<PAGE>
<PAGE>
SCHEDULE 14A INFORMATION
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
1st STATE BANCORP, INC.
- ----------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- ----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] NO FEE REQUIRED
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(1) 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:
________________________________________________________________
[ ] 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:
____________________________________________
2. Form, Schedule or Registration Statement no.:
____________________________________________
3. Filing Party:
____________________________________________
4. Date Filed:
____________________________________________
<PAGE>
<PAGE>
[LOGO]
[1ST STATE BANCORP, INC. LETTERHEAD]
December 20, 1999
Dear Stockholder:
We invite you to attend the first Annual Meeting of
Stockholders (the "Annual Meeting") of 1st State Bancorp, Inc.
(the "Company") to be held at the main office of 1st State Bank
(the "Bank") located at 445 S. Main Street, Burlington, North
Carolina, on Tuesday, January 25, 2000, at 5:30 p.m., eastern
time.
The attached Notice of Annual Meeting and Proxy Statement
describe the formal business to be transacted at the meeting.
During the meeting, we will also report on the operations of 1st
State Bank, the Company's wholly owned subsidiary. Directors
and officers of the Company and the Bank will be present to
respond to any questions the stockholders may have.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN,
DATE AND RETURN THE ACCOMPANYING FORM OF PROXY AS SOON AS
POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE ANNUAL
MEETING. Your vote is important, regardless of the number of
shares you own. This will not prevent you from voting in person
but will assure that your vote is counted if you are unable to
attend the meeting.
On behalf of the Board of Directors and all the employees
of the Company and the Bank, I wish to thank you for your
continued support.
Sincerely,
/s/ James C. McGill
James C. McGill
President
<PAGE>
<PAGE>
________________________________________________________________
1ST STATE BANCORP, INC.
445 S. MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
________________________________________________________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 25, 2000
________________________________________________________________
NOTICE IS HEREBY GIVEN that the Annual Meeting of
Stockholders (the "Annual Meeting") of 1st State Bancorp, Inc.
(the "Company") will be held at the main office of 1st State
Bank (the "Bank"), located at 445 S. Main Street, Burlington,
North Carolina, on Tuesday, January 25, 2000, at 5:30 p.m.,
eastern time.
A Proxy Statement and Proxy Card for the Annual Meeting are
enclosed.
The Annual Meeting is for the purpose of considering and
acting upon the following matters:
1. The election of three directors of the Company;
and
2. The transaction of such other business as may
properly come before the Annual Meeting or any
adjournment thereof.
The Board of Directors is not aware of any other business
to come before the Annual Meeting.
Any action may be taken on any one of the foregoing
proposals at the Annual Meeting on the date specified above or
on any date or dates to which, by original or later adjournment,
the Annual Meeting may be adjourned. Stockholders of record at
the close of business on December 10, 1999, are the stockholders
entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof.
You are requested to fill in and sign the enclosed proxy
card which is solicited by the Board of Directors and to mail it
promptly in the enclosed envelope. The proxy will not be used
if you attend and vote at the Annual Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ A. Christine Baker
A. Christine Baker
Secretary
Burlington, North Carolina
December 20, 1999
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE
COMPANY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO
INSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
<PAGE>
________________________________________________________________
PROXY STATEMENT
OF
1ST STATE BANCORP, INC.
445 S. MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
________________________________________________________________
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 25, 2000
________________________________________________________________
________________________________________________________________
GENERAL
________________________________________________________________
This Proxy Statement is furnished to stockholders of 1st
State Bancorp, Inc. (the "Company") in connection with the
solicitation by the Board of Directors of the Company of proxies
to be used at the Annual Meeting of Stockholders (the "Annual
Meeting") which will be held at the main office of 1st State
Bank (the "Bank"), located at 445 S. Main Street, Burlington,
North Carolina, on Tuesday, January 25, 2000, at 5:30 p.m.,
eastern time, and at any adjournment thereof. The accompanying
Notice of Annual Meeting and proxy card and this Proxy Statement
are being first mailed to stockholders on or about December 20,
1999.
________________________________________________________________
VOTING AND REVOCABILITY OF PROXIES
________________________________________________________________
Stockholders who execute proxies retain the right to revoke
them at any time. Unless so revoked, the shares represented by
properly executed proxies will be voted at the Annual Meeting
and all adjournments thereof. Proxies may be revoked by written
notice to A. Christine Baker, Secretary of the Company, at the
address shown above, by filing a later dated proxy prior to a
vote being taken on a particular proposal at the Annual Meeting
or by attending the Annual Meeting and voting in person. The
presence of a stockholder at the Annual Meeting will not in
itself revoke such stockholder's proxy.
Proxies solicited by the Board of Directors of the Company
will be voted in accordance with the directions given therein.
WHERE NO INSTRUCTIONS ARE INDICATED, PROXIES WILL BE VOTED FOR
THE NOMINEES FOR DIRECTOR SET FORTH BELOW. The proxy confers
discretionary authority on the persons named therein to vote
with respect to the election of any person as a director where
the nominee is unable to serve or for good cause will not serve,
and matters incident to the conduct of the Annual Meeting. If
any other business is presented at the Annual Meeting, proxies
will be voted by those named therein in accordance with the
determination of a majority of the Board of Directors. Proxies
marked as abstentions will not be counted as votes cast. Shares
held in street name which have been designated by brokers on
proxies as not voted will not be counted as votes cast. Proxies
marked as abstentions or as broker non-votes, however, will be
treated as shares present for purposes of determining whether a
quorum is present.
________________________________________________________________
VOTING SECURITIES AND SECURITY OWNERSHIP
________________________________________________________________
The securities entitled to vote at the Annual Meeting
consist of the Company's common stock, par value $.01 per share
(the "Common Stock"). Stockholders of record as of the close of
business on December 10, 1999 (the "Record Date") are entitled
to one vote for each share of Common Stock then held. As of the
Record Date, there were 3,163,125 shares of Common Stock issued
and outstanding. The presence, in person or by proxy, of at
least one-third of the total number of shares of Common Stock
outstanding and entitled to vote will be necessary to constitute
a quorum at the Annual Meeting.
<PAGE>
Persons and groups beneficially owning more than 5% of the
Common Stock are required to file certain reports with respect
to such ownership pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The following table sets
forth information regarding the shares of Common Stock
beneficially owned as of the Record Date by persons who
beneficially own more than 5% of the Common Stock, each of the
Company's directors, the executive officers of the Company named
in the Summary Compensation Table set forth under "Proposal I --
Election of Directors -- Executive Compensation -- Summary
Compensation Table," and all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED PERCENT OF
AS OF THE RECORD DATE (1) CLASS (2)
------------------------- ----------
<S> <C> <C>
5% Stockholder
- --------------
1st State Bancorp, Inc. 253,050 (3) 8.0%
Employee Stock Ownership Plan
("ESOP")
445 S. Main Street
Burlington, North Carolina 27215
Directors
- ---------
Bernie C. Bean 18,750 0.6
James C. McGill 23,127 0.7
Virgil L. Stadler 53,615 (4) 1.7
James A. Barnwell, Jr. 43,750 1.4
James G. McClure 44,575 (5) 1.4
T. Scott Quakenbush 53,510 (6) 1.7
Richard C. Keziah 53,386 (7) 1.7
Richard H. Shirley 29,294 0.9
Executive Officers
- ------------------
A. Christine Baker 26,547 (8) 0.8
Fairfax C. Reynolds 21,348 (9) 0.7
Frank Gavigan 10,326 (10) 0.3
John D. Hansell 3,733 0.1
All directors and executive 381,961 12.1
officers of the Company
as a group (12 persons)
<FN>
____________
(1) In accordance with Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), a person is
deemed to be the beneficial owner, for purposes of this
table, of any shares of Common Stock if he or she has or
shares voting or investment power with respect to such
Common Stock or has a right to acquire beneficial ownership
at any time within 60 days from the Record Date. As used
herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to
dispose or direct the disposition of shares. The listed
amounts do not include shares with respect to which
Directors Shirley, McClure and Stadler have voting power by
virtue of their positions as trustees of the trusts holding
253,050 shares under the ESOP and 151,894 shares under the
Bank's Deferred Compensation Plan ("DCP"). The shares held
by the DCP trust are held for the benefit of directors and
executive officers of the Company in the following amounts:
Mr. Bean 5,524; Mr. McGill 55,163; Mr. Stadler 9,188; Mr.
Barnwell 6,187; Mr. McClure 7,241; Mr. Quakenbush 9,295;
Mr. Keziah 9,984; Mr. Shirley 6,187; Ms. Baker 21,660; and
Mr. Reynolds 21,465. Shares held by the ESOP trust and
allocated to the accounts of participants are voted in
accordance with the participants' instructions, and
unallocated shares are voted in the same ratio as ESOP
participants direct the voting of allocated shares or, in
the absence of such direction, in the ESOP trustees' best
judgment. The shares held by the DCP trust are voted in
the same proportion as the ESOP trustees vote the shares
held in the ESOP trust. The listed amounts also do not
include shares with respect to which Directors Barnwell,
Kesiah and McGill share voting power by virtue of their
positions as directors of 1st
2
<PAGE>
<PAGE>
State Bank Foundation, Inc. (the "Foundation"), which holds
187,500 shares of Common Stock. The shares held by the
Foundation are voted in the same ratio as all other shares
of Common Stock are voted on any given proposal submitted
to stockholders.
(2) Based on a total of 3,163,125 shares of Common Stock
outstanding as of the Record Date.
(3) These shares are currently held in a suspense account for
future allocation and distribution among participants as
the loan used to purchase the shares is repaid. At the
Record Date, 22,162 shares had been committed to be
allocated. See footnote 1 above for information on how
these shares are voted.
(4) Includes 7,760 shares owned by Mr. Stadler's spouse.
(5) Includes 15,049 shares owned by Mr. McClure's spouse, 2,443
shares owned by Mr. McClure's daughter, 2,442 shares owned
by Mr. McClure's son, and 14,075 shares owned by two
partnerships of which Mr. McClure is a partner.
(6) Includes 7,152 shares owned by Mr. Quakenbush's spouse.
(7) Includes 1,593 shares owned by Mr. Keziah's spouse.
(8) Includes 625 shares held as custodian for Ms. Baker's minor
child.
(9) Includes 200 shares held by Mr. Reynolds' spouse as
custodian for minor children.
(10) Includes 356 shares held by Mr. Gavigan's spouse and 100
shares held by Mr. Gavigan's spouse as custodian for minor
child.
</FN>
</TABLE>
________________________________________________________________
PROPOSAL I -- ELECTION OF DIRECTORS
________________________________________________________________
GENERAL
The Company's Board of Directors consists of eight members.
The Company's Articles of Incorporation require that directors
be divided into three classes, as nearly equal in number as
possible, with approximately one-third of the directors elected
each year. At the Annual Meeting, three directors will be
elected for a term expiring at the 2003 Annual Meeting. The
Board of Directors has nominated Bernie C. Bean, James C.
McGill and Virgil L. Stadler to serve as directors for a
three-year period. All nominees are currently members of the
Board. Under Virginia law and the Company's Bylaws, directors
are elected by a plurality of the votes present in person or by
proxy at a meeting at which a quorum is present.
It is intended that the persons named in the proxies
solicited by the Board of Directors will vote for the election
of the named nominees. If either nominee is unable to serve,
the shares represented by all valid proxies will be voted for
the election of such substitute as the Board of Directors may
recommend or the size of the Board may be reduced to eliminate
the vacancy. At this time, the Board knows of no reason why any
nominee might be unavailable to serve.
3
<PAGE>
<PAGE>
The following table sets forth, for each nominee for
director and continuing director of the Company, his age, the
year he first became a director of the Bank, which is the
Company's principal operating subsidiary, and the expiration of
his term as a director. All such persons were appointed as
directors in 1998 in connection with the incorporation and
organization of the Company. Each director of the Company also
is a member of the Board of Directors of the Bank.
<TABLE>
<CAPTION>
YEAR FIRST
AGE AT ELECTED AS CURRENT
SEPTEMBER 30, DIRECTOR OF TERM
NAME 1999 THE BANK TO EXPIRE
---- ------------ ----------- ---------
BOARD NOMINEES FOR TERMS TO EXPIRE IN 2003
<S> <C> <C> <C>
Bernie C. Bean 69 1978 2000
James C. McGill 58 1988 2000
Virgil L. Stadler 63 1982 2000
DIRECTORS CONTINUING IN OFFICE
James A. Barnwell, Jr. 59 1988 2001
James G. McClure 54 1989 2001
T. Scott Quakenbush 68 1978 2001
Richard C. Keziah 67 1983 2002
Richard H. Shirley 52 1987 2002
</TABLE>
Set forth below is information concerning the Company's
directors. Unless otherwise stated, all directors have held the
positions indicated for at least the past five years.
BERNIE C. BEAN is retired. From 1988 to 1995 he was the
President and General Manager of Craftique, Inc., a furniture
manufacturer located in Mebane, North Carolina.
JAMES C. MCGILL is the President and Chief Executive Officer
of the Company and has been the President and Chief Executive
Officer of the Bank since December 1988. He serves on the
Boards of Hospice of Alamance and Alamance Community College and
in 1997 served as the chairman of the North Carolina Bankers
Association. He also serves as a director of the Foundation, a
charitable foundation dedicated to charitable and community
service causes within the Bank's community.
VIRGIL L. STADLER is the Vice President of Stadler Country
Hams, Inc. in Elon College, North Carolina. He is active with
the Alamance Community College Foundation, Elon Homes for
Children and the Burlington area Chamber of Commerce.
JAMES A. BARNWELL, JR. is President of Huffman Oil Co.,
Inc., a petroleum marketer in Burlington, North Carolina. He
has served on the advisory board of the Salvation Army Boys &
Girls Club and the YMCA board. He also serves as a director of
the Foundation.
JAMES G. MCCLURE is President of Green & McClure, a retail
furniture store in Graham, North Carolina. He has served as
President of the Graham Area Business Association, on the
zoning board for the city of Graham and is an Elder at the
Graham Presbyterian Church.
T. SCOTT QUAKENBUSH retired in April 1997 from his position
as Vice President and sales manager with Carolina Paper Box
Company in Burlington, North Carolina.
4
<PAGE>
<PAGE>
RICHARD C. KEZIAH is President of Monarch Hosiery Mills,
Inc. in Burlington, North Carolina. He also serves on the Board
of Directors of Elon Homes for Children. He also serves as a
director of the Foundation.
RICHARD H. SHIRLEY is President of Dick Shirley Chevrolet,
Inc., an automobile dealership located in Burlington, North
Carolina. He has served as the President of the Alamance County
YMCA and as a member and chairman of the Economic Development
Committee of the Burlington area Chamber of Commerce.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following sets forth information with respect to
executive officers who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
AGE AT
SEPTEMBER 30,
NAME 1999 TITLE
- ---- ------------- -----
<S> <C> <C>
A. Christine Baker 46 Treasurer and Secretary of the
Company and the Bank and Executive
Vice President - Chief Financial
Officer of the Bank
Fairfax C. Reynolds 46 Vice President and Assistant Secretary of the
Company and Executive Vice President -
Commercial and Retail Banking of the Bank
Frank Gavigan 41 Senior Vice President - Senior Credit Officer
of the Bank
John D. Hansell 62 Manager - First Capital Services, LLC
</TABLE>
A. CHRISTINE BAKER is the Treasurer and Secretary of the
Company and served as the Executive Vice President, Secretary
and Treasurer of the Bank since April 1985. She has served as
President and director of the Burlington Rotary Club, director
and treasurer of the local chapter of the American Red Cross and
director and Vice President of the Childcare Resource and
Referral Service.
FAIRFAX C. REYNOLDS is the Vice President and Assistant
Secretary of the Company and has served as the Bank's Executive
Vice President in charge of Retail and Commercial Banking since
1989. He serves on the Board of Directors of YMCA of Alamance
County, the Alamance County Arts Council, the Alamance County
Area Chamber of Commerce and the Alamance Country Club. He is
an Elder of the First Presbyterian Church.
FRANK GAVIGAN has served as the Bank's Senior Vice
President - Senior Credit Officer since 1990. He has served as
the budget director and on the executive committee of the United
Way, as Vice President and a director of Alamance County Meals
on Wheels, as President and a director of Alamance Prevention
Alliance and on the finance committee of Front Street United
Methodist Church.
JOHN D. HANSELL has served since May 1987 as Manager of 1st
Capital Services Company, LLC and its predecessor, First Capital
Services, Inc., entities the Company owns that sell annuities,
mutual funds and insurance products on an agency basis. He has
served on the small business council of the Alamance Chamber of
Commerce and on the Board of Directors of the International
Association of Financial Planners.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company meets monthly and may
have additional special meetings. During the year ended
September 30, 1999, the Board of Directors of the Company met
eight times and the Board of Directors of the Bank met 12 times.
No director attended fewer than 75% in the aggregate of the
total number of Company Board of Directors meetings held during
the year ended September 30, 1999 and the total number of
meetings held by
5
<PAGE>
committees on which he served during such fiscal year. The
Company's Board of Directors has standing Audit and Executive
Committees.
The Board of Directors' Audit Committee consists of
Directors Keziah, Quakenbush and Stadler, who serves as
Chairperson. The Audit Committee met two times during the year
ended September 30, 1999. The function of the Audit Committee
is to examine and approve the audit report prepared by the
independent auditors, to review and recommend the independent
auditors to be engaged by the Company, to review the internal
audit function and internal accounting controls, and to review
and approve audit policies.
The Board of Directors' Executive Committee consists of
Directors McGill, Barnwell, Shirley and Keziah and one
additional director who serves on a rotating basis for a
three-month period. The Executive Committee, among other
things, evaluates the compensation and benefits of the
directors, officers and employees, recommends changes, and
monitors and evaluates employee performance. The Executive
Committee reports its evaluations and findings to the full Board
of Directors and all compensation decisions are ratified by the
full Board of Directors. Directors of the Company who also are
officers of the Company abstain from discussion and voting on
matters affecting their compensation. The Executive Committee
also monitors the performance of the Company's investment
portfolio and reviews loans. The Executive Committee is
empowered to exercise all of the authority of the Board when the
Board is not in session. The Executive Committee met 12 times
during the fiscal year ended September 30, 1999.
The Company's full Board of Directors acts as a nominating
committee. The Board of Directors met once during the year
ended September 30, 1999 for the purpose of considering
potential nominees to the Board of Directors. In its
deliberations, the Board, functioning as a nominating committee,
considers the candidate's knowledge of the banking business and
involvement in community, business and civic affairs, and also
considers whether the candidate would provide for adequate
representation of its market area. The Company's Articles of
Incorporation set forth procedures that must be followed by
stockholders seeking to make nominations for director. In order
for a stockholder of the Company to make any nominations, he or
she must give written notice thereof to the Secretary of the
Company not less than thirty days nor more than sixty days prior
to the date of any such meeting; provided, however, that if less
than forty days' notice of the meeting is given to stockholders,
such written notice shall be delivered or mailed, as prescribed,
to the Secretary of the Company not later than the close of
business on the tenth day following the day on which notice of
the meeting was mailed to stockholders. Each such notice given
by a stockholder with respect to nominations for the election of
directors must set forth (i) the name, age, business address
and, if known, residence address of each nominee proposed in
such notice; (ii) the principal occupation or employment of each
such nominee; and (iii) the number of shares of stock of the
Company which are beneficially owned by each such nominee. In
addition, the stockholder making such nomination must promptly
provide any other information reasonably requested by the
Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Overview and Philosophy
The Company's executive compensation policies are
established by the Executive Committee of the Board of Directors
(the "Committee"). The Committee is responsible for developing
the Company's executive compensation policies. The Company's
President, James C. McGill, under the direction of the
Committee, implements the Company's executive compensation
policies. Mr. McGill abstains from voting on and discussions of
matters affecting his compensation. The Committee's objectives
in designing and administering the specific elements of the
Company's executive compensation program are as follows:
. To link executive compensation rewards to
increases in shareholder value, as
measured by favorable long-term operating
results and continued strengthening of the
Company's financial condition.
6
<PAGE>
<PAGE>
. To provide incentives for executive
officers to work towards achieving
successful annual results as a step in
achieving the Company's long-term
operating results and strategic
objectives.
. To correlate, as closely as possible,
executive officers' receipt of
compensation with the attainment of
specified performance objectives.
. To maintain a competitive mix of total
executive compensation, with particular
emphasis on awards related to increases in
long-term shareholder value.
. To attract and retain top performing
executive officers for the long-term
success of the Company.
In furtherance of these objectives, the Committee has
determined that there should be two specific components of
executive compensation: base salary and a cash bonus.
Base Salary. The Committee makes recommendations to the
Board concerning executive compensation on the basis of surveys
of salaries paid to executive officers of other bank holding
companies, non-diversified banks and other financial
institutions similar in size, market capitalization and other
characteristics. The Committee's objective is to provide for
base salaries that are competitive with the average salary paid
by the Company's peers.
Bonus. The Company pays a discretionary bonus on an annual
basis based on satisfaction of a combination of individual and
Company performance objectives. Whether bonuses are paid each
year and the amount of such bonuses are determined by the
Committee, subject to ratification by the Board of Directors, at
year end based on the Company's ability to achieve performance
goals established by the Board in each year's Business Plan.
Discretionary bonuses for achieving specific performance goals
during the year are paid during the next fiscal year.
In addition, the Committee believes that stock related
award plans are an important element of compensation since they
provide executives with incentives linked to the performance of
the Common Stock. Accordingly, the Committee intends to
recommend that the Board of Directors adopt a stock option plan
and a management recognition plan, which plans would be subject
to stockholder approval at a meeting currently expected to be
held in May 2000.
It is anticipated that the Board of Directors will adopt a
stock option plan pursuant to which officers and directors would
be granted options to acquire Common Stock and that the Company
will reserve for issuance pursuant to an option plan a number of
shares equal to 10% of the outstanding Common Stock. The
Committee believes that an option plan can serve as a means of
providing key employees with the opportunity to acquire a
proprietary interest in the Company and to link their interests
with those of the Company's stockholders.
In addition, it is anticipated that the Board of Directors
will adopt a management recognition plan pursuant to which
officers and directors would be granted awards of restricted
Common Stock, subject to vesting and forfeiture as determined by
the Committee, and that the Company will reserve for issuance
pursuant to a management recognition plan a number of shares
equal to 4% of the outstanding Common Stock. The purpose of a
management recognition plan is to reward and retain personnel of
experience and ability in key positions of responsibility by
providing such employees with a proprietary interest in the
Company as compensation for their past contributions to the
Company and the Bank and as an incentive to make further
contributions in the future.
Compensation of the President
Mr. McGill's base salary is established in accordance with
the terms of the employment agreement entered into between the
Bank and Mr. McGill. See " -- Executive Compensation --
Employment Agreements." The Committee determines the
President's compensation on the basis of several factors. In
determining Mr. McGill's base salary, the Committee reviewed
compensation paid to chief executive officers of similarly
situated banks and non-diversified banks and other financial
institutions of similar asset size. The Committee believes that
Mr. McGill's base salary is generally
7
<PAGE>
<PAGE>
competitive with the average salary paid to executives of
similar rank and expertise at banking institutions which the
Committee considered to be comparable and taking into account
the Bank's superior performance and complex operations relative
to comparable institutions.
Mr. McGill received bonus compensation for fiscal year 1999
pursuant to the same basic factors as described above under " --
Bonus." In establishing Mr. McGill's bonus, the Committee
considered the Company's overall performance, record of increase
in shareholder value and success in meeting strategic objectives
and his personal leadership and accomplishments. These factors
were considered in conjunction with the Company's financial
results for fiscal 1999 in relation to the established Business
Plan and achieving certain annual performance goals, including
but not limited to return on assets and return on equity,
satisfactory results of regulatory examinations and independent
audits, and successfully completing the conversion of the Bank
from the mutual to the stock form of ownership and from a
savings bank to a commercial bank.
The Committee believes that the Company's executive
compensation program serves the Company and its shareholders by
providing a direct link between the interests of executive
officers and those of shareholders generally and by helping to
attract and retain qualified executive officers who are
dedicated to the long-term success of the Company.
Members of the Executive Committee
James A. Barnwell
Richard C. Keziah
James C. McGill
Richard H. Shirley
8
<PAGE>
<PAGE>
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph and table which follow show the cumulative total
return on the Common Stock for the period from April 26, 1999
(the day trading began in the Common Stock following completion
of the Company's initial public offering) through the fiscal
year ended September 30, 1999 with (1) the total cumulative
return of all companies whose equity securities are traded on
the Nasdaq market and (2) the total cumulative return of banking
companies traded on the Nasdaq market. The comparison assumes
$100 was invested on April 26, 1999 in the Company's Common
Stock and in each of the foregoing indices and assumes
reinvestment of dividends. The stockholder returns shown on the
performance graph are not necessarily indicative of the future
performance of the Common Stock or of any particular index.
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
APRIL 26, 1999 THROUGH SEPTEMBER 30, 1999
04/26/99 09/30/99
-------- --------
COMPANY $100 $103.1
NASDAQ 100 104.0
NASDAQ BANKS 100 92.3
[Line graph appears here depicting the cumulative total
shareholder return of $100 invested in the Common Stock as
compared to $100 invested in all companies whose equity
securities are traded on the Nasdaq market and $100 invested in
banking companies traded on the Nasdaq market. Line graph plots
the cumulative total return from April 26, 1999 to September 30,
1999. Plot points are provided above.]
9
<PAGE>
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth
the cash and noncash compensation for the fiscal years ended
September 30, 1999 and 1998 awarded to or earned by the
President and the four other executive officers who earned
salary and bonus in fiscal 1999 and 1998 exceeding $100,000 for
services rendered in all capacities to the Company and the Bank.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
NAME AND FISCAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION
- ------------------ ------ ------ ----- ------------------- ------------
<S> <C> <C> <C> <C> <C>
James C. McGill 1999 $175,000 $365,000 -- $155,383 (2)
President and Chief 1998 175,000 257,000 -- 107,352
Executive Officer of
the Company and the
Bank
A. Christine Baker 1999 95,000 182,500 -- 69,135 (2)
Treasurer and 1998 95,000 128,500 -- 44,469
Secretary of the
Company and the
Bank and Executive
Vice President-
Chief Financial
Officer of the Bank
Fairfax C. Reynolds 1999 95,000 182,500 -- 72,112 (2)
Vice President and 1998 95,000 128,500 -- 47,476
Assistant Secretary
of the Company and
Executive Vice
President of the
Bank
Frank Gavigan 1999 76,000 35,000 -- 22,165 (2)
Senior Vice 1998 76,000 30,000 -- 10,260
President-Senior
Credit Officer of
the Bank
John D. Hansell 1999 42,000 72,607 (3) -- 22,616 (2)
Manager-First 1998 42,000 68,220 (3) -- 5,460
Capital Services,
LLC
<FN>
____________
(1) Executive officers receive indirect compensation in the form of certain
perquisites and other personal benefits. The amount of such benefits
received by the named executive officer in fiscal 1999 did not exceed 10% of
the executive officer's salary and bonus.
(2) Includes $186, $186, $186, $2,280 and $1,260 in matching contributions under
the Bank's 401(k) Plan for executive officers McGill, Baker, Reynolds,
Gavigan and Hansell, respectively. Also includes $125,383 $39,135 and
$42,112 accrued under the Company's Deferred Compensation Plan for the
benefit of executive officers McGill, Baker and Reynolds, respectively, for
service as an employee during the year ended September 30, 1999. Also
includes $29,814, $29,814, $29,814, $19,885 and $21,356 in shares of Common
Stock committed to be allocated during the year ended September 30, 1999
under the ESOP to the accounts of executive officers McGill, Baker, Reynolds,
Gavigan and Hansell, respectively.
(3) Consists of commissions.
</FN>
</TABLE>
10
<PAGE>
<PAGE>
Employment Agreements and Guaranty Agreements. The Bank has
entered into employment agreements with James C. McGill, A.
Christine Baker and Fairfax C. Reynolds (each individual is
referred to herein as an "Employee" and the three individuals
are referred to collectively as the "Employees"). The Board
believes that the employment agreements assure fair treatment of
the Employees in their careers with the Company by assuring them
of some financial security.
The employment agreements became effective on April 23, 1999
and provide for a term of three years, with an annual base
salary equal to the Employee's existing base salary rate in
effect on the date of conversion. On each anniversary date of
the commencement of the employment agreements, the term of the
Employee's employment will be extended for an additional
one-year period beyond the then effective expiration date upon a
determination by the Bank's Board of Directors that the
performance of the Employee has met the required performance
standards and that such employment agreements should be
extended. The employment agreements provide the Employee
with a salary review by the Board of Directors not less often
than annually, as well as with inclusion in any discretionary
bonus plans, retirement and medical plans, vacation and sick
leave and any fringe benefits that become available to senior
management, including for example, any stock option or incentive
compensation plans and any other benefits commensurate with
their responsibilities. If the Board decides not to renew an
employment agreement for any reason, and if the Employee remains
an employee of the Bank until the Agreement expires, the Bank
must pay the Employee an amount equal to two times total
compensation if the Employee is later terminated.
The employment agreements terminate upon the Employee's
death, may terminate upon the Employee's disability and are
terminable for just cause, no severance benefits are available.
If the Bank terminates the Employee without just cause, the
Employee is entitled to receive three times total compensation
as well as continued medical and dental insurance under any
group plan chosen by the Employee from the plans the Bank
maintains, unless that coverage is not permitted by the terms of
such plan, in which case the Bank will remit to the Employee,
not less frequently than monthly, the actual cost to the
Employee of equivalent insurance. These provisions are in
addition to, and not in lieu of, any other rights that the
Employee has under the employment agreement and will continue
until the Employee first becomes eligible for participation in
Medicare. If the employment agreements are terminated due to
the Employee's "disability" as defined in the employment
agreements, the Employee will be entitled to a continuation of
his or her salary and benefits through the date of termination,
including any period prior to the establishment of the
Employee's disability. In the event of the Employee's death
during the term of the employment agreements, his or her estate
will be entitled to receive three times total compensation
determined as of the date of death. Each Employee is able to
voluntarily terminate his or her employment agreement by
providing 90 days' written notice to the Board of Directors, in
which case the Employee is entitled to receive only his or her
compensation, vested rights, and benefits up to the date of
termination.
The Bank will pay a severance benefit equal to the
difference between the product of 2.99 and the Employee's "base
amount" as defined in the Internal Revenue Code Section
280G(b)(3) and the sum of any other "parachute payments" as
defined under Code Section 280G(b)(2) that the Employee receives
on account of the change in control, and (ii) provide long-term
disability and medical insurance for 18 months if any of the
following occur:
. the Employee's involuntary termination of employment
other than for "just cause" during the period
beginning six months before a change in control and
ending on the later of the first anniversary of the
change in control or the expiration date of the
employment agreements (the "Protected Period");
. the Employee's voluntary termination within 90 days of
the occurrence of certain specified events occurring
during the Protected Period which have not been
consented to by the Employee; or
. the Employee's voluntary termination of employment for
any reason within the 30-day period beginning on the
date of the change in control.
The Employee will be paid either in one lump sum within ten
days of the later of the date of the change in control and the
Employee's last day of employment or if prior to the date which
is 90 days before the date on which a change in control occurs,
the Employee filed a duly executed irrevocable written election,
payment of such amount shall
11
<PAGE>
<PAGE>
be made according to the elected schedule. "Change in control"
generally refers to the acquisition, by any person or entity, of
the ownership or power to vote more than 25% of the Company's or
the Bank's voting stock, the control of the election of a
majority of the Company's or the Bank's directors, or the
exercise of a controlling influence over the Company's or the
Bank's management or policies. In addition, under the
employment agreements, a change in control occurs when, during
any consecutive two-year period, directors of the Company or the
Bank at the beginning of such period cease to constitute
two-thirds of the Board of Directors of the Company or the Bank,
unless the election of replacement directors was approved by a
two-thirds vote of the initial directors then in office. The
employment agreements provide that within 10 business days of a
change in control, the Company must deposit in a trust an amount
equal to the Internal Revenue Code Section 280G maximum. The
payments that would be made to Mr. McGill, Ms. Baker and Mr.
Reynolds assuming termination of employment under the foregoing
circumstances at September 30, 1999 would have been
approximately $1.3 million, $645,000 and $645,000, respectively.
These provisions may have an anti-takeover effect by making it
more expensive for a potential acquiror to obtain control of the
Company. In the event that the Employee prevails over the Bank,
or obtains a written settlement, in a legal dispute as to the
employment agreement, he or she will be reimbursed for legal and
other expenses.
In addition to the employment agreements, the Company has
entered into guaranty agreements with each of the Employees.
The guaranty agreements provide that the Company will perform
all covenants and honor all obligations required to be performed
or to which the Bank is subject pursuant to the employment
agreements in the event that such covenants are not performed or
obligations are not honored by the Bank, and that to the extent
permitted by law, the Company will be jointly and severally
liable with the Bank for the payment of all amounts due under
the employment agreements. The guarantee agreements provide the
Employee with a salary review by the Board of Directors not less
often than annually, as well as with inclusion in any
discretionary bonus plans, retirement and medical plans,
customary fringe benefits, vacation and sick leave.
DIRECTOR COMPENSATION
Fees. Each non-employee member of the Bank's Board of
Directors receives a monthly retainer fee based on the following
schedule:
. the Chairman of the Board - $2,000;
. members of the Executive Committee - $1,750; and
. other directors - $1,500.
In addition, non-employee members of the Company's Board of
Directors receive a monthly retainer fee of $250. Officers who
are directors are not compensated for their service as
directors.
Deferred Compensation Plan. The Bank adopted the DCP,
effective September 24, 1997, for the Bank's directors and
select executive officers. Under the DCP, before each fiscal
year begins, each non-employee director may elect to defer
receipt of all or part of his future fees and any other
participant may elect to defer receipt of up to 25% of his or
her salary or 100% of his or her bonus compensation for the
year. Deferred amounts are credited at the end of the calendar
year to bookkeeping accounts in the name of each participant.
On each September 30, the Company will credit the accounts
of directors Barnwell, Bean, Keziah, McClure, Quakenbush,
Shirley, and Stadler with $8,795, $7,852, $10,051, $7,852,
$7,852, $8,795 and $7,852, respectively, provided that such
annual credits shall not be made for the benefit of non-employee
directors after 12 years of service credits. Similarly, the
plan provides supplemental executive retirement benefits for
executive officers McGill, Baker and Reynolds through initial
credits and through annual credits on each September 30th of
$81,972, $30,789 and $33,766, respectively. Each participant is
fully vested in his or her account balance under the DCP.
Until distributed in accordance with the terms of the DCP,
each participant's account will be credited with a rate of
return equal to the Bank's highest rate of interest paid on the
Bank's one-year certificates of deposit. As of April 23, 1999,
each participant may prospectively elect to instead have all or
part of his account credited with the total return on the
Company's common stock. Account balances will normally be
distributed in five substantially equal annual
12
<PAGE>
<PAGE>
installments beginning during the first quarter of the calendar
year following the calendar year in which the participant ceases
to be a director or employee, with any subsequent payments being
made by the last day of the first quarter of each subsequent
calendar year until the participant has received the entire
amount of his or her account. Participants may, however, elect
to receive their distributions in a lump sum or in installments
paid over a period of up to 10 years. In the event of a
participant's death, the balance of his plan account will be
paid in a lump sum (unless the participant elects to continue
the previously designated distribution method) to his designated
beneficiary, or if none, his estate.
The Bank has established a trust in order to hold assets
with which to pay plan benefits to participants. Trust assets
are subject to claims of general creditors. In the event a
participant prevails over the Bank in a legal dispute as to the
terms or interpretation of the DCP, he or she would be
reimbursed for his legal and other expenses.
TRANSACTIONS WITH MANAGEMENT
The Bank offers loans to its directors and executive
officers. These loans were made in the ordinary course of
business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve
more than the normal risk of collectibility or present other
unfavorable features. Under current law, the Bank's loans to
directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those
prevailing for comparable transactions with other persons and
must not involve more than the normal risk of repayment or
present other unfavorable features. Furthermore, all loans to
such persons must be approved in advance by a disinterested
majority of the Company's Board of Directors. At September 30,
1999, loans to directors and executive officers and their
affiliates totaled $8.2 million, or 11.4% of the Company's
stockholders' equity, at that date.
________________________________________________________________
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
________________________________________________________________
KPMG LLP was the Company's independent auditors for the 1999
fiscal year. KPMG LLP has been retained by the Board of
Directors to be the Company's auditors for the 2000 fiscal year.
A representative of KPMG LLP is expected to be present at the
Annual Meeting and will have the opportunity to make a statement
if he or she so desires. The representative will also be
available to answer appropriate questions.
________________________________________________________________
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
________________________________________________________________
Pursuant to regulations promulgated under the Exchange Act,
the Company's officers and directors and all persons who own
more than ten percent of the Common Stock ("Reporting Persons")
are required to file reports detailing their ownership and
changes of ownership in the Common Stock and to furnish the
Company with copies of all such ownership reports that are
filed. Based solely on the Company's review of the copies of
such ownership reports which it has received in the past fiscal
year or with respect to the past fiscal year, or written
representations that no annual report of changes in beneficial
ownership were required, the Company believes that during fiscal
year 1999 all Reporting Persons have complied with these
reporting requirements.
________________________________________________________________
OTHER MATTERS
________________________________________________________________
The Board of Directors is not aware of any business to come
before the Annual Meeting other than those matters described
above in this proxy statement and matters incident to the
conduct of the Annual Meeting. However, if any other matters
should properly come before the Annual Meeting, it is intended
that proxies in the accompanying form will be voted in respect
thereof in accordance with the determination of a majority of
the Board of Directors.
13
<PAGE>
<PAGE>
________________________________________________________________
MISCELLANEOUS
________________________________________________________________
The cost of soliciting proxies will be borne by the Company.
The Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by
them in sending proxy materials to the beneficial owners of
Common Stock. In addition to solicitations by mail, directors,
officers and regular employees of the Company may solicit
proxies personally or by telegraph or telephone without
additional compensation.
The Company's 1999 Annual Report to Stockholders, including
financial statements, is being mailed to all stockholders of
record as of the close of business on the Record Date. Any
stockholder who has not received a copy of such Annual Report
may obtain a copy by writing to the Secretary of the Company.
The Annual Report is not to be treated as a part of the proxy
solicitation material or as having been incorporated herein by
reference.
________________________________________________________________
STOCKHOLDER PROPOSALS
________________________________________________________________
For consideration at the Annual Meeting, a stockholder
proposal must be delivered or mailed to the Company's Secretary
no later than December 30, 1999. In order to be eligible for
inclusion in the proxy materials of the Company for the Annual
Meeting of Stockholders for the year ending September 30, 2000,
any stockholder proposal to take action at such meeting must be
received at the Company's executive offices at 445 S. Main
Street, Burlington, North Carolina 27215 by no later than August
22, 2000. Any such proposals shall be subject to the
requirements of the proxy rules adopted under the Securities
Exchange Act of 1934, as amended.
BY ORDER OF THE Board of Directors
/s/ A. Christine Baker
A. Christine Baker
Secretary
December 20, 1999
Burlington, North Carolina
________________________________________________________________
ANNUAL REPORT ON FORM 10-K
________________________________________________________________
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1999 AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT
CHARGE TO EACH STOCKHOLDER AS OF THE RECORD DATE UPON WRITTEN
REQUEST TO THE CORPORATE SECRETARY, 1st STATE BANCORP, INC., 445
S. MAIN STREET, BURLINGTON, NORTH CAROLINA 27215.
14
<PAGE>
<PAGE>
________________________________________________________________
REVOCABLE PROXY
________________________________________________________________
1ST STATE BANCORP, INC.
BURLINGTON, NORTH CAROLINA
________________________________________________________________
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 25, 2000
The undersigned hereby appoints Richard H. Shirley, James G.
McClure and T. Scott Quakenbush with full powers of
substitution, to act as attorneys and proxies for the
undersigned, to vote all shares of the common stock of 1st State
Bancorp, Inc. which the undersigned is entitled to vote at the
Annual Meeting of Stockholders, to be held at the main office of
1st State Bank (the "Bank") located at 445 S. Main Street,
Burlington, North Carolina, on Tuesday, January 25, 2000, at
5:30 p.m. (the "Annual Meeting"), and at any and all
adjournments thereof, as follows:
VOTE
FOR WITHHELD
--- --------
1. The election as directors of all
nominees listed below (except as
marked to the contrary below). [ ] [ ]
Bernie C. Bean
James C. McGill
Virgil L. Stadler
INSTRUCTION: TO WITHHOLD YOUR VOTE
FOR ANY OF THE INDIVIDUALS NOMINATED, INSERT
THAT NOMINEE'S NAME ON THE LINE PROVIDED BELOW.
_____________________________
2. The transaction of such other business
as may properly come before the Annual
Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES
LISTED ABOVE.
________________________________________________________________
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS. IF ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL
MEETING, INCLUDING MATTERS RELATING TO THE CONDUCT OF THE ANNUAL
MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN ACCORDANCE WITH THE DETERMINATION OF A MAJORITY OF THE BOARD
OF DIRECTORS. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS
OF NO OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING.
________________________________________________________________
<PAGE>
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the
Annual Meeting or at any adjournment thereof, then the power of
said attorneys and prior proxies shall be deemed terminated and
of no further force and effect. The undersigned may also revoke
his proxy by filing a subsequent proxy or notifying the
Secretary of his decision to terminate his proxy.
The undersigned acknowledges receipt from the Company prior
to the execution of this proxy of a Notice of Annual Meeting and
a Proxy Statement dated December 20, 1999.
Dated: ________________, 2000
______________________________ ______________________________
PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER
______________________________ ______________________________
SIGNATURES OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
Please sign exactly as your name appears on the enclosed
card. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. Corporation
proxies should be signed in corporate name by an authorized
officer. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
