<PAGE>
As filed with the Securities and Exchange Commission on April 19, 1999
Registration No. 333-70981
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 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 56-2119954
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification
organization) Code Number) Number)
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)
_______________
Copies to:
WILLIAM R. GILLIAM, President EDWARD C. WINSLOW III
First Community Financial Corporation RANDALL A. UNDERWOOD
708 South Church Street Brooks, Pierce, McLendon, Humphrey &
Post office Box 1837 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)
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
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 to Community Savings'
depositors and borrowers who have subscription rights. To purchase shares in
that offering, depositors and borrowers 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>
====================================================================================================
Per Share at Per Share at
Minimum Maximum Total at Minimum Total at Maximum
====================================================================================================
<S> <C> <C> <C> <C>
Purchase Price $15.00 $15.00 $22,950,000 $31,050,000
Estimated Underwriting, Marketing
and Other Fees and Expenses $ 0.57 $ 0.49 $ 874,000 $ 1,005,000
Estimated Net Proceeds $14.43 $14.51 $22,076,000 $30,045,000
====================================================================================================
</TABLE>
First Community has applied for approval for the common stock to be listed
for quotation on the Nasdaq National Market. If First Community does not
satisfy the conditions for quotation on the Nasdaq National Market, it will
apply for approval to be listed for quotation on the Nasdaq Small Cap Market.
If it is listed on either Nasdaq market, First Community expects to use FCFN as
its listing symbol.
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) 221-1503.
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 investing
the principal and interest payments from the loan
it will make to 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 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 December
31, 1998, Community Savings had assets of $172.9
million, net loans of $127.2 million and deposits
of $140.4 million.
Highlights of Community Savings' operations
include:
. Capital Position. As of December 31, 1998,
Community Savings had equity of $23.2
million. Its capital substantially exceeded
all minimum capital requirements imposed by
its federal and state regulators.
. Profitable Operations. For the fiscal years
ended December 31, 1998, 1997 and 1996,
Community Savings had net income of $271,000,
$590,000 and $399,000 and a return on average
assets of 0.16%, 0.36% and 0.26%. Community
Savings' future earnings will be affected by
changes in market interest rates and other
factors.
. Asset Quality. On December 31, 1998, 1997 and
1996, Community Savings had a low level of
nonperforming assets. See "Business of
Community Savings -Nonperforming Assets and
Asset Classification."
. Sale of Fixed Rate Loans. Community Savings
sells most of its fixed interest rate home
mortgage loans in the secondary market and
retains most of its variable interest rate
home mortgage loans.
3
<PAGE>
. 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. On December 31, 1995,
loans accounted for only 51% of its assets
and very few of its loans were commercial,
construction or consumer loans. On December
31, 1998, loans accounted for 74% 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 Management believes that converting 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.
4
<PAGE>
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
from First Community 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 March 31,
1999 who had deposits at the close of
business on that date of at least $50;
(4) Community Savings' depositor and borrower
members as of April 15, 1999 who did not have
deposits of at least $50 on June 30, 1997 or
March 31, 1999; 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.
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 in a broader
offering to the public.
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
stock sold will be based upon an independent
valuation of the estimated market value of First
Community and Community Savings. The amount to be
sold is now estimated to range from $22,950,000 to
$31,050,000,
5
<PAGE>
which is the valuation range of First Community
and Community Savings as of March 12, 1999. After
the offerings terminate, the independent appraiser
will determine the final estimated market value,
and that amount of stock will be sold.
After the offering begins, 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.
See "The Conversion - Purchase Price of Common
Stock and Number of Shares Offered."
EXPIRATION DATE OF THE Subscription rights in the subscription offering
SUBSCRIPTION AND expire at 12:00 Noon., Eastern 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.
. 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
6
<PAGE>
. 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 - Minimum and 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 savings
accounts and certificates of deposit
maintained at Community Savings which contain
sufficient funds for the purchase.
No wire transfers will be accepted.
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.
7
<PAGE>
See "The Conversion - Exercise of Subscription
Rights and Purchases in the Community Offering."
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
applied for approval to have the common stock
listed for quotation on the Nasdaq National
Market. If it does not satisfy the conditions for
approval to be listed for quotation on the Nasdaq
National Market, it will apply to have the common
stock listed for quotation on the Nasdaq Small Cap
Market. If the common stock is listed for
quotation on either Nasdaq market, First Community
expects to use FCFN as its listing symbol.
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.
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.
NOT TRANSFERABLE Subscriptions 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 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 offerings. 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 and in
noninterest-earning deposits at Community Savings.
First Community expects to pay the remainder of
the net proceeds to Community Savings in exchange
for all of the capital stock of Community
8
<PAGE>
Savings. Community Savings expects to use up to
$1,500,000 to purchase 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. If management determines that the
return on the proceeds would be increased if they
are invested by Community Savings in loans or
other assets, First Community may loan the
proceeds to, invest them in, or deposit them in
interest-bearing or noninterest-bearing accounts
at, Community Savings. The following chart
illustrates how management expects to initially
use the proceeds of the offering. The chart
assumes that 1,800,000 shares will be sold. The
amounts shown in the chart are estimates only. The
estimated amounts would be different if the number
of shares sold is different from 1,800,000, if the
actual expenses of the offering are different from
estimated amounts or if there is an
oversubscription and Community Savings' employee
stock ownership plan is unable to buy its shares
in the subscription offering.
9
<PAGE>
USES OF PROCEEDS
<TABLE>
<CAPTION>
$27,000,000
Gross Offering Proceeds
__________________________________
$940,000 $26,060,000
Estimated offering expenses Estimated net proceeds
________________________________________________________________________________________
<S> <C> <C>
$2,280,000 (8.8% of estimated $11,890,000 (45.6% of $11,890,000 (45.6% of estimated net proceeds)
net proceeds) estimated net proceeds) Paid to Community Savings
Estimated loan to ESOP; Held by First Community
ESOP will use loan proceeds to for working capital and
buy First Community common investment in interest
stock directly from First Com- earning deposits and ____________________________
munity in the conversion, or other investments,
if the ESOP's order is not filled including possible non-
in the conversion, in the open interest savings deposits
market at Community Savings
$1,500,000 (5.7 % of $10,390,000 (39.9% of estimated
estimated net proceeds) net proceeds)
Paid to First Community Invested by Community Savings in
for shares contributed loans, interest earning deposits and
to foundation other investments
</TABLE>
10
<PAGE>
First Community and Community Savings may also use
proceeds of the offerings to acquire common stock
in the open market for use in stock based employee
benefits plans, and may use proceeds to acquire or
construct new branch offices or other financial
institutions. Neither First Community nor
Community Savings has entered into any agreements
or made any definite plans concerning any such
branch office or acquisition. 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 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.
Management could use the voting power resulting
from its ownership to block mergers,
consolidations and other business combinations and
to perpetuate their control of First Community.
See "Anti-Takeover Provisions Affecting First
Community and Community Savings."
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.
11
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED PERCENTAGE OF SHARES
VALUE OF ISSUED, INCLUDING SHARES
SHARES ISSUED 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%
---------- ----
TOTAL $3,420,000 22.0%
----- ---------- ----
</TABLE>
In connection with the conversion, Community Savings
will enter into an employment agreement with W. R.
Gilliam, its President and Chief Executive 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.
12
<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 REDUCE 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. Nevertheless, these operating changes
have not yet caused Community Savings' earnings to match the earnings of its
peer institutions. Community Savings' return on average equity for the years
ended December 31, 1997 and 1996 was 2.60% and 1.82%, as compared to
substantially higher 6.75% and 3.62% averages for North Carolina savings
institutions. Community Savings' return on average equity for the year ended
December 31, 1998 was 1.04%.
At December 31, 1998, Community Savings' ratio of retained income to assets
was 13.4%. 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 29.3%. 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.
13
<PAGE>
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. See "Business of Community
Savings - Lending Activities - Commercial, Financial and Agricultural Lending, -
Construction Lending, and - Consumer Lending."
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 applied for approval to have the common stock listed for quotation
on the Nasdaq National Market. If First Community does not satisfy the
conditions for quotation on the Nasdaq National Market, it will apply to have
the common stock listed for quotation on the Nasdaq Small Cap 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 PLANNED USES OF THE OFFERING PROCEEDS ARE NOT SPECIFIC.
Management has developed specific plans for using only a small portion of
the anticipated offering proceeds. Assuming that 1,800,000 shares are sold in
the offerings, management expects to loan approximately $2,280,000, or 8.75% of
the estimated net proceeds, to Community Savings' employee stock ownership plan
to enable the plan to buy shares of First Community common stock. However, the
employee stock ownership plan will pay all of this amount back to First
Community unless there is an oversubscription and its stock order is not filled
in the offerings and as a result the plan is forced to buy its shares in the
open market. In addition, $1,500,000, or 5.75% of the estimated net proceeds,
will be used by Community Savings to buy the newly issued shares to be
contributed to the foundation, but this $1,500,000 will be returned to First
Community when the shares are purchased from it. Except as set forth above, no
specific plans have been developed for the use of the offering proceeds.
Management expects that the proceeds will initially be invested in loans,
mortgage-backed securities and other investments in accordance with Community
Savings' then existing lending and investment policies and used for general
working capital needs. See "Use of Proceeds."
14
<PAGE>
THE SHARES OF COMMON STOCK OFFERED IN THE OFFERINGS ARE NOT INSURED.
The shares of common stock offered in the offerings are not savings
accounts or savings deposits and will not be insured by the Federal Deposit
Insurance Corporation or any other government agency. The stock is subject to
investment risk, including the loss of the principal amount invested.
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 employee stock ownership plan, 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.
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
15
<PAGE>
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 REDUCE 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 December 31, 1998, Community Savings would have reported a net
loss of $719,000 for the 1998 fiscal year, rather than reporting net income of
$271,000. See "The Conversion - Establishment of the Foundation - Tax
Considerations."
THE CONTRIBUTION TO THE FOUNDATION MAY NOT BE TAX DEDUCTIBLE, WHICH WOULD
FURTHER REDUCE 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."
FIRST COMMUNITY'S GOVERNING DOCUMENTS, REGULATORY PROVISIONS AND VOTING CONTROL
OF DIRECTORS, OFFICERS AND EMPLOYEES MAY PREVENT OR DISCOURAGE MERGERS,
ACQUISITIONS AND OTHER CHANGES IN CONTROL WHICH MIGHT BE FAVORED BY SOME
STOCKHOLDERS AND MAY MAKE IT DIFFICULT TO REPLACE EXISTING MANAGEMENT.
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
16
<PAGE>
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. These laws and regulations require
regulatory approval of purchases of as little as 10% of any class of equity
security of First Community or Community Savings. 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."
The trustees of Community Savings' employee stock ownership plan, subject
to the provisions of the Employee Retirement Income Security Act of 1974, as
amended, will vote all unallocated shares held by the plan and all allocated
shares for which participating employees do not give voting instructions.
Recipients of shares granted under the proposed management recognition plan will
vote all vested and unvested shares granted to them. If the proposed stock
option plan acquires and holds shares to fund unexercised options, optionees
will be allowed to direct the voting of shares held to satisfy options not yet
exercised by them. In addition, participants of the option plan will have the
right to vote all shares received upon the exercise of options granted to them.
Shares of First Community common stock held by the foundation must be voted by
the foundation in the same ratio as all other shares of First Community stock.
See "The Conversion - Establishment of the Charitable Foundation - Regulatory
Conditions Imposed on the Foundation."
Directors and executive officers of Community Savings and First Community,
as a result of their expected purchases in the offering and their voting control
over shares which may be held by stock based employee benefit plans and the
foundation, could have the voting power to block mergers, consolidations and
other business combinations and to perpetuate their control of Community Savings
and First Community. See "Stock Purchases By Directors and Executive Officers"
and "Anti-Takeover Provisions Affecting First Community and Community Savings -
Anti-Takeover Effect of Employment Agreement, Special Termination Agreements,
Benefit Plans and the Foundation."
AGREEMENTS WITH EMPLOYEES MAY DISCOURAGE MERGERS, ACQUISITIONS AND CHANGES IN
MANAGEMENT CONTROL WHICH MAY BE FAVORED BY SOME STOCKHOLDERS.
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."
17
<PAGE>
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 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000."
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.
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. See "The Conversion - Purchase Price of Common Stock and Number of
Shares Offered."
18
<PAGE>
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.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE AT OR FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ------------------
(Dollars In Thousands)
<S> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $172,936 $167,817 $156,751
Loans receivable, net
Held for sale -- 287 2,256
Held for investment 127,230 114,546 85,871
Investments
Available for sale 16,477 9,082 6,991
Held to maturity -- 13,397 25,403
Mortgage-backed securities
Available for sale 14,628 9,497 12,486
Held to maturity -- 8,650 11,314
Federal funds sold -- 300 350
Deposits 140,417 134,697 122,524
Advances from Federal Home Loan Bank 5,000 6,700 9,000
Retained income 23,157 22,837 22,167
SELECTED OPERATING DATA:
Total interest and dividend income $ 12,544 $ 11,583 $ 10,620
Total interest expense 6,967 6,740 6,380
-------- -------- --------
Net interest income 5,577 4,843 4,240
Provision for loan loss 550 360 60
Net interest income after provision for -------- -------- --------
loan loss
Other operating income 5,027 4,483 4,180
Other operating expense 561 365 357
5,179 3,879 3,937
Income before income taxes -------- -------- --------
Income tax expense 409 969 600
138 379 201
Net income -------- -------- --------
$ 271 $ 590 $ 399
======== ======== ========
SELECTED OTHER DATA:
Return on average assets 0.16% 0.36% 0.26%
Return on average retained income 1.16% 2.60% 1.82%
Average retained income to average assets 13.61% 13.94% 14.26%
Retained income to end of period assets 13.39% 13.61% 14.14%
Interest rate spread for period 2.87% 2.54% 2.20%
Net interest margin 3.46% 3.14% 2.87%
Nonperforming assets to total assets 0.14% 0.14% 0.14%
Loan loss reserves to nonperforming loans 536.69% 324.07% 226.73%
Average interest-earning assets to average-
interest bearing liabilities 113.78% 113.79% 115.48%
Other operating expense to average assets 3.03% 2.38% 2.55%
</TABLE>
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<PAGE>
RECENT DEVELOPMENTS
Below are summaries of historical financial and other data of Community
Savings for the periods and at the dates indicated. The information as of March
31, 1999 and for the three months then ended are derived from unaudited
financial statements. In the opinion of management, all adjustments, which
consist only of normal recurring accruals, necessary for the fair presentation
of data are included. All averages have been calculated on a monthly basis
unless otherwise stated. Ratios for the three month periods ending March 31,
1999 and March 31, 1998 have been annualized so that they can be compared to
ratios for the one year periods set forth in the "Selected Financial and Other
Data of Community Savings." The operating and other data presented for the three
months ended March 31, 1999 are not necessarily indicative of the results which
can be expected for the year ending December 31, 1999.
<TABLE>
<CAPTION>
AT AT
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $174,671 $172,936
Loans receivable, net
Held for investment 131,349 127,230
Investments
Available for sale 16,170 16,477
Mortgage-backed securities
Available for sale 12,377 14,628
Deposits 142,252 140,417
Advances from Federal Home Loan Bank 5,000 5,000
Retained income 23,281 23,157
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
SELECTED OPERATING DATA:
Total interest and dividend income $ 3,133 $ 3,099
Total interest expense 1,638 1,761
Net interest income 1,495 1,338
Provision for loan loss 90 100
Net interest income after provision for
loan loss 1,405 1,238
Other operating income 257 119
Other operating expense 1,220 821
Income before income taxes 443 536
Income tax expense 108 186
Net income $ 335 $ 350
SELECTED OTHER DATA:
Return on average assets 0.77% 0.83%
Return on average retained income 5.75% 6.07%
Retained income to average assets 13.39% 13.59%
Retained income to end of period assets 13.30% 13.39%
Interest rate spread for period 3.08% 2.28%
Net interest margin 3.64% 3.16%
Nonperforming assets to total assets 0.19% 0.16%
Loan loss reserves to nonperforming loans 435.29% 320.36%
Average interest-earning assets to average-
interest bearing liabilities 113.83% 121.47%
Other operating expense to average assets 2.80% 1.94%
</TABLE>
20
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998 AND
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31,
1999 AND MARCH 31, 1998.
FINANCIAL CONDITION
Total assets increased 1.00% to $174.7 million at March 31, 1999, compared
to $172.9 million at December 31, 1998. Loan production continued to emphasize
commercial and consumer credits in an effort to diversify the loan portfolio and
reduce the reliance on single family home mortgage loans. At March 31, 1999,
approximately 67% of Community Savings' loan portfolio, before net items,
consisted of home mortgage loans, while at December 31, 1998, approximately 71%
of the loan portfolio, before net items, were home mortgage loans.
Deposits increased to $142.3 million at March 31, 1999 from $140.4 million
at December 31, 1998, an increase of 1.31%. Loans, net of reserves, increased
3.24% at March 31, 1999 to $131.3 million from the December 31, 1998 balance of
$127.2 million. Investments and mortgage-backed securities decreased 8.2% to
$28.5 million at March 31, 1999 compared to the December 31, 1998 balance of
$31.1 million. Management's emphasis on building a solid net interest income
stream via loan portfolio growth is evidenced by the $4.1 million increase in
net loans funded by the $2.6 million reduction in investments and mortgage-
backed securities and $1.8 million increase in deposits for the three month
period ended December 31, 1998.
Borrowed funds, collateralized through an agreement with the Federal Home
Loan Bank of Atlanta, remained unchanged at $5.0 million at March 31, 1999.
Community Savings' non-performing assets, which are composed of loans 90
days or more delinquent, foreclosed real estate and repossessed assets, were
$323,000, or 0.19% of total assets, at March 31, 1999, compared to $248,000, or
0.14% of total assets, at December 31, 1998. In the opinion of management, the
$1.4 million allowance for loan losses at March 31, 1999, or 1.07% of the loan
portfolio, before net items, was adequate to cover potential losses.
RESULTS OF OPERATIONS
Net Income. Net income for the three-month period ended March 31, 1999
decreased 4.3% to $335,000 compared to $350,000 for the three-month period
ended March 31, 1998. The reduction in earnings was primarily the result of
expenses related to replacement of computer equipment for Year 2000 preparedness
purposes and increased compensation expenses incurred in attracting, retaining
and hiring personnel experienced in commercial banking.
Interest Income. Interest income increased 1.1% for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998. The
increase in interest income primarily resulted from an 8.65% increase in
interest and fees on loans.
Interest Expense. Interest expense decreased 7.0% for the three months
ended March 31, 1999 compared to the three months ended March 31,1998. The
decrease in interest expense was primarily the result of a 5.9% decrease in
interest expense on deposits reflecting a moderately lower interest rate
environment and management's effort to refine deposit-pricing schemes. A 25.8%
decrease in borrowing interest expense reflects a 12.2% decrease in outstanding
borrowings from $5.7 million at March 31,1998 to $5.0 million at March 31,1999
and a moderately lower interest rate environment.
Net Interest Income. Net interest income, before the provision for loan
losses, for the three-month period ended March 31, 1999, increased 11.7% or
$156,000 compared to the three-month period ended March 31,1998. The continuing
emphasis placed on loan growth was the primary cause of the increase in net
interest income.
21
<PAGE>
Provision for Loan Losses. Loans charged off against the allowance for loan
losses during the three-month period ended March 31, 1999 totaled $15,000 or
.01% of average loans outstanding. A provision of $90,000 was added to the
allowance for loan losses, increasing the period end balance to $1.4 million or
1.07% of outstanding loans. During the three months ended March 31, 1998, a
$100,000 provision was added to the allowance for loan losses. Management
considered the allowance for loan losses to be adequate at March 31,1999.
Other Income. Non-interest, or "other," income increased $138,000 or 116%
to $257,000 for the three-month period ended March 31, 1999 compared to $119,000
for the three-month period ended March 31,1998. Although management is
encouraged by the increase in non-interest income, continued emphasis will be
placed on improving non-interest income revenue. 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 increasing non-interest income. This newly formed subsidiary contributed
$31,000 of the non-interest income during the three months ended March 31, 1999.
General and Administrative Expenses. General and administrative, or non-
interest, expenses increased 48.6% or $399,000 for the three months ended March
31, 1999, compared to the three-month period ended March 31,1998. Community
Savings incurred approximately $60,000 in expenses related to upgrading in-house
computer equipment in connection with Year 2000 preparedness. Compensation
expense increased $249,000 as Community Savings has sought to hire, retain and
attract commercial bank experienced personnel needed to fulfill the bank's long-
term objectives.
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.
22
<PAGE>
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 December 31, 1998, Community Savings had total assets of $172.9
million, net loans of $127.2 million, deposits of $140.4 million and retained
income of $23.2 million.
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
Community Savings is not converting at this time because it needs
additional capital to achieve any specific business objective. Community Savings
now has no stockholders. While the institution has a significant net worth, its
existing members are not able to receive any return on such net worth like
stockholders of a stock institution. Community Savings is converting to stock
form and forming First Community as its holding company so that it will have
increased flexibility to react to changes in its operating environment, so that
it will have greater capital and enhanced access to capital markets in the
future and so that its depositors and other members and its management and
employees will be able to share in the net worth and earnings of Community
Savings as stockholders. See "The Conversion - General" and "The Conversion -
Purposes of Conversion."
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
23
<PAGE>
$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, assuming 1,530,000 shares are issued in
the conversion, to $2,604,000, assuming 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 ESOP, which are estimated to range from $1,956,000 to
$2,604,000, First Community expects to 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 Community Savings Charitable
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. The types and amounts of First Community's investments will vary
from time to time based upon the interest rate environment, asset/liability mix
considerations and other factors. In the event management determines that the
return on these proceeds would be increased if they are invested by Community
Savings in loans or other assets, First Community expects to loan the proceeds
to, or invest them in, or to deposit them in either interest-bearing or
noninterest-bearing accounts at, Community Savings. Community Savings would then
invest those amounts in loans or investments in accordance with its then
existing lending and investment policies.
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 considerations at the time the investments are to be made. In using the
proceeds paid to it, Community Savings expects to continue its recent efforts to
invest more of its assets in commercial and consumer loans and less of its
assets in investment and mortgage back securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Management
Strategy." 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. The following chart
illustrates how management currently expects to initially use the proceeds of
the offering. The chart assumes that 1,800,000 shares will be sold. The amounts
shown in the chart are estimates only. The estimated amounts set forth in the
chart would be different if the number of shares sold is different from
1,800,000, if the actual expenses of the offering are different from estimated
amounts or if there is an oversubscription and the ESOP is unable to buy its
shares in the subscription offering.
24
<PAGE>
USES OF PROCEEDS
<TABLE>
<S> <C> <C>
$27,000,000
Gross Offering Proceeds
$940,000 $26,060,000
Estimated offering expenses Estimated net proceeds
$2,280,000 (8.8% of estimated $11,890,000 (45.6% of $11,890,000 (45.6% of estimated net proceeds)
net proceeds) estimated net proceeds) Paid to Community Savings
Estimated loan to ESOP; Held by First Community
ESOP will use loan proceeds to for working capital and
buy First Community common investment in interest
stock directly from First Community earning deposits and
in the conversion, or other investments,
if the ESOP's order is not filled including possible non-
in the conversion, in the open interest savings deposits
market at Community Savings
$1,500,000 (5.7 % of $10,390,000 (39.9% of
estimated net proceeds) estimated net proceeds)
Paid to First Community Invested by Community
for shares contributed Savings in loans, interest
to foundation earning deposits and other
investments
</TABLE>
25
<PAGE>
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.
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
26
<PAGE>
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 (1) its net income for the most recent
fiscal year, or (2) 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 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.
27
<PAGE>
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 applied for approval to have its common stock
listed for quotation on the Nasdaq National Market.
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, the market value of the common stock
purchased in the offering by persons not associated with First Community (the
"public float") must equal at least $18 million, and First Community must have
at least 400 stockholders and at least three market makers. If the amount of
common stock sold in the offering is below the $27 million midpoint of the
current valuation range, the public float, as computed by Nasdaq, may be less
than $18 million. 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.
If First Community does not satisfy the conditions for quotation on the
Nasdaq National Market, it will apply to have the common stock listed for
quotation on the Nasdaq Small Cap market. The listing requirements for the
Nasdaq Small Cap market are easier to satisfy, but there is no assurance that
First Community will satisfy them.
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 table presents the historical capitalization of Community
Savings at December 31, 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." The table does not
reflect withdrawals from deposit accounts for the purchase of common stock; any
such withdrawals would reduce pro forma deposits. Also, the table does not
reflect the issuance of any shares which may be reserved for issuance pursuant
to the Stock Option Plan. See "Management of Community Savings -Proposed Stock
Option Plan."
28
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMUNITY PRO FORMA CAPITALIZATION AT DECEMBER 31, 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
DECEMBER 31, 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 $140,417 $ 140,417 $ 140,417 $ 140,417 $ 140,417
Borrowings 5,000 5,000 5,000 5,000 5,000
-------- ---------- ---------- ---------- ----------
Total deposits and borrowings $145,417 $ 145,417 $ 145,417 $ 145,417 $ 145,417
======== ========== ========== ========== ==========
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 - 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 (2) - 510 510 510 510
Less: Common stock acquired by
ESOP (3) - (1,956) (2,280) (2,604) (2,977)
Common stock acquired by
MRP (3) - (978) (1,140) (1,302) (1,488)
Retained earnings -
substantially restricted 23,010 23,010 23,010 23,010 23,010
Accumulated other comprehensive
income 147 147 147 147 147
Total Equity -------- ---------- ---------- ---------- ----------
$ 23,157 $ 42,809 $ 46,307 $ 49,806 $ 53,830
======== ========== ========== ========== ==========
</TABLE>
29
<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) 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.
(3) 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."
30
<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:
. 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;
. none of the shares of common stock will be sold in any syndicated
community offering;
. fees will be payable to Trident Securities with respect to the
subscription and community offerings as described in "The Conversion -
Marketing Arrangements;" and
. 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 a 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, 1998 have been based upon the following
assumptions:
. the sale of shares of common stock occurred at the beginning of such
period 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 date; and
. such net proceeds were invested on a consolidated basis at the
beginning of the period at a yield of 4.60%, which represents the
average one-year treasury constant maturity rate for the last week of
December, 1998. First Community did not use the arithmetic average of
Community Savings
31
<PAGE>
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 in the table. 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 2.94%.
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.
The following table gives 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.
32
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 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 $ 271 $ 271 $ 271 $ 271
Pro forma adjustments:
Net income from proceeds 564 667 770 888
ESOP (83) (97) (111) (127)
MRP (125) (146) (167) (191)
---------- ---------- ---------- ----------
Pro forma (5) $ 626 $ 694 $ 763 $ 841
========== ========== ========== ==========
Net income per share
Historical $ 0.19 $ 0.16 $ 0.14 $ 0.12
Pro forma adjustments:
Net income from proceeds 0.39 0.39 0.40 0.40
ESOP (3) (0.06) (0.06) (0.06) (0.06)
MRP (4) (0.09) (0.09) (0.09) (0.09)
---------- ---------- ---------- ----------
Pro forma net income per share (5) $ 0.43 $ 0.41 $ 0.39 $ 0.38
========== ========== ========== ==========
Number of shares used in calculating earnings per
share (7) 1,456,133 1,697,333 1,938,533 2,215,913
========== ========== ========== ==========
Stockholders' equity (book value) (6)
Historical $ 23,157 $ 23,157 $ 23,157 $ 23,157
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 $ 42,809 $ 46,307 $ 49,806 $ 53,830
========== ========== ========== ==========
Stockholders' equity (book value) per share (6)
Historical $ 14.21 $ 12.19 $ 10.67 $ 9.34
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 $ 26.26 $ 24.37 $ 22.95 $ 21.70
========== ========== ========== ==========
Pro forma price to book value 57.1% 61.5% 65.4% 69.1%
========== ========== ========== ==========
Pro forma price to net income (P/E ratio) 34.9 36.6 38.5 39.5
========== ========== ========== ==========
Number of shares used in calculating equity per share (6) 1,630,000 1,900,000 2,170,000 2,480,500
========== ========== ========== ==========
</TABLE>
33
<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, 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, 1998 (based on shares released for
the period pursuant to SOP 93-6) would have been $0.39, compared with
$0.38, 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. Pro forma MRP adjustments assume that expense will be
amortized over an assumed five year vesting period, 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 as a result of the contribution to
the foundation. 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%, which is the maximum
federal tax rate. No state tax benefit was given because the permitted
deduction for state tax purposes is not expected to have a material impact
on net income.
(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 table, 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.
Pursuant to Statement of Financial Accounting Standards No. 128, MRP shares
assumed to be unvested are excluded from outstanding shares in computing
earnings per share.
34
<PAGE>
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.
The following table presents (i) Community Savings' historical regulatory
capital position on December 31, 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.
35
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA REGULLATORY CAPITAL POSITION AT DECEMBER 31, 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
DECEMBER 31, 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>
Capital under generally accepted
accounting principles $ 23,157 13.4% $ 33,217 18.2% $ 35,047 19.0% $36,878 19.8%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Tier 1 (leverage) capital $ 23,010 13.1% $ 33,070 18.1% $ 34,900 18.9% $36,731 19.7%
Tier 1 (leverage) capital
requirement (2) 7,016 4.0% 7,314 4.0% 7,387 4.0% 7,460 4.0%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Excess $15,994 9.1% $ 25,756 14.1% $ 27,513 14.9% $29,270 15.7%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Tier 1 risk adjusted capital $23,010 26.2% $ 33,070 36.8% $ 34,900 38.7% $36,731 40.6%
Tier 1 risk adjusted capital
requirement 3,513 4.0% 3,594 4.0% 3,608 4.0% 3,623 4.0%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Excess $19,497 22.2% $ 29,476 32.8% $ 31,292 34.7% $33,107 36.6%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Total risk based capital $24,111 27.5% $ 34,171 38.0% 36,001 39.9% $37,832 41.8%
Total risk based capital
requirement 7,027 8.0% 7,188 8.0% 7,217 8.0% 7,246 8.0%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Excess $17,084 19.5% $ 26,983 30.0% $ 28,784 31.9% $30,585 33.8%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
NC regulatory capital $24,111 13.9% $ 34,171 18.7% $ 36,001 19.5% $37,832 20.3%
NC regulatory capital
requirement 8,647 5.0% 9,150 5.0% 9,241 5.0% 9,333 5.0%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
Excess $15,464 8.9% $ 25,021 13.7% $ 27,760 14.5% $28,499 15.3%
--------- ---------- --------- ---------- --------- ---------- ------- ----------
<CAPTION>
2,380,500
SHARES SOLD AT
PRICE OF $15.00
PER SHARE
----------------------
PERCENT OF
REGULATORY
AMOUNT ASSETS (1)
-------- ----------
<S> <C> <C>
Capital under generally accepted
accounting principles $ 38,983 20.7%
======== ==========
Tier 1 (leverage) capital $ 38,836 20.6%
Tier 1 (leverage) capital requirement (2) 7,545 4.0%
-------- ----------
Excess $ 31,291 16.6%
======== ==========
Tier 1 risk adjusted capital $ 38,836 42.7%
Tier 1 risk adjusted capital
requirement 3,640 4.0%
-------- ----------
Excess $ 35,196 38.7%
======== ==========
Total risk based capital $ 39,937 43.9%
Total risk based capital
requirement 7,280 8.0%
-------- ----------
Excess $ 32,657 35.9%
======== ==========
NC regulatory capital $ 39,937 21.2%
NC regulatory capital
requirement 9,438 5.0%
-------- ----------
Excess $ 38,498 16.2%
======== ==========
</TABLE>
_________________________
(1) For 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-
weight assets. Net proceeds (after ESOP and MRP) were assumed to be
invested short term treasury securities (0% risk-weighted) and one-to-four
family residential mortgage loans (50% risk-weight) with a weight 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.
36
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
If the foundation was not being established as part of the conversion,
Community Savings' independent appraiser 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 December 31, 1998.
37
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT FOUNDATION
AT DECEMBER 31, 1998 AND FOR THE YEAR 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..................... 192,588 194,092 196,086 197,914 199,585 201,737
Total liabilities................ 149,779 149,779 149,779 149,779 149,779 149,779
Pro forma stockholders'
equity.......................... 42,809 44,313 46,307 48,135 49,806 51,958
Pro forma consolidated
net income.................... 626 680 694 755 763 829
Pro forma stockholders'
equity
per share..................... 26.26 26.51 24.37 24.48 22.95 22.97
Pro forma consolidated net
income per share.............. 0.43 0.46 0.41 0.43 0.39 0.41
Offering price as a
percentage
of pro forma
stockholders'
equity per share.............. 57.1% 56.6% 61.5% 61.3% 65.4% 65.3%
Offering price to pro
forma net
income per share............... 34.9 32.6 36.6 34.9 38.5 36.6
Pro forma market
capitalization
to total assets................ 12.7% 12.9% 14.8% 14.9% 16.6% 16.8%
Pro Forma Financial Ratios:
Return on total assets........ 0.33% 0.35% 0.36% 0.39% 0.39% 0.42%
Return on stockholders'
equity
(annualized)............... 1.47% 1.54% 1.50% 1.57% 1.54% 1.60%
Stockholders' equity to
total assets................. 22.2% 22.8% 23.6% 24.3% 25.0% 25.8%
<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..................... 203,609 206,133
Total liabilities................ 149,779 149,779
Pro forma stockholders'
equity.......................... 53,830 56,354
Pro forma consolidated
net income.................... 841 915
Pro forma stockholders'
equity
per share..................... 21.70 21.67
Pro forma consolidated net
income per share.............. 0.38 0.39
Pro Forma Pricing Ratios:
Offering price as a
percentage
of pro forma
stockholders'
equity per share.............. 69.1% 69.2%
Offering price to pro
forma net
income per share............... 39.5 38.5
Pro forma market
capitalization
to total assets................ 18.3% 18.9%
Pro Forma Financial Ratios:
Return on total assets........ 0.42% 0.45%
Return on stockholders'
equity
(annualized)............... 1.57% 1.63%
Stockholders' equity to
total assets................. 26.4% 27.3%
</TABLE>
38
<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
AMOUNT ANTICIPATED AS A PERCENT
TO BE PAID NUMBER OF SHARES OF SHARES
NAME FOR SHARES TO BE PURCHASED (1) ISSUED
- ---- ----------- ------------------- ------------
<S> <C> <C> <C>
Jimmy L. Byrd, Director $ 300,000 20,000/(2)/ 1.11%
W. R. Gilliam, Director, President and
Chief Executive Officer 300,000 20,000/(2)/ 1.11%
Julian P. Griffin, Director 300,000 20,000/(2)/ 1.11%
Edgar L. Hartgrove, Director 300,000 20,000/(2)/ 1.11%
William C. Ingold, Director 300,000 20,000/(2)/ 1.11%
Charles A. LeGrand, Director 300,000 20,000/(2)/ 1.11%
James D. Moser, Jr., Director 300,000 20,000/(2)/ 1.11%
W. Joseph Rich, Director 160,000 10,667 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 300,000 20,000/(2)/ 1.11%
and Secretary
Judy L. Pennington, Vice President 40,000 2,667 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>
39
<PAGE>
(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 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. Shares would not be acquired by the Stock Option Plan until
the Plan is approved by First Community's stockholders at a meeting not
expected to be held until more than one year following the conversion. See
"Management of Community Savings - Proposed Stock Option Plan."
(2) Represents the maximum purchase allowed in the offering.
If (i) the Stock Option Plan is approved by First Community's stockholders
and all of the stock options were granted to directors and executive officers
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, all of the MRP shares which could be granted under the MRP are
granted and issued to directors and executive officers 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.
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
40
<PAGE>
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 (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
41
<PAGE>
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 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.
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
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<PAGE>
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.
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
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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 March 31, 1999 (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.
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
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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.
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 March 31, 1999, who had Qualifying Deposits on such
date;
(iv) Community Savings' "Other Members," who are depositor and borrower
members of Community Savings as of April 15, 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.
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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 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 April 15, 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-
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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 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
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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.
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
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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 & Company ("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)
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, including the ratio
of its assets to liabilities, the composition of its assets and liabilities,
levels of nonperforming assets, interest rate risk exposure, capital levels and
operating efficiency, 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. Ferguson has advised Community Savings that it has considered the
effect of the conversion on the net worth and earnings potential of First
Community and Community Savings. Ferguson also compared the projected price to
earnings ratio and price to book value ratio to the ratios of a comparable
group. In correlating the market value of First Community and Community Savings
to the market value of comparable institutions, minor downward adjustments were
made as a result of Community Savings' balance sheet and earnings
characteristics and because the offering is a new issue of securities.
Ferguson's 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 March 12, 1999, 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
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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 - 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 forma market value of Community
Savings and First Community so that the aggregate pro 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
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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 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
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(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.
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.
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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.
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 and First Community have
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
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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) 221-1503.
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 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.
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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 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.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
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
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foundation with common stock of First Community, as further described below.
Establishment of the foundation is contingent on the approval of the Plan of
Conversion.
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.
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.
The management of the affairs of the foundation will be vested in its board
of directors. 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 provide that the
corporation is organized exclusively for charitable purposes and 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.
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 those 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 those 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 will be diluted as a result of the
foundation. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Foundation", "Pro Forma Data" and
"Risk Factors - Establishment of the foundation will dilute the voting and
ownership interests of stockholders."
Upon completion of the conversion, the foundation is expected to own
between 4.03% and 6.13% of First Community's outstanding common stock. Except
for the restrictions set forth below, 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.
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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.
As a private foundation under Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended (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 the foundation's assets or would
otherwise jeopardize the foundation's capacity to carry out its charitable
purposes.
VALUATION RANGE IS REDUCED AS A RESULT OF THE FOUNDATION. As a result of
the anticipated establishment of the foundation, the valuation range, as
estimated by Community Savings' independent appraiser, has decreased and the
amount of stock available for sale in the offering has 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 an organization exempt from federal income taxation under
Section 501(c)(3) of 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.
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 the 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
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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 further reduce
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.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. The foundation will be
required to agree to the following conditions imposed by the FDIC in connection
with the conversion:
1. the foundation will be subject to examination by the FDIC;
2. the foundation must comply with supervisory directives imposed by the
FDIC;
3. the foundation will operate in accordance with written policies
adopted by the foundation's board of directors;
4. any shares of common stock of First Community held by the foundation
must be voted in the same ratio as all other shares of First Community
common stock voted on all proposals considered by stockholders of
First Community; and
5. The foundation shall provide annual reports to the FDIC describing
grants made and grant recipients.
The foundation could request a waiver of the voting restriction described
in item 4 above and would request a waiver if the restriction would result in
the loss of its tax-exempt status. There can be no assurances that the FDIC
would grant a waiver, unconditional or otherwise. If the voting restriction is
waived or becomes unenforceable, the FDIC could impose such other conditions
relating to control of the foundation's common stock as are determined by the
FDIC to be appropriate at the time.
APPROVAL OF FOUNDATION. Establishment of the foundation is contingent upon
the approval of the conversion at the Special Meeting.
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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 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
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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 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.
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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.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements which are based
on certain assumptions and describes future plans, strategies and expectations
of First Community. These forward-looking statements are generally identified
by use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. First Community's ability to predict results
or the actual effect of future plans and strategies is inherently uncertain.
Factors which could have a material adverse effect on First Community's and
Community Savings' operations include, but are not limited to, changes in:
interest rates, general economic conditions, liquidation and regulation,
monetary and fiscal policies of the U.S. Government including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of their
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in their market area and accounting
principles and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed
on such statements.
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
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'
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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 December 31, 1998,
investments and mortgage-backed securities accounted for only 18% of Community
Savings' assets, and net loans accounted for 74%. On that date, home mortgage
loans accounted for 71% of Community Savings' loan portfolio, before net items,
and commercial, construction and consumer loans accounted for almost 25%. 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 December 31, 1998, adjustable rate loans totaled $117.7
million, or 92.5% of total loans outstanding, before net items, while fixed rate
loans totaled $9.5 million or 7.5% 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
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 December 31, 1998, Community Savings had a one-year cumulative negative
gap of 10.56% 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
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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.
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<PAGE>
<TABLE>
<CAPTION>
Terms to Repricing at December 31, 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 $ 320 $ 846 $ 2,580 $ 1,417 $ 5,163
Consumer loans - fixed rate 640 806 2,380 506 4,332
--------- --------- -------- -------- --------
Subtotal 960 1,652 4,960 1,923 9,495
Mortgage loans-adjustable rate 13,224 32,287 40,160 - 85,671
Home equity 4,671 - - - 4,671
Construction 9,227 - - - 9,227
Commercial 18,093 - - - 18,093
Consumer 55 - - - 55
--------- --------- -------- -------- --------
Subtotal 45,270 32,287 40,160 - 117,717
Investments /(1)/
Interest bearing cash 3,822 - - - 3,822
Investment securities 13,098 6,612 10,087 2,457 31,105
--------- --------- -------- -------- --------
Subtotal 16,920 6,612 10,087 2,457 34,927
Total rate sensitive assets 63,150 40,551 55,207 4,600 162,139
--------- --------- -------- -------- --------
Interest-bearing liabilities:
Deposits
Savings 3,709 11,127 1,569 1,714 18,119
NOW and money market accounts 2,805 6,117 4,382 1,665 14,969
Certificates 36,833 55,102 13,856 - 105,791
Federal Home Loan Bank 5,000 - - - 5,000
borrowings --------- --------- -------- -------- --------
Total rate sensitive liabilities 48,347 72,346 19,807 3,379 143,879
--------- --------- -------- -------- --------
Interest rate sensitivity gap $ 14,803 $ (31,795) $ 35,400 $ (148) $ 18,260
========= ========= ======== ======== ========
Cumulative gap $ 14,803 $ (16,993) $ 18,407 $ 18,259
========== ========= ======== ========
Cumulative gap as a % of average
interest - earning assets/(2)/ 9.20% (10.56%) 11.44% 11.34%
Cumulative gap as a % of average total 8.65% (9.93%) 10.76% 10.67%
assets
</TABLE>
(1) Includes mortgage-backed securities.
(2) During the one year period ended December 31, 1998.
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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 December 31, 1998, of instantaneous and permanent 100
to 400 basis point changes in market interest rates.
CHANGE IN INTEREST
RATES IN BASIS POINTS % CHANGE IN
(RATE SHOCK) NET PORTFOLIO VALUE
------------ -------------------
Up 400 (50%)
Up 300 (37%)
Up 200 (23%)
Up 100 (11%)
Static -
Down 100 9%
Down 200 17%
Down 300 25%
Down 400 36%
The following table presents the predicted effects on Community Savings'
net interest income as of December 31, 1998 of instantaneous and permanent 100
to 400 basis point changes in market interest rates.
CHANGE IN INTEREST
RATES IN BASIS POINTS % CHANGE IN
(RATE SHOCK) NET INTEREST INCOME
------------ -------------------
Up 400 (28%)
Up 300 (19%)
Up 200 (10%)
Up 100 (4%)
Static -
Down 100 3%
Down 200 4%
Down 300 7%
Down 400 11%
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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
17% increase in net portfolio value and a 4% increase in net interest income.
In the event of a 200 basis point increase in interest rates, Community Savings
would be expected to experience a 23% decrease in net portfolio value and a 10%
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 December 31, 1998, the estimated market value of liquid assets (cash,
cash equivalents, and marketable securities) was approximately $38.0 million,
representing 26% 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.
The primary uses of Community Savings' liquidity are to fund loans, provide
for deposit fluctuations and invest in other non-loan earning assets. At
December 31, 1998, outstanding off-balance sheet commitments to extend credit in
the form of loan originations totaled $10.2 million. Undrawn lines of credit
totaled $5.6 million. Management considers current liquidity levels adequate to
meet Community Savings' cash flow requirements.
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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 December 31, 1998, was $23.2 million, an increase of
1.4% from $22.8 million at December 31, 1997. Totals include $147,000 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 December 31, 1998, Community
Savings' ratio of Tier I capital to average assets was 13.5%. 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 December 31, 1998, Community Savings had a ratio of qualifying total capital
to risk-weighted assets of 27.4%.
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 December 31, 1998, Community Savings' net worth totaled
13.4% 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.
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
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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. All mission critical functions have now been tested.
Operating plans are being developed which would be implemented in the event
power failures or failures in communications equipment prevent use of computer
systems serving Community Savings or otherwise impair Community Savings'
operations. Management is also 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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997 AND
COMPARISON OF RESULTS OF OPERATIONS FOR THE TWELVE MONTH PERIODS ENDED DECEMBER
31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996.
FINANCIAL CONDITION. Total assets increased 3.05% to $172.9 million at
December 31, 1998 compared to $167.8 million at December 31, 1997 and $156.7
million at December 31, 1996. Two significant changes in the asset mix from 1996
to 1998 were the $39.1 million (44.4%) increase in net loans receivable and the
$25.1 million (44.7%) 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, 1998, approximately 75.1%
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 $140.4 million at December 30, 1998 from $134.7
million at December 31, 1997 or 4.25%. Loans, net of reserves increased 10.8% at
December 31, 1998 to $127.2 million from the December 31, 1997 balance of $114.8
million. Total debt securities decreased 23.4% to $31.1 million at December 31,
1998 compared to the December 31, 1997 balance of $40.6 million, which was a
27.7% decrease from December 31, 1996. Management's emphasis on building a solid
net interest income stream via loan portfolio growth is evidenced by the $39.1
million increase in net loans funded by the $25.1 million reduction in debt
securities and $17.9 million increase in deposits during the twenty-four month
period ended December 31, 1998.
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Borrowed funds, collateralized through an agreement with the Federal Home
Loan Bank, decreased 25.4% to $5.0 million at December 31, 1998 from 6.7 million
at December 31, 1997, and at December 31, 1997 had decreased 25.5% from $9.0
million at December 31, 1996. The interest rate on the Federal Home Loan Bank
borrowings is variable and the borrowings 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 $248,000, or 0.14% of total assets, at December
31, 1998, as compared to $241,000, or 0.14% of total assets at December 31,
1997, and 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 $1.3 million allowance for loan losses at
December 31, 1998 was adequate to cover potential losses.
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, 1998 decreased
54.0% to $271,000 as compared to the year ended December 31, 1997. Net income
for the year ended December 31, 1997 increased 47.8% to $590,000 compared to
$399,000 for the year-ended December 31, 1996. The reduction in earnings in 1998
was a result of management's efforts to eliminate inefficient resources and
obsolete equipment in preparation for operating Community Savings in a
commercial banking environment. During the year ended December 31, 1998
approximately $800,000 in expenses were incurred to retire recurring overhead
costs related to compensation agreements and fixed assets. 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.
Interest Income. Interest and dividend increased by 8.3% to $12.5 million
for the twelve-month period ended December, 31, 1998. Interest and dividend
income increased to $11.6 million, an increase of 9.1%, for the year ended
December 31, 1997 from $10.6 million during the same period in 1996. The
increases in interest and dividend income for 1998 and 1997 can be principally
attributed to substantial increases in the average balance of the loan
portfolio, partially offset by decreases in the average balance of investments
and mortgage-backed securities. Overall, the yield on average interest-earning
assets increased to 7.79% for the year ended December 31, 1998, compared to
7.51% for the year ended December 31, 1997 and 7.19% for the year ended December
31, 1996. The primary reason for this increase was an increase in the amount of
higher yielding commercial, construction and consumer loans.
Interest Expense. Interest expense increased 3.4% to $7.0 million for the
year ended December 31, 1998. Interest expense increased 5.6% to $6.7 million
for the year ended December 31, 1997, compared to $6.4 million for the year
ended December 31, 1996. The 1998 and 1997 increases in interest expense are a
result of growth in deposits, principally in certificates of deposit, during the
period. In 1998, there was a 30.3% decrease in interest expenses on borrowings.
Net Interest Income. Net interest income, before the provision for loan
losses, for the year ended December 31, 1998, was $5.6 million, an increase of
15.2% or $734,000 as compared to the year ended December 31, 1997. 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. The yield on
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average interest-earning assets increased 28 basis points to 7.79% in 1998 and
increased 32 basis points to 7.51% in 1997. The cost of average interest-bearing
liabilities decreased 5 basis points to 4.92% in 1998 and decreased 2 basis
points to 4.97% in 1997, causing net interest margins to increase 32 basis
points in 1998 and 27 basis points in 1997.
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.
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<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
------------------------------- --------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- --------- -------- ---------- ----------- ---------- ---------- --------- ---------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing $ 5,502 $ 337 6.12% $ 4,340 $ 258 5.94% $ 4,202 $ 236 5.62%
deposits
Federal funds sold 150 8 5.59 304 17 5.59 500 26 5.20
Investment and
mortgage-backed
securities 33,175 2,211 6.67 47,760 3,294 6.90 60,560 3,631 6.00
Loans receivable, net 122,133 9,988 8.18 101,826 8,015 7.87 82,450 6,728 8.16
-------- ------- ------ ------- ------- ---- -------- ------- ------
Total interest-earning
assets 160,960 12,544 7.79% 154,230 11,584 7.51% 147,712 10,621 7.19%
-------- ------- ------ ------- ------- ---- -------- ------- -------
Non-interest-earning
assets 10,114 8,693 6,415
--------
Total $171,074 $162,923 $154,127
======== ======== ========
Liabilities:
Interest-bearing
liabilities:
Certificates of deposit $102,777 5,738 5.58% $ 93,643 5,248 5.60% $ 85,210 4,839
Savings accounts 18,365 529 2.88 20,010 605 3.02 20,774 628
NOW and money market
accounts 14,860 379 2.55 14,102 427 3.03 13,593 455
Federal Home Loan Bank 5,458 321 5.87 7,788 460 5.91 8,333 460
borrowings -------- ------- ----- -------- ------- ---- -------- -------
Total interest-bearing
liabilities 141,460 6,967 4.92% 135,543 6,740 4.97% 127,910 6,382 4.99%
Non-interest-bearing -------- ------- ------ ------- ------- ---- -------- ------- ----
liabilities 6,330 4,672 4,234
Equity 23,284 22,708 21,983
-------- -------- --------
Total $171,074 $162,923 $154,127
======== ======== ========
Net interest income $ 5,577 $ 4,844 $4,239
======= ======= =======
Interest rate spread /(1)/ 2.87% 2.54% 2.20%
====== ===== ====
Net interest-earning assets $ 19,500 $ 18,687 $ 19,802
======== ======== ========
Net yield on interest-earning 3.46% 3.14% 2.87%
assets/(2)/ ====== =====
</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.
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<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, 1998 vs. 1997 Year Ended December 31, 1997 vs. 1996
------------------------------------------ ---------------------------------------
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 $ 71 $ (8) $ 79 $ 8 $ 14 $ 22
Fed funds (9) 0 (9) (10) 1 (9)
Investments and (976) (107) (1,084) (835) 498 (337)
mortgage-backed securities 1,650 323 1,974 1,532 (245) 1,287
Loans receivable ------ ----- ------- ------ ----- ------
Total interest-earning assets 736 224 960 695 268 963
------ ----- ------- ------ ----- ------
Interest expense on:
Certificates of deposit 510 (20) 490 473 (64) 409
Savings accounts (48) (28) (76) (23) 0 (23)
NOW and money market 22 (70) (48) 17 (45) (28)
accounts (136) (3) (139) (31) 31 (0)
Federal Home Loan Bank ------ ----- ------- ------ ----- ------
borrowings
Total interest-bearing 348 (121) 227 436 (78) 358
liabilities ------ ----- ------- ------ ----- ------
Increase (decrease) in net $ 388 $ 345 $ 733 $ 259 $ 346 $ 606
interest income ====== ===== ======= ====== ===== ======
</TABLE>
Provision for Loan Losses. No loans were charged-off against the
allowance for loan losses during the year ended December 31, 1998. A provision
of $550,000 was added to the allowance for loan losses during 1998, increasing
the end of period allowance for loan losses to $1.3 million or 1.05% of
outstanding loans.
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 during 1997, increasing the end of
period balance to $781,000 or .67% of outstanding loans. Management considered
the allowance for loan losses to be adequate at December 31, 1998. During the
year ending December 31, 1998, commercial loans increased $11.9 million or 195%
and consumer loans increased $2.7 million or 160%. During the year ending
December 31, 1997, commercial loans increased to $6.1 million from only $400,000
at December 31, 1996 and consumer loans increased to $1.7 million from only
$333,000 at December 31, 1996. Management feels it prudent to maintain an
allowance of at least 1% of outstanding loans due to decisions to change loan
composition, loan volume and the resulting increased risk levels in the
portfolio caused by the significant increase in the commercial and consumer loan
portfolios. Although commercial and consumer loans have a greater return on
investment than mortgage loans, they also have an inherently higher default
rate. As management executes its plan to diversify a significant portion of the
loan portfolio into commercial and consumer credits, Community Savings deems it
prudent to prepare for the anticipated future higher charge off rates by
increasing the loan loss allowance.
Other Income. Non-interest or "other" income increased $196,000 or
53.6% to $561,000 during the year ended December 31, 1998 and increased $8,000
or 2.2% to $365,000 during the year ended December 31, 1997. Non-interest
income is typically derived from service charges on deposit accounts, loan
servicing fees, and other
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<PAGE>
fees associated with loans and other services. A wholly-owned subsidiary of
Community Savings was organized in December 1997 for the sole purpose of
increasing non-interest income.
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 increased 33.5% or $1.3 million during the year ended December 31, 1998
and decreased 1.5% during the year ended December 31, 1997. Ignoring the
$767,000 special one-time FDIC assessment during 1996, general and
administrative expenses were 22.4% higher during 1997 than in 1996. During 1998,
$533,000 of overhead expenses were incurred to fully fund deferred compensation
plans for directors and salary continuation plans for Community Savings'
president. In addition $273,500 in expense was incurred to write down certain
fixed assets. The primary reason for the 1997 increase was a $601,000 increase
in compensation and fringe benefit expenses.
Income Taxes. The effective tax rates for the years ended December 31,
1998, 1997 and 1996 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
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<PAGE>
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.
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 December 31,
1998, only 3.4% of Community Savings' loan portfolio, before net items, was not
secured by real estate. On December 31, 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 $127.2 million at December 31, 1998 representing 73.5% of
Community Savings' total assets at such date. On that date, 71.4% of Community
Savings' loan portfolio, before net items, was composed of home mortgage loans.
Commercial, financial and agricultural loans represented 14.2% of Community
Savings' loan portfolio, before net items, and construction loans and home
equity loans represented 7.3% and 3.7%, respectively, of Community Savings' loan
portfolio, before net items, on that date. Consumer loans represented 3.4% of
the loan portfolio,
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<PAGE>
before net items. As of December 31, 1998, 92.5% of the loans in Community
Savings' loan portfolio, before net items, had adjustable interest rates.
The following table sets forth the composition of Community Savings' loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At December 31
------------------------------------------------------
1998 1997 1996
------------------ ---------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Mortgage $ 90,834 71.4% $ 97,581 83.9% $84,652 91.2%
Home equity line of credit 4,671 3.7 4,778 4.1 4,131 4.5
Construction 9,291 7.3 5,871 5.1 1,058 1.1
Commercial, financial and agriculture 18,029 14.2 6,120 5.3 400 0.4
Consumer 4,387 3.4 1,686 1.4 333 0.4
Held for sale - - 287 0.2 2,256 2.4
-------- ----- -------- ----- ------- -----
Total gross loans 127,212 100.0% 116,323 100.0% 92,830 100.0%
===== ===== =====
Less:
Unearned fees and discounts 448 439 363
Loans in process including funded but unclosed loans (1,798) 270 3,848
Allowance for loan loss 1,332 781 492
-------- -------- -------
Net loan receivable $127,230 $114,833 $88,127
======== ======== =======
</TABLE>
75
<PAGE>
The following table sets forth the time to contractual maturity or
repricing of Community Savings' loan portfolio at December 31, 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 December 31, 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
--------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Mortgage $46,439 $19,438 $23,540 $1,054 $363 $ 90,834
Home equity 4,671 - - - - 4,671
Construction 9,291 - - - - 9,291
Commercial, financial and agricultural 17,794 - - - - 17,794
Consumer 1,501 1,523 857 506 - 4,387
Other Loans 55 - - - - 55
Less: Allowance for loan losses (1,332) - - - - (1,332)
Loans in process 1,798 - - - - 1,798
Unearned fees (448) - - - - (448)
------- ------- ------- ------ --------- --------
$79,949 $20,961 $24,397 $1,560 $363 $127,230
======= ======= ======= ====== ========= ========
</TABLE>
The following table sets forth the dollar amount at December 31, 1998 of
all loans maturing or repricing more than one year after December 31, 1998 which
have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable Totals
------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage $3,995 $40,400 $44,395
Consumer 2,886 - 2,886
------ ------- -------
Total $6,881 $40,400 $47,281
====== ======= =======
</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.
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<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,
-------------------------------------------
1998 1997 1996
------------ ----------------- ----------
<S> <C> <C> <C>
(In Thousands)
Loans receivable, net, beginning of period $114,833 $ 88,127 $77,591
Loan originations, net of principal repayments:
Held-for-investment /(1)/ 13,316 29,189 10,622
Held-for-sale 8,474 415 637
-------- -------- -------
Total loan originations, net of principal repayments 21,790 29,604 11,259
Loan sales (8,843) (2,429) (588)
Changes in loan allowance, net (550) (470) (134)
-------- -------- -------
Loans receivable, net, end of period $127,230 $114,833 $88,127
======== ======== =======
</TABLE>
(1) Includes $0, $125,000 and $165,000 in loan purchases during 1998, 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 December 31, 1998, approximately 71.4% 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.
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<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 December 31, 1998,
Community Savings had $18.0 million outstanding in commercial, financial and
agricultural loans, comprising 14.2% 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 December 31, 1998 was approximately $9.3 million, representing
approximately 7.3% 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
78
<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 December 31, 1998, Community Savings had
approximately $4.7 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 LENDING. 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 December 31, 1998, Community Savings' consumer loan
portfolio totaled $4.4 million, representing 3.4% 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.
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<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 December 31, 1998,
Community Savings had $945,000 in such unfunded mortgagge loan commitments and
$9.2 million unfunded commitments to make other types of loans. In addition, on
such date Community Savings had $5.6 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 December 31, 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.
80
<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 December 31
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans 90 days past due and still accruing $ 131 $ 241 $ 217
Consumer loans 90 days past due and still accruing 26 - -
Nonaccrual loans - - -
Repossessed assets 7 - -
Real estate owned 84 - -
--------- --------- ---------
Total nonperforming assets $ 248 $ 241 $ 217
========= ========= =========
Nonperforming loans to total loans 0.12% 0.21% 0.23%
Nonperforming assets to total assets 0.14% 0.14% 0.14%
Total assets $ 172,936 $ 167,817 $ 156,751
Total loans, before net items $ 127,212 $ 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 December 31, 1998, Community Savings had approximately $1.5 million
of loans internally classified as "substandard," $20,000 of 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.
81
<PAGE>
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 December 31, 1998, Community Savings had no loans categorized
as special mention.
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.
82
<PAGE>
The following table describes the activity related to Community Savings'
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- ---------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $ 781 $ 492 $ 431
Provision for loan losses 550 360 60
Charge-offs - 71/(1)/ -
Recoveries - - (1)
--------- --------- --------
Net charge-offs - 71 (1)
--------- --------- --------
Balance, end of period $ 1,331 $ 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 1.05% 0.67% 0.54%
Ratio of allowance to total nonperforming
assets at end of period 536.69% 324.07% 226.73%
Total loans, before net items $ 127,212 $ 116,323 $ 92,830
Average loans, before allowance $ 123,464 $ 102,607 $ 82,942
Nonperforming assets $ 248 $ 241 $ 217
</TABLE>
(1) THIS ENTIRE AMOUNT WAS CHARGED OFF IN CONNECTION WITH A SINGLE MORTGAGE
LOAN.
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.
83
<PAGE>
<TABLE>
<CAPTION>
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 $ 452 40% 71.4% $ 578 74% 83.9% $ 378 77% 91.2%
Home equity line of credit 136 12 3.7 39 5 4.1 25 5 4.5
Construction 170 15 7.3 62 8 5.1 15 3 1.1
Commercial, financial, 283 25 14.2 78 10 5.3 49 10 0.4
agricultural
Consumer 90 8 3.4 24 3 1.4 25 5 0.4
Held-for-sale - - 0.0 - - 0.2 - - 2.4
------ --- ----- ----- --- ----- ----- --- -----
Total $1,131 100% 100.0% $ 781 100% 100.0% $ 492 100% 100.0%
====== === ===== ===== === ===== ===== === =====
</TABLE>
84
<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
December 31, 1998, Community Savings' investment and mortgage-backed securities
portfolio totaled approximately $31.1 million, consisting primarily of U.S.
government and agency securities, municipal bonds, 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
December 31, 1998, all of Community Savings investment securities and mortgage-
backed securities were classified as available for sale.
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
also 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
December 31, 1998, Community Savings' investment in stock of the Federal Home
Loan Bank of Atlanta was $1.4 million.
85
<PAGE>
The following table sets forth certain information regarding Community
Savings' investment and mortgage-backed securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31
----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
US government and agency obligations
US treasury securities - Held to maturity $ - $ 6,347 $ 15,249
US treasury securities - Available for sale 1,536 4,030 4,975
Federal agency securities - Held to maturity - 6,955 9,959
Federal agency securities - Available for sale 12,328 5,037 2,002
-------- -------- --------
Total U.S. Government and agency 13,864 22,369 32,185
-------- -------- --------
Municipal securities - Held to maturity - 95 195
Municipal securities - Available for sale 2,599 - -
-------- -------- --------
Total municipal securities 2,599 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 0 2,254 2,570
GNMA - Available for sale 1,221 - 2,189
FNMA - Available for sale 1,234 - -
FHLMC - Held to maturity 0 4,498 5,434
FHLMC - Available for sale 3,320 49 85
REMIC's - Held to maturity 0 1,898 3,310
REMIC's - Available for sale 8,853 9,448 10,212
-------- -------- --------
Total mortgage-backed securities 14,628 18,147 23,800
-------- -------- --------
Total investment and mortgage-backed securities $ 31,105 $ 40,625 $ 56,194
======== ======== ========
</TABLE>
As of December 31, 1998, all of Community Savings investment securities and
mortgage-backed securities were classified as available for sale and were
recorded at estimated market value. On that date the amortized cost of its
investment and mortgage-backed securities portfolio was $30.9 million.
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of Community Savings'
investment and mortgage-backed debt securities portfolio as of December 31,
1998.
86
<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>
(Dollars In Thousands)
U.S. treasury notes - available for sale $ 509 6.32% $ 1,027 6.19% $ - -%
Federal agency securities - available
for sale 1,003 6.33 6,990 6.09 1,021 5.54
------- ---- ------- ---- -------- ------
Total debt securities - available for sale 1,512 6.33 8,017 6.10 1,021 5.54
------- ---- ------- ---- -------- ------
Mortgage-backed securities - available for
sale - - - - 173 8.730
GNMA participation certificates - - - - 1,038 6.670
FHLMC participation certificates - - - - - -
FNMA participation certificates - - - - 1,250 5.99
REMIC's ------- ---- ------- ---- -------- ------
Total mortgage-backed securities - - - - - 2,461 7.11
available for sale ------- ---- ------- ---- -------- ------
Municipal Securities - available for sale - - - - 387 6.47
------- ---- ------- ---- -------- ------
Total debt securities $ 1,512 5.88% $ 8,017 6.12% $ 3,869 7.29%
======= ==== ======= ==== ======== ======
<CAPTION>
After Ten Years Total
--------------------- ----------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
---------- --------- --------- ----------
<C> <C> <C> <C>
<S>
U.S. treasury notes - available for sale $ - -% $ 1,536 6.23%
Federal agency securities - available
for sale 3,314 6.71 12,328 6.40
-------- ----- ------- -----
Total debt securities - available for sale 3,314 6.71 13,864 6.38
-------- ----- ------- -----
Mortgage-backed securities - available for
sale
GNMA participation certificates 1,048 0.00 1,221 8.96
FHLMC participation certificates 2,282 9.57 3,320 8.53
FNMA participation certificates 1,234 6.30 1,234 6.30
REMIC's 7,603 6.53 8,853 6.49
-------- ----- ------- -----
Total mortgage-backed securities - 12,167 7.12 14,628 7.14
available for sale -------- ----- ------- -----
Municipal Securities - available for sale 2,212 6.72 2,599 6.68
-------- ----- ------- -----
Total debt securities $ 17,693 7.15% $31,091 6.67%
======== ===== ======= =====
</TABLE>
87
<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 investment 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
December 31, 1998, 75.3% of Community Savings' deposits consisted of certificate
accounts, 12.9% consisted of statement savings accounts, 10.7% consisted of
interest-bearing transaction accounts and 1.0% 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 Year Ended
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 539 8,225 156
Interest credited 5,180 3,948 3,461
-------- -------- --------
Total deposits at end of period $140,416 $134,697 $122,524
======== ======== ========
</TABLE>
The following table sets forth certain other information regarding
Community Savings' savings deposits at the dates indicated.
88
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------------- -------------------------
Minimum Percent Weighted Percent Weighted
Deposit of Average of Average
Required Balance Deposits Rate Balance Deposits Rate
-------- ------- -------- ---- ------- -------- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest bearing $ 1 $ 1,522 1.09% $ 716 0.53%
NOW and money market accounts $ 100 14,985 10.67 2.19% 14,712 10.92 3.01%
Statement/passbook $ 100 18,119 12.90 2.71% 19,069 14.16 3.00%
-------- ------ -------- ------
Total demand deposits 34,626 24.66 34,497 25.61
-------- ------ -------- ------
Time Deposits:
Certificate accounts with original maturities of:
3 months $ 500 225 0.16 217 0.16
6 months $ 500 7,598 5.41 6,060 4.50
7 months $10,000 7,069 5.03 15,838 11.76
9 months $ 500 33,417 23.80 8,438 6.26
12 months $ 500 20,288 14.45 12,809 9.51
18 months - IRA $ 100 15,219 10.84 15,062 11.18
18 months $ 500 9,950 7.09 25,223 18.73
24 months $ 500 3,903 2.78 5,429 4.03
30 months $ 500 3,109 2.21 4,697 3.49
36 months $ 500 2,401 1.71 3,549 2.63
48 months $ 500 581 0.41 744 0.55
60 months and over $ 500 2,031 1.45 2,134 1.58
-------- ------ -------- ------
Total time deposits 105,791 75.34 5.39% 100,200 74.39 5.72%
-------- ------ -------- ------
Total deposits $140,417 100.00% $134,697 100.00%
======== ====== ======== ======
<CAPTION>
December 31, 1996
-------------------------
Percent Weighted
of Average
Balance Deposits Rate
------- -------- ----
<S> <C> <C> <C>
Demand accounts:
Non-interest bearing
NOW and money market accounts $ 744 0.61%
Statement/passbook 13,968 11.40 3.13%
21,051 17.18 3.00
Total demand deposits -------- ------
35,763 29.19
------
Time Deposits:
Certificate accounts with original maturities of:
3 months
6 months 350 0.29
7 months 8,692 7.09
9 months 4,987 4.07
12 months 10,028 8.18
18 months - IRA 9,344 7.63
18 months 14,296 11.67
24 months 18,400 15.02
30 months 7,518 6.14
36 months 4,665 3.81
48 months 4,386 3.58
60 months and over 1,764 1.44
2,331 1.90
Total time deposits -------- ------
86,761 70.81 5.58%
-------- ------
Total deposits $122,524 100.00%
======== ======
</TABLE>
89
<PAGE>
The following table presents the maturities of all certificates of deposit
as of December 31, 1998:
(IN THOUSANDS)
One year or less $ 91,935
More than 1 and less than 3 years 12,595
More than 3 years 1,261
--------
Total $105,791
========
Based upon historical experience, Community Savings expects that a substantial
percentage of its time deposits coming due within twelve months after December
31, 1998 will be renewed.
As of December 31, 1998, the aggregate amount of outstanding certificates
of deposit in amounts greater than or equal to $100,000 was $18.5 million,
representing 17.5% 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.
(IN THOUSANDS)
3 Months or less $ 7,137
Over 3 months through 12 months 9,117
Over 12 months 2,252
--------
Total $ 18,506
========
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 Year Ended December 31,
----------------------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Federal Home Loan Bank advances:
Average balance outstanding (monthly) $ 5,458 $ 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 5.87% 5.91% 5.52%
Weighted average interest rate at end of period 5.66% 5.94% 5.73%
</TABLE>
90
<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 December 31,
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 December 31,
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 Main Branch building $986,827 $82,604,822
27215
166 Huffman Mill Road land $ 48,676
Burlington, North Carolina Branch building $ 27,047 $25,180,953
27215
257 South Graham-Hopedale land $ 50,279
Road Branch building $ 52,778 $15,308,798
Burlington, North Carolina
27215
227 South Main Street land $ 95,347
Graham, North Carolina 27253 Branch building $105,803 $17,321,933
706 South Church Street Credit land $ 89,386
Burlington, North Carolina Administration building $ 28,273 -
27215
500 South Main Street leasehold
Burlington, North Carolina Administration improvements $ 11,836 -
27215
</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 December 31, 1998 was $816,840.
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
91
<PAGE>
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.
One former Community Savings depositor, whose account was terminated in
1992, has taken the position that he is being improperly denied the right to
purchase common stock in the subscription offering. This former depositor has
made a complaint to the FDIC and Administrator and has threatened legal action
if he is not allowed to purchase in the subscription offering. Management of
Community Savings and First Community believe that the position taken by the
former depositor is without merit and does not expect it to materially and
adversely affect the financial condition or results of operation of Community
Savings or First Community.
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 December 31, 1998, Community Savings had 54 full-time employees and
11 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.
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<PAGE>
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%. Initially, it is expected that First Community and Community
Savings will not file consolidated tax returns but will instead file separate
tax returns. The filing of a consolidated tax return would impair First
Community's ability to make a distribution to its stockholders which would be
treated for tax purposes as a non-taxable return of capital.
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 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.
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Retained income at December 31, 1998, 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 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.
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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 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'
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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 (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,
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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 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
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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 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
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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 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 December 31, 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 December 31, 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.
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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.
As of December 31, 1998, the largest aggregate amount of loans which
Community Savings had to any one borrower was $2.8 million; these loans were
performing in accordance with their original terms as of December 31, 1998.
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 December 31, 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 December 31, 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.
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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 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 December 31, 1998, Community Savings'
liquidity ratio, calculated in accordance with North Carolina regulations, was
approximately 20.2%.
PROMPT CORRECTIVE REGULATORY ACTION. The Federal Deposit Insurance
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
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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 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.
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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 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. First Community and Community Savings do not now
expect to request stockholder approval of the proposed MRP and Stock Option Plan
until more than one year after the conversion is completed. 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 completed.
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,
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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.
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.
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First Community has appointed an audit committee composed of directors
Moser, Rich and Hartgrove. This committee will be responsible for meeting with
and retaining independent auditors, overseeing the adequacy of internal controls
and monitoring compliance with First Community's policies and procedures and
with generally accepted accounting principles.
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 DECEMBER 31, 1998 WITH FIRST COMMUNITY
---- ----------------- --------------------
<S> <C> <C>
W. R. Gilliam 61 President and Chief Executive Officer
Larry H. Hall 53 Executive Vice President
Joseph C. Canada 50 Senior Vice President and Secretary
Christopher B. Redcay 46 Treasurer and Chief Financial Officer
</TABLE>
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.
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<TABLE>
<CAPTION>
AGE ON
DECEMBER 31, 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
</TABLE>
A cousin of Jimmy L. Byrd is married to Joseph C. Canada, an executive officer
of First Community and Community Savings.
BOARD MEETINGS AND COMMITTEES
Community Savings' Board of Directors has regular meetings twice each
month, and held 24 regular and special meetings in the fiscal year ended
December 31, 1998. 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, 1998.
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, 1998.
Community Savings' audit committee is composed of directors Moser, Rich and
Hartgrove. This committee is responsible for meeting with and retaining
independent auditors, overseeing the adequacy of internal controls and
monitoring 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, 1998, met one time.
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, 1998, 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 seven times during the fiscal year ended
December 31, 1998.
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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, 1998, the long range planning committee met one time.
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 related to
the directors' deferred compensation arrangements was approximately $149,000
during the fiscal year ended December 31, 1998. 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, 1998 was approximately
$163,000. 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
SEPTEMBER 30, POSITIONS AND OCCUPATIONS COMMUNITY SAVINGS
NAME 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, 1998 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 salary and bonus compensation exceeded $100,000 for
service in all capacities.
<TABLE>
OTHER ANNUAL
NAME AND COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS ($)/1/ COMPENSATION/2/
------------------ ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
W. R. Gilliam 1998 $103,000 $32,317 - $359,622
President, Chief Executive Officer, and
Director
</TABLE>
____________________
1 Under the "Other Annual Compensation" category, perquisites for the fiscal
year ended December 31, 1998 did not exceed the lesser of $50,000, or 10%
of salary and bonus as reported for Mr. Gilliam.
2 Includes (a) $6,675 in directors' fees; (b) $315,046 accrued under
supplemental income agreements established for the benefit of Mr. Gilliam,
(c) $14,505 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) $8,769 in
contributions to Community Savings' retirement plans for Mr. Gilliam and
(e) $14,627 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.
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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 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, 1998 was approximately $90,000. 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,
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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, 1998, compensation expense related
to the supplemental income plans was $315,000. As a result of accruals during
1998, the supplemental income plans are fully funded.
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, 1998, Community
Savings paid approximately $20,000 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
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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 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
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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 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 currently expected to be held no sooner than one year
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. Under the MRP, directors and employees of
Community Savings could be issued shares of First Community common stock.
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. A committee of
directors would be appointed to administer the MRP. This committee will
determine the persons who would receive shares, the number of shares to be
issued to recipients, the vesting and forfeiture requirements applicable to the
shares and other terms applicable to issued shares.
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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.
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 currently expected to be held no sooner than one
year following the conversion. Directors and employees of Community Savings
could be granted options under the plan.
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 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. This committee will determine the persons
to whom options would be issued, the number of options issued to recipients, the
vesting and forfeiture requirements of the options and other terms of the
options. 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.
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
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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 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.
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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
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 December 31, 1996 which exceed $60,000 in the
aggregate. [PLEASE UPDATE THIS TABLE]
<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.
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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 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
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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."
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.
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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 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.
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<PAGE>
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.
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.
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<PAGE>
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.
ANTI-TAKEOVER EFFECT OF EMPLOYMENT AGREEMENT, SPECIAL TERMINATION
AGREEMENTS, BENEFIT PLANS AND THE FOUNDATION. 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, subject to the
requirement that all shares held by the Foundation must be voted in the same
proportion as the shares voted by other stockholders. 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
and all of the stock options were granted to directors and executive officers
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, all of the MRP shares which could be granted under the MRP are
granted and issued to directors and executive officers 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
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<PAGE>
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
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."
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<PAGE>
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.
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.
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
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<PAGE>
Carolina, which firm has also rendered its opinion to Community Savings
concerning 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, 1998 and
1997 and for each of the years in the three-year period ended
December 31, 1998 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 but do
contain all material information regarding the contracts and documents; each
such statement is qualified by reference to the contract or document.
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.
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<PAGE>
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.
124
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at December 31, 1998
and 1997 F-2
Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996 F-3
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Retained Income for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</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.
125
<PAGE>
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
February 17, 1999
The Board of Directors
Community Savings Bank of Burlington, SSB
Burlington, North Carolina
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, comprehensive income,
retained income and cash flows present fairly, in all material respects, the
financial position of Community Savings Bank of Burlington, SSB and its
subsidiary at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 3,084,695 $ 3,064,469
Interest-bearing deposits in financial institutions 3,822,429 2,506,258
Federal funds sold - 300,000
Investment securities:
Available for sale 16,476,827 9,081,606
Held to maturity (estimated market value of $13,409,400 at 1997) - 13,396,826
Mortgage-backed securities:
Available for sale 14,628,446 9,496,528
Held to maturity (estimated market value of $8,885,600 at 1997) - 8,650,469
Loans receivable held for sale - 287,046
Loans receivable held for investment, net 127,229,600 114,545,660
Federal Home Loan Bank of Atlanta stock, at cost which approximates market 1,369,000 1,369,000
Premises and equipment, net 2,407,367 1,940,856
Income taxes receivable - 103,634
Deferred income taxes 1,427,946 1,130,258
Accrued interest receivable 1,049,197 1,041,764
Prepaid expenses and other assets 1,440,992 902,668
------------- -------------
Total assets $ 172,936,499 $ 167,817,042
------------- -------------
LIABILITIES AND RETAINED INCOME
Deposits:
Noninterest-bearing demand $ 1,536,380 $ 715,834
Interest-bearing demand 14,969,522 14,711,789
Savings 18,119,231 19,069,492
Large denomination certificates of deposit 18,505,630 15,823,433
Other time deposits 87,285,743 84,376,650
------------- -------------
Total deposits 140,416,506 134,697,198
------------- -------------
Borrowed money 5,000,000 6,700,000
Accrued interest payable 62,794 97,487
Advance payments by borrowers for property taxes and insurance 229,340 239,841
Other liabilities 4,070,743 3,245,535
------------- -------------
Total liabilities 149,779,383 144,980,061
------------- -------------
Commitments and contingencies (Notes 7, 9 and 12)
Retained income:
Appropriated 2,735,920 2,735,920
Unappropriated 20,274,240 20,003,103
Accumulated other comprehensive income 146,956 97,958
------------- -------------
Total retained income 23,157,116 22,836,981
------------- -------------
Total liabilities and retained income $ 172,936,499 $ 167,817,042
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,987,574 $ 8,014,788 $ 6,727,796
Interest and dividends on investments 2,556,450 3,568,504 3,892,621
--------------- ---------------- ----------------
Total interest income 12,544,024 11,583,292 10,620,417
--------------- ---------------- ----------------
Interest expense:
Interest on deposits 6,646,326 6,280,159 5,921,312
Interest on borrowed money 320,549 460,005 459,563
--------------- ---------------- ----------------
Total interest expense 6,966,875 6,740,164 6,380,875
--------------- ---------------- ----------------
Net interest income before provision for loan losses 5,577,149 4,843,128 4,239,542
Provision for loan losses 550,000 360,000 60,000
--------------- ---------------- ----------------
Net interest income 5,027,149 4,483,128 4,179,542
--------------- ---------------- ----------------
Other income:
Service charges on deposit accounts 94,989 69,300 58,481
Other fees and service charges 204,547 143,049 96,386
Loan servicing fees 66,528 60,915 69,451
Other 194,586 91,808 132,700
--------------- ---------------- ----------------
Total other income 560,650 365,072 357,018
--------------- ---------------- ----------------
General and administrative expenses:
Compensation and fringe benefits 3,100,348 2,492,858 1,891,704
Occupancy 226,164 190,476 149,801
Furniture and fixtures 284,669 251,275 72,985
Advertising 197,201 166,627 142,398
Data processing 292,465 120,078 125,363
Federal insurance premiums 82,046 78,727 970,776
Other 995,958 578,985 583,288
--------------- ---------------- ----------------
Total general and administrative expenses 5,178,851 3,879,026 3,936,315
--------------- ---------------- ----------------
Income before income taxes 408,948 969,174 600,245
Income taxes 137,811 379,490 201,270
--------------- ---------------- ----------------
Net income $ 271,137 $ 589,684 $ 398,975
--------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income $ 271,137 $ 589,684 $ 398,975
Unrealized gain on available for sale securities 121,816 118,784 40,680
Reclassification of net (gains) losses recognized in net income (47,577) 2,733 (8,925)
Income taxes relating to unrealized gain on available
for sale securities (25,241) (41,317) (10,797)
--------------- --------------- ----------------
Other comprehensive income 48,998 80,200 20,958
--------------- --------------- ----------------
Comprehensive income $ 320,135 $ 669,884 $ 419,933
=============== =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONSOLIDATED STATEMENTS OF RETAINED INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Appropriated Unappropriated Income Total
------------------ --------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 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
Change in net unrealized gains (losses),
net of income taxes - - 48,998 48,998
Net income - 271,137 - 271,137
------------------ --------------------- ---------------------- ---------------
Balance at December 31, 1998 $ 2,735,920 $ 20,274,240 $ 146,956 $ 23,157,116
------------------ --------------------- ---------------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
CONSOLIDATED STATEMENTS OF RETAINED INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 271,137 $ 589,684 $ 398,975
Adjustment to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 550,000 360,000 60,000
Depreciation 273,635 242,575 94,489
Accretion of discounts on securities, net (52,818) (212,345) (282,645)
Provision for deferred income taxes (322,929) (290,668) (165,301)
Loss (gain) on disposals of premises and equipment 75,030 - (909)
Loss (gain) on disposal of foreclosed assets - 8,292 (60,454)
Net loss (gain) on sales of investment and
mortgage-backed securities (47,577) 2,733 (8,925)
Originations of loans held for sale (8,474,219) (415,200) (636,603)
Proceeds from sale of loans held for sale 8,827,702 2,428,507 587,895
Change in valuation allowance for loans held for sale - (48,241) 48,241
Net loss (gain) on sale of loans (66,437) 4,150 (1,346)
Other operating activities 430,383 335,328 161,358
--------------- --------------- ---------------
Net cash provided by operating activities 1,464,107 3,004,815 194,775
--------------- --------------- ---------------
Investing activities:
Purchases of investment securities available for sale (20,499,323) (6,008,024) (14,850,615)
Proceeds from sales of securities and mortgage-backed
securities available for sale 6,851,060 4,663,199 11,457,866
Proceeds from maturities of securities available for sale 5,357,000 1,000,000 -
Purchases of investment securities held to maturity - (924,612) (6,510,741)
Proceeds from maturities of securities held to maturity 6,091,028 13,177,236 12,649,056
Proceeds from sales of securities held to maturity 2,915,862 - -
Proceeds from principal repayments of mortgage-backed
securities available for sale 8,979,163 3,992,300 6,626,479
Proceeds from redemption of FHLB stock - 171,900 -
Net increase in loans held for investment (13,315,931) (29,189,064) (10,622,268)
Proceeds from disposal of foreclosed assets - 146,214 191,345
Purchases of premises and equipment (815,376) (637,948) (573,202)
Proceeds from sale of premises and equipment - - 12,693
--------------- --------------- ---------------
Net cash used in investing activities (4,436,517) (13,608,799) (1,619,387)
--------------- --------------- ---------------
Financing activities:
Net increase in deposit accounts 5,719,308 12,172,900 3,616,868
Net change in escrow deposits (10,501) 24,797 21,524
Repayments of FHLB borrowings, net of proceeds (1,700,000) (2,300,000) -
--------------- --------------- ---------------
Net cash provided by financing activities 4,008,807 9,897,697 3,638,392
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 1,036,397 (706,287) 2,213,780
Cash and cash equivalents, beginning of year 5,870,727 6,577,014 4,363,234
--------------- --------------- ---------------
Cash and cash equivalents, end of year $6,907,124 $5,870,727 $6,577,014
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED 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 includes a wholly-owned subsidiary, Community Financial Services, that
provides investment services generally to Bank customers.
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.
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.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Securities are classified into three categories:
(1) Securities Held to Maturity - Debt securities that the Bank has the
positive intent and the ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost;
(2) Trading Securities - 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; and
(3) Securities Available for Sale - Debt and equity securities not
classified as either securities held to maturity or trading securities
are reported at fair value, with unrealized gains and losses excluded
from earnings and reported as other comprehensive income, 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.
F-7
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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, 1998 and 1997, and during the three years
ended December 31, 1998, 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.
F-8
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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, 1998 and 1997 the Bank owned 13,690 shares 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
F-9
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
COMPREHENSIVE INCOME
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income" on January
1, 1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains, and
losses) in general-purpose financial statements.
SEGMENT INFORMATION
During the year ended December 31, 1998, the Bank adopted the provisions of
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The Statement requires that public business enterprises
report certain information about operating segments in their annual
financial statements and in condensed financial statements of interim
periods issued to shareholders. It also requires that the public business
enterprises report related disclosures and descriptive information about
products and services provided by significant segments, geographic areas,
and major customers, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts
from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources, and in
assessing performance. The Bank has determined that it has one significant
operating segment, the providing of general commercial financial services
to customers located in the single geographic area of Central North
Carolina. The various products are those generally offered by community
banks, and the allocation of resources is based on the overall performance
of the institution, versus the individual branches or products.
There are no differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and the measurement of segment amounts has not changed for 1998
from prior years.
EMPLOYERS DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Bank has adopted the provisions of SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal
years beginning after December 15, 1997. This Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. The adoption of
SFAS No. 132 did not have a material effect on the Bank's consolidated
financial statements.
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 CONSOLIDATED FINANCAL STATEMENTS
________________________________________________________________________________
2. INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED GROSS UNREALIZED MARKET
----------------------------
COST GAINS LOSSES VALUE
-------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
1998:
Available for sale:
U.S. Treasury securities $ 1,510,302 $ 25,635 $ - $ 1,535,937
U.S. Government agency securities 12,213,021 131,508 (16,549) 12,322,250
Municipals 2,621,123 724 (23,338) 2,598,509
Other equity securities 114,000 - - 114,000
-------------- ---------- ----------- -------------
$16,458,446 $157,867 $(39,887) $16,570,696
============== ========== =========== =============
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
============== ========== =========== =============
</TABLE>
During 1998, the Bank transferred securities classified as held-to-maturity
with an amortized cost of $2,500,969 to available-for-sale resulting in a
net unrealized gain of $23,406. In addition, a held-to-maturity security
with a carrying value of $1,496,500 was liquidated with a loss of $250
recognized on the sale.
Available for sale securities with carrying values of $5,000,342,
$7,167,156 and $1,548,594 were sold during the years ended December 31,
1998, 1997 and 1996, respectively. Gross realized gains on these sales
during 1998, 1997 and 1996 were $15,860, $12,024, and $52,782,
respectively. Gross realized losses on sales during 1997 were $882. There
were no losses realized on sales during 1998 or 1996.
Securities with a carrying value of $271,650 were pledged as collateral to
secure public funds at December 31, 1998. Securities with a carrying value
of $4,492,102 were pledged as collateral at December 31, 1997 to secure
advances with the FHLB. Securities with a carrying value of $502,683 and
$506,296 were pledged as collateral for treasury, tax and loan deposits at
December 31, 1998 and 1997, respectively.
F-11
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCAL 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 $ 1,501,805 $ 1,512,182
Due after one year through five years 7,881,615 8,016,377
Due after five years through ten years 1,401,846 1,407,548
Due after ten years 5,559,180 5,526,320
------------ --------------
$16,344,446 $16,462,427
------------ --------------
</TABLE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED GROSS UNREALIZED MARKET
-------------------------------
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
1998:
Available for sale:
FHLMC participation certificates $ 3,286,340 $ 41,442 $ (7,507) $ 3,320,275
GNMA participation certificates 1,140,227 81,205 - 1,221,432
FNMA participation certificates 1,236,874 - (3,155) 1,233,719
REMICs 8,860,328 21,877 (29,185) 8,853,020
-------------- ------------ ------------ --------------
$ 14,523,769 $ 144,524 $ (39,847) $ 14,628,446
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
</TABLE>
F-12
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCAL STATEMENTS
________________________________________________________________________________
Mortgage-backed securities with a carrying value of $1,807,308 were sold
during the year ended December 31, 1998 resulting in gross realized gains
of $34,640 and gross realized losses of $2,923. 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.
During 1998, the Bank transferred securities classified as held-to-maturity
with an amortized cost of $3,445,554 to available-for-sale resulting in a
net unrealized gain of $123,488. In addition, a held-to-maturity mortgage-
backed security with a carrying value of $1,413,634 was liquidated
resulting in a realized gain of $5,728.
Mortgage-backed securities held as available for sale, with a carrying
value of $5,765,253 and $5,831,553, were pledged as collateral for advances
from the FHLB at December 31, 1998 and 1997, respectively.
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
prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ --------------
<S> <C> <C>
Available for sale:
Due after five years through ten years $ 2,466,913 $ 2,461,045
Due after ten years 12,056,856 12,167,401
------------ --------------
$14,523,769 $14,628,446
------------ --------------
</TABLE>
F-13
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Mortgage loans $ 95,505,366 $ 102,358,704
Consumer loans 4,386,415 1,685,644
Commercial loans 27,320,172 11,990,967
-------------- --------------
Total 127,211,953 116,035,315
Less:
Loans in process, including funded but unclosed loans 1,797,608 (269,837)
Allowance for loan losses (1,331,617) (781,177)
Deferred loan fees (448,344) (438,641)
-------------- --------------
Loans receivable, net $ 127,229,600 $ 114,545,660
============== ==============
</TABLE>
At both December 31, 1998 and 1997, 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).
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 1997 are fixed rate mortgage loans with an estimated
market value of approximately $287,000, respectively. These were no loans
held for sale at December 31, 1998.
Net gains on sales of loans receivable held for sale amounted to $66,437
and $1,346 for the years ended December 31, 1998 and 1996, respectively.
Net losses on sales of loans receivable held for sale amounted to $4,150
during year ended December 31, 1997.
The changes in the allowance for loan losses for the years ended December
31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Balance at beginning of period $ 781,177 $ 491,658 $ 431,295
Provisions for loan losses 550,000 360,000 60,000
Loans charged off - (71,055) -
Recoveries 440 574 363
----------- ------------ ------------
Balance at end of period $ 1,331,617 $ 781,177 $ 491,658
=========== ============= ============
F-14
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 consist of the
following:
1998 1997
Land $ 350,638 $ 350,638
Office buildings 1,947,045 1,969,576
Furniture, fixtures and equipment 1,427,736 1,274,686
Vehicles 32,730 32,730
----------- -----------
3,758,149 3,627,630
Less accumulated depreciation (1,350,782) (1,686,774)
----------- -----------
Total $ 2,407,367 $ 1,940,856
=========== ===========
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, 1998,
1997 and 1996, were $90,292, $88,719, and $75,028, 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 $626,585, $537,874 and $389,949 related to
these plans during the years ended December 31, 1998, 1997 and 1996,
respectively. Included in other liabilities at December 31, 1998 and 1997
is $3,563,592 and $3,112,368, 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 $992,891 and
$791,620 at December 31, 1998 and 1997, respectively.
7. BORROWED MONEY
Borrowed money represents advances from the FHLB and totaled $5,000,000 and
$6,700,000 at December 31, 1998 and 1997, respectively. These advances had
a weighed average rate of
F-15
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5.66% and 6.0% at December 31, 1998 and 1997, respectively. Advances
outstanding at December 31, 1998 mature in September 1999.
At December 31, 1998 and 1997 the Bank had securities with a carrying value
of $5,765,253 and $10,323,655, respectively, and certain loans secured by
one to four family residential mortgages pledged against actual and
potential borrowings from the FHLB.
At December 31, 1998, the Bank had an additional $10,000,000 of credit
available with the FHLB.
8. DEPOSITS
The scheduled maturities of certificates of deposit of as of December 31,
1998 are summarized as follows (in thousands):
1999 $ 91,935
2000 11,636
2001 959
2002 757
2003 504
----------
$ 105,791
==========
At December 31, 1998 and 1997, the Bank had cash and due from banks
approximating $312,000 and $1,200,000, respectively, pledged to secure
certain Individual Retirement Accounts.
9. INCOME TAXES
The components of income taxes for the years ended December 31, 1998, 1997
and 1996 are as follows:
1998 1997 1996
Current expense $ 460,740 $ 670,158 $ 366,571
Deferred benefit (322,929) (290,668) (165,301)
---------- ---------- ----------
Total $ 137,811 $ 379,490 $ 201,270
========== ========== ==========
F-16
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Reconciliation of expected income tax at the statutory Federal rate of 34%
with income tax expense for the years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected income tax expense $ 139,042 $ 329,484 $ 204,083
State income taxes net of federal income tax
benefit - 7,638 -
Non-deductible expenses (1,231) 42,368 (2,813)
--------- --------- ---------
$ 137,811 $ 379,490 $ 201,270
========= ========= =========
</TABLE>
The components of the net deferred income tax asset at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred income tax assets:
Deferred directors' fees $1,211,621 $1,058,205
Bad debt reserve 441,592 265,600
Deferred loan fees and costs 152,437 149,138
---------- ----------
1,805,650 1,472,943
---------- ----------
Deferred income tax liabilities:
Depreciation and amortization 16,315 10,889
Unrealized gains on securities available-for-sale 75,704 50,464
FHLB stock dividends 221,340 221,340
Other 64,345 59,992
---------- ----------
377,704 342,685
---------- ----------
Net deferred income tax asset $1,427,946 $1,130,258
========== ==========
</TABLE>
Retained income at December 31, 1998, 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, through fiscal 1986 (pre-1987 bad debt reserves). Reductions
of the allocated amount 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.
10. LEASES
The Bank has a non-cancelable operating lease for office space that expires
in April 2001. Payments made under this lease during 1998, 1997, and 1996
were $28,258, $16,306, and $3,397, respectively. Future minimum lease
payments under this lease for years subsequent to December 31, 1998 are
$53,220 for both 1999 and 2000 and $17,740 for 2001.
F-17
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. 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, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
As of June 30, 1998, the date of the most recent notification from the
FDIC, the Bank was categorized 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 Bank's actual capital amounts and ratios as of December 31, 1998 and
1997 are presented in the table below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ----------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1998:
- ----
Total Capital (to Risk Weighted
Weighted Assets) $ 24,110,778 27.4% $ 7,045,040 8.0% $ 8,806,300 10.0%
Tier I Capital (to Risk Weighted
Weighted Assets) 23,010,161 26.1% 3,522,520 4.0% 5,283,780 6.0%
Tier I Capital (to Average Assets) 23,010,161 13.5% 6,592,400 4.0% 8,240,500 5.0%
Total Tangible Capital (to Total
tangible Assets) 24,110,778 13.8% 8,713,406 5.0% 8,713,406 5.0%
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%
</TABLE>
F-18
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
12. 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 $24,166,854 and $21,262,067 at
December 31, 1998 and 1997, 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. The Bank does not capitalize mortgage servicing rights
related to loans serviced for others due to the fact that the fee received
is considered adequate compensation for the costs incurred to service the
related loans.
13. 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.
F-19
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the contractual amounts of the Bank's exposure to off-balance
sheet risk as of December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit:
Commitments to originate loans $ 10,178,000 $ 8,024,000
Undrawn balances on lines of credit 5,596,000 4,677,000
------------ ------------
$ 15,774,000 $ 12,701,000
------------ ------------
</TABLE>
14. 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, 1998
and 1997 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 values of the Bank's loan
portfolio at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Loans:
Carrying amount $ 127,229,600 $ 114,545,660
Estimated fair value 124,685,900 114,259,000
</TABLE>
F-20
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on demand),
totaling $34,625,133 and $34,497,115 at December 31, 1998 and 1997,
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.
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 values and estimated fair values of certificates
of deposit and FHLB advances at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Certificates of deposits:
Carrying amount $ 105,791,400 $ 100,200,083
Estimated fair value 105,818,200 100,381,000
Advances from the FHLB:
Carrying amount $ 5,000,000 $ 6,700,000
Estimated fair value 5,000,000 6,700,000
</TABLE>
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $15,774,000 and $12,701,000
at December 31, 1998 and 1997, respectively.
The Bank's remaining assets and liabilities are not considered financial
instruments.
15. CASH FLOW SUPPLEMENTAL DISCLOSURES
The following information is supplemental information regarding the cash
flows for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1998 1996
<S> <C> <C> <C>
Cash paid for:
Interest on deposits and borrowed funds $ 6,681,020 $ 6,730,576 $ 6,385,624
Income taxes 520,000 720,000 280,000
Summary of noncash investing and financing
activities:
Real estate acquired through settlement of loans $ 81,991 $ 154,506 $ 27,474
</TABLE>
F-21
<PAGE>
COMMUNITY SAVINGS BANK OF BURLINGTON, SSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. RECENT DEVELOPMENTS
In October 1998, the Bank's Board of Directors approved to convert the Bank
from a North Carolina - chartered mutual savings bank to a North Carolina -
chartered stock savings bank in connection with a proposed initial public
offering of common stock. Simultaneous to the stock conversion, the Bank
intends to become a wholly-owned subsidiary of First Community Financial
Corporation, a savings bank holding company organized under North Carolina
law. The conversion is expected to be completed in the second quarter of
1999.
F-22
<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 PROSPECTUS 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 OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 13
Selected Financial and Other Data
of Community Savings.................................................... 19
Recent Developments....................................................... 20
First Community Financial Corporation..................................... 22
Community Savings Bank, SSB............................................... 23
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 27
Market for Common Stock................................................... 28
Capitalization............................................................ 28
Pro Forma Data............................................................ 31
Historical and Pro Forma Capital Compliance............................... 35
Comparison of Valuation and Pro Forma Information
with No Foundation...................................................... 37
Stock Purchases by Directors and Executive Officers....................... 39
The Conversion............................................................ 41
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 61
Business of First Community............................................... 72
Business of Community Savings............................................. 72
Taxation.................................................................. 92
Supervision and Regulation................................................ 93
Management of First Community............................................. 103
Management of Community Savings........................................... 104
Description of Capital Stock.............................................. 114
Anti-Takeover Provisions Affecting First Community
and Community Savings................................................... 117
Certain Provisions of the Articles of Incorporation and
Bylaws of First Community............................................... 121
Legal Opinions............................................................ 121
Experts................................................................... 122
Registration Requirements................................................. 122
Additional Information.................................................... 122
Index to Consolidated Financial Statements................................ 123
</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 or 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>
<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.
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
5.1 Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P. as to legality of securities to be registered hereby*
8.1 Revised 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.*
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ferguson & Company
23.3 Consent of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P.
27.1 Financial Data Schedule
99.1 Appraisal Report of Ferguson & Company*
99.2 Conversion Valuation Update Report
99.3 Form of Stock Order Form
* 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:
II-4
<PAGE>
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(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 2 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 16/th/ day of April, 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 2 to Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
Date: April 16, 1999 By: /s/ William R. Gilliam
------------------------------------------
William R. Gilliam, President and Director
(Chief Executive Officer)
Date: April 16, 1999 By: /s/ Christopher B. Redcay
------------------------------------------
Christopher B. Redcay, Treasurer
(Principal Accounting Officer and
Principal Financial Officer)
Date: April 16, 1999 By: /s/ Jimmy L. Byrd
------------------------------------------
Jimmy L. Byrd, Director
Date: April 16, 1999 By: /s/ Julian P. Griffin
------------------------------------------
Julian P. Griffin, Director
Date: April 16, 1999 By: /s/ Edgar L. Hartgrove
------------------------------------------
Edgar L. Hartgrove, Director
Date: April 16, 1999 By: /s/ William C. Ingold
------------------------------------------
William C. Ingold, Director
Date: April 16, 1999 By: /s/ Charles A. LeGrand
------------------------------------------
Charles A. LeGrand, Director
Date: April 16, 1999 By: /s/ James D. Moser, Jr.
------------------------------------------
James D. Moser, Jr., Director
Date: April 16, 1999 By: /s/ W. Joseph Rich
------------------------------------------
W. Joseph Rich, Director
Date: April 16, 1999 By: /s/ Alfred J. Spitzner
------------------------------------------
Alfred J. Spitzner, Director
Date: April 16, 1999 By: /s/ Herbert N. Wellons
------------------------------------------
Herbert N. Wellons, Director
<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.
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
5.1 Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P. as to legality of securities to be registered hereby*
8.1 Revised 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*
10.4 Forms of Employee Stock Ownership Plan and Trust of
Community Savings Bank, Inc.*
<PAGE>
EXHIBIT NO.
(PER EXHIBIT
TABLES IN
ITEM 601 OF
REGULATION S-B) DESCRIPTION
- --------------- -----------
10.5 Form of Capital Maintenance Agreement between First
Community Financial Corporation and Community Savings
Bank, Inc.*
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ferguson & Company
23.3 Consent of Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P.
27.1 Financial Data Schedule
99.1 Appraisal Report of Ferguson & Company*
99.2 Conversion Valuation Update Report
99.3 Form of Stock Order Form
* Filed previously.
<PAGE>
FIRST COMMUNITY FINANCIAL
CORPORATION
COMMON STOCK
1,530,000 TO 2,380,500
SHARES
$15.00 PER SHARE
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
First Community Financial Corporation, a North Carolina corporation (the
"Company"), and Community Savings Bank SSB, a North Carolina-chartered and
federally-insured mutual savings bank (the "Bank"), hereby confirm, as of March
___, 1999, their respective agreements with Trident Securities, Inc.
("Trident"), a broker-dealer registered with the Securities and Exchange
Commission ("Commission") and a member of the National Association of Securities
Dealers, Inc. ("NASD"), as follows:
1. Introductory. The Bank intends to convert from a state-chartered mutual
------------
savings bank to a state-chartered stock savings bank as a wholly owned
subsidiary of the Company (which conversion, together with the Offerings, as
defined below, the issuance of shares of common stock of the Bank to the Company
and the incorporation of the Company, are referred to collectively herein as the
"Conversion") pursuant to a plan of conversion adopted on January 7, 1999 (as
amended, if amended, the "Plan"). In accordance with the Plan, the Company is
offering shares of its common stock (the "Shares" and the "Common Stock"),
pursuant to nontransferable subscription rights in a subscription offering (the
"Subscription Offering") to certain depositors and borrowers of the Bank and to
the Bank's tax-qualified employee stock benefit plans (i.e., the Bank's Employee
Stock Ownership Plan (the "ESOP")). Shares of the Common Stock not sold in the
Subscription Offering may be offered to the general public in a community
offering, with preference given to natural persons residing in Alamance County,
North Carolina (the "Community Offering"), subject to the right of the Company
and the Bank, in their absolute discretion, to reject orders in the Community
Offering in whole or in part. Shares not sold in the Subscription Offering or
otherwise in the Community Offering may be offered to certain members of the
general public as part of the Community Offering by a group of broker-dealers
(the "Syndicated Community Offering") (the Subscription Offering and, if any,
the Community and Syndicated Community Offerings are sometimes referred to
collectively as
<PAGE>
the "Offerings"). In the Offerings, the Company is offering between 1,530,000
and 2,070,000 Shares, with the possibility of offering up to 2,380,500 Shares
without a resolicitation of subscribers. With the exception of the ESOP, no
person (or persons through a single account) may purchase in the Offerings more
than 15,000 Shares; no person, together with associates of and persons acting in
concert with such person, may purchase in the Offerings more than 20,000 Shares.
The Company and the Bank have been advised by Trident that it will utilize its
best efforts in assisting the Company and the Bank with the sale of the Shares
in the Offerings, including any Syndicated Community Offering. Prior to the
execution of this Agreement, the Company has delivered to Trident a prospectus
dated as of the date hereof and all supplements thereto to be used in the
Offerings. Such prospectus contains information with respect to the Company, the
Bank and the Shares.
2. Representations and Warranties.
------------------------------
(a) The Company and the Bank jointly and severally represent and warrant
to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto,
on Form SB-2 (No. 333-70981), including a prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act
of 1933, as amended (the "Act"); and such registration statement has
become effective under the Act and no stop order has been issued with
respect thereto and no proceedings therefor have been initiated or, to
the Company's best knowledge, threatened by the Commission. Except as
the context may otherwise require, such registration statement, as
amended or supplemented, on file with the Commission at the time the
registration statement became effective, including the prospectus,
financial statements, schedules, exhibits and all other documents
filed as part thereof, as amended and supplemented, is herein called
the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the Commission at the time the Registration
Statement became effective is herein called the "Prospectus," except
that if the prospectus filed by the Company with the Commission
pursuant to Rule 424(b) of the general rules and regulations of the
Commission under the Act (together with the enforceable published
policies and actions of the Commission thereunder, the "SEC
Regulations") differs from the form of prospectus on file at the time
the Registration Statement became effective, the term "Prospectus"
shall refer to the Rule 424(b) prospectus from and after the time it
is filed with or mailed for filing to the Commission and shall include
any amendments or supplements thereto from and after their dates of
effectiveness or use, respectively. If any Shares covered by the
Registration Statement remain unsubscribed following completion of the
Subscription Offering and, if any, the
2
<PAGE>
Community Offering, the Company, if required by the SEC Regulations
(i) will promptly file with the Commission a post-effective amendment
to such Registration Statement relating to the results of the
Subscription Offering and, if any, the Community Offering, any
additional required information with respect to the proposed plan of
distribution and any required revised pricing information or (ii) if
no such post-effective amendment is required, will file with, or mail
for filing to, the Commission a prospectus or prospectus supplement
containing information relating to the results of the Subscription
Offering and, if any, the Community Offering and pricing information
pursuant to Rule 424(c) of the Regulations, in either case in a form
reasonably acceptable to the Company and Trident.
(ii) The Bank has filed an Application including exhibits (as amended
or supplemented, the "Stock Application" and which together with the
Acquisition Application and Form FR Y-3 referred to below, are
sometimes referred to collectively herein as the "Conversion
Application") with the Administrator of the Savings Institution
Division of the North Carolina Department of Commerce (the
"Administrator"), which has been approved by the Administrator; and
the Prospectus and the proxy statement for the solicitation of proxies
from members for the special meeting to approve the Plan (the "Proxy
Statement") included as part of the Stock Application have been
approved for use by the Administrator. No order has been issued by the
Administrator preventing or suspending the use of the Prospectus or
the Proxy Statement; and no action by or before the Administrator
revoking such approvals is pending or, to the Bank's best knowledge,
threatened. The Company has filed with the Administrator the Company's
Acquisition Application and with the Federal Reserve Bank of Richmond
(acting on behalf of the Board of Governors of the Federal Reserve
System, which is referred to herein together with the Federal Reserve
Bank of Richmond as the FRB) a Form FR Y-3, each requesting approval
for the Company to acquire all of the issued and outstanding common
shares of stock to be issued by the Bank, and has received approval of
such acquisition of the shares of the Bank from the Administrator and
FRB.
(iii) At the date of the Prospectus (i) the Registration Statement
and the Prospectus (as amended or supplemented, if amended or
supplemented) complied with the Act and the SEC Regulations, (ii) the
Registration Statement (as amended or supplemented, if amended or
supplemented) did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus (as amended or supplemented, if amended or supplemented)
did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
3
<PAGE>
Representations or warranties in this subsection shall not apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company or the Bank relating to
Trident by or on behalf of Trident expressly for use in the
Registration Statement or Prospectus.
(iv) The Company has been duly organized as a North Carolina
corporation, and the Bank has been duly organized as a mutual savings
bank under the laws of North Carolina, and each of them is validly
existing and in good standing under the laws of the jurisdiction of
its organization with full power and authority to own its property and
conduct its business as described in the Registration Statement and
Prospectus; the Bank is a member in good standing of the Federal Home
Loan Bank of Atlanta; and the deposit accounts of the Bank are insured
by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC") up to the applicable
legal limits. Each of the Company and the Bank is not required to be
qualified to do business as a foreign corporation in any jurisdiction
where non-qualification would have a material adverse effect on the
Company and the Bank, taken as a whole. The Bank does not own equity
securities of or an equity interest in any business enterprise except
as described in the Prospectus. Upon amendment of the Bank's charter
and bylaws as provided in the rules and regulations of the
Administrator and completion of the sale by the Company of the Shares
as contemplated by the Prospectus, (i) the Bank will be converted
pursuant to the Plan to a North Carolina-chartered capital stock
savings bank with full power and authority to own its property and
conduct its business as described in the Prospectus, (ii) all of the
authorized and outstanding capital stock of the Bank will be owned of
record and beneficially by the Company, and (iii) the Company will
have no direct subsidiaries other than the Bank.
(v) The Bank has good and marketable title to all assets material to
its business and to those assets described in the Prospectus as owned
by it, free and clear of all material liens, charges, encumbrances or
restrictions, except for liens for taxes not yet due, except as
described in the Prospectus and except as could not in the aggregate
have a material adverse effect upon the operations or financial
condition of the Bank; and all of the leases and subleases material to
the operations or financial condition of the Bank, under which it
holds properties, including those described in the Prospectus, are in
full force and effect as described therein.
(vi) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by all necessary actions on the part of each of the Company
and the Bank, and this Agreement is a valid and binding obligation
with valid execution and delivery of each of the Company and the Bank,
enforceable in accordance with its terms (except as the enforceability
thereof may be limited by bankruptcy, insolvency,
4
<PAGE>
moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of
creditors of savings and loan holding companies the accounts of whose
subsidiaries are insured by the FDIC or by general equity principles,
regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the
provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or pursuant to Sections 23A and 23B of the Federal
Reserve Act, 12 U.S.C. Sections 371c and 371c-1 (collectively,
"Section 23A")).
(vii) There is no litigation or governmental proceeding pending or,
to the best knowledge of the Company or the Bank, threatened against
or involving the Company, the Bank or any of their respective assets
which individually or in the aggregate would reasonably be expected to
have a material adverse effect on the condition (financial or
otherwise), results of operations and business, including the assets
and properties, of the Company and the Bank, taken as a whole.
(viii) The Company and the Bank have received the opinions of Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P. with respect to federal
and North Carolina tax consequences of the Conversion, to the effect
that the Conversion will constitute a taxfree reorganization under the
Internal Revenue Code of 1986, as amended, and will not be a taxable
transaction for the Bank or the Company under the laws of North
Carolina and the facts relied upon in such opinions are accurate and
complete.
(ix) Each of the Company and the Bank has all such corporate power,
authority, authorizations, approvals and orders as may be required to
enter into this Agreement and to carry out the provisions and
conditions hereof, subject to the limitations set forth herein and
subject to the satisfaction of any conditions imposed by the
Administrator, FDIC or the FRB in connection with their approvals of
the Conversion Application, and except as may be required under the
securities laws of various jurisdictions, and in the case of the
Company, as of the Closing Date, will have such approvals and orders
to issue and sell the Shares to be sold by the Company as provided
herein, and in the case of the Bank, as of the Closing Date, will have
such approvals and orders to issue and sell the Shares of its Common
Stock to be sold to the Company as provided in the Plan, subject to
the issuance of an amended charter to the Bank in the form required
for North Carolina-chartered stock savings banks (the "Stock
Charter"), the form of which Stock Charter has been approved by the
Administrator.
(x) Neither the Company nor the Bank is in violation of any rule or
regulation of the Administrator or the FDIC that could reasonably be
expected to result in any
5
<PAGE>
enforcement action against the Company, the Bank or their officers or
directors that might have a material adverse effect on the condition
(financial or otherwise), operations, businesses, assets or properties
of the Company and the Bank, taken as a whole.
(xi) The financial statements and any related notes or schedules
which are included in the Registration Statement and the Prospectus
fairly present the financial condition, income, retained earnings and
cash flows of the Bank at the respective dates thereof and for the
respective periods covered thereby and comply as to form with the
applicable accounting requirements of the SEC Regulations. Such
financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved, except as set forth therein, and such financial
statements are consistent with financial statements and other reports
filed by the Bank with supervisory and regulatory authorities except
as such generally accepted accounting principles may otherwise
require. The tables in the Prospectus accurately present the
information purported to be shown thereby at the respective dates
thereof and for the respective periods therein.
(xii) There has been no material change in the condition (financial
or otherwise), results of operations or business, including assets and
properties, of the Company and the Bank, taken as a whole, since the
latest date as of which such condition is set forth in the Prospectus,
except as set forth therein; and the capitalization, assets,
properties and business of each of the Company and the Bank conform in
all material respects to the descriptions thereof contained in the
Prospectus. None of the Company or the Bank has any material
liabilities of any kind, contingent or otherwise, except as set forth
in the Prospectus.
(xiii) Except as set forth in the Prospectus, there has been no breach
or default (or the occurrence of any event which, with notice or lapse
of time or both, would constitute a default) under, or creation or
imposition of any lien, charge or other encumbrance upon any of the
properties or assets of the Company or the Bank pursuant to any of the
terms, provisions or conditions of, any agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which
the Company or the Bank is a party or by which any of them or any of
their respective assets or properties may be bound or is subject, or
violation of any governmental license or permit or any enforceable
published law, administrative regulation or order or court order,
writ, injunction or decree, which breach, default, encumbrance or
violation would have a material adverse effect on the condition
(financial or otherwise), operations, business, assets or properties
of the Company and the Bank, taken as a whole; all agreements which
are material to the condition (financial or otherwise), results of
operations or business of the Company and the
6
<PAGE>
Bank, taken as a whole are in full force and effect, and no party to
any such agreement has instituted or, to the best knowledge of the
Company and the Bank, threatened any action or proceeding wherein the
Company or the Bank would be alleged to be in default thereunder.
(xiv) None of the Company or the Bank is in violation of its
respective charter or bylaws. The execution and delivery hereof and
the consummation of the transactions contemplated hereby by the
Company and the Bank do not conflict with or result in a breach of the
charter or bylaws of the Company or the Bank (in either mutual or
stock form) or constitute a material breach of or default (or an event
which, with notice or lapse of time or both, would constitute a
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of
any lien, charge or other encumbrance upon any of the properties or
assets of the Company or the Bank pursuant to any of the terms,
provisions or conditions of, any material agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which
the Company or the Bank is a party or violate any governmental license
or permit or any enforceable published law, administrative regulation
or order or court order, writ, injunction or decree (subject to the
satisfaction of any conditions imposed by the Administrator, FDIC or
the FRB in connection with their approvals of the Conversion
Application), which breach, default, encumbrance or violation would
have a material adverse effect on the condition (financial or
otherwise), operations or business of the Company and the Bank, taken
as a whole.
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and prior to the
Closing Date (as hereinafter defined), except as otherwise may be
indicated or contemplated therein, none of the Company or the Bank has
issued any securities which will remain issued at the Closing Date or
incurred any liability or obligation, direct or contingent, or
borrowed money, except borrowings in the ordinary course of business,
or entered into any other transaction not in the ordinary course of
business and consistent with prior practices, which is material in
light of the business of the Company and the Bank, taken as a whole.
(xvi) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company shall be within the range as
set forth in the Prospectus under the caption "Capitalization," and no
Common Stock of the Company shall be outstanding immediately prior to
the Closing Date; the issuance and the sale of the Shares of the
Company have been duly authorized by all necessary action of the
Company and approved by the Administrator and, when issued in
accordance with the terms of the Plan and paid for, shall be validly
issued, fully paid and nonassessable and shall conform to the
description thereof contained in the Prospectus; the issuance of the
Shares is not subject to
7
<PAGE>
preemptive rights, except as set forth in the Prospectus; and good
title to the Shares will be transferred by the Company upon issuance
thereof against payment therefor, free and clear of all claims,
encumbrances, security interests and liens against the Company
whatsoever. The certificates representing the Shares will conform in
all material respects with the requirements of applicable laws and
regulations. The issuance and sale of the capital stock of the Bank to
the Company has been duly authorized by all necessary action of the
Bank and the Company and appropriate regulatory authorities (subject
to the satisfaction of any conditions imposed by the Administrator,
FDIC or FRB in connection with their approval of the Conversion
Application), and such capital stock, when issued in accordance with
the terms of the Plan, will be fully paid and nonassessable and will
conform in all material respects to the description thereof contained
in the Prospectus.
(xvii) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of
this Agreement or the issuance of the Shares, except for the
declaration of effectiveness of any required post-effective amendment
by the Commission and approval of the Stock Application by the
Administrator or FDIC and approval of the Company's Acquisition
Application and Form FR Y-3 filings by the Administrator and FRB,
respectively, the approval of the Stock Charter by the Administrator
and the filing of such Stock Charter with the North Carolina Secretary
of State, and as may be required under the securities laws of various
jurisdictions.
(xviii) All contracts and other documents required to be filed as
exhibits to the Registration Statement or the Conversion Application
have been filed with the Commission, the Administrator, FDIC and/or
the FRB, as the case may be.
(xix) PricewaterhouseCoopers LLP, which has audited the financial
statements of the Bank at December 31, 1998 and 1997 as included in
the Prospectus, is an independent public accountant within the meaning
of the Code of Professional Ethics of the American Institute of
Certified Public Accountants and Title 12 of the Code of Federal
Regulations, Section 571.2(c)(3).
(xx) For the past five years, the Company and the Bank have timely
filed all required federal, state and local franchise tax returns, and
no deficiency has been asserted with respect to such returns by any
taxing authorities, and the Company and the Bank have paid all taxes
that have become due and, to the best of their knowledge, have made
adequate reserves for similar future tax liabilities, except where any
failure to make such filings, payments and reserves, or the assertion
of such a deficiency, would not have a material adverse effect on the
condition of the Company and the Bank, taken as a whole.
8
<PAGE>
(xxi) All of the loans represented as assets of the Bank on the most
recent financial statements of the Bank included in the Prospectus
meet or are exempt from all applicable requirements of federal, state
or local law pertaining to lending and interest, including without
limitation truth in lending (including the requirements of Regulation
Z and 12 C.F.R. Part 226, real estate settlement procedures, consumer
credit protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted,
would not have a material adverse effect on the Company and the Bank,
taken as a whole.
(xxii) The records of account holders, depositors, borrowers and
other members of the Bank delivered to Trident by the Bank or its
agent for use during the Conversion have been prepared or reviewed by
the Bank and, to the best knowledge of the Company and the Bank, are
reliable and accurate.
(xxiii) None of the Company, the Bank or, to the best knowledge of the
Company and the Bank, the employees of the Company or the Bank, has
made any payment of funds of the Company or the Bank prohibited by
law, and no funds of the Company or the Bank have been set aside to be
used for any payment prohibited by law.
(xxiv) To the best knowledge of the Company and the Bank, the Company
and the Bank are in compliance with all laws, rules and regulations
relating to the discharge, storage, handling and disposal of hazardous
or toxic substances, pollutants or contaminants and neither the
Company nor the Bank believes that the Company or the Bank is subject
to liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or any similar
law, except for violations which, if asserted, would not have a
material adverse effect on the Company and the Bank, taken as a whole.
There are no actions, suits, regulatory investigations or other
proceedings pending or, to the best knowledge of the Company or the
Bank, threatened against the Company or the Bank relating to the
discharge, storage, handling and disposal of hazardous or toxic
substances, pollutants or contaminants. To the best knowledge of the
Company and the Bank, no disposal, release or discharge of hazardous
or toxic substances, pollutants or contaminants, including petroleum
and gas products, as any of such terms may be defined under federal,
state or local law, has been caused by the Company or the Bank or, to
the best knowledge of the Company or the Bank, has occurred on, in or
at any of the facilities or properties of the Company or the Bank,
except such disposal, release or discharge which would not have a
material adverse effect on the Company and the Bank, taken as a whole.
(xxv) At the Closing Date, the Company and the Bank will have
completed the conditions precedent to, and shall have conducted the
Conversion in all material
9
<PAGE>
respects in accordance with the Plan and all applicable laws,
regulations, published decisions and orders, including any terms,
conditions, requirements and provisions precedent to the Conversion
imposed by the Administrator, FDIC or the FRB.
(b) Trident represents and warrants to the Company and the Bank that:
(i) Trident is registered as a broker-dealer with the Commission,
and is in good standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with full
corporate power and authority to provide the services to be furnished
to the Company and the Bank hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of Trident,
and this Agreement is a legal, valid and binding obligation of
Trident, enforceable in accordance with its terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of
creditors of registered broker-dealers accounts of whose may be
protected by the Securities Investor Protection Corporation or by
general equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, and except to the
extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or pursuant to Section 23A).
(iv) Each of Trident and, to Trident's knowledge, its employees,
agents and representatives who shall perform any of the services
required hereunder to be performed by Trident shall be duly authorized
and shall have all licenses, approvals and permits necessary to
perform such services, and Trident is a registered selling agent in
the jurisdictions listed in Exhibit A hereto and will remain
registered in such jurisdictions in which the Company is relying on
such registration for the sale of the Shares, until the Conversion is
consummated or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with
the corporate charter or bylaws of Trident or violate, conflict with
or constitute a breach of, or default (or an event which,
10
<PAGE>
with notice or lapse of time, or both, would constitute a default)
under, any material agreement, indenture or other instrument by which
Trident is bound or under any governmental license or permit or any
law, administrative regulation, authorization, approval or order or
court decree, injunction or order.
(vi) Any funds received by Trident to purchase Common Stock will be
handled in accordance with Rule 15c2-4 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's knowledge, threatened
against Trident any action or proceeding before the Commission, the
NASD, any state securities commission or any state or federal court
concerning Trident's activities as a broker-dealer.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis of
------------------------------------------------------
the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Bank hereby employ Trident
as their agent to utilize its best efforts in assisting the Company with the
Company's sale of the Shares in the Offering. The employment of Trident
hereunder shall terminate (a) forty-five (45) days after the Offerings close,
unless the Company and the Bank, with the approval of the Administrator, are
permitted to extend such period of time, or (b) upon consummation of the
Conversion, whichever date shall first occur.
In the event the Company is unable to sell a minimum of 1,530,000 Shares (or
such lesser amount as the Administrator may permit) within the period herein
provided, this Agreement shall terminate, and the Company and the Bank shall
refund promptly to any persons who have subscribed for any of the Shares, the
full amount which they may have received from them, together with interest as
provided in the Prospectus, and no party to this Agreement shall have any
obligation to the other party hereunder, except as set forth in Sections 6, 8(a)
and 9 hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the Bank
until all Shares are sold and paid for were made prior to the commencement of
the Offerings, with provision for prompt refund to the purchasers as set forth
above, or for delivery to the Company if all Shares are sold. If all conditions
precedent to the consummation of the Conversion are satisfied, including the
sale of all Shares required by the Plan to be sold, the Company agrees to issue
or have issued such Shares and to release for delivery certificates to
subscribers thereof for such Shares on the Closing Date against payment to the
Company by any means authorized pursuant to the Prospectus, at the principal
office of the Company at 708 South Church Street, Burlington, North Carolina
27216, or at such other place as shall be agreed upon between the parties
hereto. The date upon which Trident is paid the compensation due hereunder is
herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a subscriber
to forward to the Bank for deposit in a segregated account the offering price of
the Common Stock ordered on or
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<PAGE>
before twelve noon on the next business day following receipt or execution of an
order form by Trident or (b) to solicit indications of interest in which event
(i) Trident will subsequently contact any potential subscriber indicating
interest to confirm the interest and give instructions to execute and return an
order form or to receive authorization to execute the order form on the
subscriber's behalf, (ii) Trident will mail acknowledgements of receipt of
orders to each subscriber confirming interest on the business day following such
confirmation, (iii) Trident will debit accounts of such subscribers on the third
business day ("debit date") following receipt of the confirmation referred to in
(i), and (iv) Trident will forward completed order forms together with such
funds to the Bank on or before twelve noon on the next business day following
the debit date for deposit in a segregated account. Trident acknowledges that if
the procedure in (b) is adopted, subscribers' funds are not required to be in
their accounts until the debit date.
In addition to the expenses specified in Section 6 hereof, Trident shall receive
the following compensation for its services hereunder:
(a)(i) a commission equal to 1.75% of the aggregate dollar amount of Common
Stock sold in the Subscription Offering and any Community Offering, except
no commissions shall be payable on shares purchased by directors, executive
officers, the employee stock ownership plan and "associates" of directors
and executive officers as defined in the Plan, and (ii) a commission to be
agreed upon by Trident and the Company for Shares sold by other member
firms of the NASD through a selected dealers arrangement in any Syndicated
Community Offering. All commissions shall be based on the amount of Common
Stock sold. All such commissions are to be payable in same-day funds to
Trident on the Closing Date.
(b) Trident shall be reimbursed for allocable expenses, including but not
limited to travel, communications and postage and legal fees and expenses,
whether or not the Offerings are successfully completed; provided, however,
that neither the Company nor the Bank shall pay or reimburse Trident for
any of the foregoing expenses accrued after Trident shall have notified the
Company or the Bank of its election to terminate this Agreement pursuant to
Section 11 hereof or after such time as the Company or the Bank shall have
given notice in accordance with Section 12 hereof that Trident is in breach
of this Agreement. Trident's out-of-pocket expenses will not exceed $7,500,
and its legal fees and expenses will not exceed $27,500, without the
consent of the Company and the Bank. Full payment to defray Trident's
reimbursable expenses shall be made in same-day funds on the Closing Date
or, if the Conversion is not completed and is terminated for any reason,
within ten (10) business days of receipt by the Company of a written
request from Trident for reimbursement of its expenses. Trident
acknowledges receipt of $2,500 advance payment from the Bank which shall be
credited against the total reimbursement due Trident hereunder.
(c) Notwithstanding the limitations on reimbursement of Trident for
allocable expenses provided in the immediately preceding paragraph (b), in
the event that a resolicitation or
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<PAGE>
other event causes the Offerings to be extended beyond their original
expiration date, the Company and the Bank shall reimburse Trident for its
reasonable expenses incurred during such extended period, even if the
allowances for reimbursable expenses provided for paragraph (b) above have
been exhausted, provided that any reimbursements in excess of the
limitations in paragraph (b) would not exceed an amount equal to the
product obtained by dividing $35,000 (the original reimbursable out-of-
pocket expense limit), respectively, by the total number of days of the
unextended Subscription Offering (calculated from the date of the
Prospectus to the intended close of the Subscription Offering as stated in
the Prospectus) and multiplying such product by the number of days of the
extension (that number of days from the date of the supplemental prospectus
used in the extended offering to the closing of the extension of the
offering(s) described in such supplemental prospectus).
The Company shall pay any stock issue and transfer taxes which may be payable
with respect to the sale of the Shares. The Company and the Bank shall also pay
all expenses of the Conversion incurred by them or on their prior approval
including but not limited to their attorneys' fees, NASD filing fees, and
attorneys' fees relating to any required state securities laws research and
filings, telephone charges, air freight, rental equipment, supplies, transfer
agent charges, fees relating to auditing and accounting and costs of printing
all documents necessary in connection with the Conversion.
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
--------
assisting the Company on a best efforts basis in offering a minimum of 1,530,000
and a maximum of 2,070,000 Shares, with the possibility of offering up to
2,380,500 Shares (except as the Adminstrator may permit to be decreased or
increased) in the Offerings. The Shares are to be offered to the public at the
price set forth on the cover page of the Prospectus and the first page of this
Agreement.
5. Further Agreements. The Company and the Bank jointly and severally
------------------
covenant and agree that:
(a) The Company shall deliver to Trident, from time to time, such number
of copies of the Prospectus as Trident reasonably may request. The Company
authorizes Trident to use the Prospectus in any lawful manner in connection
with the offer and sale of the Shares.
(b) The Company will notify Trident immediately upon discovery, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement becomes effective or any supplement to the
Prospectus has been filed, (ii) of the issuance by the Commission of any
stop order relating to the Registration Statement or of the initiation or
the threat of any proceedings for that purpose, (iii) of the receipt of any
notice with respect to the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, and (iv) of the receipt of any
comments from the staff of the
13
<PAGE>
Commission relating to the Registration Statement. If the Commission enters
a stop order relating to the Registration Statement at any time, the
Company will make every reasonable effort to obtain the lifting of such
order at the earliest possible moment.
(c) During the time when a prospectus is required to be delivered under
the Act, the Company will comply so far as it is able with all requirements
imposed upon it by the Act, as now in effect and hereafter amended, and by
the Regulations, as from time to time in force, so far as necessary to
permit the continuance of offers and sales of or dealings in the Shares in
accordance with the provisions hereof and the Prospectus. If during the
period when the Prospectus is required to be delivered in connection with
the offer and sale of the Shares any event relating to or affecting the
Company and the Bank, taken as a whole, shall occur as a result of which it
is necessary, in the opinion of counsel for Trident, with the concurrence
of counsel to the Company, to amend or supplement the Prospectus in order
to make the Prospectus not false or misleading in light of the
circumstances existing at the time it is delivered to a purchaser of the
Shares, the Company forthwith shall prepare and furnish to Trident a
reasonable number of copies of an amendment or amendments or of a
supplement or supplements to the Prospectus (in form and substance
satisfactory to counsel for Trident) which shall amend or supplement the
Prospectus so that, as amended or supplemented, the Prospectus shall not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser of the Shares, not misleading. The Company will not file or use
any amendment or supplement to the Registration Statement or the Prospectus
of which Trident has not first been furnished a copy or to which Trident
shall reasonably object after having been furnished such copy. For the
purposes of this subsection the Company and the Bank shall furnish such
information with respect to themselves as Trident from time to time may
reasonably request.
(d) The Company and the Bank have taken or will take all reasonably
necessary action as may be required to qualify or register the Shares for
offer and sale by the Company under the securities laws of such
jurisdictions as Trident and either the Company or its counsel may agree
upon; provided, however, that the Company shall not be obligated to qualify
as a foreign corporation to do business under the laws of any such
jurisdiction. In each jurisdiction where such qualification or registration
shall be effected, the Company, unless Trident agrees that such action is
not necessary or advisable in connection with the distribution of the
Shares, shall file and make such statements or reports as are, or
reasonably may be, required by the laws of such jurisdiction.
(e) Appropriate entries will be made in the financial records of the Bank
sufficient to establish a liquidation account for the benefit of eligible
account holders and supplemental eligible account holders in accordance
with the requirements of the Administrator.
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<PAGE>
(f) The Company will file a registration statement for the Common Stock
under Section 12(g) of the Exchange Act, prior to completion of the stock
offering pursuant to the Plan and shall request that such registration
statement be effective upon or before completion of the Conversion. The
Company shall maintain the effectiveness of such registration for a minimum
period of three years or for such shorter period as may be required by
applicable law.
(g) The Company will make generally available to its security holders as
soon as practicable, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the regulations promulgated under the Act)
covering a twelve-month period beginning not later than the first day of
the Company's fiscal quarter next following the effective date (as defined
in said Rule 158) of the Registration Statement.
(h) For a period of three (3) years from the date of this Agreement
(unless the Common Stock shall have been deregistered under the Exchange
Act), the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to
shareholders for such year; and the Company will furnish to Trident (i) as
soon as publicly available, a copy of each report or definitive proxy
statement of the Company filed with the Commission under the Exchange Act
or mailed to shareholders, and (ii) from time to time, such other public
information concerning the Company as Trident may reasonably request.
(i) The Company shall use the net proceeds from the sale of the Shares
consistently with the manner set forth in the Prospectus.
(j) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived in writing by Trident.
(k) The Company shall advise Trident, if necessary, as to the allocation
of deposits, in the case of eligible account holders and supplemental
eligible account holders, and votes, in the case of other members, and of
the Shares in the event of an oversubscription and shall, after
consultation with Trident, provide Trident final instructions as to the
allocation of the Shares ("Allocation Instructions") in such event and such
information shall be accurate and reliable. Trident shall be entitled to
rely on such instructions and shall have no liability in respect of its
reliance thereon, including without limitation, no liability for or related
to any denial or grant of a subscription in whole or in part.
(l) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Trident in order for Trident to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding
and Withholding."
15
<PAGE>
6. Payment of Expenses. Whether or not the Conversion is consummated, the
-------------------
Company and the Bank shall pay or reimburse Trident for (a) all filing fees paid
or incurred by Trident in connection with all filings with the NASD with respect
to the Offerings and, (b) in addition, if the Company is unable to sell a
minimum of 1,530,000 Shares or such lesser amount as the Administrator may
permit or the Conversion is otherwise terminated, the Company and the Bank shall
reimburse Trident for allocable expenses incurred by Trident relating to the
offering of the Shares as provided in Section 3 hereof; provided, however, that
neither the Company nor the Bank shall pay or reimburse Trident for any of the
foregoing expenses accrued after Trident shall have notified the Company or the
Bank of its election to terminate this Agreement pursuant to Section 11 hereof
or after such time as the Company or the Bank shall have given notice in
accordance with Section 12 hereof that Trident is in breach of this Agreement.
7. Conditions of Trident's Obligations. Except as may be waived in writing by
-----------------------------------
Trident, the obligations of Trident as provided herein shall be subject to the
accuracy of the representations and warranties contained in Section 2 hereof as
of the date hereof and as of the Closing Date, to the performance by the Company
and the Bank of their obligations hereunder and to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinions of
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., special counsel for
the Company and the Bank, addressed to Trident, in form and substance
reasonably satisfactory to counsel for Trident, covering the matters
described in Exhibit B hereto.
(b) At the Closing Date, Trident shall receive the letter of Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P., special counsel for the
Company and the Bank, dated the Closing Date, addressed to Trident, in form
and substance reasonably satisfactory to counsel for Trident, covering the
matters described in Exhibit C hereto.
(c) Counsel for Trident shall have been furnished such documents as they
reasonably may require for the purpose of enabling them to review or pass
upon the matters required by Trident, and for the purpose of evidencing the
accuracy, completeness or satisfaction of any of the representations,
warranties or conditions herein contained, including but not limited to,
resolutions of the Board of Directors of the Company and the Bank regarding
the authorization of this Agreement and the transactions contemplated
hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the condition,
financial or otherwise, business or results of operations of the Company
and the Bank, taken as a whole, since the latest date as of which such
condition is set forth in the Prospectus, except as referred to therein;
(ii) there shall have been no transaction entered into by the Company or
the Bank after the latest date as of which the financial condition of the
Company or the Bank is set forth in the Prospectus other than transactions
referred to or contemplated therein, transactions in the ordinary course of
business, and transactions which are not material to the Company and
16
<PAGE>
the Bank, taken as a whole; (iii) none of the Company or the Bank shall
have received from the Administrator, FRB, FDIC, or Commission any
direction (oral or written) to make any change in the method of conducting
their respective businesses which is material to the business of the
Company and the Bank, taken as a whole, with which they have not complied;
(iv) no action, suit or proceeding, at law or in equity or before or by any
federal or state commission, board or other administrative agency, shall be
pending or threatened against the Company or the Bank or affecting any of
their respective assets, wherein an unfavorable decision, ruling or finding
would have a material adverse effect on the business, operations, financial
condition or income of the Company and the Bank, taken as a whole; and (v)
the Shares shall have been qualified or registered for offering and sale by
the Company under the securities laws of such jurisdictions as Trident and
the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive, financial and accounting officer(s) of each of the
Company and the Bank, dated the Closing Date, to the effect that: (i) they
have examined the Prospectus and, at the time the Prospectus became
authorized by the Company for use, the Prospectus did not contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading with respect to the Company or the
Bank; (ii) since the date the Prospectus became authorized by the Company
for use, no event has occurred which should have been set forth in an
amendment or supplement to the Prospectus which has not been so set forth,
including specifically, but without limitation, any material change in the
business, condition (financial or otherwise) or results of operations of
the Company or the Bank and, the conditions set forth in clauses (ii)
through (iv) inclusive of subsection(d) of this Section 7 have been
satisfied; (iii) to the best knowledge of such officers, no order has been
issued by the Commission, the FDIC or the Administrator to suspend the
Offerings or the effectiveness of the Prospectus, and no action for such
purposes has been instituted or threatened by the Commission, the FDIC or
the Administrator; (iv) to the best knowledge of such officers, no person
has sought to obtain review of the final actions of the Administrator
approving the Plan; and (v) all of the representations and warranties
contained in Section 2 of this Agreement are true and correct, with the
same force and effect as though expressly made on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other documents, (i)
copies of the letters from the Administrator authorizing the use of the
Prospectus and the Proxy Statement, (ii) a copy of the order of the
Commission declaring the Registration Statement effective; (iii) copies of
the letters from the appropriate North Carolina authority evidencing the
corporate existence of the Bank; (iv) a copy of the letter from the
appropriate North Carolina authority evidencing the incorporation (and, if
generally
17
<PAGE>
available from such authority, good standing) of the Company; (v) a copy of
the Company's charter certified by the appropriate North Carolina
governmental authority; and, (vi) if available, a copy of the Certification
from the Administrator approving the Bank's Stock Charter.
(g) As soon as available after the Closing Date, Trident shall receive a
certified copy of the Bank's Stock Charter executed by the appropriate
North Carolina governmental authority.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from PricewaterhouseCoopers LLP,
independent certified public accountants, addressed to Trident and the
Company, in substance and form satisfactory to counsel for Trident, with
respect to the financial statements and certain financial information
contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to counsel for Trident from PricewaterhouseCoopers,
LLP, independent certified public accountants, dated the Closing Date and
addressed to Trident and the Company, confirming the statements made by
them in the letter delivered by them pursuant to the preceding subsection
as of a specified date not more than five (5) days prior to the Closing
Date.
All such opinions, certificates, letters and documents shall be in compliance
with the provisions hereof only if they are, in the reasonable opinion of
Trident and its counsel, satisfactory to Trident and its counsel. Any
certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Bank to Trident as to the statements made therein. If any condition to Trident's
obligations hereunder to be fulfilled prior to or at the Closing Date is not so
fulfilled, Trident may terminate this Agreement or, if Trident so elects, may
waive in writing any such conditions which have not been fulfilled, or may
extend the time of their fulfillment. If Trident terminates this Agreement as
aforesaid, the Company and the Bank shall reimburse Trident for its expenses as
provided in Section 3(b) hereof.
8. Indemnification.
---------------
(a) The Company and the Bank jointly and severally agree to indemnify and
hold harmless Trident, its officers, directors and employees and each
person, if any, who controls Trident within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage and expense whatsoever and shall further promptly
reimburse such persons for any legal or other expenses reasonably incurred
by each or any of them in investigating, preparing to defend or defending
against any action, proceeding or claim (whether commenced or threatened)
arising out of or based upon (A) any misrepresentation by the Company or
the Bank in
18
<PAGE>
this Agreement or any breach of warranty by the Company or the Bank with
respect to this Agreement or arising out of or based upon any untrue or
alleged untrue statement of a material fact or the omission or alleged
omission of a material fact required to be stated or necessary to make not
misleading any statements contained in (i) the Registration Statement or
the Prospectus or (ii) any application (including the Stock Application and
the Form FR Y-3) or other document or communication (in this Section 8
collectively called "Application") prepared or executed by or on behalf of
the Company or the Bank or based upon written information furnished by or
on behalf of the Company or the Bank, whether or not filed in any
jurisdiction, to effect the Conversion or qualify the Shares under the
securities laws thereof or filed with the Administrator or Commission,
unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or the Bank
with respect to Trident by or on behalf of Trident expressly for use in the
Prospectus or any amendment or supplement thereof or in any Application, as
the case may be, or (B) provided such loss, liability, claim, damage or
expense is not caused principally and directly by Trident's gross
negligence or willful misconduct, the participation by Trident in the
Conversion. This indemnity shall be in addition to any liability the
Company and the Bank may have to Trident otherwise.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii)
any records of account holders, depositors, borrowers and other members of
the Bank delivered to Trident by the Bank or its agents for use during the
Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Bank, their officers, directors and employees and each person, if any, who
controls the Company or the Bank within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Bank to Trident, but only with
respect to (A) statements or omissions, if any, made in the Prospectus or
any amendment or supplement thereof, in any Application or to a purchaser
of the Shares in reliance upon, and in conformity with, written information
furnished to the Company or the Bank with respect to Trident by or on
behalf of Trident expressly for use in the Prospectus or in any
Application; (B) any misrepresentation by Trident in Section 2(b) of this
Agreement; or (C) any liability of the Company or the Bank which is found
in a final judgment by a court of competent jurisdiction (not subject to
further appeal) to have principally and directly resulted from gross
negligence or willful misconduct of Trident.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise
than under this Section 8. In case any such action is brought against any
indemnified
19
<PAGE>
party, and it notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than the reasonable cost of investigation except as
otherwise provided herein. In the event the indemnifying party elects to
assume the defense of any such action and retain counsel acceptable to the
indemnified party, the indemnified party may retain additional counsel, but
shall bear the fees and expenses of such counsel unless (i) the
indemnifying party shall have specifically authorized the indemnified party
to retain such counsel or (ii) the parties to such suit include such
indemnifying party and the indemnified party, and such indemnified party
shall have been advised by counsel that one or more material legal defenses
may be available to the indemnified party which may not be available to the
indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such
counsel. An indemnifying party against whom indemnity may be sought shall
not be liable to indemnify an indemnified party under this Section 8 if any
settlement of any such action is effected without such indemnifying party's
consent. To the extent required by law, this Section 8 is subject to and
limited by the provisions of Section 23A.
9. Contribution. In order to provide for just and equitable contribution in
------------
circumstances in which the indemnity agreement provided for in Section 8 above
is for any reason held to be unavailable to Trident, the Company and/or the Bank
other than in accordance with its terms, the Company or the Bank and Trident
shall contribute to the aggregate losses, liabilities, claims, damages, and
expenses of the nature contemplated by said indemnity agreement incurred by the
Company or the Bank and Trident (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Bank on the one
hand and Trident on the other from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above, but also the relative fault of the Company or
the Bank on the one hand and Trident on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Bank on
the one hand and Trident on the other shall be deemed to be in the same
proportions as the total net proceeds from the Conversion received by the
Company and the Bank bear to the total commissions received by Trident under
this Agreement. The relative fault of the Company or the Bank on the one hand
and Trident on the other shall be determined by reference to, among
20
<PAGE>
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Bank or by Trident and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, Trident shall not be required
to contribute any amount in excess of the amount by which commissions owed
Trident pursuant to this Agreement exceeds the amount of any damages which
Trident has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. To the extent required by law, this Section 8 is subject to
and limited by the provisions of Section 23A.
10. Survival of Agreements, Representations and Indemnities. The respective
-------------------------------------------------------
indemnities of the Company and the Bank and Trident and the representations and
warranties of the Company and the Bank and of Trident set forth in or made
pursuant to this Agreement shall remain in full force and effect, regardless of
any termination or cancellation of this Agreement or any investigation made by
or on behalf of Trident or the Company or the Bank or any controlling person or
indemnified party referred to in Section 8 hereof, and shall survive any
termination or consummation of this Agreement and/or the issuance of the Shares,
and any legal representative of Trident, the Company, the Bank and any such
controlling persons shall be entitled to the benefit of the respective
agreements, indemnities, warranties and representations.
11. Termination. Trident may terminate this Agreement by giving the notice
-----------
indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make
it, in Trident's reasonable opinion, impracticable to proceed with the
offering of the Shares; or if trading on the New York Stock Exchange shall
have suspended; or if the United States shall have become involved in a war
or major hostilities; or if a general banking moratorium has been declared
by a state or federal authority which has a material effect on the Bank or
the Conversion; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared; or if there shall have
been a material change in the capitalization, condition or business of the
Company, or if the Bank shall have sustained a material or
21
<PAGE>
substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not said loss shall
have been insured; or if there shall have been a material adverse change in
the condition or prospects of the Company or the Bank.
(b) If Trident elects to terminate this Agreement as provided in this
Section, the Company and the Bank shall be notified promptly by Trident by
telephone or telegram, confirmed by letter.
(c) If this Agreement is terminated by Trident for any of the reasons set
forth in subsection (a) above, and to fulfill its obligations, if any,
pursuant to Sections 3(b) and (c), 6, 8(a) and 9 of this Agreement and upon
demand, the Company and the Bank shall pay Trident the full amount so owing
thereunder.
(d) The Bank may terminate the Conversion in accordance with the terms of
the Plan. Such termination shall be without liability to any party, except
that the Company and the Bank shall be required to fulfill their
obligations, if any, pursuant to Sections 3(b) and (c), 6, 8(a) and 9 of
this Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Michael Best & Friedrich LLP, 100 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, Attention: W. Charles Jackson, Esquire) and
if sent to the Company or the Bank, shall be mailed, delivered or telegraphed
and confirmed to First Community Financial Corporation, 708 South Church Street,
Burlington, North Carolina 27216, Attention: Mr. William R. Gilliam, President
(with a copy to Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., P.O. Box
26000, Greensboro, North Carolina 27420, Attention: Randall A. Underwood,
Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and shall be
-------
binding upon, Trident, the Company, the Bank and the controlling and other
persons referred to in Section 8 hereof, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained; provided, however,
that the Bank and Company specifically consent to any assignment by Trident of
its rights and obligations hereunder to McDonald Investments, Inc.
14. Construction. Unless governed by preemptive federal law, this Agreement
------------
shall be governed by and construed in accordance with the substantive laws of
North Carolina.
22
<PAGE>
15. Counterparts. This Agreement may be executed in separate counterparts,
------------
each of which when so executed and delivered shall be an original, but all of
which together shall constitute but one and the same instrument.
* * *
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
FIRST COMMUNITY FINANCIAL COMMUNITY SAVINGS BANK, SSB
CORPORATION
By:__________________________ By:________________________________
William R. Gilliam William R. Gilliam
President and Chief President and Chief
Executive Officer Executive Officer
Date: April ____, 1999 Date: April ___, 1999
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By:__________________________
Date: April ____, 1999
23
<PAGE>
Exhibit A
Trident Securities, Inc. is a registered selling agent in the jurisdictions
--
listed below:
Alabama Missouri
Alaska Montana
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Inc. Georgia
Securities, only, no agents)
Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan Tennessee
Minnesota Utah
Mississippi Wisconsin
Wyoming
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
listed below:
Hawaii
South Dakota
24
<PAGE>
Exhibit B
Matters to be Addressed in Section 7(a) Opinion
- -----------------------------------------------
(i) the Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of North Carolina;
the Bank has been duly organized and is validly existing as a mutual
savings bank under the laws of the State of North Carolina; Community
Financial Services, Inc. (the "Subsidiary") has been duly organized and is
validly existing as a corporation in good standing under the laws of the
State of North Carolina; and the Company, the Bank and the Subsidiary have
full power and authority to own their properties and conduct their
businesses as described in the Prospectus;
(ii) the Bank is a member of the Federal Home Loan Bank of Atlanta, and
the deposit accounts of the Bank are insured by the SAIF up to the
applicable legal limits, and to our Actual Knowledge, no actions or
proceedings are pending or threatened to revoke such membership or
insurance coverage;
(iii) to our Actual Knowledge, the Bank has no direct or indirect
subsidiary corporations, except for the Subsidiary;
(iv) neither the Company nor the Bank is required to be registered as an
investment company under the Investment Company Act of 1940;
(v) the Company, the Bank and the Subsidiary are each duly qualified to
do business and are in good standing as a foreign corporation in each
jurisdiction where the ownership or leasing of its properties or the
conduct of its business of which such we have Actual Knowledge requires
such qualification, unless the failure to be so qualified would not
reasonably be expected to have a material adverse effect on the business,
operations or financial condition of the Company and the Bank, taken as a
whole (a "Material Adverse Effect");
(vi) to our Actual Knowledge, each of the Company, the Bank and the
Subsidiary has obtained all licenses, permits and other governmental
authorizations required for the conduct of its business as described in the
Prospectus, except where the failure to obtain such licenses, permits or
governmental authorizations would not reasonably be expected to have a
Material Adverse Effect; to our Actual Knowledge, all of the leases and
subleases material to the business of the Company, the Bank or the
Subsidiary under which the Company, the Bank or the Subsidiary holds
properties are in full force and effect; to our Actual Knowledge, neither
the Company, the Bank, nor the Subsidiary is in violation of its charter or
bylaws;
25
<PAGE>
(vii) the Plan has been duly adopted and approved by the Boards of
Directors of the Bank and the Company and the members of the Bank; the Plan
complies with, and to our Actual Knowledge, the Conversion has been
effected in all material respects in accordance with, applicable North
Carolina law, the regulations of the Administrator and the applicable
Administrator approvals issued thereunder; to our Actual Knowledge, all of
the terms, conditions, requirements and provisions with respect to the
filing or submission of certain required reports or other materials by the
Company or the Bank have been complied with by the Company and the Bank in
all material respects except for reports and items required to be filed or
submitted after the Closing Date; and, to our Actual Knowledge, no person
has sought to obtain regulatory or judicial review of the final action of
the Administrator in approving the Plan;
(viii) the Company has authorized Common Stock as set forth in the
Registration Statement and the Prospectus, the description thereof in the
Registration Statement and the Prospectus is accurate and complete in all
material respects, and, upon issuance of the Shares pursuant to the
Company' instructions, the outstanding capital stock of the Company will be
within the range set forth in the Registration Statement and Prospectus;
(ix) upon the filing of the Bank's Stock Charter in accordance with North
Carolina law and the completion of the sale by the Company of the Shares as
contemplated by the Prospectus and Plan, (a) the Bank will be converted
pursuant to the Plan to a North Carolina-chartered capital stock savings
bank with full power and authority to own its property and conduct its
business as described in the Prospectus, and (b) all of the outstanding
capital stock of the Bank will be owned of record and, to our Actual
Knowledge, beneficially by the Company free and clear of all liens,
charges, encumbrances and restrictions;
(x) the issuance and sale of the Shares have been duly authorized by all
necessary corporate action on the part of the Company; the Shares, upon
receipt of consideration and issuance in accordance with the terms of the
Plan and this Agreement, will be validly issued, fully paid, nonassessable
and free of preemptive rights; and purchasers of such shares from the
Company, upon issuance thereof against payment therefor, will acquire such
shares free and clear of all claims, encumbrances, security interests and
liens created by the Company;
(xi) the certificates for the Shares comply in all material respects with
the applicable law of North Carolina and the form of certificate used to
evidence the Shares is in due and proper form;
(xii) the issuance and sale of the capital stock of the Bank to the
Company have been duly authorized by all necessary corporate action of the
Bank and the Company and have received the approval of the Administrator
and FRB, and such capital stock, upon receipt of payment and issuance in
accordance with the terms of the Plan, will be validly issued,
26
<PAGE>
fully paid and nonassessable and free of preemptive rights; the Company
upon issuance thereof against payment to the Bank of a portion of the net
proceeds from the sale of the Shares, will acquire such shares which, to
our Actual Knowledge, are free and clear of all claims, encumbrances,
security interests and liens whatsoever;
(xiii) subject to the satisfaction of the conditions to the Administrator
and FRB approval of the Conversion Application and the non-objection of the
FDIC to the Stock Application, no further approval, authorization, consent
or other order of any regulatory agency is required in connection with the
execution and delivery of this Agreement, the issuance and sale of the
Shares and the consummation of the Conversion, except for the
Administrator's approval of the Bank's Stock Charter and filing of the
Bank's Stock Charter with the North Carolina Secretary of State, and except
as may be required under the blue sky securities laws of various
jurisdictions and the regulations of the NASD (as to which no opinion need
be rendered in such letter);
(xiv) the execution and delivery of this Agreement and the consummation of
the Conversion have been duly authorized by all necessary corporate action
on the part of each of the Company and the Bank, and this Agreement is a
legal, valid and binding obligation of each of the Company and the Bank,
enforceable in accordance with its terms except as the enforceability
thereof may be limited by (i) bankruptcy, insolvency, moratorium,
reorganization, receivership, conservatorship or other similar laws
relating to or affecting the enforcement of creditors' rights generally or
the rights of creditors of depository institutions whose accounts are
insured by the FDIC or savings and loan holding companies the accounts of
whose subsidiaries are insured by the FDIC; (ii) general equity principles,
regardless of whether such enforceability is considered in a proceeding in
equity or at law, or (iii) laws relating to the safety and soundness of
insured depository institutions and their affiliates, and except to the
extent that the provisions of Sections 8 and 9 hereof may be unenforceable
as against public policy or applicable law, including but not limited to,
Section 23A;
(xv) except as set forth in the Prospectus, to our Actual Knowledge, the
Bank is not in violation of any directive from the FDIC or Administrator to
make any change in the method of conducting its business and there are no
legal or governmental proceedings pending or threatened against or
involving the assets of the Company or the Bank, which violation or
proceedings would reasonably be expected to have a Material Adverse Effect
(provided that for this purpose we do not regard any litigation or
governmental proceeding to be "threatened" unless the potential litigant or
government authority has manifested to the management of the Company or the
Bank, or to us, a present intention to initiate such litigation or
proceeding);
(xvi) the statements in the Prospectus under the captions "Supervision and
Regulation," "Taxation," "Dividend Policy," "Anti-Takeover Provisions
Affecting First Community and Community Savings" "Historical and Pro Forma
Capital Compliance" and
27
<PAGE>
"Description of Capital Stock," insofar as they are, or refer to,
statements of North Carolina or federal law or legal conclusions (excluding
financial or statistical data or stock valuation information included
therein, as to which an opinion need not be expressed), have been prepared
or reviewed by us and are accurate in all material respects; further, the
information under the caption "The Conversion - Income Tax Consequences"
has been reviewed by us and constitutes a correct summary, in all material
respects, of the opinion rendered by us to the Bank and Company with
respect to the federal and state tax consequences of the Conversion;
(xvii) the Stock Application and Acquisition Application have been
approved by the Administrator, the FR Y-3 has been approved by the FRB; the
FDIC has given its notice of non-objection to the Stock Application; the
Proxy Statement has been authorized for use by the Administrator; the
Registration Statement and any post-effective amendment thereto have been
declared effective by the Commission; and no proceedings are pending by or
before the Commission, the Administrator, the FRB or the FDIC seeking to
revoke or rescind the orders declaring the Registration Statement or any
post-effective amendment thereto effective or approving (or issuing a non-
objection with respect to) the Stock Application, Acquisition Application
or the FR Y-3 and, to our Actual Knowledge, no such proceedings are
contemplated or threatened (provided that for this purpose we do not regard
any litigation or governmental proceeding to be "threatened" unless the
potential litigant or government authority has manifested to the management
of the Company or the Bank, or to us, a present intention to initiate such
litigation or proceeding); the Employee Stock Ownership Plan is not
required to register as a holding company;
(xviii) the execution and delivery of this Agreement and the consummation
of the Conversion by the Company and the Bank do not (i) violate or
conflict with the charter, certificate of incorporation or bylaws of the
Company, the Bank (in either mutual or stock form) or the Subsidiary, (ii)
our Actual Knowledge, constitute a breach of or default (or an event which,
with notice or lapse of time or both, would constitute a default) under,
give rise to any right of termination, cancellation or acceleration
contained in, or result in the creation or imposition of any lien, charge
or other encumbrance upon any of the properties or assets of the Company,
the Bank or the Subsidiary pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, lease, debenture,
note, instrument or obligation to which the Company, the Bank or the
Subsidiary is a party (other than the required establishment of the
liquidation account pursuant to the Plan) which in any such event would
reasonably be expected to result in a Material Adverse Effect or (iii)
violate the applicable North Carolina laws and regulations applicable to
the Conversion or FDIC regulations applicable to the Conversion or, to our
Actual Knowledge, any law, administrative regulation, court order, writ,
injunction or decree (subject to the satisfaction of certain post-closing
conditions imposed by the Administrator, FRB and FDIC in connection with
the approvals of, or notices of non-objection to, the Stock Application,
the Acquisition Application or the FRY-3);
28
<PAGE>
(xix) to our Actual Knowledge, there has been no violation of any provision
of the Company's, the Bank's or the Subsidiary's charter, certificate of
incorporation, articles of incorporation or bylaws or breach or default (or
the occurrence of any event which, with notice or lapse of time or both,
would constitute a default) by the Company, the Bank or the Subsidiary
under any agreement, contract, indenture, lease, bond, debenture, note,
instrument or obligation to which the Company, the Bank or the Subsidiary
is a party or by which any of them or any of their respective assets or
properties may be bound, or violation of any license, permit, law,
administrative regulation or order, court order, injunction or decree which
violation, breach or default would reasonably be expected to have a
Material Adverse Effect;
(xx) The Stock Application, the Acquisition Application, the FR Y-3, the
Registration Statement, the Prospectus and the Proxy Statement, in each
case, as amended and supplemented, comply as to form in all material
respects with the requirements of the Act, the SEC Regulations and the
rules and regulations and written and published decisions and orders of the
Administrator, the FRB and the FDIC, as the case may be (except as to
information provided in writing by Trident with respect to Trident included
therein and financial statements, notes to financial statements, financial
tables and other financial and statistical data and appraisal information
included therein, as to which no opinion need be rendered); to our Actual
Knowledge, all documents and exhibits required to be filed with the
Conversion Application and the Registration Statement have been so filed;
and the descriptions in the Conversion Application and the Registration
Statement of such documents and exhibits are accurate and complete in all
material respects.
29
<PAGE>
Exhibit C
Matters to be Addressed in Section 7(b) Opinion
-----------------------------------------------
You have asked us whether anything has come to our Actual Knowledge that
would lead us to believe (i) that the Registration Statement, as amended or
supplemented (except the financial statements, notes to financial statements,
financial tables and other financial and statistical data, including the
appraisal prepared by Ferguson & Company ("Ferguson") contained or described
therein, with respect to which we make no comment), at the time it became
effective, contained an untrue statement of material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or (ii) that the Prospectus, as amended or supplemented (except the
financial statements, notes to financial statements, financial tables and other
financial and statistical data, including the appraisal prepared by Ferguson,
contained or described therein, with respect to which we make no comment) as of
the date the Registration Statement became effective or as of the date thereof
or as of the Closing Date, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
While we cannot opine as to factual matters, we have participated, in the
course of serving as special counsel to the Bank and the Company, in discussions
and conferences with certain officers and other representatives of the Bank and
the Company, representatives of independent accountants of the Bank and the
Company, and your representatives and special counsel, at which times the
contents of the Registration Statement and the Prospectus were discussed and
drafts of those documents were reviewed and revised.
In response to your request, we can advise you that, although we have not
independently investigated or verified the correctness and completeness of all
of the information included in the Registration Statement, as amended or
supplemented, or the Prospectus, as amended or supplemented, nothing has come to
our Actual Knowledge in the course of our review of the Registration Statement
and the Prospectus and participation in the discussions in connection with the
preparation of those documents or otherwise which has caused us to believe that
the Registration Statement, as amended or supplemented, at the time it became
effective, contained an untrue statement of material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein in light of the circumstances under which they were made not
misleading, or that the Prospectus, as amended or supplemented, at the date the
Registration Statement was declared effective or as of the date thereof or as of
the Closing Date, contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
30
<PAGE>
However, the character of the factual determinations involved in the
registration and offering processes is such that we do not assume any
responsibility for the accuracy, completeness, or fairness of such factual
statements as contained in the Registration Statement or the Prospectus. In
addition, we express no view or belief as to any information concerning or
provided by you or your affiliates, or as to any financial statements, notes to
financial statements, financial tables and other financial and statistical data,
including the appraisal prepared by Ferguson, contained or described in the
Registration Statement or the Prospectus.
We state no belief regarding whether the Conversion and/or any one or more
of the transactions or agreements contemplated in the Plan could or will be
affected in any way by any pending administrative or legal proceedings involving
the conversion of any other mutual savings institution to stock form under
applicable North Carolina laws and regulations. We note that the conversions of
certain North Carolina state savings banks from mutual to stock form and their
related mergers with commercial banks under North Carolina laws and regulations
have been challenged in administrative and legal proceedings by members of those
institutions as being improperly conducted, in breach of the duties of the
officers and directors of those institutions to the members of such institutions
and/or otherwise invalid or improper.
31
<PAGE>
FIRST COMMUNITY FINANCIAL CORPORATION
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
The Corporation will furnish to any shareholder upon request and without charge
a copy of the Articles of Incorporation and Bylaws of the Corporation, which set
forth certain other provisions with respect to acquisition of shares of the
Corporation, as well as a description of the Corporation's authorized common
and preferred stock and other provisions affecting stockholder rights and
corporate governance.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ......Custodian.......
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to Minors
right of survivorship Act...........................
and not as tenants (State)
in common
Additional abbreviations may also be used though not in the above list.
For value received, ______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENFIYING NUMBER
OF ASSIGNEEE)
_________________________________________
_________________________________________
---------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE
OF ASSIGNEE
___________________________________________________________________________
___________________________________________________________________________
____________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
__________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated _______________________________
________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S)GUARANTEED:__________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO SEC, RULE 17Ad-15.
<PAGE>
[CERTIFICATE APPEARS HERE]
<PAGE>
LETTERHEAD OF
BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, L.L.P.
April 15, 1999
Board of Directors
Community Savings Bank, SSB
708 South Church Street
P.O. Box 1837
Burlington, North Carolina 27216-1837
Re: Conversion of Community Savings Bank, SSB from a North Carolina-
chartered mutual savings bank to a North Carolina-chartered stock
savings bank and its simultaneous acquisition by First Community
Financial Corporation, a North Carolina savings bank holding company
Members of the Board:
You have requested our opinions regarding certain income tax consequences
in connection with the proposed conversion of Community Savings Bank, SSB
("Community Mutual") from a North Carolina-chartered mutual savings bank with
federally insured deposit accounts to Community Savings Bank, Inc., a North
Carolina-chartered stock savings bank with federally insured deposit accounts
("Community"), and the simultaneous acquisition of Community as a wholly-owned
subsidiary by First Community Financial Corporation, a savings bank holding
company organized under North Carolina law ("Holding Company"). This
reorganization and conversion of Community Mutual and acquisition of Community
by the Holding Company shall be referred to as the "Conversion". Terms not
otherwise defined in this letter shall have the meanings assigned to them in the
Amended and Restated Plan of Conversion adopted by the Board of Directors of
Community Mutual on January 7, 1999 (the "Plan").
In connection with our opinions, we have reviewed copies of applications
filed by Community Mutual and the Holding Company with the Administrator, North
Carolina Savings Institutions Division, to effect the Conversion (the
"Applications"), Chapters 54C and 105 of the North Carolina General Statutes,
and applicable federal laws, rules and regulations, including the Internal
Revenue Code of 1986, as amended ("Code"). We have examined the Plan, Community
Mutual's existing Certificate of Incorporation and Bylaws, the Second Amended
Certificate of Incorporation for Community, the Bylaws for Community, the
corporate minutes approving the Conversion and related records of Community
Mutual. We have also examined the Holding Company's Articles of Incorporation,
Bylaws, corporate minutes approving the Conversion and related records. In
addition, we have examined certificates of
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 2
officials of Community Mutual, Community and the Holding Company, the
Registration Statement of the Holding Company on Form SB-2, which the Holding
Company intends to file with the Securities and Exchange Commission on or about
January 15, 1999 (the "Registration Statement") containing a proposed Prospectus
(hereinafter referred to as the "Prospectus") and such other documents as we
have deemed necessary or appropriate for purposes of giving the opinions set
forth in this letter. We have assumed the authenticity of all documents
presented to us as originals, the conformity to the originals of all documents
presented to us as copies, and the genuineness of all signatures of individuals,
and we know of no reason such assumptions are unwarranted for purposes of the
opinions expressed herein. We have assumed that all statements made in the
above-described documents are accurate and complete, and will be accurate and
complete at all times from now through the consummation of the Conversion. We
have not independently verified any factual matter relating to the Conversion in
connection with the preparation of our opinions herein and, accordingly, such
opinions do not take into account any matters not set forth herein which might
have been disclosed by independent verification. We have further assumed that
the Conversion will be consummated pursuant to the terms of the Plan.
In issuing the opinions set forth below, we have also assumed the accuracy
of the following representations of Community Mutual:
1. The fair market value of the deposit accounts and the interest in the
Liquidation Account received by each Eligible Account Holder and
Supplemental Eligible Account Holder in Community pursuant to the
Conversion will, in each instance, be equal to the fair market value
of the deposit accounts and the proprietary interest of each such
Eligible Account Holder and Supplemental Eligible Account Holder in
Community Mutual surrendered in the Conversion. The aggregate fair
market value of the deposit accounts and interests in the Liquidation
Account held by Eligible Account Holders as of the close of business
on the Eligibility Record Date will equal or exceed 99% of the
aggregate fair market value of all deposit accounts in Community
Mutual (including accounts of less than $50) as of the close of
business on that date. The aggregate fair market value of the deposit
accounts and interests in the Liquidation Account held by Supplemental
Eligible Account Holders, officers and directors of Community Mutual
and their associates as of the close of business on the Supplemental
Eligibility Record Date will equal or exceed 99% of the aggregate fair
market value of all deposit accounts in Community Mutual (including
accounts of less than $50) as of the close of business on that date.
2. The Subscription Rights to purchase Conversion Stock received in the
Conversion by each recipient have no fair market value. This
assumption is based upon your representation and the opinion of
Ferguson & Company that such Subscription Rights
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 3
have no fair market value because they will be acquired by recipients
without cost, are nontransferable and afford the recipients the right
only to purchase Conversion 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.
3. Immediately following the Conversion, the Eligible Account Holders and
Supplemental Eligible Account Holders will own all of the outstanding
interests in the Liquidation Account and will own such interests
solely by reason of their ownership of deposits and proprietary
interests in Community Mutual on the Eligibility Record Date and
Supplemental Eligibility Record Date, respectively. Pursuant to the
Plan, no additional interests in the Liquidation Account shall be
issued following the Conversion.
4. Immediately following the consummation of the Conversion, Community
will possess the same assets and liabilities as Community Mutual held
immediately before the Conversion, plus proceeds from the sale of
Conversion Stock less proceeds retained by the Holding Company, less
assets used to pay expenses incurred in the Conversion. Assets of
Community Mutual used to pay expenses of the Conversion and all
distributions (except for regular, normal interest payments made by
Community Mutual immediately before the Conversion) in the aggregate
will constitute less than 1% of the net assets of Community Mutual.
5. Except for Community Mutual's agreement to sell all of Community's
issued and outstanding common stock to the Holding Company in the
Conversion, at the time of the Conversion, Community Mutual will not
have outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire stock
in Community Mutual.
6. Community has no plan or intention to reacquire any of its common
stock issued to the Holding Company in the Conversion. Community has
no plan or intention to issue additional shares of its common stock
following the Conversion. The common stock of Community issued to the
Holding Company in the Conversion will not be callable or subject to a
put option.
7. Community has no plan or intention to sell or otherwise dispose of any
of the assets of Community Mutual acquired in the Conversion, except
for dispositions made in the ordinary course of business.
8. The liabilities of Community Mutual assumed by Community and the
liabilities, if any, to which the transferred assets are subject were
incurred by Community Mutual in the ordinary course of its business
and are associated with the assets transferred.
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 4
9. Following the Conversion, Community will continue the historic
business of Community Mutual, will use a significant portion of
Community Mutual's historic business assets in Community's business,
and will continue to engage in the same business in substantially the
same manner as engaged in by Community Mutual before the Conversion.
10. Community Mutual and Community (treated as one entity for purposes of
this representation) and the Holding Company will each pay their own
expenses attributable to the Conversion.
11. Community Mutual is not under the jurisdiction of a court as a debtor
in (i) a bankruptcy proceeding or (ii) a receivership, foreclosure, or
similar proceeding in a federal or state court.
12. None of the compensation received by an employee of Community Mutual
or Community who is also an Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member will be separate consideration
for, or allocable to, his or her status as an Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member. None of the
interests in the Liquidation Account of Community received by an
employee of Community Mutual or Community who is an Eligible Account
Holder or Supplemental Eligible Account Holder will be separate
consideration for, or allocable to, any employment agreement or
arrangement. All compensation paid to Eligible Account Holders and
Supplemental Eligible Account Holders who are also employees of
Community Mutual or Community will be for services actually rendered
and commensurate with amounts paid to third parties bargaining at
arm's-length for similar services. Officers, directors and other
employees may in the future be issued restricted common stock of the
Holding Company and options to purchase shares of the Common Stock of
the Holding Company in exchange for future services pursuant to the
proposed Management Recognition Plan and Stock Option Plan described
in the Prospectus.
13. No Eligible Account Holder or Supplemental Eligible Account Holder
will be excluded from participating in the Liquidation Account.
14. The Holding Company has no plan or intention to redeem or otherwise
acquire any of the Conversion Stock to be issued pursuant to the
Conversion, except as disclosed in the Prospectus regarding possible
purchases to fund the ESOP, MRP and stock option plans. The Holding
Company has no plan or intention to sell or otherwise dispose of the
common stock of Community received by it in the Conversion. The
Conversion Stock issued in the Conversion will not be callable or
subject to a put option.
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 5
15. At the time of Conversion, the fair market value of the assets of
Community Mutual on a going-concern basis will equal or exceed the
amount of its liabilities plus the amount of liabilities to which its
assets are subject. Immediately before the Conversion, Community
Mutual will have a positive net worth.
16. No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders or any other grantee of
Subscription Rights in lieu of (i) Subscription Rights for Conversion
Stock, or (ii) an interest in the Liquidation Account of Community.
17. There is no plan or intention for Community to be liquidated or merged
with another corporation following the Conversion.
18. The Conversion described herein is motivated by valid business
purposes and not by tax avoidance purposes.
19. After the Conversion, Community will continue the corporate existence
and business of Community Mutual with only the following changes:
(i) An amended and restated Certificate of Incorporation to allow for
the issuance of capital stock of Community, and
(ii) New corporate Bylaws.
20. There exists no intercorporate indebtedness between Community Mutual
and Community (treated as one entity for purposes of this
representation) and the Holding Company, that was issued, acquired, or
will be settled at a discount.
21. In the Conversion, the Holding Company will acquire 100% of the issued
and outstanding common stock of Community.
22. Neither Community Mutual and Community (treated as one entity for
purposes of this representation) nor the Holding Company is a
regulated investment company, a real estate investment trust or a
corporation 50% or more of the value of whose assets are stock and
securities and 80% or more of the value of whose total assets are held
for investment. In making the 50-percent and 80-percent determinations
under the preceding sentence, stock and securities in any subsidiary
corporation shall be disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidiary's assets, and a
corporation shall be considered a subsidiary if the parent owns
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 6
50 percent or more of the combined voting power of all classes of
stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of stock outstanding. In determining total
assets there shall be excluded cash and cash items (including
receivables) and Government securities.
Based upon the foregoing assumptions, our opinions with respect to the
federal and North Carolina income tax consequences of the Conversion are as
follows (for purposes of the opinions set forth below, Eligible Account Holders
shall include, if applicable pursuant to the Plan, Supplemental Eligible Account
Holders):
1. The Conversion of Community Mutual from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock savings bank
will qualify as a reorganization within the meaning of Section 368(a)
of the Code, and neither Community Mutual nor Community will recognize
any gain or loss as a result of such reorganization. Revenue Ruling
80-105, 1980-1 C.B. 78. Community Mutual in its form as a North
Carolina-chartered mutual savings bank and Community in its form as a
North Carolina-chartered stock savings bank will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
2. Community's basis in each of Community Mutual's assets will be the
same as Community Mutual's basis immediately prior to the Conversion.
Section 362(b) of the Code.
3. No gain or loss will be recognized by the Holding Company upon receipt
of money in exchange for the shares of the Conversion Stock issued
pursuant to the exercise of the Subscription Rights issued therefor.
Section 1032(a) of the Code.
4. No gain or loss will be recognized by Community upon receipt of money
from the Holding Company in exchange for the shares of its common
stock to be issued to the Holding Company in the Conversion. Section
1032(a) of the Code.
5. The holding period of the Community assets after the Conversion will
include the period during which the assets were held by Community
Mutual prior to the Conversion. Section 1223(2) of the Code.
6. Gain or loss, if any, will be realized by an Eligible Account Holder
on the exchange of such person's deposit account and proprietary
interest in Community Mutual for (i) a withdrawable deposit account in
Community in the same dollar amount as such person's deposit account
in Community Mutual immediately prior to the Conversion, (ii) such
person's interest in the Liquidation Account of Community, and (iii)
Subscription Rights
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 7
to purchase the Conversion Stock. Such gain, if any, will be
recognized by an Eligible Account Holder only to the extent of the
fair market value of such person's interest in the Subscription Rights
received. Section 1001 of the Code. You have represented to us that
the Subscription Rights to purchase Conversion Stock have no fair
market value. Accordingly, gain recognized by an Eligible Account
Holder as a result of the Conversion is limited to an amount not in
excess of the fair market value of such person's interest in the
Subscription Rights received in the Conversion. Paulsen v.
----------
Commissioner, 469 U.S. 131, 139 (1985), quoting Society for Savings v.
------------ ----------------------
Bowers, 349 U.S. 143, 150 (1955).
------
7. The basis of the deposit account in Community received by an Eligible
Account Holder will be the cost of such deposit account. The cost
basis of such deposit account in Community (i) will be equal to the
fair market value of such deposit account in Community and (ii) will
be equal to such person's basis in his or her deposit account in
Community Mutual exchanged therefor. Section 1012 of the Code.
8. The basis of the interest in the Liquidation Account received by an
Eligible Account Holder will be equal to the cost of such interest.
The cost of the Liquidation Account will be the fair market value of
the proprietary interest in Community Mutual given for the Liquidation
Account. Section 1012 of the Code. An interest in the Liquidation
Account will be deemed to have no value, or nominal, if any, fair
market value. Paulsen v. Commissioner, 469 U.S. 131, 139 (1985)
-----------------------
(quoting Society for Savings v. Bowers, 349 U.S. 143, 150 (1955)).
-----------------------------
9. The basis of Subscription Rights received by an Eligible Account
Holder will be zero, increased by the gain, if any, recognized on
their receipt. Section 1012 of the Code. Gain is recognized only to
the extent of the fair market value of the Subscription Rights. You
have represented to us that the Subscription Rights to purchase
Conversion Stock have no fair market value. Accordingly, the basis of
the Subscription Rights received by an Eligible Account Holder will be
zero.
10. The basis of the Conversion Stock purchased pursuant to the exercise
of Subscription Rights will be the purchase price thereof. Section
1012 of the Code.
11. The holding period of the Conversion Stock acquired through the
exercise of Subscription Rights will commence upon the date of such
exercise. Section 1223(6) of the Code.
12. For purposes of Section 381 of the Code, Community will be treated
just as Community Mutual would have been treated had there been no
reorganization of Community Mutual
<PAGE>
Board of Directors
Community Savings Bank, SSB
April 15, 1999
Page 8
from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank. Accordingly, and with regard
only to the reorganization of Community Mutual into Community, the tax
attributes of Community Mutual enumerated in Section 381(c) of the
Code shall be taken into account by Community as if there had been no
reorganization. Treasury Regulation (S)1.381(b)(1)(a)(2).
13. For North Carolina income tax purposes, the Conversion will be treated
in a manner identical to the way the Conversion is treated pursuant to
the Code. Sections 105-130.3, 105-130.5, 105-134.5, and 105-134.6 of
the North Carolina General Statutes.
No opinion is expressed with regard to the following:
1. The tax treatment of any aspect of the Conversion that is not
specifically set forth and addressed in the foregoing opinions.
2. The status, including without limitation, the tax treatment, of
Community Mutual's and Community's bad-debt reserves before or after
the Conversion.
3. For purposes of Section 381 of the Code, the effect upon Community
Mutual and Community of the acquisition of all of the common stock of
Community by the Holding Company in the Conversion.
The opinions herein expressed represent only our best judgments with
respect to the interpretation of published material and are not binding upon the
Internal Revenue Service or the courts. Our opinions are limited to matters of
North Carolina and federal law.
The opinions contained herein are rendered solely for your benefit and for
the benefit of purchasers of Conversion Stock and may not be used for any other
purpose whatsoever or relied upon by, published or communicated to any other
party without our prior written consent in each instance. We hereby consent to
the inclusion of this letter as an exhibit to the Applications being filed by
Community Mutual with the Administrator and as an exhibit to the Registration
Statement.
Sincerely,
BROOKS, PIERCE, McLENDON
HUMPHREY & LEONARD, L.L.P.
By: /s/ Howard L. Williams
-----------------------------------------
Howard L. Williams
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated February 17, 1999 on our
audits of the consolidated financial statements of Community Savings Bank of
Burlingtion, SSB as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998 in each of the Application to
Convert a Mutual Savings Bank to a Stock Owned Savings Bank of Community Savings
Bank, SSB and the Registration Statement (Form SB-2) and the related Prospectus
of First Community Financial Corporation for the registration of shares of its
common stock and to the reference to our firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
April 19, 1999
<PAGE>
[LETTERHEAD OF FERGUSON & COMPANY]
APRIL 19, 1999
BOARD OF DIRECTORS
COMMUNITY SAVINGS BANK, SSB
708 S. CHURCH STREET
BURLINGTON, NORTH CAROLINA 27215
DIRECTORS:
We hereby consent to the use of our firm's name in the applications for
conversion of Community Savings Bank, SSB, Burlington, North Carolina, and any
amendments thereto, filed with the Division of Savings Institutions, North
Carolina Department of Commerce (the "Division"), and the FDIC, in the Form SB-2
Registration Statement and any amendments thereto, and in the Acquisition
Application and the Holding Company Application for First Community Financial
Corporation as filed with the Division and the Federal Reserve Board,
respectively. We also hereby consent to the inclusion of, a summary of, and
references to our Appraisal Report and our opinion concerning subscription
rights in such filings including the Prospectus of First Community Financial
Corporation and the Proxy Statement of Community Savings Bank, SSB.
Sincerely,
/s/ Robin L. Fussell
Robin L. Fussell
Principal
<PAGE>
April 19, 1999
Board of Directors
First Community Financial Corporation
708 South Church Street
P.O. Box 1837
Burlington, North Carolina 27216-1837
Gentlemen:
We hereby consent to reference to our firm in the "Legal Opinions" section
of the Prospectus included in the Registration Statement of First Community
Financial Corporation on Form SB-2, as amended (the "Registration Statement")
and included in the Application to Convert a Stock Owned Savings Bank of
Community Savings Bank, SSB and to the reference to the opinions rendered by our
firm which are described in such section of the Prospectus.
Very truly yours,
BROOKS, PIERCE, MCLENDON,
HUMPHREY & LEONARD, L.L.P.
By: /s/ Randall A. Underwood
----------------------------------
Randall A. Underwood
RAU/sw
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,084,695
<INT-BEARING-DEPOSITS> 3,822,429
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,105,273
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 127,211,953
<ALLOWANCE> 1,331,617
<TOTAL-ASSETS> 172,936,499
<DEPOSITS> 140,416,506
<SHORT-TERM> 5,000,000
<LIABILITIES-OTHER> 4,362,877
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 23,157,116
<TOTAL-LIABILITIES-AND-EQUITY> 172,936,499
<INTEREST-LOAN> 9,987,574
<INTEREST-INVEST> 2,556,450
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,544,024
<INTEREST-DEPOSIT> 6,646,326
<INTEREST-EXPENSE> 6,966,875
<INTEREST-INCOME-NET> 5,577,149
<LOAN-LOSSES> 550,000
<SECURITIES-GAINS> 47,577
<EXPENSE-OTHER> 995,958
<INCOME-PRETAX> 408,948
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 271,137
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.79
<LOANS-NON> 0
<LOANS-PAST> 157,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 781,177
<CHARGE-OFFS> 0
<RECOVERIES> 440
<ALLOWANCE-CLOSE> 1,331,617
<ALLOWANCE-DOMESTIC> 1,331,617
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Conversion Valuation Update Report
---------------------------
Valued as of March 12, 1999
COMMUNITY SAVINGS BANK, SSB
Burlington, North Carolina
Prepared By:
Ferguson & Company
Suite 305
860 West Airport Freeway
Hurst, Texas 76054
817/577-9558
<PAGE>
March 15, 1999
Board of Directors
Community Savings Bank, SSB
708 S. Church Street
Burlington, North Carolina 27215
Dear Directors:
We have completed and hereby provide, as of March 12, 1999, an updated
independent appraisal of the estimated pro forma market value of Community
Savings Bank, SSB, Burlington, North Carolina ("Community" or the "Bank"), in
connection with the conversion of Community from the mutual to stock form of
organization ("Conversion"). This appraisal report update is furnished pursuant
to the filing of an amendment to the Holding Company's Registration Statement
updating the financial information and in response to comments received from the
banking regulatory authorities. Our original appraisal report, dated December
9, 1998, is incorporated herein by reference.
In preparing this appraisal update, we reviewed our original appraisal and the
various filings and applications filed with the Federal Deposit Insurance
Corporation ("FDIC"), Securities and Exchange Commission ("SEC"), Federal
Reserve Board ("FRB"), and the Savings Institutions Division of the North
Carolina Department of Commerce ("Division"). We considered, among other items,
recent developments in stock market conditions. In addition, where appropriate,
we considered information based on other available published sources that we
believe is reliable; however, we cannot guarantee the accuracy or completeness
of such information. This updated appraisal also considered comments and
questions from the FDIC regarding the original appraisal report.
Our appraisal update is based on the Bank's representation that the
information in the applications for conversion and additional evidence furnished
us by the Bank are accurate and complete. We did not independently verify the
financial statements and other information furnished by the Bank, nor did we
independently value its assets and liabilities. The appraisal update considers
the Bank as a going concern and should not be considered as an indication of its
liquidation value.
Our valuation is not intended, and must not be construed, as a recommendation
of any kind as to the advisability of purchasing shares of common stock in the
conversion. 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 who purchase
shares of common stock in the conversion will thereafter be able to sell such
shares at prices related to the foregoing estimate of the Bank's pro forma
market value. Ferguson & Company ("F&C") is not a seller of securities within
the meaning of any federal or state securities laws and any report prepared by
F&C shall not be used as an offer or solicitation with respect to the purchase
or sale of any securities.
<PAGE>
Board of Directors
March 15, 1999
Page 2
Recent Financial Performance
- ----------------------------
The Bank has a December 31 fiscal year. The initial conversion application
and appraisal are based on its September 30, 1998, financial information. This
amendment to the registration updates the financial information to the Bank's
fiscal year. Therefore, this update is based on December 31, 1998 information,
the most recent information that will be available to stock subscribers.
Net income for the December 31, 1998 year was $271,000. Appraisal earnings
adjustments increased appraisal earnings to $899,000 for the year (see Exhibit
X), or $14,000 more than the $885,000 appraisal earnings reported for the
trailing twelve months ending September 30, 1998.
Recent Thrift Equity Market Conditions
- --------------------------------------
Since our original appraisal as of December 9, 1998, the overall thrift equity
market has stabilized with some minor up and down movement. Just prior to the
date of the original appraisal, the thrift equities market was erratic, with
some significant up and down movement. For example, the SNL thrift index
dropped 18.7% between September 30, 1998 and October 8, 1998. Then it increased
24.1% between October 8, 1998 and October 16, 1998. Exhibit I shows the
movement of the SNL Thrift index from December 31, 1997, to March 12, 1999, the
date of this update. The table shows that the index increased by 8.4% during
the update period. The general level of interest rates has increased during the
update period, with most of the increase coming on the long end (see Exhibit
II).
Exhibit III provides information on thrift conversions completed since August
31, 1998. Thirteen of the twenty thrifts have increased in value since
conversion, six have declined in value, and one experienced no change. The
thrifts have averaged an increase of 6.4%, with a median increase of 3.1%.
Individual changes have ranged from an 8.8% decrease to an increase of 28.8%.
Short term price increases have occurred as follows: One day--average 8.0%,
median 8.1%; one week--average 8.2%, median 6.9%; and one month--average 9.4%,
median 5.9%. Standard conversions have performed slightly better than mutual
holding companies.
The group of comparative institutions, included in Exhibit V, experienced an
average decrease in per share value of 5.5% and a median decrease in value of
4.3% during the update period, with ten decreasing in value and one experiencing
no change. The total market value of the group decreased an average of 6.7% and
a median of 6.9%, with ten decreasing in value and one experiencing no change.
Generally, when the decrease in market value is disproportionate to the decrease
in per share value, the Company has engaged in stock buy backs. Such was the
case with Cameron.
During 1993, it was not unusual for conversion stocks to increase in price by
30% immediately. As pointed out above, most recent conversions have experienced
more modest increases. However, conversions completed since December 15, 1998
have generally shown higher immediate results. Closings between mid July and
mid December have had dismal after market performance, as they were generally
priced higher than subsequent deals.
<PAGE>
Board of Directors
March 15, 1999
Page 3
Valuation Approach
- ------------------
Exhibit VI indicates the pro forma market valuation of Community versus the
comparative group and all publicly held thrifts. Pro forma pricing ratios for
Community are based on the financial information shown in Exhibit VIII. Pro
forma earnings are based on currently available interest rates and pro forma
assets and book value information are taken from the December 31, 1998 financial
data included in the offering circular.
At the $27,000,000 midpoint of the range, Community is valued at 61.5% of pro
forma book value, representing a discount of 41.0% from the mean and 34.6% from
the median of the comparative group. The midpoint price is 21.6 times pro forma
earnings, representing a premium of 33.3% over the mean and a premium of 36.7%
over the median of the comparative group.
As compared to all publicly held thrifts, at the midpoint of the range,
Community's price earnings ratio represents a premium of 35.0% over the mean and
a 43.0% premium over the median and its price to book ratio of 61.5% represents
a 51.5% discount from the mean and a 46.7% discount from the median of all
publicly held thrifts.
As compared to thrift conversions completed within the past six months (see
Exhibit III), Community's midpoint price to pro forma book of 61.5% represents
an 11.6% discount from the mean and a discount of 6.0% from the median. And its
price earnings ratio of 21.6 represents an 8.0% premium over the mean and a
53.2% premium over the median.
At the maximum, Community's price to book ratio of 65.4% represents a discount
of 6.0% from the mean and it is equal to the median, while, at the supermaximum,
Community's price to book ratio of 69.1% represents a discount of 0.7% from the
mean and a 5.7% premium over the median of recent conversions.
Conclusion
- ----------
In our opinion, Community's estimated pro forma market value at March 12,
1999, was $27,000,000, which did not change from our original appraisal as of
December 9, 1998. The resulting valuation range is $22,950,000 at the minimum
to $31,050,000 at the maximum, based on a range of 15% below and 15% above the
midpoint valuation. The supermaximum is $35,707,500 based on 1.15 times the
maximum. Pro forma comparisons with the comparative group are presented in
Exhibit VI based on calculations shown in Exhibit VIII. Community will also
contribute to a charitable foundation 100,000 shares of its stock valued at $15
per share, with a total value of $1,500,000.
During the update period from December 9, 1998, to March 12, 1999, thrift
equity markets have shown some upward movement, stabilizing after an erratic
October. Interest rates have increased on the long end. The SNL Thrift Index
increased 8.4%, the average value of the comparative group decreased 5.5%, and
the median value of the comparative group decreased 4.3%. Recent conversions
have shown improving receptivity. However, the interest in conversion stock
remains well below interest levels witnessed in 1997 and early 1998.
Considering all of the above factors together, we believe that no change in the
midpoint value is justified.
<PAGE>
Board of Directors
March 15, 1999
Page 4
Our opinion is based upon circumstances as of the date hereof, including
current conditions in the United States securities markets. Events occurring
after the date hereof, including, but not limited to, changes affecting the
United States securities markets and subsequent results of operations of
Community, could materially affect the assumptions used in preparing this
opinion.
Respectfully,
Ferguson & Company
/s/ Robin L. Fussell
Robin L. Fussell
Principal
<PAGE>
List of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Title Page
- ---------- ------------------------------------- ----------
<S> <C> <C>
I SNL Index 1
II Selected Interest Rates 2
III Recent Conversions 3
IV Selected Publicly Held Thrifts 6
V Comparative Group Price Changes 21
VI Pro Forma Comparisons 23
VII Comparison of Pricing Ratios 25
VIII Pro Forma Assumptions 26
Pro Forma Effect of Conversion Proceeds 27
Pro Forma Analysis Sheet 31
IX Demographic Information 33
X Appraisal Earnings Adjustments 34
</TABLE>
<PAGE>
Exhibit I - SNL Index
FERGUSON & COMPANY
- ------------------
<TABLE>
<CAPTION>
% CHANGE SINCE
------------------------------------------------
SNL PREVIOUS
DATE INDEX DATE 12/31/97 12/9/98 12/31/98
---- ----- ---- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
12/31/97 814.1
1/31/98 768.3 -5.6% -5.6%
2/27/98 818.7 6.6% 0.6%
3/31/98 869.3 6.2% 6.8%
4/30/98 882.1 1.5% 8.4%
5/31/98 897.2 1.7% 10.2%
6/30/98 833.5 -7.1% 2.4%
7/31/98 783.7 -6.0% -3.7%
8/28/98 631.5 -19.4% -22.4%
9/30/98 651.3 3.1% -20.0%
10/8/98 529.7 -18.7% -34.9%
10/16/98 657.1 24.1% -19.3%
10/30/98 676.3 2.9% -16.9%
11/30/98 710.6 5.1% -12.7%
12/9/98 681.7 -4.1% -16.3%
12/31/98 705.9 3.5% -13.3% 3.5%
1/31/99 715.4 1.3% -12.1% 4.9% 1.3%
2/28/99 695.4 -2.8% -14.6% 2.0% -1.5%
3/12/99 739.0 6.3% -9.2% 8.4% 4.7%
[GRAPH APPEARS HERE]
</TABLE>
Source: SNL & F&C calculations 1
<PAGE>
FERGUSON & COMPANY
- ------------------
Exhibit II - Selected Interest Rates
<TABLE>
<CAPTION>
3/12/99 vs.
12/11/98
----------
Increase
3/12/99 12/11/98 (Decrease)
---------- --------- ----------
<S> <C> <C> <C>
Federal funds rate 4.80 4.68 0.12
3 month T-bill discount (1) 4.48 4.36 0.12
1 year T-bill discount (1) 4.54 4.33 0.21
5 year treasury rate 5.15 4.41 0.74
10 year treasury rate 5.22 4.62 0.60
Long term treasury rate 5.57 5.01 0.56
</TABLE>
(1) Rates presented represent discounts, not yields.
2
<PAGE>
FERGUSON & COMPANY Exhibit III - Recent Conversions
- ------------------ (completed since August 31, 1998)
<TABLE>
<CAPTION>
Conversion IPO Gross
Assets Proceeds IPO Price
Ticker Company's Short Name State IPO Date ($000) ($000) ($)
<S> <C> <C> <C> <C> <C> <C>
SJFC South Jersey Financial Corp. NJ 02/12/1999 249,805 35,124 10.000
PBCP Provident Bancorp Inc. (MHC) NY 01/08/1999 679,104 38,640 10.000
RSBI Ridgewood Financial Inc. (MHC) NJ 01/08/1999 242,662 10,462 7.000
COHB Cohoes Bancorp Inc. NY 01/04/1999 535,716 92,575 10.000
FCAP First Capital Inc. IN 01/04/1999 NA NA 10.000
FPFC First Place Financial Corp. OH 01/04/1999 609,398 104,386 10.000
GCFC Grand Central Financial Corp. OH 12/30/1998 121,641 19,389 10.000
LNCB Lincoln Bancorp IN 12/30/1998 304,500 68,093 10.000
ONFC Oneida Financial Corp. (MHC) NY 12/30/1998 217,642 15,946 10.000
SPN Security of PA Financial Corp. PA 12/30/1998 111,990 15,116 10.000
ISFC Innes Street Financial Corp. NC 12/29/1998 192,716 22,483 10.000
WGBC Willow Grove Bncp Inc. (MHC) PA 12/24/1998 405,374 22,409 10.000
VCAP Virginia Capital Bancshares VA 12/23/1998 472,280 105,600 10.000
CMSV Community Savings Bankshares FL 12/16/1998 NA NA 10.000
PULB Pulaski Financial Corp. MO 12/03/1998 NA NA 10.000
SCFS Seacoast Financial Services MA 11/20/1998 1,106,590 140,000 10.000
FNFI First Niles Financial Inc. OH 10/27/1998 72,497 17,544 10.000
SFFS Sound Federal Bancorp (MHC) NY 10/08/1998 254,749 22,995 10.000
CNYF CNY Financial Corp. NY 10/06/1998 233,729 52,516 10.000
WEBK West Essex Bancorp (MHC) NJ 10/05/1998 299,025 17,729 10.000
Maximum 1,106,590 140,000 10.000
Minimum 72,497 10,462 7.000
Average 359,378 47,118 9.850
Median 254,749 22,995 10.000
W/O MHCs
- --------
SJFC South Jersey Financial Corp. NJ 02/12/1999 249,805 35,124 10.000
COHB Cohoes Bancorp Inc. NY 01/04/1999 535,716 92,575 10.000
FPFC First Place Financial Corp. OH 01/04/1999 609,398 104,386 10.000
GCFC Grand Central Financial Corp. OH 12/30/1998 121,641 19,389 10.000
LNCB Lincoln Bancorp IN 12/30/1998 304,500 68,093 10.000
SPN Security of PA Financial Corp. PA 12/30/1998 111,990 15,116 10.000
ISFC Innes Street Financial Corp. NC 12/29/1998 192,716 22,483 10.000
VCAP Virginia Capital Bancshares VA 12/23/1998 472,280 105,600 10.000
SCFS Seacoast Financial Services MA 11/20/1998 1,106,590 140,000 10.000
FNFI First Niles Financial Inc. OH 10/27/1998 72,497 17,544 10.000
CNYF CNY Financial Corp. NY 10/06/1998 233,729 52,516 10.000
Maximum 1,106,590 140,000 10.000
Minimum 72,497 15,116 10.000
Average 381,444 56,946 9.803
Median 249,805 52,516 10.000
</TABLE>
Source: SNL & F&C calculations 3
<PAGE>
FERGUSON & COMPANY EXHIBIT III - Recent Conversions
- ------------------ (completed since August 31, 1998)
<TABLE>
<CAPTION>
Conversion Pro Forma Pricing Ratios
----------------------------------------------------
Price/ Price/ Price/ Price/ Price
Ticker Book Tan Book Earnings Assets 3/12/99
(%) (%) (x) (%) ($)
<S> <C> <C> <C> <C> <C>
SJFC 65.0 65.0 11.3 12.3 11.188
PBCP 95.6 95.6 15.7 5.4 10.250
RSBI 85.8 85.8 19.3 4.1 8.125
COHB 69.9 69.9 13.6 14.7 10.688
FCAP 100.0 NA NA NA 10.000
FPFC 70.5 70.5 14.1 14.6 10.313
GCFC 63.4 63.4 24.4 13.7 10.250
LNCB 67.4 67.4 16.4 18.3 10.500
ONFC 85.0 85.0 18.7 6.8 9.750
SPN 70.0 70.0 16.5 11.9 9.500
ISFC 65.4 65.4 11.8 10.4 12.313
WGBC 92.5 92.5 17.8 5.2 9.938
VCAP 60.9 60.9 11.6 18.3 12.875
CMSV 100.0 1.0 NA NA 12.500
PULB 100.0 NA NA NA 9.453
SCFS 52.6 52.6 2.9 11.2 10.313
FNFI 62.7 62.7 23.9 19.5 10.813
SFFS 100.0 100.0 15.6 8.3 9.125
CNYF 70.0 70.0 47.2 18.3 12.125
WEBK 95.4 95.4 40.2 5.6 9.250
Maximum 100.0 100.0 47.2 19.5 12.875
Minimum 52.6 1.0 2.9 4.1 8.125
Average 78.6 70.7 18.9 11.7 10.463
Medium 70.2 69.9 16.4 11.9 10.282
<CAPTION>
W/O MHCs
- --------
<S> <C> <C> <C> <C> <C>
SJFC 65.0 65.0 11.3 12.3 11.188
COHB 69.9 69.9 13.6 14.7 10.688
FPFC 70.5 70.5 14.1 14.6 10.313
GCFC 63.4 63.4 24.4 13.7 10.250
LNCB 67.4 67.4 16.4 18.3 10.500
SPN 70.0 70.0 16.5 11.9 9.500
ISFC 65.4 65.4 11.8 10.4 12.313
VCAP 60.9 60.9 11.6 18.3 12.875
SCFS 52.6 52.6 2.9 11.2 10.313
FNFI 62.7 62.7 23.9 19.5 10.813
CNYF 70.0 70.0 47.2 18.3 12.125
Maximum 70.5 70.5 47.2 19.5 12.875
Minimum 52.6 52.6 2.9 10.4 9.500
Average 69.6 65.9 20.0 13.5 10.742
Median 65.4 65.4 14.1 14.6 10.688
</TABLE>
Source: SNL & F&C calculations 4
<PAGE>
FERGUSON & COMPANY Exhibit III - Recent Conversions
- ------------------ (completed since August 31, 1998)
<TABLE>
<CAPTION>
Post Conversion Price Changes
-------------------------------------
P/B P/TB One One One To
3/12/99 3/12/99 Day Week Month Date
Ticker (%) (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
SJPC NA NA 8.8 6.3 10.6 11.9
PBCP NA NA 20.0 19.4 21.9 2.5
RSBI NA NA 14.3 27.7 28.6 16.1
COHB NA NA 13.8 15.3 10.0 6.9
PCAP 74.1 74.1 - 2.5 3.8 -
FPFC 67.7 67.7 7.5 14.4 6.9 3.1
GCPC NA NA 10.0 4.1 5.0 2.5
LNCB NA NA 8.8 10.0 11.3 5.0
ONPC NA NA 10.0 7.5 1.3 (2.5)
SPN 66.8 66.8 5.6 - (4.4) (5.0)
ISPC 76.8 76.8 30.0 31.3 32.5 23.1
WGBC 88.4 91.9 1.9 4.4 5.0 (0.6)
VCAP NA NA 26.9 30.6 34.4 28.8
CMSV NA NA 5.6 7.5 17.5 25.0
PULB 72.7 72.7 (1.9) (2.5) (1.3) (5.5)
SCPS NA NA 3.1 0.6 (1.3) 3.1
FNFI 63.4 63.4 15.0 8.8 13.8 8.1
SFFS 87.4 87.4 (15.0) (11.3) - (8.8)
CNYF 80.5 80.5 (5.0) (4.4) (7.5) 21.3
WEBK NA NA - (7.5) 0.6 (7.5)
Maximum 88.4 91.9 30.0 31.3 34.4 28.8
Minimum 63.4 63.4 (15.0) (11.3) (7.5) (8.8)
Average 75.3 75.7 8.0 8.2 9.4 6.4
Median 74.1 74.1 8.1 6.9 5.9 3.1
W/O MHCs
- --------
SJFC NA NA 8.8 6.3 10.6 11.9
COHB NA NA 13.8 15.3 10.0 6.9
FPFC 67.7 67.7 7.5 14.4 6.9 3.1
GCFC NA NA 10.0 4.1 5.0 2.5
LNCB NA NA 8.8 10.0 11.3 5.0
SPN 66.8 66.8 5.6 - (4.4) (5.0)
ISFC 76.8 76.8 30.0 31.3 32.5 23.1
VCAP NA NA 26.9 30.6 34.4 28.8
SCFS NA NA 3.1 0.6 (1.3) 3.1
FNFI 63.4 63.4 15.0 8.8 13.8 8.1
CNYF 80.5 80.5 (5.0) (4.4) (7.5) 21.3
Maximum 80.5 80.5 30.0 31.3 34.4 28.8
Minimum 63.4 63.4 (5.0) (4.4) (7.5) (5.0)
Average 72.9 73.3 9.7 9.0 9.6 8.2
Median 67.7 67.7 8.8 8.8 10.0 6.9
</TABLE>
Source: SNL & F&C calculations 5
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
Dep Closing Market
Ins Price Value
Ticker Company's Short Name City State Region Agency Exchange IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AABC Access Anytime Bancorp Inc. Clovis NM SW SAIF NASDAQ 08/08/1986 6.875 8.44
ABBK Abington Bancorp Inc. Abington MA NE BIF NASDAQ 06/10/1986 14.625 48.95
ABCL Alliance Bancorp Hinsdale IL MW SAIF NASDAQ 07/07/1992 20.000 229.28
ABCW Anchor BanCorp Wisconsin Madison WI MW SAIF NASDAQ 07/16/1992 16.438 295.62
AFBC Advance Financial Bancorp Wellsburg WV SE SAIF NASDAQ 01/02/1997 11.625 11.59
AHCI Ambanc Holding Co. Amsterdam NY MA BIF NASDAQ 12/27/1995 15.875 65.01
ALBC Albion Banc Corp. Albion NY MA SAIF NASDAQ 07/26/1993 9.750 7.34
ALLB Greater Delaware Valley (MHC) Broomall PA MA SAIF NASDAQ 03/03/1995 11.625 38.06
AMFC AMB Financial Corp. Munster IN MW SAIF NASDAQ 04/01/1996 13.750 11.96
ANA Acadiana Bancshares Inc. Lafayette LA SW SAIF AMSE 07/16/1996 18.063 33.34
ANDB Andover Bancorp Inc. Andover MA NE BIF NASDAQ 05/08/1986 30.000 195.60
ANE Alliance Bncp of New England Vernon CT NE BIF AMSE 12/19/1986 10.125 23.21
ASBI Ameriana Bancorp New Castle IN MW SAIF NASDAQ 03/02/1987 16.125 56.54
ASBP ASB Financial Corp. Portsmouth OH MW SAIF NASDAQ 05/11/1995 11.500 19.03
ASFC Astoria Financial Corp. Lake Success NY MA SAIF NASDAQ 11/18/1993 50.188 2,748.36
BDJI First Federal Bancorp. Bemidji MN MW SAIF NASDAQ 04/04/1995 11.750 11.67
BFD BostonFed Bancorp Inc. Burlington MA NE SAIF AMSE 10/24/1995 18.750 95.62
BFSB Bedford Bancshares Inc. Bedford VA SE SAIF NASDAQ 08/22/1994 12.250 28.00
BKC American Bank of Connecticut Waterbury CT NE BIF AMSE 12/01/1981 21.125 99.34
BKCT Bancorp Connecticut Inc. Southington CT NE BIF NASDAQ 07/03/1986 15.250 78.29
BKUNA BankUnited Financial Corp. Coral Gables FL SE SAIF NASDAQ 12/11/1985 6.938 124.12
BNKU Bank United Corp. Houston TX SW SAIF NASDAQ 08/09/1996 41.188 1,300.00
BVCC Bay View Capital Corp. San Mateo CA WE SAIF NASDAQ 05/09/1986 19.313 369.13
CAFI Camco Financial Corp. Cambridge OH MW SAIF NASDAQ NA 14.563 79.77
CASB Cascade Financial Corp. Everett WA WE SAIF NASDAQ 09/16/1992 14.375 62.23
CASH First Midwest Financial Inc. Storm Lake IA MW SAIF NASDAQ 09/20/1993 14.875 37.41
CATB Catskill Financial Corp. Catskill NY MA BIF NASDAQ 04/18/1996 14.750 64.29
CBES CBES Bancorp Inc. Excelsior Springs MO MW SAIF NASDAQ 09/30/1996 15.000 13.82
CBK Citizens First Financial Corp. Bloomington IL MW SAIF AMSE 05/01/1996 15.438 34.49
CBSA Coastal Bancorp Inc. Houston TX SW SAIF NASDAQ NA 17.813 125.91
CEBK Central Bancorp Inc. Somerville MA NE BIF NASDAQ 10/24/1986 18.000 35.41
CENB Century Bancorp Inc. Thomasville NC SE SAIF NASDAQ 12/23/1996 13.750 16.93
CFB Commercial Federal Corp. Omaha NE MW SAIF NYSE 12/31/1984 22.875 1,390.77
CFCP Coastal Financial Corp. Myrtle Beach SC SE SAIF NASDAQ 09/26/1990 16.500 103.50
CFFC Community Financial Corp. Staunton VA SE SAIF NASDAQ 03/30/1988 11.000 28.29
CFNC Carolina Fincorp Inc. Rockingham NC SE SAIF NASDAQ 11/25/1996 7.500 14.29
CFTP Community Federal Bancorp Tupelo MS SE SAIF NASDAQ 03/26/1996 13.000 51.57
CIBI Community Investors Bancorp Bucyrus OH MW SAIF NASDAQ 02/07/1995 10.750 13.10
CKFB CKF Bancorp Inc. Danville KY MW SAIF NASDAQ 01/04/1995 18.000 14.29
CLAS Classic Bancshares Inc. Ashland KY MW SAIF NASDAQ 12/29/1995 14.453 18.76
CMRN Cameron Financial Corp Cameron MO MW SAIF NASDAQ 04/03/1995 13.875 30.38
CMSB Commonwealth Bancorp Inc. Norristown PA MA SAIF NASDAQ 06/17/1996 15.563 229.10
CNIT CENIT Bancorp Inc. Norfolk VA SE SAIF NASDAQ 08/06/1992 20.250 97.38
CNSB CNS Bancorp Inc. Jefferson City MO MW SAIF NASDAQ 06/12/1996 12.438 18.06
COFI Charter One Financial Cleveland OH MW SAIF NASDAQ 01/22/1988 31.188 5,158.39
COOP Cooperative Bankshares Inc. Wilmington NC SE SAIF NASDAQ 08/21/1991 11.875 36.17
CRSB Crusader Holding Corp. Philadelphia PA MA SAIF NASDAQ NA 10.000 38.33
CRZY Crazy Woman Creek Bancorp Buffalo WY WE SAIF NASDAQ 03/29/1996 12.375 11.25
CVAL Chester Valley Bancorp Inc. Downingtown PA MA SAIF NASDAQ 03/27/1987 19.000 70.04
DCBI Delphos Citizens Bancorp Inc. Delphos OH MW SAIF NASDAQ 11/21/1996 16.375 28.75
DCOM Dime Community BancsharesInc. Brooklyn NY MA BIF NASDAQ 06/26/1996 22.688 261.02
DME Dime Bancorp Inc. New York NY MA BIF NYSE 08/19/1986 27.063 3,019.35
DSL Downey Financial Corp. Newport Beach CA WE SAIF NYSE 01/01/1971 20.188 567.91
EBI Equality Bancorp Inc. St. Louis MO MW SAIF AMSE 12/02/1997 9.250 23.31
</TABLE>
Source: SNL & F&C calculations 6
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
Dep Closing Market
Ins Price Value
Ticker Company's Short Name City State Region Agency Exchange IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBSI Eagle Bancshares Tucker GA SE SAIF NASDAQ 04/01/1986 20.750 115.32
EFBC Empire Federal Bancorp Inc. Livingston MT WE SAIF NASDAQ 01/27/1997 12.750 29.83
EGLB Eagle BancGroup Inc. Bloomington IL MW SAIF NASDAQ 07/01/1996 22.250 24.03
EQSB Equitable Federal Savings Bank Wheaton MD MA SAIF NASDAQ 09/10/1993 17.750 21.82
ESBF ESB Financial Corp. Ellwood City PA MA SAIF NASDAQ 06/13/1990 15.500 81.62
ESBK Elmira Savings Bank (The) Elmira NY MA BIF NASDAQ 03/01/1985 22.750 17.36
FAB FIRSTFED AMERICA BANCORP INC. Swansea MA NE SAIF AMSE 01/15/1997 14.375 101.95
FBBC First Bell Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ 06/29/1995 15.625 95.32
FBCI Fidelity Bancorp Inc. Chicago IL MW SAIF NASDAQ 12/15/1993 23.500 54.60
FBNW FirstBank Corp. Lewiston ID WE SAIF NASDAQ 07/02/1997 15.438 26.92
FBSI First Bancshares Inc. Mountain Grove MO MW SAIF NASDAQ 12/22/1993 12.500 26.43
FCB Falmouth Bancorp Inc. Falmouth MA NE BIF AMSE 03/28/1996 14.375 19.87
FCME First Coastal Corp. Westbrook ME NE BIF NASDAQ NA 9.563 13.01
FDEF First Defiance Financial Defiance OH MW SAIF NASDAQ 10/02/1995 11.750 89.01
FED FirstFed Financial Corp. Santa Monica CA WE SAIF NYSE 12/16/1983 15.875 316.76
FESX First Essex Bancorp Inc. Andover MA NE BIF NASDAQ 08/04/1987 17.000 129.40
FFBH First Federal Bancshares of AR Harrison AR SE SAIF NASDAQ 05/03/1996 16.875 77.21
FFBZ First Federal Bancorp Inc. Zanesville OH MW SAIF NASDAQ 07/13/1992 9.875 31.11
FFCH First Financial Holdings Inc. Charleston SC SE SAIF NASDAQ 11/10/1983 18.750 253.31
FFDB FirstFed Bancorp Inc. Bessemer AL SE SAIF NASDAQ 11/19/1991 9.250 22.61
FFDF FFD Financial Corp. Dover OH MW SAIF NASDAQ 04/03/1996 13.000 18.84
FFES First Federal of EastHartford East Hartford CT NE SAIF NASDAQ 06/23/1987 24.750 68.23
FFFD North Central Bancshares Inc. Fort Dodge IA MW SAIF NASDAQ 03/21/1996 16.500 48.91
FFFL Fidelity Bankshares Inc. (MHC) West Palm Beach FL SE SAIF NASDAQ 01/07/1994 18.250 117.94
FFHH FSF Financial Corp. Hutchinson MN MW SAIF NASDAQ 10/07/1994 14.250 42.37
FFHS First Franklin Corp. Cincinnati OH MW SAIF NASDAQ 01/26/1988 13.750 23.44
FFIC Flushing Financial Corp. Flushing NY MA BIF NASDAQ 11/21/1995 13.750 149.86
FFKY First Federal Financial Corp. Elizabethtown KY MW SAIF NASDAQ 07/15/1987 23.375 96.47
FFLC FFLC Bancorp Inc. Leesburg FL SE SAIF NASDAQ 01/04/1994 17.375 63.52
FFSL First Independence Corp. Independence KS MW SAIF NASDAQ 10/08/1993 10.875 12.16
FFSX First Fed SB of Siouxland (MHC) Sioux City IA MW SAIF NASDAQ 07/13/1992 22.625 64.45
FFWC FFW Corp. Wabash IN MW SAIF NASDAQ 04/05/1993 15.250 21.99
FFYF FFY Financial Corp. Youngstown OH MW SAIF NASDAQ 06/28/1993 18.125 136.39
FGHC First Georgia Holding Inc. Brunswick GA SE SAIF NASDAQ 02/11/1987 7.500 35.99
FISB First Indiana Corp. Indianapolis IN MW SAIF NASDAQ 08/02/1983 19.500 247.71
FKFS First Keystone Financial Media PA MA SAIF NASDAQ 01/26/1995 14.000 31.77
FKKY Frankfort First Bancorp Inc. Frankfort KY MW SAIF NASDAQ 07/10/1995 14.500 22.58
FLAG FLAG Financial Corp. LaGrange GA SE SAIF NASDAQ 12/11/1986 10.500 69.30
FLFC First Liberty Financial Corp. Macon GA SE SAIF NASDAQ 12/06/1983 20.938 285.00
FLGS Flagstar Bancorp Inc. Bloomfield Hills MI MW SAIF NASDAQ NA 27.875 381.05
FMCO FMS Financial Corp. Burlington NJ MA SAIF NASDAQ 12/14/1988 9.000 65.09
FMSB First Mutual Savings Bank Bellevue WA WE BIF NASDAQ 12/17/1985 13.250 56.25
FNGB First Northern Capital Corp. Green Bay WI MW SAIF NASDAQ 12/29/1983 12.000 105.18
FSBI Fidelity Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ 06/24/1988 17.250 34.23
FSPT FirstSpartan Financial Corp. Spartanburg SC SE SAIF NASDAQ 07/09/1997 30.000 113.64
FTF Texarkana First FinancialCorp Texarkana AR SE SAIF AMSE 07/07/1995 23.000 37.48
FTFC First Federal Capital Corp. La Crosse WI MW SAIF NASDAQ 11/02/1989 14.000 252.16
FTNB Fulton Bancorp Inc. Fulton MO MW SAIF NASDAQ 10/18/1996 15.250 25.22
FTSB Fort Thomas Financial Corp. Fort Thomas KY MW SAIF NASDAQ 06/28/1995 12.000 17.69
FWWB First Washington Bancorp Inc. Walla Walla WA WE SAIF NASDAQ 11/01/1995 19.750 233.19
GAF GA Financial Inc. Pittsburgh PA MA SAIF AMSE 03/26/1996 14.750 101.17
GDW Golden West Financial Oakland CA WE SAIF NYSE 05/29/1959 99.500 5,657.68
GFED Guaranty Federal Bcshs Inc. Springfield MO MW SAIF NASDAQ 12/31/1997 11.375 65.32
GPT GreenPoint Financial Corp. New York NY MA BIF NYSE 01/28/1994 34.625 3,276.99
</TABLE>
Source: SNL & F&C calculations 7
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrift
- ------------------
<TABLE>
<CAPTION>
Dep Closing Market
Ins Price Value
Ticker Company's Short Name City State Region Agency Exchange IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GSFC Green Street Financial Corp. Fayetteville NC SE SAIF NASDAQ 04/04/1996 11.750 47.98
GSLA GS Financial Corp. Metairie LA SW SAIF NASDAQ 04/01/1997 11.563 34.08
GTPS Great American Bancorp Champaign IL MW SAIF NASDAQ 06/30/1995 16.000 21.75
GUPB GFSB Bancorp Inc. Gallup NM SW SAIF NASDAQ 06/30/1995 14.375 15.05
HALL Hallmark Capital Corp. West Allis WI MW SAIF NASDAQ 01/03/1994 10.250 29.52
HARL Harleysville Savings Bank Harleysville PA MA SAIF NASDAQ 08/04/1987 18.625 41.68
HARS Harris Financial Inc. (MHC) Harrisburg PA MA SAIF NASDAQ 01/25/1994 12.500 419.80
HAVN Haven Bancorp Inc. Westbury NY MA SAIF NASDAQ 09/23/1993 13.750 121.82
HBFW Home Bancorp Fort Wayne IN MW SAIF NASDAQ 03/30/1995 27.500 60.09
HBNK Highland Bancorp Inc. Burbank CA WE SAIF NASDAQ NA 37.188 81.11
HBS Haywood Bancshares Inc. Waynesville NC SE SAIF AMSE 12/18/1987 14.500 18.13
HCBC High Country Bancorp Inc. Salida CO SW SAIF NASDAQ 12/10/1997 13.500 17.85
HCFC Home City Financial Corp. Springfield OH MW SAIF NASDAQ 12/30/1996 16.000 13.75
HFFB Harrodsburg First Fin Bancorp Harrodsburg KY MW SAIF NASDAQ 10/04/1995 13.750 24.25
HFFC HF Financial Corp. Sioux Falls SD MW SAIF NASDAQ 04/08/1992 15.500 73.67
HFSA Hardin Bancorp Inc. Hardin MO MW SAIF NASDAQ 09/29/1995 16.375 12.03
HHFC Harvest Home Financial Corp. Cheviot OH MW SAIF NASDAQ 10/10/1994 15.000 13.13
HIFS Hingham Instit. for Savings Hingham MA NE BIF NASDAQ 12/20/1988 15.625 30.69
HMLK Hemlock Federal Financial Corp. Oak Forest IL MW SAIF NASDAQ 04/02/1997 13.250 23.61
HMNF HMN Financial Inc. Spring Valley MN MW SAIF NASDAQ 06/30/1994 12.875 68.16
HOMF Home Federal Bancorp Seymour IN MW SAIF NASDAQ 01/23/1988 22.875 116.50
HPBC Home Port Bancorp Inc. Nantucket MA NE BIF NASDAQ 08/25/1988 23.875 43.98
HRBF Harbor Federal Bancorp Inc. Baltimore MD MA SAIF NASDAQ 08/12/1994 17.500 31.44
HRZB Horizon Financial Corp. Bellingham WA WE BIF NASDAQ 08/01/1986 13.625 102.14
HTHR Hawthorne Financial Corp. El Segundo CA WE SAIF NASDAQ NA 14.750 76.63
HWEN Home Financial Bancorp Spencer IN MW SAIF NASDAQ 07/02/1996 8.000 7.12
HZFS Horizon Financial Svcs Corp. Oskaloosa IA MW SAIF NASDAQ 06/30/1994 11.000 9.68
IFSB Independence Federal Svgs Bank Washington DC MA SAIF NASDAQ 06/06/1985 12.500 16.01
INBI Industrial Bancorp Inc. Bellevue OH MW SAIF NASDAQ 08/01/1995 19.625 94.81
IPSW Ipswich Savings Bank Ipswich MA NE BIF NASDAQ 05/26/1993 9.875 23.62
ITLA ITLA Capital Corp. La Jolla CA WE BIF NASDAQ 10/24/1995 15.250 109.29
IWBK InterWest Bancorp Inc. Oak Harbor WA WE SAIF NASDAQ NA 23.313 365.41
JSB JSB Financial Inc. Lynbrook NY MA BIF NYSE 06/27/1990 55.438 526.98
JSBA Jefferson Savings Bancorp Inc. Ballwin MO MW SAIF NASDAQ 04/08/1993 13.313 133.63
JXSB Jacksonville Savings Bk (MHC) Jacksonville IL MW SAIF NASDAQ 04/21/1995 11.000 20.99
JXVL Jacksonville Bancorp Inc. Jacksonville TX SW SAIF NASDAQ 04/01/1996 15.500 36.29
KFBI Klamath First Bancorp Klamath Falls OR WE SAIF NASDAQ 10/05/1995 16.000 142.40
KNK Kankakee Bancorp Inc. Kankakee IL MW SAIF AMSE 01/06/1993 22.625 30.94
KSBK KSB Bancorp Inc. Kingfield ME NE BIF NASDAQ 06/24/1993 13.250 16.82
KYF Kentucky First Bancorp Inc. Cynthiana KY MW SAIF AMSE 08/29/1995 12.750 15.31
LARK Landmark Bancshares Inc. Dodge City KS MW SAIF NASDAQ 03/28/1994 22.500 27.71
LARL Laurel Capital Group Inc. Allison Park PA MA SAIF NASDAQ 02/20/1987 16.000 35.01
LFCO Life Financial Corp. Riverside CA WE SAIF NASDAQ NA 3.750 24.61
LFED Leeds Federal Bankshares (MHC) Baltimore MD MA SAIF NASDAQ 05/02/1994 12.875 65.23
LO Local Financial Corp. Oklahoma City OK SW SAIF AMSE NA 10.063 206.66
LOGN Logansport Financial Corp. Logansport IN MW SAIF NASDAQ 06/14/1995 13.500 16.18
LSBI LSB Financial Corp. Lafayette IN MW BIF NASDAQ 02/03/1995 28.000 25.69
LSBX Lawrence Savings Bank North Andover MA NE BIF NASDAQ 05/02/1986 10.750 46.57
LXMO Lexington B&L Financial Corp. Lexington MO MW SAIF NASDAQ 06/06/1996 10.375 10.46
MAFB MAF Bancorp Inc. Clarendon Hills IL MW SAIF NASDAQ 01/12/1990 22.438 560.27
MARN Marion Capital Holdings Marion IN MW SAIF NASDAQ 03/18/1993 21.063 31.31
MASB MASSBANK Corp. Reading MA NE BIF NASDAQ 05/28/1986 38.000 132.97
MBFC MegaBank Financial Corp. Englewood CO SW SAIF NASDAQ NA 9.188 69.89
MBLF MBLA Financial Corp. Macon MO MW SAIF NASDAQ 06/24/1993 18.813 23.46
</TABLE>
Source: SNL & F&C calculations 8
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
Dep Closing Market
Ins Price Value
Ticker Company's Short Name City State Region Agency Exchange IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MCBN Mid-Coast Bancorp Inc. Waldoboro ME NE SAIF NASDAQ 11/02/1989 7.500 5.36
MDBK Medford Bancorp Inc. Medford MA NE BIF NASDAQ 03/18/1986 17.500 152.42
MECH MECH Financial Inc. Hartford CT NE BIF NASDAQ 06/26/1996 30.375 160.92
METF Metropolitan Financial Corp. Mayfield Heights OH MW SAIF NASDAQ NA 9.875 76.59
MFBC MFB Corp. Mishawaka IN MW SAIF NASDAQ 03/25/1994 22.375 32.76
MFFC Milton Federal Financial Corp. West Milton OH MW SAIF NASDAQ 10/07/1994 14.250 31.34
MFLR Mayflower Co-operative Bank Middleboro MA NE BIF NASDAQ 12/23/1987 20.250 18.23
MONT Montgomery Financial Corp. Crawfordsville IN MW SAIF NASDAQ 07/01/1997 9.500 15.10
MRKF Market Financial Corp. Mount Healthy OH MW SAIF NASDAQ 03/27/1997 8.375 10.81
MSBF MSB Financial Inc. Marshall MI MW SAIF NASDAQ 02/06/1995 13.250 17.35
MSBK Mutual Savings Bank FSB Bay City MI MW SAIF NASDAQ 07/17/1992 10.000 42.90
MTXC Matrix Bancorp Inc. Denver CO SW SAIF NASDAQ NA 14.250 95.82
MWBX MetroWest Bank Framingham MA NE BIF NASDAQ 10/10/1986 5.875 83.76
NBN Northeast Bancorp Auburn ME NE BIF AMSE 08/19/1987 10.125 28.00
NBSI North Bancshares Inc. Chicago IL MW SAIF NASDAQ 12/21/1993 12.000 15.13
NEIB Northeast Indiana Bancorp Huntington IN MW SAIF NASDAQ 06/28/1995 15.375 25.71
NHTB New Hampshire Thrift Bncshrs Newport NH NE SAIF NASDAQ 05/22/1986 14.750 31.04
NMSB NewMil Bancorp Inc. New Milford CT NE BIF NASDAQ 02/01/1986 11.813 45.30
NSLB NS&L Bancorp Inc. Neosho MO MW SAIF NASDAQ 06/08/1995 14.000 8.62
NTMG Nutmeg Federal S&LA Danbury CT NE SAIF NASDAQ NA 9.625 12.86
NWSB Northwest Bancorp Inc. (MHC) Warren PA MA SAIF NASDAQ 11/07/1994 10.000 473.49
OCFC Ocean Financial Corp. Toms River NJ MA SAIF NASDAQ 07/03/1996 15.000 219.41
OCN Ocwen Financial Corp. West Palm Beach FL SE SAIF NYSE NA 8.688 528.20
OFCP Ottawa Financial Corp. Holland MI MW SAIF NASDAQ 08/19/1994 23.000 129.12
OHSL OHSL Financial Corp. Cincinnati OH MW SAIF NASDAQ 02/10/1993 14.000 34.53
OTFC Oregon Trail Financial Corp. Baker City OR WE SAIF NASDAQ 10/06/1997 13.000 52.76
PBCI Pamrapo Bancorp Inc. Bayonne NJ MA SAIF NASDAQ 11/14/1989 23.250 66.10
PBCT People's Bank (MHC) Bridgeport CT NE BIF NASDAQ 07/06/1988 29.188 1,859.72
PBHC Pathfinder Bancorp Inc. (MHC) Oswego NY MA BIF NASDAQ 11/16/1995 10.750 29.43
PBKB People's Bancshares Inc. New Bedford MA NE BIF NASDAQ 10/30/1986 20.500 68.06
PBOC PBOC Holdings Inc. Los Angeles CA WE SAIF NASDAQ NA 9.375 197.26
PCBC Perry County Financial Corp. Perryville MO MW SAIF NASDAQ 02/13/1995 21.500 17.42
PDB Piedmont Bancorp Inc. Hillsborough NC SE SAIF AMSE 12/08/1995 9.063 23.61
PEDE Great Pee Dee Bancorp Cheraw SC SE SAIF NASDAQ 12/31/1997 13.000 28.79
PEEK Peekskill Financial Corp. Peekskill NY MA SAIF NASDAQ 12/29/1995 13.750 28.08
PERM Permanent Bancorp Inc. Evansville IN MW SAIF NASDAQ 04/04/1994 11.250 43.57
PFDC Peoples Bancorp Auburn IN MW SAIF NASDAQ 07/07/1987 19.875 64.82
PFED Park Bancorp Inc. Chicago IL MW SAIF NASDAQ 08/12/1996 14.188 31.03
PFFB PFF Bancorp Inc. Pomona CA WE SAIF NASDAQ 03/29/1996 17.563 271.22
PFFC Peoples Financial Corp. Massillon OH MW SAIF NASDAQ 09/13/1996 9.438 12.12
PFNC Progress Financial Corp. Blue Bell PA MA SAIF NASDAQ 07/18/1983 15.875 80.74
PFSB PennFed Financial Services Inc West Orange NJ MA SAIF NASDAQ 07/15/1994 15.438 135.75
PHBK Peoples Heritage Finl Group Portland ME NE BIF NASDAQ 12/04/1986 18.813 1,646.96
PHFC Pittsburgh Home Financial Corp Pittsburgh PA MA SAIF NASDAQ 04/01/1996 13.875 24.67
PHSB PHS Bancorp Inc. (MHC) Beaver Falls PA MA SAIF NASDAQ 07/10/1997 11.563 31.91
PLSK Pulaski Savings Bank (MHC) Springfield NJ MA SAIF NASDAQ 04/03/1997 10.000 21.08
PRBC Prestige Bancorp Inc. Pleasant Hills PA MA SAIF NASDAQ 06/27/1996 13.188 13.15
PROV Provident Financial Holdings Riverside CA WE SAIF NASDAQ 06/28/1996 16.250 75.05
PSFC Peoples-Sidney Financial Corp. Sidney OH MW SAIF NASDAQ 04/28/1997 12.500 21.20
PSFI PS Financial Inc. Chicago IL MW SAIF NASDAQ 11/27/1996 9.750 17.14
PTRS Potters Financial Corp. East Liverpool OH MW SAIF NASDAQ 12/31/1993 12.750 13.09
PVFC PVF Capital Corp. Bedford Heights OH MW SAIF NASDAQ 12/30/1992 14.000 55.87
PVSA Parkvale Financial Corp. Monroeville PA MA SAIF NASDAQ 07/16/1987 21.000 132.63
QCBC Quaker City Bancorp Inc. Whittier CA WE SAIF NASDAQ 12/30/1993 15.000 84.60
</TABLE>
Source:SNL & F&C calculations 9
<PAGE>
<TABLE>
<CAPTION>
Dep Closing Market
Ins Price Value
Ticker Company's Short Name City State Region Agency Exchange IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QCFB QCF Bancorp Inc. Virginia MN MW SAIF NASDAQ 04/03/1995 25.250 29.05
QCSB Queens County Bancorp Inc. Flushing NY MA BIF NASDAQ 11/23/1993 29.875 634.87
RELY Reliance Bancorp Inc. Garden City NY MA SAIF NASDAQ 03/31/1994 30.750 267.76
RIVR River Valley Bancorp Madison IN MW SAIF NASDAQ 12/20/1996 14.000 16.43
RSLN Roslyn Bancorp Inc. Roslyn NY MA BIF NASDAQ 01/13/1997 17.813 737.44
RVSB Riverview Bancorp Inc. Camas WA WE SAIF NASDAQ 10/01/1997 12.875 77.42
SCBS Southern Community Bancshares Cullman AL SE SAIF NASDAQ 12/23/1996 11.250 12.16
SCCB S. Carolina Community Bancshrs Winnsboro SC SE SAIF NASDAQ 07/07/1994 15.000 8.68
SFED SFS Bancorp Inc. Schenectady NY MA SAIF NASDAQ 06/30/1995 18.438 22.28
SFFC StateFed Financial Corp. Des Moines IA MW SAIF NASDAQ 01/05/1994 10.375 16.03
SFIN Statewide Financial Corp. Jersey City NJ MA SAIF NASDAQ 10/02/1995 17.250 73.10
SGVB SGV Bancorp Inc. West Covina CA WE SAIF NASDAQ 06/29/1995 11.250 24.54
SIB Staten Island Bancorp Inc. Staten Island NY MA BIF NYSE 12/22/1997 17.688 773.03
SKBO Skibo Financial Corp. (MHC) Carnegie PA MA SAIF NASDAQ 04/04/1997 8.000 27.56
SMBC Southern Missouri Bancorp Inc. Poplar Bluff MO MW SAIF NASDAQ 04/13/1994 14.438 19.39
SOBI Sobieski Bancorp Inc. South Bend IN MW SAIF NASDAQ 03/31/1995 14.688 10.72
SOPN First Savings Bancorp Inc. Southern Pines NC SE SAIF NASDAQ 01/06/1994 21.750 79.06
SPBC St. Paul Bancorp Inc. Chicago IL MW SAIF NASDAQ 05/18/1987 21.500 875.58
SRN Southern Banc Co. Gadsden AL SE SAIF AMSE 10/05/1995 12.125 14.22
SSFC South Street Financial Corp. Albemarle NC SE SAIF NASDAQ 10/03/1996 7.563 31.83
SSM Stone Street Bancorp Inc. Mocksville NC SE SAIF AMSE 04/01/1996 14.375 24.70
STFR St. Francis Capital Corp. Brookfield WI MW SAIF NASDAQ 06/21/1993 38.625 192.24
STSA Sterling Financial Corp. Spokane WA WE SAIF NASDAQ NA 17.375 139.97
SVRN Sovereign Bancorp Inc. Wyomissing PA MA SAIF NASDAQ 08/12/1986 13.125 2,153.39
THR Three Rivers Financial Corp. Three Rivers MI MW SAIF AMSE 08/24/1995 13.250 10.50
THRD TF Financial Corp. Newtown PA MA SAIF NASDAQ 07/13/1994 18.125 57.03
TRIC Tri-County Bancorp Inc. Torrington WY WE SAIF NASDAQ 09/30/1993 10.500 9.23
TSH Teche Holding Co. Franklin LA SW SAIF AMSE 04/19/1995 14.375 42.51
TWIN Twin City Bancorp Bristol TN SE SAIF NASDAQ 01/04/1995 13.938 16.99
UCBC Union Community Bancorp Crawfordsville IN MW SAIF NASDAQ 12/29/1997 12.000 34.68
UFBS Union Financial Bcshs Inc. Union SC SE SAIF NASDAQ NA 12.000 16.15
UPFC United PanAm Financial Corp. San Mateo CA WE SAIF NASDAQ NA 3.813 64.49
USAB USABancshares Inc. Philadelphia PA MA BIF NASDAQ NA 8.500 17.06
WAYN Wayne Savings Bancshares (MHC) Wooster OH MW SAIF NASDAQ 06/25/1993 15.750 39.16
WBST Webster Financial Corp. Waterbury CT NE SAIF NASDAQ 12/12/1986 30.000 1,119.80
WCFB Webster City Federal SB (MHC) Webster City IA MW SAIF NASDAQ 08/15/1994 15.500 32.80
WEFC Wells Financial Corp. Wells MN MW SAIF NASDAQ 04/11/1995 16.125 26.64
WEHO Westwood Homestead Fin. Corp. Cincinnati OH MW SAIF NASDAQ 09/30/1996 10.125 23.58
WFI Winton Financial Corp. Cincinnati OH MW SAIF AMSE 08/04/1988 13.875 55.71
WFSL Washington Federal Inc. Seattle WA WE SAIF NASDAQ 11/17/1982 22.125 1,237.73
WHGB WHG Bancshares Corp. Lutherville MD MA SAIF NASDAQ 04/01/1996 11.500 15.91
WM Washington Mutual Inc. Seattle WA WE BIF NYSE 03/11/1983 44.813 26,592.12
WRNB Warren Bancorp Inc. Peabody MA NE BIF NASDAQ 07/09/1986 8.875 68.52
WSB Washington Savings Bank, FSB Bowie MD MA SAIF AMSE NA 3.875 17.14
WSFS WSFS Financial Corp. Wilmington DE MA BIF NASDAQ 11/26/1986 15.750 180.17
WSTR WesterFed Financial Corp. Missoula MT WE SAIF NASDAQ 01/10/1994 17.688 79.80
WVFC WVS Financial Corp. Pittsburgh PA MA SAIF NASDAQ 11/29/1993 15.063 50.70
YFCB Yonkers Financial Corp. Yonkers NY MA SAIF NASDAQ 04/18/1996 14.875 40.55
YFED York Financial Corp. York PA MA SAIF NASDAQ 02/01/1984 14.438 140.06
Maximum 99.500 26,592.12
Minimum 3,750 5.36
Average 16.437 298.78
Median 14.563 41.68
</TABLE>
Source: SNL & F&C calculations 10
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
T Common ROAA ROAE
Price/ Price/ Current Common Equity/ Before Before
LTM Price/ Tangible Price/ Dividend Equity/ T Assets Core EPS Extra Extra
Core EPS Book Book Assets Yield Total Assets Assets MRQ LTM LTM LTM Merger
Ticker (x) (%) (%) (%) (%) ($000) (%) (%) ($) (%) (%) Target
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AABC 31.3 89.5 89.5 7.1 2.91 118,463 8.0 8.0 0.22 0.26 3.12 No
ABBK 16.8 148.0 161.6 8.3 1.37 591,151 5.6 5.1 0.87 0.79 12.68 No
ABCL 13.9 123.3 124.2 11.6 2.80 1,982,496 9.4 9.3 1.44 0.76 8.32 No
ABCW 13.2 216.0 218.9 13.9 1.22 2,123,461 6.4 6.3 1.25 1.14 17.66 No
AFBC 14.9 78.3 78.3 9.8 2.75 121,944 12.6 12.6 0.78 0.65 4.86 No
AHCI 26.0 108.4 108.4 11.8 1.76 554,254 10.8 10.8 0.61 0.34 3.04 No
ALBC 20.7 114.3 114.3 9.6 1.23 76,470 8.4 8.4 0.47 0.49 5.76 No
ALLB 18.8 127.9 127.9 13.5 3.10 281,949 10.6 10.6 0.62 0.74 6.90 No
AMFC 17.9 89.2 89.2 10.2 2.33 116,913 11.5 11.5 0.77 0.19 1.45 No
ANA 15.1 104.3 104.3 14.2 2.44 289,187 13.7 13.7 1.20 0.97 6.28 No
ANDB 11.9 161.5 161.5 13.9 2.80 1,410,247 8.6 8.6 2.53 1.27 15.64 No
ANE 14.3 127.5 129.3 8.2 1.98 283,581 6.4 6.3 0.71 0.96 13.83 No
ASBI 15.5 125.7 131.6 14.3 3.72 398,667 11.4 10.9 1.04 0.97 8.33 No
ASBP 17.4 123.7 123.7 15.8 3.48 120,776 12.7 12.7 0.66 0.93 6.83 No
ASFC 16.9 194.6 235.6 13.4 1.91 20,587,741 6.9 5.7 2.97 0.30 3.74 No
BDJI 11.8 88.3 88.3 9.0 - 129,488 10.2 10.2 1.00 0.69 6.59 No
BFD 13.1 111.3 115.2 8.4 2.13 1,139,123 7.2 7.0 1.43 0.72 9.33 No
BFSB 13.3 130.2 130.2 17.6 2.61 159,563 13.6 13.6 0.92 1.38 10.18 No
BKC 10.2 157.1 161.6 14.8 3.98 669,976 9.4 9.2 2.07 1.64 18.98 No
BKCT 15.3 156.9 156.9 15.0 3.67 521,376 9.6 9.6 1.00 1.29 13.07 No
BKUNA 23.9 66.4 79.7 3.3 - 3,832,377 5.0 4.2 0.29 0.17 3.24 No
BNKU 11.0 184.1 200.7 8.8 1.55 14,823,561 4.8 4.4 3.73 0.91 18.21 No
BVCC 13.6 97.7 151.5 6.6 2.07 5,596,232 6.8 4.5 1.42 0.41 5.87 No
CAFI 11.7 132.6 140.6 12.5 2.95 637,135 9.4 9.0 1.25 1.16 12.13 No
CASB 17.5 185.2 185.2 12.7 - 489,807 6.9 6.9 0.82 0.90 12.86 No
CASH 15.3 89.8 100.4 7.9 3.50 473,485 8.8 7.9 0.97 0.64 6.34 No
CATB 15.7 94.4 94.4 19.9 2.51 323,793 21.0 21.0 0.94 1.28 5.72 No
CBES 14.6 81.6 81.6 9.0 3.73 149,223 11.0 11.0 1.03 0.73 5.58 No
CBK 18.4 95.8 95.8 12.0 - 287,274 12.5 12.5 0.84 0.72 5.44 No
CBSA 7.9 113.4 155.8 4.2 1.80 2,982,161 3.8 2.8 2.26 0.55 14.96 No
CEBK 15.7 92.8 101.2 9.5 1.78 371,324 10.3 9.5 1.15 0.78 7.91 No
CENB 17.0 90.5 90.5 17.9 4.95 95,129 19.8 19.8 0.81 0.94 4.54 No
CFB 12.5 147.1 184.2 11.5 1.14 12,076,377 7.8 6.3 1.83 0.75 9.58 No
CFCP 16.7 263.6 263.6 15.5 1.70 666,086 5.9 5.9 0.99 1.15 19.32 No
CFFC 20.8 105.6 106.0 14.7 2.91 192,509 13.9 13.9 0.53 1.04 7.49 No
CFNC 13.4 90.6 90.6 12.3 3.20 116,534 13.6 13.6 0.56 0.76 4.46 No
CFTP 27.7 86.3 86.3 17.9 2.62 288,260 20.7 20.7 0.47 1.21 5.45 No
CIBI 15.4 130.3 130.3 11.4 2.23 114,876 8.8 8.8 0.70 0.82 8.25 No
CKFB 21.2 103.0 103.0 21.8 3.00 65,580 21.2 21.2 0.85 1.21 5.60 No
CLAS 21.3 89.8 103.8 13.3 2.21 141,648 14.8 13.0 0.68 0.63 4.23 No
CMRN 14.5 74.3 74.3 13.8 2.02 220,939 18.5 18.5 0.96 1.02 5.06 No
CMSB 17.9 119.3 150.4 10.2 2.06 2,257,499 8.5 6.9 0.87 0.47 5.39 No
CNIT 15.8 188.0 203.1 15.9 2.96 623,547 8.1 7.5 1.28 0.92 12.39 No
CNSB 23.0 83.1 83.1 18.9 2.41 95,401 22.8 22.8 0.54 0.88 3.69 No
COFI 13.9 275.0 301.0 21.1 1.80 24,467,255 7.7 7.1 2.25 1.14 14.77 No
COOP 16.1 114.4 114.4 9.3 - 389,773 8.1 8.1 0.74 0.62 7.49 No
CRSB 7.8 152.4 160.0 14.9 - 256,936 9.8 9.4 1.28 1.93 19.13 No
CRZY 15.5 79.1 79.1 18.0 3.23 62,701 22.7 22.7 0.80 1.14 4.92 No
CVAL 20.0 206.1 206.1 17.0 1.68 410,494 8.3 8.3 0.95 1.04 12.15 No
DCBI 16.7 108.7 108.7 23.9 1.47 120,543 22.0 22.0 0.98 1.49 6.12 No
DCOM 17.5 147.1 168.8 14.3 2.47 1,829,675 9.7 8.6 1.30 0.99 8.80 No
DME 13.7 217.9 261.5 13.5 0.74 22,320,850 6.2 5.2 1.97 1.13 18.15 No
DSL 10.9 118.2 NA 9.1 1.59 6,270,419 7.7 NA 1.86 0.98 12.71 No
EBI 18.9 89.6 89.6 8.1 2.59 289,111 9.0 9.0 0.49 0.44 4.56 No
</TABLE>
Source: SNL & F&C calculations 11
<PAGE>
FURGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- -------------------
<TABLE>
<CAPTION>
T Common ROAA ROAE
Price/ Price/ Current Common Equity/ Before Before
LTM Price/ Tangible Price/ Dividend Equity/ T Assets Core EPS Extra Extra
Core EPS Book Book Assets Yield Total Assets Assets MRQ LTM LTM LTM Merger
Ticker (x) (%) (%) (%) (%) ($000) (%) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBSI 12.7 157.0 157.0 8.6 3.08 1,367,209 5.5 5.5 1.63 0.88 13.30 No
EFBC 18.0 79.7 79.7 28.4 3.14 105,199 35.6 35.6 0.71 1.20 3.28 No
EGLB 27.8 122.0 122.0 13.3 1.80 180,101 10.9 10.9 0.80 0.51 4.44 No
EQSB 11.6 109.0 109.0 5.7 - 383,861 5.2 5.2 1.53 0.91 17.47 No
ESBF 14.9 133.6 150.5 8.4 2.32 972,438 6.3 5.6 1.04 0.63 9.10 No
ESBK 13.5 113.4 113.4 7.1 2.68 244,644 6.2 6.2 1.69 0.56 9.04 No
FAB 15.1 91.0 91.0 7.5 1.39 1,438,152 7.4 7.4 0.95 0.55 5.96 No
FBBC 11.6 129.0 129.0 12.4 2.56 767,606 9.6 9.6 1.35 1.09 10.36 No
FBCI 17.4 125.7 125.9 10.1 1.87 540,679 8.0 8.0 1.35 0.74 7.24 No
FBNW 13.8 94.4 94.4 13.2 2.33 203,615 13.8 13.8 1.12 1.06 6.84 No
FBSI 15.8 109.6 114.1 15.2 0.96 176,251 13.9 13.4 0.79 0.98 7.05 No
FCB 27.6 85.5 85.5 17.5 1.95 113,766 19.6 19.6 0.52 0.93 4.38 No
FCME 8.0 79.8 79.8 6.8 - 191,413 8.5 8.5 1.20 0.93 10.05 No
FDEF 29.4 95.0 110.7 11.3 3.40 785,399 11.9 10.4 0.40 0.45 2.99 No
FED 9.9 130.6 131.2 9.1 - 3,677,128 7.0 7.0 1.60 0.88 14.40 No
FESX 12.7 133.3 178.0 10.4 3.76 1,248,014 7.8 5.9 1.34 0.90 11.73 No
FFBH 13.4 95.8 95.8 13.1 1.90 599,945 13.7 13.7 1.26 1.03 6.97 No
FFBZ 26.0 185.6 185.6 14.2 1.62 219,699 7.6 7.6 0.38 0.63 8.19 No
FFCH 14.8 205.4 205.4 13.4 2.56 1,892,804 6.5 6.5 1.27 0.95 14.65 No
FFDB 14.7 124.7 134.6 12.5 3.03 181,434 10.0 9.3 0.63 0.86 8.77 No
FFDF 32.5 115.5 115.5 17.5 2.31 107,472 15.2 15.2 0.40 0.86 4.58 No
FFES 12.4 93.5 93.5 6.9 2.91 989,030 7.4 7.4 2.00 0.52 7.30 No
FFFD 12.5 103.0 118.5 15.3 2.42 334,718 14.9 13.2 1.32 1.44 8.73 No
FFFL 17.7 136.0 139.7 8.3 5.48 1,498,442 6.1 5.9 1.03 0.60 8.93 No
FFHH 13.0 88.7 95.1 9.8 3.51 433,567 10.1 9.4 1.10 0.75 7.17 No
FFHS 14.3 111.9 112.2 9.8 2.18 240,315 8.7 8.7 0.96 0.78 8.62 No
FFIC 12.9 113.5 117.9 13.1 2.33 1,142,055 11.6 11.2 1.07 0.92 7.51 No
FFKY 15.9 170.6 213.3 20.1 2.57 478,938 11.8 9.7 1.47 1.42 11.29 No
FFLC 15.0 119.3 119.3 13.7 2.53 463,820 11.5 11.5 1.16 1.05 8.37 No
FFSL 11.1 85.0 85.0 8.3 3.22 126,695 9.7 9.7 0.98 0.78 8.17 No
FFSX 18.1 146.2 178.6 11.8 2.12 547,863 8.0 6.7 1.25 0.79 9.96 No
FFWC 12.1 111.1 119.8 10.3 2.75 214,329 9.2 8.6 1.26 0.96 10.21 No
FFYF 18.0 170.4 170.4 20.9 1.24 672,755 12.3 12.3 1.01 1.20 9.35 No
FGHC 17.9 222.6 235.9 18.3 1.60 196,993 8.2 7.8 0.42 1.14 14.14 No
FISB 13.9 149.2 150.7 13.8 2.67 1,795,990 9.2 9.2 1.40 1.12 11.96 No
FKFS 11.0 122.9 122.9 7.4 1.71 427,075 6.1 6.1 1.27 0.70 10.89 No
FKKY 14.5 102.7 102.7 16.5 6.07 136,812 16.1 16.1 1.00 1.22 7.03 No
FLAG 15.0 137.3 137.3 12.0 2.29 453,648 8.8 8.8 0.70 0.68 7.72 No
FLFC 16.4 227.6 248.7 17.9 1.81 1,588,043 7.9 7.2 1.28 1.08 13.99 No
FLGS 11.4 250.5 256.4 12.3 1.15 3,092,515 4.9 4.8 2.44 1.37 25.26 No
FMCO 12.7 153.1 153.9 9.7 1.33 667,423 6.4 6.3 0.71 0.81 13.18 No
FMSB 14.7 162.4 162.4 11.5 1.51 489,230 7.1 7.1 0.90 1.11 15.95 No
FNGB 16.0 138.3 138.3 14.6 3.33 719,713 10.6 10.6 0.75 0.98 9.08 No
FSBI 12.1 116.6 116.6 7.8 2.09 438,182 6.7 6.7 1.43 0.73 10.50 No
FSPT 16.8 105.3 105.3 21.4 2.67 530,830 20.3 20.3 1.79 1.36 5.64 No
FTF 11.4 139.2 139.2 19.6 2.78 191,301 14.1 14.1 2.01 1.78 12.12 No
FTFC 14.6 209.6 235.3 14.4 2.00 1,786,504 6.9 6.2 0.96 1.19 16.59 No
FTNB 23.1 100.1 100.1 21.7 1.97 116,522 21.7 21.7 0.66 0.96 4.20 No
FTSB 18.5 136.2 136.2 16.8 2.08 105,430 12.3 12.3 0.65 0.96 6.60 No
FWWB 14.5 122.0 146.4 15.2 1.82 1,469,457 11.6 9.9 1.36 1.12 8.93 No
GAF 13.4 95.1 95.9 12.6 4.34 823,322 13.3 13.2 1.10 1.01 7.74 No
GDW 12.5 181.1 181.1 14.7 0.56 38,468,729 8.1 8.1 7.96 1.14 15.37 No
GFED 20.0 95.8 95.8 23.3 2.81 288,438 23.0 23.0 0.57 1.28 5.29 No
GPT 17.6 161.0 369.9 23.5 2.54 13,970,344 12.9 6.0 1.97 1.13 10.11 No
</TABLE>
Source: SNL & F&C calculations 12
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
T Common ROAA ROAE
Price/ Price/ Current Common Equity/ Before Before
LTM Price/ Tangible Price/ Dividend Equity/ T Assets Core EPS Extra Extra
Core EPS Book Book Assets Yield Total Assets Assets MRQ LTM LTM LTM Merger
Ticker (x) (%) (%) (%) (%) ($000) (%) (%) ($) (%) (%) Target
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GSFC 16.8 79.2 79.2 27.9 4.09 171,721 35.3 35.3 0.70 1.58 4.48 No
GSLA 26.3 70.3 70.3 21.6 2.42 157,534 30.8 30.8 0.44 0.97 2.12 No
GTPS 28.1 94.0 94.0 13.9 2.75 157,066 14.7 14.7 0.57 0.57 3.30 No
GUPB 17.5 115.3 115.3 11.3 2.09 133,770 9.8 9.8 0.82 0.72 6.36 No
HALL 10.3 82.1 82.1 6.1 - 481,457 7.2 7.2 1.00 0.67 8.87 No
HARL 12.4 156.3 156.3 9.9 1.93 420,394 6.3 6.3 1.50 0.88 13.63 No
HARS 26.0 221.2 228.1 16.8 1.92 2,496,469 7.6 7.4 0.48 0.82 10.33 No
HAVN 15.6 101.6 107.2 5.1 2.18 2,395,523 5.0 4.8 0.88 0.37 6.92 No
HBFW 20.2 150.3 150.3 15.7 1.16 382,356 10.5 10.5 1.36 0.83 7.18 No
HBNK 11.1 186.7 186.7 13.4 1.34 604,803 7.2 7.2 3.35 1.50 19.72 No
HBS 10.6 84.8 87.7 12.1 4.41 149,542 14.3 13.9 1.37 0.08 0.53 No
HCBC 20.8 99.1 99.1 16.3 2.96 109,877 16.4 16.4 0.65 0.83 4.49 No
HCFC 15.4 126.5 126.5 16.1 2.50 85,355 12.7 12.7 1.04 1.21 7.65 No
HFFB 17.2 82.5 82.5 22.7 2.91 110,688 25.5 25.5 0.80 1.32 5.00 No
HFFC 12.9 121.0 121.0 10.7 2.32 602,601 8.8 8.8 1.20 0.98 10.03 No
HFSA 17.2 97.6 97.6 9.3 3.91 130,113 9.5 9.5 0.95 0.84 8.07 No
HHFC 25.9 127.2 127.2 13.7 2.93 95,752 10.8 10.8 0.58 0.59 5.42 No
HIFS 10.6 129.7 129.7 11.8 2.56 260,076 9.1 9.1 1.47 1.26 13.18 No
HMLK 14.9 86.8 86.8 11.6 2.72 204,424 13.3 13.3 0.89 0.80 5.33 No
HMNF 14.2 99.6 108.5 9.8 2.49 694,658 9.9 9.1 0.91 0.57 5.38 No
HOMF 11.7 167.5 171.5 15.7 1.92 738,378 9.4 9.2 1.95 1.46 15.70 No
HPBC 11.3 183.0 183.0 16.0 3.35 275,570 8.7 8.7 2.12 1.42 15.63 No
HRBF 17.0 108.3 108.3 13.8 2.97 227,562 12.8 12.8 1.03 0.79 6.25 No
HRZB 12.4 114.9 114.9 17.4 3.23 587,631 15.1 15.1 1.10 1.54 9.99 No
HTHR 6.0 96.9 96.9 5.5 - 1,395,064 5.7 5.7 2.48 1.10 21.53 No
HWEN 25.0 99.1 99.1 13.8 1.50 51,561 14.0 14.0 0.32 0.69 4.08 No
HZFS 13.3 132.1 132.1 11.3 1.64 85,796 8.6 8.6 0.83 (0.63) (6.68) No
IFSB 11.9 72.8 79.2 6.4 - 249,194 8.8 8.2 1.05 1.43 18.88 No
INBI 16.5 156.1 156.1 24.4 3.26 388,059 15.7 15.7 1.19 1.50 9.36 No
IPSW 9.8 166.0 166.0 8.7 2.03 271,328 5.2 5.2 1.01 1.09 20.34 No
ITLA 8.1 103.3 103.5 10.6 - 1,032,647 10.3 10.2 1.88 1.46 13.95 No
IWBK 14.0 208.5 226.8 14.1 2.40 2,601,561 6.7 6.2 1.67 0.98 13.88 No
JSB 13.6 137.7 137.7 32.5 3.25 1,621,649 23.6 23.6 4.07 2.84 11.86 No
JSBA 16.9 101.7 124.4 10.2 2.10 1,317,195 9.4 7.8 0.79 0.65 6.85 No
JXSB 19.6 115.4 115.4 12.4 2.73 169,280 10.7 10.7 0.56 0.65 6.07 No
JXVL 10.8 102.3 102.3 14.1 3.23 260,412 13.8 13.8 1.43 1.37 9.67 No
KFBI 15.5 97.4 105.4 13.6 2.38 1,047,677 14.0 13.0 1.03 0.97 6.73 No
KNK 14.5 78.0 90.8 7.5 2.12 411,779 9.6 8.4 1.56 0.57 5.86 No
KSBK 9.4 122.9 137.0 9.8 1.21 171,314 8.0 7.2 1.41 1.11 14.31 No
KYF 17.7 109.7 109.7 19.2 3.92 79,906 17.5 17.5 0.72 1.06 6.09 No
LARK 16.0 118.9 118.9 12.4 2.67 223,700 10.4 10.4 1.41 1.04 8.24 No
LARL 11.7 143.2 143.2 15.5 3.75 225,916 10.8 10.8 1.37 1.47 13.85 No
LFCO 2.1 40.0 40.0 6.5 - 380,343 16.2 16.2 1.79 2.66 20.44 No
LFED 19.2 130.2 130.2 20.8 4.35 313,922 16.0 16.0 0.67 1.13 6.91 No
LO 11.6 174.1 205.0 9.7 - 2,128,979 5.6 4.8 0.87 0.93 17.73 No
LOGN 13.9 98.2 98.2 16.8 3.26 96,085 17.2 17.2 0.97 1.37 7.55 No
LSBI 15.0 133.1 133.1 11.1 1.43 232,811 7.8 7.8 1.87 0.79 9.69 No
LSBX 5.5 99.7 99.7 13.7 - 340,041 13.7 13.7 1.95 2.52 21.09 No
LXMO 16.2 66.9 71.4 10.3 2.89 101,982 15.4 14.5 0.64 0.65 3.84 No
MAFB 13.3 162.6 197.7 13.6 1.25 4,120,761 8.4 7.0 1.69 1.08 14.03 No
MARN 15.8 95.2 97.3 16.8 4.18 194,644 17.7 17.4 1.33 1.17 6.04 No
MASB 15.5 120.3 121.9 14.1 2.84 946,625 11.7 11.5 2.46 1.17 10.05 No
MBFC 15.8 255.2 255.2 30.3 - 230,809 11.9 11.9 0.58 1.96 19.52 No
MBLF 13.1 82.7 82.7 11.3 3.19 208,076 13.6 13.6 1.44 0.89 6.64 No
</TABLE>
Source: SNL & F&C calculations 13
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
T Common ROAA ROAE
Price/ Price/ Current Common Equity/ Before Before
LTM Price/ Tangible Price/ Dividend Equity/ T Assets Core EPS Extra Extra
Core EPS Book Book Assets Yield Total Assets Assets MRQ LTM LTM LTM Merger
Ticker (x) (%) (%) (%) (%) ($000) (%) (%) ($) (%) (%) Target
MCBN 17.9 100.8 100.8 7.6 2.67 70,936 7.5 7.5 0.42 0.45 5.67 No
MDBK 14.7 149.1 156.4 13.2 2.51 1,151,188 8.9 8.5 1.19 1.09 11.99 No
MECH 18.6 168.8 170.1 15.8 1.98 1,019,369 9.4 9.3 1.63 0.92 9.40 No
METF 10.6 179.6 191.8 5.6 - 1,363,434 3.1 2.9 0.93 0.66 17.78 No
MFBC 15.7 104.7 104.7 9.8 1.61 334,668 9.4 9.4 1.43 0.80 7.36 No
MFFC 21.9 112.7 112.7 12.6 4.21 249,052 10.4 10.4 0.65 0.66 5.89 No
MFLR 14.4 133.2 135.0 12.2 3.95 150,104 9.1 9.0 1.41 1.11 11.81 No
MONT 14.0 76.7 76.7 12.4 2.32 121,469 16.2 16.2 0.68 0.92 5.25 No
MRKF 21.5 69.7 69.7 19.9 3.34 56,004 27.4 27.4 0.39 0.87 2.81 No
MSBF 14.0 129.4 129.4 20.7 2.42 84,261 16.0 16.0 0.95 1.47 8.91 No
MSBK 16.4 118.8 118.8 7.6 - 564,434 6.4 6.4 0.61 0.44 7.71 No
MTXC 10.0 200.4 200.4 10.3 - 929,607 5.1 5.1 1.42 1.31 22.01 No
MWBX 10.3 166.0 166.0 12.1 3.40 690,351 7.3 7.3 0.57 1.25 16.97 No
NBN 10.2 106.5 114.2 8.3 2.09 336,195 7.8 7.3 0.99 0.89 11.35 No
NBSI 33.3 115.2 115.2 12.0 3.67 125,832 10.5 10.5 0.36 0.41 3.46 No
NEIB 10.9 102.8 102.8 12.1 2.34 212,425 11.8 11.8 1.41 1.16 9.14 No
NHTB 10.4 115.1 130.7 9.6 4.34 323,736 8.3 7.4 1.42 0.97 11.88 No
NMSB 14.1 130.0 130.0 12.7 3.05 357,764 9.7 9.7 0.84 0.81 8.72 No
NSLB 17.7 82.6 83.3 13.3 4.57 64,844 16.1 16.0 0.79 0.75 4.19 No
NTMG 20.9 181.6 181.6 12.1 2.08 105,507 6.7 6.7 0.46 1.07 12.81 No
NWSB 23.8 208.8 251.9 16.4 1.60 2,889,419 7.9 6.6 0.42 0.82 9.58 No
OCFC 15.2 111.0 111.5 14.1 3.20 1,561,744 12.7 12.6 0.99 0.85 6.36 No
OCN 10.6 121.0 124.7 16.0 - 3,308,079 13.2 12.9 0.82 (0.03) (0.28) No
OFCP 15.9 170.8 207.6 13.4 1.91 938,030 7.8 6.5 1.45 0.94 11.49 No
OHSL 16.1 125.3 125.3 12.9 3.57 267,176 10.1 10.1 0.87 0.86 8.04 No
OTFC 16.7 82.0 82.0 18.0 1.85 303,197 20.3 20.3 0.78 1.23 5.03 No
PBCI 15.0 132.8 133.2 16.0 5.38 413,474 12.0 12.0 1.55 1.11 8.94 No
PBCT 32.4 218.2 259.7 18.8 3.15 9,918,700 8.6 7.3 0.90 1.01 11.05 No
PBHC 28.3 132.1 154.9 14.5 1.86 203,394 11.0 9.5 0.38 0.62 5.27 No
PBKB 9.2 196.4 199.2 7.2 3.71 944,640 3.7 3.6 2.23 0.91 23.90 No
PBOC 9.4 109.3 109.3 5.9 - 3,335,027 5.4 5.4 1.00 0.39 7.52 No
PCBC 21.5 104.4 104.4 17.7 2.33 98,500 17.0 17.0 1.00 0.86 4.73 No
PDB 15.4 114.6 114.6 18.3 5.30 129,244 16.0 16.0 0.59 1.24 7.55 No
PEDE 22.4 90.0 90.0 40.3 2.77 69,091 44.8 44.8 0.58 1.73 3.84 No
PEEK 19.4 91.1 91.1 18.3 2.62 213,495 20.1 20.1 0.71 0.90 4.09 No
PERM 17.9 107.7 142.2 9.0 2.13 497,975 8.1 6.3 0.63 0.61 6.74 No
PFDC 15.5 144.2 144.2 20.5 2.42 315,969 14.2 14.2 1.28 1.41 9.46 No
PFED 16.9 83.3 83.3 15.7 3.38 198,307 18.8 18.8 0.84 0.95 4.59 No
PFFB 15.3 114.9 116.1 9.2 - 2,957,345 8.0 7.9 1.15 0.60 7.25 No
PFFC 28.6 84.3 84.3 13.9 6.36 87,279 16.5 16.5 0.33 1.23 6.94 No
PFNC 18.0 193.4 NA 12.5 1.01 647,382 6.4 NA 0.88 0.89 13.88 No
PFSB 12.8 125.3 142.7 8.8 1.04 1,542,468 6.5 5.8 1.21 0.75 10.97 No
PHBK 14.2 216.2 258.4 16.3 2.45 10,102,459 7.5 6.4 1.33 1.03 13.79 No
PHFC 12.4 105.9 107.1 6.6 2.02 386,522 6.2 6.2 1.12 0.51 7.33 No
PHSB 21.8 109.4 109.4 13.1 2.42 244,253 12.0 12.0 0.53 0.65 5.24 No
PLSK 19.2 92.4 92.4 10.6 3.20 199,792 11.4 11.4 0.52 0.54 4.63 No
PRBC 18.1 89.1 89.1 7.4 1.65 177,374 8.3 8.3 0.73 0.45 4.79 No
PROV 12.0 87.7 87.7 8.6 - 870,241 9.8 9.8 1.36 0.70 6.63 No
PSFC 26.0 106.6 106.6 19.7 2.24 108,461 17.1 17.1 0.48 0.74 3.61 No
PSFI 14.1 84.9 84.9 19.0 5.33 100,176 22.3 22.3 0.69 0.91 3.28 No
PTRS 13.1 117.3 117.3 9.7 1.81 134,474 8.3 8.3 0.97 0.87 9.58 No
PVFC 11.6 164.9 164.9 12.8 - 435,891 7.8 7.8 1.21 1.19 16.09 No
PVSA 12.4 154.8 155.4 11.4 2.86 1,161,137 7.4 7.4 1.70 1.07 14.67 No
QCBC 11.6 110.7 110.7 9.3 - 919,980 8.4 8.4 1.29 0.91 10.28 No
</TABLE>
14
Source: SNL & F&C calculations
<PAGE>
FERGUSON & COMPANY Exhibit IV -- Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
T Common ROAA ROAE
Price/ Price/ Current Common Equity/ Before Before
LTM Price/ Tangible Price/ Dividend Equity/ T Assets Core EPS Extra Extra
Core EPS Book Book Assets Yield Total Assets Assets MRQ LTM LTM LTM Merger
Ticker (x) (%) (%) (%) (%) ($000) (%) (%) ($) (%) (%) Target
QCFB 10.9 147.5 147.5 20.0 - 145,332 13.6 13.6 2.32 1.64 9.98 No
QCSB 22.3 367.9 367.9 36.3 3.35 1,746,882 8.6 8.6 1.34 1.62 17.32 No
RELY 15.1 151.8 223.2 10.8 2.34 2,472,304 7.2 5.0 2.04 0.81 10.11 No
RIVR 12.8 88.3 89.3 11.9 1.71 138,369 13.5 13.3 1.09 0.91 6.85 No
RSLN 14.4 123.1 123.6 19.7 2.58 3,735,032 16.0 16.0 1.24 1.43 8.54 No
RVSB 16.1 121.4 125.0 25.6 1.86 302,856 19.6 19.1 0.80 1.72 7.86 No
SCBS 13.4 142.1 142.1 17.8 2.67 68,370 12.5 12.5 0.84 1.11 6.71 No
SCCB 19.2 91.2 91.2 19.1 4.53 45,570 20.9 20.9 0.78 0.94 4.61 No
SFED 20.5 94.4 94.4 12.5 1.95 178,167 13.3 13.3 0.90 1.20 9.74 No
SFFC 16.0 98.8 98.8 17.5 1.93 91,797 17.7 17.7 0.65 1.11 6.24 No
SFIN 21.8 120.8 121.0 11.3 3.01 652,628 9.4 9.4 0.79 0.54 5.65 No
SGVB 12.8 78.9 79.7 5.3 - 461,533 6.7 6.7 0.88 0.50 6.71 No
SIB 16.9 115.5 118.7 20.5 2.04 3,776,947 17.7 17.3 1.05 1.45 6.39 No
SKBO 32.0 111.9 111.9 19.2 3.75 143,937 17.1 17.1 0.25 0.52 3.08 No
SMBC 17.6 88.7 88.7 12.3 3.46 158,381 13.8 13.8 0.82 0.70 4.53 No
SOBI 18.1 79.7 79.7 10.4 2.18 102,910 12.2 12.2 0.81 0.62 4.64 No
SOPN 16.5 116.0 116.0 28.0 4.60 287,801 24.2 24.2 1.32 1.77 7.63 No
SPBC 17.6 171.7 NA 14.5 3.72 6,034,116 8.5 NA 1.22 0.51 5.76 No
SRN 24.3 78.5 79.0 13.8 2.89 103,015 17.6 17.5 0.50 0.52 2.95 No
SSFC 32.9 104.5 104.5 17.5 5.29 181,971 16.8 16.8 0.23 0.46 2.88 No
SSM 17.1 86.2 86.2 19.9 3.27 124,096 23.1 23.1 0.84 1.39 5.02 No
STFR 13.7 156.7 177.3 8.8 1.66 2,024,008 5.6 5.0 2.83 0.84 11.62 No
STSA 16.2 117.6 242.0 6.1 - 2,314,587 5.1 2.6 1.07 0.30 5.42 No
SVRN 13.5 174.1 269.5 9.8 0.61 21,913,873 5.5 3.6 0.97 0.70 12.42 No
THR 14.4 89.5 89.8 10.6 3.47 98,813 11.9 11.9 0.92 0.72 5.57 No
THRD 16.9 98.4 114.4 8.6 2.65 665,608 7.9 6.9 1.07 0.58 7.39 No
TRIC 14.2 88.5 88.5 11.4 4.19 81,321 12.8 12.8 0.74 1.10 7.74 No
TSH 12.2 83.3 83.3 10.4 3.48 415,337 12.5 12.5 1.18 0.93 6.82 No
TWIN 14.5 120.2 120.2 15.3 2.87 111,436 12.7 12.7 0.96 1.10 8.60 No
UCBC 17.1 85.5 85.5 32.1 3.50 108,162 37.5 37.5 0.70 1.82 4.65 No
UFBS 10.8 105.1 119.2 8.5 2.95 189,403 8.1 7.2 1.11 0.84 10.53 No
UPFC 9.1 80.6 82.9 15.7 - 425,559 19.5 19.0 0.42 1.53 10.51 No
USAB 14.7 132.2 132.8 10.3 - 165,117 8.2 8.2 0.58 1.17 11.08 No
WAYN 22.5 156.6 156.6 14.6 3.94 268,022 9.3 9.3 0.70 0.67 7.08 No
WBST 16.1 201.8 234.9 12.4 1.47 9,033,917 6.1 5.3 1.86 0.76 13.16 No
WCFB 24.2 143.0 143.0 35.6 5.16 92,109 24.9 24.9 0.64 1.41 5.95 No
WEFC 11.7 102.9 102.9 13.9 3.72 191,876 13.5 13.5 1.38 1.26 8.92 No
WEHO 19.5 98.3 98.3 18.2 3.95 129,871 18.5 18.5 0.52 1.04 4.94 No
WFI 13.9 201.4 204.3 15.0 2.16 371,953 7.4 7.3 1.00 1.19 16.12 No
WFSL 11.6 162.1 173.9 21.6 3.59 5,723,073 13.4 12.6 1.90 2.03 14.85 No
WHGB 22.1 98.5 98.5 11.4 3.13 138,691 11.6 11.6 0.52 0.55 3.70 No
WM 15.6 278.9 312.7 16.1 2.05 165,493,281 5.7 5.1 2.88 0.96 16.62 No
WRNB 12.5 174.0 174.0 17.5 4.06 397,065 10.1 10.1 0.71 1.57 14.79 No
WSB 14.4 71.5 71.5 6.5 2.58 265,195 9.0 9.0 0.27 0.54 6.23 No
WSFS 10.2 211.4 212.3 11.1 0.76 1,635,710 5.2 5.2 1.55 1.16 19.24 No
WSTR 13.6 88.0 112.2 8.2 3.17 970,581 9.3 7.5 1.30 0.69 6.39 No
WVFC 14.4 163.6 163.6 16.6 4.25 320,384 10.2 10.2 1.05 1.16 10.60 No
YFCB 14.4 96.7 96.7 10.6 2.15 382,969 11.0 11.0 1.03 0.74 6.47 No
YFED 18.8 123.8 123.8 11.1 3.60 1,262,648 9.0 9.0 0.77 0.72 8.11 No
Maximum 33.3 367.9 369.9 40.3 6.36 165,493,281 44.8 44.8 7.96 2.84 25.26
Minimum 2.1 40.0 40.0 3.3 - 45,570 3.1 2.6 0.22 ( 0.63) (6.68)
Average 16.0 126.8 133.6 13.8 2.37 2,067,993 11.7 11.4 1.13 0.96 9.07
Median 15.1 115.4 118.7 13.1 2.42 336,195 10.0 9.7 0.99 0.93 7.91
</TABLE>
Source: SNL & F&C calculations 15
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION> ROAA ROAE
Price/ Before Before
NPAs/ Core EPS Core EPS Extra Extra
Pricing Assets MRQ MRQ MRQ MRQ
Ticker Date (%) (x) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
AABC 03/12/1999 0.34 19.1 0.09 0.38 4.75
ABBK 03/12/1999 0.12 15.9 0.23 0.71 12.25
ABCL 03/12/1999 0.19 13.5 0.37 0.93 10.01
ABCW 03/12/1999 0.47 12.8 0.32 1.09 17.31
AFBC 03/12/1999 0.41 15.3 0.19 0.62 4.87
AHCI 03/12/1999 0.45 22.1 0.18 0.34 3.25
ALBC 03/12/1999 0.34 24.4 0.10 0.41 4.75
ALLB 03/12/1999 0.51 19.4 0.15 0.68 6.35
AMFC 03/12/1999 0.43 13.8 0.25 0.48 4.20
ANA 03/12/1999 0.24 15.6 0.29 0.70 5.04
ANDB 03/12/1999 0.25 13.2 0.57 1.15 13.65
ANE 03/12/1999 NA 10.6 0.24 1.01 15.19
ASBI 03/12/1999 0.49 16.1 0.25 0.96 8.21
ASBP 03/12/1999 0.30 19.2 0.15 0.87 6.87
ASFC 03/12/1999 0.56 21.3 0.59 (0.91) (12.18)
BDJI 03/12/1999 0.47 10.5 0.28 0.74 7.08
BFD 03/12/1999 NA 12.0 0.39 0.72 9.69
BFSB 03/12/1999 0.58 13.3 0.23 1.32 9.81
BKC 03/12/1999 1.40 11.5 0.46 1.46 16.02
BKCT 03/12/1999 0.31 17.3 0.22 1.02 10.68
BKUNA 03/12/1999 0.61 173.5 0.01 0.04 0.79
BNKU 03/12/1999 0.63 12.1 0.85 0.78 15.71
BVCC 02/22/1999 NA 12.7 0.38 0.53 7.78
CAFI 03/12/1999 NA 12.1 0.30 1.05 10.95
CASB 03/12/1999 0.30 16.3 0.22 0.88 12.71
CASH 03/12/1999 0.80 10.6 0.35 0.82 8.66
CATB 03/12/1999 0.18 14.8 0.25 1.25 5.84
CBES 03/12/1999 1.69 26.8 0.14 0.34 3.01
CBK 03/12/1999 0.33 14.8 0.26 0.81 6.30
CBSA 03/12/1999 0.60 10.6 0.42 0.39 10.65
CEBK 03/12/1999 0.38 15.5 0.29 0.72 7.09
CENB 03/12/1999 0.13 17.2 0.20 0.93 4.65
CFB 03/12/1999 0.78 11.4 0.50 1.10 13.54
CFCP 03/12/1999 0.49 16.5 0.25 1.09 18.58
CFFC 03/12/1999 0.42 34.4 0.08 1.29 9.27
CFNC 03/12/1999 0.14 15.6 0.12 0.74 5.37
CFTP 03/12/1999 0.46 20.3 0.16 1.15 5.51
CIBI 03/12/1999 NA 14.9 0.18 0.72 8.19
CKFB 03/12/1999 0.10 20.5 0.22 1.06 4.97
CLAS 03/12/1999 0.38 19.0 0.19 0.65 4.48
CMRN 03/12/1999 0.73 15.8 0.22 0.87 4.44
CMSB 03/12/1999 0.49 18.5 0.21 0.52 6.17
CNIT 03/12/1999 0.15 15.3 0.33 1.04 12.56
CNSB 03/12/1999 0.21 20.7 0.15 0.96 4.12
COFI 03/12/1999 0.44 NM (1.06) 0.71 9.06
COOP 03/12/1999 0.63 16.5 0.18 0.60 7.42
CRSB 03/12/1999 1.04 7.4 0.34 1.11 10.97
CRZY 03/12/1999 0.52 14.7 0.21 1.18 5.14
CVAL 03/12/1999 0.35 17.0 0.28 1.18 13.96
DCBI 03/12/1999 - 14.6 0.28 1.47 6.68
DCOM 03/12/1999 0.32 15.3 0.37 1.05 10.58
DME 03/12/1999 0.43 13.0 0.52 1.15 18.17
DSL 03/12/1999 0.44 11.2 0.45 0.83 10.67
EBI 03/12/1999 0.35 19.3 0.12 0.40 4.42
</TABLE>
SOURCE: SNL & F&C calculations 16
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
ROAA ROAE
Price/ Before Before
NPAs/ Core EPS Core EPS Extra Extra
Pricing Assets MRQ MRQ MRQ MRQ
Ticker Date (%) (x) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
EBSI 03/12/1999 0.85 12.4 0.42 0.74 12.54
EFBC 03/12/1999 - 15.2 0.21 0.48 1.35
EGLB 03/12/1999 0.85 19.9 0.28 0.67 6.08
EQSB 03/12/1999 0.13 10.3 0.43 0.61 11.49
ESBF 03/12/1999 NA 14.9 0.26 0.58 9.21
ESBK 03/12/1999 0.62 12.1 0.47 0.61 9.91
FAB 03/12/1999 0.22 11.2 0.32 0.65 8.00
FBBC 03/12/1999 0.08 10.9 0.36 1.05 10.75
FBCI 03/12/1999 0.13 16.3 0.36 0.70 7.71
FBNW 03/12/1999 0.33 12.9 0.30 1.08 7.55
FBSI 03/12/1999 0.03 15.6 0.20 0.96 6.90
FCB 03/12/1999 - 30.0 0.12 0.61 3.08
FCME 03/12/1999 NA 8.9 0.27 0.79 8.99
FDEF 03/12/1999 1.83 NM (0.20) (0.76) (6.24)
FED 03/12/1999 0.84 9.5 0.42 0.96 14.23
FESX 03/12/1999 0.49 10.9 0.39 0.92 11.56
FFBH 03/12/1999 0.90 12.1 0.35 1.07 7.55
FFBZ 03/12/1999 0.53 22.4 0.11 0.70 9.17
FFCH 03/12/1999 0.70 14.2 0.33 1.00 15.02
FFDB 03/12/1999 0.60 15.4 0.15 0.81 8.15
FFDF 03/12/1999 0.09 32.5 0.10 0.54 3.48
FFES 03/12/1999 0.15 17.2 0.36 0.33 4.42
FFFD 03/12/1999 0.19 11.8 0.35 1.29 8.68
FFFL 03/12/1999 0.26 19.8 0.23 0.58 9.40
FFHH 03/12/1999 0.25 11.9 0.30 0.79 7.69
FFHS 03/12/1999 0.28 13.8 0.25 0.74 8.45
FFIC 03/12/1999 0.23 12.7 0.27 0.96 8.23
FFKY 03/12/1999 0.05 16.2 0.36 1.30 10.99
FFLC 03/12/1999 0.15 14.0 0.31 1.07 8.89
FFSL 03/12/1999 1.08 10.9 0.25 0.78 8.10
FFSX 03/12/1999 0.44 16.2 0.35 1.04 13.13
FFWC 03/12/1999 0.58 10.3 0.37 1.01 10.73
FFYF 03/12/1999 0.54 16.8 0.27 1.22 9.82
FGHC 03/12/1999 1.41 15.6 0.12 1.13 14.33
FISB 03/12/1999 1.08 13.2 0.37 1.15 12.42
FKFS 03/12/1999 1.19 10.3 0.34 0.63 10.19
FKKY 03/12/1999 - 13.4 0.27 1.23 7.40
FLAG 03/12/1999 1.57 20.2 0.13 0.05 0.54
FLFC 03/12/1999 0.74 15.4 0.34 1.20 15.11
FLGS 03/12/1999 1.90 9.6 0.73 1.41 28.15
FMCO 03/12/1999 0.74 11.8 0.19 0.82 13.34
FMSB 03/12/1999 - 13.3 0.25 1.12 15.39
FNGB 03/12/1999 0.06 15.8 0.19 0.95 8.95
FSBI 03/12/1999 0.16 12.3 0.35 0.67 9.63
FSPT 03/12/1999 0.39 17.1 0.44 1.21 5.67
FTF 03/12/1999 - 11.3 0.51 1.70 12.09
FTFC 03/12/1999 0.13 14.0 0.25 1.16 16.90
FTNB 03/12/1999 0.88 20.1 0.19 0.99 4.56
FTSB 03/12/1999 3.29 15.0 0.20 1.13 9.18
FWWB 03/12/1999 0.37 13.7 0.36 1.07 9.17
GAF 03/12/1999 0.23 13.2 0.28 0.97 7.47
GDW 03/12/1999 0.85 12.8 1.95 1.15 14.69
GFED 03/12/1999 0.35 20.3 0.14 1.16 5.02
GPT 03/12/1999 2.12 22.2 0.39 0.96 7.50
</TABLE>
Source: SNL & F&C calculations 17
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
ROAA ROAE
Price/ Before Before
NPAs/ Core EPS Core EPS Extra Extra
Pricing Assets MRQ MRQ MRQ MRQ
Ticker Date (%) (x) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
GSFC 03/12/1999 0.10 17.3 0.17 1.49 4.25
GSLA 03/12/1999 0.17 28.9 0.10 0.69 1.85
GTPS 03/12/1999 NA 80.0 0.05 0.18 1.19
GUPB 03/12/1999 1.19 16.3 0.22 0.66 6.58
HALL 03/12/1999 0.76 9.9 0.26 0.66 9.17
HARL 03/12/1999 - 13.7 0.34 0.74 11.86
HARS 03/12/1999 0.63 28.4 0.11 0.66 8.63
HAVN 03/12/1999 0.36 14.3 0.24 0.43 8.47
HBFW 03/12/1999 - 20.2 0.34 0.82 7.60
HBNK 03/12/1999 0.99 8.9 1.04 1.48 20.80
HBS 03/12/1999 0.51 13.4 0.27 (1.20) (8.30)
HCBC 03/12/1999 0.17 24.1 0.14 0.66 3.87
HCFC 03/12/1999 NA 14.3 0.28 1.20 9.10
HFFB 03/12/1999 - 16.4 0.21 1.35 5.20
HFFC 03/12/1999 0.33 15.5 0.25 0.75 7.99
HFSA 03/12/1999 0.14 15.8 0.26 1.22 12.49
HHFC 03/12/1999 0.01 25.0 0.15 0.57 5.40
HIFS 03/12/1999 0.19 9.8 0.40 1.31 13.90
HMLK 03/12/1999 0.06 13.3 0.25 0.75 5.45
HMNF 03/12/1999 NA 9.2 0.35 1.17 11.84
HOMF 03/12/1999 0.81 11.0 0.52 1.43 15.16
HPBC 03/12/1999 - 11.5 0.52 1.54 17.58
HRBF 03/12/1999 0.37 18.2 0.24 0.73 5.84
HRZB 03/12/1999 - 11.8 0.29 1.50 9.89
HTHR 03/12/1999 4.78 8.2 0.45 1.09 17.80
HWEN 03/12/1999 0.84 66.7 0.03 0.23 1.49
HZFS 03/12/1999 1.44 16.2 0.17 (0.23) (2.52)
IFSB 03/12/1999 NA 8.7 0.36 1.10 13.18
INBI 03/12/1999 0.25 15.3 0.32 1.53 9.76
IPSW 03/12/1999 0.44 11.2 0.22 0.97 18.02
ITLA 03/12/1999 0.72 7.6 0.50 1.51 14.39
IWBK 03/12/1999 0.76 12.4 0.47 1.20 16.89
JSB 03/12/1999 NA 13.5 1.03 2.58 10.76
JSBA 03/12/1999 0.67 20.8 0.16 0.48 5.04
JXSB 03/12/1999 0.93 16.2 0.17 0.76 7.07
JXVL 03/12/1999 0.68 10.5 0.37 1.31 9.61
KFBI 03/12/1999 0.23 14.8 0.27 0.94 6.67
KNK 03/12/1999 0.69 23.6 0.24 0.35 3.57
KSBK 03/12/1999 NA 9.5 0.35 1.06 13.24
KYF 03/12/1999 0.03 18.8 0.17 0.97 5.55
LARK 03/12/1999 0.29 13.7 0.41 1.08 10.02
LARL 03/12/1999 0.28 12.9 0.31 1.48 13.52
LFCO 03/12/1999 2.27 3.5 0.27 1.34 11.95
LFED 03/12/1999 0.80 18.9 0.17 1.11 6.92
LO 03/12/1999 0.14 10.9 0.23 0.92 16.93
LOGN 03/12/1999 0.33 13.5 0.25 1.32 7.59
LSBI 03/12/1999 NA 16.7 0.42 0.69 8.73
LSBX 03/12/1999 0.18 5.1 0.53 2.79 20.71
LXMO 03/12/1999 0.72 16.2 0.16 0.59 3.69
MAFB 03/12/1999 0.51 12.8 0.44 1.08 14.29
MARN 03/12/1999 0.83 14.2 0.37 1.20 6.68
MASB 03/12/1999 0.12 17.3 0.55 1.14 9.71
MBFC 03/12/1999 NA 16.4 0.14 1.74 17.01
MBLF 03/12/1999 0.72 12.7 0.37 0.90 6.63
</TABLE>
18
Source: SNL & F&C calculations
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
ROAA ROAE
Price/ Before Before
NPAs/ CoreEPS Core EPS Extra Extra
Pricing Assets MRQ MRQ MRQ MRQ
Ticker Date (%) (x) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
MCBN 03/12/1999 0.58 18.8 0.10 0.42 5.57
MDBK 03/12/1999 0.17 15.6 0.28 1.03 11.44
MECH 03/12/1999 0.44 30.4 0.25 0.55 5.68
METF 03/12/1999 1.30 10.3 0.24 0.60 18.00
MFBC 03/12/1999 0.04 12.4 0.45 0.82 8.53
MFFC 03/12/1999 0.17 23.8 0.15 0.51 4.78
MFLR 03/12/1999 0.85 12.7 0.40 1.16 12.65
MONT 03/12/1999 NA 14.8 0.16 0.80 4.72
MRKF 03/12/1999 - 34.9 0.06 0.58 2.10
MSBF 03/12/1999 0.19 15.1 0.22 1.34 8.32
MSBK 03/12/1999 0.09 12.5 0.20 0.59 9.59
MTXC 03/12/1999 0.85 8.9 0.40 1.15 21.93
MWBX 03/12/1999 0.25 9.8 0.15 1.29 17.42
NBN 03/12/1999 0.56 10.6 0.24 0.84 10.80
NBSI 03/12/1999 - 21.4 0.14 0.56 5.36
NEIB 03/12/1999 0.57 8.5 0.45 1.28 10.85
NHTB 03/12/1999 0.87 9.5 0.39 1.12 13.50
NMSB 03/12/1999 0.40 11.8 0.25 0.62 6.59
NSLB 03/12/1999 0.03 19.4 0.18 0.66 4.03
NTMG 03/12/1999 0.87 20.1 0.12 1.00 11.56
NWSB 03/12/1999 0.78 27.8 0.09 0.61 7.61
OCFC 03/12/1999 0.35 13.9 0.27 0.75 6.05
OCN 03/12/1999 NA NM (0.16) (1.20) (9.82)
OFCP 03/12/1999 0.42 13.4 0.43 1.02 13.11
OHSL 03/12/1999 0.10 16.7 0.21 0.81 7.72
OTFC 03/12/1999 0.18 14.1 0.23 1.32 6.07
PBCI 03/12/1999 NA 14.5 0.40 1.09 8.93
PBCT 03/12/1999 0.50 NM - 0.41 4.61
PBHC 03/12/1999 1.27 29.9 0.09 0.48 4.17
PBKB 03/12/1999 0.17 7.3 0.70 1.12 30.94
PBOC 03/12/1999 0.44 4.8 0.49 1.29 23.52
PCBC 03/12/1999 - 23.4 0.23 0.73 4.22
PDB 03/12/1999 0.57 17.4 0.13 1.05 6.42
PEDE 03/12/1999 0.57 25.0 0.13 1.54 3.41
PEEK 03/12/1999 0.52 19.1 0.18 0.86 4.14
PERM 03/12/1999 0.26 14.1 0.20 0.68 8.49
PFDC 03/12/1999 0.19 15.1 0.33 1.41 9.68
PFED 03/12/1999 0.11 13.6 0.26 1.13 5.77
PFFB 03/12/1999 1.05 13.3 0.33 0.69 8.93
PFFC 03/12/1999 0.13 33.7 0.07 1.12 6.68
PFNC 03/12/1999 NA 14.7 0.27 0.96 14.47
PFSB 03/12/1999 0.45 12.5 0.31 0.72 10.87
PHBK 03/12/1999 0.63 13.4 0.35 1.32 17.39
PHFC 03/12/1999 1.51 10.5 0.33 0.53 8.16
PHSB 03/12/1999 0.16 20.7 0.14 0.62 5.15
PLSK 03/12/1999 0.53 19.2 0.13 0.62 5.35
PRBC 03/12/1999 0.51 17.4 0.19 0.43 5.09
PROV 03/12/1999 0.67 9.0 0.45 0.75 7.61
PSFC 03/12/1999 0.59 44.6 0.07 0.44 2.51
PSFI 03/12/1999 0.72 12.2 0.20 1.56 6.45
PTRS 03/12/1999 0.17 11.4 0.28 0.98 11.51
PVFC 03/12/1999 0.75 10.3 0.34 1.30 16.96
PVSA 03/12/1999 0.34 12.2 0.43 1.03 14.79
QCBC 03/12/1999 0.88 10.7 0.35 0.95 10.83
</TABLE>
Source: SNL & F&C calculations 19
<PAGE>
FERGUSON & COMPANY Exhibit IV - Selected Publicly Held Thrifts
- ------------------
<TABLE>
<CAPTION>
ROAA ROAE
Price/ Before Before
NPAs/ Core EPS Core EPS Extra Extra
Pricing Assets MRQ MRQ MRQ MRQ
Ticker Date (%) (x) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
QCFB 03/12/1999 0.38 10.4 0.61 1.43 10.11
QCSB 03/12/1999 0.34 20.2 0.37 1.66 19.15
RELY 03/12/1999 0.32 12.8 0.60 0.84 11.78
RIVR 03/12/1999 NA 13.5 0.26 0.82 6.08
RSLN 03/12/1999 0.18 13.5 0.33 1.44 9.03
RVSB 03/12/1999 0.32 17.9 0.18 1.39 6.96
SCBS 03/12/1999 0.21 14.8 0.19 0.95 6.51
SCCB 03/12/1999 1.99 20.8 0.18 0.84 4.02
SFED 03/12/1999 0.63 23.1 0.20 2.93 22.83
SFFC 03/12/1999 1.43 15.3 0.17 1.12 6.27
SFIN 03/12/1999 0.44 NM (0.09) (0.21) (2.25)
SGVB 03/12/1999 0.71 10.4 0.27 0.55 8.03
SIB 03/12/1999 0.45 15.8 0.28 1.31 6.96
SKBO 03/12/1999 0.50 28.6 0.07 0.70 4.08
SMBC 03/12/1999 0.57 14.4 0.25 0.86 6.08
SOBI 03/12/1999 0.18 17.5 0.21 0.58 4.63
SOPN 03/12/1999 0.38 16.5 0.33 1.80 7.53
SPBC 03/12/1999 NA 16.8 0.32 0.88 10.43
SRN 03/12/1999 - 33.7 0.09 0.35 1.99
SSFC 03/12/1999 0.24 37.8 0.05 0.40 2.49
SSM 03/12/1999 - 15.0 0.24 1.44 5.74
STFR 03/12/1999 0.17 11.9 0.81 0.80 13.02
STSA 03/12/1999 0.40 39.5 0.11 0.25 4.82
SVRN 03/12/1999 0.51 13.7 0.24 0.81 14.97
THR 03/12/1999 0.80 13.3 0.25 0.70 5.66
THRD 03/12/1999 0.29 18.1 0.25 0.58 7.38
TRIC 03/12/1999 - 13.8 0.19 1.11 7.48
TSH 03/12/1999 0.22 11.2 0.32 0.86 6.81
TWIN 03/12/1999 0.35 10.6 0.33 1.42 11.20
UCBC 03/12/1999 NA 17.7 0.17 1.71 4.48
UFBS 03/12/1999 0.44 11.5 0.26 0.77 9.56
UPFC 03/12/1999 NA NM (0.20) (3.31) (16.85)
USAB 03/12/1999 1.19 30.4 0.07 0.79 10.76
WAYN 03/12/1999 0.40 21.9 0.18 0.67 7.07
WBST 03/12/1999 0.32 15.3 0.49 0.94 15.20
WCFB 03/12/1999 0.02 24.2 0.16 1.44 5.90
WEFC 03/12/1999 NA 10.6 0.38 1.31 9.71
WEHO 03/12/1999 0.13 15.8 0.16 1.04 5.42
WFI 03/12/1999 0.45 13.3 0.26 1.21 16.13
WFSL 03/12/1999 0.57 11.1 0.50 2.02 14.79
WHGB 03/12/1999 0.05 22.1 0.13 0.47 3.98
WM 03/12/1999 0.73 13.8 0.81 0.40 6.61
WRNB 03/12/1999 0.85 12.3 0.18 1.45 14.08
WSB 03/12/1999 NA 19.4 0.05 0.36 4.02
WSFS 03/12/1999 0.68 7.0 0.56 1.13 19.44
WSTR 03/12/1999 0.37 13.4 0.33 0.74 6.97
WVFC 03/12/1999 0.21 14.0 0.27 1.25 11.97
YFCB 03/12/1999 0.24 13.8 0.27 0.70 6.38
YFED 03/12/1999 0.93 27.8 0.13 0.52 5.76
Maximum 4.78 173.5 1.95 2.93 30.94
Minimum - 3.5 (1.06) (3.31) (16.85)
Average 0.51 16.9 0.28 0.89 8.80
Median 0.41 14.7 0.26 0.92 8.19
</TABLE>
20
Source: SNL & F&C calculations
<PAGE>
FERGUSON & COMPANY Exhibit V - Comparative Group Price Changes
- ------------------
<TABLE>
<CAPTION>
Total Assets
Number MRQ
Ticker Company's Short Name City State Of Offices ($000) IPO Date
<S> <C> <C> <C> <C> <C> <C>
CLAS Classic Bancshares Inc. Ashland KY 5 141,648 12/29/1995
CMRN Cameron Financial Corp Cameron MO 4 220,939 04/03/1995
FBSI First Bancshares Inc. Mountain Grove MO 8 176,251 12/22/1993
FKKY Frankfort First Bancorp Inc. Frankfort KY 3 136,812 07/10/1995
FTF Texarkana First Financial CorpTexarkana AR 5 191,301 07/07/1995
GSFC Green Street Financial Corp. Fayetteville NC 3 171,721 04/04/1996
GTPS Great American Bancorp Champaign IL 3 157,066 06/30/1995
HBS Haywood Bancshares Inc. Waynesville NC 4 149,542 12/18/1987
JXVL Jacksonville Bancorp Inc. Jacksonville TX 7 260,412 04/01/1996
PDB Piedmont Bancorp Inc. Hillsborough NC 1 129,244 12/08/1995
SMBC Southern Missouri Bancorp Inc. Poplar Bluff MO 8 158,381 04/13/1994
Maximum 8 260,412
Minimum 1 129,244
Average 5 179,114
Median 4 157,724
</TABLE>
21
<PAGE>
FERGUSON & COMPANY Exhibit V - Comparative Group Price Changes
<TABLE>
<CAPTION>
Increase (Decrease) from
March 12, 1999 December 9, 1998 12/9/1998 to 3/12/1999
----------------------------- ---------------------------- ------------------------------
Share Price Market Value Share Price Market Value Share Price Market Value
----------- ------------
Ticker ($) ($M) ($) ($M) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
CLAS 14.453 18.76 14.750 19.17 (2.0) (2.1)
CMRN 13.875 30.38 16.000 38.94 (13.3) (22.0)
FBSI 12.500 26.43 12.625 27.30 (1.0) (3.2)
FKKY 14.500 22.58 15.000 23.76 (3.3) (5.0)
FTF 23.000 37.48 24.125 40.43 (4.7) (7.3)
GSFC 11.750 47.98 14.375 58.70 (18.3) (18.3)
GTPS 16.000 21.75 16.000 21.75 - -
HBS 14.500 18.13 16.750 20.94 (13.4) (13.4)
JXVL 15.500 36.29 16.125 39.05 (3.9) (7.1)
PDB 9.063 23.61 9.375 25.20 (3.3) (6.3)
SMBC 14.438 19.39 15.500 20.79 (6.9) (6.7)
Maximum 23.000 47.98 24.125 58.70 - -
Minimum 9.063 18.13 9.375 20.79 (18.3) (22.0)
Average 15.425 30.16 16.400 33.66 (5.5) (6.7)
Median 14.500 23.10 15.750 24.48 (4.3) (6.9)
</TABLE>
Source: SNL & F&C calculations 22
<PAGE>
FERGUSON & COMPANY Exhibit VI - Pro Forma Comparisons
- ------------------
<TABLE>
<CAPTION>
As of March 12, 1999
Ticker Name Price Mk Value PE P/Book P/TBook P/Assets Div Yld
($) ($Mil) (X) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
Community Savings Bank
----------------------
Before Conversion N/A N/A N/A N/A N/A N/A N/A
Pro Forma Supermaximum 15.000 35.71 25.3 69.1 69.1 18.3 2.00
Pro Forma Maximum 15.000 31.05 23.4 65.4 65.4 16.4 2.00
Pro Forma Midpoint 15.000 27.00 21.6 61.5 61.5 14.6 2.00
Pro Forma Minimum 15.000 22.95 19.5 57.1 57.1 12.7 2.00
Comparative Group
-----------------
Averages 15.314 34.24 16.2 104.3 110.1 16.4 3.07
Medians 14.453 26.43 15.8 94.0 102.3 14.1 2.78
North Carolina Thrifts
----------------------
Averages 12.458 32.52 17.3 97.9 98.2 18.1 3.90
Medians 11.875 24.70 16.5 90.6 90.6 17.9 4.41
Southeast Region Thrifts
------------------------
Averages 14.202 75.11 16.8 124.0 126.9 16.1 2.91
Medians 13.000 36.08 15.9 114.5 115.3 15.7 2.83
All Public Thrifts
------------------
Averages 16.437 298.78 16.0 126.8 133.6 13.8 2.37
Medians 14.563 41.68 15.1 115.4 118.7 13.1 2.42
Comparative Group
-----------------
CLAS ClassicBcshs-KY 14.453 18.76 21.3 89.8 103.8 13.3 2.21
CMRN CameronFinlCorp-MO 13.875 30.38 14.5 74.3 74.3 13.8 2.02
FBSI FirstBcshs-MO 12.500 26.43 15.8 109.6 114.1 15.2 0.96
FKKY FranfortFirst-KY 23.375 96.47 15.9 170.6 213.3 20.1 2.57
FTF TexarkanaFirst-AR 23.000 37.48 11.4 139.2 139.2 19.6 2.78
GSFC GreenStreetFin-NC 11.750 47.98 16.8 79.2 79.2 27.9 4.09
GTPS GreatAmrcnBncp-IL 16.000 21.75 28.1 94.0 94.0 13.9 2.75
HBS HaywoodBcshs-NC 14.500 18.13 10.6 84.8 87.7 12.1 4.41
JXVL Jacksonville-TX 15.500 36.29 10.8 102.3 102.3 14.1 3.23
PDB PiedmontBancorp-NC 9.063 23.61 15.4 114.6 114.6 18.3 5.30
SMBC SthrnMissouBncp-MO 14.438 19.39 17.6 88.7 88.7 12.3 3.46
</TABLE>
23
<PAGE>
FERGUSON & COMPANY Exhibit VI - Pro Forma Comparisons
- ------------------
<TABLE>
<CAPTION>
As of March 12, 1999
Ticker Name Assets Eq/A TEq/A EPS ROAA ROAE
($000) (%) (%) ($) (%) (%)
Community Savings Bank
----------------------
<S> <C> <C> <C> <C> <C> <C>
Before Conversion 172,936 13.4 13.4 N/A 0.53 3.91
Pro Forma Supermaximum 203,099 26.5 26.5 0.59 0.73 2.74
Pro Forma Maximum 199,075 25.0 25.0 0.64 0.71 2.80
Pro Forma Midpoint 195,576 23.7 23.7 0.70 0.69 2.87
Pro Forma Minimum 192,078 22.3 22.3 0.77 0.66 2.94
Comparative Group
-----------------
Averages 203,222 16.5 16.0 1.04 1.03 6.35
Medians 171,721 14.3 13.9 0.82 1.02 5.06
North Carolina Thrifts
----------------------
Averages 182,868 19.0 19.0 0.80 0.98 4.95
Medians 149,542 16.8 16.8 0.74 0.94 4.54
Southeast Region Thrifts
------------------------
Averages 599,692 14.5 14.4 0.92 0.97 7.62
Medians 191,905 13.4 13.2 0.83 0.99 7.49
All Public Thrifts
------------------
Averages 2,067,993 11.7 11.4 1.13 0.96 9.07
Medians 336,195 10.0 9.7 0.99 0.93 7.91
Comparative Group
-----------------
CLAS ClassicBcshs-KY 141,648 14.8 13.0 0.68 0.63 4.23
CMRN CameronFinlCorp-MO 220,939 18.5 18.5 0.96 1.02 5.06
FBSI FirstBcshs-MO 176,251 13.9 13.4 0.79 0.98 7.05
FKKY FranfortFirst-KY 478,938 11.8 9.7 1.47 1.42 11.29
FTF TexarkanaFirst-AR 191,301 14.1 14.1 2.01 1.78 12.12
GSFC GreenStreetFin-NC 171,721 35.3 35.3 0.70 1.58 4.48
GTPS GreatAmrcnBncp-IL 157,066 14.7 14.7 0.57 0.57 3.30
HBS HaywoodBcshs-NC 149,542 14.3 13.9 1.37 0.08 0.53
JXVL Jacksonville-TX 260,412 13.8 13.8 1.43 1.37 9.67
PDB PiedmontBancorp-NC 129,244 16.0 16.0 0.59 1.24 7.55
SMBC SthrnMissouBncp-MO 158,381 13.8 13.8 0.82 0.70 4.53
Note: Stock prices are closing prices or last trade. Pro forma
calculations for Community are based on sales at $15 a share
with a minimum of $22,950,000, midpoint of $27,000,000,
maximum of $31,050,000, and supermaximum of $35,707,500.
Sources:Community's audited and unaudited financial
Statements, SNL Securities, and F&C calculations.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit VII
FERGUSON & COMPANY Comparison of Pricing Ratios
- ------------------
Community Group Percent Premium
Savings Compared to (Discount) Versus
------------- ------------------------ ----------------------
Bank Average Median Average Median
---------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Comparison of PE ratio at
midpoint to:
- ----------------------------------
Comparative group 21.6 16.2 15.8 33.3 36.7
North Carolina thrifts 21.6 17.3 16.5 24.9 30.9
Southeast Region thrifts 21.6 16.8 15.9 28.6 35.8
All public thrifts 21.6 16.0 15.1 35.0 43.0
Recent conversions 21.6 20.0 14.1 8.0 53.2
Comparison of PE ratio at
maximum to:
- ----------------------------------
Comparative group 23.4 16.2 15.8 44.4 48.1
North Carolina thrifts 23.4 17.3 16.5 35.3 41.8
Southeast Region thrifts 23.4 16.8 15.9 39.3 47.2
All public thrifts 23.4 16.0 15.1 46.3 55.0
Recent conversions 23.4 20.0 14.1 17.0 66.0
Comparison of PE ratio at
supermaximum to:
- ----------------------------------
Comparative group 25.3 16.2 15.8 56.2 60.1
North Carolina thrifts 25.3 17.3 16.5 46.2 53.3
Southeast Region thrifts 25.3 16.8 15.9 50.6 59.1
All public thrifts 25.3 16.0 15.1 58.1 67.5
Recent conversions 25.3 20.0 14.1 26.5 79.4
Comparison of PB ratio at
midpoint to:
- ----------------------------------
Comparative group 61.5 104.3 94.0 (41.0) (34.6)
North Carolina thrifts 61.5 97.9 90.6 (37.2) (32.1)
Southeast Region thrifts 61.5 124.0 114.5 (50.4) (46.3)
All public thrifts 61.5 126.8 115.4 (51.5) (46.7)
Recent conversions 61.5 69.6 65.4 (11.6) (6.0)
Comparison of PB ratio at
maximum to:
- ----------------------------------
Comparative group 65.4 104.3 94.0 (37.3) (30.4)
North Carolina thrifts 65.4 97.9 90.6 (33.2) (27.8)
Southeast Region thrifts 65.4 124.0 114.5 (47.3) (42.9)
All public thrifts 65.4 126.8 115.4 (48.4) (43.3)
Recent conversions 65.4 69.6 65.4 (6.0) -
Comparison of PB ratio at
supermaximum to:
- ----------------------------------
Comparative group 69.1 104.3 94.0 (33.7) (26.5)
North Carolina thrifts 69.1 97.9 90.6 (29.4) (23.7)
Southeast Region thrifts 69.1 124.0 114.5 (44.3) (39.7)
All public thrifts 69.1 126.8 115.4 (45.5) (40.1)
Recent conversions 69.1 69.6 65.4 (0.7) 5.7
</TABLE>
Source: SNL & F&C calculations 25
<PAGE>
FERGUSON & COMPANY Exhibit VIII
Pro Forma Assumptions
1. Net proceeds from the conversion were invested at the beginning of the
period at 4.60%, which was the approximate rate on the one-year treasury
bill on December 31, 1998. This rate was selected because it is
considered more representative of the rate the Bank is likely to earn.
2. Community's ESOP will acquire 8% of the conversion stock with loan
proceeds obtained from the Holding Company; therefore, there will be no
interest expense. We assumed that the ESOP expense is 1/15th annually of
the initial purchase.
3. Community's RP will acquire 4% of the stock through open market
purchases at the same price per share as that paid for conversion stock
and the expense is recognized ratably over five years as the shares
vest.
4. All pro forma income and expense items are adjusted for income taxes at
a combined income tax rate of 36.0%, with the exception of the
foundation contribution, on which the assumed tax benefit is 34.0%. The
lower rate was used because most of the benefit is expected to be
realized during the carryforward period, and the State of North Carolina
does not permit contribution carryforwards.
5. In calculating the pro forma adjustments to net worth, the ESOP and RP
are deducted in accordance with generally accepted accounting
principles.
6. Earnings per share ("EPS") have been calculated simply by dividing pro
forma net income by the total shares assumed issued. The price earnings
("P/E") ratio is simply total pro forma market capitalization (i.e.,
value of shares to be sold plus the assigned value of shares issued to
the charitable foundation) divided by pro forma net income. Calculating
EPS under AICPA SOP 93-6 and assuming 1/15th of the ESOP shares are
committed to be released at the beginning of the period and under SFAS
128 assuming 20% of the RP shares are vested at the beginning of the
period, basic EPS would be $0.86, $0.78, $0.72, and $0.66, diluted EPS
would be the same as basic EPS, and the PE ratio based on basic EPS
would be 17.4, 19.3, 20.9, and 22.6, respectively, at the minimum,
midpoint, maximum, and supermaximum of the range.
<PAGE>
FERGUSON & COMPANY
- ------------------
Exhibit VIII
Pro Forma Effect of Conversion Proceeds
At the Minimum of the Conversion Valuation Range
Valuation Date as of March 12, 1999
<TABLE>
<CAPTION>
Community Savings Bank, Burlington, NC
- ---------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Value $ 22,950,000
Less: Estimated Expenses (874,000)
-----------------
Net Conversion Proceeds $ 22,076,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 22,076,000
Less: ESOP Contributions (1,956,000)
RP Contributions (978,000)
-----------------
Net Conversion Proceeds after ESOP & RP $ 19,142,000
Estimated Incremental Rate of Return(1) 2.94%
-----------------
Estimated Additional Income $ 563,540
Less: ESOP Expense (83,456)
RP Expense (125,184)
-----------------
$ 354,900
-----------------
<CAPTION>
3. Pro Forma Calculations
Before Conversion After
Period Conversion Results Conversion
-------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
31-Dec-98 $ 899,000 $ 354,900 $ 1,253,900
b. Pro Forma Net Worth
31-Dec-98 $ 23,157,000 $ 19,652,000 $ 42,809,000
c. Pro Forma Net Assets
31-Dec-98 $ 172,936,000 $ 19,142,000 $ 192,078,000
</TABLE>
(1) Assumes Proceeds can be reinvested at 4.60% and earnings taxed at a rate of
36.0 percent.
(2) Pro forma effect on capital includes $510,000 increase related to
contribution to foundation.
27
<PAGE>
FERGUSON & COMPANY
- ------------------
<TABLE>
<CAPTION>
Exhibit VIII
Pro Forma Effect of Conversion Proceeds
At the Midpoint of the Conversion Valuation Range
Valuation Date as of March 12, 1999
Community Savings Bank, Burlington, NC
- -----------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation $ 27,000,000
Less: Estimated Expenses (940,000)
-------------
Net Conversion Proceeds $ 26,060,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 26,060,000
Less: ESOP Contributions (2,280,000)
RP Contributions (1,140,000)
-------------
Net Conversion Proceeds after ESOP & RP $ 22,640,000
Estimated Incremental Rate of Return(1) 2.94%
-------------
Estimated Additional Income $ 666,522
Less: ESOP Expense (97,280)
RP Expense (145,920)
-------------
$ 423,322
============
3. Pro Forma Calculations
Before Conversion After
Period Conversion Results Conversion
------------------------------------------------------
a. Pro Forma Earnings
Twelve Months Ended
December 31, 1998 $ 899,000 $ 423,322 $ 1,322,322
b. Pro Forma Net Worth
December 31, 1998 $ 23,157,000 $ 23,150,000 $ 46,307,000
c. Pro Forma Net Assets
December 31, 1998 $ 172,936,000 $ 22,640,000 $ 195,576,000
</TABLE>
(1) Assumes Proceeds can be reinvested at 4.60% and earnings taxed at a rate of
36.0 percent.
(2) Pro forma effect on capital includes $510,000 increase related to
contribution to foundation.
28
<PAGE>
FERGUSON & COMPANY
- -----------------
Exhibit VIII
Pro Forma Effect of Conversion Proceeds
At the Maximum of the Conversion Valuation Range
Valuation Date as of March 12, 1999
<TABLE>
<CAPTION>
Community Savings Bank, Burlington, NC
- ---------------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation $31,050,000
Less: Estimated Expenses (1,005,000)
--------------
Net Conversion Proceeds $30,045,000
2. Additional Income From Conversion Proceeds
Net Conversion Proceeds $30,045,000
Less: ESOP Contributions (2,604,000)
RP Contributions (1,302,000)
--------------
Net Conversion Proceeds after ESOP & RP $26,139,000
Estimated Incremental Rate of Return(1) 2.94%
--------------
Estimated Additional Income 769,532
Less: ESOP Expense (111,104)
RP Expense (166,656)
$ 491,772
===============
</TABLE>
3. Pro Forma Calculations
<TABLE>
<CAPTION>
Before Conversion After
Period Conversion Results Conversion
----------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
December 31, 1998 $ 899,000 $ 491,772 $ 1,390,772
b. Pro Forma Net Worth
December 31, 1998 $ 23,157,000 $ 26,649,000 $ 49,806,000
c. Pro Forma Net Assets
December 31, 1998 $ 172,936,000 $ 26,139,000 $ 199,075,000
</TABLE>
(1) Assumes Proceeds can be reinvested at 4.60% and earnings taxed at a rate of
36.0 percent.
(2) Pro forma effect on capital includes $510,000 increase related to
contribution to foundation.
29
<PAGE>
FERGUSON & COMPANY
- ------------------
Exhibit VIII
Pro Forma Effect of Conversion Proceeds
At the SuperMax of the Conversion Valuation Range
Valuation Date as of March 12, 1999
<TABLE>
<CAPTION>
Community Savings Bank, Burlington, NC
- --------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation $ 35,707,500
Less: Estimated Expenses $ (1,080,000)
-----------------
Net Conversion Proceeds $ 34,627,500
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 34,627,500
Less: ESOP Contributions $ (2,976,600)
RP Contributions $ (1,488,300)
Net Conversion Proceeds after ESOP & RP $ 30,162,600
Estimated Incremental Rate of Return(1) 2.94%
-----------------
Estimated Additional Income $ 887,987
Less: ESOP Expense $ (127,002)
RP Expense $ (190,502)
-----------------
$ 570,483
-----------------
<CAPTION>
3. Pro Forma Calculations
Before Conversion After
Period Conversion Results Conversion
-------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
December 31, 1998 $ 899,000 $ 570,483 $ 1,469,483
b. Pro Forma Net Worth
December 31, 1998 $ 23,157,000 $ 30,672,600 $ 53,829,600
c. Pro Forma Net Assets
December 31, 1998 $ 172,936,000 $ 30,162,600 $ 203,098,600
</TABLE>
(1) Assumes Proceeds can be reinvested at 4.60% and earnings taxed at a rate of
36.0 percent.
(2) Pro forma effect on capital includes $510,000 increase related to
contribution to foundation.
30
<PAGE>
FERGUSON & COMPANY
- ------------------
Exhibit VIII
Pro Forma Analysis Sheet
<TABLE>
<CAPTION>
Name of Association: Community Savings Bank, Burlington, NC
Date of Market Prices: March 12, 1999 N. Carolina Publicly All Publicly
Comparatives Held Thrifts Held Thrifts
------------ ------------ ------------
Symbols Value Mean Median Mean Median Mean Median
------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price-Earnings Ratio P/E
- --------------------
Last Twelve Months N/A
At Minimum of Range 19.5
-------------------------------------------------------------------------------------
At Midpoint of Range 21.6 16.2 15.8 17.3 16.5 16.0 15.1
-------------------------------------------------------------------------------------
At Maximum of Range 23.4
At Supermax of Range 25.3
Price-Book Ratio P/B
- ----------------
At Minimum of Range 57.1%
---------------------------------------------------------------------------------------
At Midpoint of Range 61.5% 104.3 94.0 97.9 90.6 126.8 115.4
---------------------------------------------------------------------------------------
At Maximum of Range 65.4%
At Supermax of Range 69.1%
Price-Asset Ratio P/A
- -----------------
At Minimum of Range 12.7%
At Midpoint of Range 14.6%
----------------------------------------------------------------------------------------
At Maximum of Range 16.4% 16.4 14.1 18.1 17.9 13.8 13.1
----------------------------------------------------------------------------------------
At Supermax of Range 18.3%
Twelve Mo. Earnings Base Y $ 899,000
Period Ended December 31, 1998
Book Value B $ 23,157,000
As of December 31, 1998
Total Assets A $172,936,000
As of December 31, 1998
Return on Money (1) R 2.94%
Conversion Expense X $ 940,000
Underwriting Commission C 0.00%
Percentage Underwritten S 0.00%
Estimated Dividend
Dollar Amount DA $ 570,000
Yield DY 2.00%
ESOP Contributions P $2,280,000
RP Contributions I $1,140,000
ESOP Annual Expense E $ 97,280
RP Annual Contributions M $ 145,920
Cost of ESOP Borrowings F 0.00%
Charity Contribution CC $1,500,000
Tax Effect of Contribution TEC $ 510,000
After Tax Effect of Contri ATEC $ 990,000
(1) Assumes Proceeds can be reinvested at 4.60% and earnings taxed at a rate of 36.0 percent.
(2) Pro forma effect on capital includes $510,000 increase related to contribution to foundation.
</TABLE>
31
<PAGE>
FERGUSON & COMPANY
- ------------------
Exhibit VIII
Pro Forma Analysis Sheet
<TABLE>
<CAPTION>
Calculation of Estimated Value (V) at Midpoint Value (including foundation shares):
<S> <C> <C> <C>
1. V= P/A(A-X-P-I-CC) $ 28,500,000
--------------------
1-P/A(1-(CxS))
2. V= P/B(B-X-P-I-ATEC) $ 28,500,000
---------------------
1-P/B(1-(CxX))
3. V= P/E(Y-R(X+P+I+CC)-(E+M)) $ 28,500,000
--------------------------
1-P/E(R(1-(CxX))
</TABLE>
<TABLE>
<CAPTION>
Calculation of Shares Being Offered for Sale (excluding foundation shares):
Value
Estimated Value Per Share Total Shares Date
------------------------- ---------- -------------------- --------------
<S> <C> <C> <C>
$27,000,000 $15.00 1,800,000 12-Mar-99
</TABLE>
Range of Value
$27.0 million x 1.15 = $31.05 million or 2,070,000 shares at $15.00 per share
$27.0 million x 0.85 = $22.95 million or 1,530,000 shares at $15.00 per share
32
<PAGE>
FERGUSON & COMPANY Exhibit IX - Demographic Information
Key Economic Indicators
United States, North Carolina, Alamance County
<TABLE>
<CAPTION>
United North Alamance
Key Economic Indicator States Carolina County
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Population, 2003 Est. 283,104,612 8,097,713 126,029
1998 - 2003 Percent Change, Est. 4.77 7.28 5.56
Total Population, 1998 Est. 270,221,502 7,547,981 119,394
1990 - 98 Percent Change, Est. 8.65 13.87 10.33
Total Population, 1990 248,709,873 6,628,637 108,213
- -------------------------------------------------------------------------------------
Household Income, 2003 Est. 44,032 45,330 41,389
1998 - 2003 Percent Change, Est. 15.46 21.62 17.38
Household Income, 1998 Est. 38,135 37,271 35,260
- -------------------------------------------------------------------------------------
Per Capita Income, 1998 18,423 18,038 16,924
- -------------------------------------------------------------------------------------
Household Income Distribution-2003 Est. (%)
$15,000 and less 17 16 17
$15,000 - $25,000 14 15 16
$25,000 - $50,000 33 35 37
$50,000 - $100,000 27 27 25
$100,000 - $150,000 6 5 4
$150,000 and over 3 2 1
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Unemployment rate, December 1998 4.47 4.63 3.23
- -------------------------------------------------------------------------------------
Median Age of Population, 1998 Est. 35.1 35.2 37.7
Median Age of Population, 1990 32.9 33.1 35.6
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Average Housing Value, 1990 79,098 79,714 77,078
- -------------------------------------------------------------------------------------
Total Households, 2003 Est. 106,772,786 3,148,154 50,667
1998 - 2003 Percent Change, Est. 5.61 8.29 6.44
Total Households, 1998 101,102,128 2,907,228 47,600
1990 - 98 Percent Change, Est. 9.96 15.50 11.60
Total Households, 1990 91,947,410 2,517,026 42,652
- -------------------------------------------------------------------------------------
Total Housing Units, 1990 101,641,260 2,818,193 45,312
% Vacant 10.07 10.69 5.87
% Occupied 89.93 89.31 94.13
% By Owner 57.78 60.74 67.63
% By Renter 32.15 28.57 26.50
=====================================================================================
</TABLE>
Source: Scan/US, Inc. & CACI
33
<PAGE>
FERGUSON & COMPANY
- ------------------
Exhibit X - Appraisal Earnings Adjustments
($000's)
<TABLE>
<CAPTION>
<S> <C> <C>
Net income, year ended December 31, 1998 271
---------
Loan loss provision for the year 550
Estimated normal loan loss provision 188
---------
Add back excess loan loss provision 362
Add back non-recurring write-offs of obsolete
software and other fixed assets 288
Add back non-recurring charge for directors'
compensation plan 331
---------
Sub-total 981
Tax effect @ 36% 353
---------
Net adjustments 628
---------
Appraisal earnings 899
=========
</TABLE>
34
<PAGE>
First Community Financial Corporation
Stock Order Form
------------------------------------------------
Community Expiration Date for
Savings Bank, SSB Stock Order Forms:
708 South Church Street
Burlington, NC 27215 May , 1999
(336) 221-1503 12:00 Noon, Eastern Time
- --------------------------------------------------------------------------------
IMPORTANT--PLEASE NOTE: A properly completed original stock order
form must be used to subscribe for common stock. Faxes or copies of
this form may not be accepted. Please read the Stock Ownership Guide
and Stock Order Form Instructions as you complete this Form.
- --------------------------------------------------------------------------------
(1) Number of Shares Subscription Price (2) Total Payment Due
X $15.00 + $
---------------- ------------------
- --------------------------------------------------------------------------------
(3) Employee/Officer/Director Information
[_] Check here if you are a director, officer or employee of Community Savings
or a member of such person's immediate family.
- --------------------------------------------------------------------------------
(4) Method of Payment/Check
Enclosed is a check, bank draft or money order made payable to
First Community Financial Corporation in the amount of: $
--------------
No wire transfers will be accepted.
- --------------------------------------------------------------------------------
(5) Method of Payment/Withdrawal The undersigned authorizes withdrawal from the
following account(s) at Community Savings Bank. There is no penalty for early
withdrawal for purposes of this payment.
Account Number(s) Withdrawal
Amount(s)
-------------------------------------------
$
-------------------------------------------
$
-------------------------------------------
$
-------------------------------------------
Total Withdrawal Amount $
---------------
In order to subscribe for shares through an individual retirement
account ("IRA") at Community Savings Bank, you must contact the
Stock Information Center at Community Savings Bank no later
than April , 1999.
- --------------------------------------------------------------------------------
(6) Purchaser Information
a. [ ] Eligible Account Holder --Check here if you were a depositor of at least
$50.00 at Community Savings Bank on June 30,1997. Enter information below
for all deposit accounts that you had at Community Savings Bank on June
30, 1997.
b. [ ] Supplemental Eligible Account Holder -- Check here if you were a
depositor of at least $50.00 at Community Savings Bank on March 31, 1999
but are not an Eligible Account Holder. Enter information below for all
deposit accounts that you had at Community Savings Bank on
March 31, 1999.
c. [ ] Other Member -- Check here if you were a depositor on April 15, 1999, or
a borrower of Community Savings Bank with loans outstanding as of April
15, 1999, but are not an Eligible Account Holder or Supplemental Eligible
Account Holder. Enter information below for all deposit accounts that you
had at Community Savings Bank on April 15, 1999 and/or for all loans you
had with Community Savings Bank as of April 15, 1999.
ACCOUNT INFORMATION
----------------------------
. These account numbers correspond
to the preprinted account
registration in the top left hand
corner of this form.
----------------------------
. These may not be all of your
qualifying accounts.
. You must list any account
numbers from other stock order
forms you have received in the
mail and any other accounts that
you have, or have had ownership
in, at Community Savings Bank.
Account Title (Names on Accounts) Account Number(s)
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
. If you do not list all of your
accounts, you may not receive all
of the shares that you are
eligible for.
- --------------------------------------------------------------------------------
7. Stock Registration/Form of Stock Ownership
[ ] Individual
[ ] Individual Retirement Account (IRA)
[ ] Joint Tenants with right of survivorship
[ ] Corporation or Partnership
[ ] Tenants in Common
[ ] Uniform Transfer to Minors Act
[ ] Fiduciary (Under Agreement Dated ____, 19 )
[_] Other ________________
- --------------------------------------------------------------------------------
(8) Name(s) in which your stock is to be registered (Please print clearly)
- -----------------------------------------------------
Name(s) continued
- -----------------------------------------------------
Street Address
- -----------------------------------------------------
- -----------------------------------------------------
Telephone (Daytime) City State Zip Code
( )
------------------------ ---------------- ---------------- --------
Social Security No. or Tax ID No.
--------------------------------
If you would like order confirmation and stock allocation information delivered
to you via e-mail or facsimile, please fill in the box below with your complete
e-mail address or facsimile number. If no information is listed below, you will
be notified via the U.S. Mail.
E-Mail or Facsimile Number
- --------------------------
County of Residence
- --------------------------
- --------------------------------------------------------------------------------
(9) NASD Affiliation
[ ] Check]here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of
the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD member has a beneficial
interest. To comply with conditions under which an exemption from the NASD's
Interpretation With Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD Affiliation box, (i) not to sell,
transfer or hypothecate the stock for a period of 90 days following
issuance, and (ii) to report this subscription in writing to the applicable
NASD member within one day of payment therefor.
- --------------------------------------------------------------------------------
(10) Associate--Acting in Concert
[ ] Check]here and complete the reverse side of this Form, if you or any
associate (as defined on the reverse side of this Form) or persons acting
in concert with you have submitted other orders for shares in the offering.
- --------------------------------------------------------------------------------
(11) Acknowledgment
To be effective, this fully completed Stock Order Form and Form of
Certification must be actually received by Community Savings Bank, no
later than 12:00 noon, Eastern Time on June , 1999, unless extended;
otherwise this Stock Order Form and all subscription rights will be void.
Completed Stock Order Forms, together with the executed Form of
Certification and the required payment or withdrawal authorization, may be
delivered to Community Savings Bank or may be mailed to the address
indicated on the enclosed business reply envelope. All rights exercisable
hereunder are not transferable and shares purchased upon exercise of such
rights must be purchased for the account of the person exercising such
rights.
It is understood that this Stock Order Form will be accepted in accordance
with, and subject to, the terms and conditions of the Plan of Conversion
("Plan") of Community Savings Bank, as amended, described in the
accompanying Prospectus. If the Plan is not approved by the members of
Community Savings Bank at a Special Meeting to be held on June , 1999, or
any adjournment thereof, all orders will be canceled and funds received as
payment, with accrued interest, will be returned promptly.
The undersigned agrees that after receipt by Community Savings Bank, this
Stock Order Form may not be modified, withdrawn or canceled without
Community Savings Bank's consent, and if authorization to withdraw from
deposit accounts at Community Savings Bank has been given as payment for
shares, the amount authorized for withdrawal shall not otherwise be
available for withdrawal by the undersigned.
Under penalty of perjury, I certify that the Social Security or Tax ID
Number and the other information provided in this Stock Order Form are
true, correct and complete, that I am not subject to back-up withholding,
that I am purchasing only for my own account and that there is no
agreement or understanding regarding the transfer of my subscription
rights or the sale or transfer of these shares.
applicable regulations prohibit any person from transferring or entering
into any agreement directly or indirectly to transfer the legal or
beneficial ownership of subscription rights, or the underlying securities
to the account of another. Community Savings Bank and First Community
Financial Corporation. will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription
rights and will not honor orders known by them to involve such transfer. I
acknowledge that the common stock offered is not a savings or deposit
account and is not insured by the Savings Association Insurance Fund, the
Bank Insurance Fund, the Federal Deposit Insurance Corporation, or any
other government agency, may lose value and is not guaranteed by Community
Savings Bank or First Community Financial Corporation. I further
acknowledge receipt of the Prospectus at least 48 hours prior to delivery
of this Stock Order Form to Community Savings Bank.
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE
FORM OF CERTIFICATION ON THE REVERSE HEREOF.
Signature Date Signature Date OFFICE USE
----------------- -------- ----------------- -------- --------
Date
Received
------- -------
Batch # Order #
A SIGNED FORM OF CERTIFICATION MUST ACCOMPANY ALL STOCK ORDER FORMS
(SEE REVERSE SIDE)
<PAGE>
Item (6)a, b--(continued)
Account Title (Names Account Account Title (Names Account
on Accounts) Number(s) on Accounts) Number(s)
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
Item (10)--(continued) "Associate" is defined as (i) any corporation
or organization (other than Community Savings
List below all other orders Bank, First Community Financial Corporation
submitted by you or your or a majority-owned subsidiary of Community
Associates (as defined) or by Savings Bank or First Community Financial
persons acting in concert with Corporation) of which such person is an
you. officer or partner or is, directly or
indirectly, the beneficial owner of 10% or
Number of more of any class of equity securities, (ii)
Name(s) Listed on Shares any trust or other estate in which such
Other Stock Order Ordered person has a substantial beneficial interest
Forms or as to which such person serves as 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 Internal Revenue Code of
1986, as amended; and (iii) 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 of Community
Savings Bank or First Community Financial
Corporation or any of their subsidiaries.
A valid Stock Order Form must be signed and dated below and on the front of
this form.
- --------------------------------------------------------------------------------
CERTIFICATION
I/WE ACKNOWLEDGE THE COMMON STOCK OF FIRST COMMUNITY FINANCIAL CORPORATION
IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND IS NOT FEDERALLY INSURED, AND IS
NOT GUARANTEED BY COMMUNITY SAVINGS BANK, FIRST COMMUNITY FINANCIAL
CORPORATION OR BY THE FEDERAL GOVERNMENT. THE SECURITIES ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
If anyone asserts that the common stock is federally insured or guaranteed,
or is as safe as an insured deposit, I should call the Federal Deposit
Insurance Corporation Regional Director, Nancy E. Hall at (404) 817-1300.
I/We further certify that, before purchasing the common stock, no par
value, of First Community Financial Corporation, the proposed holding
company for Community Savings Bank, I/we received a Prospectus dated April
, 1999 (the "Prospectus"), which contains disclosure concerning the
nature of the common stock being offered and describes the following risks
involved in the investment under the heading "RISK FACTORS" beginning on
page 12 of the Prospectus.
1. After the conversion, First Community's return on equity
will be low compared to other companies, and this could
reduce the value of the common stock. .................... (page 13)
2. 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. ............................................... (page 13)
3. Increasing interest rates could reduce Community Savings'
earnings. ................................................ (page 14)
4. There is a limited market for the common stock which could
make it difficult to sell and negatively affect
the trading price. ....................................... (page 14)
5. The shares of common stock offered in the offerings are
not insured............................................... (page 15)
6. The costs associated with the employee stock ownership
plan will reduce First Community's earnings and
stockholders' equity. .................................... (page 15)
7. 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. ..................................... (page 15)
8. Establishment of the foundation will dilute the voting and
ownership interests of stockholders. ..................... (page 16)
9. The establishment of the foundation will reduce
earnings. ................................................ (page 16)
10. The contribution to the foundation may not be tax
deductible, which would further reduce earnings. ......... (page 16)
11. First Community's governing documents, regulatory
provisions and voting control of directors, officers and
employees, may prevent or discourage mergers, acquisitions
and other changes in control which might be favored by
some stockholders and may make it difficult to replace
existing management. ..................................... (page 16)
12. Agreements with employees may discourage mergers,
acquisitions and changes in management control which may
be favored by some stockholders. ......................... (page 17)
13. Subscribers may be taxed on subscription rights. ......... (page 18)
14. 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. ........................................ (page 18)
15. 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. ............................. (page 18)
16. First Community could issue additional shares to correct
errors in allocations which could dilute the ownership and
voting rights of stockholders. .......................... (page 18)
BY EXECUTING THIS CERTIFICATION, INVESTORS ARE NOT WAIVING ANY RIGHTS
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
Signature Date Signature Date
------------------------------------ --------------------------------------
Name (Please Print) Name (Please Print)
------------------------------------ --------------------------------------
<PAGE>
Subscription Rights
Special Notice
Any transfer of, or attempt to transfer, a subscription right to any other
person is illegal and subject to civil fines and/or penalties and even criminal
fines and/or penalties. The Bank intends to prosecute vigorously any transfer
of, or attempt to transfer, subscription rights that comes to its attention.
If you are (or have been already) contacted by anyone offering to give you
money to buy stock in exchange for transferring the stock to them later or to
share in any way proceeds upon the sale of the stock, or to transfer your
subscription rights in any other way, please call us immediately at (336) .
<PAGE>
[UP ARROW APPEARS HERE]
THIS IS YOUR PROXY CARD.
YOU MAY RECEIVE MORE THAN ONE PROXY CARD IN THIS PACKET OF MATERIAL.
PLEASE VOTE ALL PROXY CARDS RECEIVED.
A POSTAGE PRE-PAID ENVELOPE IS INCLUDED IN THIS
PACKET FOR YOUR CONVENIENCE.
THANK YOU.
<PAGE>
First Community Financial Corporation
Stock Order Form Instructions
- ------------------------------------------------------------------------------
Item 1--
. Fill in the number of shares that you wish to purchase.
. The minimum order is 30 shares. The maximum order for any person is 15,000
shares. The maximum order by persons exercising purchase rights as a result
of a single account is 15,000 shares in the aggregate. The maximum order by
any person, together with his associates and persons acting in concert with
such person, is 20,000 shares in the aggregate.
. First Community Financial Corporation and Community Savings Bank have the
right to reject the order of any subscriber who (i) submits false or
misleading information on a Stock Order Form or otherwise, (ii) attempts to
purchase shares in violation of the Plan or applicable law or (iii) fails to
cooperate with attempts to verify information with respect to subscription
rights.
. Failure to properly complete and return this Stock Order Form will result in
the loss of subscription rights.
Item 2--
. Multiply the shares ordered by $15 per share.
Item 3--
. Check the box if you are a director, officer or employee of Community
Savings Bank or are a member of such person's immediate family.
Item 4--
. You can pay for shares in cash (if delivered by you) or by check, bank draft
or money order made payable to First Community Financial Corporation.
. Funds earn interest at the current Community Savings Bank statement savings
rate until the offering is completed or terminated.
. Do not mail cash to purchase stock.
. Wire transfers will not be accepted as payment.
Item 5--
. If you plan to pay for your order by a withdrawal from a Community Savings
Bank deposit account, list the account number(s) and the amount of
withdrawal for each account.
. Your order will be returned if, on the date your order is received, the
accounts designated do not contain sufficient funds to complete your
purchase.
. There is no penalty for early withdrawals to use funds on deposit at
Community Savings Bank to pay for stock purchases.
. In order to use your Community Savings Bank IRA to order stock, you must
call the Stock Information Center before May , 1999 and complete all
required paperwork.
Item 6--
. Please check the appropriate box to tell us when you were a depositor of at
least $50.00 at Community Savings Bank.
. The preprinted account numbers correspond to the preprinted name and address
at the top of the order form.
. These may not be all of your qualifying accounts.
. You must make sure that every account you have ownership in or have had at
Community Savings Bank is listed.
. If you do not list all of your accounts, you may not receive all of the
shares you are eligible for.
Item 7--
. Please consult the Stock Ownership Guide below for help with these sections.
Item 8--
. The name and address for the stock registration should be the same as the
name and address in the preprinted section at the top of your Stock Order
Form.
Item 9--
. Please check the box if you are a member of the NASD or if this item
otherwise applies to you.
Item 10--
. Please check this box if any of your Associates (as defined on the back of
the Stock Order Form) or persons acting in concert with you have submitted
other orders for shares.
Item 11--
. Please sign and date the Stock Order Form where indicated and return it to
the address appearing on the front of this Stock Order Form.
. Review the Stock Order Form carefully, including the Acknowledgment, before
you sign.
. An additional signature is required only when payment is authorized from a
deposit account that requires multiple signatures to withdraw funds.
. If you have any remaining questions, or for assistance in completing your
Stock Order Form, please call the Stock Information Center at (336) 221-
1503.
- -------------------------------------------------------------------------------
Stock Ownership Guide
- ------------------------------------------------------------------------------
If you decide to subscribe for common stock, you will need to register your
common stock in one of the following ways. Please consult this guide when
completing items 7 and 8 of your Stock Order Form.
Individual
. Include the first name, middle initial and last name of the shareholder.
. Avoid the use of two initials.
. Omit titles such as "Mr." "Mrs." or "Dr."
Joint Tenants with Right of Survivorship
. Joint Tenant can be used to identify two or more owners.
. When stock is held by joint tenants, ownership passes automatically to the
surviving joint tenant (s) upon the death of any joint tenant.
. All parties must agree to the transfer or sale of shares held by joint
tenants.
. In order to subscribe as joint tenants, all tenants must appear together on
an eligible joint tenant account at Community Savings Bank.
Tenants in Common
. Tenants in common may be used to identify two or more owners.
. When stock is held by tenants in common, upon the death of one co-tenant,
ownership of the stock is held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant.
. All parties must agree to the transfer or sale of shares held by tenants in
common.
. In order to subscribe as tenants in common, all tenants must appear
together on an eligible tenants in common account at Community Savings
Bank.
Uniform Transfer to Minors
. Shares may be held in the name of a custodian for a minor under the Uniform
Transfer to Minors Acts of each state.
. There may be only one custodian and one minor designated on a stock
certificate.
. Example, shares held by John Doe as custodian for Susan Doe under the North
Carolina Uniform Transfer to Minors Act will be abbreviated: John Doe, CUST
Susan Doe UTMA, NC.
. Use the minor's social security number.
Fiduciaries
Information provided with respect to shares to be held in a fiduciary capacity
must contain the following:
. The name(s) of the fiduciary. If an individual, list the first name, middle
initial and last name. If a corporation, list the full corporate title. If
an individual and a corporation, list the corporation before the
individual.
. The fiduciary capacity, such as administrator, executor, trustee,
committee, etc.
. The date of the document governing the relationship.
. The name of the maker, donor or testator and the name of the beneficiary.
. An example of fiduciary ownership in the case of a trust is:
John Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe.
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