Capital has leased (collectively, "Capital Property"), together with such other
studies, testing, and intrusive sampling and analyses as Home shall deem
necessary or desirable (collectively, the "Environmental Survey"). All such
Phase I environmental assessments shall be completed within sixty (60) days
following the date of this Agreement and thereafter the parties shall conduct
and complete any such additional studies, testing, sampling, and analyses within
sixty (60) days following completion of all Phase I environmental assessments.
B. RESULTS OF ENVIRONMENTAL SURVEYS CONDUCTED BY CAPITAL OR
CBC. If (i) the final results of any Environmental Survey (or any related
analytical data) conducted by Capital or CBC reflect that there likely has been
any discharge, disposal, release, or emission by any person of any Hazardous
Substance on, from, or relating to any of the Real Property, real estate subject
to a Real Property Lease, or Loan Collateral at any time prior to the Effective
Time, or that any action has been taken or not taken, or a condition or event
likely has occurred or exists, with respect to any of the Real Property, real
estate subject to a Real Property Lease, or Loan Collateral which constitutes or
would or may constitute a violation of any Environmental Laws, and if, (ii)
based on the advice of its legal counsel or other consultants, Capital or CBC
believes that Home or any Home Subsidiary is reasonably likely to become
responsible for the remediation of such discharge, disposal, release or emission
or for other corrective action with respect to any such violation, or that Home
or any Home Subsidiary is reasonably likely to become liable for monetary
damages (including, without limitation, any civil or criminal penalties or
assessments) resulting therefrom (or that, in the case of any of the Loan
Collateral, Home or any Home Subsidiary is reasonably likely to incur any such
liability if it acquired title to such Loan Collateral), and if, (iii) based on
the advice of its legal counsel or other consultants, Capital or CBC believes
the amount of expenses or liability which Home or
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any Home Subsidiary is reasonably likely to incur or for which Home or any Home
Subsidiary could become responsible or liable on account of any and all such
remediation, corrective action or monetary damages at any time or over any
period of time could equal or exceed an aggregate of $50,000, then Capital or
CBC shall give Home written notice thereof (together with all information in its
possession relating thereto) within fifteen (15) days of the completion of the
Environmental Survey and, at Capital's or CBC's option and discretion, at any
time thereafter and up to the Effective Time, Capital or CBC may terminate this
Agreement without further obligation or liability to Home.
C. RESULTS OF ENVIRONMENTAL SURVEYS CONDUCTED BY HOME. If (i)
the final results of any Environmental Survey (or any related analytical data)
conducted by Home reflect that there likely has been any discharge, disposal,
release, or emission by any person of any Hazardous Substance on, from, or
relating to any of the Capital Property at any time prior to the Effective Time,
or that any action has been taken or not taken, or a condition or event likely
has occurred or exists, with respect to any of the Capital Property which
constitutes or would or may constitute a violation of any Environmental Laws,
and if, (ii) based on the advice of its legal counsel or other consultants, Home
believes that Capital or CBC is reasonably likely to become responsible for the
remediation of such discharge, disposal, release or emission or for other
corrective action with respect to any such violation, or that Capital or CBC is
reasonably likely to become liable for monetary damages (including, without
limitation, any civil or criminal penalties or assessments) resulting therefrom,
and if, (iii) based on the advice of its legal counsel or other consultants,
Home believes the amount of expenses or liability which Capital or CBC is
reasonably likely to incur or for which Capital or CBC could become responsible
or liable on account of any and all such remediation, corrective action or
monetary damages at any time or over any period of time could equal or exceed an
aggregate of $50,000, then Home shall give Capital and CBC written notice
thereof (together with all information in its possession relating thereto)
within fifteen (15) days of the completion of the Environmental Survey and, at
Home's option and discretion, at any time thereafter and up to the Effective
Time, Home may terminate this Agreement without further obligation or liability
to Capital or CBC.
6.07 EMPLOYEES; SEVERANCE PAYMENTS; EMPLOYEE BENEFITS.
A. EMPLOYMENT AGREEMENT. Home shall enter into an amended and
restated employment agreement with Edwin E. Bridges as of the Effective Time
which shall contain substantially the same terms and conditions and be in
substantially the same form as is attached as Exhibit B to this Agreement.
B. EMPLOYMENT OF OTHER HOME EMPLOYEES. Provided they remain
employed by Home at the Effective Time, Capital will in good faith use its best
efforts to locate suitable positions for and offer employment to all other
employees of Home ("Home Employees") at an office of Capital or Home located
within a reasonable commuting distance from their respective job locations at
the Effective Time. The employment so offered by Capital shall be at such
compensation as that of the Home Employee at the Effective Time. Notwithstanding
the foregoing, or anything else in this Agreement, Capital shall have no
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obligation with respect to any specific Home Employee, except as set forth in
subparagraphs C and E below. Each such Home Employee's employment shall be on an
"at-will" basis, and nothing in this Agreement shall be deemed to constitute an
employment agreement with any such person or to obligate Capital to employ any
such person for any specific period of time or in any specific position or to
restrict Capital's right to terminate the employment of any such person at any
time and for any reason satisfactory to Capital.
C. SEVERANCE PAYMENT. In the event Capital terminates any
employee of Home other than Edwin E. Bridges within one year of the Effective
Time for any reason other than cause ("cause" to be determined in Capital's
absolute discretion), Capital shall pay to such employee severance pay in an
amount equal to such employee's regular salary for one week, with a minimum of
three weeks, per year of such employee's employment with Home.
D. EMPLOYEE BENEFITS. Except as otherwise provided herein, all
Home Employees shall be entitled to receive all employee benefits and to
participate in all benefit plans provided by CBC and Capital on the same basis
(including costs) and subject to the same eligibility and vesting requirements,
and to the same conditions, restrictions and limitations, as generally are in
effect and applicable to other newly hired employees of CBC and Capital.
However, each Home Employee shall be given credit for his or her full years of
service with Home for purposes of entitlement to vacation and sick leave and for
purposes of eligibility and vesting (but not for benefit accrual purposes) under
any CBC and Capital benefit plans. There shall be no exclusion from coverage
under the CBC and Capital health insurance plan as a result of pre-existing
conditions to the extent such conditions were covered under any health insurance
plan maintained by Home prior to the Effective Time.
E. EMPLOYEE STOCK OWNERSHIP PLAN. Home acknowledges that CBC
intends to assume the Home Employee Stock Ownership Plan ("Home ESOP"), and,
thereafter, to terminate the Home ESOP at the earliest practicable time
permitted by applicable legal and accounting authority (including without
limitation the applicable requirements for the transactions contemplated by this
Agreement to be treated as a "pooling of interests" for accounting purposes),
all at CBC's discretion. CBC intends to continue to make ESOP loan payments
substantially consistent with Home's past practices, and CBC will not terminate
the ESOP until all loan balances due under the ESOP have been paid in full. Home
covenants and agrees with CBC and Capital to take any actions reasonably
requested by CBC or Capital to facilitate such assumption, including without
limitation, obtaining consents and approval, providing notices, and making any
filings as may be necessary or desirable.
F. PENSION PLAN. Prior to December 31, 1998, or the Effective
Time if the Effective Time is prior to December 31, 1998, (i) Home shall fund
any deficits existing in the Home defined benefit pension plan ("Pension Plan"),
and (ii) Home's Board of Directors shall adopt a resolution to terminate the
Pension Plan, effective before the Effective Time or as soon after the Effective
Time as possible, in accordance with the terms of the Pension Plan and the
requirements of ERISA and the Code.
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G. STOCK PLANS. CBC and Capital acknowledge that the Exchange
will constitute a change in control for purposes of Home's Management
Recognition Plan and Stock Option Plan and that all outstanding awards
thereunder, totaling 26,347 shares of Home Stock and 49,295 stock options will
be fully vested as a result of the Exchange.
6.08 CONFIDENTIALITY. Capital, CBC and Home each agrees that it will
treat as confidential and not disclose to any unauthorized person any documents
or other information obtained from or learned about the others during the course
of the negotiation of this Agreement and the carrying out of the events and
transactions described herein (including any information obtained during the
course of any due diligence investigation or review provided for herein or
otherwise) and which documents or other information relates in any way to the
business, operations, personnel, customers, or financial condition of such other
parties; and that it will not use any such documents or other information for
any purpose except for the purposes for which such documents and information
were provided to it and in furtherance of the transactions described herein.
However, the above obligations of confidentiality shall not prohibit the
disclosure of any such document or information by any party to this Agreement to
the extent (i) such document or information is then available generally to the
public or is already known to the person or entity to whom disclosure is
proposed to be made (other than through the previous actions of such party in
violation of this Paragraph 6.08), (ii) such document or information was
available to the disclosing party on a nonconfidential basis prior to the same
being obtained pursuant to this Agreement, (iii) disclosure is required by
subpoena or order of a court or regulatory authority of competent jurisdiction,
or by the SEC, FDIC or other regulatory authorities in connection with the
transactions described herein, or (iv) to the extent that, in the reasonable
opinion of legal counsel to such party, disclosure otherwise is required by law.
Capital, CBC and Home shall cause their respective Subsidiaries and affiliates,
and all of their respective officers, directors, employees and agents to comply
with the provisions of this Paragraph 6.08.
In the event this Agreement is terminated for any reason, each of the
parties hereto immediately shall return to the other parties all copies of any
and all documents or other written materials or information of or relating to
such other parties which were obtained from them or their Subsidiaries or
affiliates during the course of the negotiation of this Agreement and the
carrying out of the events and transactions described herein (whether during the
course of any due diligence investigation or review provided for herein or
otherwise) and which documents or other information relates in any way to the
business, operations, personnel, customers, or financial condition of such other
parties.
The parties' obligations of confidentiality under this Paragraph 6.08
shall survive and remain in effect following any termination of this Agreement.
6.09 REORGANIZATION FOR TAX PURPOSES. Capital, CBC and Home each
undertakes and agrees to use its reasonable best efforts to cause the Exchange
to qualify as a "reorganization" within the meaning of Section 368(a)(1)(B) of
the Code, and that it will not intentionally take any action that would cause
the Exchange to fail to so qualify.
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6.10 ACCOUNTING TREATMENT. Capital, CBC and Home each undertakes and
agrees to use its reasonable best efforts to cause the Exchange to qualify to be
treated as a "pooling-of-interests" for accounting purposes and that it will not
intentionally take any action that would cause the Exchange to fail to so
qualify.
6.11 OTHER PERMISSIBLE TRANSACTIONS. Home agrees that CBC and/or
Capital may offer to acquire, enter into agreements to acquire and acquire
financial institution holding companies and their subsidiaries, financial
institutions or financial services entities and their subsidiaries, leasing
companies and other entities which are permissible for financial institutions to
own, and/or the assets and liabilities of such entities prior to the Effective
Time.
ARTICLE VII
CONDITIONS PRECEDENT TO EXCHANGE
7.01 CONDITIONS TO ALL PARTIES' OBLIGATIONS. Notwithstanding any other
provision of this Agreement to the contrary, the obligations of each of the
parties to this Agreement to consummate the transactions described herein shall
be conditioned upon the satisfaction of each of the following conditions
precedent on or prior to the Closing Date:
A. APPROVAL BY GOVERNMENTAL OR REGULATORY AUTHORITIES; NO
DISADVANTAGEOUS CONDITIONS. (i) The Exchange and the other transactions
described herein (not including the Reorganization) shall have been approved, to
the extent required by law, by the FDIC, the Commissioner and the North Carolina
State Banking Commission, the Administrator, the Federal Reserve, and by all
other governmental or regulatory agencies or authorities having jurisdiction
over such transaction, (ii) no governmental or regulatory agency or authority
shall have withdrawn its approval of such transactions or imposed any condition
on such transactions or conditioned its approval thereof, which condition is
reasonably deemed by Capital, CBC or Home to be materially disadvantageous or
burdensome or to impact so adversely the economic or business benefits of this
Agreement as to render it inadvisable for such party to consummate the
transactions contemplated herein; (iii) all waiting periods required following
necessary approvals by governmental or regulatory agencies or authorities shall
have expired, and, in the case of any waiting period imposed by law or
regulation following approval by the Federal Reserve, the FDIC, or other
governmental or regulatory authority, no unwithdrawn objection to the
transactions contemplated herein shall have been raised by the U.S. Department
of Justice; and (iv) all other consents, approvals, and permissions, and the
satisfaction of all of the requirements prescribed by law or regulation,
necessary to the carrying out of the transactions contemplated herein shall have
been procured.
B. EFFECTIVENESS OF REGISTRATION STATEMENT; COMPLIANCE WITH
SECURITIES AND OTHER "BLUE SKY" REQUIREMENTS. The Registration Statement shall
be effective under the 1933 Act and no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC. CBC and Capital
shall have taken all such actions, if any, as required by applicable state
securities laws (i) to cause the CBC Stock to be issued upon
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consummation of the Exchange, at the time of the issuance thereof, to be duly
qualified or registered (unless exempt) under such laws, (ii) to cause all
conditions to any exemptions from qualification or registration under such laws
to have been satisfied, and (iii) to obtain any and all required approvals or
consents with respect to the issuance of such stock, and any such required
approvals or consents shall have been obtained and shall remain in effect.
C. ADVERSE PROCEEDINGS, INJUNCTION, ETC. There shall not be
(i) any order, decree, or injunction of any court or agency of competent
jurisdiction which enjoins or prohibits the Exchange or any of the other
transactions described herein (not including the Reorganization) or any of the
parties hereto from consummating any such transaction, (ii) any pending or
threatened investigation of the Exchange or any of such other transactions
contemplated herein (not including the Reorganization) by the U.S. Department of
Justice, or any actual or threatened litigation under federal antitrust laws
relating to the Exchange or any other such transactions, or (iii) any suit,
action, or proceeding by any person (including any governmental, administrative,
or regulatory agency), pending or threatened before any court or governmental
agency in which it is sought to restrain or prohibit Home, CBC or Capital from
consummating the transactions contemplated herein (not including the
Reorganization) or carrying out any of the terms or provisions of this
Agreement, or (iv) any other suit, claim, action, or proceeding pending or
threatened against Home, CBC or Capital or any of their officers or directors
which shall reasonably be considered by Home, CBC or Capital to be materially
burdensome in relation to the proposed transactions or materially adverse in
relation to the financial condition of such corporation, and which has not been
dismissed, terminated, or resolved to the satisfaction of all parties hereto
within ninety (90) days of the institution or threat thereof.
D. APPROVAL BY BOARD OF DIRECTORS AND SHAREHOLDERS. The Boards
of Directors of Home, Capital and CBC shall have duly approved and adopted this
Agreement by appropriate resolutions and the shareholders of Home shall have
duly approved, ratified, and confirmed this Agreement and the transactions
contemplated herein, all to the extent required by and in accordance with the
provisions of this Agreement, applicable law, and applicable provisions of their
respective Articles of Incorporation and Bylaws.
E. FAIRNESS OPINIONS. Home shall have received from Baxter
Fentriss and Company a written opinion, in form and substance satisfactory to
Home and its counsel, dated as of the date of this Agreement to Home's
shareholders, to the effect that the terms of the transactions contemplated
herein are fair, from a financial point of view, to Home and its shareholders.
Capital and/or CBC shall have received from Interstate Johnson Lane a written
opinion, in form and substance satisfactory to Capital and/or CBC and its/their
counsel, dated as of the date of this Agreement to Capital's and/or CBC's
shareholders, to the effect that the terms of the transactions contemplated
herein are fair, from a financial point of view, to Capital and/or CBC and
its/their shareholders.
F. TAX OPINION. The parties shall have received, in form and
substance satisfactory to Capital, CBC and Home, an opinion of
PricewaterhouseCoopers LLP substantially to the effect that: (i) for federal
income tax purposes, consummation of the Exchange will
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constitute a "reorganization" as defined in ss. 368(a)(1)(B) of the Code; (ii)
that no taxable gain will be recognized by a shareholder of Home upon such
shareholder's receipt of CBC Stock in exchange for his or her Home Stock; (iii)
that the basis of the CBC Stock received by the shareholder in the Exchange will
be the same as his or her Home Stock surrendered in exchange therefor; and (iv)
that, if Home Stock is a capital asset in the hands of the shareholder at the
Effective Time, then the holding period of the CBC Stock received by the
shareholder in the Exchange will include the holding period of Home Stock
surrendered in exchange therefor. In rendering its opinion,
PricewaterhouseCoopers LLP may rely on representations contained in certificates
of officers of Home, CBC and Capital.
G. LISTING OF CBC'S STOCK. CBC Stock shall have been approved
for listing on the Nasdaq SmallCap Market effective as of the Effective Time.
H. NO TERMINATION OR ABANDONMENT. This Agreement shall not
have been terminated by any party hereto.
7.02 ADDITIONAL CONDITIONS TO HOME'S OBLIGATIONS. Notwithstanding any
other provision of this Agreement to the contrary, Home's obligations to
consummate the transactions described herein shall be conditioned upon the
satisfaction of each of the following conditions precedent on or prior to the
Closing Date:
A. MATERIAL ADVERSE CHANGE. There shall not have been any
Material Adverse Change in the financial condition or results of operations of
Capital or CBC, and there shall not have occurred any event or development and
there shall not exist any condition or circumstance which, with the lapse of
time or otherwise, is reasonably likely to cause, create, or result in any such
Material Adverse Change.
B. COMPLIANCE WITH LAWS. Capital and CBC shall have complied
in all material respects with all federal and state laws and regulations
applicable to the transactions described herein and where the violation of or
failure to comply with any such law or regulation is reasonably likely to have a
Material Adverse Effect on the financial condition or results of operations of
Capital or CBC.
C. CAPITAL'S AND CBC'S REPRESENTATIONS AND WARRANTIES AND
PERFORMANCE OF AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by
Home as provided in Paragraph 9.02 below, each of the representations and
warranties of Capital and CBC contained in this Agreement shall have been true
and correct as of the date hereof and shall remain true and correct in all
material respects on and as of the Effective Time with the same force and effect
as though made on and as of such date, except (i) representations and warranties
that speak as of a specific date, (ii) for changes which are not, in the
aggregate, material and adverse to the financial condition and results of
operations of Capital or CBC, and (iii) as otherwise contemplated by this
Agreement; and Capital and CBC shall have performed in all material respects all
their respective obligations, covenants, and agreements hereunder to be
performed by them on or before the Closing Date. Home shall have received a
certificate dated
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as of the Closing Date and executed by Capital's and CBC's President and Chief
Financial Officer to the foregoing effect and as to any other matter as Home may
reasonably request.
D. LEGAL OPINION OF CAPITAL'S AND CBC'S COUNSEL. Home shall
have received from Capital's and CBC's counsel, Smith, Anderson, Blount,
Dorsett, Mitchell & Jernigan LLP, a written opinion, dated as of the Closing
Date in the form of Exhibit C attached hereto.
E. OTHER DOCUMENTS AND INFORMATION FROM CAPITAL AND CBC.
Capital and CBC shall have provided to Home correct and complete copies of their
respective Bylaws, Articles of Incorporation and board resolutions (all
certified by their respective secretaries), together with a certificate of the
incumbency of its officers and such other closing documents and information as
may be reasonably requested by Home or its counsel.
F. ACCEPTANCE BY HOME'S COUNSEL. The form and substance of all
legal matters described herein or related to the transactions contemplated
herein shall be reasonably acceptable to Home's legal counsel.
7.03 ADDITIONAL CONDITIONS TO CAPITAL'S AND CBC'S OBLIGATION.
Notwithstanding any other provision of this Agreement to the contrary, Capital's
and CBC's obligation to consummate the transactions described herein shall be
conditioned upon the satisfaction of each of the following conditions precedent
on or prior to the Closing Date:
A. MATERIAL ADVERSE CHANGE. There shall not have occurred any
Material Adverse Change in the financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties, or
operations of Home or any Home Subsidiary, and there shall not have occurred any
event or development and there shall not exist any condition or circumstance
which, with the lapse of time or otherwise, is reasonably likely to cause,
create, or result in any such Material Adverse Change.
B. COMPLIANCE WITH LAWS. Home and each Home Subsidiary shall
have complied in all material respects with all federal and state laws and
regulations applicable to the transactions described herein and where the
violation of or failure to comply with any such law or regulation is reasonably
likely to have a Material Adverse Effect on Home.
C. HOME'S REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF
AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by Capital or CBC as
provided in Paragraph 9.02 below, each of the representations and warranties of
Home contained in this Agreement shall have been true and correct in all
material respects as of the date hereof and shall remain true and correct on and
as of the Effective Time with the same force and effect as though made on and as
of such date, except (i) representations and warranties that speak as of a
specific date, (ii) for changes which do not, in the aggregate, result in a
Material Adverse Effect on the financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties, or
operations of Home or any Home Subsidiary, and (iii) as otherwise contemplated
by this Agreement; and Home shall have
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performed in all material respects all its obligations, covenants, and
agreements hereunder to be performed by it on or before the Closing Date.
Capital and CBC shall have received a certificate dated as of
the Closing Date and executed by Home's President and Chief Financial Officer to
the foregoing effect and as to such other matters as may be reasonably requested
by Capital or CBC.
D. LEGAL OPINION OF HOME'S COUNSEL. Capital and CBC shall have
received from Home's counsel, Moore & Van Allen, PLLC, a written opinion, dated
as of the Closing Date in the form of Exhibit D attached hereto.
E. OTHER DOCUMENTS AND INFORMATION FROM HOME. Home shall have
provided to Capital and CBC correct and complete copies of its Articles of
Incorporation, Bylaws, and board and shareholder resolutions (all certified by
Home's Secretary), together with certificates of the incumbency of Home's
officers and such other closing documents and information as may be reasonably
requested by Capital, CBC or their counsel.
F. CONSENTS TO ASSIGNMENT OF LEASES. Home shall have obtained
all required consents to the Exchange as may be required under the Real Property
Leases and all other leases, under the same terms, rates, and conditions of such
Real Property Leases and all other leases in effect as of the date of this
Agreement, and such consents shall be in such form and substance as shall be
satisfactory to CBC; and each of Home's and each of Home Subsidiary's lessors
shall have confirmed in writing that Home or such Subsidiary, as the case may
be, is not in material default under the terms and conditions of the Real
Property Lease or any other lease between such lessor and Home or such
Subsidiary.
G. ACCEPTANCE BY CAPITAL'S AND CBC'S COUNSEL. The form and
substance of all legal matters described herein or related to the transactions
contemplated herein shall be reasonably acceptable to Capital's and CBC's legal
counsel.
H. EXERCISE OF DISSENTERS RIGHTS. The aggregate number of
shares of Home Stock as to which cash is required to be paid as the result of
the exercise of any dissenters rights pursuant to the NCBCA, when coupled with
any other shares of Capital Stock, CBC Stock and Home Stock deemed tainted for
"pooling-of-interest" purposes, shall not exceed 10% of the total number of
shares of Home Stock outstanding at the date of this Agreement or at the
Effective Time.
I. EMPLOYMENT AND NON-COMPETE AGREEMENT. Edwin E. Bridges
("Bridges") shall enter into an amended and restated employment and non-compete
agreement with Home substantially in the form of Exhibit B attached hereto or
otherwise in form and substance satisfactory to Capital and CBC. Such amended
and restated employment and non-compete agreement shall amend, restate, replace
and supersede any prior employment agreement between Bridges and Home.
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J. CAPITAL REORGANIZATION INTO A HOLDING COMPANY STRUCTURE.
Prior to the Effective Time, Capital shall have reorganized into a holding
company structure such that Capital is a wholly-owned Subsidiary of CBC (the
"Reorganization"), and (i) the Reorganization shall have been approved, to the
extent required by law, by the FDIC, the Commissioner and the North Carolina
State Banking Commission, the Federal Reserve, and by all other governmental or
regulatory agencies or authorities having jurisdiction over such transaction,
(ii) no governmental or regulatory agency or authority shall have withdrawn its
approval of the Reorganization or imposed any condition on the Reorganization or
conditioned its approval thereof, which condition is reasonably deemed by
Capital or CBC to be materially disadvantageous or burdensome or to impact so
adversely the economic or business benefits of the Reorganization as to render
it inadvisable for Capital or CBC to consummate the Reorganization; (iii) all
waiting periods required following necessary approvals by governmental or
regulatory agencies or authorities shall have expired, and, in the case of any
waiting period imposed by law or regulation following approval by the Federal
Reserve, the FDIC, or other governmental or regulatory authority, no unwithdrawn
objection to the Reorganization shall have been raised by the U.S. Department of
Justice; and (iv) all other consents, approvals, and permissions, and the
satisfaction of all of the requirements prescribed by law or regulation,
necessary to the carrying out of the Reorganization shall have been procured.
The Reorganization shall be structured such that each share of Capital's common
stock outstanding as of the date of this Agreement shall be exchanged for or
converted into one share of CBC's common stock. Notwithstanding the foregoing,
at Capital's option, in the event the Reorganization is not consummated prior to
the Effective Time, the transactions contemplated by this Agreement may be
restructured such that Home is merged into Capital in consideration for the
distribution by Capital to Home Shareholders of 1.280 shares of Capital's common
stock for each share of Home Stock (other than any shares held by Capital or as
to which rights of dissent and appraisal are properly exercised). In the event
Capital exercises such option, the provisions of this Agreement shall be
modified to the extent necessary to effect such a restructuring.
K. ACCOUNTING TREATMENT. (i) Capital and CBC shall have
received assurances from PricewaterhouseCoopers LLP, in form and content
satisfactory to them, to the effect that the Exchange will qualify to be treated
as a "pooling-of-interests" for accounting purposes; (ii) if requested by the
Capital or CBC, Home's independent public accountants shall have delivered to
Capital and CBC a letter in form and content satisfactory to them to the effect
that such accountants are not aware of any fact or circumstance that might cause
the Exchange not to qualify for such treatment; (iii) it shall not have come to
the attention of management of Capital or CBC that any event has occurred or
that any condition or circumstance exists that makes it likely that the Exchange
may not so qualify.
L. RESIGNATIONS. Capital and CBC shall have received the
written resignation, satisfactory in form and substance to Capital and CBC, from
each director of Home, effective as of the Effective Time.
M. AFFILIATES' AGREEMENTS. Capital and CBC shall have received
an Affiliates Agreement executed by each person who is an Affiliate of Home (as
defined in
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Paragraph 2.26 above) at least five (5) days prior to the Closing in form and
content reasonably satisfactory to Capital and CBC.
ARTICLE VIII
TERMINATION; BREACH
8.01 MUTUAL TERMINATION. At any time prior to the Effective Time (and
whether before or after approval hereof by the shareholders of Capital or Home),
this Agreement may be terminated by the mutual agreement of Capital, CBC and
Home. Upon any such mutual termination, all obligations of Capital, CBC and Home
hereunder shall terminate and each party shall pay costs and expenses as
provided in Paragraph 6.04 above.
8.02 UNILATERAL TERMINATION. This Agreement may be terminated by either
Capital, CBC or Home (whether before or after approval hereof by Home's or
Capital's shareholders) upon written notice to the other parties and under the
circumstances described below.
A. TERMINATION BY CAPITAL OR CBC. This Agreement may be
terminated by Capital or CBC by action of either of their Board of Directors:
(i) if Home shall have violated or failed to fully
perform any of its obligations, covenants, or agreements contained in Article IV
or Article VI herein in any material respect;
(ii) if Capital or CBC determines at any time that
any of Home's representations or warranties contained in Article II or in any
other certificate or writing delivered pursuant to this Agreement shall have
been false or misleading in any material respect when made, or that there has
occurred any event or development or that there exists any condition or
circumstance which has caused or, with the lapse of time or otherwise, is
reasonably likely to cause any such representations or warranties to become
false or misleading in any material respect;
(iii) if Home's shareholders do not ratify and
approve this Agreement and the transactions contemplated herein or Capital's
shareholders do not approve the Reorganization;
(iv) if any of the conditions of the obligations of
Capital or CBC (as set forth in Paragraph 7.01 or 7.03 above) shall not have
been satisfied or effectively waived in writing, or if the transactions
contemplated herein shall not have become effective, on or before June 30, 1999,
unless such date is extended as evidenced by the written mutual agreement of the
parties hereto;
(v) if the number of shares dissenting from the
Exchange, when coupled with any other shares of Capital Stock, CBC Stock and
Home Stock deemed tainted
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from "pooling-of-interest" purposes, precludes accounting for the Exchange as a
pooling of interests pursuant to APB Opinion No. 16; or
(vi) if the Board of Directors of Home (x) fails to
convene a meeting of the Home shareholders to approve the Exchange on or before
December 31, 1998 (the "Meeting Date"), or postpones the date scheduled for the
meeting of the Home shareholders to approve the Exchange beyond the Meeting
Date, except with the written consent of Capital or CBC, (y) fails to recommend
the approval of this Agreement and the Exchange to the Home shareholders in
accordance with Section 6.01.D. hereof, or (z) withdraws or amends or modifies
in a manner adverse to Capital or CBC its recommendation or approval in respect
of this Agreement and the Exchange or fails to reconfirm such recommendation
within two business days of a written request for such confirmation by Capital
or CBC.
However, before Capital or CBC may terminate
this Agreement for any of the reasons specified above in clause (i) or (ii) of
this Paragraph 8.02.A., it shall give written notice to Home as provided herein
stating its intent to terminate and a description of the specific breach,
default, violation, or other condition giving rise to its right to so terminate,
and, such termination by Capital or CBC shall not become effective if, within
thirty (30) days following the giving of such notice, Home shall cure such
breach, default, or violation or satisfy such condition to the reasonable
satisfaction of Capital and CBC.
B. TERMINATION BY HOME. This Agreement may be terminated by
Home by action of its Board of Directors:
(i) if Capital or CBC shall have violated or failed
to fully perform any of its obligations, covenants, or agreements contained in
Article V or VI herein in any material respect;
(ii) if Home determines at any time that any of
Capital's or CBC's representations and warranties contained in Article III
herein or in any other certificate or writing delivered pursuant to this
Agreement shall have been false or misleading in any material respect when made,
or that there has occurred any event or development or that there exists any
condition or circumstance which has caused or, with the lapse of time or
otherwise, is reasonably likely to cause any such representations or warranties
to become false or misleading in any material respect;
(iii) if, notwithstanding Home's compliance with its
obligations contained in this Agreement, Home's shareholders do not ratify and
approve this Agreement;
(iv) if any of the conditions of the obligations of
Home (as set forth in Paragraph 7.01 or 7.02 above) shall not have been
satisfied or effectively waived in writing, or if the transactions contemplated
herein shall not have become effective, on or before June 30, 1999, unless such
date is extended as evidenced by the written mutual agreement of the parties
hereto.
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However, before Home may terminate this
Agreement for any of the reasons specified above in clause (i) or (ii) of this
Paragraph 8.02.B., it shall give written notice to Capital and CBC as provided
herein stating its intent to terminate and a description of the specific breach,
default, violation, or other condition giving rise to its right to so terminate,
and, such termination by Home shall not become effective if, within thirty (30)
days following the giving of such notice, Capital or CBC shall cure such breach,
default, or violation or satisfy such condition to the reasonable satisfaction
of Home.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.01 "PREVIOUSLY DISCLOSED" INFORMATION; "MATERIAL ADVERSE EFFECT" AND
"MATERIAL ADVERSE CHANGE"
A. "Previously Disclosed" shall mean, as to Home, Capital or
CBC, the disclosure of information in a letter delivered by such party to the
others prior to the date of this Agreement and which specifically refers to this
Agreement and is arranged in paragraphs corresponding to the Paragraphs,
subparagraphs, and items of this Agreement applicable thereto, all of which
documents are incorporated herein by reference.
Information disclosed in any party's letter described above
shall be deemed to have been Previously Disclosed by such party for the purpose
of any given Paragraph, subparagraph, or item of this Agreement only to the
extent that information is expressly set forth in such party's letter described
above and that, in connection with such disclosure, a specific reference is made
in the letter to that Paragraph, subparagraph, or item.
B. Where used in this Agreement, the terms "Material Adverse
Effect" and "Material Adverse Change" shall mean an event, matter, item or
circumstance (other than as a result of (i) changes in GAAP, (ii) changes in
banking and similar laws of general application or interpretations thereof by
courts or governmental authorities, or (iii) any non-recurring merger-related
expense of any kind) that in and of itself, or when combined with all similar
events, matters, items or circumstances, reasonably would be expected to have,
now or in the future, a material adverse effect on the business, financial
condition, operations, results of operations or prospects of either party.
9.02 WAIVER. Any term or condition of this Agreement may be waived
(except as to matters of regulatory approvals and approvals required by law),
either in whole or in part, at any time by the party which is, and whose
shareholders are, entitled to the benefits thereof; provided, however, that any
such waiver shall be effective only upon a determination by the waiving party
(through action of its Board of Directors) that such waiver would not adversely
affect the interests of the waiving party or its shareholders; and, provided
further, that no waiver of any term or condition of this Agreement by any party
shall be effective unless such waiver is in writing and signed by the waiving
party, or be construed to be a waiver of any succeeding breach of the same term
or condition. No failure or delay of any party to exercise any power, or to
insist
49
<PAGE>
upon a strict compliance by any other party of any obligation, and no custom or
practice at variance with any terms hereof, shall constitute a waiver of the
right of any party to demand a full and complete compliance with such terms.
9.03 AMENDMENT. This Agreement may be amended, modified, or
supplemented at any time or from time to time prior to the Effective Time, and
either before or after its approval by the shareholders of Home, by an agreement
in writing approved by a majority of the Board of Directors of CBC, Capital and
Home executed in the same manner as this Agreement; provided, however, that,
except with the further approval of Home's shareholders of that change or as
otherwise provided herein, following approval of this Agreement by the
shareholders of Home no change may be made in the number of shares of CBC Stock
into which each share of Home Stock will be converted.
9.04 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered personally
or by courier, or mailed by certified mail, postage prepaid, as follows:
A. If to Home, to:
Home Savings Bank of Siler City, Inc., SSB
300 East Raleigh Street
Siler City, North Carolina 27344
Attention: Mr. Edwin E. Bridges
With copy to:
Anthony Gaeta, Esq.
Moore & Van Allen, PLLC
1 Hannover Square
Raleigh, North Carolina 27601
B. If to CBC or Capital, to:
Capital Bank
4400 Falls of Neuse Road
Raleigh, North Carolina 27609
Attention: James A. Beck
With copy to:
John L. Jernigan
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP
2500 First Union Capitol Center
Raleigh, North Carolina 27601
50
<PAGE>
9.05 FURTHER ASSURANCES. Home, CBC and Capital each agree to furnish to
the others such further assurances with respect to the matters contemplated
herein and their respective agreements, covenants, representations, and
warranties contained herein, including the opinion of legal counsel, as such
other parties may reasonably request.
9.06 HEADINGS AND CAPTIONS. Headings and captions of the articles,
sections, and paragraphs of this Agreement have been inserted for convenience of
reference only and do not constitute a part hereof.
9.07 ENTIRE AGREEMENT. This Agreement (including all schedules and
exhibits attached hereto and all documents incorporated herein by reference)
contains the entire agreement of the parties with respect to the transactions
described herein and supersedes any and all other oral or written agreement(s)
heretofore made, and there are no representations or inducements by or to, or
any agreements between, any of the parties hereto other than those contained
herein in writing.
9.08 SEVERABILITY OF PROVISIONS. The invalidity or unenforceability of
any term, phrase, clause, paragraph, restriction, covenant, agreement, or other
provision hereof shall in no way affect the validity or enforceability of any
other provision or part hereof.
9.09 ASSIGNMENT. This Agreement may not be assigned by any party hereto
except with the prior written consent of the other parties hereto.
9.10 ENFORCEMENT. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court located in the State of
North Carolina, this being in addition to any other remedy to which they are
entitled at law or in equity.
9.11 COUNTERPARTS. Any number of counterparts of this Agreement may be
signed and delivered, each of which shall be considered an original and which
together shall constitute one agreement.
9.12 GOVERNING LAW. This Agreement is made in and shall be construed
and enforced in accordance with the internal laws (and not the laws of conflict)
of the State of North Carolina.
9.13 INSPECTION. Any right of CBC and Capital hereunder to investigate
or inspect the assets, books, records, files, and other information of Home and
Home's Subsidiaries in no way shall establish any presumption that CBC or
Capital should have conducted any investigation or that such right has been
exercised by CBC or Capital or their respective agents, representatives, or
others. Any investigations or inspections that have been made by CBC, Capital or
their respective agents, representatives, or others prior to the Closing Date
shall not be
51
<PAGE>
deemed in any way in derogation or limitation of the covenants, representations,
and warranties made by or on behalf of Home and Home's Subsidiaries in this
Agreement.
9.14 SURVIVAL OF REPRESENTATIONS, WARRANTIES, INDEMNIFICATION AND OTHER
AGREEMENTS.
A. REPRESENTATIONS, WARRANTIES AND OTHER AGREEMENTS. None of
the representations, warranties or agreements herein shall survive the
effectiveness of the Exchange, and no party shall have any right after the
Effective Time to recover damages or other relief from any other party to this
Agreement by reason of any breach of representation or warranty, any
nonfulfillment or nonperformance of any agreement contained herein, or
otherwise; provided, however, that the parties' agreements contain in Paragraphs
5.02, 6.07 and 6.08 and Article VIII hereof, and CBC's representations and
warranties contained in Paragraph 3.02, shall survive the effectiveness of the
Exchange.
B. INDEMNIFICATION AND OTHER AGREEMENTS. CBC's indemnification
and all other agreements and obligations pursuant to Paragraph 5.02 above shall
become effective only at the Effective Time, and CBC shall not have any
obligation under that Paragraph prior to the Effective Time or in the event of
or following termination of this Agreement prior to the Effective Time.
[remainder of page intentionally left blank; signatures appear on next page]
52
<PAGE>
IN WITNESS WHEREOF, Home, Capital and CBC have each caused this
Agreement to be executed in its name by its duly authorized officers as of the
date first above written.
HOME SAVINGS BANK OF SILER CITY, INC., SSB
By: /s/ Edwin E. Bridges
------------------------------------
Name: Edwin E. Bridges
Title: President
ATTEST:
/s/
- ------------------------
______ Secretary
[CORPORATE SEAL]
CAPITAL BANK
By: /s/ James A. Beck
------------------------------------
Name:
Title:
ATTEST:
/s/ Allen T. Nelson, Jr.
- ------------------------
_______ Secretary
[CORPORATE SEAL]
CAPITAL BANK CORPORATION
By: /s/ James A. Beck
------------------------------------
Name:
Title:
ATTEST:
/s/ Allen T. Nelson, Jr.
- ------------------------
_______ Secretary
[CORPORATE SEAL]
53
<PAGE>
AMENDMENT 1 TO AGREEMENT AND PLAN OF REORGANIZATION AND SHARE EXCHANGE BY AND
AMONG CAPITAL BANK, CAPITAL BANK CORPORATION
AND HOME SAVINGS BANK OF SILER CITY, INC., SSB
THIS AMENDMENT 1 TO AGREEMENT AND PLAN OF REORGANIZATION AND SHARE
EXCHANGE (this "Amendment") is entered into as of the 11th day of February,
1999, by and among Capital Bank ("Capital"), Capital Bank Corporation ("CBC")
and Home Savings Bank of Siler City, Inc., SSB ("Home").
WHEREAS, Capital, CBC and Home are parties to that certain Agreement and
Plan of Reorganization and Share Exchange, dated as of September 29, 1998 (the
"Agreement"); and,
WHEREAS, the parties desire to amend the Agreement as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual benefits
to be derived from this Amendment and the Agreement, Home, CBC and Capital
hereby adopt and make this Amendment and mutually agree as follows:
1. All references in the Agreement, wherever appearing, to Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, shall be changed
to references to Section 368(a) of the Internal Revenue Code of 1986, as
amended.
2. Paragraph 5.05 of the Agreement is amended in its entirety to read as
follows:
"5.05 ADVISORY BOARD OF DIRECTORS. After the Effective Time, the
current members of Home's Board of Directors may, in CBC's sole
discretion, serve as members of Capital's (or Home's, as the case may be)
local advisory board. CBC may terminate advisory directors, with or
without cause, at any time in its sole discretion. Any compensation, if
any, paid to advisory directors shall be at the sole discretion of CBC."
3. The parties to the Agreement agree that the Agreement and the
transactions contemplated thereby must, in accordance with Nasdaq Stock Market
requirements, be approved by the shareholders of Capital and CBC. Accordingly,
the parties agree that:
a. In the third line of Paragraph 3.03, after the word "by", the
following shall be inserted: "the shareholders of Capital in the manner required
by law (as contemplated by Paragraph 6.01.A) below and by".
b. In the fourth line of the second paragraph of Paragraph 3.04,
after the word "of", the following shall be inserted: "Capital's shareholders as
described in Paragraph 7.01.D below and of".
54
<PAGE>
c. In the fifth line of Paragraph 6.01.A, after the word "on", the
following shall be inserted: "the approval of this Agreement and the
transactions contemplated hereby and".
d. In the fourth line of Paragraph 6.01.C, the word "and" shall be
replaced with a comma, and after the word "as", the following shall be inserted:
"for distribution to Capital's shareholders as the proxy statement relating to
its solicitation of proxies for use at the Capital Shareholder Meeting,". In the
seventh line of Paragraph 6.01.C, after the word "Meeting", insert the
following: ", Capital Shareholder Meeting,".
e. In the third line of Paragraph 7.01.D, after the word "of", the
following shall be inserted: "Capital and".
f. In the second line of Paragraph 8.02.A(iii), after the word
"not", the following shall be inserted: "ratify and approve this Agreement and
the transactions contemplated herein or do not".
g. In the second line of Paragraph 8.02.B(iii), after the words
"approve this Agreement", the following shall be inserted: "or if the
shareholders of Capital do not ratify and approve this Agreement and the
transactions contemplated hereby."
h. In the third line of Paragraph 9.03, after the words
"shareholders of", the following shall be inserted: "Capital or". In the fifth
line of Paragraph 9.03, after the words "approval of", the following shall be
inserted: "Capital's and". In the sixth line of Paragraph 9.03, after the words
"shareholders of", the following shall be inserted: "Capital and".
Except as amended by this Amendment, the Agreement shall remain unchanged
and in full force and effect. This Amendment is made in and shall be construed
and enforced in accordance with the internal laws (and not the laws of conflict)
of the State of North Carolina. Any number of counterparts of this Amendment may
be signed and delivered, each of which shall be considered an original and which
together shall constitute one and the same amendment of the Agreement.
[remainder of page intentionally left blank; signatures appear on next page]
55
<PAGE>
IN WITNESS WHEREOF, Home, Capital and CBC have each caused this Amendment
to be executed in its name by its duly authorized officers as of the date first
above written.
HOME SAVINGS BANK OF SILER CITY, INC., SSB
By: /s/ Edwin Bridges
Name: Edwin Bridges
Title: President
ATTEST:
- ------------------------
______ Secretary
[CORPORATE SEAL]
CAPITAL BANK
By: /s/ Allen T. Nelson, Jr.
Name: Allen T. Nelson, Jr.
Title: Chief Financial Officer
ATTEST:
- ------------------------
_______ Secretary
[CORPORATE SEAL]
CAPITAL BANK CORPORATION
By: /s/ Allen T. Nelson, Jr.
Name: Allen T. Nelson, Jr.
Title: Chief Financial Officer
ATTEST:
- ------------------------
_______ Secretary
[CORPORATE SEAL]
56
<PAGE>
APPENDIX III
(BAXTER FENTRISS
AND COMPANY logo)
9100 ARBORETUM PARKWAY SUITE 280 RICHMOND, VIRGINIA 23236
(804) 323-7540 FAX (804) 323-7457
September 29, 1998
The Board of Directors of
Home Savings Bank of Siler City, Inc., SSB
and
Edwin E. Bridges, Trustee for the
Employee Stock Ownership Plan of
Home Savings Bank of Siler City, Inc., SSB
300 East Raleigh Street
Siler City, NC 27344
Dear Ladies and Gentlemen:
Home Savings Bank of Siler City, Inc., SSB, Siler City, North Carolina ("Home")
has entered into an agreement with Capital Bank, Raleigh, North Carolina and
Capital Bank Corporation, Raleigh, North Carolina (a new bank holding company to
be formed by Capital Bank)(collectively referred to herein as "Capital")
providing for the acquisition of HOME by Capital ("Acquisition"). The terms of
the Acquisition are set forth in the Agreement and Plan of Reorganization and
Share Exchange dated September 29, 1998.
The terms of the Acquisition provide that, with the possible exception of those
shares as to which dissenter's rights may be perfected, each outstanding share
of Home ($1.00 par value) shall be converted into the right to receive 1.28
Capital ($5.00 par value) shares ("Consideration").
You have asked our opinion as to whether the proposed transaction pursuant to
the terms of the Acquisition are fair to the respective shareholders of Home
from a financial point of view.
In rendering our opinion, we have evaluated the financial statements of Home and
Capital available to us from published sources. In addition, we have, among
other things: (a) to the extent deemed relevant, analyzed selected public
information of certain other financial institutions and compared Home and
Capital from a financial point of view to the other financial institutions; (b)
considered the historical market price of the common stock of Home and Capital;
(c) compared the terms of the Acquisition with the terms of certain other
comparable transactions to the extent information concerning such acquisitions
was publicly available; (d) reviewed the drafts of the Agreement and Plan of
Reorganization and related documents; and (e) made such other analyses
<PAGE>
and examinations as we deemed necessary. We also met with various senior
officers of Home and Capital to discuss the foregoing as well as other matters
that may be relevant.
We have not independently verified the financial and other information
concerning Home, or Capital, or other data which we have considered in our
review. We have assumed the accuracy and completeness of all such information;
however, we have no reason to believe that such information is not accurate and
complete. Our conclusion is rendered on the basis of securities market
conditions prevailing as of the date hereof and on the conditions and prospects,
financial and otherwise, of Home and Capital as they exist and are known to us
as of June 30, 1998.
We have acted as financial advisor to Home in connection with the Acquisition
and will receive from Home a fee for our services, a significant portion of
which is contingent upon the consummation of the Acquisition.
It is understood that this opinion may be included in its entirety in any
communication by Home or the Board of Directors to the stockholders of Home. The
opinion may not, however, be summarized, excerpted from or otherwise publicly
referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we are
of the opinion that the Consideration is fair to the shareholders of Home from a
financial point of view.
Sincerely,
/s/
Baxter Fentriss and Company
<PAGE>
February 1, 1999
APPENDIX IV
Board of Directors
Capital Bank Corporation
4400 Falls of Neuse Road
Post Office Box 18949
Raleigh, North Carolina 27619-8949
Members of the Board:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, of the consideration to be paid by the shareholders of
Capital Bank Corporation ("Capital Bank") under the terms of a certain Agreement
and Plan of Reorganization and Share Exchange (the "Agreement"), dated as of
September 29, 1998, by and among Capital Bank, Capital Bank Corporation and Home
Savings Bank of Siler City, Inc., SSB ("Home Savings") pursuant to which the
shareholders of Home Savings will exchange their shares for shares of Capital
Bank Corporation (the "Exchange"). Under the terms of the Agreement, each of the
outstanding shares of Home Savings common stock shall be converted into the
right to receive 1.28 shares of Capital Bank common stock. The foregoing summary
of the Exchange is qualified in its entirety by reference to the Agreement.
Interstate/Johnson Lane Corporation ("IJL") is one of the largest
independent investment banking firms headquartered in the Southeast. As part of
its regular investment banking business, IJL evaluates securities in connection
with negotiated underwritings, leveraged buyouts, secondary distributions,
private placements, estate and gift valuations, mergers and acquisitions,
employee stock ownership plan purchases and other activities.
We have developed our Opinion on the basis of the findings and conclusions
arising from our conduct of due diligence with respect to Capital Bank and Home
Savings. In arriving at our Opinion, we have, among other things:
1) reviewed the terms and conditions of the Agreement and Joint
Proxy Statement-Prospectus;
2) analyzed certain historical business and financial information
relating to Capital Bank and Home Savings;
3) conducted discussions with members of the senior management of
Capital Bank and Home Savings with respect to the business and
prospects of Capital Bank and Home Savings and the strategic
objectives of the Exchange;
<PAGE>
Board of Directors
Capital Bank Corporation
February 1, 1999
Page 2
4) reviewed financial and market information as to certain
other publicly traded companies believed by us to be reasonably
similar to Home Savings;
5) considered the financial terms of selected merger and
acquisition transactions in the thrift industry believed by us to
be reasonably similar to the proposed Exchange;
6) performed a pro forma dilution analysis using financial projections
for Capital Bank and Home Savings in calendar years 1999 and 2000,
including potential cost savings, merger costs and synergies, to
estimate the impact to the shareholders of Capital Bank; and
7) conducted, as appropriate and relevant, such other financial
studies, analyses and investigations as the basis for the
conclusions set forth in this Opinion.
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information furnished to us
by Capital Bank and Home Savings including, without limitation, all financial
projections of Capital Bank and Home Savings. Accordingly, we do not make any
warranties, nor do we express any opinion regarding the accuracy of such
projections. We have also relied upon the reasonable assurances of management of
Capital Bank and Home Savings that they are unaware of any facts that would make
the information provided to us materially incomplete or misleading.
Based upon and subject to the foregoing and such other matters as we
considered relevant, it is our opinion that as of the date hereof, the
consideration provided for in the Agreement is fair, from a financial point of
view, to the shareholders of Capital Bank.
Our fees for rendering our Opinion are not contingent upon the Opinion
expressed herein, and neither IJL nor any of its affiliates or employees has a
present or intended material financial interest in the Company. Further, IJL is
independent of all parties participating in the proposed Exchange.
<PAGE>
Board of Directors
Capital Bank Corporation
February 1, 1999
Page 3
This Opinion is furnished pursuant to our engagement letter dated July 16,
1998. Our Opinion is directed to the Board of Directors of Capital Bank
Corporation and does not constitute a recommendation to any shareholder of
Capital Bank as to how such a shareholder should vote in connection with the
Exchange. This Opinion is a summary discussion of our underlying analyses and
may be included in the Joint Proxy Statement-Prospectus relating to the
Exchange.
Very truly yours,
/s/
INTERSTATE/JOHNSON LANE CORPORATION
<PAGE>
APPENDIX V
DISSENTERS' RIGHTS
N.C. GEN. STAT. CHAPTER 55, ARTICLE 13 WITH 1997 AMENDMENTS
GENERAL STATUTES OF NORTH CAROLINA
CHAPTER 55. NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13. DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
N.C. Gen. Stat. ss.55-13-01 (1996)
ss.55-13-01. Definitions
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and in
the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances, giving due consideration to the rate currently paid by the
corporation on its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
N.C. Gen. Stat. ss.55-13-02 (1996)
ss.55-13-02. Right to dissent
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions: <PAGE>
(1) Consummation of a plan of merger to which the corporation (other than
a parent corporation in a merger under G.S. 55-11-04) is a party unless (i)
approval by the shareholders of that corporation is not required under G.S.
55-11-03(g) or (ii) such shares are then redeemable by the corporation at a
price not greater than the cash to be received in exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, unless such shares are
then redeemable by the corporation at a price not greater than the cash to be
received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than as permitted by G.S. 55-12-01,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed in cash to the shareholders within one
year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates, alters, or
abolishes a right in respect of redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the shares; (iii) alters or
abolishes a preemptive right of the holder of the shares to acquire shares or
other securities; (iv) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes; (v) reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share so created is to be
acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization;
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under
this Article may not challenge the corporate action creating his entitlement,
including without limitation a merger solely or partly in exchange for cash or
other property, unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or (ii) held by at least 2,000 record shareholders,
unless in either case:
(1) The articles of incorporation of the corporation issuing the shares
provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for the shares anything except:
a. Cash;
<PAGE>
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which, at
the record date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting at which the plan of merger or share
exchange is to be acted on, were either listed subject to notice of issuance
on a national securities exchange or held of record by at least 2,000 record
shareholders; or
c. A combination of cash and shares as set forth in sub-subdivisions
a. and b. of this subdivision.
N.C. Gen. Stat. ss.55-13-03 (1996)
ss.55-13-03. Dissent by nominees and beneficial owners
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(1) He submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(2) He does so with respect to all shares of which he is the beneficial
shareholder.
N.C. Gen. Stat. ss.55-13-04 (1996)
ss.55-13-04 through 55-13-19
Reserved for future codification purposes.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
N.C. Gen. Stat. ss.55-13-20 (1996)
ss.55-13-20. Notice of dissenters' rights
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no longer than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22. <PAGE>
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action.
ss.55-13-21. Notice of intent to demand payment
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand payment
for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this Article.
N.C. Gen. Stat. ss.55-13-22 (1996)
ss.55-13-22. Dissenters' notice
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S.
55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating dissenters'
rights under G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
<PAGE>
N.C. Gen. Stat. ss.55-13-23 (1996)
ss.55-13-23. Duty to demand payment
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
N.C. Gen. Stat. ss.55-13-24 (1996)
ss.55-13-24. Share restrictions
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
N.C. Gen. Stat. ss.55-13-25 (1996)
ss.55-13-25. Payment
(a) As soon as the proposed corporate action is taken, or within 30 days after
receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the end of
a fiscal year ending not more than 16 months before the date of payment, an
income statement for that year, a statement of cash flows for that year, and
the latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenters' right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
<PAGE>
N.C. Gen. Stat. ss.55-13-26 (1996)
ss.55-13-26. Failure to take action
(a) If the corporation does not take the proposed action within 60 days after
the date for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
N.C. Gen. Stat. ss.55-13-27 (1996)
ss.55-13-27
Reserved for future codification purposes.
N.C. Gen. Stat. ss.55-13-28 (1996)
ss.55-13-28. Procedure if shareholder dissatisfied with corporation's
payment or failure to perform
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
the amount in excess of the payment by the corporation under G.S. 55-13-25 for
the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing (i) under subdivision
(a)(1) within 30 days after the corporation made payment for his shares or (ii)
under subdivisions (a)(2) and (a)(3) within 30 days after the corporation has
failed to perform timely. A dissenter who fails to notify the corporation of his
demand under subsection (a) within such 30-day period shall be deemed to have
withdrawn his dissent and demand for payment.
N.C. Gen. Stat. ss.55-13-29 (1996)
ss.55-13-29
<PAGE>
Reserved for future codification purposes.
PART 3. JUDICIAL APPRAISAL OF SHARES
N.C. Gen. Stat. ss.55-13-30 (1996)
ss.55-13-30. Court action
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i) the
date payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's
payment demand under G.S. 55-13-28 by filing a complaint with the Superior Court
Division of the General Court of Justice to determine the fair value of the
shares and accrued interest. A dissenter who takes no action within the 60-day
period shall be deemed to have withdrawn his dissent and demand for payment.
(a1) Repealed by Session Laws 1997-202, s.4, effective October 1, 1997.
(b) [Reserved for future codification purposes.]
(c) The court shall have the discretion to make all dissenters (whether or not
residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The parties are entitled to
the same discovery rights as parties in other civil proceedings. The proceeding
shall be tried as in other civil actions. However, in a proceeding by a
dissenter in a corporation that was a public corporation immediately prior to
consummation of the corporate action giving rise to the right of dissent under
G.S. 55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his shares, plus
interest, exceeds the amount paid by the corporation.
ss.55-13-31. Court action
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court, and shall assess the costs as it
finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable.
<PAGE>
(1)Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2)Against either the corporation or a dissenter, in favor of either or
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
