<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1999
================================================================================
REGISTRATION NO. 333-70981
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
________________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________________________
FIRST COMMUNITY FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
NORTH CAROLINA 6036 APPLIED FOR
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code Number)
organization)
708 SOUTH CHURCH STREET
POST OFFICE BOX 1837
BURLINGTON, NORTH CAROLINA 27216-1837
(336) 227-3631
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
_____________________
<TABLE>
<S> <C>
WILLIAM R. GILLIAM, PRESIDENT COPIES TO:
First Community Financial Corporation EDWARD C. WINSLOW III
708 South Church Street RANDALL A. UNDERWOOD
Post Office Box 183 Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
Burlington, North Carolina 27216-1837 2000 Renaissance Plaza
(336) 227-3631 Post Office Box 26000
Greensboro, North Carolina 27420
(Name and address, including zip code,
and telephone number, including area
code, of agent for service)
</TABLE>
_____________________
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes
effective.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
_______________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
TITLE OF EACH CLASS DOLLAR PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, no par value $37,207,500/(1)(2)/ $15.00 $ 37,207,500 $ 10,343.69(3)
==========================================================================================================================
</TABLE>
(1) The amount to be registered is based upon the maximum of the valuation
range of Community Savings Bank, SSB and the Registrant, as established by
an independent appraisal.
(2) Includes $1,500,000 for shares to be contributed to a charitable
foundation, as described herein.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
<PAGE>
PROSPECTUS
FIRST COMMUNITY FINANCIAL CORPORATION
UP TO 2,380,500 SHARES OF COMMON STOCK
$15.00 PER SHARE
First Community Financial Corporation is offering shares of its common
stock for $15.00 per share. First Community is the proposed holding company for
Community Savings Bank, SSB, which is converting from a mutual savings bank to a
stock savings bank.
First Community is offering the shares first in a subscription offering to
persons who have subscription rights because of their relationship with
Community Savings. To purchase shares in that offering, you must submit a
properly completed order form, together with full payment for the shares, to
Community Savings before __________, Eastern time, on __________, 1999.
If First Community does not sell enough shares in the offering described
above to complete the conversion, the remaining shares will be offered for sale
to members of the general public with preference given to people who live in
Alamance County, North Carolina. First Community could begin the offering to
members of the general public at any time during the subscription offering and
could terminate it at any time without notice.
First Community is offering between a minimum of 1,530,000 shares and a
maximum of 2,070,000 shares based upon an independent appraisal. If the
appraiser increases its valuation, the number of shares sold could be increased
by 15% above the maximum to 2,380,500 shares.
<TABLE>
<CAPTION>
===========================================================================================================
ESTIMATED UNDERWRITING,
MARKETING AND OTHER FEES AND ESTIMATED NET CONVERSION
PURCHASE PRICE EXPENSES PROCEEDS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share at Minimum $ 15.00 $ 0.57 $ 14.43
Per Share at Maximum $ 15.00 $ 0.49 $ 14.51
Total at Minimum $22,950,000 $ 874,000 $22,076,000
Total at Maximum $31,050,000 $1,005,000 $30,045,000
===========================================================================================================
</TABLE>
First Community has received conditional approval for the common stock to
be listed for quotation on the Nasdaq National Market under the symbol
FCFN.
Trident Securities, Inc. has agreed to assist First Community in selling
the shares, but does not guarantee that the minimum number of shares will be
sold. First Community and Community Savings will hold all funds received from
subscribers in an interest-bearing savings account at Community Savings until
First Community completes or terminates the offering.
Community Savings has established a stock information center at Community
Savings' headquarters office at 708 South Church Street, Burlington, North
Carolina, telephone number (336) __________.
Neither the Securities and Exchange Commission, the Administrator of the
Savings Institutions Division, North Carolina Department of Commerce, any State
Securities Commission, nor the Federal Deposit Insurance Corporation has
approved or disapproved of these securities or passed on the accuracy or
adequacy of the disclosures in this prospectus. Any representation to the
contrary is a criminal offense.
The shares of common stock offered are not savings accounts or savings
deposits and are not insured by the Federal Deposit Insurance Corporation or any
other government agency. The securities are subject to investment risks,
including the possible loss of the principal invested.
FOR A DISCUSSION OF FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE
INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE _____.
TRIDENT SECURITIES, INC.
________________, 1999
<PAGE>
COMMUNITY SAVINGS BANK, SSB
BURLINGTON, NORTH CAROLINA
[MAP OF NORTH CAROLINA WITH
ALAMANCE COUNTY HIGHLIGHTED]
2
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus and does
not contain all the information that you need to know before making an informed
investment decision. To understand the stock offering fully, you should read
this entire prospectus carefully, including the financial statements and the
notes to the financial statements of Community Savings.
FIRST COMMUNITY FINANCIAL First Community is a North Carolina corporation
CORPORATION recently organized by the Board of Directors of
Community Savings to acquire all of the capital
stock that Community Savings will issue upon its
conversion from the mutual to stock form of
ownership. First Community has not yet engaged in
any business. Upon completion of the conversion,
its business will initially consist solely of
owning Community Savings, investing the proceeds
of the conversion that it retains and holding the
indebtedness to be outstanding from Community
Savings' Employee Stock Ownership Plan.
First Community's executive office is located at
708 South Church Street, Burlington, North
Carolina, and its telephone number is (336) 227-
3631.
COMMUNITY SAVINGS BANK, SSB Community Savings is a North Carolina-chartered
mutual savings bank headquartered in Burlington,
North Carolina. Community Savings is a member of
the Federal Home Loan Bank system, and its
deposits are insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance
Corporation.
Community Savings conducts business through its
headquarters office in Burlington, North Carolina,
its two full service branches in Burlington, its
full service branch in Graham, North Carolina and
its loan origination office in Burlington.
Community Savings' primary market area consists of
the communities in Alamance County, North
Carolina. Alamance County is located in the
Piedmont area of North Carolina east of Greensboro
and west of Durham. At September 30, 1998,
Community Savings had assets of $170.4 million,
net loans of $127.4 million, deposits of $138.0
million and equity of $23.3 million.
Community Savings is primarily engaged in the
business of attracting deposits from the general
public and using such deposits to make loans in
its primary market area. Community Savings makes a
wide variety of loans. Most of Community Savings'
fixed interest rate home mortgage loans are
originated with the intention that they will be
sold in the secondary market. Variable rate loans
are generally held in Community Savings'
portfolio. Community Savings has been, and intends
to continue to be, a community-oriented financial
institution offering a variety of financial
services to meet the needs of the communities it
serves.
Highlights of Community Savings' operations
include:
. Capital Position. As of September 30, 1998,
Community Savings had equity of $23.3 million.
Its capital substantially exceeded all minimum
capital requirements imposed by its federal and
state regulators.
3
<PAGE>
. Profitable Operations. For the nine months
ended September 30, 1998 Community Savings had
net income of $433,000 and a return on average
assets of 0.34%. For the fiscal years ended
December 31, 1997 and 1996, Community Savings
had net income of $590,000 and $399,000 and a
return on average assets of 0.36% and 0.26%.
Community Savings' future earnings will be
affected by changes in market interest rates
and other factors.
. Asset Quality. On September 30, 1998, December
31, 1997 and December 31, 1996, Community
Savings had a low level of nonperforming
assets. Community Savings did not own any
foreclosed properties on any of those dates.
See "Business of Community Savings -
Nonperforming Assets and Asset
Classification."
. Offerings of New Products. For many years,
Community Savings operated as a traditional
thrift institution in accepting deposits and
making almost exclusively home mortgage loans.
However, Community Savings has recently begun
to change its methods of operation so that in
the future it will be able to offer its
customers a wider array of products and operate
more like a community bank than a traditional
thrift institution. While this transformation
process is not yet complete, many of the
organizational changes necessary to the process
have occurred at substantial cost to Community
Savings.
. Changing Asset Mix. In recent years, the
composition of Community Savings' assets has
changed significantly. In December 31, 1995,
loans accounted for only 51% of its assets and
very few of its loans were commercial,
construction or consumer loans. On September
30, 1998, loans accounted for 75% of Community
Savings' assets, and commercial, construction
and consumer loans accounted for a significant
portion of its loan portfolio. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operation -
Management Strategy."
THE CONVERSION The conversion involves the transformation of
Community Savings from mutual to stock form, First
Community's acquisition of all of the outstanding
capital stock of Community Savings and First
Community's sale of its common stock to the
depositors and borrowers of Community Savings and
other persons who have the right to purchase
shares.
The conversion and the offerings will not be
completed if they are not approved by various
federal and state regulatory officials and by the
members of Community Savings eligible to vote at a
special meeting to be held on _______________,
1999.
REASONS FOR THE CONVERSION The management of Community Savings recognizes
that banking and financial services organizations
are in the process of fundamental changes,
reflecting changes in local, national and
international economies, changes in technology and
changes in state and federal laws. Management
believes that converting
4
<PAGE>
Community Savings from mutual to stock form and
organizing First Community as a holding company
will enhance Community Savings' ability to
complete the process of transforming itself from a
traditional thrift institution to a community bank
and its ability to compete in its changing
operating environment. Community Savings also
believes that its performance will be enhanced if
its customers, its employees, its directors and
others in its local community are given the
opportunity to invest in its future as
owners.
The existing management of Community Savings and
First Community believes that it will be in the
best interests of Community Savings, First
Community and First Community's stockholders to
remain an independent financial institution. If
the conversion is approved and completed, First
Community and Community Savings intend to pursue
the business strategy described in this prospectus
with the goal of enhancing shareholder value over
the long term. Neither First Community nor
Community Savings has any plan to be acquired by
any larger financial institution.
COMMUNITY SAVINGS CHARITABLE To continue its long-standing support of
FOUNDATION charitable causes in its local community,
Community Savings has established a charitable
foundation called Community Savings Charitable
Foundation. If the conversion is approved and
completed, Community Savings expects to acquire up
to 100,000 newly issued shares of First
Community's common stock for $1,500,000 and
contribute those shares to the foundation. The
foundation will use those shares to support
various charitable causes in the communities in
which Community Savings operates.
THE OFFERINGS Between 1,530,000 and 2,380,500 shares of First
Community's common stock are being offered at the
price of $15.00 per share in a subscription
offering to the following persons in the following
order of priority:
(1) Community Savings' depositors as of June 30,
1997 who had deposits at the close of
business on that date of at least $50;
(2) Community Savings' employee stock ownership
plan;
(3) Community Savings' depositors as of
_______________ who had deposits at the close
of business on that date of at least
$50;
(4) Community Savings' depositor and borrower
members as of _______________, 1999 who did
not have deposits of at least $50 on June 30,
1997 or _____________________________;
and
(5) directors, officers and employees of
Community Savings who are not described in
categories (1) through (4) above.
The beneficial owners of individual retirement
accounts, Keogh savings accounts and other similar
retirement accounts, as opposed to the trustees or
custodians for the accounts, can exercise
subscription rights related to those accounts.
5
<PAGE>
If First Community receives more subscriptions
than there are shares offered, available shares
will be allocated among subscribers, and
subscriptions of subscribers in prior categories
will be filled first.
Shares of common stock not subscribed for in the
subscription offering, if any, will be offered in
a community offering to members of the general
public, with priority given to people and trusts
for people who are residents of Alamance County,
North Carolina, including IRAs, Keogh accounts and
similar retirement accounts established for the
benefit of people in that county. First Community
and Community Savings may reject orders in the
community offering in whole or in part. If there
is a community offering, management expects that
First Community will offer all shares not
purchased in the community offering to the general
public in a syndicated community offering.
STOCK PRICING AND NUMBER OF The purchase price of the stock offered in the
SHARES TO BE OFFERED conversion is $15.00 per share. The amount of
VALUATION OF THE stock sold will be based upon an independent
estimated market value of First Community and
Community Savings. Ferguson & Company has
determined that, in its opinion, on December 9,
1998, the estimated market valuation, or valuation
range, of First Community and Community Savings
was from $22,950,000 to $31,050,000. After the
offerings terminate, Ferguson will determine the
final estimated market value, and that amount of
stock will be sold.
Depending upon market and financial conditions
after commencement of the subscription offering,
the estimated market value and the amount of stock
to be sold could be increased to up to 15% above
the maximum of the valuation range, or to
$35,707,500. Subscribers will have no right to
cancel, rescind or change their orders as a result
of the increase. If the final estimated market
value is less than $22,950,000 or more than
$35,707,500, no shares will be sold until
subscribers are given the right to cancel, rescind
or change their orders.
If errors are made in allocating shares, First
Community may issue additional shares of its
common stock, up to 3% of the number of shares
issued in the conversion, to correct the errors.
Those shares would also be issued for $15.00 per
share.
EXPIRATION DATE OF THE Subscription rights in the subscription offering
Eastern SUBSCRIPTION AND expire at 12:00 Noon., Time, on _______________,
COMMUNITY OFFERINGS 1999, unless extended. First Community may
commence a community offering at any time after
the subscription offering begins and may end any
community offering at any time, but not later than
_______________, 1999, unless extended with the
approval of regulatory officials.
STOCK PURCHASE LIMITATIONS Minimum: 30 shares for $450.
Maximum:
. No purchaser may buy more than 15,000 shares
for $225,000.
6
<PAGE>
. No purchasers exercising subscription rights
as a result of a single account may buy more
than 15,000 shares for $225,000 in the
aggregate.
. Purchasers acting together may buy no more
than 20,000 shares for $300,000 in the
aggregate.
. Purchasers, together with
. their spouse or relatives who live in the
same home or who are directors or
executive officers of Community
Savings,
. corporations or other organizations of
which a purchaser is an officer, partner
or 10% owner, and
. trusts and estates in which the purchaser
has a substantial beneficial interest or
serves as a fiduciary
may buy no more than 20,000 shares for
$300,000 in the aggregate.
. Community Savings' employee stock ownership
plan may buy up to 8% of the sum of the
shares issued in the conversion and the
shares contributed to the foundation.
Purchase limitations may be changed by Community
Savings' Board of Directors. For a more detailed
description of the maximum purchase limitations,
see "The Conversion - Maximum Purchase
Limitations."
HOW TO ORDER STOCK If you have subscription rights, you may order
shares of stock in the subscription offering only
by returning the original of the stock order form
accompanying this prospectus, properly completed
with full payment for all of the shares ordered.
Community Savings must receive original stock
order forms and required payments for purchases in
the subscription offering prior to 12:00 noon on
_______________, 1999. Copies of stock order
forms, including facsimile copies, will not be
accepted.
Purchasers in the community offering must deliver
original stock order forms and required payments
for purchases prior to the time the community
offering terminates, which may be at any time, but
not later than ________________, 1999, unless
extended with the consent of regulatory
officials.
REQUIRED FORMS OF PAYMENT Payment for subscriptions may be made:
FOR SHARES
. in cash, if delivered in person;
. by check, bank draft or money order; or
. by authorization of withdrawal from certain
deposit accounts maintained at Community
Savings which contain sufficient funds for
the purchase.
7
<PAGE>
No wire transfers will be accepted.
Payments made in cash, by check, bank draft,
negotiable order of withdrawal or money order will
earn interest at the rate Community Savings is
paying on its statement savings accounts from the
date payment is received until the conversion is
completed or terminated or, in the case of an
order submitted in the community offering, until
it is determined that the order will not be
accepted. Subscription payments made by
authorization of withdrawal from a deposit account
at Community Savings will continue to earn
interest at the rate being paid on the account
until the conversion is completed or terminated,
and the funds will be unavailable to the depositor
after the order is submitted.
No early withdrawal penalties will be incurred in
connection with payments made through
authorization of withdrawals from certificate
accounts, including IRA, Keogh and similar
retirement accounts, maintained at Community
Savings. However, if after such withdrawal the
applicable minimum balance requirement is not
satisfied, the certificate account will be
canceled and the remaining balance will earn
interest at the rate Community Savings is paying
on its statement savings accounts.
Payment for stock may be made from funds in an
IRA, Keogh or similar account at Community Savings
only if the beneficial owner of such account
directs Community Savings to transfer that account
to a self-directed account in the name of an
independent trustee. Persons wishing to use their
Community Savings IRA's to purchase stock must
visit the Stock Information Center by
________________, 1999 in order for the necessary
paperwork for such purchases to be executed before
the offering terminates.
Once an order is delivered, it cannot be revoked
or changed without the consent of Community
Savings.
MARKET FOR COMMON STOCK Neither First Community nor Community Savings has
ever issued stock before, and there is no existing
market for the common stock. First Community has
received conditional approval to have the common
stock listed for quotation on the Nasdaq National
Market under the symbol "FCFN".
DIVIDEND POLICY After the conversion, First Community currently
expects to pay cash dividends on the common stock
twice each year at an initial semiannual rate of
15 cents per share, or an annual rate of 30 cents
per share. First Community expects that the first
dividend will be paid after the end of the first
calendar quarter which ends at least six months
after the conversion. In addition, First Community
could pay special nonrecurring cash dividends.
First Community's Board of Directors will
determine if and when dividends will be paid.
There can be no assurance that dividends will be
paid on the common stock or that, if dividends are
paid, they will not be reduced or eliminated in
the future.
Within the first year after completion of the
conversion, neither First Community nor Community
Savings will pay any dividend or make any
distribution that represents a return of capital
for income tax purposes.
8
<PAGE>
First Community's ability to pay dividends may be
dependent upon its receipt of dividends from
Community Savings. Community Savings' ability to
pay dividends is restricted.
For a detailed discussion of First Community's
dividend policy, see "Dividend Policy."
SUBSCRIPTION RIGHTS ARE Subscription rights are not transferable.
Subscriptions rights may be exercised
NOT TRANSFERABLE only by the person to whom they are issued and
only for his or her own account. Persons
exercising subscription rights are required to
certify that they are purchasing shares for their
own accounts and that they have no agreement or
understanding for the sale or transfer of the
shares. If you transfer subscription rights, you
will forfeit your right to purchase, and other
sanctions may be imposed on you.
USE OF PROCEEDS First Community expects to loan to the employee
stock ownership plan between $1,956,000 and
$2,976,600 to enable the plan to purchase shares
of common stock in the conversion. After deducting
the amount of this loan from the proceeds, First
Community plans to retain approximately half of
the remaining net proceeds and initially invest
them primarily in interest-earning deposits, U.S.
government, federal agency and other marketable
securities and mortgage-backed securities.
First Community expects to pay the remainder of
the net proceeds to Community Savings in exchange
for all of the capital stock of Community Savings.
Community Savings expects to use up to $1,500,000
to purchase up to 100,000 newly issued shares of
common stock from First Community, and will then
contribute those shares to the foundation.
Community Savings expects to invest the remaining
proceeds in loans, mortgage-backed securities and
investments consisting primarily of U.S.
government and federal agency obligations,
interest-earning deposits and other marketable
securities.
First Community and Community Savings may use
proceeds of the offerings to acquire common stock
in the open market for use in a management
recognition plan and a stock option plan expected
to be adopted sometime after the conversion.
See "-Benefits of the Conversion to
Management."
In addition, First Community and Community Savings
could use proceeds of the offerings to acquire or
construct other branch offices in Alamance County
or surrounding counties and to acquire other
financial institutions. However, neither First
Community nor Community Savings has entered into
any agreements or made any definite plans
concerning any such transaction. See "Use of
Proceeds."
STOCK OWNERSHIP BY The directors and executive officers of First
MANAGEMENT Community and of Community Savings and their
associates currently anticipate subscribing for
218,333 shares of common stock in the amount of
$3,275,000. This amount represents from 14.3% to
9.2% of the shares of common stock to be
9
<PAGE>
issued in the conversion at the minimum to 15%
above the maximum of the current valuation range.
In addition, it is expected that Community
Savings' employee stock ownership plan will
subscribe for 8% of the sum of the number of
shares of common stock issued in the conversion
and the number of shares contributed to the
foundation.
After the conversion, management expects that,
subject to stockholder approval, directors and
employees of First Community and Community Savings
will receive stock grants for a number of shares
of common stock equal to 4% of the sum of the
number of shares issued in the conversion and the
number of shares of common stock contributed to
the foundation. Management also expects that,
subject to stockholder approval, directors and
employees will receive options to purchase a
number of shares of common stock equal to 10% of
the sum of the number of shares issued in the
conversion and the number of shares of common
stock contributed to the foundation.
BENEFITS OF THE CONVERSION As a part of the conversion, Community Savings
TO MANAGEMENT will establish an employee stock ownership plan to
provide retirement benefits to employees.
Management expects that the plan, using money
loaned by First Community from the offering
proceeds, will acquire shares of common stock
issued in the conversion.
After the conversion, First Community and
Community Savings intend to adopt a management
recognition plan which would make stock grants to
directors and employees and a stock option plan
which would grant stock options to directors and
employees. These plans will be subject to approval
at a meeting of stockholders. If the plans are
approved, management expects that the benefits set
forth in the table below would be available for
distribution to employees and directors. The table
assumes that shares are allocated at $15.00 per
share and that 1,800,000 shares are issued in the
conversion. Stock options are not given any value
in the table because they will have an exercise
price equal to the fair market value of First
Community's common stock on the day the options
are granted. Recipients of stock options will
realize value only if the price of First Community
common stock increases following the date the
stock options are granted.
<TABLE>
<CAPTION>
ESTIMATED PERCENTAGE OF SHARES ISSUED,
VALUE OF INCLUDING SHARES ISSUED
SHARES TO THE FOUNDATION
<S> <C> <C>
Employee stock ownership plan $2,280,000 8.0%
Stock awards $1,140,000 4.0%
Stock options -- 10.0%
</TABLE>
In connection with the conversion, Community
Savings will enter into an employment agreement
with W. R. Gilliam, its President and Chief
Executive
10
<PAGE>
Officer, and First Community will enter into special
termination agreements with four other executive officers.
The employment agreement and special termination agreements
provide certain potential benefits to executive officers in
the event of a change in control.
See "Management of Community Savings" for more details
regarding these benefits.
11
<PAGE>
RISK FACTORS
Investors should consider the following factors, in addition to the
information presented elsewhere in this prospectus, before deciding whether to
purchase the common stock.
After the conversion, First Community's return on equity will be low compared to
other companies, and this could negatively impact the value of the common stock.
Historically, Community Savings' earnings have been negatively impacted by
the fact that its asset portfolio contained lower levels of loans and higher
levels of investment securities than its peer institutions. Investments
generally produce lower rates of return than loans, and in recent years
Community Savings has taken steps to increase the amount of loans outstanding.
Much of this increase has occurred in the higher yielding construction,
commercial and consumer loan portfolios.
At September 30, 1998, Community Savings' ratio of retained income to
assets was 13.7%. Assuming the sale of 1,800,000 shares of common stock in the
conversion and the contribution of 100,000 shares to the foundation, First
Community's ratio of equity to assets would have been 24%. It is doubtful that
First Community will be able to quickly deploy the capital raised in the
conversion in loans and other earning assets in a manner consistent with its
business plan and operating philosophies and in a manner which will generate
near-term earnings which will support its higher capital position.
In addition, the costs associated with new stock-based employee benefits,
such as the employee stock ownership plan and management recognition plan, will
increase First Community's future compensation expenses, thereby adversely
affecting its net income and return on equity. As a result, it is expected that
First Community's return on equity initially will be below industry norms.
Investors expecting a return on equity which will meet or exceed industry norms
for the foreseeable future should carefully evaluate and consider the risk that
such returns will not be achieved.
COMMUNITY SAVINGS PLANS TO CONTINUE INCREASING ITS LEVELS OF CONSTRUCTION,
COMMERCIAL AND CONSUMER LOANS, AND THIS WILL INCREASE THE RISKS ASSOCIATED WITH
ITS LOAN PORTFOLIO.
Community Savings plans to continue increasing its levels of construction,
commercial and consumer loans in the near future. Such loans generally require
specialized underwriting skills and involve more risk than single family
mortgage lending.
Many of Community Savings' construction loans are, and are expected to
continue to be, loans to builders constructing homes and other properties on a
speculative basis. As a result, repayment often depends on the builder's
ability to sell the building upon completion. Community Savings' risk of loss
is also influenced by the accuracy of the estimate of the completed property's
value and by the accuracy of estimated construction costs. Consequently, the
abilities of the builders and general economic and market conditions have a
great impact on whether construction loans perform as expected.
Commercial loans are generally larger than other loans and involve greater
concentration of assets. In addition, payments on these loans depend to a large
degree on results of operation and on the management abilities of the borrower.
Also, as compared to home mortgage loans, it is more likely that the repayment
of these loans will be negatively impacted by adverse conditions in the real
estate market or economy in general.
Consumer loans also generally involve more risk than home mortgage lending
because payment patterns are more significantly influenced by general economic
conditions and because the collateral for these loans, such as automobiles,
frequently consists of depreciating property.
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Increasing interest rates could reduce Community Savings' earnings.
Community Savings' earnings, as is the case with savings institutions
generally, are dependent to a large degree on its net interest income, which is
generally the difference between interest income from loans and investments and
interest expense on deposits and borrowings. Community Savings' interest income
and interest expense are significantly affected by general economic conditions
and by policies of the federal government and various regulatory agencies.
Community Savings' interest rate risk analyses indicate that Community
Savings' asset and liability structure presents significant interest rate risk
and that the value of Community Savings' assets and net interest income could be
negatively impacted by increases in interest rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management."
There is a limited market for the common stock which could make it difficult to
sell and negatively affect the trading price.
Neither First Community nor Community Savings has ever issued stock to the
public. Consequently, no market now exists for the common stock. First
Community has received conditional approval to have the common stock listed for
quotation on the Nasdaq National Market. However, the existence of a public
trading market will depend upon the presence in the marketplace of both willing
buyers and willing sellers at any given time. Because of the limited number of
shares which will be sold in the offering, there can be no assurance that an
active and liquid trading market will develop, or once developed, continue.
Purchasers of common stock should recognize that the absence of an active and
liquid trading market may make it difficult to sell the common stock and may
have an adverse effect on the price. See "Market for Common Stock."
The costs associated with the employee stock ownership plan will reduce First
Community's earnings and stockholders' equity.
Community Savings' employee stock ownership plan expects to purchase, with
funds borrowed from First Community, 8% of the sum of the number of shares of
common stock issued in the conversion and the number of shares contributed to
the foundation. See "Management of Community Savings - Employee Stock Ownership
Plan." Assuming the issuance of 2,070,000 shares in the conversion and the
contribution of 100,000 shares to the foundation, 173,600 shares would be
purchased by the ESOP, which - if such shares are acquired at $15.00 per share -
would have a value of $2,604,000.
If, because of an oversubscription for shares of common stock or for any
other reason, the plan is unable to purchase in the conversion 8% of the sum of
the number of shares issued in the conversion and the number of shares
contributed to the foundation, then the plan expects to purchase such shares in
the open market after the conversion. In that event, the actual cost of the plan
may be more or less than the amounts set forth above because the price paid for
its shares will depend upon the price at which the plan can acquire shares in
the open market. The purchase of common stock by the plan will reduce the
stockholders' equity and the earnings of First Community.
Applicable accounting rules require the measure of compensation recorded by
First Community to be based upon the fair value of the shares owned by the
employee stock ownership plan. Since the fair value of the shares following the
offering cannot be predicted, Community Savings cannot reasonably estimate the
impact of the plan on its financial statements. While an increase in the fair
value of the shares will cause an increase in plan-related expenses for
accounting purposes, an increase in the fair value of the shares after they are
acquired would not increase the actual out-of-pocket cost of the plan.
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<PAGE>
The ownership and voting interests of stockholders may be diluted by the
issuance of shares under the management recognition plan and stock option plan.
Those plans will also increase First Community's compensation expenses and
reduce its earnings.
Management expects to request First Community's stockholders to approve a
management recognition plan and a stock option plan at a meeting after the
conversion. Under the proposed management recognition plan, directors and
employees of Community Savings would be awarded an amount of common stock equal
to 4% of the sum of the number of shares issued in the conversion and the number
of shares contributed to the foundation. Under the proposed stock option plan,
directors and employees of Community Savings would be granted options to
purchase an amount of common stock equal to 10% of the sum of the number of
shares issued in the conversion and the number of shares contributed to the
foundation at exercise prices equal to the market price of the common stock on
the date the options are granted.
Shares issued under the two plans may be from authorized but unissued
shares of common stock or they may be purchased in the open market. If shares
issued under the plans consist of newly issued shares of common stock, the
voting and ownership interests of existing stockholders would be diluted.
The cost of the shares acquired by the management recognition plan will be
expensed equally over the period within which the shares become unrestricted. If
2,070,000 shares of common stock are issued in the conversion and 100,000 shares
are contributed to foundation and if the management recognition plan acquired
86,800 shares at a cost of $15.00 per share with these shares vesting equally
over a five year period, the total annual expense of the management recognition
plan would be $260,400 per year. The granting of options under the stock option
plan may also result in compensation expenses which can not be determined.
See "Pro Forma Data" and "Management of Community Savings - Proposed
Management Recognition Plan" and "- Proposed Stock Option Plan."
Establishment of the foundation will dilute the voting and ownership interests
of stockholders.
Community Savings expects to purchase from the foundation 100,000 newly
issued shares of First Community common stock, with an expected value of
$1,500,000. As a result of the establishment of the foundation, the number of
outstanding shares will be increased by 100,000. As a result, persons
purchasing shares in the conversion will have their ownership and voting
interests in First Community diluted accordingly. Because the shares will be
acquired by First Community's wholly-owned subsidiary, their issuance will not
result in additional capital on a consolidated basis. See "Pro Forma Data"and
"Comparison of Valuation and Pro Forma Information with No Foundation."
The establishment of the foundation will have a negative impact on
earnings.
Community Savings will recognize an estimated $1,500,000 expense in the
quarter in which it makes the contribution to the foundation, which is expected
to be the second quarter of 1999. Such expense will have a material adverse
impact on Community Savings' earnings for the 1999 fiscal year, possibly
resulting in an operating loss for that year. The contribution expense will be
partially offset by the tax deductibility of the expense. Community Savings has
been advised by its tax counsel that the contribution to the foundation will be
deductible for federal income tax purposes, subject to a limitation based on 10%
of Community Savings annual taxable income. If the foundation had been
established at September 30, 1998, Community Savings would have reported a net
loss of $547,000 for the first nine months of 1998 rather than reporting net
income of $443,000. See "The Conversion - Establishment of the Foundation -
Tax Considerations."
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<PAGE>
The contribution to the foundation may not be deductible, which would increase
the negative impact on earnings.
Community Savings estimates that substantially all of the contribution to
the foundation should be deductible for federal tax purposes over a permissible
six-year period. However, no assurance can be made that Community Savings will
have sufficient pre-tax income over the five-year period following 1999 to fully
use the carryover related to the excess contribution in 1999. If it does not,
the expected tax benefit associated with the foundation will be reduced, and the
foundation's negative impact on earnings will be increased. Furthermore,
although First Community and Community Savings have received an opinion of their
tax counsel that Community Savings should be entitled to the deduction for the
contribution to the foundation, there can be no assurance that the IRS will
recognize the foundation as a tax exempt organization or that the deduction will
be permitted. If the foundation was not considered tax exempt, there would be
no tax benefit related to the foundation, and the negative impact on earnings
would be increased. See "The Conversion - Establishment of the Foundation - Tax
Considerations."
The foundation may make it more difficult for an outsider to acquire or gain
control of First Community.
Upon completion of the conversion, the foundation will own 6.13%, 5.26%,
4.61% or 4.03% of the total shares of First Community's common stock outstanding
at the minimum, midpoint, maximum and 15% above the maximum of the valuation
range. The foundation's board of directors (who initially will be appointed by
Community Savings' Board of Directors) will exercise sole voting power over such
shares, subject to their fiduciary duties. This potential voting power might be
used to preclude takeover attempts that certain stockholders deem to be in their
best interests and might tend to perpetuate management.
There could be challenges to the establishment of the foundation, which could
delay the sale of shares or increase the valuation range.
The establishment and funding of a charitable foundation as a part of a
conversion is innovative and has been done in only a limited number of
instances. As such, the foundation may be subject to potential challenges even
though the Boards of Directors of First Community and Community Savings have
carefully considered the various factors involved in establishing the
foundation. If anyone were to institute an action seeking to prevent Community
Savings from establishing the foundation, the conversion could be delayed and
there can be no assurance that the persons would not succeed in eliminating the
foundation or obtaining monetary damages or other relief against First Community
or Community Savings. If Community Savings was forced to eliminate the
foundation, the estimated value of First Community and Community Savings would
increase because the current valuation range takes into account the dilutive
impact of the issuance of the shares to the foundation. Because of its effect
on the valuation of the shares of common stock, the elimination of the
foundation could require that First Community provide new disclosures to
subscribers and give them an opportunity to change their orders, which would
delay the sale of shares.
New legislation or regulation could have a negative impact on First Community or
Community Savings.
Community Savings and First Community are subject to extensive banking
regulation and supervision. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the North Carolina Administrator,
the Board of Governors of the Federal Reserve System, the FDIC, the North
Carolina Legislature or the Congress, could have a material impact on Community
Savings, First Community or the conversion.
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<PAGE>
Congress currently has under consideration various proposals to consolidate
the regulatory functions of the four federal banking agencies: the Office of
Thrift Supervision, the FDIC, the Office of the Comptroller of the Currency and
the Federal Reserve. The outcome of efforts to effect regulatory consolidation
is uncertain. Therefore, Community Savings and First Community are unable to
determine the extent to which legislation, if enacted, could affect their
businesses
First Community's governing documents, regulatory provisions and voting control
of directors, officers and employees may discourage or impede takeover attempts.
First Community's articles of incorporation and bylaws contain provisions
that may discourage attempts to acquire control of First Community that are not
negotiated with First Community's Board of Directors. These provisions may
result in First Community being less attractive to a potential acquiror and may
result in stockholders receiving less for their shares than otherwise might be
available in the event of a takeover attempt. In addition, these provisions may
have the effect of discouraging takeover attempts that some stockholders might
believe to be in their best interests, including takeover proposals in which
stockholders might receive a premium for their shares over the then-current
market price, as well as making it more difficult for individual stockholders or
a group of stockholders to elect directors or to remove incumbent management.
First Community's Board of Directors believes, however, that these provisions
are in the best interests of First Community and its stockholders because the
provisions encourage potential acquirors to negotiate directly with the Board of
Directors, which the Board of Directors believes is in the best position to act
on behalf of all stockholders.
These provisions include, among others, that certain merger, consolidation,
or other business combinations must receive the affirmative vote of at least 75%
of the stockholders if not approved by at least 75% of the directors who are not
affiliated with the other organization involved in the transaction. For a
detailed discussion of these provisions, see "Anti-Takeover Provisions Affecting
First Community and Community Savings."
Banking laws and regulations may deter potential acquirors from seeking to
obtain control of First Community. Applicable banking laws and regulations
contain provisions that, for a period of three years after the conversion is
completed, prohibit any person from directly or indirectly acquiring or offering
to acquire beneficial ownership of more than 10% of any class of equity security
of First Community or Community Savings, with certain exceptions, without the
prior approval of the North Carolina Administrator. The Change in Bank Control
Act, together with North Carolina regulations, require that the consent of the
North Carolina Administrator and Federal Reserve be obtained prior to any person
or company acquiring control of a savings bank or a savings bank holding
company. For a more detailed discussion of these laws and regulations, see
"Anti-Takeover Provisions Affecting First Community and Community Savings" and
"Supervision and Regulation - Regulation of First Community."
Directors and executive officers of Community Savings and First Community
expect to purchase approximately 13.39% to 8.80% of the sum of the number of
shares of common stock issued in the conversion and the number of shares
contributed to the foundation, based upon the minimum and 15% above the maximum
of the valuation range. See "Anticipated Stock Purchases by Management."
It is expected that Community Savings' Employee Stock Ownership Plan will
acquire a number of shares equal to 8% of the sum of the shares issued in the
conversion and the number of shares contributed to the foundation. Employees
will vote the shares allocated to them under the plan, and the plan trustees
(directors of Community Savings) will vote unallocated shares and allocated
shares for which no voting instructions have been received, in their discretion,
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended.
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<PAGE>
Under the proposed management plan, if approved by First Community's
stockholders, a number of shares equal to 4% of the sum of the number of shares
issued in the conversion and the number of shares contributed to the foundation
could be issued to directors and employees of Community Savings. Recipients of
shares under the plan will have voting control over the shares regardless of
whether such shares are unrestricted. See "Management of Community Savings -
Proposed Management Recognition Plan."
Under the proposed stock option plan, if approved by First Community's
stockholders, directors and employees of Community Savings could receive options
to purchase a number of shares equal to 10% of the sum of the number of shares
issued in the conversion and the number of shares contributed to the foundation.
If shares are acquired and held by the plan prior to the exercise of options,
holders of unexercised options are expected to have voting control over the
shares held to satisfy their options. See "Management of Community Savings -
Proposed Stock Option Plan."
In addition, the foundation's directors (who will be initially appointed
by Community Savings' Board of directors) could exercise sole voting power over
between 6.13% and 4.03% of the shares of common stock outstanding based upon
the minimum and 15% above the maximum, of the valuation range.
Because First Community's articles of incorporation require the affirmative
vote of 75% of the outstanding shares entitled to vote in order to approve
certain mergers, consolidations or other business combinations, the directors,
officers and employees, as a group, may be able to effectively block such
transactions. See "Anti-Takeover Provisions Affecting First Community and
Community Savings."
Agreements with employees may discourage takeover attempts.
In connection with the conversion, Community Savings will enter into an
employment agreement with W. R. Gilliam, its President and Chief Executive
Officer and will enter into special termination agreements with four other
executive officers. See "Management of Community Savings - Employment
Agreement" and "Special Termination Agreements." Because these agreements
provide certain benefits to employees in the event of a change in control, the
existence of the employment agreements and special termination agreements may
tend to discourage mergers, consolidations, acquisitions or other transactions
that would result in a change in control of First Community or Community
Savings. See "Anti-Takeover Provisions Affecting First Community and Community
Savings - First Community - Anti-Takeover Effect of Employment Agreement,
Special Termination Agreements and Benefit Plans."
Subscribers may be taxed on the subscription rights.
If the subscription rights granted in connection with the conversion are
determined to have any value, the receipt of subscription rights will be taxable
to recipients who exercise their subscription rights to purchase shares. Whether
subscription rights have any value is a factual determination. Community
Savings has received an opinion from Ferguson stating that the subscription
rights do not have value, but Ferguson's opinion is not binding on the IRS. See
"The Conversion - Income Tax Consequences."
If the computer systems of Community Savings and its service providers do not
function properly in the year 2000, business operations could be disrupted and
earnings could be reduced.
An important business risk has emerged regarding whether existing software
programs and operating systems will function properly during the year 2000.
Community Savings has taken actions to minimize its risks related to possible
system failures. There can be no assurances, however, that the actions taken by
Community Savings and its service providers will be effective to remedy all
potential problems. If
17
<PAGE>
actions taken are not successful in preventing all year 2000 computer problems,
Community Savings' or its vendors' resulting errors, potential systems
interruptions and the costs necessary to update software could have a materially
adverse effect on First Community's business, financial condition, earnings and
prospects.
There could be delays in completing the conversion which could mean that
conditions relevant to an investment in the common stock may adversely change
before shares are issued and become tradeable.
The conversion cannot be completed until approvals from various banking
regulators are received. Final approvals will not be received for an indefinite
number of days after the end of the offering period which is expected to expire
on ____________________, 1999. Until the approvals are received and the
conversion is completed, no stock certificates will be issued and no shares of
common stock may be traded. During this period, business and other conditions
relevant to an investment in the shares could adversely change, but subscribers
will not have the right to cancel or change their orders.
Trident Securities is not obligated to purchase shares.
First Community and Community Savings have engaged Trident Securities to
consult with and advise them regarding the conversion and to assist, on a best-
efforts basis, in soliciting subscriptions and purchase orders for shares of
common stock in the offering. Trident Securities is under no obligation to
purchase any shares of common stock in the offering.
Trident Securities has given no opinion regarding the appropriateness of the
number of shares to be sold or the terms of the offering.
Trident Securities has not prepared or delivered any opinion or
recommendation regarding the appropriateness of the amount of common stock to
be issued in the conversion. Trident Securities has not prepared any fairness
opinion regarding the terms of the offering or any opinion regarding the price
at which shares of common stock may trade.
First Community could issue additional shares to correct errors in allocations
which could dilute the ownership and voting rights of stockholders.
If errors are made in allocating shares among subscribers, First Community
may issue additional shares up to three percent of the shares issued in the
conversion, in order to correct them. The additional shares, if any, would be
issued at $15.00 per share. If additional shares were issued, the ownership and
voting interests of existing shareholders would be diluted accordingly.
SELECTED FINANCIAL
AND OTHER DATA OF COMMUNITY SAVINGS
Below are summaries of historical financial and other data of Community
Savings. This information is based in part on the Financial Statements and
Notes to Financial Statements of Community Savings included in this prospectus.
All averages presented in this prospectus have been calculated on a monthly
basis unless otherwise stated. Ratios for the nine month period ended September
30, 1998 have been annualized so that they can be compared to ratios for the one
year periods ended December 31, 1997 and December 31, 1996.
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<PAGE>
<TABLE>
<CAPTION>
At or for the
Nine Months At or for the At or for the
Ended Year Ended Year Ended
September 30, December 31, December 31,
-------------- ------------- -------------
1998 1997 1996
----- ----- -----
(Dollars In Thousands)
<S> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $170,374 $167,817 $156,751
Loans receivable, net
Held for sale -- 287 2,256
Held for investment 127,403 114,546 85,871
Investments
Available for sale 12,197 9,082 6,991
Held to maturity 3,502 13,397 25,403
Mortgage-backed securities
Available for sale 10,006 9,497 12,486
Held to maturity 5,237 8,650 11,314
Federal funds sold -- 300 350
Deposits 138,024 134,697 122,524
Advances from Federal Home Loan Bank 5,000 6,700 9,000
Retained income 23,267 22,837 22,167
SELECTED OPERATING DATA:
Total interest and dividend income $ 9,434 $ 11,583 $ 10,620
Total interest expense 5,221 6,740 6,380
-------- -------- --------
Net interest income 4,213 4,843 4,240
Provision for loan loss 350 360 60
Net interest income after provision for -------- -------- --------
loan loss
Other operating income 3,863 4,483 4,180
Other operating expense 377 365 357
3,599 3,879 3,937
Income before income taxes -------- -------- --------
Income tax expense 641 969 600
208 379 201
Net income -------- -------- --------
$ 433 $ 590 $ 399
======== ======== ========
SELECTED OTHER DATA:
Return on average assets 0.34% 0.36% 0.26%
Return on average retained income 2.48% 2.60% 1.82%
Average retained income to average assets 13.66% 13.94% 14.26%
Tangible retained income to end of period assets 13.66% 13.61% 14.14%
Interest rate spread for period 2.89% 2.54% 2.20%
Net interest margin 3.49% 3.14% 2.87%
Nonperforming assets to total assets 0.13% 0.14% 0.14%
Loan loss reserves to nonperforming loans 518.81% 324.07% 226.73%
Average interest-earning assets to average-
interest bearing liabilities 114.07% 113.79% 115.48%
Other operating expense to average assets 2.81% 2.38% 2.55%
</TABLE>
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FIRST COMMUNITY FINANCIAL CORPORATION
Community Savings caused First Community to be incorporated under North
Carolina law in October 1998 for the purpose of acquiring and holding all of the
outstanding capital stock of Community Savings to be issued in connection with
the conversion. First Community has received conditional approval from the
Board of Governors of the Federal Reserve System (the "Federal Reserve") and the
Administrator of the Savings Institution Division, North Carolina Department of
Commerce (the "Administrator") to become a bank holding company and as such will
be subject to regulation by the Federal Reserve and the Administrator. The
holding company structure will give First Community greater flexibility than
Community Savings currently has to expand and diversify its business activities.
See "Supervision and Regulation - Regulation of First Community."
Prior to completion of the conversion, First Community will not own any
material assets or transact any material business. Upon completion of the
conversion, on an unconsolidated basis, First Community will have no significant
assets other than the stock of Community Savings acquired in the conversion, the
loan receivable with respect to the loan made to Community Savings' employee
stock ownership plan (the "ESOP") to enable the ESOP to purchase shares of
common stock in the conversion, and the portion of the net proceeds First
Community retains from the sale of common stock in the conversion. Some of the
proceeds of the offerings retained by First Community could subsequently be
deposited in, loaned to, or invested in Community Savings. First Community will
have no significant liabilities upon completion of the conversion. The
management of First Community is set forth under "Management of First
Community." First Community's executive office is located at the headquarters
office of Community Savings at 708 South Church Street, Burlington, North
Carolina.
The existing management of First Community believes it will be in the best
interests of First Community, Community Savings and First Community's
stockholders for First Community to remain an independent company.
COMMUNITY SAVINGS BANK, SSB
Community Savings is a North Carolina-chartered mutual savings bank.
Community Savings was organized in 1934. Community Savings has been a member of
the Federal Home Loan Bank system and its deposits have been federally insured
since 1934. Community Savings' deposits are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to
the maximum extent permitted by law.
Community Savings is a member of the Federal Loan Home Bank of Atlanta,
which is one of the 12 regional banks for federally-insured savings institutions
and other eligible members comprising the Federal Home Loan Bank system. As a
North Carolina-chartered savings bank, Community Savings is regulated by the
Administrator. Community Savings is further subject to regulations of the FDIC
with respect to certain matters and, as a subsidiary of First Community, will be
indirectly subject to regulation by the Federal Reserve. See "Supervision and
Regulation - Regulation of First Community" and "- Regulation of Community
Savings."
Community Savings conducts business through three full service offices in
Burlington, North Carolina, one full service office in Graham, North Carolina
and one loan origination office in Burlington. Community Savings' primary
market area encompasses Alamance County, North Carolina, although the bank has
recently begun making significant amounts of loans to borrowers in Guilford
County to the west. At September 30, 1998, Community Savings had total assets
of $170.4 million, net loans of $127.4 million, deposits of $138.0 million and
retained income of $23.3 million.
20
<PAGE>
Community Savings is a community-oriented financial institution which
offers a variety of financial services to meet the needs of the communities it
serves. Community Savings is principally engaged in the business of attracting
deposits from the general public and using such deposits to make residential
real estate loans, commercial loans, construction loans, home equity line of
credit loans, consumer loans and various investments.
Community Savings' revenues are derived primarily from interest on loans.
Community Savings also receives interest income from its investments, mortgage-
backed securities and interest-earning deposit balances. Community Savings also
receives non-interest income from transaction and service fees and other
sources. Community Savings' major expenses are interest on deposits and general
and administrative expenses such as compensation and employee benefits, federal
deposit insurance premiums, data processing expenses and occupancy and related
expenses.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the common stock cannot
be determined until the conversion is completed, it is presently estimated that
the net proceeds will be between $22,076,000 and $30,045,000, based on the
current valuation range. If the gross proceeds of the shares sold are increased
to 15% above the maximum of the valuation range, it is estimated that net
proceeds will equal $34,627,500. See "Pro Forma Data" for the assumptions used
to arrive at these amounts. The actual net proceeds may vary materially from
the estimated amounts.
The estimated amount of net proceeds includes proceeds from the sale of the
shares which are expected to be purchased by the ESOP in the subscription
offering with funds borrowed from First Community. The amount loaned to the
ESOP is estimated to range from $1,956,000 (if 1,530,000 shares are issued in
the conversion) to $2,604,000 (if 2,070,000 shares are issued in the
conversion). If for any reason the ESOP is unable to purchase its shares in the
subscription offering, the ESOP is expected to purchase its shares in the open
market - in which event the cost of the purchases may be higher or lower because
the purchase price per share may be higher or lower than $15.00. See
"Management of Community Savings - Employee Stock Ownership Plan."
After first deducting the amount of the net proceeds loaned by First
Community to the employee stock ownership plan (estimated to range from
$1,956,000 to $2,604,000), it is expected that First Community will retain
approximately 50% of the remaining net proceeds of the offering and will pay the
balance of the net proceeds to Community Savings in exchange for all of the
common stock of Community Savings to be issued in connection with the
conversion. From such balance paid to Community Savings, it is expected that
Community Savings will pay $1,500,000 back to First Community for the 100,000
shares of common stock to be issued to Community Savings and then contributed to
the Community Savings Charitable Foundation (the "Foundation").
First Community expects to use the portion of the net proceeds it retains
for working capital and investment purposes. First Community does not expect to
have significant operating expenses and anticipates that it will initially
invest the net proceeds it retains primarily in interest-earning deposits, U.S.
government, federal agency and other marketable securities and mortgage-backed
securities. Proceeds could also be loaned to, deposited in or invested in
Community Savings. The types and amounts of such investments will vary from
time to time based upon the interest rate environment, asset/liability mix
considerations and other factors.
Net proceeds paid to Community Savings initially will become part of
Community Savings' general funds and will be invested primarily in loans,
mortgage-backed securities and investments consisting primarily of interest-
earning deposit balances, U.S. government and federal agency obligations and
other marketable securities in accordance with Community Savings' lending and
investment policies. The relative amounts to be invested in each of these types
of investments will depend upon loan demand, rates of return and asset/liability
matching
21
<PAGE>
considerations at the time the investments are to be made. Management is not
able to predict the yields which will be produced by the investment of the
proceeds of the offerings because such yields will be significantly influenced
by general economic conditions and the interest rate environment existing at the
time the investments are made. Proceeds not so invested will be used for general
corporate purposes.
First Community and Community Savings could also use proceeds of the
offering to support future expansion of operations through acquisitions of other
financial institutions or their branches or the opening of new branches in or
near Community Savings' primary market area. There are no pending agreements or
understandings regarding any such acquisitions or branch openings, and there are
no pending negotiations regarding any such acquisitions or branch openings at
this time.
The proceeds of the offering will increase Community Savings' net worth and
regulatory capital and may enhance the potential for growth through increased
lending and investment activities, branch acquisitions, business combinations or
otherwise. Payments for shares of common stock made through the withdrawal of
existing deposit accounts at Community Savings will not result in the receipt of
new funds for investment.
If the proposed management recognition plan ("MRP") is adopted, the MRP
will acquire a number of shares of common stock equal to 4% of the sum of the
number of shares issued in the conversion and the number of shares contributed
to the Foundation. See "Management of Community Savings - Proposed Management
Recognition Plan." Such shares may be acquired in the open market or acquired
through First Community's issuance of authorized but unissued shares. In the
event shares are acquired in the open market, the funds for such purchase may be
provided by Community Savings from the proceeds of the conversion. Management
estimates that between 65,200 and 86,800 shares will be acquired by the MRP,
assuming the issuance of between 1,530,000 and 2,070,000 shares, respectively,
and the contribution of 100,000 shares to the Foundation. If all such shares
were acquired by the MRP in the open market, and if such shares were acquired at
a price of $15.00 per share, Community Savings would contribute between $978,000
and $1,302,000 to the MRP for this purpose.
If the proposed stock option plan ("Stock Option Plan") is adopted, the
plan could acquire a number of shares of common stock in the open market equal
to 10% of the sum of the number of shares issued in the conversion and the
number of shares contributed to the Foundation. These shares would be held by
the Stock Option Plan for issuance upon the exercise of stock options. To the
extent the Stock Option Plan does not acquire sufficient shares to satisfy
options granted under the plan, First Community will reserve authorized but
unissued shares for this purpose. See "Management of Community Savings -
Proposed Stock Option Plan." In the event shares are acquired in the open
market, the funds for such purchase may be provided by First Community or
Community Savings from the proceeds of the conversion. Management estimates
that between 163,000 and 217,000 shares will be acquired by the Stock Option
Plan, assuming the issuance of between 1,530,000 and 2,070,000 shares,
respectively, in the conversion. If all such shares were acquired by the plan
in the open market, and if such shares were acquired at a price of $15.00 per
share, First Community or Community Savings would contribute between $2,445,000
and $3,255,000 to the Stock Option Plan for this purpose.
Upon completion of the conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Based upon facts and circumstances which may arise following the
conversion, the Board of Directors may determine to repurchase stock in the
future. Such facts and circumstances may include, but are not limited to (1)
market and economic factors such as the price at which the common stock is
trading, the volume of trading, the attractiveness of other investment
alternatives in terms of the rates of return and risks involved in the
investments, (2) the ability to increase the book value and earnings per share
of the remaining outstanding shares and improve First Community's return on
equity; (3) the reduction of dilution to stockholders caused by having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (4) any other circumstances in which repurchases would
be in the best interests of First Community and its stockholders.
22
<PAGE>
There will be no stock repurchases unless both First Community and
Community Savings will be capitalized in excess of applicable regulatory
requirements after the repurchases and unless capital will be adequate taking
into account, among other things, the level of nonperforming assets and other
risks, First Community's and Community Savings' current and projected results of
operations and asset/liability structure, the economic environment and tax and
other regulatory considerations. Federal regulations require that, subject to
certain exceptions, First Community must obtain approval of the Federal Reserve
prior to repurchasing common stock for in excess of 10% of its net worth during
any 12 month period. See "Supervision and Regulation - Regulation of First
Community - Dividend and Repurchase Limitations." First Community has no
intention to repurchase any common stock during the first year following the
conversion.
DIVIDEND POLICY
Upon conversion, First Community's Board of Directors will have the
authority to declare dividends on the common stock, subject to statutory and
regulatory requirements. First Community now expects to pay cash dividends on
the common stock twice each year at an initial semiannual rate of 15 cents per
share (or an annual rate of 30 cents per share). First Community expects to pay
the first dividend after the end of the first calendar quarter ending at least
six months after the conversion. In addition, the Board of Directors may decide
from time to time that it is prudent to pay special nonrecurring cash dividends.
Special cash dividends, if paid, may be in addition to, or in lieu of, regular
cash dividends.
First Community's Board of Directors will periodically review its policy
concerning dividends. Declarations of dividends, if any, by the Board of
Directors will depend upon a number of factors, including investment
opportunities available to First Community and Community Savings, capital
requirements, regulatory limitations, First Community's and Community Savings'
results of operations and financial condition, tax considerations and general
economic conditions. After a review of such factors, First Community's Board of
Directors may authorize dividends to be paid in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. No
assurances can be given that any dividends will in fact be paid on the common
stock or, if dividends are paid, that they will not be reduced or discontinued
in the future.
Community Savings has agreed with the FDIC that, within the first year
after completion of the conversion, neither First Community nor Community
Savings will pay any dividend or make any distribution that represents, or is
characterized as, or is treated for tax purposes as, a return of capital.
First Community's income sources initially will consist of earnings on the
capital it retains from the offering, interest received from the loan to the
ESOP and dividends paid by Community Savings to First Community, if any.
Consequently, First Community's ability to pay dividends may depend upon
dividend payments by Community Savings to First Community, which payments are
subject to various restrictions. Under current North Carolina regulations,
Community Savings could not declare or pay a cash dividend if its effect would
be to reduce Community Savings' net worth to an amount which is less than the
minimum required by the FDIC and the Administrator. In addition, for a period
of five years after the conversion, Community Savings will be required, under
existing regulations, to obtain the prior written approval of the Administrator
before it can declare and pay a cash dividend on its capital stock in an amount
in excess of one-half of the greater of (i) its net income for the most recent
fiscal year, or (ii) the average of its net income after dividends for the most
recent fiscal year and not more than two of the immediately preceding fiscal
years, if applicable. See "Supervision and Regulation - Regulation of Community
Savings - Restrictions on Dividends and Other Capital Distributions." As a
converted institution, Community Savings also will be subject to the regulatory
restriction that it will not be permitted to declare or pay a dividend on or
repurchase any of its capital stock if the effect thereof would be to
23
<PAGE>
cause its regulatory capital to be reduced below the amount required for the
liquidation account established in connection with the conversion. See "The
Conversion -Effects of Conversion - Liquidation Rights" and "- Liquidation
Rights After the Conversion." Also, see "Taxation - Federal Income Taxation" for
a discussion of federal income tax provisions that may limit the ability of
Community Savings to pay dividends to First Community without incurring a
recapture tax.
MARKET FOR COMMON STOCK
First Community, as a newly organized company, has never issued capital
stock, and consequently, there is no established market for its common stock at
this time. First Community has received conditional approval to have its common
stock listed for quotation on the Nasdaq National Market under the symbol
"FCFN."
There can be no assurance that the common stock will in fact be listed for
quotation on the Nasdaq National Market. In order to initially qualify for
listing on the Nasdaq National Market, First Community must have at least 400
stockholders and at least three market makers. Although management believes
that First Community will have at least 400 stockholders, there can be no
assurance that it will. First Community will seek to encourage and assist at
least three market makers to make a market in the common stock, but there is no
assurance that will occur. First Community expects that Trident Securities
will act as a market maker.
A public trading market having the desirable characteristics of depth,
liquidity and orderliness will depend upon the presence in the marketplace of
both willing buyers and willing sellers at any given time, which is not within
First Community's control. No assurance can be given that an active trading
market will develop or be maintained or that any investor will be able to sell
the common stock at or above the purchase price paid in the offering.
CAPITALIZATION
The following tables present the historical capitalization of Community
Savings at September 30, 1998 and the pro forma capitalization of First
Community at such date after giving effect to the sale of the common stock, the
contribution of 100,000 shares of common stock to the Foundation and application
of the assumptions set forth under "Pro Forma Data," assuming that 1,530,000;
1,800,000; 2,070,000; and 2,380,500 shares of common stock are sold at the
minimum, midpoint, maximum and 15% above the maximum of the current valuation
range. A change in the number of shares issued in the conversion may materially
affect such pro forma capitalization. See "Use of Proceeds" and "The
Conversion - Purchase Price of Common Stock and Number of Shares Offered."
24
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMUNITY PRO FORMA CAPITALIZATION AT SEPTEMBER 30, 1998
BASED UPON SALE OF
------------------------------------------------------------------------------
1,530,000 1,800,000 2,070,000 2,380,500
HISTORICAL SHARES AT A SHARES AT A SHARES AT A SHARES AT A
CAPITALIZATION PRICE OF PRICE OF PRICE OF PRICE OF
SEPTEMBER 30, 1998 $15.00 PER SHARE $15.00 PER SHARE $15.00 PER SHARE $15.00 PER SHARE(1)
-------------------- ----------------- ----------------- ---------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (2) $138,024 $ 138,024 $ 138,024 $ 138,024 $ 138,024
Borrowings 5,000 5,000 5,000 5,000 5,000
-------- ---------- ---------- ---------- ----------
Total deposits and $143,024 $ 143,024 $ 143,024 $ 143,024 $ 143,024
borrowings ======== ========== ========== ========== ==========
Capital stock:
Preferred stock, no par value
per share:
authorized - 5,000,000
shares; assumed
outstanding - none $ - $ - $ - $ - $ -
Common stock, no par value
per share; authorized --
20,000,000 shares; assumed
outstanding - as shown plus
100,000 shares to be
contributed to Foundation (3) - 23,576 27,560 31,545 36,128
Less: Expense of contribution
to Foundation - (1,500) (1,500) (1,500) (1,500)
Plus: Tax benefit of
contribution to Foundation (4) - 510 510 510 510
Less: Common stock acquired by
ESOP (5) - (1,956) (2,280) (2,604) (2,977)
Common stock acquired by
MRP (5) - (978) (1,140) (1,302) (1,488)
Retained earnings -
substantially restricted 23,172 23,172 23,172 23,172 23,172
Accumulated other comprehensive 95 95 95 95 95
income -------- ---------- ---------- ---------- ----------
Total Equity $ 23,267 $ 42,919 $ 46,417 $ 49,916 $ 53,940
======== ========== ========== ========== ==========
</TABLE>
25
<PAGE>
(1) Represents the number of shares of common stock that would be issued in the
conversion after giving effect to a 15% increase in maximum valuation in
the valuation range.
(2) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Any such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) Does not reflect the issuance of any shares of common stock reserved for
issuance pursuant to Community Savings' Stock Option Plan. See "Management
of Community Savings - Proposed Stock Option Plan."
(4) Based upon an effective tax rate of 34%, the recognition of the federal tax
benefit is limited annually to 10% of First Community's annual taxable
income, subject to the ability of First Community to carry forward any
unused portion of the deduction for five years following the year of the
contribution.
(5) Assumes that 8% of the sum of the number of shares of common stock offered
hereby plus the number of shares contributed to the Foundation will be
purchased by the ESOP in the conversion. The funds used by the ESOP to
acquire shares will be borrowed from First Community. Assumes that, after
the conversion, a number of shares equal to 4% of the sum of the number of
shares of common stock offered hereby plus the number of shares contributed
to the Foundation will be purchased by the MRP with funds contributed by
Community Savings. The common stock acquired by both the ESOP and the MRP
is reflected as a reduction of stockholders' equity. See "Management of
Community Savings - Employee Stock Ownership Plan" and "- Proposed
Management Recognition Plan."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, management currently
estimates that net proceeds will be between $22,076,000 and $34,627,500
(including net proceeds from shares expected to be purchased by the ESOP with
funds borrowed from First Community), based upon the following assumptions: (i)
22.8%, 20.6%, 18.9% and 17.5% of the common stock sold in the conversion at the
minimum, midpoint, maximum and 15% above the maximum, respectively, of the
valuation range will be sold to the ESOP, directors and executive officers and
their associates as defined in Community Savings' Plan of Conversion (and that
Trident Securities will not receive certain compensation with respect to such
sales), and none of the shares of common stock will be sold in any syndicated
community offering pursuant to selected dealer agreements; (ii) fees will be
payable to Trident Securities with respect to the subscription and community
offerings as described in "The Conversion - Marketing Arrangements;" and (iii)
conversion expenses, excluding the fees and commissions to Trident Securities,
will be approximately $558,000. Actual net proceeds may vary depending upon the
number of shares sold to the ESOP and to directors, executive officers and their
associates, the number of shares, if any, sold in the syndicated community
offering pursuant to selected dealer arrangements and the actual expenses of the
conversion. Payments for shares made through withdrawals from existing
Community Savings deposit accounts will not result in the receipt of new funds
for investment by Community Savings. However, capital will increase and
interest-bearing liabilities will decrease by the amount of such withdrawals.
Under Community Savings' Plan of Conversion, the common stock must be sold
at an aggregate price equal to not less than the minimum nor more than the
maximum of the valuation range based upon an independent appraisal. The
valuation range as of December 9, 1998 is from a minimum of $22,950,000 to a
maximum of $31,050,000, with a midpoint of $27,000,000. However, with the
consent of the Administrator and the FDIC, the aggregate price of the common
stock sold may be increased to up to 15% above the maximum of the valuation
range, or to $35,707,500, without a resolicitation and without any right to
cancel, rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the subscription offering. See
"The Conversion - Purchase Price of Common Stock and Number of Shares Offered."
Pro forma consolidated net earnings and book value of First Community at or
for the year ended December 31, 1997 and the nine months ended September 30,
1998 have been based upon the following assumptions: (i) the sale of shares of
common stock in connection with the conversion occurred at the beginning of such
periods and yielded net proceeds available for investment of $22,076,000,
$26,060,000, $30,045,000 and $34,627,500 (based upon the issuance of 1,530,000,
1,800,000; 2,070,000 and 2,380,500 shares, respectively, at $15.00 per share)
on such dates; and (ii) such net proceeds were invested on a consolidated basis
at the beginning of the periods at a yield of 4.50%, which represents the
average one-year treasury constant maturity rate for the last week of September,
1998. First Community did not use the arithmetic average of Community Savings'
weighted-average yield on interest-earning assets and weighted-average interest
rate paid on deposits. Management believes that the one-year Treasury rate is a
more appropriate rate for purposes of preparing the pro forma data because
proceeds from the conversion are expected to be initially invested in
instruments with similar yields and maturities. The effect of withdrawals from
deposit accounts for the purchase of common stock has not been reflected. Such
withdrawals have no effect on pro forma stockholders' equity, and management
does not believe that such withdrawals will have a material impact on pro forma
net earnings or pro forma net earnings per share. In calculating pro forma net
earnings, an effective tax rate of 36% has been assumed, resulting in a yield
after taxes of 2.88%. Historical and pro forma per share amounts have been
calculated by dividing Community Savings' historical amounts and First
Community's pro forma amounts by the indicated number of shares of common stock,
assuming that such number of shares had been outstanding during the entire
period.
27
<PAGE>
The following tables give effect to the issuance of 100,000 shares of First
Community's common stock to Community Savings and the contribution of such
shares to the Foundation at the time the conversion is completed. In addition,
the valuation range takes into account the dilutive impact of the issuance of
the shares to be contributed to the Foundation.
The following pro forma information is not intended to represent the market
value of the common stock, the value of net assets and liabilities or of future
results of operations. The assumptions regarding investment yields should not
be considered indicative of actual yields for future periods. The following
information is not intended to be used as a basis for projection of results of
operations for future periods.
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
--------------------------------------------------------------------------
1,530,000 1,800,000 2,070,000 2,380,500
shares at $15.00 shares at $15.00 shares at $15.00 shares at $15.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (15% above Max.)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 22,950 $ 27,000 $ 31,050 $ 35,708
Plus shares contributed to Foundation (1) 1,500 1,500 1,500 1,500
---------- ---------- ---------- ----------
Pro forma market capitalization $ 24,450 $ 28,500 $ 32,550 $ 37,208
========== ========== ========== ==========
Gross proceeds $ 22,950 $ 27,000 $ 31,050 $ 35,708
Less offering expenses and commissions (874) (940) (1,005) (1,080)
---------- ---------- ---------- ----------
Estimated net conversion proceeds (2) 22,076 26,060 30,045 34,628
Less common stock acquired by ESOP (3) (1,956) (2,280) (2,604) (2,977)
Less common stock acquired by MRP (4) (978) (1,140) (1,302) (1,488)
---------- ---------- ---------- ----------
Estimated proceeds available for investment $ 19,142 $ 22,640 $ 26,139 $ 30,163
========== ========== ========== ==========
Net income
Historical $ 590 $ 590 $ 590 $ 590
Pro forma adjustments:
Net income from proceeds 551 652 753 869
ESOP (83) (97) (111) (127)
MRP (125) (146) (167) (191)
---------- ---------- ---------- ----------
Pro forma $ 933 $ 999 $ 1,065 $ 1,141
========== ========== ========== ==========
Net income per share
Historical $ 0.39 $ 0.34 $ 0.30 $ 0.26
Pro forma adjustments:
Net income from proceeds 0.37 0.37 0.37 0.38
ESOP (3) (0.06) (0.06) (0.06) (0.06)
MRP (4) (0.08) (0.08) (0.08) (0.08)
---------- ---------- ---------- ----------
Pro forma net income per share (5) $ 0.62 $ 0.57 $ 0.53 $ 0.50
========== ========== ========== ==========
Number of shares used in calculating earnings per
share (7) 1,508,293 1,758,133 2,007,973 2,295,289
========== ========== ========== ==========
Stockholders' equity (book value) (6)
Historical $ 22,837 $ 22,837 $ 22,837 $ 22,837
Estimated net conversion proceeds 22,076 26,060 30,045 34,628
Plus: Shares contributed to Foundation 1,500 1,500 1,500 1,500
Less: Contribution to Foundation (1,500) (1,500) (1,500) (1,500)
Plus: Tax benefit of contribution to Foundation (5) 510 510 510 510
Less common stock acquired by:
ESOP (1,956) (2,280) (2,604) (2,977)
MRP (978) (1,140) (1,302) (1,488)
---------- ---------- ---------- ----------
Pro forma stockholders' equity $ 42,489 $ 45,987 $ 49,486 $ 53,510
========== ========== ========== ==========
Stockholders' equity (book value) per share (6)
Historical $ 14.01 $ 12.02 $ 10.52 $ 9.21
Estimated net conversion proceeds 13.54 13.72 13.85 13.96
Plus: Shares contributed to Foundation 0.92 0.79 0.69 0.60
Less: Contribution to Foundation (0.92) (0.79) (0.69) (0.60)
Plus: Tax benefit of contribution to Foundation (5) 0.31 0.27 0.24 0.21
Less common stock acquired by:
ESOP (3) (1.20) (1.20) (1.20) (1.20)
MRP (4) (0.60) (0.60) (0.60) (0.60)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share $ 26.06 $ 24.21 $ 22.81 $ 21.58
========== ========== ========== ==========
Pro forma price to book value 57.5% 62.0% 65.8% 69.5%
========== ========== ========== ==========
Pro forma price to net income (P/E ratio) 24.2 26.3 28.3 30.0
========== ========== ========== ==========
Number of shares used in calculating equity per
share (6) 1,630,000 1,900,000 2,170,000 2,480,500
========== ========== ========== ==========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended September 30, 1998
-------------------------------------------------------------------------
1,530,000 1,800,000 2,070,000 2,380,500
shares at $15.00 shares at $15.00 shares at $15.00 shares at $15.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (15% above Max.)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 22,950 $ 27,000 $ 31,050 $ 35,708
Plus shares contributed to Foundation (1) 1,500 1,500 1,500 1,500
---------- ---------- ---------- ----------
Pro forma market capitalization $ 24,450 $ 28,500 $ 32,550 $ 37,208
========== ========== ========== ==========
Gross proceeds $ 22,950 $ 27,000 $ 31,050 $ 35,708
Less offering expenses and commissions (874) (940) (1,005) (1,080)
---------- ---------- ---------- ----------
Estimated net conversion proceeds (2) 22,076 26,060 30,045 34,628
Less common stock acquired by ESOP (3) (1,956) (2,280) (2,604) (2,977)
Less common stock acquired by MRP (4) (978) (1,140) (1,302) (1,488)
---------- ---------- ---------- ----------
Estimated proceeds available for investment $ 19,142 $ 22,640 $ 26,139 $ 30,163
========== ========== ========== ==========
Net income
Historical $ 433 $ 433 $ 433 $ 433
Pro forma adjustments:
Net income from proceeds 414 489 564 651
ESOP (63) (73) (83) (95)
MRP (94) (109) (125) (143)
---------- ---------- ---------- ----------
Pro forma $ 690 $ 740 $ 789 $ 846
========== ========== ========== ==========
Net income per share
Historical $ 0.29 $ 0.25 $ 0.22 $ 0.19
Pro forma adjustments:
Net income from proceeds 0.27 0.28 0.27 0.28
ESOP (3) (0.04) (0.04) (0.04) (0.04)
MRP (4) (0.06) (0.06) (0.06) (0.06)
---------- ---------- ---------- ----------
Pro forma net income per share (5) $ 0.46 $ 0.43 $ 0.39 $ 0.37
========== ========== ========== ==========
Number of shares used in calculating earnings per
share (7) ========== ========== ========== ==========
1,508,293 1,758,133 2,007,973 2,295,289
========== ========== ========== ==========
Stockholders' equity (book value) (6)
Historical $ 23,267 $ 23,267 $ 23,267 $ 23,267
Estimated net conversion proceeds 22,076 26,060 30,045 34,628
Plus: Shares contributed to Foundation 1,500 1,500 1,500 1,500
Less: Contribution to Foundation (1,500) (1,500) (1,500) (1,500)
Plus: Tax benefit of contribution to Foundation (5) 510 510 510 510
Less common stock acquired by:
ESOP (1,956) (2,280) (2,604) (2,977)
MRP (978) (1,140) (1,302) (1,488)
---------- ---------- ---------- ----------
Pro forma stockholders' equity $ 42,919 $ 46,417 $ 49,916 $ 53,940
========== ========== ========== ==========
Stockholders' equity (book value) per share (6)
Historical $ 14.27 $ 12.25 $ 10.72 $ 9.38
Estimated net conversion proceeds 13.55 13.72 13.84 13.96
Plus: Shares contributed to Foundation 0.92 0.79 0.69 0.60
Less: Contribution to Foundation (0.92) (0.79) (0.69) (0.60)
Plus: Tax benefit of contribution to Foundation (5) 0.31 0.27 0.24 0.21
Less common stock acquired by:
ESOP (3) (1.20) (1.20) (1.20) (1.20)
MRP (4) (0.60) (0.60) (0.60) (0.60)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share $ 26.33 $ 24.44 $ 23.00 $ 21.75
========== ========== ========== ==========
Pro forma price to book value 57.0% 61.4% 65.2% 69.0%
========== ========== ========== ==========
Pro forma price to net income (P/E ratio) 24.5 26.8 28.8 30.4
========== ========== ========== ==========
Number of shares used in calculating equity per
share (6) 1,630,000 1,900,000 2,170,000 2,480,500
========== ========== ========== ==========
</TABLE>
30
<PAGE>
(1) It is assumed that Community Savings contributes to the Foundation 100,000
shares of the common stock of First Community which is valued at
$1,500,000.
(2) Subject to approval by First Community's stockholders at a meeting to be
held no sooner than six months after the conversion, 10% of the sum of the
number of shares issued in the conversion and the number of shares
contributed to the Foundation may be reserved for issuance to directors,
officers, and employees under the Stock Option Plan. In lieu of reserving
shares for issuance, the Stock Option Plan may purchase shares in the open
market to be delivered upon the exercise of options. Because management
cannot reasonably estimate the number of options which might be exercised
or the option exercise price or whether the shares will be purchased in the
open market, no provision for the Stock Option Plan has been made in the
pro forma calculations. At 15% above the maximum of the valuation range,
it is expected that options to acquire 248,050 shares of the common stock
could be granted under the Stock Option Plan. If all shares under the
Stock Option Plan were newly issued, the exercise price was $15.00 for the
shares issued pursuant to the options, and all of the options were
exercised, the number of outstanding shares of common stock would increase
from 2,480,500 to 2,728,550 and the pro forma earnings per share of the
outstanding common stock for the year ended December 31, 1997 and nine
months ended September 30, 1998 (based on shares released for the period
pursuant to SOP 93-6) would have been $0.49 and $0.36, respectively,
compared with $0.50 and $0.37, respectively, if the Stock Option Plan did
not exist. See "Management of Community Savings - Proposed Stock Option
Plan."
(3) It is assumed that the ESOP will purchase 8% of the sum of the number of
shares of common stock issued in the conversion and the number of shares
contributed to the Foundation. Pro forma ESOP adjustments assume that
6.67% of the shares will be committed to be released each year, and that
expense is reduced by a 36% tax rate. See "Management of Community Savings
- Employee Stock Ownership Plan."
(4) It is assumed that the MRP will purchase a number of shares equal to 4% of
the sum of the number of shares of common stock issued in the conversion
and the number of shares contributed to the Foundation for issuance to
directors, officers and employees, subject to approval by First Community's
stockholders at a meeting to be held no sooner than six months after
conversion. Pro forma MRP adjustments assume that expense will be
amortized over five years, and that expense is reduced by a 36% tax rate.
See "Management of Community Savings - Proposed Management Recognition
Plan."
(5) Does not give affect to the non-recurring expense that is expected to be
recognized in the second quarter of 1999 if the Foundation is approved. In
that event, First Community will recognize an after-tax expense for the
amount of the contribution to the Foundation which is expected to be
$990,000 based upon an effective tax rate of 34%.
(6) The retained earnings of Community Savings will be substantially restricted
after the conversion. See "Dividend Policy," "Supervision and Regulation -
Regulation of Community Savings - Restrictions on Dividends and Other
Capital Distributions."
(7) Earnings per share is calculated based on the number of shares outstanding
indicated in the previous tables, which include shares to be acquired by
the ESOP and the MRP. Pursuant to American Institute of Certified Public
Accountants Statement of Position 93-6, earnings per share is calculated
based on the ESOP shares released for the period according to scheduled
contributions.
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
Community Savings is subject to the North Carolina savings bank requirement
that net worth, computed in accordance with the requirements of the
Administrator, equal or exceed 5% of total assets. In addition, Community
Savings is subject to the capital requirements of the FDIC. The FDIC requires
that institutions which receive the highest rating during their examination
process and are not experiencing or anticipating significant growth must
maintain a leverage ratio of Tier I capital to total assets (as defined in FDIC
regulations) of at least 3%. All other institutions are required to maintain a
ratio of 1% or 2% above the 3% minimum with an absolute minimum leverage ratio
of not less than 4%. The FDIC also imposes requirements that (i) the ratio of
Tier I capital to risk-weighted assets equal at least 4%, and (ii) the ratio of
total capital to risk-weighted assets equal at least 8%. As demonstrated in the
table below, Community Savings exceeds the North Carolina capital requirements
and the FDIC Tier I and risk-based capital requirements on a historical and pro
forma basis.
31
<PAGE>
The following table presents (i) Community Savings' historical regulatory
capital position on September 30, 1998 and (ii) Community Savings' pro forma
regulatory capital position on such date after giving effect to the assumptions
set forth under "PRO FORMA DATA" and "CAPITALIZATION" and further assuming that
First Community will retain 50% of the net proceeds of the common stock sold in
the conversion after deducting the amount necessary to fund the loan to the ESOP
and assuming that Community Savings will pay to First Community $1,500,000 in
exchange for the shares to be issued to Community Savings and contributed to the
Foundation.
32
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA REGULATORY CAPITAL POSITION AT SEPTEMBER 30, 1998
-----------------------------------------------------------------------------
COMMUNITY SAVINGS'
HISTORICAL 1,530,000 1,800,000 2,070,000
REGULATORY CAPITAL SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
POSITION AT PRICE OF $15.00 PRICE OF $15.00 PRICE OF $15.00
SEPTEMBER 30, 1998 PER SHARE PER SHARE PER SHARE
---------------------- ------------------------ ---------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
REGULATORY REGULATORY REGULATORY REGULATORY
AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1)
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $23,172 13.5% $33,232 18.4% $35,062 19.3% $36,893 20.1%
Tier 1 (leverage) capital
requirement (2) 6,870 4.0% 7,211 4.0% 7,285 4.0% 7,358 4.0%
------- ------- ------- ------- ------- ------- ------- -------
Excess $16,302 9.5% $26,021 14.4% $27,777 15.3% $29,535 16.1%
======= ======= ======= ======= ======= ======= ======= =======
Tier 1 risk adjusted capital $23,172 23.8% $33,232 33.5% $35,062 35.2% $36,893 36.9%
Tier 1 risk adjusted
capital requirement 3,892 4.0% 3,973 4.0% 3,987 4.0% 4,002 4.0%
------- ------- ------- ------- ------- ------- ------- -------
Excess $19,280 19.8% $29,259 29.5% $31,075 31.2% $32,890 32.9%
======= ======= ======= ======= ======= ======= ======= =======
Total risk based capital $24,304 25.0% $34,364 34.6% 36,194 36.3% $38,025 38.0%
Total risk based capital
requirement 7,785 8.0% 7,946 8.0% 7,975 8.0% 8,004 8.0%
------- ------- ------- ------- ------- ------- ------- -------
Excess $16,519 17.0% $26,418 26.6% $28,219 28.3% $30,020 30.0%
======= ======= ======= ======= ======= ======= ======= =======
NC regulatory capital $24,304 14.3% $34.364 19.0% $36,194 19.9% $38,025 20.7%
NC regulatory capital
requirement 8,519 5.0% 9,022 5.0% 9,113 5.0% 9,205 5.0%
------- ------- ------- -------- ------- ------- ------- -------
Excess $15,785 9.3% $25,342 14.0% $27,081 14.9% $28,820 15.7%
======= ======= ======= ======== ======= ======= ======= =======
<CAPTION>
2,380,500
SHARES SOLD AT
PRICE OF $15.00
PER SHARE
---------------------
PERCENT OF
REGULATORY
AMOUNT ASSETS(1)
---------- ---------
<S> <C> <C>
Tier 1 (leverage) capital $38,998 21.0%
Tier 1 (leverage) capital
requirement (2) 7,442 4.0%
------- ---------
Excess $31,555 17.0%
======= =========
Tier 1 risk adjusted capital $38,998 38.8%
Tier 1 risk adjusted
capital requirement 4,019 4.0%
------- ---------
Excess $34,979 34.8%
======= =========
Total risk based capital $40,130 39.9%
Total risk based capital
requirement 8,038 8.0%
------- ---------
Excess $32,092 31.9%
======= =========
NC regulatory capital $40,130 21.6%
NC regulatory capital 9,310 5.0%
requirement ------- ---------
$30,820 16.6%
Excess ======= =========
</TABLE>
_____________________________
(1) For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent of total average assets. For the Tier 1 risk-adjusted
capital and total risk-based capital calculations, percent of total risk-
weighted assets. Net proceeds (after ESOP and MRP) were assumed to be
invested in short-term treasury securities (0% risk-weight) and one-to-four
family residential mortgage loans (50% risk-weight) with a weighted average
risk-weight of 20%.
(2) For the purposes of this table, Community Savings has assumed that its
leverage capital requirement is 4% of total average assets.
33
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
If the Foundation was not being established as part of the conversion,
Ferguson has estimated that the pro forma market value of First Community and
Community Savings would be approximately $29,500,000 at the midpoint of the
valuation range, which is approximately $1,000,000 greater than the pro forma
market value of Community Savings if the Foundation is established and funded by
Community Savings as described in this prospectus. This would result in
approximately $2,500,000, or a 9.26%, increase, in the amount of common stock
offered for sale in the conversion at the midpoint of the valuation range. The
price to pro forma stockholders' equity (book value) ratio and the price to pro
forma income ratio would be approximately the same under both the current
appraisal and the estimate of the value of First Community and Community Savings
without the Foundation. Further, at the midpoint of the valuation range, pro
forma stockholders' equity per share and pro forma net income per share would be
essentially the same with the Foundation as without the Foundation. This
estimate by Ferguson is solely for purposes of providing members with sufficient
information with which to make an informed decision about the effect of the
Foundation. The following table does not reflect the $1,500,000 expense
Community Savings will accrue during the year ended December 31, 1999 as a
result of its contribution of 100,000 shares to the Foundation. There is no
assurance that in the event the Foundation was not established that the
appraisal prepared at that time would conclude that the pro forma market value
of First Community and Community Savings would be same as that estimated below.
Any appraisal prepared at that time would be based on the facts and
circumstances existing at that time, including, among other things, then current
market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and other ratios, at the minimum, midpoint, maximum and 15%
above the maximum of the valuation range, assuming the conversion was completed
at September 30, 1998.
34
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT FOUNDATION
AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS THEN ENDED
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM
----------------------------- --------------------------- ---------------------------
WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
-------------- ------------ ------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount... $ 22,950 $ 25,075 $ 27,000 $ 29,500 $ 31,050 $ 33,925
Pro forma market
capitalization............. 24,250 25,075 28,500 29,500 32,550 33,925
Total assets................ 190,025 191,529 193,523 195,351 197,022 199,174
Total liabilities........... 147,106 147,106 147,106 147,106 147,106 147,106
Pro forma stockholders'
equity..................... 42,919 44,423 46,417 48,245 49,916 52,068
Pro forma consolidated
net income................. 690 729 740 784 789 838
Pro forma stockholders'
equity per share........... 26.33 26.57 24.44 24.53 23.00 23.02
Pro forma consolidated net
income per share........... 0.46 0.47 0.43 0.43 0.39 0.40
Pro Forma Pricing Ratios:
Offering price as a
percentage of pro forma
stockholders' equity per
share..................... 57.0% 56.4% 61.4% 61.1% 65.2% 65.2%
Offering price to pro forma
net income per share...... 24.5 23.9 26.8 26.2 28.8 28.1
Pro forma market
capitalization to total
assets.................... 12.9% 13.1% 14.8% 15.1% 16.6% 17.0%
Pro Forma Financial Ratios:
Return on total assets.... 0.37% 0.38% 0.39% 0.40% 0.40% 0.42%
Return on stockholders'
equity (annualized)....... 1.62% 1.65% 1.60% 1.63% 1.59% 1.62%
Stockholders' equity to
total assets.............. 22.6% 23.2% 24.0% 24.7% 25.3% 26.1%
<CAPTION>
AT 15% ABOVE THE MAXIMUM
---------------------------
WITH NO
FOUNDATION FOUNDATION
------------- -------------
<S> <C> <C>
Estimated offering amount..... $ 35,708 $ 39,014
Pro forma market
capitalization............... 37,208 39,014
Total assets.................. 201,046 203,570
Total liabilities............. 147,106 147,106
Pro forma stockholders'
equity....................... 53,940 56,464
Pro forma consolidated
net income................... 846 900
Pro forma stockholders'
equity per share............. 21.75 21.71
Pro forma consolidated net
income per share............. 0.37 0.37
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share............. 69.0% 69.1%
Offering price to pro forma
net income per share......... 30.4 30.4
Pro forma market capitalization
to total assets ............ 18.5% 19.2%
Pro Forma Financial Ratios:
Return on total assets....... 0.42% 0.45%
Return on stockholders' equity
(annualized)................. 1.58% 1.60%
Stockholders' equity to
total assets................ 26.8% 27.7%
</TABLE>
35
<PAGE>
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
Directors, officers and employees of Community Savings will be entitled to
subscribe for shares of common stock in the subscription offering in their
capacities as such and to the extent they qualify as eligible purchasers under
Community Savings' Plan of Conversion. They may also purchase common stock in
the community offering or in the syndicated community offering, if any. Shares
purchased by such persons will be purchased at the same price per share - $15.00
- - that will be paid by other purchasers in the offerings and such persons will
be subject to the maximum purchase limitations applicable to all other
purchasers of shares in the conversion.
The following table sets forth for each of the executive officers and
directors of Community Savings who intend to purchase common stock, and for all
executive officers and directors as a group (including in each case all
"associates" of such persons), the aggregate dollar amount of common stock for
which such director or executive officer has informed Community Savings he and
his associates intend to subscribe. The amounts reflected in the table are
estimates only, and the number of shares of common stock actually subscribed for
by the listed individuals may differ from the number reflected in the table.
The following table assumes that 1,800,000 shares of common stock will be issued
and that sufficient shares will be available to satisfy the subscriptions of
Community Savings' executive officers and directors and their associates.
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED NUMBER
AMOUNT OF SHARES AS A PERCENT
TO BE PAID TO BE OF SHARES
NAME FOR SHARES PURCHASED (1) ISSUED
- ----- ----------- ------------- -------------
<S> <C> <C> <C>
Jimmy L. Byrd, Director $ 300,000 20,000 1.11%
W. R. Gilliam, Director, President and Chief Executive Officer 300,000 20,000 1.11%
Julian P. Griffin, Director 300,000 20,000 1.11%
Edgar L. Hartgrove, Director 300,000 20,000 1.11%
William C. Ingold, Director 300,000 20,000 1.11%
Charles A. LeGrand, Director 300,000 20,000 1.11%
James D. Moser, Jr., Director 300,000 20,000 1.11%
W. Joseph Rich, Director 160,000 10,666 0.59%
Alfred J. Spitzner, Director 200,000 13,333 0.74%
Herbert N. Wellons, Director 200,000 13,333 0.74%
Larry H. Hall, Executive Vice President 225,000 15,000 0.83%
Joseph C. Canada, Senior Vice President and Secretary 300,000 20,000 1.11%
Judy L. Pennington, Vice President 40,000 2,666 0.14%
Christopher B. Redcay, Treasurer and Chief Financial Officer 50,000 3,333 0.18%
---------- ------- ------
Total $3,275,000 218,333 12.12%
========== ======= ======
</TABLE>
(1) Subscriptions by the ESOP are not aggregated with shares of common stock
purchased by the executive officers and directors listed above. See
"Management of Community Savings - Employee Stock Ownership Plan." Also,
grants under the proposed MRP and shares subject to option under the
proposed Stock Option Plan, if adopted following the conversion, are not
aggregated with
36
<PAGE>
shares of common stock purchased by the executive officers and directors
listed above. It is expected that the ESOP will acquire 8% of the sum of
the number of shares issued in the conversion and the number of shares
contributed to the Foundation . Recipients of shares under the ESOP will
have voting control over the shares allocated to them, and trustees of the
ESOP (directors of Community Savings) will have voting control over
unallocated shares. See "Management of Community Savings -Employee Stock
Ownership Plan." Under the proposed MRP, if approved by First Community's
stockholders, a number of shares equal to 4% of the sum of the number of
shares issued in the conversion and the number of shares contributed to the
Foundation could be issued to directors and certain employees of Community
Savings. Recipients of shares under the MRP will have voting control over
such shares regardless of whether such shares have vested. See "Management
of Community Savings - Proposed Management Recognition Plan." Under the
proposed Stock Option Plan, if approved by First Community's stockholders,
directors and certain employees of Community Savings could receive options
to purchase a number of shares equal to 10% of the sum of the number of
shares issued in the conversion and the number of shares contributed to the
Foundation. If shares are acquired in the open market and held by the Stock
Option Plan prior to the exercise of options under the Plan, holders of
unexercised options will have voting control over the shares held to fund
their options. See "Management of Community Savings - Proposed Stock Option
Plan."
Without the prior written consent of the Administrator, shares of common
stock purchased by directors or executive officers of Community Savings in the
conversion cannot be sold during a period of one year following the conversion,
except upon death of the director or executive officer. Such restriction also
applies to any shares issued to such person as a stock dividend, stock split or
otherwise with respect to any of such originally restricted stock.
In addition, the North Carolina conversion regulations provide that
directors and executive officers and their associates are prohibited from
purchasing outstanding shares of First Community's common stock for a period of
three years following the conversion, except from or through a broker or dealer
registered with the SEC or Secretary of State of North Carolina, unless the
prior written approval of the Administrator is obtained. This provision does
not apply to negotiated transactions involving more than 1% of First Community's
outstanding common stock or to purchases of stock made by or held by one or more
tax-qualified or non-tax-qualified employee stock benefit plans of Community
Savings or First Community which may be attributable to individual executive
officers or directors. Purchases and sales of First Community's common stock by
officers and directors will also be subject to the short-swing trading
prohibitions contained in Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and other rules promulgated pursuant to the
Exchange Act.
THE CONVERSION
THE BOARD OF DIRECTORS OF COMMUNITY SAVINGS HAS ADOPTED AND THE ADMINISTRATOR
HAS APPROVED COMPLETION OF THE TRANSACTIONS DESCRIBED IN COMMUNITY SAVINGS' PLAN
OF CONVERSION SUBJECT TO APPROVAL BY THE MEMBERS OF COMMUNITY SAVINGS AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS. APPROVAL BY THE ADMINISTRATOR DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE
ADMINISTRATOR.
GENERAL
Community Savings was organized in 1934 and has operated since that time as
a traditional savings and loan association. It recognizes that the banking and
financial services industries are in the process of fundamental changes,
reflecting changes in the local, national and international economies,
technological changes and changes in state and federal laws. As a result, for
several years Community Savings has been studying the environment in which it
operates and its strategic options.
As a result of its study of its strategic options, Community Savings
adopted a Plan of Conversion providing for its transformation from a mutual
savings bank to a stock savings bank, the acquisition of all of Community
Savings' outstanding capital stock by First Community and the sale of First
Community's common stock to Community Savings' depositors and borrowers and
others as described in this prospectus
37
<PAGE>
(the "Plan of Conversion"). Community Savings believes that converting the bank
from the mutual to stock form and organizing First Community to be its holding
company will provide increased flexibility for Community Savings and First
Community to react to changes in their operating environment, regardless of the
strategies ultimately chosen.
The existing management of Community Savings and First Community believes
that it will be in the best interests of Community Savings, First Community and
the stockholders of First Community for First Community to remain an independent
financial institution. Assuming completion of the conversion, First Community
and Community Savings intend to pursue the business strategy described in this
prospectus with the goal of enhancing shareholder value over the long term.
Neither First Community nor Community Savings has any existing plan to consider
any business combination in which First Community or Community Savings would be
acquired by another entity, and neither company has any agreement or
understanding with respect to any such business combination.
The Board of Directors' adoption of the Plan of Conversion is subject to
approval by the members of Community Savings and receipt of required regulatory
approvals. Pursuant to the Plan of Conversion, Community Savings will be
converted from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank and will become a wholly-owned subsidiary
of First Community. First Community will issue its common stock to be sold in
the conversion and will use that portion of the net proceeds thereof which it
does not retain to purchase the capital stock of Community Savings. By letter
dated ______________, 1999, the Administrator approved the Plan of Conversion,
subject to approval by the members of Community Savings and satisfaction of
certain other conditions. A special meeting of Community Savings' members (the
"Special Meeting") will be held on ______________, 1999 for the purpose of
considering approval of the Plan of Conversion.
Completion of the conversion is contingent also upon receipt of the
approvals of the Federal Reserve and the Administrator for First Community to
acquire Community Savings. Those approvals have been received. The conversion
cannot be completed until the expiration of the Bank Merger Act of 1956 waiting
period which began to run upon approval by the Federal Reserve of First
Community's application and expires ______________, 1999. Finally, completion of
the conversion is contingent upon receipt from the FDIC of a final non-objection
letter with respect to the transaction. The FDIC has issued a conditional
notification that it does not intend to object to the conversion.
The following is a summary of all material provisions of the Plan of
Conversion. It is qualified in its entirety by the provisions of the Plan of
Conversion, which contains a more detailed description of the terms of the
conversion. The Plan of Conversion is attached as Attachment I to Community
Savings' Proxy Statement for the Special Meeting which has been delivered to all
members of Community Savings. The Plan of Conversion can also be obtained by
written request from Community Savings. See "Additional Information."
PURPOSES OF CONVERSION
Community Savings, as a mutual savings bank, now has no stockholders and no
authority to issue capital stock. By converting to the stock form of
organization, Community Savings will be structured in the form used by most
commercial banks, other business entities and a substantial number of savings
institutions. conversion to a North Carolina-chartered capital stock savings
bank and the formation of a holding company offers a number of advantages which
may be important to the future performance of Community Savings, including (i) a
larger capital base for Community Savings' operations, (ii) enhanced future
access to capital markets and (iii) an opportunity for depositors of Community
Savings to become stockholders of First Community.
After completion of the conversion, the unissued common and preferred stock
authorized by First Community's articles of incorporation will permit First
Community, subject to market conditions, to raise
38
<PAGE>
additional equity capital through further sales of securities. Following the
conversion, First Community will also be able to use stock-related incentive
programs to attract, retain and provide incentives for qualified directors and
executive and other personnel of First Community and Community Savings. See
"Management of Community Savings -Employee Stock Ownership Plan," "- Proposed
Management Recognition Plan" and "-Proposed Stock Option Plan."
Formation of a holding company will provide greater flexibility than
Community Savings would otherwise have to expand and diversify its business
activities through existing or newly formed subsidiaries, or through
acquisitions of, or mergers with, both mutual and stock institutions, as well as
other companies. However, there are no current understandings or agreements
regarding any such business combinations.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of Community Savings' long-standing commitment to
its local community, the Plan of Conversion provides for the establishment of a
charitable foundation in connection with the conversion. The Plan of Conversion
provides that Community Savings and First Community will establish the
Foundation, which will be incorporated under North Carolina law as a not for
profit corporation, and Community Savings will fund the Foundation with common
stock of First Community, as further described below.
First Community and Community Savings believe that the funding of the
Foundation with common stock of First Community is a means of establishing a
common bond between Community Savings and the communities in which Community
Savings operates. This will enable such communities to share in the potential
growth and success of First Community and Community Savings over the long term.
By further enhancing Community Savings' visibility and reputation in the
communities in which it operates, management also believes the Foundation will
enhance the long-term value of Community Savings' community banking
franchise.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which Community Savings operates, including, but not
limited to, providing grants or donations to support housing assistance, not-
for-profit medical facilities, community groups and other types of organizations
or projects.
Establishment of the Foundation is contingent on the approval of the Plan
of Conversion.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which Community
Savings operates. Community Savings has long emphasized community lending and
community development activities. Community Savings intends to continue to
emphasize community lending and community development activities following the
conversion. However, such activities are not Community Savings' sole corporate
purpose. The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes and may be able to support
such activities in ways that are not presently available to Community Savings.
Community Savings believes that the Foundation will enable First Community and
Community Savings to assist their local community in areas beyond community
development and lending. As a result, the Board of Directors believes the
establishment of a charitable foundation is consistent with Community Saving's
commitment to community service.
The Boards of Directors of Community Savings and First Community also
believe that the funding of the Foundation with common stock of First Community
is a means of enabling the communities in which Community Savings operates to
share in the potential growth and success of First Community and Community
Savings long after completion of the conversion. The Foundation accomplishes
that goal by providing for continued ties between the Foundation and Community
Savings, thereby forming a partnership with the community. The establishment of
the Foundation could also enable First Community and Community Savings to
develop a unified charitable donation strategy and would centralize the
responsibility for administration and allocation of
39
<PAGE>
corporate charitable funds. Community Savings, however, does not expect the
contribution to the Foundation to take the place of its traditional community
lending and charitable activities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
North Carolina law as a not for profit corporation. Pursuant to the
Foundation's bylaws, the Foundation's board of directors will be comprised of 10
members. The initial board of directors will be appointed by the Board of
Directors of Community Savings, and the initial board of directors is expected
to include all existing directors of Community Savings. Future directors of the
Foundation will be appointed by the Foundation's then existing board of
directors. The articles of incorporation of the Foundation provides that the
corporation is organized exclusively for charitable purposes as set forth in
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code").
The Foundation's articles of incorporation further provides that no part of the
net earnings of the Foundation will inure to the benefit of, or be distributable
to its directors, officers or members.
The authority for the affairs of the Foundation will be vested in its board
of directors. The directors of the Foundation will be responsible for
establishing the policies of the Foundation regarding grants or donations by the
Foundation, consistent with the stated purposes for which the Foundation was
established. No formal policy governing Foundation grants exists at this time;
the Foundation's board of directors will adopt such a policy upon establishment
of the Foundation.
There will be no agreements or understandings with directors of the
Foundation regarding the exercise of control, directly or indirectly, over the
management or policies of First Community or Community Savings, including
agreements related to voting, acquisition or disposition of First Community's
stock. As directors of a not for profit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purposes for which the Foundation
is established.
Community Savings will provide administrative support services to the
Foundation. Initially, the Foundation is expected to have no employees. The
board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between Community Savings and the Foundation will
comply with the affiliate transaction restrictions set forth in Sections 23A and
23B of the Federal Reserve Act, as amended.
Community Savings determined to fund the Foundation with First Community
common stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of First Community and Community Savings over the long term.
The funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if Community Savings contributed cash to the
Foundation since, as a shareholder, the Foundation will share in the potential
growth and success of First Community. As such, the contribution of stock to
the Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that Community Savings, if it were not making
the stock contribution, would have to contribute to the Foundation in future
years to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends or other
distributions that may be paid or made on First Community's common stock in the
future and, subject to applicable federal and state laws, from loans
collateralized by the common stock and from the proceeds of sales of the common
stock in the open market from time to time as may be permitted to provide the
Foundation with additional liquidity. As a private foundation under Section
501(c)(3) of the Code, the Foundation will be required to distribute annually in
grants or donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of First
Community's common stock by Community Savings is that the amount of common stock
that may be sold by the Foundation in any one year shall not exceed 5% of the
average market value of the assets held by the Foundation, except where the
board of directors of the Foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a long-term
reduction of the value of
40
<PAGE>
the Foundation's assets or would otherwise jeopardize the Foundation's capacity
to carry out its charitable purposes. While there may be greater risk associated
with a one-stock portfolio in comparison to a diversified portfolio, First
Community believes any such risk is mitigated by the ability of the Foundation's
directors to sell more than 5% of its stock in such circumstances.
Immediately upon completion of the conversion, Community Savings will
purchase 100,000 shares of newly issued shares of common stock from First
Community at a price of $15.00 per share and will contribute such shares to the
Foundation. As a result, upon completion of the conversion, the issuance of
100,000 shares to Community Savings and the contribution of such shares to the
Foundation, immediately following the conversion, First Community would have
1,630,000, 1,900,000 and 2,170,000 shares issued and outstanding at the minimum,
midpoint and maximum, respectively, of the valuation range. Because First
Community will have an increased number of shares outstanding, the voting and
ownership interests of shareholders in First Community's common stock would be
diluted, as compared to their interests in First Community if the Foundation was
not established. For additional discussion of the dilutive effect, see
"Comparison of Valuation and Pro Forma Information With No Foundation", "Pro
Forma Data" and "Risk Factors - The Establishment of the Foundation Will Dilute
the Voting and Ownership Interests of Stockholders."
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. Community Savings proposes to capitalize
the Foundation with 100,000 shares of First Community's common stock which would
have a market value of $1.5 million, based on the purchase price of $15.00 per
share. Such contribution, once made, will not be recoverable by Community
Savings. As a result of the anticipated establishment of the Foundation, the
valuation range, as estimated by Ferguson, has decreased and the amount of stock
available for sale in the offering has also correspondingly decreased. The
amount of the decrease is 141,667, 166,667, 191,667 and 220,400 shares, or $2.13
million, $2.50 million, $2.88 million and $3.31 million, at the minimum,
midpoint, maximum and 15% above the maximum of the valuation range,
respectively. See "Pro Forma Data" and "Comparison of Valuation and Pro Forma
Data Information with No Foundation."
TAX CONSIDERATIONS. First Community and Community Savings have been
advised by their tax counsel that an organization created for the above purposes
will qualify as a section 501(c)(3) exempt organization under the Code and will
be classified as a private foundation rather than a public charity. A private
foundation typically receives its support from one person or one corporation
whereas a public charity receives its support from the public. The Foundation
will submit a request to the Internal Revenue Service ("IRS") to be recognized
as an exempt organization after the Special Meeting. As long as the Foundation
files its application for tax-exempt status within 15 months from the date of
its organization and provided the IRS approves the application, the effective
date of the Foundation's status as a section 501(c)(3) organization will be the
date of its organization.
Under the Code, Community Savings may deduct charitable contributions up to
10% of its taxable income in any one year and any contributions made by
Community Savings in excess of the deductible amount will be deductible for
federal tax purposes over each of the five succeeding taxable years. Community
Savings believes that the conversion presents a unique opportunity to establish
and fund a charitable foundation given the substantial amount of additional
capital being raised in the conversion. In making such a determination,
Community Savings considered the dilutive impact of the Foundation on the amount
of common stock available to be offered for sale in the conversion. See
"Comparison of Valuation and Pro Forma Information with No Foundation." Based
on such consideration, management believes that the contribution to the
Foundation in excess of the 10% annual limitation is justified given Community
Savings' capital position and its earnings, the substantial additional capital
being raised in the conversion and the potential benefits of the Foundation to
the community. Assuming sale of the common stock at the midpoint of the
valuation range, First Community would have pro forma consolidated capital of
$46.4 million, or 24.0% of consolidated assets, and Community Savings' pro forma
tier 1 leverage and risk-based capital ratios would be 19.3 and 36.3%,
respectively. See "Regulatory Capital Compliance," "Capitalization" and
"Comparison of Valuation and Pro Form Information with No Foundation."
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Thus, the amount of the contribution will not adversely impact the financial
condition of First Community and Community Savings. Community Savings therefore
believes that the amount of the charitable contribution is reasonable given
First Community's and Community Savings' pro forma capital positions. As such,
management does not believe that the contribution raises any safety and
soundness concerns.
Community Savings has received an opinion of its tax counsel that Community
Savings' contribution of First Community's common stock to the Foundation will
not constitute an act of self-dealing and that Community Savings will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution, subject to a limitation based on 10% of Community
Savings' annual taxable income. Community Savings, however, would be able to
carry forward any unused portion of the deduction for five years following the
year in which the contribution is made for federal tax purposes. Thus, while
Community Savings expects to receive a charitable contribution deduction of
approximately $1.5 million in 1999, which is expected to substantially exceed
10% of its 1999 taxable income, Community Savings will be permitted under the
Code to carry over the excess contribution over a five-year period for federal
income tax purposes. Assuming the close of the offerings at the midpoint of the
valuation range, Community Savings estimates that substantially all of the
deduction should be deductible over the six-year period. However, no assurances
can be made that Community Savings will have sufficient pre-tax income over the
five year period following the year in which the contribution is made to fully
use the carryover related to the excess contribution. Community Savings does not
expect to make any further contributions to the Foundation within the first five
years following the initial contribution. After that time, Community Savings may
consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of First
Community and Community Savings and at that time, the interests of shareholders
and depositors of First Community and Community Savings and the financial
condition and operations of the Foundation.
Although Community Savings has received an opinion of its tax counsel that
Community Savings is entitled to a deduction for the charitable contribution,
there can be no assurances that the IRS will recognize the Foundation as a
Section 501(c)(3) exempt organization or that the deduction will be permitted.
In such event, Community Savings' contribution to the Foundation would be
expensed without tax benefit, resulting in a reduction in earnings in the year
in which the IRS makes such a determination. See "Risk Factors - The
Contribution to the Foundation May Not Be Deductible, Which Would Increase the
Negative Impact on Earnings."
In cases of willful, flagrant or repeated acts or failures to act which
result in violations of the IRS rules governing private foundations, a private
foundation's status as a private foundation may be involuntarily terminated by
the IRS. In such event, the managers of a private foundation could be liable
for excise taxes based on such violations and the private foundation could be
liable for a termination tax under the Code. The Foundation's articles of
incorporation provide that it shall have a perpetual existence. In the event,
however, the Foundation were subsequently dissolved as a result of a loss of its
tax exempt status, the Foundation would be required under the Code and its
articles of incorporation to distribute any assets remaining in the Foundation
at that time for one or more exempt purposes within the meaning of Section
501(c)(3) of the Code, or to distribute such assets to the federal government,
or to a state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
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APPROVAL OF FOUNDATION. Establishment of the Foundation is contingent upon
the approval of the conversion at the Special Meeting.
EFFECTS OF CONVERSION
GENERAL. Each person with a deposit account in Community Savings has pro
rata rights, based upon the balance in his or her account, in the net worth of
Community Savings upon liquidation. However, this right is tied to the
depositor's account and has no tangible market value separate from such deposit
account. Further, Community Savings' depositors can realize value with respect
to their interests only in the unlikely event that Community Savings is
liquidated and has a positive net worth. In that event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus
after other claims, including those with respect to the deposit accounts of
depositors, are paid.
Upon Community Savings' conversion to stock form, its certificate of
incorporation will be amended to authorize the issuance of permanent
nonwithdrawable capital stock to represent the ownership of Community Savings,
including its net worth. The capital stock of Community Savings also will be
separate and apart from deposit accounts and will not be insured by the FDIC or
any other governmental entity. Certificates will be issued to evidence ownership
of the capital stock. All of the outstanding capital stock of Community Savings
will be acquired by First Community, which in turn will issue its common stock
to purchasers in the conversion. The stock certificates issued by First
Community will be transferable and, therefore, subject to applicable law, the
stock could be sold or traded if a purchaser is available with no effect on any
deposit account the seller may hold at Community Savings. The capital stock of
First Community also will not be insured by the FDIC or any other governmental
entity.
VOTING RIGHTS. Under Community Savings' current certificate of
incorporation and bylaws, deposit account holders and borrowers have voting
rights with respect to certain matters relating to Community Savings, including
the election of directors. After the conversion, (i) neither deposit account
holders nor borrowers will have voting rights with respect to Community Savings
and will therefore not be able to elect directors of Community Savings or
control its affairs; (ii) voting rights with respect to Community Savings will
be vested in First Community as the sole stockholder of Community Savings; and
(iii) voting rights with respect to First Community will be vested in First
Community's stockholders. Each purchaser of First Community's common stock will
be entitled to vote on any matters to be considered by First Community's
stockholders. For a description of the voting rights of the holders of the
common stock, see "Description of Capital Stock."
DEPOSIT ACCOUNTS AND LOANS. The account balances, interest rates and other
terms of deposit accounts at Community Savings and the existing deposit
insurance coverage of such accounts will not be affected by the conversion
(except to the extent that a depositor directs Community Savings to withdraw
funds to pay for his or her common stock). Furthermore, the conversion will not
affect the balances, interest rates, maturities or other terms of loan accounts,
or the obligations of borrowers under their individual contractual arrangements
with Community Savings.
CONTINUITY. Community Savings will continue without interruption, during
and after completion of the conversion, to provide its services to depositors
and borrowers pursuant to existing policies and will maintain its current
offices operated by the existing management and employees of Community
Savings.
LIQUIDATION RIGHTS. In the unlikely event of a complete liquidation of
Community Savings, either before or after conversion, account holders would have
claims for the amount of their deposit accounts, including accrued interest, and
would receive the protection of deposit insurance up to applicable limits. In
addition to deposit insurance coverage, depositor liquidation rights before and
after conversion would be as set forth below.
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Liquidation Rights Prior to the Conversion. As described above under "-
General", prior to the conversion, in the event of a complete liquidation of
Community Savings, each holder of a deposit account in Community Savings would
receive such holder's pro rata share of any assets of Community Savings
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts, including accrued
interest). Such holder's pro rata share of such remaining assets, if any, would
be in the same proportion of such assets as the value of such holder's deposit
account was to the total value of all deposit accounts in Community Savings at
the time of liquidation.
Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan of Conversion provides that, upon completion of
the conversion, a memorandum account called a "Liquidation Account" will be
established for the benefit of Community Savings' depositors as of June 30, 1997
who had aggregate deposits on the close of business on such at of at least
$50.00 ("Eligible Account Holders") and Community Savings' depositors as of
_______________, 1999 who had aggregate deposits on the close of business on
such date of at least $50.00 ("Supplemental Eligible Account Holders"). The
amount of the Liquidation Account will be equal to the net worth of Community
Savings as of the date of its latest statement of financial condition contained
in this prospectus. Under applicable regulations, Community Savings will not be
permitted to pay dividends on, or repurchase any of, its capital stock if its
net worth would thereby be reduced below the aggregate amount then required for
the Liquidation Account. See "Dividend Policy" and Supervision and Regulation -
Regulation of Community Savings - Restrictions on Dividends and Other Capital
Distributions." After the conversion, Eligible Account Holders and Supplemental
Eligible Account Holders will be entitled, in the event of a liquidation of
Community Savings, to receive liquidating distributions of any assets remaining
after payment of all creditors' claims (including the claims of all depositors
to the withdrawal values of their deposit accounts, including accrued interest),
before any distributions are made on Community Savings' capital stock, equal to
their proportionate interests at that time in the Liquidation Account.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have an initial interest ("subaccount balance") in the Liquidation Account for
each deposit account held as of June 30, 1997 (the "Eligibility Record Date") or
as of ___________________ (the "Supplemental Eligibility Record Date"),
respectively. Each initial subaccount balance will be the amount determined by
multiplying the total opening balance in the Liquidation Account by the
Qualifying Deposit (a deposit of at least $50 as of the Eligibility Record Date
or Supplemental Eligibility Record Date, as applicable) of such deposit account
divided by the total of all Qualifying Deposits on that date. If the amount in
the deposit account on any subsequent annual closing date of Community Savings
is less than the balance in such deposit account on any other annual closing
date or the balance in such an account on the Eligibility Record Date or
Supplemental Eligibility Record Date, as the case may be, this interest in the
Liquidation Account will be reduced by an amount proportionate to any such
reduction, and will not thereafter be increased despite any subsequent increase
in the related deposit account. An Eligible Account Holder's or Supplemental
Eligible Account Holder's interest in the Liquidation Account will cease to
exist if the deposit account is closed. The Liquidation Account will never
increase and will be correspondingly reduced as the interests in the Liquidation
Account are reduced or cease to exist. In the event of a liquidation, any
assets remaining after the above liquidation rights of Eligible Account Holders
and Supplemental Eligible Account Holders are satisfied would be distributed to
First Community, as sole stockholder of Community Savings.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not
Community Savings is the surviving institution, would not be viewed as a
complete liquidation for purposes of distribution of the Liquidation Account.
In any such transaction, the Liquidation Account would be assumed by the
surviving institution to the full extent authorized by regulations of the
Administrator as then in effect.
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OFFERING OF COMMON STOCK
As part of the conversion, First Community is making the subscription
offering of its common stock in the priorities and to the persons described
below under "- Subscription Offering." In addition, any shares which remain
unsubscribed for in the subscription offering will be offered in the community
offering to members of the general public, with priority being given to natural
persons and trusts of natural persons residing or located in Alamance County,
North Carolina, including IRAs, Keogh accounts and similar retirement accounts
established for the benefit of natural persons who are residents of Alamance
County. See "- Community Offering." If necessary, all shares of common stock
not purchased in the subscription offering and community offering, if any, may
be offered for sale to the general public through a syndicate of registered
broker-dealers as selected dealers to be managed by Trident Securities. See "-
Syndicated Community Offering."
The Plan of Conversion requires that the aggregate dollar amount of the
common stock sold equal not less than the minimum nor more than the maximum of
the valuation range which is established in connection with the conversion;
provided, however, with the consent of the Administrator and the FDIC, the
aggregate dollar amount of the common stock sold may be increased to as much as
15% above the maximum of the valuation range, without a resolicitation of
subscribers or any right to cancel subscriptions, in order to reflect changes in
market and financial conditions following commencement of the subscription
offering. See "- Purchase Price of Common Stock and Number of Shares
Offered."
If a syndicated community offering is not feasible or successful and common
stock having an aggregate value of at least the minimum of the valuation range
is not subscribed for in the subscription and community offerings, First
Community will consult with the Administrator to determine an appropriate
alternative method of selling all shares of common stock offered in the
conversion and not subscribed for in the offering. The same per share price
($15.00) will be paid by purchasers in the subscription, community and
syndicated community offerings.
The subscription offering will expire at the Expiration Time, which is
12:00 noon, Eastern Time, on _______________, 1999, unless, with the approval of
the Administrator, the offering period is extended by First Community and
Community Savings. The community offering, if any, may begin at any time after
the subscription offering begins and will terminate at the Expiration Time or at
any time thereafter, but not later than _______________, 1999, unless extended
with the approval of the Administrator. The syndicated community offering, if
any, or other sale of all shares not subscribed for in the subscription and
community offerings, made as soon as practicable following the Expiration Time.
The sale of the common stock must, under the North Carolina conversion
regulations, be completed within 45 days after the Expiration Time unless such
period is extended with the approval of the Administrator. In the event such an
extension is approved, subscribers would be given the opportunity to increase
(subject to maximum purchase limitations), decrease (subject to minimum purchase
limitations) or rescind their subscriptions. In such event, substantial
additional printing, legal and accounting expenses may be incurred in completing
the conversion.
The commencement and completion of any required community or syndicated
community offering will be subject to market conditions and other factors beyond
First Community's control. Accordingly, no assurance can be given that any
required community or syndicated community offering or other sale of common
stock will be commenced at any particular time or as to the length of time that
will be required to complete the sale of all shares of common stock offered, and
significant changes may occur in the estimated pro forma market value of the
common stock, together with corresponding changes in the offering price, the
number of shares being offered, and the net proceeds realized from the sale of
the common stock. The Plan of Conversion requires that the conversion be
completed within 24 months after the date of approval of the Plan of Conversion
by Community Savings' members.
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SUBSCRIPTION OFFERING
In accordance with North Carolina conversion regulations, non-transferable
subscription rights have been granted under the Plan of Conversion to the
following persons in the following order of priority:
(i) Community Savings' "Eligible Account Holders," who are depositors as
of June 30, 1997 who had aggregate deposits at the close of business on
such date of at least $50 ("Qualifying Deposits");
(ii) the ESOP;
(iii) Community Savings' "Supplemental Eligible Account Holders," who are
depositors as of ____________________, who had Qualifying Deposits on such
date;
(iv) Community Savings' "Other Members," who are depositor and borrower
members of Community Savings as of _______________, 1999, the voting record
date for the Special Meeting, who are not Eligible Account Holders or
Supplemental Eligible Account Holders; and
(v) directors, officers and employees of Community Savings who are not
Eligible Account Holders, Supplemental Eligible Account Holders or Other
Members.
All subscriptions received will be subject to the availability of common stock
after satisfaction of subscriptions of all persons having prior rights in the
subscription offering, and to the maximum purchase limitations and other terms
and conditions set forth in the Plan of Conversion and described below.
In order to ensure proper identification of subscription rights, it is the
responsibility of subscribers in the subscription offering to provide correct
account verification information on the stock order form.
ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder has been granted,
without payment therefor, non-transferable subscription rights to purchase First
Community common stock up to the maximum purchase limitation described in "-
Minimum and Maximum Purchase Limitations." If Eligible Account Holders
subscribe for more shares of First Community common stock than are available for
purchase, the shares offered will first be allocated among the subscribing
Eligible Account Holders so as to enable each subscribing Eligible Account
Holder to the extent possible, to purchase the number of shares necessary to
make his or her total allocation of common stock equal to the lesser of 100
shares of common stock or the number of shares subscribed for by such Eligible
Account Holder. Any shares remaining after such allocation will be allocated
among the subscribing Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that each such Eligible Account Holder's
Qualifying Deposits bears to the total of the Qualifying Deposits of all such
Eligible Account Holders.
ESOP. The ESOP has been granted, without payment therefor, subscription
rights to purchase a number of shares of First Community common stock up to 8%
of the sum of the aggregate number of shares issued in the conversion and the
number of shares contributed to the Foundation. The ESOP is expected to purchase
such number of shares in the conversion. If, because of an oversubscription for
shares of First Community common stock or for any other reason, the ESOP is
unable to purchase in the conversion 8% of the sum of the total number of shares
offered in the conversion and the number of shares contributed to the
Foundation, then the Board of Directors of First Community intends to approve
the purchase by the ESOP in the open market, after the conversion, of such
shares as are necessary for the ESOP to acquire such number of shares.
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders and the ESOP, each Supplemental Eligible Account Holder has been
granted, without payment therefor, non-transferable subscription rights to
purchase First Community common stock up to the maximum purchase limitation
described in "- Minimum and Maximum
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Purchase Limitations." If Supplemental Eligible Account Holders subscribe for
more shares of First Community common stock than are available for purchase, the
shares offered will first be allocated among the subscribing Supplemental
Eligible Account Holders so as to enable each subscribing Supplemental Eligible
Account Holder to the extent possible, to purchase the number of shares
necessary to make his or her total allocation of common stock equal to the
lesser of 100 shares of common stock or the number of shares subscribed for by
such Supplemental Eligible Account Holder. Any shares remaining after such
allocation will be allocated among the subscribing Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that each such
Supplemental Eligible Account Holder's Qualifying Deposits bears to the total of
the Qualifying Deposits of all such Supplemental Eligible Account Holders.
OTHER MEMBERS. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, each Other Member (a member of Community
Savings as of _______________, 1999 who is not an Eligible Account Holder or
Supplemental Eligible Account Holder) has been granted, without payment
therefor, non-transferable subscription rights to purchase First Community
common stock up to the maximum purchase limitation described in "- Minimum and
Maximum Purchase Limitations." If Other Members subscribe for more shares of
First Community common stock than remain available for purchase by Other
Members, shares will be allocated among the subscribing Other Members in the
proportion that the number of votes eligible to be cast by each Other Member
bears to the total number of votes eligible to be cast at the Special Meeting by
all Other Members whose subscriptions remain unsatisfied.
EMPLOYEES, OFFICERS, AND DIRECTORS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members,
Community Savings' employees, officers and directors who are not Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members have
each been granted, without payment therefor, non-transferable subscription
rights to purchase First Community common stock up to the maximum purchase
limitation described in "- Minimum and Maximum Purchase Limitations." If more
shares are subscribed for by such employees, officers and directors than are
available for purchase by them, the available shares will be allocated among
subscribing employees, officers and directors pro rata on the basis of the
amount of their respective subscriptions.
COMMUNITY OFFERING
Any shares of First Community common stock which remain unsubscribed for in
the subscription offering may be offered by First Community to members of the
general public in the community offering, which may commence at any time after
commencement of the subscription offering, with priority given to natural
persons and trusts of natural persons residing or located in Alamance County,
North Carolina, including IRA accounts, Keogh accounts and similar retirement
accounts established for the benefit of natural persons who are residents of
Alamance County. The community offering may terminate at the Expiration Time or
at any time thereafter, but no later than _______________, 1999, unless further
extended with the consent of the Administrator. The opportunity to subscribe
for shares of common stock in the community offering is subject to the right of
Community Savings and First Community, in their sole discretion, to accept or
reject any such orders, in whole or in part, either at the time of receipt of an
order or as soon as practicable following the termination of the community
offering. In the event Community Savings and First Community reject any such
orders after receipt, subscribers will be promptly notified and all funds
submitted with subscriptions will be returned with interest at Community
Savings' statement savings rate.
In the event that subscriptions by subscribers in the community offering
whose orders would otherwise be accepted exceed the shares available for
purchase in the community offering, then subscriptions of natural persons and
trusts of natural persons residing in Alamance County, including IRAs, Keogh
accounts and similar
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retirement accounts established for the benefit of natural persons who are
residents of Alamance County ("First Priority Community Subscribers") will be
filled in full up to applicable purchase limitations (to the extent such
subscriptions are not rejected by Community Savings and First Community) prior
to any allocation to other subscribers in the community offering.
In the event of an oversubscription by First Priority Community Subscribers
whose orders would otherwise be accepted, shares of common stock will be
allocated first to each First Priority Community Subscriber whose order is
accepted in full or in part by Community Savings and First Community in the
entire amount of such order up to a number of shares no greater than 15,000
shares, which number shall be determined by the Board of Directors of Community
Savings prior to the time the conversion is consummated with the intent to
provide for a wide distribution of shares among such subscribers. Any shares
remaining after such allocation will be allocated to each First Priority
Community Subscriber whose order is accepted in full or in part on an equal
number of shares basis until all orders are filled. Such allocation shall also
be applied to subscriptions by other subscribers in the community offering, in
the event shares are available for such subscribers but there is an
oversubscription by them.
In order to ensure proper allocation of shares in the event of an
oversubscription, it is the responsibility of subscribers in the community
offering to provide correct addresses of residence on the stock order form.
SYNDICATED COMMUNITY OFFERING
The Plan of Conversion provides that, if necessary, all shares of First
Community common stock not purchased in the subscription and community
offerings, if any, may be offered for sale to the general public in a syndicated
community offering through a syndicate of registered broker-dealers as selected
dealers (the "Selected Dealers") to be formed and managed by Trident Securities
acting as agent of First Community. First Community and Community Savings have
the right to reject orders, in whole or in part, in their sole discretion in the
syndicated community offering. Neither Trident Securities nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
common stock in the syndicated community offering; however, Trident Securities
has agreed to use its best efforts in the sale of shares in the syndicated
community offering. First Community common stock sold in the syndicated
community offering will be sold at the purchase price of $15.00 per share which
is the same price as all other shares being offered in the conversion.
It is estimated that the Selected Dealers, including Trident Securities,
will receive a negotiated commission based on the amount of common stock sold by
the Selected Dealer, payable by First Community. During the syndicated
community offering, Selected Dealers may only solicit indications of interest
from their customers to place orders for the purchase of shares of common stock
with First Community as of a certain date (the "Order Date"). When and if
Trident Securities and First Community believe that enough indications and
orders have been received in the offerings to consummate the conversion, Trident
Securities will request, as of the Order Date, Selected Dealers to submit orders
to purchase shares for which they have received indications of interest from
their customers. Selected Dealers will send confirmations of the orders to such
customers on the next business day after the Order Date. Selected Dealers will
debit the accounts of their customers on a date which will be three business
days from the Order Date ("Debit Date"). Customers who authorize Selected
Dealers to debit their brokerage accounts are required to have the funds for
payment in their account on but not before the Debit Date. On the next business
day following the Debit Date, Selected Dealers will remit funds to the account
that First Community established for each Selected Dealer. After payment has
been received by First Community from Selected Dealers, funds will earn interest
at Community Savings' statement savings rate until the consummation of the
conversion. In the event the conversion is not consummated as described above,
funds with interest will be returned promptly to the Selected Dealers, who, in
turn, will promptly credit their customers' brokerage accounts.
The syndicated community offering may close at any time after the
Expiration Time at the discretion of Community Savings and First Community, but
in no case later than _______________, 1999.
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FRACTIONAL SHARES
In making allocations in the event of oversubscriptions, all computations
will be rounded down to the nearest whole share; no fractional shares will be
issued. Excess and other amounts sent by subscribers which are not used to
satisfy subscriptions will be refunded with interest at Community Savings'
statement savings rate, and amounts designated for withdrawal from deposit
accounts will be released.
PURCHASE PRICE OF COMMON STOCK AND NUMBER OF SHARES OFFERED
The purchase price of shares of common stock sold in the subscription
offering, community offering and syndicated community offering will be $15.00
per share. The purchase price was determined by the Boards of Directors of
First Community and Community Savings in consultation with Community Savings'
financial advisor and sales agent, Trident Securities.
The North Carolina regulations governing conversions of North Carolina-
chartered mutual savings banks to stock form require that the aggregate purchase
price of the shares of common stock of First Community sold in connection with
the conversion be equal to not less than the minimum, nor more than the maximum,
of the valuation range which is established by an independent appraisal in the
conversion and is described below; provided, however, that with the consent of
the Administrator and the FDIC the aggregate purchase price of the common stock
sold may be increased to up to 15% above the maximum of the valuation range,
without a resolicitation of subscribers or any right to cancel, rescind or
change subscription orders, to reflect changes in market and financial
conditions following commencement of the subscription offering.
FDIC rules with respect to appraisals require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the conversion pursuant to its business plan.
Community Savings has retained Ferguson, an independent appraisal firm
experienced in the valuation and appraisal of savings institutions and their
holding companies, to prepare an appraisal of the pro forma market value of
Community Savings and First Community and to assist Community Savings in
preparing a business plan. For its services in determining such valuation and
assisting with the business plan, Ferguson will receive an aggregate fee of
$25,000, plus $3,500 for each written opinion or update of its appraisal, and
will be reimbursed for its out-of-pocket expenses.
Ferguson has informed Community Savings that its appraisal has been made in
reliance upon the information contained in this prospectus, including the
financial statements of Community Savings. Ferguson has further informed
Community Savings that it also considered the following factors, among others,
in making the appraisal: (i) the present and projected operating results and
financial condition of First Community and Community Savings; (ii) the economic
and demographic conditions in Community Savings' existing market area; (iii)
certain historical, financial and other information relating to Community
Savings; (iv) the proposed dividend policy of First Community; (v) a comparative
evaluation of the operating and financial statistics of Community Savings with
those of other savings institutions; (vi) the aggregate size of the offering;
and (vii) the trading market for the securities of institutions Ferguson
believes to be comparable in relevant respects to First Community and Community
Savings and general conditions in the markets for such securities. In addition,
Ferguson has advised Community Savings that it has considered the effect of the
conversion on the net worth and earnings potential of
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First Community and Community Savings. Ferguson has also advised Community
Savings that its appraisal has been based upon the assumption that Community
Savings will purchase 100,000 newly issued shares of First Community's common
stock for $15.00 per share and contribute such shares to the Foundation
immediately after consummation of the conversion.
On the basis of its consideration of the above factors, Ferguson has
advised Community Savings that, in its opinion, at December 9, 1998, the
valuation range of Community Savings and First Community was from a minimum of
$22,950,000 to a maximum of $31,050,000, with a midpoint of $27,000,000. Based
upon such valuation and a purchase price for shares offered in the conversion of
$15.00 per share, the number of shares to be offered ranges from a minimum of
1,530,000 shares to a maximum of 2,070,000 shares, with a midpoint of 1,800,000
shares.
The Board of Directors of Community Savings has reviewed the methodology
and assumptions used by Ferguson in preparing the appraisal and has determined
that the valuation range, as well as the methodology and assumptions used, were
reasonable and appropriate.
Upon completion of the offerings, Ferguson will confirm or update its
valuation of the estimated aggregate pro forma market value of Community Savings
and First Community. Based on the confirmed or updated appraisal, a
determination will be made of the total number of shares of common stock which
will be offered and sold in the conversion.
With the consent of the Administrator and the FDIC, the aggregate price of
the shares sold in the conversion may be increased by up to 15% above the
maximum of the valuation range, or to $35,707,500 (2,380,500 shares), without a
resolicitation of subscribers and without any right to cancel, rescind or change
subscription orders, to reflect changes in market and financial conditions
following commencement of the subscription offering.
Also, the Plan of Conversion provides that, if there are errors in
allocating shares among subscribers, an additional number of shares of common
stock, up to three percent of the shares issued in the conversion, may be issued
to correct those errors. Any such shares will be issued without any
resolicitation of subscribers and without any right to cancel, rescind or change
subscription orders.
Because of the establishment of the Foundation, the number of shares to be
issued and outstanding following the conversion will be increased by 100,000
shares. Funding the Foundation with authorized but unissued shares will have
the effect of diluting the ownership and voting interests of persons purchasing
shares in the conversion, since a greater number of shares will be outstanding
upon completion of the conversion than would be if the Foundation were not
established. See "Risk Factors - The Establishment of the Foundation Will
Dilute the Voting and Ownership Interests of Stockholders."
No sale of shares may be consummated unless, after the expiration of the
offering period, Ferguson confirms to Community Savings, First Community, the
Administrator and the FDIC, that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause Ferguson to conclude that the aggregate purchase price of the common
stock sold in the conversion is incompatible with its estimate of the aggregate
pro forma market value of Community Savings and First Community at the
conclusion of the offering. If the aggregate pro forma market value of
Community Savings and First Community as of such date is within the valuation
range (or, with the consent of the Administrator and FDIC, not more than 15%
above the maximum of the valuation range), then such pro forma market value will
determine the number of shares of common stock to be sold in the conversion. If
there has occurred a change in the aggregate pro
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forma market value is below the minimum of the valuation range or more than 15%
above the maximum of the valuation range, a resolicitation of subscribers may be
made based upon a new valuation range, the Plan of Conversion may be terminated
or such other actions as the Administrator and the FDIC may permit may be taken.
In the event of a resolicitation, subscribers would be given a specified
time period within which to respond to the resolicitation. If a subscriber
fails to respond to the resolicitation by the end of such period, the
subscription of such subscriber will be canceled, funds submitted with the
subscription will be refunded promptly with interest at Community Savings'
statement savings rate, and holds on accounts from which withdrawals were
designated will be released. Any such resolicitation will be by means of an
amended prospectus filed with the SEC. A resolicitation may delay completion of
the conversion. If the Plan of Conversion is terminated, all funds will be
returned promptly with interest at Community Savings' statement savings rate
from the date payment was deemed received, and holds on funds authorized for
withdrawal from deposit accounts will be released. See "- Exercise of
Subscription Rights and Purchases in the Community Offering."
The valuation by Ferguson is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing common stock.
Ferguson did not independently verify the financial statements and other
information provided by Community Savings, nor did Ferguson value independently
the assets or liabilities of Community Savings. The valuation considers
Community Savings as a going concern and should not be considered as an
indication of the liquidation value of Community Savings or First Community.
Moreover, because such valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing such shares in the
conversion will thereafter be able to sell shares at prices in the range of the
foregoing valuation of the pro forma market value thereof.
A copy of the complete appraisal by Ferguson is on file and available for
inspection at the office of the Savings Institutions Division of the North
Carolina Department of Commerce, Tower Building, Suite 301, 1110 Navaho Drive,
Raleigh, North Carolina 27609. A copy is also available for inspection at the
Stock Information Center. A copy of the appraisal has also been filed as an
exhibit to the Registration Statement filed with the SEC with respect to the
common stock offered hereby. See "Additional Information."
EXERCISE OF SUBSCRIPTION RIGHTS AND PURCHASES IN COMMUNITY OFFERING
In order for subscription rights to be effectively exercised in the
subscription offering and in order to purchase in the subscription offering, the
original signed stock order form in the form provided by First Community and
Community Savings, accompanied by the required payment for the aggregate dollar
amount of common stock desired or appropriate instructions authorizing
withdrawal from one or more Community Savings deposit accounts (other than
negotiable order of withdrawal accounts or other demand deposit accounts), must
be received by Community Savings by the Expiration Time, which is 12:00 noon,
Eastern Time, on __________________, 1999.
Subscription rights (i) for which Community Savings does not receive
original signed stock order forms by the Expiration Time (unless such time is
extended), or (ii) for which stock order forms are executed defectively or are
not accompanied by full payment (or appropriate withdrawal instructions) for
subscribed shares, will expire whether or not Community Savings has been able to
locate the persons entitled to such rights. Copies of the stock order form,
including copies sent by facsimile, will not be accepted.
In order to purchase in the community offering, the stock order form,
accompanied by the required payment for the aggregate dollar amount of common
stock desired or appropriate instructions authorizing withdrawal from one or
more Community Savings deposit accounts (other than negotiable order of
withdrawal
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accounts or other demand deposit accounts), must be received by
Community Savings prior to the time the community offering terminates, which
could be at any time at or subsequent to the Expiration Time. No orders will be
accepted from persons who do not have subscription rights in the subscription
offering unless a community offering is commenced.
Persons wishing to use funds in a Community Savings IRA to purchase First
Community common stock must transfer the funds in such account to a self-
directed IRA at an institution other than Community Savings. The Stock
Information Center can assist with such transfers. However, persons desiring to
use funds in a Community Savings IRA to purchase common stock must visit the
Stock Information Center on or before __________________, 1999 in order to
complete that purchase so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Time.
An executed stock order form once received by Community Savings, may not be
modified, amended or rescinded without the consent of Community Savings.
Community Savings has the right to extend the subscription period subject to
applicable regulations or to waive or permit correction of incomplete or
improperly executed stock order forms, but does not represent that it will do
so.
The amount to be remitted with the stock order form shall be the aggregate
dollar amount that a subscriber or purchaser desires to invest in the
subscription and community offerings. Complete payment must accompany all
completed stock order forms submitted in the subscription and community
offerings in order for subscriptions to be valid. See "- Purchase Price of
Common Stock and Number of Shares Offered."
Payment for shares will be permitted to be made by any of the following
means:
(i) in cash, if delivered in person to any office of Community Savings;
(ii) by check, bank draft, negotiable order of withdrawal or money order,
provided that the foregoing will only be accepted subject to collection and
payment; or
(iii) by appropriate authorization of withdrawal from any deposit account
in Community Savings (other than a negotiable order of withdrawal account
or other demand deposit account).
In order to ensure proper identification of subscription rights and proper
allocations in the event of an oversubscription, it is the responsibility of
subscribers to provide correct account verification information on the stock
order form. Stock order forms submitted by unauthorized purchasers or in
amounts exceeding purchase limitations will not be honored.
Interest will be paid by Community Savings on payments for common stock
made in cash or by check, bank draft, negotiable order of withdrawal or money
order at Community Savings' statement savings rate. Such interest shall be paid
from the date the order is accepted for processing and payment in good funds is
received by Community Savings until completion or termination of the conversion.
Community Savings is entitled to invest all amounts paid on subscriptions for
common stock for its own account until completion or termination of the
conversion. After amounts submitted for payment are applied to the purchase
price for shares sold, they will no longer earn interest, and they will not be
insured by the FDIC or any other government agency or other entity. Community
Savings may not knowingly lend funds or otherwise extend credit to any person to
purchase common stock in the conversion.
Payment may not be made by wire transfer. Stock order forms directing that
payment for shares be made by authorization of withdrawal will be accepted only
if, at the time the stock order form is received, there exists sufficient funds
in the account from which withdrawal is authorized to pay the full purchase
price for the number of shares ordered.
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For purposes of determining the withdrawal balance of deposit accounts from
which withdrawals have been authorized, such withdrawals will be deemed to have
been made upon receipt of appropriate authorization therefor, but interest will
be paid by Community Savings on the amount deemed to have been withdrawn at the
contractual rate of interest paid on such accounts until the date on which the
conversion is completed or terminated.
The stock order forms contain appropriate means by which authorization of
withdrawals from deposit accounts may be made to pay for subscribed shares.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be withdrawn (except by Community Savings as payment for common
stock) until the conversion is completed or terminated. Savings accounts will
be permitted to be established for the purpose of making payment for subscribed
shares of common stock. Funds authorized for withdrawal will continue to earn
interest at the applicable contract interest rate until completion or
termination of the conversion or, in the case of an order submitted in the
community offering, until it is determined that such order cannot or will not be
accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of common
stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied, such certificate
account will be canceled and the remaining balance thereof will earn interest at
Community Savings' statement savings rate.
Upon completion or termination of the conversion, Community Savings will
return to subscribers all amounts paid with subscriptions which are not applied
to the purchase price for shares, plus interest at its passbook savings rate
from the date good funds are received until the consummation or termination of
the conversion, and Community Savings will release deposit account withdrawal
orders given in connection with the subscriptions to the extent funds are not
withdrawn and applied toward the purchase of shares.
DELIVERY OF STOCK CERTIFICATES
Certificates representing common stock issued in the conversion will be
mailed by First Community's transfer agent to persons entitled thereto at the
address of such persons appearing on the stock order form as soon as practicable
following consummation of the conversion. Any certificates returned as
undeliverable will be held by First Community until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for common stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of common stock for which they
have subscribed, even though trading of the common stock may have
commenced.
PERSONS IN NON-QUALIFIED OR FOREIGN JURISDICTIONS
First Community will make reasonable efforts to comply with the securities
laws of all states of the United States in which Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members reside. However, no
shares of common stock or subscription rights under the Plan of Conversion will
be offered or sold in a foreign country, or in a state in the United States (i)
where a small number of persons otherwise eligible to subscribe for shares under
the Plan of Conversion reside or (ii) if First Community determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including, but not limited to, a requirement that
First Community, Community Savings or any employee or representative thereof
register as a broker, dealer, agent or salesperson or register or otherwise
qualify the subscription rights or common stock for sale in such state. No
payments will be made in lieu of the granting of subscription rights to persons
residing in such jurisdictions.
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MARKETING ARRANGEMENTS
Community Savings has retained Trident Securities to consult with and
advise Community Savings and First Community and to assist First Community, on a
best-efforts basis, in the marketing of shares in the offerings. Trident
Securities is a broker-dealer registered with the SEC and a member of the
National Association of Securities Dealers, Inc. ("NASD"). Trident Securities
is headquartered in Raleigh, North Carolina, and its telephone number is (919)
781-8900.
Trident Securities will assist Community Savings and First Community in the
conversion as follows: (i) it will act as marketing advisor with respect to the
subscription offering and will represent First Community as placement agent on a
best-efforts basis in the sale of the common stock in the community offering and
syndicated community offering; (ii) members of its staff will conduct training
sessions to ensure that directors, officers and employees of Community Savings
are knowledgeable regarding the conversion process; and (iii) it will provide
assistance in the establishment and supervision of the Stock Information Center,
including training staff to properly record and tabulate orders for the purchase
of common stock and to appropriately respond to customer inquiries.
For rendering its services, Community Savings has agreed to pay Trident
Securities a commission equal to 1.75% of the aggregate dollar amount of common
stock sold in the subscription and community offerings, excluding shares
purchased by the ESOP, directors, executive officers and their "associates" (as
defined in the Plan of Conversion) and excluding shares sold by other NASD
member firms under Selected Dealers agreements. Community Savings has also
agreed to pay negotiated commissions in connection with any sales made under
Selected Dealers agreements. Community Savings has paid Trident Securities
$2,500 toward amounts due to such agent.
Community Savings has agreed to reimburse Trident Securities for its
reasonable out-of-pocket expenses, including but not limited to travel,
communications, legal fees and postage, and to indemnify Trident Securities
against certain claims or liabilities, including certain liabilities under the
Securities Act. Trident Securities has agreed that Community Savings is not
required to pay its legal fees to the extent they exceed $27,500 or its other
out of pocket expenses to the extent they exceed $7,500. Total fees and
commissions to Trident Securities are expected to be between $310,083 and
$515,478 at the minimum and 15% above the maximum, respectively, of the
valuation range. See "PRO FORMA DATA" for the assumptions used to determine
these estimates.
Sales of common stock will be made primarily by registered representatives
affiliated with Trident Securities or by the broker-dealers managed by Trident
Securities. In addition, subject to applicable law, executive officers of First
Community and Community Savings may participate in the solicitation of offers to
purchase common stock. Other employees of Community Savings may participate in
the offerings in clerical capacities, providing administrative support in
effecting sales transactions and answering questions of a mechanical nature
relating to the proper execution of the stock order forms. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. Such other
employees have been instructed not to solicit offers to purchase common stock or
provide advice regarding the purchase of common stock.
A Stock Information Center has been established in Community Savings'
office at 708 South Church Street, Burlington, North Carolina, in an area
separate from Community Savings' banking operations. Employees will inform
prospective purchasers that their questions should be directed to the Stock
Information Center and will provide such persons with the telephone number of
the Stock Information Center which is (336) ________________.
Stock orders will be accepted at Community Savings' offices and will be
promptly forwarded to the Stock Information Center for processing. Sales of
common stock by registered representatives will be made from the
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Stock Information Center. In addition, Community Savings may hire one or more
temporary clerical persons to assist in typing, opening mail, answering the
phone, and with other clerical duties. An employee of Community Savings will
also be present at the Stock Information Center to process funds and answer
questions regarding payment for stock, including verification of account numbers
in the case of payment by withdrawal authorization and similar matters.
Subject to applicable state law, First Community will rely on Rule 3a4-1
under the Exchange Act, and sales of common stock in the conversion will be
conducted within the requirements of Rule 3a4-1, so as to permit officers and
current full and part-time Community Savings employees to participate in the
sale of common stock. No officer, director or employee of First Community or
Community Savings will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the common stock sold in the
conversion.
The engagement of Trident Securities and the work performed by Trident
Securities pursuant to its engagement, including a due diligence investigation,
should not be construed by purchasers of First Community common stock as
constituting an endorsement or recommendation relating to such investment or a
verification of the accuracy or completeness of information contained in this
prospectus.
MINIMUM AND MAXIMUM PURCHASE LIMITATIONS
Each person subscribing for common stock in the conversion must subscribe
for at least 30 shares ($450). The maximum number of shares of common stock
which may be purchased in the conversion by (i) any person or entity or (ii)
persons or entities exercising subscription rights through a single account, is
15,000 shares ($225,000); provided, however, that the ESOP may purchase up to 8%
of the sum of number of shares offered in the conversion plus the number of
shares contributed to the Foundation. In addition to the maximum purchase
limits just set forth (and not in lieu thereof), (i) no person or entity
together with any associates (as defined in the Plan of Conversion), may
subscribe for more than 20,000 shares ($300,000) of common stock sold in the
conversion in the aggregate and (ii) no persons or entities acting in concert
may purchase more than 20,000 shares ($300,000) of the common stock sold in the
conversion in the aggregate.
The Board of Directors of Community Savings may in its absolute discretion
(i) reduce the above-described 15,000 and 20,000 share maximum purchase
limitations or (ii) increase such 15,000 and 20,000 share maximum purchase
limitations to an amount of up to 5% of the shares of common stock offered and
sold. Any reduction or increase in the maximum purchase limitation by
Community Savings' Board of Directors may occur at any time prior to
consummation of the conversion, either before or after the Special Meeting on
__________________, 1999. In the event the 15,000 or 20,000 share maximum
purchase limitation is increased, any subscriber or group of subscribers in the
subscription, community or syndicated community offering who has subscribed for
the maximum amount which is increased, and certain other large subscribers in
the discretion of First Community, shall be given the opportunity to increase
their subscriptions up to the then applicable maximum purchase limitation.
The Plan of Conversion further provides that for purposes of the foregoing
limitations the term "associate" is used to indicate any of the following
relationships with a person:
(i) any relative or spouse of such person, or any relative of such spouse,
who has the same home as such person or who is a director or officer of
Community Savings, First Community or any subsidiary of Community Savings
or of First Community;
(ii) any corporation or organization (other than Community Savings, First
Community or a majority-owned subsidiary of Community Savings or First
Community) of which the person is
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an officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity security; and
(iii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as a trustee
or in a similar fiduciary capacity, except for any tax-qualified
employee stock benefit plan or any charitable trust which is exempt
from federal taxation pursuant to Section 501(c)(3) of the Code.
For purposes of the foregoing limitations, (i) directors and officers of
Community Savings or First Community shall not be deemed to be associates or a
group of persons acting in concert solely as a result of their serving in such
capacities, (ii) the ESOP will not be deemed to be acting in concert with any of
its trustees for purposes of determining the number of shares which any such
trustee, individually, may purchase and (iii) shares of common stock held by the
ESOP and attributed to an individual will not be aggregated with other shares
purchased directly by, or otherwise attributable to, that individual.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or interdependent conscious parallel action towards a common goal (whether or
not pursuant to an express agreement), with respect to the purchase, ownership,
voting or sale of the common stock of First Community or (ii) engaged in a
combination or pooling of voting or other interests in the securities of First
Community for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
First Community and Community Savings may presume that certain persons are
acting in concert based upon, among other things, joint account relationships
and the fact that such persons have filed joint Schedules 13D with the SEC with
respect to other companies.
APPROVAL, INTERPRETATION, AMENDMENT AND TERMINATION
Under the Plan of Conversion, the Administrator's approval thereof, and
applicable North Carolina conversion regulations, consummation of the conversion
is subject to satisfaction of certain conditions, including the following: (i)
approval of the Plan of Conversion by the affirmative vote of a majority of the
votes eligible to be cast by members of Community Savings at the Special
Meeting; (ii) sale of shares of common stock for an aggregate purchase price
equal to not less than the minimum or more than the maximum of the valuation
range unless the aggregate purchase price is increased to as much as 15% above
the maximum with the consent of the Administrator and FDIC, and (iii) receipt by
First Community and Community Savings of favorable opinions of counsel or other
tax advisor as to the federal and state tax consequences of the conversion. See
"- Income Tax Consequences."
If all conditions for consummation of the conversion are not satisfied, no
First Community common stock will be issued, Community Savings will continue to
operate as a North Carolina-chartered mutual savings bank, all subscription
funds will be promptly returned with interest at Community Savings' statement
savings rate, and all deposit withdrawal authorizations (and holds placed on
such accounts) will be canceled. In such an event, First Community would not
acquire control of Community Savings.
All interpretations by Community Savings and First Community of the Plan of
Conversion and of the stock order forms and related materials for the
subscription and community offerings will be final, subject to the authority of
the Administrator. Community Savings and First Community may reject stock order
forms that are not properly completed. However, First Community and Community
Savings retain the right, but will not be required, to waive irregularities in
submitted stock order forms or to require the submission of corrected stock
order forms or the remittance of full payment for all shares subscribed for by
such dates as they may specify.
The Plan of Conversion may be substantively amended by a two-thirds vote of
Community Savings' Board of Directors at any time prior to the Special Meeting,
and at any time thereafter by a two-thirds vote of Community
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Savings' Board of Directors with the concurrence of the Administrator. If
Community Savings determines upon the advice of counsel and after consultation
with the Administrator that any such amendment is material, subscribers would be
given the opportunity to increase, decrease or cancel their subscriptions. Also,
as required by the regulations of the Administrator, the Plan of Conversion
provides that the transactions contemplated thereby may be terminated by a two-
thirds vote of Community Savings' Board of Directors at any time prior to the
Special Meeting and may be terminated by a two-thirds vote of Community Savings'
Board of Directors at any time thereafter but prior to the completion of the
conversion with the concurrence of the Administrator, notwithstanding approval
of the Plan of Conversion by the Community Savings' members at the Special
Meeting.
CERTAIN RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS; FALSE OR MISLEADING
ORDER FORMS
The subscription rights granted under the Plan of Conversion are non-
transferable. Subscription rights may be exercised only by the person to whom
they are issued and only for his or her own account. Persons exercising
subscription rights are required to certify that they are purchasing shares for
their own accounts within the purchase limitations set forth in the Plan of
Conversion and that they have no agreement or understanding for the sale or
transfer of such shares.
Community Savings reserves the right to make an independent investigation
of any facts or circumstances brought to its attention that indicate or tend to
indicate that one or more persons acting independently or as a group acting in
concert may be attempting to violate or circumvent the regulatory prohibition on
transferability of subscription rights. The nature and extent of such
investigation will be at Community Savings' sole discretion and Community
Savings may require a holder of subscription rights to provide certified
affidavits and other documentation to satisfy Community Savings that its Plan of
Conversion and North Carolina and federal conversion regulations regarding
nontransferability are not being subverted by actions of holders of subscription
rights. In extreme cases Community Savings reserves the right to seek legal
advice from the General Counsel for the Administrator as to compliance with all
regulations governing the conversion, including the nontransferability of
subscription rights.
The Plan of Conversion provides that, if Community Savings' Board of
Directors determines that a subscriber (i) has submitted a false or misleading
information on his or her stock order form or otherwise in connection with the
attempted purchase of shares, (ii) has attempted to purchase shares of common
stock in violation of provisions of the Plan of Conversion or (iii) fails to
cooperate with attempts by Community Savings or First Community or their
employees or agents to verify information with respect to purchase rights, the
Board of Directors may reject the order of such subscriber.
INCOME TAX CONSEQUENCES
Community Savings has received an opinion from its special counsel, Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P., of Greensboro, North Carolina, to
the effect that for federal income tax purposes: (i) the conversion will
constitute a tax free reorganization with respect to Community Savings and no
gain or loss will be recognized by Community Savings either in its mutual or
stock form; (ii) no gain or loss will be recognized by Community Savings upon
the purchase of Community Savings' stock by First Community or upon the sale by
First Community of its common stock; (iii) no gain or loss will be recognized by
Community Savings' depositors with respect to their deposit accounts at
Community Savings as a consequence of the conversion; (iv) the tax basis of
depositors' deposit accounts at Community Savings will not be changed as a
result of the conversion; (v) assuming the subscription rights have no value, no
gain or loss will be recognized by Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members, or directors, officers and employees of
Community Savings upon either the issuance to them of the subscription rights or
the exercise or lapse thereof; (vi) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of interests in the Liquidation Account; (vii) assuming the
subscription rights have no value, the tax basis for common stock purchased in
the conversion will be the amount paid therefor; and (viii) the tax basis
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of interests in the Liquidation Account will be zero. Community Savings has been
further advised by its special counsel, Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P., that the tax effects of the conversion under North Carolina tax
laws will be consistent with the federal income tax consequences.
Several of the foregoing legal opinions are premised on the assumption that
the subscription rights will have no value. Community Savings has been advised
by Ferguson that, in its opinion, the subscription rights will not have any
ascertainable value, based on the fact that such rights are acquired by the
recipients without cost, are non-transferable, are of short duration and afford
the recipients the right only to purchase common stock at a price equal to its
estimated fair market value as of the date such rights are issued, which will be
the same price paid by all purchasers in the conversion. The opinion of Ferguson
is not binding on the IRS and if the subscription rights were ultimately
determined to have ascertainable value, recipients of subscription rights would
have to include in gross income an amount equal to the value of the subscription
rights received by them. The basis of the common stock purchased pursuant to
subscription rights would be increased by the amount of income realized with
respect to the receipt or exercise of the subscription rights. Moreover,
recipients of subscription rights could then have to report the transaction to
the IRS. Each Eligible Account Holder, Supplemental Eligible Account Holder,
Other Member or other recipient of subscription rights is encouraged to consult
with his, her or its own tax advisor as to the tax consequences in the event the
subscription rights are deemed to have ascertainable value.
No legal opinion has been or will be received with respect to any tax
consequences of the conversion not specifically described above, including the
tax consequences to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, other recipients of subscription rights or purchasers of
common stock under the laws of any other state, local or foreign taxing
jurisdiction to which they may be subject. Special counsel expresses no opinion
regarding the value of the subscription rights.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of Community Savings. The information contained in this
section should be read in conjunction with the Financial Statements, the
accompanying Notes to Financial Statements and the other sections contained in
this prospectus.
First Community was incorporated under North Carolina law in October 1998
at the direction of Community Savings for the purpose of acquiring and holding
all of the outstanding stock of Community Savings to be issued in the
conversion. First Community's principal business activities after the conversion
are expected to be conducted solely through Community Savings.
Community Savings' results of operations depend primarily on net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. Community Savings'
operations are affected to a much lesser degree by non-interest income, such as
transaction and other service fee income, and other sources of income. Community
Savings' principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, office occupancy costs and data processing
expenses.
MANAGEMENT STRATEGY
Community Savings' mission is to provide quality customer service, maximum
safety and security for depositors, and an equitable rate of return for
stockholders, while operating under high standards of fiscal soundness and
profitability. Community Savings intends to offer the fullest practicable range
of basic, progressive, competitive, quality products and services to its
clientele, and to provide attractive working conditions, training and
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advancement opportunities for its employees. First Community endorses the
ideals of serving as an involved corporate citizen and shares in the
responsibility of participating in activities that enhance the economic and
social health of the communities it serves.
Historically, Community Savings' lending activities have concentrated on
the origination of conventional mortgage loans for the purpose of constructing,
financing or refinancing one-to-four family residential properties. Community
Savings also originates multi-family and nonresidential real estate loans, home
equity lines of credit, and secured and unsecured consumer and business loans.
In recent years, Community Savings has been proactive in diversifying its asset
portfolio by making more loans, particularly commercial, construction and
consumer loans. On December 31, 1995, investments and mortgage-backed securities
accounted for 43% of Community Savings' assets and net loans accounted for 51%
of Community Savings' assets. In addition, 91% of its loan portfolio, before net
items, was composed of home mortgage loans, and less than 2% of its loan
portfolio, before net items, was composed of commercial, construction and
consumer loans. On September 30, 1998, investments and mortgage-backed
securities accounted for only 20% of Community Savings' assets, and net loans
accounted for 75%. On that date, home mortgage loans accounted for 73% of
Community Savings' loan portfolio, before net items, and commercial,
construction and consumer loans accounted for over 23%. Net items consist of the
allowance for loan losses, deferred fees, and loans in process.
Community Savings has traditionally emphasized variable rate loan
originations. As of September 30, 1998, adjustable rate loans totaled $120.1
million, or 92.6% of total loans outstanding, before net items, while fixed rate
loans totaled $9.6 million or 7.4% of total outstanding loans, before net items.
For many years, Community Savings operated as a traditional thrift
institution primarily engaged in the taking of savings deposits and the making
of home mortgage loans. Community Savings is in the process of making
operational and other changes needed to enable it to offer a broader array of
products and services to its customers. As a result of this process, Community
Savings expects that it will in the future operate more like a community bank
than a traditional thrift institution. Many of the organizational changes
necessary to complete this transformation have been made, at significant cost to
the institution. This transformation will take several years to complete;
however, management believes that the increased flexibility provided by the
conversion will help facilitate this process.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the potential change in Community
Savings' interest spread resulting from changes in market interest rate.
Community Savings' net interest margin may be adversely affected during interest
rate cycles that cause interest income and interest expense to respond to
changes in market interest rates in a non-symmetrical manner.
GAP ANALYSIS. As part of Community Savings' interest rate risk management
policy, Community Savings calculates an interest rate "gap". Interest rate gap
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets (primarily
loans, investments and mortgage-backed securities) and interest-bearing
liabilities (primarily deposits and borrowings) which reprice within a specific
time period, either through maturity or rate adjustment. The "gap" is the
difference between the amounts of such assets and liabilities that are subject
to repricing during stated periods. A "negative" gap for a given period means
the amount of interest-bearing liabilities maturing or otherwise repricing
within that period exceeds the amount of interest-earning assets maturing or
repricing within the same period. Accordingly, in a declining interest rate
environment, an institution with a negative gap would generally be expected,
absent the effects of other factors, to experience a lower decrease in the yield
of its earning assets relative to the cost of its liabilities, and its income
should be positively affected. Conversely, the cost of liabilities for an
institution with a negative gap would generally be expected to increase more
quickly than the yield on its assets in a rising interest rate environment, and
59
<PAGE>
such institution's net interest income generally would be expected to be
adversely affected by rising interest rates. Changes in the interest rates
generally have the opposite effect on an institution with a positive gap.
At September 30, 1998, Community Savings had a one-year cumulative negative
gap of 18.02% of average interest-earning assets. The following table indicates
the time periods in which interest-earning assets and interest-bearing
liabilities mature or reprice in accordance with their contractual terms. The
table assumes prepayments and scheduled principal amortization of fixed-rate
loans and mortgage-backed securities, and assumes that adjustable rate loans
will reprice at contractual repricing intervals. In making the computations,
Community Savings used certain assumptions frequently employed in its industry
with respect to prepayment rates and deposit decay rates. The computations would
vary significantly if different assumptions were used, and Community Savings'
actual interest rate sensitivity will be substantially different if its actual
experience differs from the assumptions used in the table.
<TABLE>
<CAPTION>
Terms to Repricing at September 30, 1998
-----------------------------------------------------------
More Than More Than
3 Months 3 Months to 1 Year to More Than
or Less 1 Year 5 Years 5 Years Total
---------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans-fixed rate $ 361 $ 947 $ 2,836 $ 1,436 $ 5,580
Consumer loans - fixed rate 678 741 2,006 445 3,870
------- -------- ------- ------- --------
Subtotal 1,039 1,688 4,842 1,881 9,450
Mortgage loans-adjustable rate 13,476 32,929 42,452 - 88,857
Home equity 4,835 - - - 4,835
Construction 11,736 - - - 11,736
Commercial 14,839 - - - 14,839
------- -------- ------- ------- --------
Subtotal 44,886 32,929 42,452 - 120,267
Investments /(1)/
Interest bearing cash 1,803 1,803
Investment securities 8,721 5,305 13,928 3,119 31,073
------- -------- ------- ------- --------
Subtotal 10,524 5,305 13,928 3,119 32,876
Total rate sensitive assets 56,449 39,922 61,222 5,000 162,593
------- -------- ------- ------- --------
Interest-bearing liabilities:
Deposits
Savings 17,983 - - - 17,983
NOW and money market accounts 14,847 - - - 14,847
Certificates 21,154 66,354 17,338 2 104,848
Federal Home Loan Bank borrowings 5,000 - - - 5,000
------- -------- ------- ------- --------
Total rate sensitive liabilities
58,984 66,354 17,338 2 142,678
------- -------- ------- ------- --------
Interest rate sensitivity gap $(2,535) $(26,432) $43,884 $ 4,998 $ 19,915
======= ======== ======= ======= ========
Cumulative gap $(2,535) $(28,968) $14,916 $19,914
======= ======== ======= =======
Cumulative gap as a % of average interest -
earning assets /(2)/ (1.58%) (18.02%) 9.28% 12.39%
Cumulative gap as a % of average total assets (1.49%) (16.98%) 8.74% 11.67%
</TABLE>
(1) Includes mortgage-backed securities.
(2) During the nine month period ended September 30, 1998.
60
<PAGE>
NET PORTFOLIO VALUE AND NET INTEREST INCOME ANALYSIS. In addition to the
interest rate gap analysis as discussed above, management monitors Community
Savings' interest rate sensitivity through the use of a model which estimates
the change in net portfolio value and net interest income in response to a range
of assumed changes in market interest rates. Net portfolio value is the present
value of expected cash flows from assets, liabilities, and off-balance sheet
items. The model estimates the effect on Community Savings' net portfolio value
and net interest income of instantaneous and permanent 100 to 400 basis point
increases and decreases in market interest rates.
The following table presents the predicted effects on Community Savings'
net portfolio value, as of September 30, 1998, of instantaneous and permanent
100 to 400 basis point changes in market interest rates.
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES
IN BASIS POINTS % CHANGE IN
(RATE SHOCK) NET PORTFOLIO VALUE
--------------- -------------------
<S> <C>
Up 400 (30.05%)
Up 300 (21.96%)
Up 200 (13.36%)
Up 100 (6.56%)
Static -
Down 100 6.27%
Down 200 12.47%
Down 300 17.82%
Down 400 24.36%
</TABLE>
The following table presents the predicted effects on Community Savings'
net interest income as of September 30, 1998 of instantaneous and permanent 100
to 400 basis point changes in market interest rates.
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES
IN BASIS POINTS % CHANGE IN
(RATE SHOCK) NET INTEREST INCOME
--------------- -------------------
<S> <C>
Up 400 (16.82%)
Up 300 (10.46%)
Up 200 (12.68%)
Up 100 (1.49%)
Static -
Down 100 1.94%
Down 200 (1.28%)
Down 300 (2.83%)
Down 400 (3.88%)
</TABLE>
61
<PAGE>
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not reflect any
actions management may undertake in response to changes in interest rates.
The tables set forth above indicate that, in the event of a 200 basis point
decrease in interest rates, Community Savings would be expected to experience a
12.47% increase in net portfolio value and a 1.28% decrease in net interest
income. In the event of a 200 basis point increase in interest rates, Community
Savings would be expected to experience a 13.36% decrease in net portfolio value
and a 12.68% decrease in net interest income.
Certain shortcomings are inherent in the method of analysis presented in
both the net portfolio value and net interest income computations and in the gap
computations presented in the tables above. Although certain assets and
liabilities may have similar maturities or periods within which they will
reprice, they may react differently to changes in market interest rates. The
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, adjustable-rate mortgages
have interest rate caps which restrict changes in interest rates on a short-term
basis and over the life of the assets. The proportion of adjustable-rate loans
could be reduced in future periods if market interest rates decline and remain
at lower levels for a sustained period due to increased refinancing activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
tables. Finally, the ability of many borrowers to service their adjustable-rate
debt may decrease in the event of a sustained interest rate increase.
Community Savings' net income in the near future is likely to be reduced if
interest rates increase. However, management did not view Community Savings'
interest rate sensitivity position at September 30, 1998 to be unacceptable in
view of Community Savings' historical results of operations and highly
capitalized position.
LIQUIDITY
Community Savings' policy is to provide adequate liquidity to meet
continuing loan demand and withdrawal requirements while servicing normal
operating expenses and satisfying regulatory liquidity guidelines. Maturing
securities, principal repayments of loans and securities, deposits, income from
operations and borrowings are Community Savings' main sources of liquidity.
Short-term investments (overnight investments with the Federal Home Loan Bank
and federal funds sold) and short-term borrowings are the primary cash
management liquidity tools. The investment portfolio provides secondary
liquidity.
At September 30, 1998, the estimated market value of liquid assets (cash,
cash equivalents, and marketable securities) was approximately $35.7 million,
representing 25.0% of deposits and borrowed funds.
Community Savings' investment portfolio consists of U.S. government and
agency obligations, mortgage-backed securities guaranteed by United States
agencies, bank-qualified state, county and municipal obligations issued by local
governmental agencies of the state of North Carolina and other permissible
securities. Mortgage-backed securities entitle Community Savings to receive a
pro rata portion of the cash flows from an identified pool of mortgages.
Although mortgage-backed securities generally offer lesser yields than the loans
by which they are collateralized, they represent substantially lower credit risk
by virtue of the guarantees that back them. Mortgage-backed securities are also
more liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of Community Savings.
62
<PAGE>
The primary uses of Community Savings' liquidity are to fund loans, provide
for deposit fluctuations and invest in other non-loan earning assets. At
September 30, 1998, outstanding off-balance sheet commitments to extend credit
in the form of loan originations totaled $8 million. Undrawn lines of credit
totaled $4.7 million. Management considers current liquidity levels adequate to
meet Community Savings' cash flow requirements.
Following the conversion, First Community will initially conduct no
business other than holding the capital stock of Community Savings and the loan
it will make to the ESOP. In order to provide sufficient funds for its
operations, First Community expects to retain and invest 50% of the net proceeds
of the conversion remaining after making the loan to the ESOP. In the future,
First Community's primary source of funds, other than income from its
investments and principal and interest payments received from the ESOP with
respect to the ESOP loan, is expected to be dividends from Community Savings.
There are limitations imposed by banking laws and regulations and tax laws upon
the ability of Community Savings to pay dividends and make other distributions
to First Community. See "Dividend Policy," "Supervision and Regulation -
Regulation of Community Savings - Restrictions on Dividends and Other Capital
Distributions," "The "Conversion - Effects of Conversion - Liquidation Rights"
and "- Liquidation Rights after the Conversion" and "Taxation - Federal Income
Taxation."
CAPITAL
Retained income is derived primarily from the retention of prior period net
income. Retained income at September 30, 1998, was $23.3 million, an increase
of 1.88% from $22.8 million at December 31, 1997. Totals include $95,000 and
$98,000, respectively, of unrealized gains on securities marked to estimated
fair market value under Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities. Retained
income at December 31, 1997 increased $670,000 over December 31, 1996 levels, an
increase of 3.0%.
FDIC regulations require savings banks to maintain certain capital adequacy
ratios, leverage ratios and risk-based capital ratios. Institutions supervised
by the FDIC must maintain a minimum leverage ratio of core (Tier I) capital to
average adjusted assets ranging from 3% to 5%. At September 30, 1998, Community
Savings' ratio of Tier I capital to average assets was 14.2%. The FDIC's risk-
based capital guidelines require savings banks to maintain qualifying total
capital to risk-weighted assets of at least 8%. Qualifying total capital for
Community Savings is defined as Tier I capital and the reserve for loan losses.
At September 30, 1998, Community Savings had a ratio of qualifying total capital
to risk-weighted assets of 25.0%.
Regulations of the Administrator require savings banks to maintain net
worth, computed in accordance with the Administrator's requirements, equal to at
least 5% of assets. At September 30, 1998, Community Savings' net worth totaled
13.7% of assets.
First Community is subject to capital adequacy guidelines of the Federal
Reserve. Capital requirements of the Federal Reserve Board are similar to those
of the FDIC.
Community Savings significantly exceeds all regulatory capital
requirements. Management anticipates that First Community and Community Savings
will continue to exceed capital adequacy requirements without altering current
operations or strategies.
RECAPITALIZATION OF INSURANCE FUND
On September 30, 1996, Congress passed into law a re-capitalization plan
for the SAIF, the insurance fund covering deposits of savings institutions. The
approved plan provided for a special assessment of 0.657% of SAIF-insured
deposits as of March 31, 1996. Community Savings' assessment, which was paid
during the last calendar quarter of 1996, amounted to approximately $767,000.
As a result of this legislation, Community Savings' deposit insurance premiums
declined substantially effective January 1, 1997.
63
<PAGE>
YEAR 2000
Potential computer programming and operational problems related to the year
2000 have become a worldwide concern. The underlying cause of this Year 2000
problem rests with antiquated computer programs identifying dates of calendar
years with two digits rather than four digits. Most old computer programs with
date-sensitive software may recognize the year 2000 as "00" and misinterpret the
year as 1900. This date misinterpretation could result in system failures or
miscalculations causing disruptions of operations, including temporary
interruption of utilities, telephone lines, inability to process transactions,
general statements, or engage in normal business activities.
Community Savings retains the services of a third party data processing
service center to process loan, deposit, general ledger, retail platform and
compliance data. Community Savings, in conjunction with its data processing
service center, conducted a Year 2000 test during October, 1998, along with
eleven of the service center's other clients. Fifteen errors were detected
during the test. Fourteen of the errors were cosmetic, having to do with the
appearance of the year rather than a true data error. The fourteen cosmetic
errors were corrected during the test period. The one actual Year 2000 error
that was reported was repaired and successfully re-tested during a November,
1998 test.
Community Savings has replaced all of its computer hardware and nearly all
of its software with Year 2000 certified compliant systems. Several of
Community Savings telecommunications systems have been replaced with Year 2000
compliant systems. Plans are being formulated to test all mission critical
functions during the first quarter of 1999. Contingency plans are also in the
developmental phase for possible technology failures. Management is in the
process of identifying customers who may pose Year 2000 risks to the institution
and is developing plans to respond to the risks identified.
The cost to bring all systems up to Year 2000 specifications are expected
to total approximately $550,000, of which amount approximately $428,000 has
already been incurred. There can be no guarantee that systems of other companies
on which Community Savings relies will be converted in a timely manner or that
Community Saving's actions will effectively deal with all potential Year 2000
problems. Any such failures in addressing potential Year 2000 problems could
have a materially adverse effect on First Community.
FINANCIAL CONDITION AT SEPTEMBER 30, 1998 COMPARED TO DECEMBER 31, 1997 AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
FINANCIAL CONDITION. Total assets increased 1.52% to $170.3 million at
September 30, 1998, compared to $167.8 million at December 31, 1997. Loan
production continued to emphasize commercial and consumer credits in an effort
to diversify the loan portfolio and reduce reliance on home mortgage loans. At
September 30, 1998, approximately 76.5% of Community Savings' loan portfolio,
before net items, consisted of loans secured by residential properties, while at
December 31, 1997, 88.0% of loans, before net items, were secured by residential
properties.
Deposits increased to $138 million at September 30, 1998 from $134.7
million at December 31, 1997, an increase of 2.5%. Loans, net of reserves,
increased 10.9% at September 30, 1998 to $127.4 million from the December 31,
1997 balance of $114.8 million. Total investments and mortgage-backed
securities decreased $9.7 million, or 23.8%, at September 30, 1998 from the
December 31, 1997 balance. Management's emphasis on building a solid net
interest income stream via loan portfolio growth is evidenced by the $12.6
million increase in net loans funded by the $9.7 million reduction in
investments and mortgage-backed securities and the $3.3 million increase in
deposits for the nine month period ended September 30, 1998.
64
<PAGE>
Borrowed funds, collateralized through an agreement with the Federal Home
Loan Bank, decreased 25.4% to $5 million at September 30, 1998 from $6.7 million
at December 31, 1997. The Federal Home Loan Bank borrowings have a variable
interest rate and mature annually at September 30. The borrowings are matched
with a collateralized mortgage obligation (CMO) in a structured, leveraged,
match-funded arbitrage. The CMO collateralizes the Federal Home Loan Bank
borrowings.
Community Savings' nonperforming assets (loans 90 days or more delinquent
and foreclosed real estate) were $218,000, or 0.13% of total assets, at
September 30, 1998, compared to $241,000, or 0.14% of total assets, at December
31, 1997. In the opinion of management, the allowance for loan losses of $1.1
million at September, 1998 or 0.88% of gross loans was adequate to cover
potential losses.
RESULTS OF OPERATIONS. Net income is influenced significantly by net
interest income. Net interest income is the difference between interest income
(derived from revenues generated from loans, investments, mortgage-backed
securities and other earning assets), and interest expense (consisting
principally of interest paid on deposits and borrowings). Operations may be
materially affected by national and international economic conditions, monetary
and fiscal policies of the Federal government, and policies of regulatory
authorities.
Net Income. Net income for the nine month period ended September 30, 1998,
decreased 49.3% to $433,000 compared to net income for the nine months ended
September 30, 1997 of $855,000. The reduction in earnings was a result of
management's efforts to eliminate inefficient resources and obsolete equipment
in preparation for operating the institution in a commercial banking
environment. Also, during the nine months ended September 30, 1998,
approximately $806,000 of expenses were incurred to retire recurring overhead
costs related to compensation agreements and fixed assets.
Interest Income. Interest income increased by 10.34% to $9.4 million for
the nine-month period ended September 30, 1998 compared to the same period in
1997. The increase in interest income can be principally attributed to the
30.7% increase in interest and fees on loans.
Interest Expense. Interest expense increased by 5.2% to $5.2 million for
the nine-month period ended September 30, 1998 compared to the same period in
1997. The increase in interest expense is a result of 7.8% growth in interest
expense on deposits, partially attributable to the $13.3 million increase in
deposits for the period, and offset in part by a 28.7% decrease in Federal Home
Loan Bank borrowing interest expense.
Net Interest Income. Net interest income, before the provision for loan
losses, for the nine-month period ended September 30, 1998, was $4.2 million, an
increase of 17.5% or $627,000 from 1997. Again, the emphasis placed on loan
growth was the primary cause of the increase.
Provision for Loan Losses. No loans were charged-off against the allowance
for loan losses for the period ended September 30, 1998. A provision of
$350,000 was added to the allowance for loan losses, increasing the end of
period balance to $1.1 million or .88% of outstanding loans. Management
considered the reserve for loan loss level to be adequate at September 30, 1998.
Management felt it was prudent to increase the provision to reflect the increase
in risk levels which accompany the decision to change loan composition, increase
loan volume and operate more like a community bank.
Non-Interest Income. Non-interest income increased $103,000 or 37.5% to
$377,000 for the nine months ended September 30, 1998. Although management is
encouraged by the increase in non-interest income, continued emphasis will be
placed on improving non-interest income. A wholly owned subsidiary of Community
Savings, Community Financial Services, Inc., a retail securities broker and
financial advisor, was formed in December 1997 for the sole purpose of enhancing
non-interest income.
65
<PAGE>
Non-Interest Expenses. Non-interest expenses increased to $3.6 million for
the nine months ended September 30, 1998, an increase of 47.5 % from the same
period in 1997. Management has placed significant emphasis on eliminating
expenses and overhead in preparation for operating as a public company.
Approximately $533,000 of overhead related expenditures have been incurred over
the nine-month period to fully fund deferred compensation and retirement plans
for directors and salary continuation plans for the president of Community
Savings in order to make the plans more comparable to plans offered by other
financial institutions. Management believes that these plans are substantially
funded. In addition, $273,000 in expenses were incurred in the write off of
certain abandoned fixed assets.
Income Taxes. Income taxes decreased to $207,000 during the nine months
ended September 30, 1998 from $474,000 for the same period in 1997. The
decrease was directly related to the decrease in income before income taxes from
1997 to 1998.
FINANCIAL CONDITION AT DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996 AND
DECEMBER 31, 1995 AND RESULTS OF OPERATIONS FOR THE TWELVE MONTH PERIODS ENDED
DECEMBER 31, 1997 AS COMPARED TO THE TWELVE MONTH ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995.
FINANCIAL CONDITION. Total assets increased 7.0% to $167.8 million at
December 31, 1997, compared to $156.7 million at December 31, 1996. Total
assets increased 2.9% to $156.7 million at December 31, 1996, compared to $152.2
million at December 31, 1995. Two significant changes in the asset mix in 1997
were the $26.7 million (30.3%) increase in net loans receivable and the $15.6
million (27.7%) decrease in investments and mortgage-backed securities. The
changes in asset mix highlight management's efforts to improve Community
Savings' net interest margin by emphasizing growth of higher yielding assets.
Lending activities have begun to concentrate on commercial, construction and
consumer credits in an effort to diversify the loan portfolio and reduce the
reliance on single family home loans. At December 31, 1997, approximately 88.0%
of Community Savings' net loan portfolio consisted of loans secured by one-to-
four family residential properties, while at December 31, 1996, 95.7% of net
loans were secured by one-to-four family residential properties.
Deposits increased to $134.7 million at December 31, 1997 from $122.5
million at December 31, 1996, an increase of 9.9%. Deposits increased 3.0% at
December 31, 1996 from December 31, 1995 levels of $118.9 million. The increase
in deposits was used in part to fund the increase in loans receivable, as loans,
net of reserves, increased 30.3% on December 31, 1997 to $114.8 million from the
December 31, 1996 balance of $88.1 million. Net loans increased 13.7% at
December 31, 1996 compared to the December 31, 1995 balance of $77.5 million.
Borrowed funds, collateralized through an agreement with the Federal Home
Loan Bank, decreased 25.5% to $6.7 million at December 31, 1997 from $9.0
million at December 31, 1996. Borrowed funds remained unchanged from December
31, 1995 to December 31, 1996. The interest rate on the Federal Home Loan Bank
borrowings are variable and the borrowings mature annually at September 30. The
borrowings are matched with a CMO in a structured, leveraged, match-funded
arbitrage. The CMO floats at 95 basis points over the one-month LIBOR index.
The CMO collateralizes the Federal Home Loan Bank borrowings.
Community Savings' nonperforming assets (loans 90 days or more delinquent
and foreclosed real estate) were $241,000 or 0.14% of total assets, at December
31, 1997, compared to $217,000, or 0.14% of total assets, at December 31, 1996.
Management takes an aggressive position in collecting delinquent loans to keep
nonperforming assets to a minimum and evaluates the quality of all portfolios to
insure the maintenance of loan loss reserves at levels believed to be adequate.
In the opinion of management, the $781,000 allowance for loan losses at December
31, 1997 was adequate to cover potential losses.
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<PAGE>
RESULTS OF OPERATIONS. Net income is influenced significantly by changes
in net interest income. Net interest income is the difference between interest
income (derived from revenues generated from loans, investments, mortgage-backed
securities and other earning assets), and interest expense (consisting
principally of interest paid on deposits and borrowings). Operations may be
materially affected by national and international economic conditions, monetary
and fiscal policies of the federal government, and policies of regulatory
authorities.
Net Income. Net income for the year ended December 31, 1997 increased
47.8% to $590,000 compared to $399,000 for year-end December 31, 1996. The
special one time assessment levied in 1996 to recapitalize the Savings
Association Insurance Fund ("SAIF") reduced net income, before income taxes, for
the year ended December 31, 1996 by $767,000. Principally, as a result of that
special assessment, net income for the year ended December 31, 1996, was
$510,000 below the net income of $909,000 earned in the year ended December 31,
1995.
Interest Income. Interest income increased to $11.6 million, an increase
of 9.0%, for the year ended December 31, 1997 from $10.6 million during the same
period in 1996. Interest income for the period ending December 31, 1996
increased 8.6% over the $9.8 million for the period ending December 31, 1995.
The increase in interest income for 1997 can be principally attributed to the
$19.4 million or 23.5% increase in the average balance of the loan portfolio,
partially offset by a $12.8 million decrease in the average balance of
investments and mortgage-backed securities. Overall, the yield on average
interest-earning assets increased to 7.51% at year-end 1997 compared to 7.19%
for the year-ending December 31, 1996. The primary reason for this increase was
an increase in the amount of higher yielding commercial, construction and
consumer loans. The 1996 increase in interest income was principally due to a
$8.7 million increase in the average balance of the loan portfolio from 1995.
Interest Expense. Interest expense increased 5.6% to $6.7 million for the
year ended December 31, 1997 compared to $6.4 million for the same period for
1996. The 1997 increase in interest expense is a result of the 9.9% growth in
deposits, principally in certificates of deposit, during the same time period.
Interest expense increased 11.3% for the year ending December 31, 1996. The
increase in 1996 can be attributed to an increase of $7.6 million in average
Federal Home Loan Bank borrowings and a $3.8 million increase in the average
balance of certificates of deposit.
Net Interest Income. Net interest income, before the provision for loan
losses, for the year ended December 31, 1997 was $4.8 million, an increase of
14.2%, or $605,000, from $4.2 million for the year ended December 31, 1996. For
the year ended December 31, 1996, net interest income, before the provision for
loan losses, increased $191,000 or 4.7% from the $4.0 million for 1995. The
yield on average interest-earning assets increased 32 basis points to 7.51% in
1997 and 6 basis points to 7.19% in 1996. The cost of average interest-bearing
liabilities decreased 2 basis points to 4.97% in 1997 and increased 14 basis
points in 1996, causing net interest margins to increase 27 basis points in 1997
and decrease by 8 basis points in 1996. The ratio of average interest-earning
assets to average interest-bearing liabilities of 113.8% for the year ended
December 31, 1997, and 115.5% for 1996 reflects a decrease in the balances of
non-interest bearing deposits.
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<PAGE>
Average Yield/Cost Analysis. The following table contains information
relating to Community Savings' average balance sheet and reflects the average
yield on assets and average cost of liabilities for the periods indicated. Such
annualized yields and costs are derived by dividing income or expense by the
average month-end balances of assets or liabilities, respectively, for the
periods presented. The average month-end balances of loans receivable include
loans on which Community Savings has discontinued accruing interest.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
--------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Assets:
Interest-earning assets:
Interest-bearing deposits $ 4,340 $ 258 5.94% $ 4,202 $ 236 5.62%
Federal funds sold 304 17 5.59 500 26 5.20
Investment and mortgage-backed
securities 47,760 3,294 6.90 60,560 3,631 6.00
Loans receivable, net 101,826 8,015 7.87 82,450 6,728 8.16
-------- ------- ---- -------- ------- ----
Total interest-earning assets 154,230 11,584 7.51% 147,712 10,621 7.19%
-------- ------- ---- -------- ------- ----
Non-interest-earning assets 8,693 6,415
-------- --------
Total $162,923 $154,127
======== ========
Liabilities:
Interest-bearing liabilities:
Certificates of deposit $ 93,643 5,248 5.60% $ 85,210 4,839 5.68%
Savings accounts 20,010 605 3.02 20,774 628 3.02
NOW accounts 14,102 427 3.03 13,593 455 3.35
Federal Home Loan Bank borrowings 7,788 460 5.91 8,333 460 5.52
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 135,543 6,740 4.97% 127,910 6,382 4.99%
-------- ------- ---- -------- ------- ----
Non-interest-bearing liabilities 4,672 4,234
Equity 22,708 21,983
-------- --------
Total $162,923 $154,127
======== ========
Net interest income $ 4,844 $ 4,239
======= =======
Interest rate spread/(1)/ 2.54% 2.20%
==== ====
Net interest-earning assets $ 18,687 $ 19,802
======== ========
Net yield on interest-earning assets/(2)/ 3.14% 2.87%
==== ====
</TABLE>
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(2) Represents the net interest income divided by average interest-earning
assets.
68
<PAGE>
Rate/Volume Analysis. The table below provides information regarding
changes in interest income and interest expense. For each category of interest-
earning assets and interest-bearing liabilities, information is provided on
changes attributable to: (i) changes in volume (changes in volume multiplied by
prior period rate); (ii) changes in rate (changes in rate multiplied by prior
period volume); and (iii) net change (the sum of the previous columns).
<TABLE>
<CAPTION>
Year Ended December 31, 1997 vs. 1996 Year Ended December 31, 1996 vs. 1995
--------------------------------------- ---------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
--------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits $ 8 $ 14 $ 22 $ 86 $ (7) $ 79
Fed funds (10) 1 (9) (13) (9) (22)
Investments and mortgage-backed securities (835) 498 (337) 32 (41) (9)
Loans receivable 1,532 (245) 1,287 713 77 790
------ ----- ------ ------ ----- ------
Total interest-earning assets 695 268 963 818 20 838
------ ----- ------ ------ ----- ------
Interest expense on:
Certificates of deposit 473 (64) 409 213 171 384
Savings accounts (23) 0 (23) (58) (72) (130)
NOW and money market accounts 17 (45) (28) 3 (58) (55)
Federal Home Loan Bank borrowings (31) 31 (0) 360 88 448
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities 436 (78) 358 518 129 647
------ ----- ------ ------ ----- ------
Increase (decrease) in net interest income $ 259 $ 346 $ 606 $ 300 $(109) $ 191
------ ----- ------ ------ ----- ------
</TABLE>
Provision for Loan Losses. Loans in the amount of $71,000 were charged-off
against the allowance for loan losses for the period ended December 31, 1997. A
provision of $360,000 was added to the allowance for loan losses, increasing the
end of period balance to $781,000 or .67% of outstanding loans. Management
considered the reserve for loan loss level to be adequate at December 31, 1997.
Management feels it is prudent to increase the provision due to decisions to
change loan composition and loan volume and the resulting increases in the risk
levels of the portfolio. During the fiscal year ended December 31, 1996 a
$60,000 provision was added to the allowance for loan losses, as compared to no
provision during the year ended December 31, 1995.
Other Income. Non-interest or "other" income increased $8,000 or 2.2% to
$365,000 for the year ended December 31, 1997. During the year ended December
31, 1996, non-interest income amounted to $357,000, a decrease of $211,000 or
37.1% from year-end 1995. Non-interest income is typically derived from service
charges on deposit accounts, loan servicing fees, certain fees associated with
loans and other services. The decrease in non-interest income in 1996 resulted
from the absence of gains on off-balance sheet hedging activities conducted
successfully in 1995 and discontinued in 1996.
General and Administrative Expenses. General and administrative, or non-
interest, expenses include compensation and fringe benefits, advertising, data-
processing, deposit insurance premiums, occupancy expenses and other costs. Such
expenses decreased 1.5% to $3.88 million for the year ended December 31, 1997
from $3.94 million for 1996. Ignoring the $767,000 special one-time FDIC
assessment during 1996, general and administrative expenses were 22.4% higher
during 1997 than in 1996. The primary reason for this increase was a $601,000
increase in compensation and fringe benefit expenses. Non-interest expenses
increased 23.1% for the year ended December 31, 1996 as compared to the year
ended December 31, 1995. Excluding the one-time $767,000 assessment in 1996,
non-interest expense decreased 0.86% for the year. The ratio of expenses to
average assets was 2.38% and 2.55% respectively for the years ending December
31, 1997 and 1996.
69
<PAGE>
Income Taxes. The effective tax rates for the years ended December 31,
1997, 1996 and 1995 approximate the statutory rate of 34% after giving effect to
nontaxable interest, other permanent tax differences, and adjustments to certain
deferred tax liabilities.
BUSINESS OF FIRST COMMUNITY
Prior to the conversion, First Community will not transact any material
business. Following the conversion, in addition to directing, planning and
coordinating the business activities of Community Savings, First Community will
invest the portion of the conversion proceeds retained by it. See "Use of
Proceeds." Upon consummation of the conversion, First Community will have no
significant assets other than the shares of Community Savings' capital stock
acquired in the conversion, the loan receivable held with respect to its loan to
the ESOP and that portion of the net proceeds of the conversion retained by it,
and it will have no significant liabilities. As a bank holding company, First
Community will be regulated by the Federal Reserve and by the Administrator.
Cash flow to First Community will be dependent upon investment earnings
from the net proceeds retained by it, payments on the ESOP loan and any
dividends received from Community Savings. Initially, First Community will
neither own nor lease any property, but will instead use the premises, equipment
and furniture of Community Savings. At the present time, First Community does
not intend to employ any persons other than its officers (who are not
anticipated to be separately compensated by First Community), but will utilize
the support staff of Community Savings from time to time. First Community
expects that employees will be hired as appropriate in the event First Community
expands its business in the future. In the future, First Community may loan to,
or may deposit or invest in Community Savings, some of the conversion proceeds
it retains. In addition, First Community may consider using some of the
proceeds of the conversion retained by it to expand its operations in its
existing primary market and other nearby areas by acquiring other financial
institutions or their branches or opening new Community Savings branches. First
Community has no existing agreements or understandings with respect to any such
acquisitions or branch openings, however.
Existing management of First Community believes it is in the best interests
of First Community and its shareholders for First Community to remain an
independent company.
BUSINESS OF COMMUNITY SAVINGS
GENERAL
Community Savings is engaged primarily in the business of attracting
deposits from the general public and using such deposits to make loans secured
by real estate. Community Savings' primary source of revenue is interest income
from its lending activities. Community Savings' other major sources of revenue
are interest and dividend income from investments and mortgage-backed
securities, interest income from its interest-earning deposit balances in other
depository institutions, and transaction and fee income from its lending and
deposit activities. The major expenses of Community Savings are interest on
deposits and borrowings and general and administrative expenses such as employee
compensation and benefits, federal deposit insurance premiums, data processing
expenses, advertising expenses and occupancy expenses.
For many years, Community Savings has operated as a traditional thrift
institution in accepting deposits and making almost exclusively mortgage loans.
Community Savings has recently begun a transformation process which will enable
it to offer more products and services to its customers. Management believes
that, when this transformation process is complete, Community Savings will
operate more like a community bank than a traditional thrift institution.
70
<PAGE>
As a North Carolina-chartered savings bank, Community Savings is subject to
examination and regulation by the FDIC and the Administrator. Upon consummation
of the conversion, Community Savings, as a subsidiary of First Community, will
be subject to indirect regulation by the Federal Reserve. The business and
regulation of Community Savings are subject to legislative and regulatory
changes from time to time. See "SUPERVISION AND REGULATION - Regulation of
Community Savings."
MARKET AREA
Community Savings' primary market area consists of the communities in
Alamance County, North Carolina. Alamance County is located in the Piedmont area
of North Carolina east of Greensboro and west of Durham. Its 1990 population was
108,213 and was expected to grow to 120,759 by the year 2010. The average wage
in Alamance County as of 1996 was $22,626, which was below the North Carolina
average of $25,393. Employment in Alamance County is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. Major employers in Alamance County include LabCorp, Alamance
County-Burlington Public Schools, Burlington Industries, Inc. and Glen Raven
Mills. Employment in Alamance County as of December, 1997 was strong, with an
unemployment rate of 2.8%. Based upon 1997 comparative data, Community Savings
had 8.63% of the deposits in Alamance County.
LENDING ACTIVITIES
GENERAL. Community Savings' primary source of revenue is interest and fee
income from its lending activities, consisting primarily of mortgage loans for
the purchase or refinancing of homes located in its primary market area.
Community Savings also makes home equity line of credit loans, construction
loans, commercial loans and various types of consumer loans. As of September 30,
1998, only 8.3% of Community Savings' loan portfolio, before net items, was not
secured by real estate. On September 30, 1998, Community Savings' largest single
outstanding loan had a balance of approximately $1.2 million. In addition to
interest earned on loans, Community Savings receives fees in connection with
loan originations, loan servicing, loan modifications, late payments, loan
assumptions and other miscellaneous services. Community Savings generally
originates its fixed-rate mortgage loans with the intention that they will be
sold in the secondary market. Its other loans are generally held in its
portfolio.
LOAN PORTFOLIO COMPOSITION. Community Savings' net loan portfolio totaled
approximately $127.4 million at September 30, 1998 representing 74.8% of
Community Savings' total assets at such date. At such date, 72.8% of Community
Savings' loan portfolio, before net items, was composed of home mortgage loans.
Commercial, financial and agricultural loans represented 11.4% of Community
Savings' loan portfolio, before net items, and construction loans and home
equity loans represented 9.1% and 3.7%, respectively, of Community Savings' loan
portfolio, before net items, on such date. Consumer loans represented 3.0% of
the loan portfolio, before net items. As of September 30, 1998, 92.6% of the
loans in Community Savings' loan portfolio, before net items, had adjustable
interest rates.
71
<PAGE>
The following table sets forth the composition of Community Savings' loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At September 30 At December 31
----------------- -----------------------------------
1998 1997 1996
----------------- ---------------- ---------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage $ 94,391 72.8% $ 97,581 83.9% $84,652 91.2%
Home equity line of credit 4,835 3.7 4,778 4.1 4,131 4.5
Construction 11,736 9.1 5,871 5.1 1,058 1.1
Commercial, financial and agriculture 14,839 11.4 6,120 5.3 400 0.4
Consumer 3,916 3.0 1,686 1.4 333 0.4
Held for sale - - 287 0.2 2,256 2.4
-------- ----- -------- ----- ------- -----
Total gross loans 129,717 100.0% 116,323 100.0% 92,830 100.0%
===== ===== =====
Less:
Unearned fees and discounts 456 439 363
Loans in process 727 270 3,848
Allowance for loan loss 1,131 781 492
-------- -------- -------
Net loan receivable $127,403 $114,833 $88,127
======== ======== =======
</TABLE>
72
<PAGE>
The following table sets forth the time to contractual maturity or
repricing of Community Savings' loan portfolio at September 30, 1998. Loans
which have adjustable rates are shown as being due in the period during which
rates are next subject to change, while fixed rate and other loans are shown as
due in the period of contractual maturity. Demand loans, loans having no stated
maturity and overdraft loans are reported as due in one year or less. The table
does not include prepayments or scheduled principal repayments. Amounts in the
table are net of loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At September 30, 1998
------------------------------------------------------------------
More Than More Than More Than
1 Year 1 Year to 3 Years to 5 Years to More Than
or Less 3 Years 5 Years 10 Years 10 Years Total
--------- --------- ---------- ---------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage $47,595 $19,383 $25,902 $1,133 $378 $ 94,391
Home equity 4,835 - - - - 4,835
Construction 11,736 - - - - 11,736
Commercial, financial and agricultural 14,839 - - - - 14,839
Consumer 1,419 1,286 720 445 - 3,870
Other 46 - - - - 46
Less: Allowance for loan losses (1,131) - - - - (1,131)
Loans in process (727) - - - - (727)
Unearned fees (456) - - - - (456)
------- ------- ------- ------ --------- --------
$78,156 $20,669 $26,622 $1,578 $378 $127,403
======= ======= ======= ====== ========= ========
</TABLE>
The following table sets forth the dollar amount at September 30, 1998
of all loans maturing or repricing more than one year after September 30, 1998
which have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable Totals
------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage $4,347 $42,449 $46,796
Consumer 2,451 - 2,451
------ ------- -------
Total $6,798 $42,449 $49,247
====== ======= =======
</TABLE>
ORIGINATION AND SALE OF LOANS. Most of the fixed interest rate home
mortgage loans originated by Community Savings are underwritten in conformity
with Federal National Mortgage Association ("FNMA") or Federal Home Loan
Mortgage Corporation ("FHLMC") underwriting standards and are sold to FHLMC or
other secondary market purchasers. Loans are generally sold without recourse.
Community Savings generally continues to service the loans it sells to FHLMC,
which generates servicing fee income. Adjustable rate mortgage loans are
generally held in Community Savings' portfolio.
73
<PAGE>
The table below sets forth Community Savings' loan origination and
sale activity and loan portfolio repayment experience during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
(In Thousands)
Loans receivable, net, beginning of period $ 88,127 $77,591
Loan originations, net of principal repayments:
Held-for-investment /(1)/ 29,189 10,622
Held-for-sale 415 637
-------- -------
Total loan originations, net of principal repayments 29,604 11,259
Loan sales (2,429) (588)
Changes in loan allowance, net (470) (134)
-------- -------
Loans receivable, net, end of period $114,833 $88,127
======== =======
</TABLE>
(1) Includes $125,000 and $165,000 in loan purchases during 1997 and 1996,
respectively.
HOME MORTGAGE LENDING. Community Savings' primary lending activity is
the origination of mortgage loans to enable borrowers to purchase or refinance
homes. Consistent with Community Savings' emphasis on being a community-oriented
financial institution, it is and has been Community Savings' strategy to focus
its lending efforts in its primary market area and in surrounding areas. On
September 30, 1998, approximately 72.8% of Community Savings' real estate loan
portfolio, before net items, consisted of home mortgage loans. These include
both loans secured by detached single-family residences and condominiums and
loans secured by housing containing not more than four separate dwelling units.
Community Savings originates conventional mortgage loans secured by
owner-occupied property in amounts of up to 95% of the value of the property.
Private mortgage insurance is generally required if the loan amount exceeds 80%
of the value of the property. The loans have both fixed and adjustable rates;
however, fixed rate home mortgage loans are generally sold in the secondary
market. The maximum term for home mortgage loans is 30 years. Substantially all
of the fixed-rate loans in Community Savings' mortgage loan portfolio have due
on sale provisions allowing Community Savings to declare the unpaid balance due
and payable in full upon the sale or transfer of an interest in the property
securing the loan.
The interest rates on adjustable rate loans are generally fixed for
the first one, three or five year period of the loan term and thereafter adjust
annually. Many adjustable rate loans have rates which are fixed for the first
five years of the loan term. Rate changes on adjustable rate loans are now
generally tied to the rates of one-year United States treasury securities
adjusted to a constant maturity of one year. Some older adjustable rate loans
are indexed to a cost of funds index. The loans have rate caps which limit the
amount of changes at the time of each adjustment and over the lives of the
loans. Adjustable rate loans are generally considered to involve a greater
degree of credit risk than fixed rate loans because borrowers may have
difficulty meeting their payment obligations if interest rates and required
payment amounts increase substantially. While home mortgage loans are normally
originated for up to 30 year terms, Community Savings estimates that such loans
remain outstanding for only approximately 80 months, because borrowers often
prepay their loans in full upon sale of the property pledged as security or upon
refinancing the original loan. Actual loan maturity is a function of, among
other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates, and the interest rates payable on outstanding
loans.
74
<PAGE>
Community Savings generally requires title insurance for its home
mortgage loans. Community Savings also generally requires that fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least equal to the greater of the loan amount or replacement
cost of the improvements on the property securing the loans.
COMMERCIAL, FINANCIAL AND AGRICULTURAL LENDING. On September 30, 1998,
Community Savings had $14.8 million outstanding in commercial, financial and
agricultural loans, comprising 11.4% of its loan portfolio, before net items.
These loans are generally secured by apartments, office, retail and other
commercial real estate or by church properties or other real estate in Community
Savings' primary market area and most have adjustable interest rates. These
loans generally do not exceed 80% of the appraised value of the collateral
securing the loans. Community Savings also provides floor plan financing of used
automobile dealerships, which loans are secured by inventories of used
automobiles. Commercial loans generally have terms of up to five years. Most
commercial loans have adjustable interest rates which are generally tied to
prime lending rates. Community Savings generally requires title insurance in
connection with its commercial, financial and agricultural loans which are
secured by real estate. Community Savings also generally requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the greater of the loan amount or the
replacement cost of the improvements on the property securing the loans.
Commercial loans generally are larger than home mortgage loans and
involve greater concentration of assets and a greater degree of risk. Payments
on these loans depend to a large degree on results of operations and management
of the properties and may be affected to a greater extent by adverse conditions
in real estate markets or the economy in general. Since commercial lending is
frequently secured by leased or operating commercial properties, repayment
frequently depends upon the results of operations of the tenant or operating
entity. Commercial loans also generally involve more specialized and complicated
underwriting decisions than home mortgage lending. Community Savings has
significantly increased its commercial, financial and agricultural lending in
recent years and intends to continue to increase the percentage of its loan
portfolio devoted to such loans.
CONSTRUCTION LENDING. Community Savings makes construction loans for
the construction of single-family dwellings and for the construction of multi-
family residential and commercial buildings. The aggregate outstanding balance
of such loans on September 30, 1998 was approximately $11.7 million,
representing approximately 9.1% of Community Savings' loan portfolio, before net
items. Some of these loans were made to persons who are constructing properties
for the purpose of occupying them; others were made to builders who were
constructing properties for sale. Loans made to builders are generally "pure"
construction loans, which require the payment of interest during the
construction period of generally one year or less and the payment of the
principal in full at the end of the construction period. Loans made to
individual property owners are both "pure" construction loans and "construction-
permanent" loans. Construction-permanent loans generally provide for the payment
of interest only during a construction period, after which the loans generally
convert to permanent loans with adjustable interest rates having terms similar
to home mortgage loans.
Construction loans for one-to-four family real estate to be occupied
by the borrower generally have a maximum loan-to-value ratio of up to 95% of the
appraised value of the property. Other construction loans are made at loan to
value ratios of up to 80%. Title insurance is generally required for
construction loans. In addition, Community Savings generally requires builders
risk or casualty insurance (and, if appropriate, flood insurance) on such loans.
Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the accuracy of the estimated cost (including
interest) of construction. If the estimate of construction costs proves to be
inaccurate, the lender may be required to advance funds beyond the amount
originally committed to permit
75
<PAGE>
completion of construction. Also, if the estimate of anticipated value proves to
be inaccurate, the lender may have security which has value insufficient to
assure full repayment. In addition, repayment of loans made to builders to
finance construction of properties for sale is often dependent upon the
builder's ability to sell the property once construction is completed.
HOME EQUITY LENDING. At September 30, 1998, Community Savings had
approximately $4.8 million in home equity line of credit loans, representing
approximately 3.7% of its loan portfolio, before net items. Community Savings'
home equity lines of credit have adjustable interest rates tied to prime
interest rates plus a margin. The home equity lines of credit require payments
of principal and interest monthly, and all outstanding amounts must be paid in
full at the end of 15 years. Home equity lines of credit are generally secured
by subordinate liens against residential real property. Community Savings
requires title opinions from attorneys in connection with these loans. Community
Savings requires that fire and extended coverage casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least sufficient to
cover its loan. Home equity loans are generally limited so that the amount of
such loans, along with any senior indebtedness, does not exceed 80% of the value
of the real estate security.
Because home equity loans involve revolving lines of credit which can
be drawn over a period of time, Community Savings faces risks associated with
changes in the borrower's financial condition. Because home equity loans have
adjustable interest rates, increased delinquencies could occur if interest rates
increase and borrowers are unable to satisfy higher payment requirements.
CONSUMER LOANS. Community Savings offers various consumer loans,
including automobile loans, boat loans, mobile home loans, loans secured by
deposit accounts, overdraft protection account loans and other secured and
unsecured loans. At September 30, 1998, Community Savings' consumer loan
portfolio totaled $3.9 million, representing 3.0% of its total loan portfolio,
before net items. Automobile loans generally have terms not exceeding 60 months,
have fixed interest rates and do not exceed 90% of the fair market value of the
automobile securing the loan. Other types of consumer loans have terms and
collateral requirements tailored to match the type of loan being made. Community
Savings generally does not make unsecured loans exceeding $50,000.
Consumer lending usually involves more risk than residential mortgage
lending because payment patterns are more significantly influenced by general
economic conditions and because any collateral for such loans frequently
consists of depreciating property.
LOAN SOLICITATION, PROCESSING AND UNDERWRITING. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.
During its loan approval process, Community Savings assesses the
applicant's ability to make principal and interest payments on the loan and the
value of the property securing the loan. Community Savings obtains detailed
written loan applications to determine the borrower's ability to repay and
verifies responses on the loan application through the use of credit reports,
financial statements, and other confirmations. Community Savings analyzes the
loan application and the property involved, and an appraiser inspects and
appraises the property. Community Savings generally requires independent fee
appraisals on mortgage loans. Loan officers appraise properties securing
consumer loans unless the collateral is complex and justifies an independent fee
appraisal. Collateral securing commercial loans of over $250,000 is appraised by
outside fee appraisers. Community Savings also obtains information concerning
the income, financial condition, employment and the credit history of the
applicant.
In general, loans of up to $500,000 may be approved by a loan
committee composed of either two or three senior officers of Community Savings,
depending upon the size of the loan. Loans of over $500,000 must be approved by
the Board of Directors of Community Savings. Certain types of loans of less than
$250,000 can be approved by other loan officers of Community Savings who have
specified loan approval authority.
76
<PAGE>
Normally, upon approval of a home mortgage loan application, Community
Savings gives a commitment to the applicant that it will make the approved loan
at a stipulated rate any time within a 60 day period. The loan is typically
funded at such rate of interest and on other terms which are based on market
conditions existing as of the date of the commitment. As of September 30, 1998,
Community Savings had $1.0 million in such unfunded mortgage loan commitments
and $646,000 unfunded commitments to make other types of loans. In addition, on
such date Community Savings had $14.3 million in undisbursed lines of credit.
NONPERFORMING ASSETS AND ASSET CLASSIFICATION. When a borrower fails
to make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. In this event, the normal procedure
followed by Community Savings is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status, and late charges
are assessed as allowed by law. In most cases, delinquencies are cured. If a
delinquency is not cured, Community Savings normally, subject to any required
prior notice to the borrower, commences foreclosure proceedings. If the loan is
not reinstated within the time permitted for reinstatement, or the property is
not redeemed prior to sale, the property may be sold at a foreclosure sale. In
foreclosure sales, Community Savings may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable to the borrower than those
normally offered.
Any property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold or
otherwise disposed of by Community Savings in an effort to recover its
investment. Real estate acquired through, or in lieu of, foreclosure is carried
at the lower of the estimated fair value of the property less estimated costs to
sell or the carrying amount of the defaulted loan plus accrued unpaid interest.
The carrying amount is subsequently reduced by additional allowances which are
charged to earnings if the estimated fair value declines below its initial value
plus any capitalized costs. Costs relating to the development and improvement of
the property are capitalized, and costs relating to holding the property are
charged to expenses. As of September 30, 1998, Community Savings had no real
estate acquired in settlement of loans.
Loans, including impaired loans, are generally classified as
nonaccrual and accrual of interest is suspended 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 (as discussed below) or is
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.
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 principal outstanding, except in the
case of loans with scheduled amortization for which the payment is generally
applied to the oldest payment due. When the future collection of the recorded
loan balance is expected, interest income may be recognized on a cash basis
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.
77
<PAGE>
The following table sets forth information with respect to
nonperforming assets identified by Community Savings, including accruing loans
90 days past due, non-accruing loans and real estate owned at the dates
indicated.
<TABLE>
<CAPTION>
At September 30 At December 31
---------------- ---------------------
1998 1997 1996
---------------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans 90 days past due and still accruing $ 218 $ 241 $ 217
Nonaccrual loans - - -
Real estate owned - - -
-------- -------- --------
Total nonperforming assets $ 218 $ 241 $ 217
======== ======== ========
Nonperforming loans to total loans 0.17% 0.21% 0.23%
Nonperforming assets to total assets 0.13% 0.14% 0.14%
Total assets $170,374 $167,817 $156,751
Total loans, before net items $129,718 $116,323 $ 92,830
</TABLE>
Applicable regulations require Community Savings to "classify" its own
assets on a regular basis. In addition, in connection with examinations of
savings institutions, regulatory examiners have authority to identify problem
assets and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by
the current net worth and paying capacity of the obligor or the collateral
pledged, if any. "Substandard" assets include those characterized by well-
defined weakness with possible risk of loss if the deficiency is not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable." Assets classified
"loss" are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a loss reserve is not
warranted.
As of September 30, 1998, Community Savings had approximately $1.4
million of loans internally classified as "substandard," no loans classified as
"doubtful" and no loans classified as "loss." Total classified loans as of
December 31, 1997 and 1996 were approximately $1.1 million and $927,000,
respectively.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as "loss,"
it charges off, or writes down the balance of, the asset. Community Savings'
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the FDIC and the Administrator
which can order the establishment of additional loss allowances.
Community Savings also identifies assets which possess credit
deficiencies or potential weaknesses deserving close attention by management.
These assets are maintained on a "special mention" listing and do not yet
warrant adverse classification. At September 30, 1998, Community Savings had no
loans categorized as special mention.
78
<PAGE>
ALLOWANCE FOR LOAN LOSSES. In originating loans, Community Savings
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a secured loan,
the quality of the security for the loan, as well as general economic
conditions. It is management's policy to maintain an adequate allowance for loan
losses based on, among other things, Community Savings' historical loan loss
experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loans.
In recent periods, Community Savings has significantly increased its
allowance for loan losses to reflect the greater inherent risks associated with
the increasing size of Community Savings loan portfolio and, in particular, the
increasing size of its commercial, construction and consumer loan portfolio.
Management continues to actively monitor Community Savings' asset
quality, to charge off loans against the allowance for loan losses when
appropriate and to provide specific loss reserves when necessary. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
The following table describes the activity related to Community
Savings' allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
------------- -------------------
1998 1997 1996
-------------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $ 781 $ 492 $ 431
Provision for loan losses 350 360 60
Charge-offs - 71 -
Recoveries - - (1)
-------- -------- -------
Net charge-offs - 71 (1)
-------- -------- -------
Balance, end of period $ 1,131 $ 781 $ 492
======== ======== =======
Ratio of net charge-offs to average loans
outstanding 0.00% 0.07% 0.00%
Ratio of allowance to total loans outstanding
at end of period 0.87% 0.67% 0.54%
Ratio of allowance to total nonperforming
assets at end of period 518.81% 324.07% 226.73%
Total loans, before net items $129,718 $116,323 $92,830
Average loans, before allowance $121,355 $102,607 $82,942
Nonperforming assets $ 218 $ 241 $ 217
</TABLE>
79
<PAGE>
The following table sets forth the composition of the allowance for
loan losses by type of loan at the dates indicated. The allowance is allocated
to specific categories of loans for statistical purposes only, and may be
applied to loan losses incurred in any loan category.
80
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------------ ------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------------- --------------------------------
PERCENT OF AMOUNT PERCENT OF AMOUNT PERCENT OF AMOUNT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
AMOUNT OF TO TOTAL TO GROSS AMOUNT OF TO TOTAL TO GROSS AMOUNT OF TO TOTAL TO GROSS
ALLOWANCE ALLOWANCE LOANS ALLOWANCE ALLOWANCE LOANS ALLOWANCE ALLOWANCE LOANS
--------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage $ 451 40 % 72.8% $578 74 % 83.9% $363 74% 91.2%
Home equity line of credit 136 12 3.7 39 5 4.1 25 5 4.5
Construction 170 15 9.1 62 8 5.1 15 3 1.1
Commercial, financial,
agricultural 283 25 11.4 78 10 5.3 49 10 0.4
Consumer 91 8 3.0 20 2 1.4 25 5 0.4
Held-for-sale - - 0.0 4 1 0.2 15 3 2.4
------ --- ----- ---- --- ----- ---- --- -----
Total $1,131 100% 100.0% $781 100% 100.0% $492 100% 100.0%
====== === ===== ==== === ===== ==== === =====
</TABLE>
81
<PAGE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Interest and dividend income from investment and mortgage-backed
securities generally provides the second largest source of income to Community
Savings after interest on loans. In addition, Community Savings receives
interest income from deposits in other financial institutions and from federal
funds sold. At September 30, 1998, Community Savings' investment and mortgage-
backed securities portfolio totaled approximately $30.9 million, consisting of
U.S. government and agency securities, municipal bonds, stock of the Federal
Home Loan Bank of Atlanta and participation certificates issued by the
Government National Mortgage Association ("GNMA") FNMA, FHLMC and Real Estate
Mortgage Investment Conduits ("REMICS").
Investments in mortgage-backed securities involve a risk that, because
of changes in the interest rate environment, actual prepayments will be greater
than estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The Financial Accounting Standards Board has issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" which
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. These investments are to be classified in three categories and
accounted for as follows: (1) debt securities that the entity has the positive
intent and ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost; (2) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with net unrealized gains and
losses included in earnings; and (3) debt and equity securities not classified
as either held-to-maturity or trading securities are classified as securities
available-for-sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of equity. At
September 30, 1998, Community Savings had no trading securities.
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
As a member of the Federal Home Loan Bank of Atlanta, Community
Savings is required to maintain an investment in stock of the Federal Home Loan
Bank of Atlanta equal to the greater of 1% of Community Savings' outstanding
home loans or 5% of its outstanding advances from the Federal Home Loan Bank of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of September 30, 1998, Community Savings' investment in stock of the Federal
Home Loan Bank of Atlanta was $1.4 million.
82
<PAGE>
The following table sets forth certain information regarding Community
Savings' investment and mortgage-backed securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At September 30 At December 31
--------------- ------------------
1998 1997 1996
--------------- -------- --------
(In Thousands)
<S> <C> <C> <C>
US government and agency obligations
US treasury securities - Held to maturity $ 504 $ 6,347 $15,249
US treasury securities - Available for sale 1,029 4,030 4,975
Federal agency securities - Held to maturity 2,997 6,955 9,959
Federal agency securities - Available for sale 10,263 5,037 2,002
------- ------- -------
Total U.S. Government and agency 14,793 22,369 32,185
------- ------- -------
Municipal securities - Held to maturity - 95 195
Municipal securities - Available for sale 889 - -
------- ------- -------
Total municipal securities 889 95 195
------- ------- -------
Other equity securities - Available for sale 14 14 14
------- ------- -------
Total other equity securities 14 14 14
------- ------- -------
Mortgage - backed securities
GNMA - Held to maturity 1,375 2,254 2,570
GNMA - Available for sale - - 2,189
FNMA - Available for sale 1,255 - -
FHLMC - Held to maturity 3,173 4,498 5,434
FHLMC - Available for sale - 49 85
REMIC's - Held to maturity 689 1,898 3,310
REMIC's - Available for sale 8,751 9,448 10,212
------- ------- -------
Total mortgage-backed securities 15,243 18,147 23,800
------- ------- -------
Total investment and mortgage-backed securities $30,939 $40,625 $56,194
======= ======= =======
</TABLE>
At September 30, 1998, the market value of Community Savings'
investment securities available for sale and held to maturity were $22.2 million
and $9.0 million, respectively.
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of Community
Savings' debt securities portfolio as of September 30, 1998.
83
<PAGE>
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years
------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield
-------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. treasury notes - held to maturity $ 504 6.32% $ - -% $ - -%
Federal agency securities - held to maturity 1,998 5.78 999 6.67 - -
------ ---- ------- ---- ---- ------
Total debt securities - held to maturity 2,502 5.89 999 6.67 - -
------ ---- ------- ---- ---- ------
U.S. treasury notes - available for sale - - 1,029 6.19 - -
Federal Home Loan Bank bonds - available
for sale - - 7,998 6.05 - -
------ ---- ------- ---- ---- ------
Total debt securities - available for sale - - 9,027 6.07 - -
------ ---- ------- ---- ---- ------
Mortgage - backed securities - held to
maturity
GNMA participation certificates - - - - 168 10.360%
FHLMC participation certificates - - - - - -
REMIC's - - - - 417 6.05%
------ ---- ------- ---- ---- ------
Total mortgage-backed securities -
held to maturity - - - - 585 7.29%
------ ---- ------- ---- ---- ------
Mortgage-backed securities - available for
sale
FNMA participation certificates
REMIC's - - - - - -
Total mortgage-backed securities - - - - - - -
------ ---- ------- ---- ---- ------
available for sale - - - - - -
------ ---- ------- ---- ---- ------
Municipal Securities - available for sale - - - - - -
------ ---- ------- ---- ---- ------
Total debt securities $2,502 5.89% $10,026 6.12% $585 7.29%
====== ==== ======= ==== ==== ======
<CAPTION>
After Ten Years Total
--------------------- --------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Debt securities
U.S. treasury notes - held to maturity $ - -% $ 504 6.32%
Federal agency securities - held to maturity - - 2,997 6.08
------- -------- ------- ----
Total debt securities - held to maturity - - 3,501 6.11
------- -------- ------- ----
U.S. treasury notes - available for sale - - 1,029 6.19
Federal Home Loan Bank bonds - available
for sale 2,265 6.87 10,263 6.40
------- -------- ------- ----
Total debt securities - available for sale 2,265 6.87 11,292 6.38
------- -------- ------- ----
Mortgage - backed securities - held to
maturity
GNMA participation certificates 1,207 8.79 1,375 8.98
FHLMC participation certificates 3,173 9.56 3,173 9.56
REMIC's 272 6.50 689 6.50
------- -------- ------- ----
Total mortgage-backed securities -
held to maturity 4,652 9.18 5,237 9.01
------- -------- ------- ----
Mortgage-backed securities - available for
sale
FNMA participation certificates
REMIC's 1,255 6.30 1,255 6.30
Total mortgage-backed securities - 8,751 6.42 8,751 6.42
------- -------- ------- ----
available for sale 10,006 6.40 10,006 6.40
------- -------- ------- ----
Municipal Securities - available for sale 889 6.89 889 6.89
------- -------- ------- ----
Total debt securities $17,812 7.15% $30,925 6.77%
======= ======== ======= ====
</TABLE>
84
<PAGE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits are the primary source of Community Savings' funds
for lending and other investment purposes. In addition to deposits, Community
Savings derives funds from loan principal repayments, loan interest payments,
interest and principal repayments from investments and mortgage-backed
securities, interest from its own interest-earning deposits and otherwise from
its operations. Repayments and income are relatively stable sources of funds
while deposit inflows and outflows may be significantly influenced by general
interest rates and money market conditions. Borrowings may be used on a short-
term basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. Community Savings attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates.
Community Savings offers statement savings accounts, negotiable order of
withdrawal accounts, money market demand accounts, non-interest-bearing
accounts, and fixed interest rate certificates with varying maturities. At
September 30, 1998, 76.0% of Community Savings' deposits consisted of
certificate accounts, 13.0% consisted of statement savings accounts, 10.8%
consisted of interest-bearing transaction accounts and an insignificant amount
consisted of noninterest-bearing transaction accounts.
Deposit flows are greatly influenced by economic conditions, the
general level of interest rates, competition, and other factors, including the
restructuring of the thrift industry. Community Savings' savings deposits
traditionally have been obtained primarily from its primary market area.
Community Savings utilizes traditional marketing methods to attract new
customers and savings deposits, including print media advertising and direct
mailings. Community Savings does not advertise for deposits outside of its local
market area or utilize the services of deposit brokers.
The following table sets forth information relating to Community
Savings' deposit flows during the periods shown and deposits at the end of such
periods.
<TABLE>
<CAPTION>
At or for the
Nine Months At or for the
Ended Year Ended
September 30, December 31,
------------- --------------------
1998 1997 1996
------------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Total deposits at beginning of period $134,697 $122,524 $118,907
Net increase (decrease) before interest
credited 106 8,225 156
Interest credited 3,721 3,948 3,461
-------- -------- --------
Total deposits at end of period $138,024 $134,697 $122,524
======== ======== ========
</TABLE>
The following table sets forth certain other information regarding
Community Savings' savings deposits at the dates indicated.
85
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 December 31, 1996
------------------------------------------- --------------------------------- -------------------
Minimum Percent Weighted Percent Weighted Percent
Deposit of Average of Average of
Required Balance Deposits Rate Balance Deposits Rate Balance Deposits
----------- -------- --------- --------- ----------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Demand accounts:
Non-interest bearing $ 1 $ 345 0.25% $ 716 0.53% $ 744 0.61%
NOW and money market $ 100 14,847 10.76 2.35% 14,712 10.92 3.01% 13,968 11.40
accounts $ 100 17,984 13.03 2.76% 19,069 14.16 3.00% 21,051 17.18
Statement/passbook -------- ------ -------- -------- -------- -------
33,176 24.04 34,497 25.61 35,763 29.19
Total demand deposits -------- ------ -------- -------- -------
Time Deposits:
Certificate accounts with
original maturities of: $ 500 239 0.17 217 0.16 350 0.29
3 months $ 500 11,281 8.17 6,060 4.50 8,692 7.09
6 months $10,000 7,202 5.22 15,838 11.76 4,987 4.07
7 months $ 500 24,914 18.05 8,438 6.26 10,028 8.18
9 months $ 500 21,390 15.50 12,809 9.51 9,344 7.63
12 months $ 100 15,588 11.29 15,062 11.18 14,296 11.67
18 months - IRA $ 500 11,796 8.55 25,223 18.73 18,400 15.02
18 months $ 500 4,347 3.15 5,429 4.03 7,518 6.14
24 months $ 500 3,108 2.25 4,697 3.49 4,665 3.81
30 months $ 500 2,347 1.70 3,549 2.63 4,386 3.58
36 months $ 500 577 0.42 744 0.55 1,764 1.44
48 months $ 500 2,059 1.49 2,134 1.58 2,331 1.90
60 months and over -------- ------ ------- -------- -------- -------
104,848 75.96 5.52% 100,200 74.39 5.72% 86,761 70.81
Total time deposits -------- ------ -------- -------- -------- -------
Total deposits $138,024 100.00% $134,697 100.00% $122,524 100.00%
======== ====== ======== ======== ======== =======
<CAPTION>
December 31, 1996
-------------------
Weighted
Average
Rate
---------
<S> <C>
Demand accounts:
Non-interest bearing
NOW and money market
accounts 3.13%
Statement/passbook 3.00%
Total demand deposits
Time Deposits:
Certificate accounts with
original maturities of:
3 months
6 months
7 months
9 months
12 months
18 months - IRA
18 months
24 months
30 months
36 months
48 months
60 months and over
Total time deposits 5.58%
Total deposits
</TABLE>
86
<PAGE>
The following table presents the maturities of all certificates of
deposit as of September 30, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
One year or less $ 87,842
More than 1 and less than 3 years 15,697
More than 3 years 1,309
--------
Total $104,848
========
</TABLE>
Based upon historical experience, Community Savings expects that a substantial
percentage of its time deposits coming due within twelve months after September
30, 1998 will be renewed.
As of September 30, 1998, the aggregate amount of outstanding
certificates of deposit in amounts greater than or equal to $100,000 was $17.0
million, representing 16.2% of all certificates of deposit on such date. Some of
these deposits were deposits of state and local governments which are subject to
rebidding from time to time and to securitization requirements. The following
table presents the maturity of these time certificates of deposit at such date.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
3 Months or less $ 3,352
Over 3 months through 12 months 11,338
Over 12 months 2,291
-------
Total $16,981
=======
</TABLE>
BORROWINGS. Community Savings' principal source of long-term
borrowings is advances from the Federal Home Loan Bank of Atlanta. The Federal
Home Loan Bank system functions in a reserve credit capacity for savings
institutions. As a member, Community Savings is required to own capital stock in
the Federal Home Loan Bank of Atlanta and is authorized to apply for advances
from the Federal Home Loan Bank of Atlanta on the security of that stock and a
floating lien on certain of its real estate secured loans and other assets. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of an institution's net worth or on the Federal Home Loan Bank of
Atlanta's assessment of the institution's creditworthiness. The table below
presents the amounts of borrowed money owed by Community Savings as of the dates
indicated, along with the weighted average interest rates payable on such
borrowings and the maturity dates of the indebtedness. All borrowings were
obtained from the Federal Home Loan Bank of Atlanta and all were repayable in
full within one year.
<TABLE>
<CAPTION>
At or for the Nine
Months Ended At or for the Year Ended
September 30, December 31,
---------------- --------------------------
1998 1997 1996
---------------- ------------ ------------
(Dollars In Thousands)
<S> <C> <C> <C>
Federal Home Loan Bank advances:
Average balance outstanding (monthly) $5,611 $7,788 $8,333
Maximum amount outstanding at any
month-end during the period $6,700 $8,950 $9,000
Balance outstanding at end of period $5,000 $6,700 $9,000
Weighted average interest rate during the period 6.05% 5.91% 5.51%
Weighted average interest rate at end of period 5.38% 5.94% 5.73%
</TABLE>
87
<PAGE>
SUBSIDIARIES
As a North Carolina-chartered savings bank, Community Savings is able
to invest up to 10% of its total assets in subsidiary service corporations.
However, any investment in service corporations which would cause Community
Savings to exceed an investment of three percent of assets must receive prior
approval of the FDIC. Community Savings has one subsidiary, Community Financial
Services, Inc., which is engaged in discount brokerage sales activities pursuant
to an agreement with UVEST Financial Services Group, Inc. Community Financial
Services, Inc. was organized in 1997 and has one employee. As of September 30,
1998, Community Savings' investment in Community Financial Services, Inc. was
$100,000 or less than one percent of assets.
PROPERTIES
The following table sets forth the location of Community Savings'
offices, as well as certain other information relating to its offices as of
September 30, 1998.
<TABLE>
<CAPTION>
Address Function Type Net Book Value Deposits
- ---------------------------------- -------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
708 South Church Street land $ 75,488
Burlington, North Carolina 27215 Main Branch building $505,873 $82,088,683
166 Huffman Mill Road land $ 48,676
Burlington, North Carolina 27215 Branch building $240,246 $24,260,842
257 South Graham-Hopedale Road land $ 50,279
Burlington, North Carolina 27215 Branch building $184,032 $14,999,561
227 South Main Street land $ 86,848
Graham, North Carolina 27253 Branch building $145,868 $16,674,704
612 South Church Street Credit land $ 89,386
Burlington, North Carolina 27215 Administration building $ 91,568 -
500 South Main Street leasehold
Burlington, North Carolina 27215 Administration improvements $ 4,927 -
</TABLE>
All of the real properties are owned by Community Savings except the
facilities at 500 South Main Street in Burlington, North Carolina. Those
facilities, which house Community Savings' credit administration operations, are
leased pursuant to a lease which expires in March, 2001.
The total net book value of Community Savings' furniture, fixtures and
equipment at September 30, 1998 was $748,000.
LEGAL PROCEEDINGS
From time to time, Community Savings is a party to legal proceedings
which arise in the ordinary course of its business. Most commonly, such
proceedings are commenced by Community Savings to enforce obligations owed to
it. From time to time, claims are asserted against Community Savings directly or
as defenses and counterclaims in actions filed by Community Savings. At this
time, Community Savings is not a party to any legal proceeding which is expected
to have a material effect on its financial condition or results of operations.
88
<PAGE>
COMPETITION
Community Savings faces strong competition both in attracting deposits
and making real estate and other loans. Its most direct competition for
deposits has historically come from other savings institutions, credit unions
and commercial banks located in its primary market area, including large
financial institutions with a statewide and nationwide presence which have
greater financial and marketing resources available to them. As of June 30,
1998, there were 11 depository institutions with 40 offices in Alamance County,
North Carolina. Based upon June, 1997 comparative data, Community Savings had
8.63% of the deposits in Alamance County. Community Savings has also faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The ability of
Community Savings to attract and retain savings deposits depends on its ability
to provide a rate of return, liquidity and risk comparable to that offered by
competing investment opportunities.
Community Savings experiences strong competition for real estate loans
from other savings institutions, commercial banks, credit unions and mortgage
banking companies. Community Savings competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
elimination of restrictions on the interstate operations of financial
institutions.
EMPLOYEES
As of September 30, 1998, Community Savings had 55 full-time employees
and 9 part-time employees. Community Savings provides its employees with basic
and major medical insurance, life insurance, sick leave and vacation benefits.
In addition, Community Savings maintains a 401(k) profit sharing plan which
covers substantially all of its employees. See "Management of Community Savings
- - 401(k) Profit Sharing Plan".
In connection with the conversion, Community Savings has adopted the
ESOP, which will provide benefits to employees of Community Savings. See
"Management of Community Savings - Employee Stock Ownership Plan." Also, the
Boards of Directors of First Community and Community Savings plan to adopt, and
stockholders of First Community will be asked to approve, the MRP and the Stock
Option Plan at a meeting of stockholders following the conversion. See
"Management of Community Savings - Proposed Management Recognition Plan" and "-
Proposed Stock Option Plan." The proposed MRP and Stock Option Plans would
provide stock-based benefits to directors and certain employees.
Employees are not represented by any union or collective bargaining
group, and Community Savings considers its employee relations to be good.
TAXATION
FEDERAL INCOME TAXATION
GENERAL. Savings institutions such as Community Savings are subject to
the taxing provisions of the Internal Revenue Code of 1986, as amended (the
"Code") applicable generally to corporations, as modified by certain provisions
specifically applicable to financial or thrift institutions. Income is reported
using the accrual method of accounting. The maximum corporate federal income tax
rate is 35%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Code were permitted certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. A reserve
89
<PAGE>
could be established for bad debts on qualifying real property loans (generally
loans secured by interests in real property improved or to be improved) under
(i) a method based on a percentage of the institution's taxable income, as
adjusted (the "percentage of taxable income method") or (ii) a method based on
actual loss experience (the "experience method"). The reserve for nonqualifying
loans was computed using the experience method.
The percentage of taxable income method was limited to 8% of taxable
income, subject to certain limitations. In order to qualify for the percentage
of taxable income method, an institution had to have at least 60% of its assets
as "qualifying assets" which generally included cash, obligations of the United
States government or an agency or instrumentality thereof or of a state or
political subdivision, residential real estate-related loans, and loans secured
by savings accounts and property used in the conduct of its business. In
addition, it had to meet certain other supervisory tests and operate principally
for the purpose of acquiring savings and investing in loans. Institutions which
became ineligible to use the percentage of taxable income method had to change
to either the reserve method or the specific charge-off method that applied to
banks.
In August 1996, provisions repealing the thrift bad debt rules were
passed by Congress as part of the "The Small Business Job Protection Act of
1996." The new rules eliminated the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. For taxable years beginning after December 31, 1995,
Community Savings' bad debt deduction are based on the experience method. These
rules also require that all thrift institutions recapture all or a portion of
their bad debt reserves added since the last taxable year beginning before
January 1, 1988. The new rules allow an institution to suspend the bad debt
reserve recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institution's average
mortgage lending activity for the six taxable years preceding 1996 adjusted for
inflation. For this purpose, only home purchase and home improvement loans are
included and the institution can elect to have the tax years with the highest
and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. Community Savings has
previously recorded a deferred tax liability equal to the bad debt recapture
applicable to the post 1987 additions to its bad debt reserve. As a result, this
recapture requirement applicable to 1987 additions to bad debt reserves will
have no material impact on Community Savings' net income or federal income tax
expense.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 legislation,
bad debt reserves created prior to the 1988 tax year were subject to recapture
into taxable income should the thrift institution fail to meet certain thrift
asset and definitional tests. New federal legislation eliminated these thrift-
related recapture rules. Community Savings is not required to provide a deferred
tax liability for the tax effect of additions to the tax bad debt reserve
through 1987.
Retained income at December 31, 1997, includes approximately $5.2
million 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.
ALTERNATIVE MINIMUM TAXES. Community Savings may also be subject to
the corporate alternative minimum tax ("AMT"). This tax is applicable only to
the extent it exceeds the regular corporate income tax. The AMT is imposed at
the rate of 20% of the corporation's alternative minimum taxable income ("AMTI")
subject to applicable statutory exemptions. AMTI is calculated by adding certain
tax preference items and making certain adjustments to the corporation's regular
taxable income. Preference items and adjustments generally applicable to
financial institutions include, but are not limited to, the following: (i) the
excess of the bad debt deduction over the amount that would have been allowable
on the basis of actual experience; (ii) interest on certain tax-exempt bonds
issued after August 7, 1986; and (iii) 75% of the excess, if any, of a
corporation's adjusted earnings and profits over
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its AMTI (as otherwise determined with certain adjustments). Net operating loss
carry-overs, subject to certain adjustments, may be utilized to offset up to 90%
of the AMTI. Credit for AMT paid may be available in future years to reduce
future regular federal income tax liability. Community Savings has not been
subject to the AMT in recent years.
Community Savings' federal income tax returns have not been audited in the
last six tax years.
STATE AND LOCAL TAXATION
Under North Carolina law, the corporate income tax rate for the 1996, 1997
and 1998 tax years was 7.75%, 7.5% and 7.25%, respectively, of federal taxable
income as computed under the Code, subject to certain prescribed adjustments.
An annual state franchise tax is imposed at a rate of 0.15% applied to the
greatest of the institution's (i) capital stock, surplus and undivided profits,
(ii) investment in tangible property in North Carolina or (iii) appraised
valuation of property in North Carolina.
The North Carolina corporate tax rate is 7% in 1999, and, under current
legislation, will drop to 6.9% thereafter.
SUPERVISION AND REGULATION
REGULATION OF FIRST COMMUNITY
GENERAL. First Community was organized for the purpose of acquiring and
holding all of the capital stock of Community Savings to be issued in the
conversion. As a bank holding company subject to the Bank Company Act of 1956,
as amended ("BHCA"), First Community will become subject to certain regulations
of the Federal Reserve. Under the BHCA, First Community's activities and those
of its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The BHCA prohibits First Community from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or substantially all of
the assets of any bank or savings bank or merging or consolidating with another
bank holding company or savings bank holding company without prior approval of
the Federal Reserve.
Additionally, the BHCA prohibits First Community from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of First Community.
Control is conclusively presumed to exist if, among other things, a person
acquires more than 25% of any class of voting stock of First Community or
controls in any manner the election of a majority of the directors of First
Community. Control is presumed to exist if a person acquires more than 10% of
any class of voting stock and the stock is registered under Section 12 of the
Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution
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subsidiary that may become "undercapitalized" with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all acceptable capital standards as of the time the institution
fails to comply with such capital restoration plan. Under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
Bank Insurance Fund (the "BIF") as a result of the default of a commonly
controlled insured depository institution and for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both.
The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
As a result of First Community's ownership of Community Savings, First
Community will be registered under the savings bank holding company laws of
North Carolina. Accordingly, First Community will also be subject to regulation
and supervision by the Administrator.
CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
"Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-
based capital guidelines, the Federal Reserve has adopted a minimum Tier I
capital (leverage) ratio, under which a bank holding company must maintain a
minimum level of Tier I capital to average total consolidated assets of at least
3% in the case of a bank holding company which has the highest regulatory
examination rating and is not contemplating significant growth or expansion.
All other bank holding companies are expected to maintain a Tier I capital
(leverage) ratio of at least 1% to 2% above the stated minimum.
DIVIDEND AND REPURCHASE LIMITATIONS. In connection with the conversion,
Community Savings has agreed with the FDIC that, during the first year after
consummation of the conversion, neither First Community nor Community Savings
will pay any dividend or make any other distribution to its stockholders which
represents, is characterized as, or is treated for federal tax purposes as, a
return of capital. In addition, First Community must obtain Federal Reserve
approval in order to use more than 10% of its net worth to make stock
repurchases during any 12 month period unless First Community (i) both before
and after the redemption satisfies capital requirements for "well capitalized"
state member banks; (ii) received a one or two rating in its last examination;
and
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(iii) is not the subject of any unresolved supervisory issues. Although the
payment of dividends and repurchase of stock by First Community are subject to
the requirements and limitations of North Carolina corporate law, except as set
forth in this paragraph, neither the Administrator nor the FDIC have promulgated
any regulations specifically limiting the right of First Community to pay
dividends and repurchase shares. However, the ability of First Community to pay
dividends or repurchase shares may be dependent upon First Community's receipt
of dividends from Community Savings. Community Savings' ability to pay dividends
is limited. See " - Regulation of Community Savings - Restrictions on Dividends
and Other Capital Distributions."
CAPITAL MAINTENANCE AGREEMENT. In connection with the Administrator's
approval of First Community's application to acquire control of Community
Savings, First Community was required to execute a capital maintenance agreement
whereby it has agreed to maintain Community Savings' capital in an amount
sufficient to enable Community Savings to satisfy all regulatory capital
requirements.
FEDERAL SECURITIES LAW. First Community has filed with the Securities and
Exchange Commission ("SEC") a Registration Statement under the Securities Act of
1933, as amended (the "Securities Act"), for the registration of the common
stock to be issued in the conversion. First Community intends to register its
common stock with the SEC pursuant to Section 12 of the Exchange Act. Upon such
registration, the proxy and tender offer rules, insider trading reporting
requirements and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable to First Community.
REGULATION OF COMMUNITY SAVINGS
GENERAL. Federal and state legislation and regulation significantly affect
the operations of federally-insured savings institutions and other federally
regulated financial institutions. The operations of regulated depository
institutions, including Community Savings, are subject to changes in applicable
statutes and regulations from time to time. Such changes may or may not be
favorable to Community Savings.
Community Savings is a North Carolina-chartered savings bank, is a member
of the Federal Home Loan Bank system, and its deposits are insured by the FDIC
through the SAIF. It is subject to examination and regulation by the FDIC and
the Administrator and to regulations governing such matters as capital
standards, mergers, establishment of branch offices, subsidiary investments and
activities, and general investment authority. Generally, North Carolina-
chartered savings banks whose deposits are insured by the SAIF are subject to
restrictions with respect to activities and investments, transactions with
affiliates and loans-to-one borrower similar to those applicable to federally-
chartered SAIF-insured savings associations. Such examination and regulation is
intended primarily for the protection of depositors and the federal deposit
insurance funds.
Community Savings is subject to various regulations promulgated by the
Federal Reserve including, without limitation, Regulation B (Equal Credit
Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers),
Regulation O (Loans to Executive Officers, Directors and Principal
Shareholders), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds) and Regulation DD (Truth in Savings). As holders of loans secured by real
property and as owners of real property, financial institutions, including
Community Savings, may be subject to potential liability under various statutes
and regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including Community Savings. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to initiate injunctive actions. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its
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liabilities to depositors and others; (ii) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions
between Community Savings and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of Community Savings is any company or
entity that controls, is controlled by or is under common control with the
savings bank. Upon consummation of the conversion, Community Savings and First
Community will be affiliates of each other. Generally, Sections 23A and 23B (i)
establish certain collateral requirements for loans to affiliates; (ii) limit
the extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings institution's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the savings
institution or the subsidiary as those provided to a nonaffiliate. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate, the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate, the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person,
or issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act with respect to loans to
directors, executive officers and principal stockholders. Under Section 22(h),
loans to directors, executive officers and stockholders who, directly or
indirectly, own more than 10% of any class of voting securities of a savings
bank, and certain affiliated entities of any of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law (as discussed below), and all loans to such persons may not exceed
the Savings Bank's unimpaired capital and unimpaired surplus. Section 22(h)
also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers or stockholders who own more than 10% of
a savings bank, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the savings bank. Any
"interested" director may not participate in the voting. The Federal Reserve has
prescribed the loan amount (which includes all other outstanding loans to such
person), as to which such prior board of director approval is required, as being
the greater of $25,000 or 5% of unimpaired capital and unimpaired surplus (up to
$500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that
loans to directors, executive officers, and principal stockholders be based on
underwriting standards not less stringent than those applied in comparable
transactions with other persons, and made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features. Section
22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC administers two separate deposit
insurance funds. The SAIF maintains a fund to insure the deposits of most
savings institutions and the BIF maintains a fund to insure the deposits of most
commercial banks. Community Savings is a member of the SAIF of the FDIC.
Community Savings is required to pay assessments to the FDIC based on a
percentage of its insured deposits. Under the FDIC's risk-based deposit
insurance assessment system, the assessment rate for an insured depository
institution depends on the assessment risk classification assigned to the
institution by the FDIC, which is determined by the institution's capital level
and supervisory evaluations. Based on the data reported to regulators
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for the date closest to the last day of the seventh month preceding the semi-
annual assessment period, institutions are assigned to one of three capital
groups -well capitalized, adequately capitalized or undercapitalized - using the
same percentage criteria as in the prompt corrective action regulations. See "-
Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The assessment rate for SAIF members had ranged from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995. This assessment fully
capitalized the SAIF. Accordingly, although the special assessment resulted in
a $767,000 one-time charge of Community Savings during its fiscal year ended
December 31, 1996, the recapitalization of the SAIF had the effect of reducing
Community Savings' future deposit insurance premiums to the SAIF. Under the
recently enacted legislation, most BIF members will be assessed approximately
1.3 basis points while the rate for most SAIF members will be approximately 6.4
basis points until January 1, 2000. At that time, BIF and SAIF members will
begin pro rata sharing of the payment at an expected rate of 2.43 basis points.
COMMUNITY REINVESTMENT ACT. Community Savings, like other financial
institutions, is subject to the Community Reinvestment Act ("CRA"). A purpose of
the CRA is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. Financial institutions' compliance with the CRA is regularly
evaluated by their regulatory agencies.
Under recently adopted regulations, institutions are first evaluated and
rated under three categories: a lending test, an investment test and a service
test. For each of these three tests, the institution is given a rating of
either "outstanding," "high satisfactory," "low satisfactory," "needs to
improve" or "substantial non-compliance." A set of criteria for each rating has
been developed and is included in the regulation. If an institution disagrees
with a particular rating, the institution has the burden of rebutting the
presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to its service area should
be considered. The ratings received under the three tests are used to determine
the overall composite CRA rating. The composite ratings are "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
During Community Savings' last compliance examination, Community Savings
received a "satisfactory" rating with respect to CRA compliance. Community
Savings' rating with respect to CRA compliance would be a factor to be
considered by the Federal Reserve and FDIC in considering applications submitted
by Community Savings to acquire branches or to acquire or combine with other
financial institutions and take other actions and, if such rating was less than
"satisfactory," could result in the denial of such applications.
CAPITAL REQUIREMENTS APPLICABLE TO COMMUNITY SAVINGS. The FDIC requires
Community Savings to have a minimum leverage ratio of Tier I capital
(principally consisting of common stockholders' equity, noncumulative perpetual
preferred stock and minority interests in consolidated subsidiaries, less
certain intangible, goodwill items, identified losses and investments in
securities subsidiaries) to total assets of at least 3%; provided, however that
all institutions, other than those (i) receiving the highest rating during the
examination process and (ii) not anticipating or experiencing any significant
growth, are required to maintain a ratio of 1% or 2% above the
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stated minimum, with an absolute minimum leverage ratio of not less than 4%. The
FDIC also requires Community Savings to have a ratio of total capital to risk-
weighted assets, including certain off-balance sheet activities, such as standby
letters of credit, of at least 8%. At least half of the total capital is
required to be Tier I capital. The remainder (Tier II capital) may consist of a
limited amount of subordinated debt, certain hybrid capital instruments, other
debt securities, certain types of preferred stock and a limited amount of loan
loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
institution may be deemed to be operating in an unsafe or unsound condition,
allowing the FDIC to take various enforcement actions, including possible
termination of insurance or placement of the institution in receivership.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At September 30, 1998, Community Savings complied with each of the capital
requirements of the FDIC and the Administrator. For a description of Community
Savings' required and actual capital levels on September 30, 1998, see
"Historical and Pro Forma Capital Compliance."
Each federal banking agency is required to establish risk-based capital
standards to take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multi-family mortgages.
On August 2, 1995, the federal banking agencies issued a joint notice of
adoption of final risk-based capital rules to take account of interest rate
risk. The final regulation required an assessment of the need for additional
capital on a case-by-case basis, considering both the level of measured exposure
and qualitative risk factors. The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.
LOANS TO ONE BORROWER. Community Savings is subject to the Administrator's
loans-to-one borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. Notwithstanding the limits just
described, savings institutions may make loans to one borrower, for any purpose,
in an amount of up to $500,000. A savings institution also is authorized to
make loans to one borrower to develop domestic residential housing units, not to
exceed the lesser of $30 million, or 30% of the savings institution's net worth,
provided that (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements; (iv) the aggregate amount of loans
made under this authority does not exceed 150% of net worth; and (v) the
institution's regulator issues an order permitting the savings institution to
use this higher limit. These limits also authorize a savings bank to make
loans-to-one borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
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As of September 30, 1998, the largest aggregate amount of loans which
Community Savings had to any one borrower was $3.1 million. Community Savings
had no loans outstanding which management believes violate the applicable loans-
to-one borrower limits.
LIMITATIONS ON RATES PAID FOR DEPOSITS. Regulations promulgated by the
FDIC place limitations on the ability of insured depository institutions to
accept, renew or roll over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations, "well
capitalized" depository institutions may accept, renew or roll such deposits
over without restriction, "adequately capitalized" depository institutions may
accept, renew or roll such deposits over with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The definitions
of "well capitalized," "adequately capitalized" and "undercapitalized" are the
same as the definitions adopted by the FDIC to implement the corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.
See "- Prompt Corrective Regulatory Action." As of September 30, 1998,
Community Savings was considered to be "well capitalized" and, thus, was not
subject to the limitations on rates payable on it deposits.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank system provides
a central credit facility for member institutions. As a member of the Federal
Home Loan Bank of Atlanta, Community Savings is required to own capital stock in
the Federal Home Loan Bank of Atlanta in an amount at least equal to the greater
of 1% of the aggregate principal amount of its unpaid residential mortgage
loans, home purchase contracts and similar obligations at the end of each
calendar year, or 5% of its outstanding advances (borrowings) from the Federal
Home Loan Bank of Atlanta. On September 30, 1998, Community Savings was in
compliance with this requirement with an investment in Federal Home Loan Bank of
Atlanta stock of $1.4 million.
FEDERAL RESERVE SYSTEM. Regulation D, promulgated by the Federal Reserve,
imposes reserve requirements on all depository institutions, including savings
banks and savings institutions, which maintain transaction accounts or non-
personal time deposits. Checking accounts, NOW accounts and certain other types
of accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts) at a savings institution. For 1998, a depository
institution must maintain average daily reserves equal to 3% of the first $47.8
million of net transaction accounts, plus 10% of that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances are exempt from the reserve requirements. These
percentages and threshold limits are subject to adjustment by the Federal
Reserve.
RESTRICTIONS ON ACQUISITIONS. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of an insured institution, such as Community Savings, without
giving at least 60 days' written notice to the FDIC and providing the FDIC an
opportunity to disapprove the proposed acquisition. Pursuant to regulations
governing acquisitions of control, control of an insured institution is
conclusively deemed to have been acquired, among other things, upon the
acquisition of more than 25% of any class of voting stock. In addition, control
is generally presumed to have been acquired, subject to rebuttal, upon the
acquisition of more than 10% of any class of voting stock. Such acquisitions of
control may be disapproved if it is determined, among other things, that (i) the
acquisition would substantially lessen competition; (ii) the financial condition
of the acquiring person might jeopardize the financial stability of the savings
bank or prejudice the interests of its depositors; or (iii) the competency,
experience or integrity of the acquiring person or the proposed management
personnel indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
For three years following completion of the conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire
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the beneficial ownership of more than 10% of any class of an equity security of
Community Savings. If any person were to so acquire the beneficial ownership of
more than 10% of any class of any equity security without prior written
approval, the securities beneficially owned in excess of 10% would not be
counted as shares entitled to vote and would not be voted or counted as voting
shares in connection with any matter submitted to stockholders for a vote.
Approval is not required for (i) any offer with a view toward public resale made
exclusively to Community Savings or its underwriters or the selling group acting
on its behalf or (ii) any offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of Community Savings by a
corporation whose ownership is or will be substantially the same as the
ownership of Community Savings, provided that the offer or acquisition is made
more than one year following the consummation of the conversion. The regulation
provides that within one year following the conversion, the Administrator would
approve the acquisition of more than 10% of beneficial ownership only to protect
the safety and soundness of the institution. During the second and third years
after the conversion, the Administrator may approve such an acquisition upon a
finding that (i) the acquisition is necessary to protect the safety and
soundness of First Community and Community Savings or the Boards of Directors of
First Community and Community Savings support the acquisition and (ii) the
acquiror is of good character and integrity and possesses satisfactory
managerial skills, the acquiror will be a source of financial strength to First
Community and Community Savings and the public interests will not be adversely
affected.
LIQUIDITY. Community Savings is subject to the Administrator's requirement
that the ratio of liquid assets to total assets equal at least 10%. The
computation of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable value, including investments with
maturities in excess of five years. At September 30, 1998, Community Savings'
liquidity ratio, calculated in accordance with North Carolina regulations, was
approximately 21.0%.
PROMPT CORRECTIVE REGULATORY ACTION. The Federal Deposit Corporation
Improvement Act of 1991 provided the federal banking agencies with broad powers
to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to Community Savings,
an institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating and is not experiencing or anticipating significant growth). An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an
institution with the highest examination rating and is not experiencing or
anticipating significant growth); (B) "significantly undercapitalized" if the
institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of
less than 3% and (C) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets equal to or less than 2%. Community
Savings is considered to be "well capitalized" under the rules set forth above.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of
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the insured deposits in any one state, unless the state has specifically
legislated a higher deposit cap. States are free to legislate stricter deposit
caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States could choose to allow interstate branching prior to June 1, 1997 by
opting-in to a group of states that permitted these transactions. These states
generally allow interstate branching via a merger of an out-of-state bank with
an in-state bank, or on a de novo basis. North Carolina enacted legislation
permitting interstate branching transactions prior to June 1, 1997 and did not
adopt legislation electing to deny interstate branching.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations.
In addition, a North Carolina-chartered stock savings bank, for a period of
five years after its conversion from mutual to stock form, must obtain the
written approval from the Administrator before declaring or paying a cash
dividend on its capital stock in an amount in excess of one-half of the greater
of (i) the institution's net income for the most recent fiscal year end, or (ii)
the average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution. Under FDIC regulations, stock repurchases may be made by
Community Savings only after receipt of FDIC approval.
In addition, upon its conversion to stock form, Community Savings is not
permitted to declare or pay a cash dividend or repurchase any of its capital
stock if the effect thereof would be to cause its net worth to be reduced below
the amount required for the liquidation account established in connection with
the conversion.
In connection with the conversion, Community Savings has agreed with the
FDIC that, during the first year after the conversion, neither First Community
nor Community Savings will pay any dividend or make any other distribution to
stockholders which represents, is characterized as, or is treated for federal
tax purposes as, a return of capital.
RESTRICTIONS ON BENEFIT PLANS. FDIC regulations provide that for a period
of one year from the date of the conversion, Community Savings may not implement
or adopt a stock option plan or restricted stock plan, other than a tax-
qualified plan or ESOP, unless: (1) the plans are fully disclosed in the
conversion proxy solicitation and stock offering material, (2) all such plans
are approved by a majority of First Community's stockholders prior to
implementation and no earlier than six months following the conversion, (3) for
stock option plans, the exercise price is at least equal to the market price of
the stock at the time of grant, and (4) for restricted stock plans, no stock
issued in connection with the conversion is used to fund the plan.
The FDIC regulations provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the conversion, the FDIC
will presume that excessive compensation will result if stock based benefit
plans fail to satisfy percentage limitations on management stock-based benefit
plans set forth in the regulations of the Office of Thrift Supervision ("OTS").
Those regulations provide that (1) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares
issued in the
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conversion, (2) for restricted stock plans, the shares issued may not exceed 3%
of the shares issued in the conversion (4% for institutions with tangible
capital of 10% or greater after the conversion), (3) the aggregate amount of
stock purchased by the ESOP shall not exceed 10% (8% for well-capitalized
institutions utilizing a 4% restricted stock plan), (4) no individual employee
may receive more than 25% of the available awards under any plan, (5) directors
who are not employees may not receive more than 5% individually or 30% in the
aggregate of the awards under any plan, and (6) the stock option and restricted
stock plans must provide that benefits will vest in equal increments over a five
year period beginning one year after the plans are approved by the stockholders
and may provide for automatic vesting only in the event of death or disability.
The awards and grants to be made under the MRP and Stock Option Plan will
conform to these requirements if such plans are submitted for stockholder
approval within one year after the conversion is consummated.
ADDITIONAL FEDERAL LIMITATIONS ON ACTIVITIES. Recent FDIC law and
regulations generally provide that Community Savings may not engage as principal
in any type of activity, or in any activity in an amount, not permitted for
national banks, or directly acquire or retain any equity investment of a type or
in an amount not permitted for national banks. The FDIC has authority to grant
exceptions from these prohibitions (other than with respect to non-service
corporation equity investments) if it determines no significant risk to the
insurance fund is posed by the amount of the investment or the activity to be
engaged in and if Community Savings is and continues to be in compliance with
fully phased-in capital standards. National banks are generally not permitted to
hold equity investments other than shares of service corporations and certain
federal agency securities. Moreover, the activities in which service
corporations for savings banks are permitted to engage are limited to those of
service corporations for national banks.
Savings banks are also required to notify the FDIC at least 30 days prior
to the establishment or acquisition of any subsidiary, or at least 30 days prior
to conducting any such new activity. Any such activities must be conducted in
accordance with the regulations and orders of the FDIC and the Administrator.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").
OTHER NORTH CAROLINA REGULATION. As a North Carolina-chartered savings
bank, Community Savings derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to: the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that Community Savings maintain federal deposit insurance as a
condition of doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
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A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a Federal Home Loan Bank; (v) savings accounts of any
savings institution as approved by the board of directors; and (vi) stock or
obligations of any agency of the State of North Carolina or of the United States
or of any corporation doing business in North Carolina whose principal business
is to make education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
MANAGEMENT OF FIRST COMMUNITY
The Board of Directors of First Community currently consists of ten
persons. Each of these persons is also a director of Community Savings, and the
name and biographical information with respect to each is set forth under
"Management of Community Savings - Directors." The articles of incorporation
and bylaws of First Community provide for staggered elections at such times as
the number of directors is at least nine. Therefore, it is expected that at
First Community's first annual meeting of stockholders approximately one-third
of the directors will be initially elected to one, two and three-year terms,
respectively, and thereafter it is expected that all directors will be elected
to terms of three years each. The bylaws of First Community provide that no
director may be elected to office after he attains the age of 72; however,
persons now serving as directors are not subject to that restriction.
The executive officers of First Community, each of whom is also currently
an executive officer of Community Savings, and each of whom serves at the
discretion of the Board of Directors of First Community, are as follows:
<TABLE>
<CAPTION>
AGE AT POSITION HELD
NAME SEPTEMBER 30, 1998 WITH FIRST COMMUNITY
- ----------------------- ------------------ -------------------------------------
<S> <C> <C>
W. R. Gilliam 61 President and Chief Executive Officer
Larry H. Hall 52 Executive Vice President
Joseph C. Canada 50 Senior Vice President and Secretary
Christopher B. Redcay 46 Treasurer and Chief Financial Officer
</TABLE>
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Biographical information with respect to each of these officers is set
forth below under "Management of Community Savings - Executive Officers." There
are no other employees of First Community. No officer, director or employee of
First Community has received remuneration from First Community to date, and it
is currently expected that no compensation will be paid by First Community in
the period immediately after the conversion. Information concerning the
principal occupations and employment of, and compensation paid by Community
Savings to, the directors and executive officers of First Community is set forth
under "Management of Community Savings." See "Management of Community Savings -
Employment Agreement" and "- Special Termination Agreements" for a description
of certain agreements expected to be entered into with the executive officers of
First Community and Community Savings.
MANAGEMENT OF COMMUNITY SAVINGS
DIRECTORS
The direction and control of Community Savings, as a mutual North Carolina-
chartered savings bank, has been vested in its ten-member Board of Directors
elected by the depositor and borrower members of Community Savings. Upon
conversion of Community Savings to capital stock form, each director of
Community Savings immediately prior to the conversion will continue to serve as
a director of Community Savings as a stock institution. All directors currently
serve for three-year terms.
Upon completion of the conversion, First Community will own all of the
issued and outstanding shares of capital stock of Community Savings, and First
Community will elect the directors of Community Savings. First Community now
plans to nominate and re-elect all members of Community Savings' existing board
of directors when their existing terms expire. Their terms are staggered so
that approximately one-third of the directors are up for reelection in 1999,
2000 and 2001. Community Savings' proposed bylaws, which would become effective
after the conversion, provide for continued staggered elections of its directors
if and when the number of directors shall equal at least nine. Community
Savings' proposed bylaws provide that no director may be elected to office after
he attains the age of 72; however, the persons now serving as directors are not
subject to that limitation. The following table sets forth certain information
with respect to the persons who currently serve as members of the Board of
Directors of Community Savings.
<TABLE>
<CAPTION>
AGE ON
SEPTEMBER 30, PRINCIPAL OCCUPATION DIRECTOR
NAME 1998 DURING LAST FIVE YEARS SINCE
- ---- ---------- ---------------------- -----
<S> <C> <C> <C>
Jimmy L. Byrd 53 Partner of Byrd Limited Partnership 1977
W. R. Gilliam, Chairman 61 President of Community Savings Bank, SSB 1986
Julian P. Griffin 66 Retired transportation executive and minister 1985
Edgar L. Hartgrove 73 Retired District Manager of Duke Power Company 1984
William C. Ingold 71 Owner of Burlington Motors, Inc., automobile dealerships 1979
Charles A. LeGrand 71 Retired hosiery executive 1975
James D. Moser, Jr. 60 Certified Public Accountant, Gilliam Coble & Moser LLP 1992
W. Joseph Rich 56 President, Rich & Thompson Funeral Service, Inc. 1977
Alfred J. Spitzner 67 Metallurgical consultant 1979
Herbert N. Wellons 76 Retired President of Community Savings Bank, SSB 1977
A cousin of Jimmy L. Byrd is married to Joseph C. Canada, an executive officer of First Community and Community Savings.
</TABLE>
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BOARD MEETINGS AND COMMITTEES
Community Savings' Board of Directors has regular meetings twice each
month, and held 23 regular and special meetings in the fiscal year ended
December 31, 1997. The Board has also established five committees to whom
certain responsibilities have been delegated - a budget committee, an audit
committee, a nominating committee, a personnel committee, and a long range
planning committee. No director attended fewer than 75% of the total number of
Board meetings and meetings of Board committees on which he served during the
year ended December 31, 1997.
Community Savings' budget committee is composed of directors LeGrand,
Hartgrove and Byrd. The budget committee reviews the annual budget and makes
budget recommendations to the full Board of Directors. The budget committee met
one time during the year ended December 31, 1997.
Community Savings' audit committee is composed of directors Moser, Rich and
Hartgrove. This committee is responsible for meeting with and retaining
independent auditors, and overseeing the adequacy of internal controls, insuring
compliance with Community Savings' policies and procedures and with generally
accepted accounting principles. The audit committee also reviews examination
reports of regulatory agencies and reviews corrective actions and makes
recommendations to the Board. The audit committee meets on an as needed basis,
and during the fiscal year ended December 31, 1997, met five times.
Community Savings' nominating committee is composed of directors Rich,
Wellons, Ingold and Griffin and meets on an as needed basis to nominate persons
to serve on Community Savings' Board of Directors. During the fiscal year ended
December 31, 1997, the nominating committee met one time.
Community Savings personnel committee is composed of directors Spitzner,
Wellons and Gilliam and reviews proposed compensation structures and personnel
needs of Community Savings and makes recommendations to the full Board of
Directors. The personnel committee met 10 times during the fiscal year ended
December 31, 1997.
Community Savings' long range planning committee is composed of Directors
LeGrand, Spitzner and Griffin and reviews long range plans of Community Savings
and makes recommendations to the full Board of Directors. During the fiscal
year ended December 31, 1997, the long range planning committee met four times.
Community Savings' Chairman of the Board and President also meet with each
of the committees of the Board.
DIRECTORS' FEES
For their service on Community Savings' Board of Directors, all members of
Community Savings' Board of Directors receive $1,000 per month. The Chairman of
the Board receives $1,050 per month. Board fees are subject to adjustment
annually. No additional fees are paid in connection with committee meetings.
Community Savings has entered into deferred compensation agreements with
its directors. Under such arrangements, the directors waived immediate receipt
of their directors' fees for various periods of time in exchange for Community
Savings' agreement to pay to the directors amounts over a specified period of
time beginning at a date set forth in the agreements. Benefits are also payable
to designated beneficiaries upon the director's death. Under some of the
agreements, benefits are also payable in the event of a disability. Benefits
vest under the agreements over a period of time so that benefits are forfeited
or reduced if service to Community Savings is terminated prior to the expiration
of specified vesting periods (other than for reasons of death or, in some cases,
disability.) Such vesting requirements have been satisfied. In order to fund
the deferred compensation benefits, Community Savings has purchased insurance
policies of which it is the beneficiary. Total compensation expense
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related to the directors' deferred compensation arrangements was approximately
$323,748 during the fiscal year ended December 31, 1997. Beginning in fiscal
year 1999, this expense is expected to be partially offset by increases in the
cash surrender value of the insurance policies purchased in connection with such
deferred compensation arrangements, which represents income to Community
Savings.
DIRECTORS' RETIREMENT PLAN
Community Savings has also adopted a Directors' Retirement Plan. This plan
provides that directors of Community Savings will be paid $1,500 per month for
10 years beginning on the later of the director's 65/th/ birthday or October 1,
1996. Alternatively, Community Savings may elect to pay the benefits in a lump
sum payment equal to the present value of the payment stream. Benefits are
payable to designated beneficiaries in the event a director dies prior to
receiving full payment.
Death and disability benefits of $1,500 per month for 10 years are payable
in the event a director dies or becomes disabled prior to reaching his 65/th/
birthday. In certain situations, the death or disability benefits may be paid
by Community Savings in a lump sum payment equal to the present value of the
stream of unpaid payments.
Benefits under the Directors' Retirement Plan vest over a period of time so
that benefits are forfeited or reduced if service to Community Savings is
terminated prior to the expiration of specified vesting periods (other than for
reasons of death or disability and other than a termination after a change in
control). All such vesting requirements are satisfied.
Insurance policies have been purchased to fund the benefits payable under
the retirement plan. Total compensation expense related to the Directors'
Retirement Plan during the fiscal year ended December 31, 1997 was approximately
$99,771. Beginning in the fiscal year 1999, this expense is expected to be
partially offset by increases in the cash surrender value of insurance policies
purchased in connection with the plan.
Existing members of the Board of Directors may also receive additional
benefits following the conversion. See "- Proposed Management Recognition Plan"
and "- Proposed Stock Option Plan."
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EXECUTIVE OFFICERS
Community Savings has five executive officers. The following table sets
forth certain information with respect to such executive officers:
<TABLE>
<CAPTION>
AGE ON EMPLOYED BY
NAME SEPTEMBER 30, POSITIONS AND OCCUPATIONS COMMUNITY SAVINGS
- ----- 1998 DURING LAST FIVE YEARS SINCE
------------- -------------------------- -----------------
<S> <C> <C> <C>
W. R. Gilliam 61 President and Chief Executive Officer 1959
Larry H. Hall 52 Executive Vice President; previously 1996
Senior Vice President; previously Vice
President of Branch Banking and Trust
Company
Joseph C. Canada 50 Senior Vice President and Secretary; 1973
previously Treasurer
Judy L. Pennington 51 Vice President; previously Assistant 1996
Vice President of First South Bank
Christopher B. Redcay 46 Treasurer and Chief Financial Officer; 1998
previously consultant with JBA
Consulting, Inc.; previously Chief
Financial Officer and Secretary -
Treasurer of F&M Financial
Corporation
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth for the twelve month period ended December
31, 1997 certain information as to the cash compensation earned by the chief
executive officer of Community Savings. There was no other executive officer of
Community Savings whose cash compensation exceeded $100,000 for service in all
capacities.
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS ($)/1/ COMPENSATION/2/
------------------ ---- ------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
W. R. Gilliam 1997 $97,500 $16,595 - $158,357
President, Chief Executive Officer, and
Director
</TABLE>
____________________
1 Under the "Other Annual Compensation" category, perquisites for the fiscal
year ended December 31, 1997 did not exceed the lesser of $50,000, or 10%
of salary and bonus as reported for Mr. Gilliam.
2 Includes (a) $12,000 in directors' fees; (b) $114,355 accrued under
supplemental income agreements established for the benefit of Mr. Gilliam,
(c) $15,150 in payments to Mr. Gilliam which are reimbursements of expenses
incurred by Mr. Gilliam with respect to life insurance policies purchased
by him, including the taxes payable on such amounts, (d) $9,750 in
contributions to Community Savings' retirement plans for Mr. Gilliam and
(e) $7,102 accrued for the benefit of Mr. Gilliam under the Directors'
Retirement Plan. The amounts described in items (b), (d) and (e) did not
represent actual cash payments to Mr. Gilliam.
Community Savings' personnel committee, composed of directors Spitzner,
Wellons, Ingold and Gilliam, makes recommendations to the full Board of
Directors with respect to compensation of its executive officers. Community
Savings' full Board of Directors then determines the compensation of the
executive officers. The
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salaries of each of the executive officers is determined based upon the
executive officer's contributions to Community Savings' overall profitability,
maintenance of regulatory compliance standards, professional leadership, and
management effectiveness in meeting the needs of day to day operations. The
Board of Directors also compares the compensation of Community Savings'
executive officers with compensation paid to executives of comparable financial
institutions in North Carolina and executives of other businesses in Community
Savings' market area. Mr. Gilliam participates in the deliberations of the
personnel committee and Board of Directors regarding compensation of executive
officers other than himself. He does not participate in the discussion or
decisions regarding his own compensation.
INCENTIVE COMPENSATION
Community Savings has an incentive bonus compensation program. Under
this program, certain employees of Community Savings, including executive
officers, are eligible to receive bonuses equal to a specified percentage of
their salary if the particular employee attains or exceeds certain personal
performance goals. The performance goals for Community Savings are structured
so that bonuses will be greater or lower, depending upon the extent to which the
goals are exceeded. Performance goals for Community Savings and for individual
participants and the proposed bonuses based on such goals are established
annually by Community Savings' Board of Directors. Discretionary bonuses are
also sometimes paid by Community Savings to its employees.
RETIREMENT PLAN
Community Savings has established a contributory savings plan for its
employees, which meets the requirements of section 401(k) of the Code.
Substantially all employees are covered by the plan. Under the plan, Community
Savings contributes $2.00 for each $1.00 contributed by the employee up to an
employee contribution of 5% of his or her salary. The 401(k) retirement plan,
which was adopted during 1997, replaced another retirement plan which provided
similar benefits.
Participants are fully vested in amounts they contribute to the plan.
Participants are fully vested in amounts contributed to the plan on their behalf
by Community Savings as employer matching contributions and as profit sharing
contributions after six years of service as follows: 1 year, 0%; 2 years, 20%; 3
years, 40%; 4 years, 60%; 5 years, 80%; 6 or more years, 100%.
The total amount contributed by Community Savings to the retirement plan
during the twelve months ended December 31, 1997 was approximately $89,000. The
assets of the plan exceeded vested benefits as of December 31, 1997, the date of
the last accounting.
It is expected that Community Savings' contributions to the 401(k)
retirement plan will decrease after the conversion as a result of the
establishment of the ESOP.
SUPPLEMENTAL INCOME PLANS
Community Savings has entered into two separate supplemental income
agreements with W. R. Gilliam, President and Chief Executive Officer. These
agreements provide that Mr. Gilliam will receive annual payments of $67,324 for
15 years upon termination of his employment with Community Savings. In the event
of Mr. Gilliam's death before all payments have been made, benefits would be
payable to designated beneficiaries. In addition, if Mr. Gilliam's employment
with Community Savings should terminate as a result of his death or disability,
such annual payments would be made for a 15-year period to Mr. Gilliam or to his
designated beneficiaries, as applicable. The benefits payable under the
supplemental income agreements are funded by the purchase of life insurance.
During the twelve months ended December 31, 1997, compensation expense related
to the supplemental income plans was $114,355. As a result of additional
accruals during 1998, the supplemental income plans are fully funded.
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LIFE INSURANCE BENEFITS
W. R. Gilliam, President and Chief Executive Officer, and Joseph C. Canada,
Senior Vice President and Secretary, are provided with $250,000 and $150,000 of
life insurance coverage by Community Savings. Mr. Gilliam and Mr. Canada own
these policies and pay the premiums on them. Community Savings reimburses the
premium expenses to Mr. Gilliam and Mr. Canada and pays the employees an
additional amount to reimburse them for the tax liability they incur as a result
of such payments. During the twelve months ended December 31, 1997, Community
Savings paid approximately $22,000 to Mr. Gilliam and Mr. Canada in such
reimbursement expenses.
OTHER BENEFITS
Community Savings provides its employees with group medical, dental, life
and disability insurance benefits. Employees are also provided with vacation,
holiday and sick leave.
EMPLOYMENT AGREEMENT
In connection with the conversion, Community Savings will enter into an
employment agreement with W. R. Gilliam, President and Chief Executive Officer,
in order to establish his duties and compensation and to provide for his
continued employment with Community Savings. The agreement will provide for an
initial annual base salary of $120,000. The agreement will provide for a three
year initial term of employment. Commencing on the first anniversary date and
continuing on each anniversary date thereafter, following a performance
evaluation of the employee, the agreement may be extended for an additional year
so that the remaining term shall be three years unless written notice of non-
renewal is given by the Board of Directors. The agreement also provides that
base salary shall be reviewed by the Board of Directors not less often than
annually. In the event of a change in control (as defined below), Mr. Gilliam's
base salary shall be increased by at least 6% annually and the agreement will
automatically be extended so that it will have a three year term after the
change in control. In addition, the employment agreement provides for
participation in all other pension, profit-sharing or retirement plans
maintained by Community Savings or by First Community for employees of Community
Savings, as well as fringe benefits normally associated with Mr. Gilliam's
office. Mr. Gilliam will continue to be eligible to receive bonuses under any
existing bonus compensation plan for executive officers and that Mr. Gilliam
will receive additional discretionary bonuses computed on the same basis as
those paid to other employees. See "- Bonus Compensation." The employment
agreement provides that it may be terminated by Community Savings for cause, as
defined in the agreement, and that it may otherwise be terminated by Community
Savings (subject to vested rights) or by Mr. Gilliam.
The employment agreement provides that the nature of Mr. Gilliam's
compensation, duties or benefits cannot be diminished following a change in
control of Community Savings or First Community. For purposes of the employment
agreement, a change in control generally will occur if (i) after the effective
date of the employment agreement, any "person" (as such term is defined in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act) directly or indirectly,
acquires beneficial ownership of voting stock, or acquires irrevocable proxies
or any combination of voting stock and irrevocable proxies, representing 25% or
more of any class of voting securities of either First Community or Community
Savings, or acquires in any manner control of the election of a majority of the
directors of either First Community or Community Savings, (ii) either First
Community or Community Savings consolidates or merges with or into another
corporation, association or entity, or is otherwise reorganized, where neither
First Community nor Community Savings is the surviving corporation in such
transaction, or (iii) all or substantially all of the assets of either First
Community or Community Savings are sold or otherwise transferred to, or are
acquired by, any other entity or group.
The employment agreement could have the effect of making it less likely
that Community Savings or First Community will be acquired by another entity.
See "Anti-takeover Provisions Affecting First Community
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and Community Savings - First Community - Anti-Takeover Effect of Employment
Agreement, Special Termination Agreements and Benefit Plans."
SPECIAL TERMINATION AGREEMENTS
In connection with the conversion, First Community will enter into special
termination agreements with Larry H. Hall, Executive Vice President; Joseph C.
Canada, Senior Vice President and Secretary; Judy L. Pennington, Vice President;
and Christopher B. Redcay, Treasurer and Chief Financial Officer. The agreements
are intended to ensure that Community Savings will be able to maintain a stable
and competent management base after the conversion. The continued success of
Community Savings depends, to a significant degree, on the skill and competence
of its officers.
The special termination agreements provide for payment to the covered
officer only in the event of a change in control of First Community or Community
Savings followed by termination of the officer's employment by Community Savings
within 24 months for other than "cause," as such term is defined in the
agreements, or in the event there are certain specified changes in the officer's
employment circumstances within 24 months following a change in control of
Community Savings or First Community and the officer terminates his or her
employment.
In the event of such a termination of employment, the officer is entitled
to payment in an amount equal to two times his or her salary and bonuses for
income tax purposes for the most recent calendar year, payable in a lump sum or
in equal monthly payments. The initial term of each of these agreements is for a
period commencing upon the effective date of the conversion and ending two
calendar years later. At the end of each anniversary date of the agreements,
they may be extended for another year so that the remaining term shall be two
years unless written notice of non-renewal is given by First Community's Board
of Directors. For purposes of the special termination agreements, "change in
control" has the same meaning as in the employment agreement to be entered into
with Mr. Gilliam. See "- Employment Agreement."
The special termination agreements could have the effect of making it less
likely that Community Savings or First Community will be acquired by another
entity. See "Restrictions on Acquisition of First Community and Community
Savings - First Community - Anti-Takeover Effect of Employment Agreement,
Special Termination Agreements and Benefit Plans."
EMPLOYEE STOCK OWNERSHIP PLAN
Community Savings has established the ESOP for its eligible employees.
The ESOP will become effective upon the conversion. Employees with one year of
service with Community Savings who have attained age 21 are eligible to
participate. As part of the conversion, the ESOP intends to borrow funds from
First Community and use the funds to purchase up to 8% of the sum of the number
of shares of common stock to be issued in the conversion and the number of
shares to be contributed to the Foundation, estimated to be between 130,400 and
173,600 shares assuming the issuance of between 1,530,000 and 2,070,000 shares.
If, because of an oversubscription for shares of common stock or for any other
reason, the ESOP is unable to purchase in the conversion 8% of the sum of the
number of shares issued in the conversion and the number of shares contributed
to the Foundation, then the Board of Directors of First Community intends to
approve the purchase by the ESOP in the open market after the conversion of such
shares as are necessary for the ESOP to acquire such number of shares. In the
future, additional shares could be purchased by the ESOP in the open market with
distributions made on shares held by the ESOP or with other assets of the
ESOP.
Collateral for First Community's loan to the ESOP will be the common stock
purchased by the ESOP. It is expected that the loan will be repaid principally
from Community Savings' discretionary contributions to the ESOP within 15 years.
Dividends, if any, paid on shares held by the ESOP may also be used to reduce
the loan. It
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is anticipated that the interest rate for the loan will be a commercially
reasonable rate at the time of loan inception. The loan will not be guaranteed
by Community Savings. Shares purchased by the ESOP and pledged as security for
the loan will be held in a suspense account for allocation among participants as
the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of relative compensation in the year of
allocation. Benefits will vest in full upon five years of service with credit
given for years of service with Community Savings prior to the conversion.
Benefits are payable upon death or disability. Community Savings' contributions
to the ESOP are not fixed, so benefits payable and corresponding expenses under
the ESOP cannot be determined, although benefits payable and corresponding
expenses have been estimated in preparing the pro forma computations set forth
in this prospectus. See "Pro Forma Data."
In connection with the establishment of the ESOP, First Community will
establish a committee of the Board of Directors to administer the ESOP. Trustees
for the ESOP will also be appointed prior to the conversion. The ESOP committee
may instruct the trustees regarding investment of funds contributed to the ESOP.
Participating employees will instruct the trustees as to the voting of all
shares allocated to their respective accounts and held in the ESOP. The
unallocated shares held in the suspense account, and all allocated shares for
which voting instructions are not received, will be voted by the trustees in
their discretion subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended.
The ESOP may be considered an "anti-takeover" device since the ESOP may
become the owner of a sufficient percentage of the total outstanding common
stock of First Community that the vote or decision whether to tender shares of
the ESOP may be used as a defense in a contested takeover. See "Anti-takeover
Provisions Affecting First Community and Community Savings - First Community -
Anti-Takeover Effect of Employment Agreements, Special Termination Agreements
and Benefit Plans."
PROPOSED MANAGEMENT RECOGNITION PLAN
The Boards of Directors of First Community and Community Savings intend to
adopt the MRP, subject to approval of the stockholders of First Community at a
meeting to be held no sooner than six months after the conversion. The MRP will
serve as a means of providing the directors and certain employees of Community
Savings with an ownership interest in First Community in a manner designed to
encourage such persons to continue their service to Community Savings. All
directors and certain employees of Community Savings would receive benefits
under the MRP.
Upon stockholder approval of the MRP, First Community and Community Savings
expect to fund the MRP with a number of shares of First Community common stock
equal to 4% of the sum of the number of shares issued in the conversion and the
number of shares contributed to the Foundation. Such shares would be provided by
the issuance of authorized but unissued shares of First Community common stock
or shares purchased by the MRP in the open market. Shares issued to recipients
under the MRP will be restricted and subject to forfeiture as described
below.
To the extent that the MRP acquires authorized but unissued shares of First
Community common stock after the conversion, the interests of existing
shareholders will be diluted. Recipients would not be required to pay for shares
issued to them under the MRP. Assuming the issuance of 2,070,000 shares in the
conversion and receipt of stockholder approval up to 86,800 shares could be
issued pursuant to the MRP.
Under applicable regulations, if the proposed MRP is submitted to and
approved by the stockholders of First Community within one year after completion
of the conversion, (i) no employee of Community Savings could receive more than
25% of the shares issued under the MRP, or 21,700 shares, assuming the issuance
of 2,070,000 shares in the conversion, (ii) the nine non-employee directors of
Community Savings could receive
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restricted stock grants for an aggregate of not more than 30% of the shares
issued under the MRP, or 26,040 shares, assuming the issuance of 2,070,000
shares in the conversion and (iii) none of the nine non-employee directors of
Community Savings could receive individually more than 5% of the shares issued
under the MRP, or 4,340 shares, assuming the issuance of 2,070,000 shares in the
conversion. If the MRP is submitted to and approved by First Community's
stockholders more than one year after consummation of the conversion, the
regulatory percentage limitations set forth above would not apply.
If the MRP is submitted to and approved by First Community's stockholders
within one year after the consummation of the conversion, the MRP will provide
that 20% of the shares granted will vest and become nonforfeitable on the first
anniversary of the date of the grant under the MRP, and 20% will vest and become
nonforfeitable on each subsequent anniversary date, so that the shares would be
completely vested at the end of five years after the date of grant. Grants of
First Community common stock under the MRP will immediately vest upon the
disability or death of a recipient. If the MRP is submitted to First Community's
stockholders and approved by them more than one year after the consummation of
the conversion, the MRP may provide that grants of First Community common stock
under the MRP will become vested on a different schedule and that grants would
be automatically vested upon retirement or upon a change in control of First
Community or Community Savings. In such event, it is expected that "change in
control" would have the same meaning as is set forth in the employment agreement
with W. R. Gilliam. See "- Employment Agreement."
After the grant of shares of First Community common stock under the MRP,
recipients will be entitled to vote all vested and unvested shares and receive
all dividends and other distributions with respect thereto. Until shares become
vested, the right to direct the voting of such shares and the right to receive
dividends thereon may not be sold, assigned, transferred, exchanged, pledged or
otherwise encumbered. If the recipient of shares under the MRP terminates his
service to Community Savings prior to the time shares become vested (and such
shares are not automatically vested under the MRP), unvested shares would be
forfeited to the MRP and would be subject to future allocation to others. In
addition, the recipient would forfeit all dividends and other distributions with
respect to shares that did not become vested.
If the MRP is approved by the stockholders, Community Savings expects to
recognize a compensation expense for the MRP awards in the amount of the fair
market value of the common stock granted. The expense would be recognized pro
rata over the years during which shares vest. The recipients of stock grants
would be required to recognize ordinary income equal to the fair market value of
the stock. The stock grants would be made in recognition of the recipients' past
service to Community Savings and as an incentive for their continued
performance.
PROPOSED STOCK OPTION PLAN
The Boards of Directors of First Community and Community Savings intend to
adopt the Stock Option Plan, subject to approval of the stockholders of First
Community at a meeting to be held no sooner than six months following the
conversion.
Upon stockholder approval of the Stock Option Plan, the trustees under the
Stock Option Plan could acquire in the open market a number of shares of First
Community common stock equal to 10% of the sum of the number of shares issued in
the conversion and the number of shares contributed to the Foundation. Such
shares could be acquired prior to the time options vest or are exercised under
the Stock Option Plan, or they could be acquired after the options vest and upon
their exercise. In lieu of purchasing shares in the open market, First Community
could issue authorized but unissued shares of its common stock to satisfy
options. First Community will reserve for issuance the maximum number of shares
of its common stock to be issued under the Plan (less any shares acquired by the
Stock Option Plan in the open market). Assuming the issuance of between
1,530,000 and 2,070,000 shares in the conversion, an aggregate of between
163,000 and 217,000 shares of
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common stock would be reserved for issuance and/or purchased in the open market
to be issued upon the exercise of options granted under the Stock Option Plan.
Assuming the Stock Option Plan is approved by First Community's
stockholders, the Stock Option Plan would be administered by a committee of
First Community's Board of Directors. Options granted under the Stock Option
Plan will have an option exercise price of not less than the fair market value
of the common stock on the date the options are granted. Options granted under
the Stock Option Plan will have a term of ten years, will not be transferable
except upon death and will continue to be exercisable upon retirement, death or
disability.
If the Stock Option Plan is submitted to and approved by First
Community's stockholders within one year after consummation of the conversion,
options granted under the Stock Option Plan will have a vesting schedule which
will provide that 20% of the options granted would vest and become
nonforfeitable on the first anniversary of the date of the option grant and 20%
will vest and become nonforfeitable on each subsequent anniversary date, so that
the options would be completely vested at the end of five years after the date
of the option grant. Options will become 100% vested upon death or disability.
If the Stock Option Plan is submitted to and approved by First Community's
stockholders more than one year after the conversion, a different vesting
schedule may be provided and the Stock Option Plan may provide that options will
become automatically vested upon retirement or upon a change in control of First
Community or Community Savings. In such event, it is expected that "change in
control" would have the same meaning as is set forth in the employment agreement
with W. R. Gilliam. See "- Employment Agreement."
Under applicable regulations, if the proposed Stock Option Plan is
submitted to and approved by First Community's stockholders within one year
after the conversion, (i) no employee of Community Savings could receive more
than 25% of the options issued under the Stock Option Plan, or options to
purchase 54,250 shares, assuming the issuance of 2,070,000 shares in the
conversion, (ii) the nine non-employee directors of Community Savings could
receive not more than 30% of the options issued under the Stock Option Plan, or
options to purchase 65,100 shares, assuming the issuance of 2,070,000 shares in
the conversion, and (iii) none of the nine non-employee directors of Community
Savings could receive individually more than 5% of the options issued under the
Stock Option Plan, or options to purchase 10,850 shares, assuming the issuance
of 2,070,000 shares in the conversion. If the Stock Option Plan is submitted to
and approved by First Community's stockholders more than one year after
consummation of the conversion, the regulatory percentage limitations set forth
above would not apply.
Options granted to employees under the Stock Option Plan may be
"incentive stock options" which are designed to result in beneficial tax
treatment to the employee but no tax deduction to First Community or Community
Savings. The holder of an incentive stock option generally is not taxed for
federal income tax purposes on either the grant or the exercise of the option.
However, the optionee must include in his or her federal alternative minimum tax
income any excess (the "Bargain Element") of the acquired common stock's fair
market value at the time of exercise over the exercise price paid by the
optionee. Furthermore, if the optionee sells, exchanges, gives or otherwise
disposes of such common stock (other than in certain types of transactions)
either within two years after the option was granted or within one year after
the option was exercised (an "Early Disposition"), the optionee generally must
recognize the Bargain Element as compensation income for regular federal income
tax purposes. Any gain realized on the disposition in excess of the Bargain
Element is subject to recognition under the usual rules applying to dispositions
of property. If a taxable sale or exchange is made after such holding periods
are satisfied, the difference between the exercise price and the amount realized
upon the disposition of the common stock generally will constitute a capital
gain or loss for tax purposes. If an optionee exercises an incentive stock
option and delivers shares of common stock as payment for part or all of the
exercise price of the stock purchased ("Payment Stock"), no gain or loss
generally will be recognized with respect to the Payment Stock; provided,
however, if the Payment Stock was acquired pursuant to the exercise of an
incentive stock option, the optionee will be subject to recognizing as
compensation income the Bargain Element on the Payment Stock as an Early
Disposition if the exchange for the new shares occurs prior to the expiration of
the holding periods for the Payment
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Stock. First Community generally would not recognize gain or loss or be
entitled to a deduction upon either the grant of an incentive stock option or
the optionee's exercise of an incentive stock option. However, if there is an
Early Disposition, First Community generally would be entitled to deduct the
Bargain Element as compensation paid the optionee.
Options granted to directors under the Stock Option Plan would be
"non-qualified stock options." In general, the holder of a non-qualified stock
option will recognize compensation income equal to the amount by which the fair
market value of the common stock received on the date of exercise exceeds the
sum of the exercise price and any amount paid for the non-qualified stock
option. If the optionee elects to pay the exercise price in whole or in part
with First Community common stock, the optionee generally will not recognize any
gain or loss on the common stock surrendered in payment of the exercise price.
First Community would not recognize any income or be entitled to claim any
deduction upon the grant of a non-qualified stock option. At the time the
optionee is required to recognize compensation income upon the exercise of the
non-qualified stock option, First Community would recognize a compensation
expense and be entitled to claim a deduction in the amount equal to the
optionee's compensation income.
In December, 1998, the Financial Accounting Standards Board (the
"FASB") announced that it had reached tentative conclusions on its project
addressing certain long-standing practice issues under Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. The
objective of the project was to issue a narrow FASB interpretation that provides
accounting guidance on certain issues related to implementing and interpreting
APB 25. The tentative conclusions reached by the FASB will cover events that
occur after December 15, 1998. Among the conclusions reached was a
determination that directors were no longer considered to be employees under the
provisions of APB 25. Therefore, any options granted to directors would have to
be accounted for under the provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Generally, such provisions would result in a charge
to earnings in the periods that options granted to directors vest, measured by
the excess of the fair market value of the option, determined using a valuation
method such as Black-Scholes, over the exercise price. If the interpretation is
issued as presently drafted, and options are granted to directors, First
Community may have to record an as yet undeterminable amount of compensation
expense.
It is expected that the Stock Option Plan will provide that after an
option has been granted, the optionee will be entitled to direct the trustees
(three directors of Community Savings) as to the voting of all shares of common
stock held by the trustees to satisfy vested and unvested options which have
been granted to the optionee. In the event a tender offer is made for shares
held by the trustees to satisfy vested and unvested options granted to an
optionee, the optionee will be able to instruct the trustees' response. Any
shares held by the trustees to satisfy options not yet granted shall be voted or
tendered by the trustees in their discretion.
It is expected that the Stock Option Plan will provide that any cash
dividends or other distributions paid or made with respect to shares of common
stock held by the trustees in trust under the Stock Option Plan with respect to
forfeited options and options not yet granted, plus earnings on such amounts,
less amounts retained by the trustees to pay the expenses of such trust, will be
paid by the trustees to First Community.
If the Stock Option Plan is approved by First Community's
stockholders, the options granted to employees and directors pursuant to the
Stock Option Plan would be issued in recognition of the recipients' past service
to Community Savings and as an incentive for their continued performance. No
cash consideration will be paid for the options.
CERTAIN INDEBTEDNESS AND TRANSACTIONS OF MANAGEMENT
Community Savings makes loans to its employees, including its
executive officers and directors, in the ordinary course of its business.
Community Savings has adopted a policy which sets forth the requirements
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applicable to such loans. These loans are made using the same credit and
underwriting standards as are applicable to the general public, and such loans
do not involve more than the normal risk of collectibility or present any other
unfavorable features. Pursuant to its employee loan policy, directors and
employees are eligible for reduced interest rates and reduced loan fees on
certain types of loans.
Set forth is a table describing the loans or series of loans Community
Savings has made to the directors and executive officers and members of their
immediate families since September 30, 1996 which exceed $60,000 in the
aggregate.
<TABLE>
<CAPTION>
ORIGINAL LOAN BALANCE OUTSTANDING AT
BORROWER TYPE OF LOAN AMOUNT SEPTEMBER 30, 1998 APPLICABLE REDUCTION
<S> <C> <C> <C> <C>
Joseph C. Canada Mortgage $ 200,000 $199,073 Waiver of fee
Joseph C. Canada Home equity credit line $50,000/1/ $ 35 Interest rate reduction
Joseph C. Canada Overdraft protection $ 1,000/1/ 0 Interest rate reduction
Joseph C. Canada Overdraft protection $ 1,000/1/ 0 Interest rate reduction
Larry H. Hall Mortgage $ 212,000 $208,325 None
W. Joseph Rich Mortgage $ 100,000 $ 95,791 Fee reduction
John F. Wellons/2/ Mortgage $ 35,000 $ 34,781 None
John F. Wellons/2/ Equity Line $ 50,000 $ 8,520 None
William and
Kathy G. Tucker/2/ Mortgage $ 120,000 $118,751 None
</TABLE>
1 Represents the maximum limit of available credit under the line. The full
amount has not been drawn.
2 Son of director Herbert N. Wellons.
3 Kathy G. Tucker is daughter of director Julian P. Griffin.
DESCRIPTION OF CAPITAL STOCK
FIRST COMMUNITY
First Community is authorized to issue 20,000,000 shares of common stock
and 5,000,000 shares of preferred stock. Neither the authorized common stock
nor the authorized preferred stock has any par value.
Common Stock. First Community's common stock will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other governmental entity. Upon payment of the
purchase price for the common stock, all such stock will be duly authorized,
validly issued, fully paid, and nonassessable.
Dividends. The holders of First Community's common stock will be entitled
to receive and share ratably in such dividends on the common stock as may be
declared by the Board of Directors of First Community out of funds legally
available therefor, subject to applicable statutory and regulatory restrictions.
See "Supervision and Regulation - Regulation of First Community - Dividend and
Repurchase Limitations." The ability of First Community to pay dividends may be
dependent on the receipt of dividends from Community
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Savings. See "Dividend Policy," "Supervision and Regulation - Regulation of
Community Savings -Restrictions on Dividends and Other Capital Distributions,"
and "Taxation."
Stock Repurchases. The shares of First Community common stock do not have
any redemption provisions. Stock repurchases are subject to North Carolina
corporate laws regarding capital distributions and are also subject to
regulations of the Federal Reserve. See "Supervision and Regulation -
Regulation of First Community - Dividend and Repurchase Limitations."
Voting Rights. Upon conversion, the holders of First Community common
stock, as the only class of capital stock of First Community then outstanding,
will possess exclusive voting rights with respect to First Community. Such
holders will have the right to elect First Community's Board of Directors and to
act on such other matters as are required to be presented to stockholders under
North Carolina law or as are otherwise presented to them. Each holder of common
stock will be entitled to one vote per share. The holders of common stock will
have no right to vote their shares cumulatively in the election of directors.
As a result, the holders of a majority of the shares of common stock will have
the ability to elect all of the directors on First Community's Board of
Directors.
Liquidation Rights. In the event of a liquidation, dissolution or winding
up of First Community, the holders of First Community common stock would be
entitled to ratably receive, after payment of or making of adequate provisions
for all debts and liabilities of First Community and after the rights, if any,
of preferred stockholders of First Community, all remaining assets of First
Community available for distribution.
Preemptive Rights. Holders of the First Community common stock will not be
entitled to preemptive rights with respect to any shares which may be issued by
First Community.
Shares Owned by Directors and Executive Officers. All shares of common
stock issued in the conversion to directors and executive officers of First
Community and Community Savings will contain a restriction providing that such
shares may not be sold without the written permission of the Administrator for a
period of one year following the date of purchase, except in the event of death
of the director or the executive officer.
PREFERRED STOCK. None of the 5,000,000 shares of First Community's
authorized preferred stock have been issued, and none will be issued in the
conversion. Such stock may be issued in one or more series with such rights,
preferences and designations as First Community's Board of Directors may from
time to time determine subject to applicable law and regulations. If and when
such shares are issued, holders of such shares may have certain preferences,
powers and rights (including voting rights) senior to the rights of the holders
of First Community's common stock. The Board of Directors can (without
stockholder approval) issue preferred stock with voting and conversion rights
which could, among other things, adversely affect the voting power of the
holders of the common stock and assist management in impeding an unfriendly
takeover or attempted change in control of First Community that some
stockholders may consider to be in their best interests but to which management
is opposed. See "Anti -Takeover Provisions Affecting First Community and
Community Savings -First Community - Restrictions in Articles of Incorporation
and Bylaws." First Community has no current plans to issue preferred
stock.
RESTRICTIONS ON ACQUISITION. Acquisitions of First Community and
acquisitions of the capital stock of First Community are restricted by
provisions in the articles of incorporation and bylaws of First Community and by
various federal and state laws and regulations. See "Anti-takeover Provisions
Affecting First Community and Community Savings - First Community - Restrictions
in Articles of Incorporation and Bylaws" and "- Regulatory Restrictions."
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COMMUNITY SAVINGS
COMMON STOCK. After consummation of the conversion, Community Savings will
be authorized to issue 100,000 shares of common stock, no par value ("Community
Savings Common Stock"). The Community Savings common stock will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other governmental entity.
DIVIDENDS. The payment of dividends by Community Savings is subject to
limitations which are imposed by North Carolina law and regulations. See
"Dividend Policy" and "Supervision and Regulation - Regulation of Community
Savings - Restrictions on Dividends and Other Capital Distributions." In
addition, federal income tax law considerations may affect the ability of
Community Savings to pay dividends and make other capital distributions. See
"Taxation." Upon conversion, First Community, as the holder of all outstanding
Community Savings common stock, will be entitled to receive such dividends on
the Community Savings common stock as may be declared by the Board of Directors
of Community Savings out of funds legally available therefor, subject to
applicable statutory and regulatory restrictions.
VOTING RIGHTS. As a mutual North Carolina-chartered savings bank,
Community Savings currently has no stockholders, and voting rights in Community
Savings are currently held by Community Savings' members (depositors and
borrowers). Members elect Community Savings' Board of Directors and vote on
such other matters as are required to be presented to them under North Carolina
law.
Upon conversion, First Community, as sole stockholder of Community Savings,
will possess the exclusive voting rights with respect to the Community Savings
common stock, will elect Community Savings' Board of Directors and will act on
such other matters as are required to be presented to stockholders under North
Carolina law or as are otherwise presented to stockholders by Community Savings'
Board of Directors. The holders of Community Savings common stock will have no
right to vote their shares cumulatively in the election of directors of
Community Savings.
LIQUIDATION RIGHTS. After the conversion, in the event of any liquidation,
dissolution or winding up of Community Savings, First Community, as holder of
all of Community Savings' outstanding capital stock, would be entitled to
receive all remaining assets of Community Savings available for distribution,
after payment of or making of adequate provisions for, all debts and liabilities
of Community Savings (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the liquidation account
established in connection with the conversion to Eligible Account Holders and
Supplemental Eligible Account Holders. See "The Conversion - Effects of
Conversion - Liquidation Rights."
PREEMPTIVE RIGHTS. Holders of the Community Savings common stock will not
be entitled to preemptive rights with respect to any shares which may be issued
by Community Savings.
RESTRICTIONS ON ACQUISITION. Acquisitions of Community Savings and
acquisitions of its capital stock are restricted by various federal and state
laws and regulations. See "Anti-takeover Provisions Affecting First Community
and Community Savings - Community Savings."
ANTI-TAKEOVER PROVISIONS AFFECTING FIRST COMMUNITY AND COMMUNITY SAVINGS
FIRST COMMUNITY
RESTRICTIONS IN ARTICLES OF INCORPORATION AND BYLAWS. The articles of
incorporation and bylaws of First Community contain certain provisions that are
intended to encourage a potential acquiror to negotiate any proposed acquisition
of First Community directly with First Community's Board of Directors. An
unsolicited
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non-negotiated takeover proposal can seriously disrupt the business
and management of a corporation and cause great expense. Accordingly, the Board
of Directors believes it is in the best interests of First Community and its
stockholders to encourage potential acquirors to negotiate directly with
management. The Board of Directors believes that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is
also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or transaction at prices reflective of the true
value of the company and that otherwise is in the best interests of all
stockholders.
However, these provisions may have the effect of discouraging offers to
purchase First Community or its securities which are not approved by the Board
of Directors, but which certain of the company's stockholders may deem to be in
their best interests or pursuant to which stockholders would receive a
substantial premium for their shares over then current market prices.
Therefore, the existence of such anti-takeover provisions in fact may not always
be in the best interests of all shareholders. Stockholders who might desire to
participate in such a takeover not supported by management may not have an
opportunity to do so. Such provisions will also render the removal of the
current Board of Directors and management more difficult. Nevertheless, the
Boards of Directors of Community Savings and First Community believe these
provisions are in the best interests of the stockholders. The Boards believe
that such provisions will assist First Community's Board of Directors in
managing First Community's affairs in the manner they believe to be in the best
interests of stockholders generally. The Boards believe that a company's board
of directors is often best able in terms of knowledge regarding First
Community's business and prospects, as well as resources, to negotiate the best
transaction for its stockholders as a whole.
The following description of certain of the provisions of First Community's
articles of incorporation and bylaws is necessarily general and reference should
be made in each instance to such articles of incorporation and bylaws. See
"Additional Information" regarding how to obtain a copy of these documents.
Board of Directors. First Community's bylaws provide that the number of
directors shall not be less than five nor more than 15. The initial number of
directors is ten, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the company to gain majority representation on the Board of Directors
in a relatively short period of time. First Community believes these provisions
to be important to continuity in the composition and policies of the Board of
Directors.
The articles of incorporation provide that, at all times when the number of
directors is at least nine, there will be staggered elections of directors. As
a result, the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years each. This provision also has
the effect of making it more difficult for a person seeking to acquire control
of First Community to gain majority representation on the Board of Directors.
First Community's articles of incorporation and bylaws provide that
directors may be removed prior to the end of their term only for cause.
Cumulative Voting. The articles of incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of First Community's shares cannot be assured representation on the
Board of Directors, the absence of cumulative voting may discourage
accumulations of First Community's shares or proxy contests that would result in
changes in the company's management.
116
<PAGE>
The Board of Directors believes that (i) elimination of cumulative voting
will help to assure continuity and stability of management and policies; (ii)
directors should be elected by a majority of the stockholders to represent the
interests of the stockholders as a whole rather than be the special
representatives of particular minority interests; and (iii) efforts to elect
directors representing specific minority interests are potentially divisive and
could impair the operations of First Community.
Special Meetings. First Community's bylaws provide that special meetings
of stockholders may be called by the Chairman of the Board, the Chief Executive
Officer, the President, or by the Board of Directors. If a special meeting is
not called by such persons or entities, stockholder proposals cannot be
presented to the stockholders for action until the next annual meeting.
Capital Stock. First Community's articles of incorporation authorize the
issuance of 20,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The shares of common stock and preferred stock authorized in addition to
the number of shares of common stock to be issued pursuant to the conversion
were authorized to provide First Community's Board of Directors with flexibility
to issue additional shares, without further stockholder approval, for proper
corporate purposes, including financing, acquisitions, stock dividends, stock
splits, director and employee stock options, grants of restricted stock to
directors and certain employees and other appropriate purposes. However,
issuance of additional authorized shares may also have the effect of impeding or
deterring future attempts to gain control of First Community.
The Board of Directors also has sole authority to determine the terms of
any one or more series of preferred stock, including voting rights, conversion
rates, dividend rights, and liquidation preferences, which could adversely
affect the voting power of the holders of the common stock and discourage an
attempt to acquire control of First Community. The Board of Directors does not
intend to issue any preferred stock, except on terms which it deems to be in the
best interests of First Community and its stockholders. However, the Board of
Directors has the power, to the extent consistent with its fiduciary duties, to
issue preferred stock to persons friendly to management or otherwise in order to
impede attempts by third parties to acquire voting control of First Community
and to impede other transactions not favored by management. The Board of
Directors currently has no plans for the issuance of additional shares of common
stock (except for such shares as may be necessary to fund the Foundation, the
MRP and the Stock Option Plan) or of shares of preferred stock.
Director Nominations. First Community's bylaws require a stockholder who
intends to nominate a candidate for election to the Board of Directors at a
stockholders' meeting to give written notice to First Community's Secretary at
least 50 days (but not more than 90 days) in advance of the date of the meeting
at which such nominations will be made. The nomination notice is also required
to include specified information concerning the nominee and the proposing
stockholder. First Community's Board of Directors believes that it is in the
best interests of the company and its stockholders to provide sufficient time
for the Board of Directors to study all nominations and to determine whether to
recommend to the stockholders that such nominees be considered.
Supermajority Voting Provisions. First Community's articles of
incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 75% of the number of the Continuing Directors (as defined in
the articles of incorporation) on First Community's Board of Directors.
"Continuing Directors" generally includes all members of the Board of Directors
who are not affiliated with any individual, partnership, trust or other person
or entity (or the affiliates and associates of such person or entity) which is a
beneficial owner of 10% or more of the voting shares of First Community at the
time it makes an offer with respect to a merger, consolidation or other business
combination. This provision could tend to make the acquisition of First
Community more difficult to accomplish without the cooperation or favorable
recommendation of the company's Board of Directors.
117
<PAGE>
ANTI-TAKEOVER EFFECT OF EMPLOYMENT AGREEMENT, SPECIAL TERMINATION
AGREEMENTS AND BENEFIT PLANS. The existence of the ESOP may tend to discourage
takeover attempts because employees participating under the ESOP and the
trustees of the ESOP will effectively control the voting of the large block of
shares held by the ESOP. See "Management of Community Savings - Employee Stock
Ownership Plan." Also, if approved by First Community's stockholders at a
meeting following the conversion, the MRP and the Stock Option Plan will provide
for the ownership of additional shares of common stock by the employees and the
directors of Community Savings and for voting control by directors and certain
employees over shares held by the MRP and Stock Option Plan which are
attributable to grants made to them under such plans even though the grants are
not yet vested. See "Management of Community Savings - Proposed Management
Recognition Plan" and "- Proposed Stock Option Plan." In addition, the
Foundation is expected to own 100,000 shares of First Community's common stock.
The affairs of the Foundation, including the exercise of voting rights in the
common stock, will be directed by its board of directors. The initial board of
directors of the Foundation will be elected by the Board of Directors of
Community Savings.
If (i) the Stock Option Plan is approved by First Community's stockholders
within one year after the conversion and all of the stock options which could be
granted to directors and executive officers under the Stock Option Plan are
granted and exercised and all the shares for such options are acquired by the
Stock Option Plan in the open market, (ii) the MRP is approved by First
Community's stockholders within one year after the conversion, all of the MRP
shares which could be granted to directors and executive officers are granted
and issued and all such shares are acquired in the open market, (iii) the ESOP
acquires 8% of the sum of the shares issued in the conversion and the shares
contributed to the Foundation and none of such shares are allocated and (iv)
First Community did not issue any additional shares of its common stock, the
shares held by directors and executive officers and their associates as a group,
including (a) shares purchased outright in the conversion, (b) shares purchased
by the ESOP, (c) shares purchased pursuant to the Stock Option Plan, (d) shares
granted under the MRP and (e) shares issued to the Foundation, would give such
persons effective control over as much as 41.5% or 36.7%, at the minimum and
maximum of the valuation range, respectively, of First Community's common stock
issued and outstanding.
The existence of the employment agreement and special termination
agreements with employees could make a business combination with Community
Savings more costly and could discourage such transactions. See "Management of
Community Savings - Employment Agreement" and "- Special Termination
Agreements."
REGULATORY RESTRICTIONS. Applicable North Carolina regulations provide
that for a period of three years following the conversion, the prior written
approval of the Administrator will be required before any person may, directly
or indirectly, acquire beneficial ownership of or make any offer to acquire any
stock or other equity security of First Community if, after the acquisition,
such person would be the beneficial owner of more than 10% of such class of
stock or other class of equity security of First Community. If any person were
to so acquire the beneficial ownership of more than 10% of any class of any
equity security without prior written approval, the securities beneficially
owned in excess of 10% would not be counted as shares entitled to vote and would
not be voted or counted as voting shares in connection with any matter submitted
to stockholders for a vote. Approval is not required for (i) any offer with a
view toward public resale made exclusively to First Community or its
underwriters or the selling group acting on its behalf or (ii) any offer to
acquire or acquisition of beneficial ownership of more than 10% of the common
stock of First Community by a corporation whose ownership is or will be
substantially the same as the ownership of First Community, provided that the
offer or acquisition is made more than one year following the consummation of
the conversion.
The regulations provide that within one year following the conversion, the
Administrator would approve the acquisition of more than 10% of beneficial
ownership only to protect the safety and soundness of the institution. During
the second and third years after the conversion, the Administrator may approve
such an acquisition upon a finding that (i) the acquisition is necessary to
protect the safety and soundness of First Community and Community Savings or the
Board of Directors of First Community and Community Savings support the
118
<PAGE>
acquisition and (ii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to First Community and Community Savings and the public
interests will not be adversely affected.
The Change in Bank Control Act, together with North Carolina regulations,
require that the consent of the Administrator and Federal Reserve be obtained
prior to any person or company acquiring "control" of a North Carolina-chartered
savings bank or a North Carolina-chartered savings bank holding company. Upon
acquiring control, such acquiror will be deemed to be a bank holding company.
Control is conclusively presumed to exist if, among other things, an individual
or company acquires the power, directly or indirectly, to direct the management
or policies of First Community or Community Savings or to vote 25% or more of
any class of voting stock. Control is rebuttably presumed to exist under the
Change in Bank Control Act if, among other things, a person acquires more than
10% of any class of voting stock, and the issuer's securities are registered
under Section 12 of the Exchange Act or the person would be the single largest
stockholder. Restrictions applicable to the operations of bank holding
companies and conditions imposed by the Federal Reserve in connection with its
approval of such acquisitions may deter potential acquirors from seeking to
obtain control of First Community. See "Supervision and Regulation - Regulation
of First Community."
COMMUNITY SAVINGS
Upon consummation of the conversion, Community Savings will become a
wholly-owned subsidiary of First Community, and, consequently, restrictions on
the acquisition of Community Savings would have a more limited effect than if
Community Savings' common stock were held directly by the stockholders
purchasing in the conversion. However, restrictions on the acquisition of
Community Savings may discourage takeover attempts of First Community in order
to gain immediate control of Community Savings.
REGULATORY RESTRICTIONS. The Administrator and the Federal Reserve have
conditionally approved First Community's acquisition of all of the stock of
Community Savings issued in the conversion. For three years following
completion of a conversion, North Carolina conversion regulations require the
prior written approval of the Administrator before any person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of an equity security of a converting state savings bank such as
Community Savings. If any person were to so acquire the beneficial ownership of
more than 10% of any class of any equity security without prior written
approval, the securities beneficially owned in excess of 10% would not be
counted as shares entitled to vote and would not be voted or counted as voting
shares in connection with any matter submitted to stockholders for a vote.
Approval is not required for (i) any offer with a view toward public resale made
exclusively to Community Savings or its underwriters or the selling group acting
on its behalf or (ii) any offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of Community Savings by a
corporation whose ownership is or will be substantially the same as the
ownership of Community Savings, provided that the offer or acquisition is made
more than one year following the consummation of the conversion. Similarly,
Federal Reserve approval is required before any person or entity may acquire
"control" of Community Savings. See "- First Community - Regulatory
Restrictions."
BOARD OF DIRECTORS. The amended certificate of incorporation of Community
Savings upon consummation of the conversion will provide that the number of
directors may be no less than five. The initial number of directors will be
ten, but such number may be changed by resolution of the Board of Directors.
This provision has the effect of enabling the Board of Directors to elect
directors friendly to management in the event of a non-negotiated takeover
attempt. Community Savings' bylaws also provide for staggered elections of
directors when the total number of directors is at least nine. These provisions
are designed to make it more difficult for a person seeking to acquire control
of Community Savings to gain majority representation on the Board of Directors
in a relatively short period of time. Community Savings believes these
provisions to be important to continuity in the composition and policies of its
Board of Directors.
119
<PAGE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
AND BYLAWS OF FIRST COMMUNITY
LIMITATIONS OF LIABILITY
First Community's articles of incorporation provide that the directors
shall be released from personal liability to First Community or its stockholders
for money damages for breach of any duty as a director to the fullest extent
permitted by North Carolina law. The North Carolina Business Corporation Act
authorizes such provisions, but provides that they are not effective with
respect to (i) acts or omissions of a director that the director knew or
believed at the time were clearly in conflict with the best interests of the
corporation, (ii) transactions from which the director derived an improper
personal benefit, (iii) liability for certain unlawful distributions of
corporation assets, and (iv) acts or omissions that occurred prior to the
effectiveness of the provisions.
INDEMNIFICATION
First Community's bylaws provide that any person who serves as a director,
officer, employee or agent of First Community shall have a right to be
indemnified by First Community to the fullest extent allowed by applicable law
for liability or litigation expense arising out of activities in such
capacities. Both the bylaws and the North Carolina Business Corporation Act
provide that there shall be no indemnification for liability or expense arising
out of activities which were known or believed by such persons at the time of
such activities to be clearly in conflict with the best interests of First
Community.
DISCLOSURE OF SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of First
Community pursuant to the provisions described above, or otherwise, First
Community has been advised 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. In the event that a claim
for indemnification against such liabilities (other than the payment by First
Community of expenses incurred or paid by a director, officer or controlling
person of First Community in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, First Community will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
120
<PAGE>
LEGAL OPINIONS
The validity of the issuance of the common stock in the conversion has been
passed upon for First Community by its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., Greensboro, North Carolina, which firm has
also rendered its opinion to Community Savings concerning certain federal and
North Carolina income tax aspects of the conversion as described herein under
"The Conversion - Income Tax Consequences." Certain legal matters will be
passed upon for Trident Securities by Michael Best & Friedrich LLP, Milwaukee,
Wisconsin.
EXPERTS
The financial statements of Community Savings as of December 31, 1997 and
December 31, 1996 and for each of the years in the three-year period ended
December 31, 1997 included herein have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Ferguson has consented to being named as an expert herein and to the
summary herein of its appraisal report as to the estimated pro forma market
value of Community Savings and First Community and its opinion with respect to
the value of subscription rights.
REGISTRATION REQUIREMENTS
First Community will register its common stock with the SEC pursuant to
Section 12 of the Exchange Act in connection with the conversion and will not
deregister the common stock for a period of three years following the completion
of the conversion. Upon such registration, the proxy and tender offer rules,
insider trading reporting requirements and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable to First
Community.
ADDITIONAL INFORMATION
First Community has filed a registration statement with the SEC on Form SB-
2 under the Securities Act with respect to the common stock offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail
from the SEC at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including First Community; the address is (http://www.sec.gov.). The
statements contained in this prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
121
<PAGE>
Community Savings has filed an Application to Convert a Mutual Savings Bank
to a Stock Owned Savings Bank with the Administrator. Pursuant to the North
Carolina conversion regulations, this prospectus omits certain information
contained in such Application. The Application, which contains a copy of
Ferguson's appraisal, may be inspected at the office of the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, Tower
Building, Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609.
Copies of the Plan of Conversion, which includes a copy of Community
Savings' proposed amended certificate of incorporation and stock bylaws, and
copies of First Community's articles of incorporation and bylaws are available
for inspection at each office of Community Savings and may be obtained by
writing to Community Savings at Post Office Box 1837, 708 South Church Street,
Burlington, North Carolina 27216-1837; Attention: W. R. Gilliam, President, or
by telephoning Community Savings at (336) 227-3631. A copy of Ferguson's
independent appraisal is also available for inspection at the Stock Information
Center.
122
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Statements of Financial Condition at December 31, 1997 and 1996 F-2
Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 F-3
Statements of Retained Income for the Years Ended December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-5
Notes to Financial Statements F-7
Condensed Statements of Financial Condition at F-23
September 30, 1998 (unaudited) and December 31, 1997
Condensed Statements of Operations for the Nine F-24
Months Ended September 30, 1998 and 1997 (unaudited)
Condensed Statements of Cash Flows for the Nine F-25
Months Ended September 30, 1998 and 1997 (unaudited)
Notes to Unaudited Financial Statements F-26
</TABLE>
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is included in the
financial statements of Community Savings or related notes. No financial
statements are provided for First Community since it was not in operation for
any of the periods presented.
123
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Community Savings Bank of Burlington, SSB
Burlington, North Carolina
We have audited the accompanying statements of financial condition of Community
Savings Bank of Burlington, SSB as of December 31, 1997 and 1996 and the related
statements of operations, retained income, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Community Savings Bank of
Burlington, SSB at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
June 5, 1998
F-1
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,064,469 $ 6,127,014
Interest-bearing deposits in financial institutions 2,506,258 100,000
Federal funds sold 300,000 350,000
Investment securities:
Available for sale 9,081,606 6,991,044
Held to maturity (estimated market value of $13,409,400 and $25,384,100 at
December 31, 1997 and 1996, respectively) 13,396,826 25,402,698
Mortgage-backed securities:
Available for sale 9,496,528 12,486,398
Held to maturity (estimated market value of $8,885,600 and $11,593,700 at
December 31, 1997 and 1996, respectively) 8,650,469 11,314,259
Loans receivable, net:
Held for sale 287,046 2,256,262
Held for investment 114,545,660 85,871,102
Premises and equipment, net 1,940,856 1,545,483
Income taxes receivable 103,634 53,796
Deferred income taxes 1,130,258 880,907
Federal Home Loan Bank of Atlanta stock, at cost which approximates market 1,369,000 1,540,900
Accrued interest receivable 1,041,764 1,068,367
Prepaid expenses and other assets 902,668 763,095
------------- -------------
Total assets $ 167,817,042 $ 156,751,325
------------- -------------
LIABILITIES AND RETAINED INCOME
Deposits:
Noninterest-bearing demand $ 715,834 $ 744,132
Interest-bearing demand 14,711,789 13,967,814
Savings 19,069,492 21,050,730
Large denomination certificates of deposit 15,823,433 11,718,072
Other time deposits 84,376,650 75,043,550
------------- -------------
Total deposits 134,697,198 122,524,298
------------- -------------
Borrowed money 6,700,000 9,000,000
Accrued interest payable 97,487 87,851
Advance payments by borrowers for property taxes and insurance 239,841 210,222
Other liabilities 3,245,535 2,761,857
------------- -------------
Total liabilities 144,980,061 134,584,228
------------- -------------
Commitments and contingencies (Notes 7, 9 and 13)
Retained income:
Appropriated 2,735,920 2,735,920
Unappropriated 20,003,103 19,413,419
Unrealized gains on available for sale securities, net 97,958 17,758
------------- -------------
Total retained income 22,836,981 22,167,097
------------- -------------
Total liabilities and retained income $ 167,817,042 $ 156,751,325
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 8,014,788 $ 6,727,796 $ 5,937,974
Interest and dividends on investments 3,568,504 3,892,621 3,844,143
----------- ----------- -----------
Total interest income 11,583,292 10,620,417 9,782,117
----------- ----------- -----------
Interest expense:
Interest on deposits 6,280,159 5,921,312 5,722,005
Interest on borrowings 460,005 459,563 11,902
----------- ----------- -----------
Total interest expense 6,740,164 6,380,875 5,733,907
----------- ----------- -----------
Net interest income before provision for loan losses 4,843,128 4,239,542 4,048,210
Provision for loan losses 360,000 60,000 -
----------- ----------- -----------
Net interest income 4,483,128 4,179,542 4,048,210
----------- ----------- -----------
Other income:
Service charges on deposit accounts 69,300 58,481 57,521
Other fees and service charges 143,049 96,386 91,989
Loan servicing fees 60,915 69,451 73,460
Other 91,808 132,700 345,278
----------- ----------- -----------
Total other income 365,072 357,018 568,248
----------- ----------- -----------
General and administrative expenses:
Compensation and fringe benefits 2,492,858 1,891,704 2,061,316
Occupancy 190,476 204,460 169,156
Advertising 166,627 142,398 130,166
Data processing 120,078 125,363 109,676
Federal insurance premiums 78,727 970,776 274,351
Other 830,260 601,614 452,254
----------- ----------- -----------
Total general and administrative expenses 3,879,026 3,936,315 3,196,919
----------- ----------- -----------
Income before income taxes 969,174 600,245 1,419,539
Income taxes 379,490 201,270 510,822
----------- ----------- -----------
Net income $ 589,684 $ 398,975 $ 908,717
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COMUNITY SAVINGS BANK OF BURLINGTON, SSB
STATEMENTS OF RETAINED INCOME
YEAR ENDED DEEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS
(LOSSES) ON
AVAILABLE FOR
SALE
APPROPRIATED UNAPPROPRIATED SECURITIES TOTAL
---------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 2,735,920 $ 18,105,727 $ (211,595) $20,630,052
Change in net unrealized gains (losses),
net of income taxes - - 208,395 208,395
Net income - 908,717 - 908,717
---------------- ------------------- ---------------- ---------------
Balance at December 31, 1995 2,735,920 19,014,444 (3,200) 21,747,164
Change in net unrealized gains (losses),
net of income taxes - - 20,958 20,958
Net income - 398,975 - 398,975
---------------- ------------------- ---------------- ---------------
Balance at December 31, 1996 2,735,920 19,413,419 17,758 22,167,097
Change in net unrealized gains (losses),
net of income taxes - - 80,200 80,200
Net income - 589,684 - 589,684
---------------- ------------------- ---------------- ---------------
Balance at December 31, 1997 $ 2,735,920 $ 20,003,103 $ 97,958 $22,836,981
================ =================== ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income $ 589,684 $ 398,975 $ 908,717
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 360,000 60,000 -
Depreciation 242,575 94,489 92,772
Accretion of discounts on securities (212,345) (282,645) (450,319)
Provision for deferred income taxes (290,668) (165,301) (244,322)
Gain on sale of premises and equipment - (909) -
Loss (gain) on disposal of real estate acquired in
settlement of loans 8,292 (60,454) -
Net loss (gain) on sales of investment and
mortgage-backed securities 2,733 (8,925) 582
Originations of loans held for sale (415,200) (636,603) (61,600)
Proceeds from sale of loans held for sale 2,428,507 587,895 1,262,510
Change in valuation allowance for loans held for sale (48,241) 48,241 (291,105)
Net loss (gain) on sale of loans held for sale 4,150 (1,346) (2,212)
Other operating activities 335,328 161,358 491,043
------------- -------------- -------------
Net cash provided by operating activities 3,004,815 194,775 1,706,066
------------- -------------- -------------
Investing activities:
Purchases of investment securities available for sale (6,008,024) (14,850,615) (9,695,469)
Proceeds from sales of securities and mortgage-backed
securities available for sale 4,663,199 11,457,866 1,510,156
Proceeds from maturities of securities available for sale 1,000,000 - -
Purchases of investment securities held to maturity (924,612) (6,510,741) (5,999,703)
Proceeds from maturities of securities held to maturity 13,177,236 12,649,056 9,449,400
Proceeds from principal repayments of mortgage-backed
securities 3,992,300 6,626,479 4,106,732
Proceeds from redemption of FHLB stock 171,900 - -
Loan originations, net of principal repayments, of loans
held for investment (29,189,064) (10,622,268) (9,834,278)
Proceeds from disposal of real estate acquired in
settlement of loans 146,214 191,345 -
Purchases of premises and equipment (637,948) (573,202) (153,361)
Proceeds from sale of premises and equipment - 12,693 3,176
------------- -------------- -------------
Net cash used in investing activities (13,608,799) (1,619,387) (10,613,347)
------------- --------------- -------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Financing activities:
Net increase (decrease) in deposit accounts 12,172,900 3,616,868 (344,994)
Net change in escrow deposits 24,797 21,524 (12,689)
Proceeds from FHLB borrowings 2,000,000 1,500,000 11,000,000
Repayments of FHLB borrowings (4,300,000) (1,500,000) (2,000,000)
------------- ------------- -------------
Net cash provided by financing activities 9,897,697 3,638,392 8,642,317
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (706,287) 2,213,780 (264,964)
Cash and cash equivalents, beginning of year 6,577,014 4,363,234 4,628,198
------------- ------------- -------------
Cash and cash equivalents, end of year $ 5,870,727 $ 6,577,014 $ 4,363,234
============= ============= =============
Supplemental disclosures:
Cash paid for interest $ 6,730,526 $ 6,385,624 $ 5,721,405
Cash paid for income taxes $ 720,000 $ 280,000 $ 775,000
Real estate acquired through settlement of loans $ 154,506 $ 27,474 $ 103,417
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Community Savings Bank of Burlington, SSB (the "Bank"), is a North Carolina
chartered savings bank regulated by the Federal Deposit Insurance
Corporation and the North Carolina Savings Institutions Administrator.
The 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 and general commercial loans, as well as to provide
refinancing for loans secured by real estate. Substantially all of the
Bank's lending activity is with customers located in Alamance and
surrounding counties within North Carolina.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments in certain securities are classified into three categories and
accounted for as follows: (1) debt securities that the entity 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 retained income.
Premiums and discounts on debt securities are recognized in interest income
on the level interest yield method over the period to maturity.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of
the securities. Premiums and discounts are amortized using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Gains and losses on the sale of securities are determined by using the
specific identification method.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable held for investment are stated at the amount of unpaid
principal, reduced by an allowance for loan losses and net deferred
origination fees. Interest on loans is accrued based on the principal
amount outstanding and is recognized on a level yield method. The accrual
of interest is discontinued, and accrued but unpaid interest is reversed
when, in management's judgment, it is determined that the collectibility of
interest, but not necessarily principal, is doubtful. Generally, this
occurs when payment is delinquent in excess of ninety days.
Loan origination fees are deferred, as well as certain direct loan
origination costs. Such costs and fees are recognized as an adjustment to
yield over the contractual lives of the related loans utilizing the
interest method.
F-7
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Commitment fees to originate or purchase loans are deferred, and if the
commitment is exercised, recognized over the life of the loan as an
adjustment of yield. If the commitment expires unexercised, commitment fees
are recognized in income upon expiration of the commitment. Fees for
originating loans for other financial institutions are recognized as loan
fee income.
A loan is considered impaired, based on current information and events, if
it is probable that the Bank will be unable to collect the scheduled
payments of principal or 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 1996, and during the three years ended
December 31, 1997, there were no loans material to the financial statements
which were defined as 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.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions. While
management believes that it has established the allowance in accordance
with generally accepted accounting principles and has taken into account
the views of its regulators and the current economic environment, there can
be no assurance that in the future the Bank's regulators or its economic
environment will not require further increases in the allowance.
LOANS HELD FOR SALE
Loans originated and intended for sale are carried at the lower of cost or
aggregate estimated market value. Net unrealized losses are recognized in
a valuation allowance by charges to income. Gains and losses on sales of
whole or participating interests in real estate loans are recognized at the
time of sale and are determined by the difference between net sales
proceeds and the Bank's basis of the loans sold, adjusted for the
recognition of any servicing assets retained.
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 is 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.
F-8
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 principal outstanding,
except in the case of loans with scheduled amortization 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 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by straight-line
and accelerated methods based on estimated service lives of assets. Useful
lives range from 10 to 40 years for substantially all premises and from 3
to 20 years for equipment and fixtures.
REAL ESTATE OWNED
Assets acquired through loan foreclosure are recorded as real estate owned
("REO") at the lower of the estimated fair value of the property less
estimated costs to sell at the date of foreclosure or the carrying amount
of the loan plus unpaid accrued interest. The carrying amount is
subsequently reduced by additional allowances which are charged to earnings
if the estimated fair value declines below its initial value plus any
capitalized costs. Costs related to the improvement of the property are
capitalized, whereas costs related to holding the property are expensed.
INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank is required to invest in Federal Home Loan Bank of Atlanta (FHLB)
stock in the amount of at least 1% of its net home mortgage loans
receivable. At December 31, 1997 and 1996 the Bank owned 13,690 and
15,409 shares, respectively, of the FHLB's $100 par value capital stock.
As no ready market exists for this stock, and it has no quoted market
value, the stock is carried at cost.
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.
F-9
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits (with remaining
maturities of ninety days or less at time of purchase) at other financial
institutions and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
NEW ACCOUNTING PRONOUNCEMENTS
The Bank adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" on January 1, 1997.
The impact of adopting this statement was not material to the Bank's
financial statements.
The Bank will adopt 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 Bank will adopt 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.
USE OF 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.
F-10
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
Investment securities at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED GROSS UNREALIZED MARKET
---------------------
COST GAINS LOSSES VALUE
----------- ------- -------- ----------
<S> <C> <C> <C> <C>
1997:
Available for sale:
U.S. Treasury securities $ 4,013,097 $16,965 $ - $ 4,030,062
U.S. Government agency securities 4,989,735 47,409 - 5,037,144
Other equity securities 14,400 - - 14,400
----------- ------- -------- -----------
$ 9,017,232 $64,374 $ - $ 9,081,606
=========== ======= ======== ===========
Held to maturity:
U.S. Treasury securities $ 6,346,619 $ 5,792 $ (6,311) $ 6,346,100
U.S. Government agency securities 6,955,257 24,401 (11,758) 6,967,900
Municipal securities 94,950 450 - 95,400
----------- ------- -------- -----------
$13,396,826 $30,643 $(18,069) $13,409,400
=========== ======= ======== ===========
1996:
Available for sale:
U.S. Treasury securities $ 4,982,528 $ 744 $ (8,168) $ 4,975,104
U.S. Government agency securities 1,985,728 15,812 - 2,001,540
Other equity securities 14,400 - - 14,400
----------- ------- -------- -----------
$ 6,982,656 $16,556 $ (8,168) $ 6,991,044
=========== ======= ======== ===========
Held to maturity:
U.S. Treasury securities $15,248,525 $32,123 $(52,248) $15,228,400
U.S. Government agency securities 9,959,334 30,967 (31,001) 9,959,300
Municipal securities 194,839 1,561 - 196,400
----------- ------- -------- -----------
$25,402,698 $64,651 $(83,249) $25,384,100
=========== ======= ======== ===========
</TABLE>
Securities with a carrying value of $7,167,156 were sold during the year
ended December 31, 1997, resulting in gross realized gains of $12,024 and
gross realized losses of $882. Available for sale securities with a
carrying value of $1,548,594, were sold during the year ended December 31,
1996, resulting in gross realized gains of $52,782. Available for sale
securities with a carrying value of $1,510,738 were sold during the year
ended December 31, 1995, resulting in gross realized losses of $582.
Securities with a carrying value of $4,492,102 and $11,462,726 were pledged
as collateral at December 31, 1997 and 1996, respectively, to secure
advances with the FHLB. Securities with a carrying value of $506,296 and
$509,894 were pledged as collateral for treasury, tax and loan deposits at
December 31, 1997 and 1996, respectively.
F-11
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------------- ---------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 2,998,619 $ 3,004,340
Due after one year through five years 6,004,213 6,062,866
--------------- ---------------
$ 9,002,832 $ 9,067,206
--------------- ---------------
Held to maturity:
Due in one year or less $ 5,441,199 $ 5,433,775
Due after one year through five years 6,992,958 7,010,825
Due after ten years 962,669 964,800
--------------- ---------------
$ 13,396,826 13,409,400
--------------- ---------------
</TABLE>
F-12
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENT
- --------------------------------------------------------------------------------
3. MORTGAGE - BACKED SECURITIES
Mortgage-backed securities at December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED GROSS UNREALIZED MARKET
-------------------------------
COST GAINS LOSSES VALUE
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
1997:
Available for sale:
FHLMC participation certificates $ 54,888 $ - $ (6,068) $ 48,820
REMICs 9,357,592 90,116 - 9,447,708
------------- ------------ ----------- -----------
$ 9,412,480 $ 90,116 $ (6,068) $ 9,496,528
============= ============ =========== ===========
Held to maturity:
GNMA participation certificates $ 2,253,791 $ 144,909 $ - $ 2,398,700
FHLMC participation certificates 4,498,375 93,500 (2,975) 4,588,900
REMICs 1,898,303 4,604 (4,907) 1,898,000
------------- ------------ ----------- -----------
$ 8,650,469 $ 243,013 $ (7,882) $ 8,885,600
============= ============ =========== ===========
1996:
Available for sale:
GNMA participation certificates $ 2,206,172 $ - $ (16,684) $ 2,189,488
FHLMC participation certificates 92,670 - (7,851) 84,819
REMICs 10,169,038 43,053 - 10,212,091
------------- ------------ ----------- -----------
$12,467,880 $ 43,053 $ (24,535) $12,486,398
============= ============ =========== ===========
Held to maturity:
GNMA participation certificates $ 2,569,698 $ 139,402 $ - $ 2,709,100
FHLMC participation certificates 5,434,182 160,518 - 5,594,700
REMICs 3,310,379 6,181 (26,660) 3,289,900
------------- ------------ ----------- -----------
$11,314,259 $ 306,101 $ (26,660) $11,593,700
============= ============ =========== ===========
</TABLE>
Mortgage-backed securities with a carrying value of $1,688,011 were
sold during the year ended December 31, 1997, resulting in gross
realized losses of $13,875. Mortgage-backed and mortgage related
securities with a carrying value of $9,900,347 were sold during the
year ended December 31, 1996, resulting in gross realized losses of
$43,857.
Mortgage-backed securities held as available for sale, with a carrying
value of $5,831,553 and $2,189,488 were pledged as collateral for
advances from the FHLB at December 31, 1997 and 1996, respectively.
F-13
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of mortgage-backed
securities at December 31, 1997, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepay penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- --------------
<S> <C> <C>
Available for sale:
Due after ten years $ 9,412,480 $ 9,496,528
============= ==============
Held to maturity:
Due after five years through ten years $ 300,638 $ 310,400
Due after ten years 8,349,831 8,575,200
------------- --------------
$ 8,650,469 8,885,600
============= ==============
</TABLE>
4. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Mortgage loans $ 102,358,704 $ 88,783,038
Consumer loans 1,685,644 332,702
Commercial loans 11,990,967 1,458,068
--------------- --------------
Total 116,035,315 90,573,808
Less:
Loans in process (269,837) (3,847,905)
Allowance for loan losses (781,177) (491,658)
Deferred loan fees (438,641) (363,143)
--------------- --------------
Loans receivable, net $ 114,545,660 $ 85,871,102
=============== ==============
</TABLE>
At both December 31, 1997 and 1996, the Bank had entered into a
security agreement with a blanket floating lien pledging its eligible
real estate loans to secure actual or potential borrowings from the
FHLB (See Note 7).
F-14
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Bank originates mortgage loans for portfolio investment or sale in
the secondary market. During the period of origination, mortgage loans
are designated as either held for sale or investment purposes.
Transfers of loans held for sale to the investment portfolio are
recorded at the lower of cost or market value on the transfer date.
Loans receivable held for sale at December 31, 1997 and 1996 are fixed
rate mortgage loans with an estimated market value of approximately
$287,000 and $2,256,000, respectively.
Net losses on sales of loans receivable held for sale amounted to
$4,150 during year ended December 31, 1997. Net gains on sales of loans
receivable held for sale amounted to $1,346 and $2,212 for the years
ended December 31, 1996 and 1995, respectively.
The changes in the allowance for loan losses for the years ended
December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of period $ 491,658 $ 431,295 $ 430,683
Provisions for loan losses 360,000 60,000 -
Loans charged off (71,055) - (530)
Recoveries 574 363 1,142
----------- ------------ -----------
Balance at end of period $ 781,177 $ 491,658 $ 431,295
=========== ============ ===========
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 350,638 $ 350,638
Office buildings 1,969,576 1,390,346
Construction in progress - 238,381
Furniture, fixtures and equipment 1,274,686 991,330
Vehicles 32,730 32,226
------------ -------------
3,627,630 3,002,921
Less accumulated depreciation (1,686,774) (1,457,438)
------------ -------------
Total $ 1,940,856 $ 1,545,483
============ =============
</TABLE>
F-15
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS
The Bank has a retirement plan which covers substantially all of its
employees. The provisions of the plan provide for contributions of 10% of
the employee's salary by the Bank and 5% by the participant, subject to
certain eligibility requirements. The plan provides that the employees
contributions are 100% vested at all times and the Bank's contributions
vest 20% per year beginning with the third year of service, with 100%
vesting after seven years or attaining normal retirement age. Employer
contributions to the retirement plan for the years ended December 31, 1997,
1996 and 1995, were $88,719, $75,028, and $76,813, respectively. The assets
of the plan exceeded the vested benefits at December 31, 1997, the date of
the last accounting. The plan is funded currently by contributions from the
employer and employees, with any forfeitures used to reduce the required
contributions.
Directors participate in deferred compensation plans. These plans generally
provide for fixed payments for a period of ten years once directors reach
age seventy. The estimated amount of future payments to be made are
provided for according to the terms of the various contracts for each
participant. The Bank expensed $537,874, $389,949 and $651,390 related to
these plans during the years ended December 31, 1997, 1996 and 1995,
respectively. Included in other liabilities at December 31, 1997 and 1996
is $3,112,368 and $2,719,031, respectively, related to these plans. The
Bank purchases life insurance contracts on the participants, of which the
Bank is the owner and beneficiary. These contracts had a cash surrender
value, net of policy loans and accrued interest thereon, of $791,620 and
$599,410 at December 31, 1997 and 1996, respectively.
7. BORROWED MONEY
Borrowed money represents advances from the FHLB and totaled $6,700,000 and
$9,000,000 at December 31, 1997 and 1996, respectively. These advances had
a weighed average rate of 6.0% at both December 31, 1997 and 1996. Advances
outstanding at December 31, 1997 mature in September 1998.
At December 31, 1997 and 1996 the Bank had securities with a carrying value
of $10,323,655 and $13,652,214, respectively, and certain loans secured by
one to four family residential mortgages pledged against actual and
potential borrowings from the FHLB.
At December 31, 1997, the Bank had an additional $8,300,000 of credit
available with the FHLB.
F-16
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. DEPOSITS
The scheduled maturities of certificates of deposit of $100,000 or more as
of December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Twelve months or less $ 13,176,406 $5,261,120
Over twelve months 2,647,027 6,456,952
------------- -------------
$ 15,823,433 $ 11,718,072
------------- -------------
</TABLE>
At both December 31, 1997 and 1996, the Bank had cash and due from banks
approximating $1,200,000 pledged with the FHLB to secure certain Individual
Retirement Accounts.
9. INCOME TAXES
The components of income taxes for the years ended December 31, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current expense $ 670,158 $ 366,571 $ 755,144
Deferred benefit (290,668) (165,301) (244,322)
---------- ---------- ----------
Total $ 379,490 $ 201,270 $ 510,822
---------- ---------- ----------
</TABLE>
Reconciliation of expected income tax at the statutory Federal rate of 34%
with income tax expense for the years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Expected income tax expense $ 329,484 $ 204,083 $ 482,643
State income taxes net of federal income tax
benefit 7,638 - -
Non-deductible expenses 42,368 (2,813) 28,179
---------- --------- ---------
$ 379,490 $ 201,270 $ 510,822
---------- --------- ---------
</TABLE>
F-17
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The components of the net deferred income tax asset at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred income tax assets:
Deferred directors' fees $ 1,058,205 $ 924,470
Bad debt reserve 265,600 167,163
Deferred loan fees and costs 149,138 123,469
Depreciation and amortization - 11,622
------------- ------------
1,472,943 1,226,724
------------- ------------
Deferred income tax liabilities:
Depreciation and amortization 10,889 -
Unrealized gains on securities
available-for-sale 50,464 9,147
FHLB stock 221,340 221,340
Other 59,992 115,330
------------- ------------
342,685 345,817
------------- ------------
Net deferred income tax asset $ 1,130,258 $ 880,907
------------- ------------
</TABLE>
Retained income at December 31, 1997, includes approximately $5,232,000 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.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on pre-1987 bad debt reserves. However, the
Bank will be recapturing a portion of its post-1987 bad debt reserve
created by using the percentage of taxable income method. The Bank has
previously recorded deferred tax liabilities related to these excess
reserves. Additionally, the Bank is now required to use the experience
method.
10. REGULATORY CAPITAL REQUIREMENTS
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. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines. 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.
F-18
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum 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 Bank's category.
The Company's actual capital amounts and ratios as of December 31, 1997 and
1996 are presented in the table below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- --------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997:
----
Total Capital (to Risk Weighted
Weighted Assets) $ 23,520,200 28.9% $ 6,505,520 8.0% $ 8,131,900 10.0%
Tier I Capital (to Risk Weighted
Weighted Assets) 22,739,023 27.9% 3,252,760 4.0% 4,879,140 6.0%
Tier I Capital (to Average Assets) 22,739,023 13.7% 6,646,440 4.0% 8,308,050 5.0%
Total Tangible Capital (to Total
tangible Assets) 23,520,200 13.9% 8,429,911 5.0% 8,429,911 5.0%
1996:
----
Total Capital (to Risk Weighted
Weighted Assets) $ 22,569,942 35.6% $ 5,076,000 8.0% $ 6,345,000 10.0%
Tier I Capital (to Risk Weighted
Weighted Assets) 22,149,339 34.9% 2,538,000 4.0% 3,807,000 6.0%
Tier I Capital (to Average Assets) 22,149,339 14.2% 6,248,000 4.0% 7,810,000 5.0%
Total Tangible Capital (to Total
tangible Assets) 22,569,942 14.4% 7,853,596 5.0% 7,853,596 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, 1996. The
Bank's assessment amounted to approximately $800,000.
F-19
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $21,262,067 and $22,122,788 at
December 31, 1997 and 1996, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payment to investors and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes servicing
fees from investors and certain charges collected from borrowers, such as
late payment fees.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT
CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet.
The Bank exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. 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. Since
many unused lines of credit expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
A summary of the contractual amounts of the Bank's exposure to off-balance
sheet risk as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commitments to extend credit:
Commitments to originate loans $ 8,024,000 $ 6,540,000
Undrawn balances on lines of credit 4,677,000 4,317,000
------------- -------------
$ 12,701,000 10,857,000
============= =============
</TABLE>
F-20
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. FAIR VALUES 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 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 Bank taken as a whole.
Fair values have been estimated using data which management considered the
best available, and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies,
resulting fair values, and recorded carrying amounts at December 31, 1997
and 1996 were as follows:
Cash and cash equivalents are by definition short-term and do not present
any unanticipated credit issues. Therefore, the carrying amount is a
reasonable estimate of fair value. The estimated fair values of investment
securities and mortgage backed securities are provided in Notes 2 and 3 to
the financial statements. These are based on quoted market prices, when
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
The fair value of loans held for sale is estimated using quoted market
prices or market prices for similar instruments.
The fair value of the net loan portfolio has been estimated using the
present value of expected cash flows, discounted at an interest rate
adjusted for servicing costs and giving consideration to estimated
prepayment risk and credit loss factors. The fair value of the Bank's loan
portfolio at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Loans:
Carrying amount $114,545,660 $ 85,871,102
Estimated fair value 114,259,000 85,040,000
</TABLE>
The fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on demand),
totaling $34,497,115 and $35,762,676 at December 31, 1997 and 1996,
respectively. Under Statement 107, the fair value of deposits with no
stated maturity is equal to the amount payable on demand. Therefore, the
fair value estimates for these products do not reflect the benefits that
the Bank receives from the low-cost, long-term funding they provide. These
benefits are considered significant.
F-21
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The fair value of certificates of deposits and advances from the FHLB is
estimated by discounting the future cash flows using the current rates
offered for similar deposits and advances with the same remaining
maturities. The carrying value and estimated fair values of certificates of
deposit and FHLB advances at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Certificates of deposits:
Carrying amount $ 100,200,083 $ 86,761,622
Estimated fair value 100,381,000 86,996,900
Advances from the FHLB:
Carrying amount $ 6,700,000 $ 9,000,000
Estimated fair value 6,700,000 9,000,000
</TABLE>
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $12,701,000 and $10,857,000
at December 31, 1997 and 1996, respectively, which are primarily comprised
of unfunded loan commitments.
The Bank's remaining assets and liabilities are not considered financial
instruments.
F-22
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONDENSED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,963,865 $ 3,064,469
Interest-bearing deposits in financial institutions and federal
funds sold 1,802,817 2,806,258
Investment securities:
Available for sale 12,196,706 9,081,606
Held to maturity 3,501,309 13,396,826
Mortgage-backed securities:
Available for sale 10,006,460 9,496,528
Held to maturity 5,237,072 8,650,469
Loans receivable, net:
Held for sale - 287,046
Held for investment 127,403,457 114,545,660
Premises and equipment, net 2,271,451 1,940,856
Income taxes receivable 103,634 103,634
Deferred income taxes 1,451,243 1,130,258
Federal Home Loan Bank of Atlanta stock, at cost which
approximates market 1,369,000 1,369,000
Accrued interest receivable 1,044,241 1,041,764
Prepaid expenses and other assets 1,022,261 902,668
------------- -------------
Total assets $ 170,373,516 $ 167,817,042
============= =============
LIABILITIES AND RETAINED INCOME
Deposits:
Noninterest-bearing demand $ 344,848 $ 715,834
Interest-bearing demand 14,847,316 14,711,789
Savings 17,983,301 19,069,492
Time deposits 104,848,325 100,200,083
------------- -------------
Total deposits 138,023,790 134,697,198
------------- -------------
Borrowed money 5,000,000 6,700,000
Accrued interest payable 47,654 97,487
Other liabilities 4,034,788 3,485,376
------------- -------------
Total liabilities 147,106,232 144,980,061
Retained income 23,172,454 22,739,023
Accumulated other comprehensive income 94,830 97,958
------------- -------------
Total retained income 23,267,284 22,836,981
------------- -------------
Total liabilities and retained income $ 170,373,516 $ 167,817,042
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest and dividend income:
Loans receivable $7,430,441 $5,682,853
Securities 2,002,963 2,866,703
---------- ----------
Total interest and dividend income 9,433,404 8,549,556
---------- ----------
Interest expense:
Deposits 4,966,402 4,607,383
Borrowings 254,406 356,579
---------- ----------
Total interest expense 5,220,808 4,963,962
---------- ----------
Net interest income 4,212,596 3,585,594
Provision for loan losses 350,000 90,000
---------- ----------
Net interest income after provision for loan losses 3,862,596 3,495,594
Other operating income 376,787 274,058
Other operating expense:
Compensation and employee benefits 2,199,080 1,639,273
Occupancy and equipment 320,474 247,354
Data processing service 215,248 89,764
Other 863,818 463,898
---------- ----------
Total other operating expenses 3,598,620 2,440,289
---------- ----------
Income before income taxes 640,763 1,329,363
Income tax expense 207,332 474,341
---------- ----------
Net income $ 433,431 $ 855,022
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 433,431 $ 855,022
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 146,817 101,067
Provision for loan losses 350,000 90,000
Provision for deferred income taxes (320,424) (84,451)
Originations of loans held for sale - (195,000)
Proceeds from sale of loans held for sale 311,406 197,065
Net gain on sale of loans held for sale (24,360) (2,065)
Changes in operating assets and liabilities:
Accrued interest receivable (2,477) (133,390)
Prepaid expenses and other assets (119,593) (108,342)
Accrued interest payable and other liabilities 497,541 254,786
------------ -------------
Net cash provided by operating activities 1,272,341 974,692
------------ -------------
Cash flows from investing activities:
Purchase of investment securities available for sale (3,626,683) (3,011,043)
Purchase of investment securities held to maturity - (924,957)
Proceeds form sales of investment securities - 3,160,963
Maturities of securities - held to maturity 9,895,517 7,888,000
Maturities of securities - available for sale - 1,000,000
Proceeds from principal repayments of mortgage-backed securities
held to maturity 3,413,397 3,086,195
Purchase of property plant and equipment (477,412) (395,898)
Loan originations, net of principal repayments (13,207,797) (21,605,823)
------------- -------------
Net cash provided by investing activities (4,002,978) (10,802,563)
------------- -------------
Cash flows for financing activities:
Net change in deposits 3,326,592 9,627,169
Net repayments of FHLB borrowings (1,700,000) (2,200,000)
------------- -------------
Net cash provided by financing activities 1,626,592 7,427,169
------------- -------------
Net increase in cash and cash equivalents (1,104,045) (2,400,702)
Cash and cash equivalents, beginning of period 5,870,727 6,577,014
------------- -------------
Cash and cash equivalents, end of period $ 4,766,682 $ 4,176,312
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO (UNAUDITED) FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
only normal recurring accruals, except as described in Note 4) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. For further information, refer to the financial statements and
notes thereto included herein.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
requirements for the disclosure of comprehensive income in interim
financial statements. Comprehensive income is defined as net income plus
transactions and other occurrences which are the result of nonowner changes
in equity. For the Bank, nonowner equity changes are comprised of
unrealized gains or losses on debt securities that will be accumulated with
net income in determining comprehensive income.
This statement does not impact the historical financial results of the
Bank's operations and is effective for years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Adoption of this standard as of
January 1, 1998 did not have an impact on the Bank's results of operations.
Other comprehensive income changes for the nine month periods ended
September 30, 1998 and 1997 were $3,128 and $47,612 respectively.
Comprehensive income for the respective periods was $436,559 and $902,634.
3. RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits," in February 1998. This
Statement revises the disclosure requirements for pension and other
postretirement benefit plans and is effective for fiscal years beginning
after December 15, 1997. The Bank expects to follow industry standards in
reporting the required information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement becomes effective for
fiscal years beginning after June 15, 1999 and will not be applied
retroactively. The statement establishes accounting and reporting standards
for derivative instruments and hedging activity. Under the standard, all
derivatives must be measured at fair value and recognized as either assets
or liabilities in the financial statements. This Statement is effective for
fiscal years beginning after June 15, 1999 with
F-26
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO (UNAUDITED) FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
initial application in the first quarter of the fiscal year. SFAS No. 133
is not expected to have a material effect on 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 a
material effect on the Bank's financial statements.
4. DIRECTOR AND OFFICER BENEFIT PLANS
During the nine month period ended September 30 ,1998, the Bank amended
various previously implemented deferred compensation and retirement plans
for the purpose of making the plans more comparable to plans offered by
other financial institutions. These amendments resulted in increases to
accrued liabilities and compensation expense of approximately $533,000.
F-27
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL OR ENTITY HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST COMMUNITY FINANCIAL CORPORATION OR COMMUNITY SAVINGS
BANK, SSB. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY, OR ANY
OTHER SECURITIES, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS POSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST COMMUNITY
FINANCIAL CORPORATION OR COMMUNITY SAVINGS BANK, SSB SINCE ANY OF THE DATES AS
OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
_________________________
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Summary................................................................
Risk Factors...........................................................
Selected Financial and Other Data
of Community Savings.................................................
First Community Financial Corporation..................................
Community Savings Bank, SSB
Use of Proceeds......................................................
Dividend Policy........................................................
Market for Common Stock................................................
Capitalization.........................................................
Pro Forma Data.........................................................
Historical and Pro Forma Capital Compliance............................
Comparison of Valuation and Pro Forma Information
with No Foundation...................................................
Anticipated Stock Purchases by Directors and Executive
Officers.............................................................
The Conversion.........................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................
Business of First Community............................................
Business of Community Savings..........................................
Taxation...............................................................
Supervision and Regulation.............................................
Management of First Community..........................................
Management of Community Savings........................................
Description of Capital Stock...........................................
Anti-Takeover Provisions Affecting First Community
and Community Savings................................................
Certain Provisions of the Articles of Incorporation and
Bylaws of First Community............................................
Legal Opinions.........................................................
Experts................................................................
Registration Requirements..............................................
Additional Information.................................................
Index to Financial Statements..........................................
</TABLE>
Until ______________, 1999, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments and subscriptions.
UP TO
2,380,500 SHARES
FIRST COMMUNITY
FINANCIAL
CORPORATION
(Proposed Holding Company for
Community Savings Bank, SSB)
COMMON STOCK
PROSPECTUS
TRIDENT SECURITIES, INC.
_______________, 1999
================================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation provide that, to the fullest
extent permitted by the North Carolina Business Corporation Act (the "NCBCA"),
no person who serves as a director shall be personally liable to the Registrant
or any of its stockholders or otherwise for monetary damages for breach of any
duty as director. The Registrant's By-laws state that any person who at any time
serves or has served as a director, officer, employee or agent of the
Registrant, or any such person who serves or has served at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, or
as a trustee or administrator under an employee benefit plan, shall have a right
to be indemnified by the Registrant to the fullest extent permitted by law
against liability and litigation expense arising out of such status or
activities in such capacity. "Liability and litigation expense" shall include
costs and expenses of litigation (including reasonable attorneys' fees),
judgments, fines and amounts paid in settlement which are actually and
reasonably incurred in connection with or as a consequence of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including appeals.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions
prescribing the extent to which directors and officers shall or may be
indemnified. Section 55-8-51 of the NCBCA permits a corporation, with certain
exceptions, to indemnify a present or former director against liability if (i)
the director conducted himself in good faith, (ii) the director reasonably
believed (x) that the director's conduct in the director's official capacity
with the corporation was in its best interests and (y) in all other cases the
director's conduct was at least not opposed to the corporation's best interests,
and (iii) in the case of any criminal proceeding, the director had no reasonable
cause to believe the director's conduct was unlawful. A corporation may not
indemnify a director in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or in
connection with a proceeding charging improper personal benefit to the director.
The above standard of conduct is determined by the board of directors, or a
committee or special legal counsel or the shareholders as prescribed in Section
55-8-55.
Sections 55-8-52 and 55-8-26 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
II-1
<PAGE>
The foregoing is only a general summary of certain aspects of North
Carolina law dealing with indemnification of directors and officers and does not
purport to be complete. It is qualified in its entirety by reference to the
relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses (other
than fees and commissions payable to the selling agent) to be incurred in
connection with the issuance and distribution of the shares.
<TABLE>
<CAPTION>
<S> <C>
Registration and Filing Fees......................................... $ 40,000
Postage and Printing................................................. 100,000
Accounting Fees and Expenses......................................... 75,000
Fees and Expenses Payable to Appraiser and Business Plan Consultant.. 30,000
Legal Fees........................................................... 155,000
Sales Agent Expenses................................................. 35,000
Conversion Data Processing........................................... 15,000
Stock Transfer Agent Fees and Costs of Stock Certificates............ 10,000
Blue Sky fees and expenses....................................... 15,000
Miscellaneous........................................................ 90,000
--------
$565,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In October 1999, Registrant sold one share of common stock, no par value
per share, to William R. Gilliam for an aggregate purchase price of $10.00.
Such sale was exempt from registration under Section 4(2) of Securities Act of
1933.
ITEM 27. EXHIBITS.
The following exhibits and financial statement schedules are filed herewith
or will, as noted, be filed by amendment.
II-2
<PAGE>
(a) Exhibits
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-B) Description
--------------- -----------
1.1 Engagement letter dated September 22, 1998 between
Community Savings Bank, SSB and Trident Securities,
Inc.*
1.2 Form of Sales Agency Agreement among First Community
Financial Corporation, Community Savings Bank, SSB and
Trident Securities, Inc. (to be filed
subsequently)
2.1 Amended and Restated Plan of Holding Company Conversion
of Community Savings Bank, SSB*
3.1 Articles of Incorporation of First Community Financial
Corporation*
3.2 Bylaws of First Community Financial Corporation*
4.1 Forms of Stock Certificate for First Community
Financial Corporation and Community Savings Bank, SSB
(to be filed subsequently)
5.1 Opinion of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P. as to legality of securities to be
registered hereby*
8.1 Opinion of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P. as to federal and state tax
consequences*
8.2 Opinion of Ferguson & Company as to the value of
subscription rights*
10.1 Letter Agreement dated August 31, 1998 between
Community Savings Bank, SSB and Ferguson & Company for
appraisal services*
10.2 Form of Employment Agreement to be entered into between
Community Savings Bank, SSB and William R.
Gilliam*
10.3 Forms of Special Termination Agreements to be entered
into between First Community Financial Corporation and
Larry H. Hall, Joseph C. Canada, Judy L. Pennington and
Christopher B. Redcay*
II-3
<PAGE>
10.4 Forms of Employee Stock Ownership Plan and Trust of
Community Savings Bank, Inc.*
10.5 Form of Capital Maintenance Agreement between First
Community Financial Corporation and Community Savings
Bank, Inc.*
24.1 Consent of PricewaterhouseCoopers LLP*
24.2 Consent of Ferguson & Company*
24.3 Consent of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P.*
27.1 Financial Data Schedule (to be filed subsequently)
99.1 Appraisal Report of Ferguson & Company*
99.2 Form of Stock Order Form (to be filed
subsequently)
* FILED PREVIOUSLY.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue .
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
II-4
<PAGE>
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of Regulation S-X at the start of any delayed
offering or throughout a continuous offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Pre-Effective Amendment
Number 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Burlington, State of
North Carolina, on the 8th day of February, 1999.
FIRST COMMUNITY FINANCIAL CORPORATION
By: /s/ William R. Gilliam
----------------------------------------
William R. Gilliam
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
Pre-Effective Amendment Number 1 to Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: February 8, 1999 By: /s/ William R. Gilliam
-------------------------------------------
William R. Gilliam, President and Director
(Chief Executive Officer)
Date: February 8, 1999 By: /s/ Christopher B. Redcay
-------------------------------------------
Christopher B. Redcay, Treasurer
(Principal Accounting Officer and
Principal Financial Officer)
Date: February 8, 1999 By: /s/ Jimmy L. Byrd
-------------------------------------------
Jimmy L. Byrd, Director
Date: February 8, 1999 By: /s/ Julian P. Griffin
-------------------------------------------
Julian P. Griffin, Director
Date: February 8, 1999 By: /s/ Edgar L. Hartgrove
-------------------------------------------
Edgar L. Hartgrove, Director
Date: February 8, 1999 By: /s/ William C. Ingold
-------------------------------------------
William C. Ingold, Director
Date: February 8, 1999 By: /s/ Charles A. LeGrand
-------------------------------------------
Charles A. LeGrand, Director
Date: February 8, 1999 By: /s/ James D. Moser, Jr.
-------------------------------------------
James D. Moser, Jr., Director
Date: February 8, 1999 By: /s/ W. Joseph Rich
-------------------------------------------
W. Joseph Rich, Director
Date: February 8, 1999 By: /s/ Alfred J. Spitzner
-------------------------------------------
Alfred J. Spitzner, Director
Date: February 8, 1999 By: /s/ Herbert N. Wellons
-------------------------------------------
Herbert N. Wellons, Director
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
(PER EXHIBIT
TABLES IN
ITEM 601 OF
REGULATION S-B) DESCRIPTION
- --------------- -----------
1.1 Engagement letter dated September 22, 1998 between Community
Savings Bank, SSB and Trident Securities, Inc.*
1.2 Form of Sales Agency Agreement among First Community
Financial Corporation, Community Savings Bank, SSB and
Trident Securities, Inc. (to be filed subsequently)
2.1 Amended and Restated Plan of Holding Company Conversion of
Community Savings Bank, SSB*
3.1 Articles of Incorporation of First Community Financial
Corporation*
3.2 Bylaws of First Community Financial Corporation*
4.1 Forms of Stock Certificate for First Community Financial
Corporation and Community Savings Bank, SSB (to be filed
subsequently)
5.1 Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P. as to legality of securities to be registered
hereby*
8.1 Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P. as to federal and state tax consequences*
8.2 Opinion of Ferguson & Company as to the value of
subscription rights*
10.1 Letter Agreement dated August 31, 1998 between Community
Savings Bank, SSB and Ferguson & Company for appraisal
services*
10.2 Form of Employment Agreement to be entered into between
Community Savings Bank, SSB and William R. Gilliam*
10.3 Forms of Special Termination Agreements to be entered into
between First Community Financial Corporation and Larry H.
Hall, Joseph C. Canada, July L. Pennington and Christopher
B. Redcay*
<PAGE>
EXHIBIT NO.
(PER EXHIBIT
TABLES IN
ITEM 601 OF
REGULATION S-B) DESCRIPTION
- --------------- -----------
10.4 Forms of Employee Stock Ownership Plan and Trust of
Community Savings Bank, Inc.*
10.5 Form of Capital Maintenance Agreement between First
Community Financial Corporation and Community Savings Bank,
Inc.*
24.1 Consent of PricewaterhouseCoopers LLP*
24.2 Consent of Ferguson & Company*
24.3 Consent of Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P.*
27.1 Financial Data Schedule (to be filed subsequently)
99.1 Appraisal Report of Ferguson & Company*
99.2 Form of Stock Order Form (to be filed subsequently)
* FILED PREVIOUSLY.
