AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-8
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
---------------
WAKE FOREST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
U.S.A. 000-25999 56-2131079
(State or other jurisdiction of (SEC File No.) (I.R.S. Employer
incorporation or organization) Identification No.)
302 South Brooks Street
P.O. Box 707
Wake Forest, N.C. 27587-0707
(919) 556-5146
(Address, including Zip Code, of principal executive offices)
---------------
Wake Forest Federal Savings & Loan Association
1997 Stock Option Plan
Wake Forest Federal Savings & Loan Association
1997 Recognition and Retention Plan
(Full title of the Plans)
---------------
Mrs. Anna O. Sumerlin
President and Chief Executive Officer
Wake Forest Federal Savings & Loan Association
302 South Brooks Street
P.O. Box 707
Wake Forest, N.C. 27587-0707
(919) 556-5146
Copy to:
V. Gerard Comizio, Esq.
Thacher Proffitt & Wood
1700 Pennsylvania Avenue, N.W. Suite 800
Washington, D.C. 20006
(202) 347-8400
(Name and address, including Zip Code, telephone number and area code,
of agent for service)
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED(1) OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Title of Securities to be Registered (2) (2)
Common Stock, $0.01 par value 76,248 shares $12.938 $986,459.00 $275.00
====================================================================================================================================
</TABLE>
(1) Based on the total number of shares of common stock of Wake Forest Federal
Savings & Loan Association ("the Association") reserved for issuance upon
the exercise of options granted pursuant to the Wake Forest Federal Savings
& Loan Association 1997 Stock Option Plan (the "Option Plan") and the total
number of shares of common stock authorized for awards under the Wake Forest
Federal Savings & Loan Association 1997 Recognition and Retention Plan (the
"RRP"). There are 54,000 shares of common stock reserved for awards under
the Option Plan and 22,248 shares authorized for awards under the RRP
(collectively, the "Plans"). In addition to such shares, this registration
statement also covers an undetermined number of shares of common stock of
the Association that, by reason of certain events specified in the Plans,
may become issuable upon exercise of options through the application of
certain anti-dilution provisions.
(2) Estimated solely for purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933, pursuant to which a
total of 76,248 restricted shares and shares that may be acquired upon
exercise of options granted in the future are deemed to be offered at
$12.938 per share, the average of the daily bid and ask prices of common
stock of the Company on the OTC Bulletin Board at the close of trading on
July 27, 1999.
================================================================================
<PAGE>
PART I
INFORMATION REQUIRED IN THE SECTION 10(A) PROSPECTUS
ITEM 1. PLAN INFORMATION.
Not required to be filed with the Securities and Exchange Commission (the
"SEC").
ITEM 2. REGISTRANT INFORMATION AND EMPLOYEE PLAN ANNUAL INFORMATION.
Not required to be filed with the SEC.
Note: The document containing the information specified in this Part I
will be sent or given to employees as specified by Rule 428(b)(1) as promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Such
document need not be filed with the SEC either as part of this registration
statement or as prospectuses or prospectus supplements pursuant to Rule 424.
These documents and the documents incorporated by reference in this registration
statement pursuant to Item 3 of Part II of this form, taken together, constitute
a prospectus that meets the requirements of Section 10(a) of the Securities Act.
PART II
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE.
The following documents and information heretofore filed with the OTS
and/or the SEC by the Registrant are incorporated by reference in this
registration statement:
(1) the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1998, which was filed with the OTS pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(included as Exhibit 99.1);
(2) the description of the Registrant's common stock (the "Common Stock")
contained in the Registrant's Form 8-A which was filed with the SEC
pursuant to the Exchange Act;
(3) the Registrant's Quarterly Report on Form 10-QSB, which was filed
with the OTS pursuant to the Exchange Act for the quarter ended
December 31, 1998, (included as Exhibit 99.2);
(4) the Registrant's Quarterly Report on Form 10-QSB, which was filed
with the OTS pursuant to the Exchange Act for quarter ended March 31,
1999 (included as Exhibit 99.3).
All documents filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act after the date hereof and prior to the date of the
termination of the offering of the Common Stock offered hereby shall be deemed
to be incorporated by reference into this Registration Statement and to be a
part hereof from the date of filing of such documents. Any statement
<PAGE>
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Registration Statement to the extent that a statement contained herein or
in any document which is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Registration Statement.
The Registrant will provide without charge to each person to whom this
Prospectus is delivered, upon request of any such person, a copy of any or all
of the foregoing documents incorporated herein by reference (other than exhibits
to such documents). Written requests should be directed to Mr. Carlton E.
Chappell, Wake Forest Federal Savings & Loan Association, 302 South Brooks
Street, P.O. Box 707, Wake Forest, N.C. 27587-707. Telephone request may be
directed to Mr. Chappell at (919) 556-5146.
ITEM 4. DESCRIPTION OF SECURITIES.
Not applicable.
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL.
Not applicable.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
12 C.F.R. Section 545.121 of OTS Regulations sets forth the ability of a
federal savings & loan association to indemnify its officers and directors. This
section provides that a savings association shall indemnify any person against
whom an action is brought or threatened because that person is or was a
director, officer or employee of the association for: (1) any amount for which
that person become liable under a judgment if such action; and (2) reasonable
costs and expenses, including reasonable attorney's fees paid or incurred by
that person in defending or settling such action, or in enforcing his or her
rights under such section if he or she attains a favorable judgment in such
enforcement action.
Indemnification shall be made to such individuals if (1) final judgements
on the merits is in the individual's favor; or (2) in case of (i) settlement;
(ii) final judgement against the individual, or (iii) final judgement in the
individual's favor, other than on the merits, if a majority of the disinterested
directors determine that the individual was acting in good faith within the
scope of his or her employment or authority as he or she could have reasonable
perceived it under the circumstances and for a purpose her or she could
reasonably have believed under the circumstances was in the best interests of
the savings association or its members.
The section also provides that no indemnification may be made unless the
association gives the OTS 60 days notice of its intention to make such
indemnification.
In addition to providing indemnification, under OTS Regulations, a savings
association may obtain insurance to protect it and its officers, directors and
employees from potential
-2-
<PAGE>
losses arising from claims against any of the for alleged wrongful acts, or
wrongful acts, committed in their capacity as directors, officers or employees.
However, the savings association may not obtain insurance which provides for
payment of losses of any person incurred as a consequence of his or her willful
or criminal misconduct.
Section 545.121 of OTS regulations is subject to and qualified by 12 U.S.C
SS 1821(k) which provides in general that a director or officer of an insured
depository institution may be held personally liable for monetary damages by, on
behalf of, or at the request or direction of the Federal Deposit Insurance
Corporation in certain circumstances.
The Registrant's Bylaws provide that it shall indemnify every person who
acts on behalf of the Registrant, or serves as a director or officer of the
Registrant, provided that such person acted in good faith and in a manner that
he or she reasonable believed to be in, and not opposed to, the best interest of
the Registrant, and with respect to any criminal proceeding such person had no
reason to believe his or her conduct was unlawful. The Bylaws also provide that
such indemnification shall be to the fullest extent permitted under North
Carolina or federal law.
The Association is party to an Employment Agreement with Mrs. Anna O.
Sumerlin ("Senior Executive"). These Employment Agreements provide for the
Association to indemnify the Senior Executive to the fullest extent permitted
under federal law.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED.
Not applicable.
ITEM 8. EXHIBITS.
4.1 Wake Forest Federal Savings & Loan Association 1997 Stock Option
Plan
4.2 Wake Forest Federal Savings & Loan Association 1997 Recognition and
Retention Plan
5.1 Opinion of Thacher Proffitt & Wood, counsel for Registrant, as to
the legality of the securities being registered
23.1 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1 hereof)
23.2 Consent of McGladrey & Pullen, LLP
99.1 Form 10-KSB for the year ended September 30, 1998 filed with the
Office of Thrift Supervision
99.2 Form 10-QSB for the quarter ended December 31, 1998 filed with the
Office of Thrift Supervision
99.3 Form 10-QSB for the quarter ended March 31, 1999 Form 10-QSB filed
with the Office of Thrift Supervision
-3-
<PAGE>
ITEM 9. UNDERTAKINGS.
A. Rule 415 offering. If the small business issuer is registering
securities under Rule 415 of the Securities Act, the small business issuer will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-8 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Wake Forest, State of North Carolina, on this
21st day of June, 1999.
WAKE FOREST BANCSHARES, INC.
(Registrant)
By: /s/ Anna O. Sumerlin
-----------------------------
Anna O. Sumerlin
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Anna O. Sumerlin
- ------------------------- President and Chief Executive Officer June 21, 1999
Anna O. Sumerlin (Principal Executive Officer) and Director
/s/ Robert C. White
- ------------------------- Chief Financial Officer (Principal June 21, 1999
Robert C. White Financial Officer) and Director
/s/ Howard L. Brown
- ------------------------- Chairman of the Board and Director June 21, 1999
Howard L. Brown
/s/ R. W. Wilkinson, III
- ------------------------- Director and Vice-Chairman June 21, 1999
R.W. Wilkinson, III
/s/ Paul K. Brixhoff
- ------------------------- Director June 21, 1999
Paul K. Brixhoff
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John D. Lyon
- ------------------------- Director June 21, 1999
John D. Lyon
/s/ Harold R. Washington
- ------------------------- Director June 21, 1999
Harold R. Washington
/s/ William S. Wooten
- ------------------------- Director June 21, 1999
William S. Wooten
/s/ Leelan A. Woodlief
- ------------------------- Director June 21, 1999
Leelan A. Woodlief
/s/ Rodney M. Privette
- ------------------------- Director June 21, 1999
Rodney M. Privette
</TABLE>
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
4.1 Wake Forest Federal Savings & Loan Association 1997
Stock Option Plan
4.2 Wake Forest Federal Savings & Loan Association 1997
Recognition and Retention Plan
5.1 Opinion of Thacher Proffitt & Wood, counsel for
Registrant, as to the legality of the securities being
registered
23.1 Consent of Thacher Proffitt & Wood (included in Exhibit
5.1 hereof)
23.2 Consent of McGladrey & Pullen, LLP
99.1 Form 10-KSB for the year ended September 30, 1998 filed
with the Office of Thrift Supervision
99.2 Form 10-QSB for the quarter ended December 31, 1998
filed with the Office of Thrift Supervision
99.3 Form 10-QSB for the quarter ended March 31, 1999 Form
10-QSB filed with the Office of Thrift Supervision
EXHIBIT 4.1
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
1997 STOCK OPTION PLAN
------------------------------
Adopted November 21, 1996
Effective as of January 22, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
---------
PURPOSE
-------
Page
----
Section 1.1 General Purpose of the Plan...................................1
ARTICLE II
----------
DEFINITIONS
-----------
Section 2.1 Association...................................................1
Section 2.2 Board.........................................................1
Section 2.3 Change in Control of the Association..........................1
Section 2.4 Code..........................................................3
Section 2.5 Committee.....................................................3
Section 2.6 Disability....................................................3
Section 2.7 Disinterested Board Member....................................3
Section 2.8 Effective Date................................................3
Section 2.9 Eligible Individual...........................................3
Section 2.10 Eligible Director.............................................3
Section 2.11 Exchange Act..................................................3
Section 2.12 Exercise Price................................................4
Section 2.13 Fair Market Value.............................................4
Section 2.14 Incentive Stock Option........................................4
Section 2.15 Non-Qualified Stock Option....................................4
Section 2.16 Option........................................................4
Section 2.17 Option Period.................................................4
Section 2.18 Person........................................................4
Section 2.19 Plan..........................................................4
Section 2.20 Retirement....................................................5
Section 2.21 Service.......................................................5
Section 2.22 Share.........................................................5
Section 2.23 Termination for Cause.........................................5
ARTICLE III
-----------
ADMINISTRATION
--------------
Section 3.1 Committee.....................................................5
Section 3.2 Committee Action..............................................6
Section 3.3 Committee Responsibilities....................................6
(i)
<PAGE>
ARTICLE IV
----------
STOCK OPTIONS
-------------
Section 4.1 Available Shares...............................................6
Section 4.2 Grants to Eligible Individuals.................................7
Section 4.3 Grants to Eligible Directors...................................8
Section 4.4 Method of Exercise.............................................9
Section 4.5 Provisions Applicable to All Options..........................10
Section 4.6 Additional Provisions Relating to Incentive Stock Options.....11
Section 4.7 Required Regulatory Provisions................................12
ARTICLE V
---------
AMENDMENT AND TERMINATION
-------------------------
Section 5.1 Termination....................................................14
Section 5.2 Amendment......................................................14
Section 5.3 Adjustments in the Event of a Business Reorganization..........14
ARTICLE VI
----------
MISCELLANEOUS
-------------
Section 6.1 Status as an Employee Benefit Plan.............................15
Section 6.2 No Right to Continued Employment...............................15
Section 6.3 Construction of Language.......................................15
Section 6.4 Governing Law..................................................16
Section 6.5 Headings.......................................................16
Section 6.6 Non-Alienation of Benefits.....................................16
Section 6.7 Taxes..........................................................16
Section 6.8 Approval of Shareholders.......................................16
Section 6.9 Notices........................................................17
(ii)
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
----------------------------------------------
1997 STOCK OPTION PLAN
----------------------
ARTICLE I
---------
PURPOSE
-------
SECTION 1.1 GENERAL PURPOSE OF THE PLAN.
The purpose of the Plan is to promote the growth and profitability of the
Association, to provide certain key officers, employees and directors of the
Association and its affiliates with an incentive to achieve corporate
objectives, to attract and retain individuals of outstanding competence and to
provide such individuals with an equity interest in the Association.
ARTICLE II
----------
DEFINITIONS
-----------
The following definitions shall apply for the purposes of this Plan,
unless a different meaning is plainly indicated by the context:
SECTION 2.1 ASSOCIATION means Wake Forest Federal Savings & Loan
Association, a federally chartered savings institution, and any successor
thereto.
SECTION 2.2 BOARD means the Board of Directors of the Association.
SECTION 2.3 CHANGE IN CONTROL OF THE ASSOCIATION means any of the
following events:
(a) approval by the stockholders of the Association of a transaction
that would result in the reorganization, merger or consolidation of the
Association with one or more other persons, other than a transaction
following which:
(i) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51%
of the outstanding equity ownership interests in the Association; and
<PAGE>
(ii) at least 51% of the securities entitled to vote generally in
the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same relative
proportions by persons who, immediately prior to such transaction,
beneficially owned (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Association;
(b) the acquisition of all or substantially all of the assets of the
Association or beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 25% or more of the outstanding
securities of the Association entitled to vote generally in the election of
directors by any person or by any persons acting in concert, or approval by
the stockholders of the Association of any transaction which would result
in such an acquisition;
(c) a complete liquidation or dissolution of the Association, or
approval by the stockholders of the Association of a plan for such
liquidation or dissolution;
(d) the occurrence of any event if, immediately following such event,
at least 50% of the members of the Board of Directors of the Association do
not belong to any of the following groups:
(i) individuals who were members of the Board of Directors of the
Association on the effective date of this Plan; or
(ii) individuals who first became members of the Board of
Directors of the Association after the effective date of this Plan
either:
(A) upon election to serve as a member of the Board of
Directors of the Association by affirmative vote of
three-quarters of the members of such Board, or of a nominating
committee thereof, in office at the time of such first election;
or
(B) upon election by the stockholders of the Association to
serve as a member of the Board of Directors of the Association,
but only if nominated for election by affirmative vote of
three-quarters of the members of such Board, or of a nominating
committee thereof, in office at the time of such first
nomination;
provided, however, that such individual's election or nomination did
not result from an actual or threatened election contest (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents (within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the
-2-
<PAGE>
Exchange Act) other than by or on behalf of the Board of the
Association; or
(e) any event which would be described in section 2.3(a), (b), (c) or
(d) if the term "Wake Forest Bancorp, M.H.C." were substituted for the term
"the Association" therein.
In no event, however, shall a Change in Control of the Association be deemed to
have occurred as a result of any acquisition of securities or assets of the
Association by a parent or subsidiary of the Association or by any employee
benefit plan maintained by any of them. For purposes of this section 2.3, the
term "person" shall have the meaning assigned to it under sections 13(d)(3) or
14(d)(2) of the Exchange Act.
SECTION 2.4 CODE means the Internal Revenue Code of 1986 (including the
corresponding provisions of any succeeding law).
SECTION 2.5 COMMITTEE means the Committee described in section 3.1.
SECTION 2.6 DISABILITY means a condition of total incapacity, mental or
physical, for further performance of duty with the Association which the
Committee shall have determined, on the basis of competent medical evidence, is
likely to be permanent.
SECTION 2.7 DISINTERESTED BOARD MEMBER means a member of the Board who (a)
is not a current employee of the Association, (b) is not a former employee of
the Association who receives compensation for prior services (other than
benefits under a tax-qualified retirement plan) during the taxable year, (c) has
not been an officer of the Association, (d) does not receive remuneration from
the Association, either directly or indirectly, in any capacity other than as a
director and (d) is not currently and for a period of at least one year has not
been eligible for discretionary awards under any stock compensation plan of the
Association. The term Disinterested Board Member shall be interpreted in such
manner as shall be necessary to conform to the requirements of section 162(m) of
the Code and Rule 16b-3 promulgated under the Exchange Act.
SECTION 2.8 EFFECTIVE DATE means the date on which the stockholders of the
Association approve the Plan as contemplated by section 6.8.
SECTION 2.9 ELIGIBLE INDIVIDUAL means any individual whom the Committee
may determine to be a key officer or employee of the Association (or of any
subsidiary of the Association) and select to receive a grant of an Option
pursuant to the Plan.
SECTION 2.10 ELIGIBLE DIRECTOR means a member of the Board who is not also
an employee or an officer of the Association.
SECTION 2.11 EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended (including the corresponding provisions of any succeeding law).
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<PAGE>
SECTION 2.12 EXERCISE PRICE means the price per Share at which Shares
subject to an Option may be purchased upon exercise of the Option, determined in
accordance with section 4.2 with regard to Options granted to Eligible
Individuals and section 4.3 with regard to Options granted to Eligible
Directors.
SECTION 2.13 FAIR MARKET VALUE means, with respect to a Share on a
specified date:
(a) the final reported sales price on the date in question (or if
there is no reported sale on such date, on the last preceding date on which
any reported sale occurred) as reported in the principal consolidated
reporting system with respect to securities listed or admitted to trading
on the principal United States securities exchange on which the Shares are
listed or admitted to trading; or
(b) if the Shares are not listed or admitted to trading on any such
exchange, the closing bid quotation with respect to a Share on such date on
the National Association of Securities Dealers Automated Quotations System,
or, if no such quotation is provided, on another similar system, selected
by the Committee, then in use; or
(c) if sections 2.13(a) and (b) are not applicable, the fair market
value of a Share as the Committee may determine.
SECTION 2.14 INCENTIVE STOCK OPTION means a right to purchase Shares that
(a) is granted to an Eligible Individual, (b) is designated by the Committee to
be an Incentive Stock Option, and (c) that satisfies the requirements of section
422 of the Code.
SECTION 2.15 NON-QUALIFIED STOCK OPTION means a right to purchase Shares
that (a) is granted to an Eligible Director; or (b) is granted to an Eligible
Individual and is designated by the Committee to be a Non-Qualified Stock
Option, or (c) is granted to an Eligible Individual and does not satisfy the
requirements of section 422 of the Code.
SECTION 2.16 OPTION means either an Incentive Stock Option or a
Non-Qualified Stock Option.
SECTION 2.17 OPTION PERIOD means the period during which an Option may be
exercised, determined in accordance with section 4.2 with regard to Options
granted to Eligible Individuals and section 4.3 with regard to Options granted
to Eligible Directors.
SECTION 2.18 PERSON means an individual, a corporation, a bank, a savings
bank, a savings and loan association, a financial institution, a partnership, an
association, a joint-stock company, a trust, an estate, an unincorporated
organization and any other business organization or institution.
SECTION 2.19 PLAN means the Wake Forest Federal Savings & Loan Association
1997 Stock Option Plan, as amended from time to time.
-4-
<PAGE>
SECTION 2.20 RETIREMENT means retirement at the normal or early retirement
date as set forth in any applicable retirement plan of the Association.
SECTION 2.21 SERVICE means service for the Association (or any subsidiary
of the Association) as an employee in any capacity, service as a director or
emeritus director or advisory director of the Association, or, with respect to
any individual who is contractually bound by restrictive covenants against
competition or solicitation which operate to benefit the Association (or any
subsidiary of the Association), performance under such covenants.
SECTION 2.22 SHARE means a share of Common Stock, par value $.01 per
share, of the Association.
SECTION 2.23 TERMINATION FOR CAUSE means termination of employment with
the Association for personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final cease and desist order, in
each case as measured against standards generally prevailing at the relevant
time in the savings and community banking industry; provided, however, that such
employee shall not be deemed to have been discharged for cause unless and until
he shall have received a written notice of termination from the Board, which
notice of termination shall be given to such employee not later than five (5)
business days after the Board adopts, and shall be accompanied by, a resolution
duly approved by affirmative vote of a majority of the entire Board at a meeting
called and held for such purpose (which meeting shall be held not more than
fifteen (15) days after notice to the individual of the meeting), at which
meeting there shall be a reasonable opportunity for the employee to make oral
and written presentations to the members of the Board, on his own behalf, or
through a representative, who may be his legal counsel, to refute the grounds
for the proposed determination) finding that in the good faith opinion of the
Board grounds exist for discharging the individual for cause.
ARTICLE III
-----------
ADMINISTRATION
--------------
SECTION 3.1 COMMITTEE.
The Plan shall be administered by a Committee consisting of the members of
the Compensation Committee of the Association who are Disinterested Board
Members. If fewer than two members of the Compensation Committee of the
Association are Disinterested Board Members, then the Board shall appoint to the
Committee such additional Disinterested Board Members as shall be necessary to
provide for a Committee consisting of at least two Disinterested Board Members.
-5-
<PAGE>
SECTION 3.2 COMMITTEE ACTION.
The Committee shall hold such meetings, and may make such administrative
rules and regulations, as it may deem proper. A majority of the members of the
Committee shall constitute a quorum, and the action of a majority of the members
of the Committee present at a meeting at which a quorum is present, as well as
actions taken pursuant to the unanimous written consent of all of the members of
the Committee without holding a meeting, shall be deemed to be actions of the
Committee. All actions of the Committee shall be final and conclusive and shall
be binding upon the Association and all other interested parties. Any Person
dealing with the Committee shall be fully protected in relying upon any written
notice, instruction, direction or other communication signed by the secretary of
the Committee and one member of the Committee, by two members of the Committee
or by a representative of the Committee authorized to sign the same in its
behalf.
SECTION 3.3 COMMITTEE RESPONSIBILITIES.
Subject to the terms and conditions of the Plan and such limitations as
may be imposed from time to time by the Board, the Committee shall be
responsible for the overall management and administration of the Plan and shall
have such authority as shall be necessary or appropriate in order to carry out
its responsibilities, including, without limitation, the authority:
(a) to interpret and construe the Plan, and to determine all questions
that may arise under the Plan as to eligibility for participation in the
Plan, the number of Shares subject to the Options, if any, to be granted,
and the terms and conditions thereof;
(b) to adopt rules and regulations and to prescribe forms for the
operation and administration of the Plan; and
(c) to take any other action not inconsistent with the provisions of
the Plan that it may deem necessary or appropriate.
ARTICLE IV
----------
STOCK OPTIONS
-------------
SECTION 4.1 AVAILABLE SHARES.
Subject to section 5.3, the maximum aggregate number of Shares with
respect to which Options may be granted at any time shall be equal to the excess
of:
(a) 54,000 Shares; over
(b) the sum of:
-6-
<PAGE>
(i) the number of Shares with respect to which previously granted
Options may then or may in the future be exercised; plus
(ii) the number of Shares with respect to which previously
granted Options have been exercised.
For purposes of this section 4.1, an Option shall not be considered as having
been exercised to the extent that such Option terminates by reason other than
the purchase of the related Shares. In no event shall more than a cumulative
total of 16,200 Shares be issued under Options granted to Eligible Directors
hereunder.
SECTION 4.2 GRANTS TO ELIGIBLE INDIVIDUALS.
(a) Subject to section 4.7 and such limitations as the Board may from
time to time impose, the number of Shares as to which an Eligible
Individual may be granted Options shall be determined by the Committee, in
its discretion.
(b) The price per Share at which an Option granted to an Eligible
Individual may be exercised shall be determined by the Committee, in its
discretion; provided, however, that the Exercise Price shall not be less
than the Fair Market Value of a Share on the date on which the Option is
granted.
(c) Subject to section 4.7, the Option Period during which an Option
granted to an Eligible Individual may be exercised shall commence on the
date specified by the Committee in the Option agreement and shall expire on
the date specified in the Option agreement or, if no date is specified, on
the earliest of:
(i) the close of business on the last day of the three-month
period commencing on the date of the Eligible Individual's termination
of employment with the Association (and all parents, subsidiaries and
affiliates thereof), other than on account of death or Disability,
Retirement or a Termination for Cause;
(ii) the close of business on the last day of the one-year period
commencing on the date of the Eligible Individual's termination of
employment with the Association (and all parents, subsidiaries and
affiliates thereof) due to death, Disability or Retirement;
(iii) the date and time when the Eligible Individual ceases to be
an employee of the Association (and all parents, subsidiaries and
affiliates thereof) due to a Termination for Cause; and
(iv) the last day of the ten-year period commencing on the date
on which the Option was granted.
-7-
<PAGE>
SECTION 4.3 GRANTS TO ELIGIBLE DIRECTORS.
(a) On the Effective Date, each Person who is then an Eligible
Director shall be granted an Option to purchase the number of Shares
specified for him or her in Column II of Table I attached hereto.
(b) Any Option granted under this section 4.3 shall be evidenced by a
written agreement which shall specify the number of Shares covered by the
Option, the Exercise Price for the Shares subject to the Option, and the
Option Period, all as determined pursuant to this section 4.3. The Option
agreement shall also set forth specifically or incorporate by reference the
applicable provisions of the Plan.
(c) The price per Share at which an Option granted to an Eligible
Director under this section 4.3 may be exercised shall be the Fair Market
Value of a Share on the date on which the Option is granted.
(d) Subject to section 4.3(e), the Option Period during which an
Option granted to an Eligible Director under this section 4.3 may be
exercised shall commence on the date the Option is granted and shall expire
on the earlier of:
(i) removal for cause in accordance with the Association's
bylaws; or
(ii) the last day of the ten-year period commencing on the date
on which the Option was granted.
(e) During the Option Period, the maximum number of Shares as to which
an outstanding Option granted pursuant to section 4.3(a) may be exercised
shall be as follows:
(i) prior to the first anniversary of the Effective Date, the
Option shall not be exercisable;
(ii) on and after the first anniversary, but prior to the second
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of twenty percent (20%) of the Shares subject to the Option
when granted;
(iii) on and after the second anniversary, but prior to the third
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of forty percent (40%) of the Shares subject to the Option
when granted, including in such forty percent (40%) any optioned
Shares purchased prior to such second anniversary;
(iv) on and after the third anniversary, but prior to the fourth
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of sixty percent (60%) of the Shares subject to the Option
when
-8-
<PAGE>
granted, including in such sixty percent (60%) any optioned Shares
purchased prior to such third anniversary;
(v) on and after the fourth anniversary, but prior to the fifth
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of eighty percent (80%) of the Shares subject to the Option
when granted, including in such eighty percent (80%) any optioned
Shares purchased prior to such fourth anniversary; and
(vi) on and after the fifth anniversary of the date on which the
Option is granted and for the remainder of the Option Period, the
Option may be exercised as to the entire number of optioned Shares not
theretofore purchased.
To the extent that any Option shall not have become exercisable prior to
the date on which the Option holder terminates Service with the Association
(and all parents, subsidiaries and affiliates thereof), such Option shall
not thereafter become exercisable; provided, however, that such an Option
shall become fully exercisable, and all optioned Shares not previously
purchased shall become available for purchase, on the date of the Option
holder's death or Disability while in Service.
SECTION 4.4 METHOD OF EXERCISE.
(a) Subject to the limitations of the Plan and the Option agreement,
an Option holder may, at any time during the Option Period, exercise his
right to purchase all or any part of the Shares to which the Option
relates; provided, however, that the minimum number of Shares which may be
purchased shall be 100, or, if less, the total number of Shares relating to
the Option that are then available for purchase. An Option holder shall
exercise an Option to purchase Shares by:
(i) giving written notice to the Committee, in such form and
manner as the Committee may prescribe, of his intent to exercise the
Option;
(ii) delivering to the Committee full payment, consistent with
section 4.4(b), for the Shares as to which the Option is to be
exercised; and
(iii) satisfying such other conditions as may be prescribed in
the Option agreement.
(b) The Exercise Price of Shares to be purchased upon exercise of any
Option shall be paid in full in cash (by certified or bank check or such
other instrument as the Association may accept) or, if and to the extent
permitted by the Committee, by one or more of the following: (i) in the
form of Shares already owned beneficially by the Option holder having an
aggregate Fair Market Value on the date the Option is exercised equal to
the aggregate Exercise Price to be paid; (ii) by requesting the Association
to cancel without payment Options outstanding to such Person for that
number of Shares whose aggregate Fair Market Value on the date of exercise,
when reduced by their aggregate Exercise Price, equals the aggregate
Exercise Price of the Options
-9-
<PAGE>
being exercised; or (iii) by a combination thereof; provided, however, that
an election under section 4.4(b)(ii) or (iii) shall be subject to the
conditions and limitations of Rule 16b-3 promulgated under the Exchange
Act. Payment for any Shares to be purchased upon exercise of an Option may
also be made by delivering a properly executed exercise notice to the
Association, together with a copy of irrevocable instructions to a broker
to deliver promptly to the Association the amount of sale or loan proceeds
to pay the purchase price. To facilitate the foregoing, the Association may
enter into agreements for coordinated procedures with one or more brokerage
firms.
(c) When the requirements of section 4.4(a) and (b) have been
satisfied, the Committee shall take such action as is necessary to cause
the issuance of a stock certificate evidencing the Option holder's
ownership of such Shares. The Person exercising the Option shall have no
right to vote or to receive dividends, nor have any other rights with
respect to the Shares, prior to the date as of which such Shares are
transferred to such Person on the stock transfer records of the
Association, and no adjustments shall be made for any dividends or other
rights for which the record date is prior to the date as of which such
transfer is effected, except as may be required under section 5.3.
SECTION 4.5 PROVISIONS APPLICABLE TO ALL OPTIONS.
(a) Any Option granted under the Plan shall be evidenced by a written
agreement which shall:
(i) designate the Option as either an Incentive Stock Option or a
Non-Qualified Stock Option;
(ii) specify the number of Shares covered by the Option;
(iii) specify the Exercise Price for the Shares subject to the
Option;
(iv) specify the Option Period;
(v) set forth specifically or incorporate by reference the
applicable provisions of the Plan; and
(vi) contain such other terms and conditions not inconsistent
with the Plan as the Committee may, in its discretion, prescribe.
(b) An Option by its terms shall not be transferable by the Option
holder other than by will or by the laws of descent and distribution, and
shall be exercisable, during the lifetime of the Option holder, only by the
Option holder; provided, however, that notwithstanding any provisions of
this Plan to the contrary, and if permitted by the Committee, an option
which has become exercisable and which is not an Incentive Stock Option may
be transferred by, and only by, the person to whom the Option was
originally granted to (i) one or more of his spouse, children and
grandchildren, or (ii) one or more trusts for the benefit of himself and/or
one or more of the foregoing individuals. Any such transfer shall be
effected by written notice to the
-10-
<PAGE>
Association given in such form and manner as the Committee may prescribe and
shall be recognized only if such notice is received by the Association prior to
the death of the person giving it. Thereafter, the transferee shall have, with
respect to such Option, all of the rights, privileges and obligations which
would attach thereunder to the transferor if the Option were issued to such
transferor. If a privilege of the Option depends on the life, employment or
other status of the transferor, such privilege of the Option for the transferee
shall continue to depend on the life, employment or other status of the
transferor. The Committee shall have full and exclusive authority to interpret
and apply the provisions of this Plan to transferees to the extent not
specifically described herein.
(c) The Association's obligation to deliver Shares with respect to an
Option shall, if the Committee so requests, be conditioned upon the receipt
of a representation as to the investment intention of the Option holder to
whom such Shares are to be delivered, in such form as the Committee shall
determine to be necessary or advisable to comply with the provisions of
applicable federal, state or local law. It may be provided that any such
representation shall become inoperative upon a registration of the Shares
or upon the occurrence of any other event eliminating the necessity of such
representation. The Association shall not be required to deliver any Shares
under the Plan prior to (i) the admission of such Shares to listing on any
stock exchange on which Shares may then be listed, or (ii) the completion
of such registration or other qualification under any state or federal law,
rule or regulation as the Committee shall determine to be necessary or
advisable.
SECTION 4.6 ADDITIONAL PROVISIONS RELATING TO INCENTIVE STOCK OPTIONS.
In addition to the limitations of section 4.6, an Option designated by the
Committee to be an Incentive Stock Option shall be subject to the following
additional provisions:
(a) If, for any calendar year, the sum of (i) plus (ii) exceeds
$100,000, where (i) equals the Fair Market Value (determined as of the date
of the grant) of Shares subject to an Option intended to be an Incentive
Stock Option which first become available for purchase during such calendar
year, and (ii) equals the Fair Market Value (determined as of the date of
grant) of Shares subject to any other options intended to be Incentive
Stock Options and previously granted to the same Eligible Individual which
first become exercisable in such calendar year, then that number of Shares
optioned which causes the sum of (i) and (ii) to exceed $100,000 shall be
deemed to be Shares optioned pursuant to a Non-Qualified Stock Option or
Non-Qualified Stock Options, with the same terms as the Option or Options
intended to be an Incentive Stock Option.
(b) The Exercise Price of an Incentive Stock Option granted to an
Eligible Individual who, at the time the Option is granted, owns Shares
comprising more than 10% of the total combined voting power of all classes
of stock of the Association shall not be less than 110% of the Fair Market
Value of a Share, and if an Option designated as an Incentive Stock Option
shall be granted at an Exercise
-11-
<PAGE>
Price that does not satisfy this requirement, the designated Exercise Price
shall be observed and the Option shall be treated as a Non-Qualified Stock
Option.
(c) The Option Period of an Incentive Stock Option granted to an
Eligible Individual who, at the time the Option is granted, owns Shares
comprising more than 10% of the total combined voting power of all classes
of stock of the Association, shall expire no later than the fifth
anniversary of the date on which the Option was granted, and if an Option
designated as an Incentive Stock Option shall be granted for an Option
Period that does not satisfy this requirement, the designated Option Period
shall be observed and the Option shall be treated as a Non-Qualified Stock
Option.
(d) An Incentive Stock Option that is exercised during its designated
Option Period but more than (i) three (3) months after the termination of
employment with the Association (other than on account of disability within
the meaning of section 22(e)(3) of the Code or death) of the Eligible
Individual to whom it was granted; and (ii) one (1) year after such
individual's termination of employment with the Association due to
disability (within the meaning of section 22(e)(3) of the Code); may be
exercised in accordance with the terms but shall be treated as a
Non-Qualified Stock Option.
(e) Except with the prior written approval of the Committee, no
individual shall dispose of Shares acquired pursuant to the exercise of an
Incentive Stock Option until after the later of (i) the second anniversary
of the date on which the Incentive Stock Option was granted, or (ii) the
first anniversary of the date on which the Shares were acquired.
SECTION 4.7 REQUIRED REGULATORY PROVISIONS.
Notwithstanding anything contained herein to the contrary:
(a) No Option shall be granted under the Plan prior to the date on
which the Plan is approved by the requisite vote of holders of Shares.
(b) No Eligible Individual may be granted Options to purchase more
than 13,500 Shares.
(c) Each Option granted hereunder shall become exercisable as follows,
unless a less rapid schedule is prescribed by the Committee when the Option
is granted:
(i) prior to the first anniversary of the Effective date, the
Option shall not be exercisable;
-12-
<PAGE>
(ii) on and after the first anniversary, but prior to the second
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of twenty percent (20%) of the Shares subject to the Option
when granted;
(iii) on and after the second anniversary, but prior to the third
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of forty percent (40%) of the Shares subject to the Option
when granted, including in such forty percent (40%) any optioned
Shares purchased prior to such second anniversary;
(iv) on and after the third anniversary, but prior to the fourth
anniversary, of the date Effective Date, the Option may be exercised
as to a maximum of sixty percent (60%) of the Shares subject to the
Option when granted, including in such sixty percent (60%) any
optioned Shares purchased prior to such third anniversary;
(v) on and after the fourth anniversary, but prior to the fifth
anniversary, of the Effective Date, the Option may be exercised as to
a maximum of eighty percent (80%) of the Shares subject to the Option
when granted, including in such eighty percent (80%) any optioned
Shares purchased prior to such fourth anniversary; and
(vi) on and after the fifth anniversary of the Effective Date and
for the remainder of the Option Period, the Option may be exercised as
to the entire number of optioned Shares not theretofore purchased.
To the extent that any Option shall not have become exercisable prior to
the date on which the Option holder terminates Service with the
Association, such Option shall not thereafter become exercisable; provided,
however, that such an Option shall become fully exercisable, and all
optioned Shares not previously purchased shall become available for
purchase, on the date of the Option holder's death or Disability while in
Service.
(d) The Exercise Period of any Option granted hereunder, whether or
not previously vested, shall be suspended as of the time and date at which
the Option holder has received notice from the Board that his or her
employment is subject to a possible Termination for Cause. Such suspension
shall remain in effect until the Option holder receives official notice
from the Board that he or she has been cleared of any possible Termination
for Cause, at which time, the original Exercise Period shall be reinstated
without any adjustment for the intervening suspended period.
(e) No Option granted hereunder, whether or not previously vested,
shall be exercised after the time and date at which the Option holder's
employment with the Association is terminated in a Termination for Cause.
-13-
<PAGE>
ARTICLE V
---------
AMENDMENT AND TERMINATION
-------------------------
SECTION 5.1 TERMINATION.
The Board may suspend or terminate the Plan in whole or in part at any
time prior to the tenth anniversary of the Effective Date by giving written
notice of such suspension or termination to the Committee. Unless sooner
terminated, the Plan shall terminate automatically on the day preceding the
tenth anniversary of the Effective Date. In the event of any suspension or
termination of the Plan, all Options theretofore granted under the Plan that are
outstanding on the date of such suspension or termination of the Plan shall
remain outstanding and exercisable for the period and on the terms and
conditions set forth in the Option agreements evidencing such Options.
SECTION 5.2 AMENDMENT.
The Board may amend or revise the Plan in whole or in part at any time;
provided, however, that if the amendment or revision:
(a) materially increases the benefits accruing under the Plan;
(b) materially increases the number of Shares which may be issued
under the Plan; or
(c) materially modifies the requirements as to eligibility for Options
under the Plan;
such amendment or revision shall be subject to approval by the shareholders of
the Association; and provided, further, that no amendment required to comply
with or conform to any condition imposed under section 162(m) of the Code on
federal income tax deductions allowable to the Association in respect of the
Plan shall require such approval.
SECTION 5.3 ADJUSTMENTS IN THE EVENT OF A BUSINESS REORGANIZATION.
(a) In the event of any merger, consolidation, or other business
reorganization in which the Association is the surviving entity, and in the
event of any stock split, stock dividend or other event generally affecting
the number of Shares held by each Person who is then a holder of record of
Shares, the number of Shares covered by each outstanding Option and the
number of Shares available pursuant to section 4.1 shall be adjusted to
account for such event. Such adjustment shall be effected by multiplying
such number of Shares by an amount equal to the number of Shares that would
be owned after such event by a Person who, immediately prior to such event,
was the holder of record of one Share, and the Exercise Price of the
Options shall be adjusted by
-14-
<PAGE>
dividing the Exercise Price by such number of Shares; provided, however,
that the Committee may, in its discretion, establish another appropriate
method of adjustment.
(b) In the event of any merger, consolidation, or other business
reorganization in which the Association is not the surviving entity, any
Options granted under the Plan which remain outstanding may be cancelled as
of the effective date of such merger, consolidation, business
reorganization, liquidation or sale by the Committee upon 30 days' written
notice to the Option holder; provided, however, that on or as soon as
practicable following the date of cancellation, each Option holder shall
receive a monetary payment in such amount, or other property of such kind
and value, as the Committee determines in good faith to be equivalent in
value to the Options that have been cancelled and that had become
exercisable prior to such cancellation.
ARTICLE VI
----------
MISCELLANEOUS
-------------
SECTION 6.1 STATUS AS AN EMPLOYEE BENEFIT PLAN.
This Plan is not intended to satisfy the requirements for qualification
under section 401(a) of the Code or to satisfy the definitional requirements for
an "employee benefit plan" under section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended. It is intended to be a non-qualified incentive
compensation program that is exempt from the regulatory requirements of the
Employee Retirement Income Security Act of 1974, as amended. The Plan shall be
construed and administered so as to effectuate this intent.
SECTION 6.2 NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the establishment of the Plan nor any provisions of the Plan nor
any action of the Board or the Committee with respect to the Plan shall be held
or construed to confer upon any Eligible Individual any right to a continuation
of employment by the Association or upon any Eligible Director any right to a
continuation of his position as a director of the Association. The Association
reserves the right to dismiss any Eligible Individual or remove any Eligible
Director or otherwise deal with any Eligible Individual or Eligible Director to
the same extent that it could if the Plan had not been adopted.
SECTION 6.3 CONSTRUCTION OF LANGUAGE.
Whenever appropriate in the Plan, words used in the singular may be read
in the plural, words used in the plural may be read in the singular, and words
importing the masculine
-15-
<PAGE>
gender may be read as referring equally to the feminine or the neuter. Any
reference to an Article or section number shall refer to an Article or section
of this Plan unless otherwise indicated.
SECTION 6.4 GOVERNING LAW.
The Plan shall be construed, administered and enforced according to the
federal laws of the United States of America and, in the absence of controlling
federal law, according to the internal laws of the State of North Carolina
applicable to contracts entered into between citizens and residents of the State
of North Carolina to be performed wholly within the borders of such State.
SECTION 6.5 HEADINGS.
The headings of Articles and sections are included solely for convenience
of reference. If there is any conflict between such headings and the text of the
Plan, the text shall control.
SECTION 6.6 NON-ALIENATION OF BENEFITS.
The right to receive a benefit under the Plan shall not be subject in any
manner to anticipation, alienation or assignment, nor shall such right be liable
for or subject to debts, contracts, liabilities, engagements or torts.
SECTION 6.7 TAXES.
The Association shall have the right to deduct from all amounts paid by
the Association in cash with respect to an Option under the Plan any taxes
required by law to be withheld with respect to such Option. Where any Person is
entitled to receive Shares pursuant to the exercise of an Option, the
Association shall have the right to require such Person to pay the Association
the amount of any tax which the Association is required to withhold with respect
to such Shares, or, in lieu thereof, to retain, or to sell without notice, a
sufficient number of Shares to cover the amount required to be withheld.
SECTION 6.8 APPROVAL OF SHAREHOLDERS.
The Plan and all Options granted hereunder shall be conditioned on the
approval of the Plan by the majority of the votes eligible to be cast by holders
of Shares of the Association (other than Wake Forest Bancorp, M.H.C.) at an
annual or special meeting of the holders of Shares held no earlier than October
3, 1996. No Option under the Plan shall be granted, nor shall any such Option be
exercised or any Shares issued or purchased, prior to such approval.
-16-
<PAGE>
SECTION 6.9 NOTICES.
Any communication required or permitted to be given under the Plan,
including any notice, direction, designation, comment, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below, or at such other address as one such
party may by written notice specify to the other party:
(a) If to the Committee:
Wake Forest Federal Savings & Loan Association 302 South Brooks
Street, P.O. Box 707 Wake Forest, North Carolina 27588-0707
Attention: Stock Option Committee
(b) If to an Option holder, to the Option holder's address as shown in
the Association's personnel records.
-17-
<PAGE>
TABLE 1
===============================================================================
I II
- -------------------------------------------------------------------------------
Howard Brown 2,315
Leelan Woodlief 2,315
John Lyon 2,314
Paul Brixhoff 2,314
Harold Washington 2,314
Watson Wilkinson 2,314
Fred Sandusky 2,314
===============================================================================
-18-
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
1997 RECOGNITION AND RETENTION PLAN
------------------------------
Adopted on November 21, 1996
Effective as of January 22, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
---------
PURPOSE
-------
Section 1.1 General Purpose of the Plan.................................1
ARTICLE II
----------
DEFINITIONS
-----------
Section 2.1 Association.................................................1
Section 2.2 Award.......................................................1
Section 2.3 Award Date..................................................1
Section 2.4 Beneficiary.................................................1
Section 2.5 Board.......................................................1
Section 2.6 Change in Control of the Association........................2
Section 2.7 Code........................................................3
Section 2.8 Committee...................................................3
Section 2.9 Disability..................................................3
Section 2.10 Disinterested Board Member..................................3
Section 2.11 Effective Date..............................................4
Section 2.12 Eligible Director...........................................4
Section 2.13 Eligible Individual.........................................4
Section 2.14 Exchange Act................................................4
Section 2.15 Person......................................................4
Section 2.16 Plan........................................................4
Section 2.17 Service.....................................................4
Section 2.18 Share.......................................................4
Section 2.19 Trust.......................................................4
Section 2.20 Trust Agreement.............................................4
Section 2.21 Trust Fund..................................................4
Section 2.22 Trustee.....................................................4
ARTICLE III
-----------
SHARES AVAILABLE UNDER PLAN
---------------------------
Section 3.1 Shares Available Under Plan.................................5
(i)
<PAGE>
Page
----
ARTICLE IV
----------
ADMINISTRATION
--------------
Section 4.1 Committee...................................................5
Section 4.2 Committee Action............................................5
Section 4.3 Committee Responsibilities..................................6
ARTICLE V
---------
THE TRUST FUND
--------------
Section 5.1 Contributions...............................................6
Section 5.2 The Trust Fund..............................................6
Section 5.3 Investments.................................................7
ARTICLE VI
----------
AWARDS
------
Section 6.1 Awards to Eligible Directors................................7
Section 6.2 To Eligible Individuals.....................................7
Section 6.3 Awards in General...........................................7
Section 6.4 Share Allocations...........................................8
Section 6.5 Dividend Rights.............................................8
Section 6.6 Voting Rights...............................................8
Section 6.7 Tender Offers...............................................8
ARTICLE VII
-----------
VESTING AND DISTRIBUTION OF SHARES
----------------------------------
Section 7.1 Vesting of Shares Granted to Eligible Directors.............8
Section 7.2 Vesting of Shares Granted to Eligible Individuals...........9
Section 7.3 Designation of Beneficiary..................................9
Section 7.4 Manner of Distribution.....................................10
Section 7.5 Taxes......................................................10
(ii)
<PAGE>
Page
----
ARTICLE VIII
------------
AMENDMENT AND TERMINATION
-------------------------
Section 8.1 Termination................................................11
Section 8.2 Amendment..................................................11
Section 8.3 Adjustments in the Event of a Business Reorganization......11
ARTICLE IX
----------
MISCELLANEOUS
-------------
Section 9.1 Status as an Employee Benefit Plan.........................12
Section 9.2 No Right to Continued Employment...........................12
Section 9.3 Construction of Language...................................12
Section 9.4 Governing Law..............................................12
Section 9.5 Headings...................................................13
Section 9.6 Non-Alienation of Benefits.................................13
Section 9.7 Taxes......................................................13
Section 9.8 Approval of Shareholders...................................13
Section 9.9 Notices....................................................13
(iii)
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
----------------------------------------------
1997 RECOGNITION AND RETENTION PLAN
-----------------------------------
ARTICLE I
---------
PURPOSE
-------
SECTION 1.1 GENERAL PURPOSE OF THE PLAN.
The purpose of the Plan is to promote the growth and profitability of the
Association and to provide eligible directors, certain key officers and
employees of the Association and its affiliates with an incentive to achieve
corporate objectives, to attract and retain directors, key officers and
employees of outstanding competence and to provide such directors, officers and
employees with an equity interest in the Association.
ARTICLE II
----------
DEFINITIONS
-----------
The following definitions shall apply for the purposes of this Plan,
unless a different meaning is plainly indicated by the context:
SECTION 2.1 ASSOCIATION means Wake Forest Federal Savings & Loan
Association, a federally chartered stock savings bank, and any successor
thereto.
SECTION 2.2 AWARD means a grant of Shares to an Eligible Director or
Eligible Individual.
SECTION 2.3 AWARD DATE means, with respect to a particular Award, the date
specified by the Committee in the notice of the Award issued to the Eligible
Director or Eligible Individual by the Committee.
SECTION 2.4 BENEFICIARY means the Person designated by an Eligible
Director or Eligible Individual pursuant to section 7.3 to receive distribution
of any Shares available for distribution to such Eligible Director or Eligible
Individual, in the event such Eligible Director or Eligible Individual dies
prior to receiving distribution of such Shares.
SECTION 2.5 BOARD means the Board of Directors of the Association.
<PAGE>
SECTION 2.6 CHANGE IN CONTROL OF THE ASSOCIATION means any of the
following events:
(a) approval by the stockholders of the Association of a
transaction that would result in the reorganization, merger or
consolidation of the Association with one or more other persons, other
than a transaction following which:
(i) at least 51% of the equity ownership interests of
the entity resulting from such transaction are beneficially
owned (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) in substantially the same relative proportions
by persons who, immediately prior to such transaction,
beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) at least 51% of the
outstanding equity ownership interests in the Association; and
(ii) at least 51% of the securities entitled to vote
generally in the election of directors of the entity resulting
from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Association;
(b) the acquisition of all or substantially all of the assets
of the Association or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of the
outstanding securities of the Association entitled to vote generally in
the election of directors by any person or by any persons acting in
concert, or approval by the stockholders of the Association of any
transaction which would result in such an acquisition;
(c) a complete liquidation or dissolution of the Association,
or approval by the stockholders of the Association of a plan for such
liquidation or dissolution;
(d) the occurrence of any event if, immediately following such
event, at least 50% of the members of the Board of Directors of the
Association do not belong to any of the following groups:
(i) individuals who were members of the Board of
Directors of the Association on the effective date of this
Plan; or
(ii) individuals who first became members of the
Board of Directors of the Association after the effective date
of this Plan either:
(A) upon election to serve as a member of
the Board of Directors of the Association by
affirmative vote of three-quarters of
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the members of such Board, or of a nominating
committee thereof, in office at the time of such
first election; or
(B) upon election by the stockholders of the
Association to serve as a member of the Board of
Directors of the Association, but only if nominated
for election by affirmative vote of three-quarters of
the members of such Board, or of a nominating
committee thereof, in office at the time of such
first nomination;
provided, however, that such individual's election or
nomination did not result from an actual or threatened
election contest (within the meaning of Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents
(within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf
of the Board of the Association; or
(e) any event which would be described in section 2.6(a), (b),
(c) or (d) if the term "Wake Forest Bancorp, M.H.C." were substituted
for the term "the Association" therein.
In no event, however, shall a Change in Control of the Association be deemed to
have occurred as a result of any acquisition of securities or assets of the
Association by a parent or subsidiary of the Association or by any employee
benefit plan maintained by any of them. For purposes of this section 2.6, the
term "person" shall have the meaning assigned to it under sections 13(d)(3) or
14(d)(2) of the Exchange Act.
SECTION 2.7 CODE means the Internal Revenue Code of 1986 (including the
corresponding provisions of any succeeding law).
SECTION 2.8 COMMITTEE means the Committee described in section 4.1.
SECTION 2.9 DISABILITY means a condition of total incapacity, mental or
physical, for further performance of duty with the Association which the
Committee shall have determined, on the basis of competent medical evidence, is
likely to be permanent.
SECTION 2.10 DISINTERESTED BOARD MEMBER means a member of the Board who
(a) is not a current employee of the Association or a subsidiary, (b) does not
receive remuneration from the Association or a subsidiary, either directly or
indirectly, in any capacity other than as a director and (c) does not possess an
interest in any other transaction, and is not engaged in a business
relationship, for which disclosure would be required pursuant to Item 404(a) or
(b) of the proxy solicitation rules of the Securities and Exchange Commission.
The term Disinterested Board Member shall be interpreted in such manner as shall
be necessary to conform to the requirements of Rule 16b-3 promulgated under the
Exchange Act.
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SECTION 2.11 EFFECTIVE DATE means the date on which the stockholders of
the Association approve the Plan as contemplated by section 9.8.
SECTION 2.12 ELIGIBLE DIRECTOR means a member of the Board of Directors of
the Association is not also an employee of the Association (or any parent,
subsidiary or affiliate thereof).
SECTION 2.13 ELIGIBLE INDIVIDUAL means any employee whom the Committee may
determine to be a key officer or employee of the Association (or of any
subsidiary thereof) and select to receive an Award pursuant to the Plan.
SECTION 2.14 EXCHANGE ACT means the Securities and Exchange Act of 1934,
as amended (including the corresponding provisions of any succeeding law).
SECTION 2.15 PERSON means an individual, a corporation, a bank, a savings
bank, a savings and loan association, a financial institution, a partnership, an
association, a joint-stock company, a trust, an estate, an unincorporated
organization and any other business organization or institution.
SECTION 2.16 PLAN means the Wake Forest Federal Savings & Loan Association
1996 Recognition and Retention Plan, as amended from time to time.
SECTION 2.17 SERVICE means service for the Association (or any subsidiary
of the Association) as an employee in any capacity, service as a director or
emeritus director or advisory director of the Association, or, with respect to
any individual who is contractually bound by restrictive covenants against
competition or solicitation which operate to benefit the Association (or any
subsidiary of the Association), performance under such covenants.
SECTION 2.18 SHARE means a share of common stock of Wake Forest Federal
Savings & Loan Association, par value $.01 per share.
SECTION 2.19 TRUST means the legal relationship created by the Trust
Agreement pursuant to which the Trustee holds the Trust Fund in trust. The Trust
may be referred to as the "Recognition and Retention Plan Trust of Wake Forest
Federal Savings & Loan Association."
SECTION 2.20 TRUST AGREEMENT means the agreement between Wake Forest
Federal Savings & Loan Association and the Trustee therein named or its
successor pursuant to which the Trust Fund shall be held in trust.
SECTION 2.21 TRUST FUND means the corpus (consisting of contributions paid
over to the Trustee, and investments thereof), and all earnings, appreciations
or additions thereof and thereto, held by the Trustee under the Trust Agreement
in accordance with the Plan, less any depreciation thereof and any payments made
therefrom pursuant to the Plan.
SECTION 2.22 TRUSTEE means the Trustee of the Trust Fund from time to time
in office. The Trustee shall serve as Trustee until it is removed or resigns
from office and is
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replaced by a successor Trustee or Trustees appointed by Wake Forest Federal
Savings & Loan Association.
ARTICLE III
-----------
SHARES AVAILABLE UNDER PLAN
---------------------------
SECTION 3.1 SHARES AVAILABLE UNDER PLAN.
The maximum number of Shares available for Awards under the Plan shall be
22,248. An aggregate maximum of 1,112 Shares may be granted in Awards to any
Eligible Director individually and a maximum of 6,674 Shares may be granted in
Awards to Eligible Directors in the aggregate. A maximum of 5,562 Shares may be
granted in Awards to any Eligible Individual.
ARTICLE IV
----------
ADMINISTRATION
--------------
SECTION 4.1 COMMITTEE.
The Plan shall be administered by the members of the Compensation
Committee of Wake Forest Federal Savings & Loan Association who are
Disinterested Board Members. If the Committee consists of fewer than two
Disinterested Board Members, then the Board shall appoint to the Committee such
additional Disinterested Board Members as shall be necessary to provide for a
Committee consisting of at least two Disinterested Board Members.
SECTION 4.2 COMMITTEE ACTION.
The Committee shall hold such meetings, and may make such administrative
rules and regulations, as it may deem proper. A majority of the members of the
Committee shall constitute a quorum, and the action of a majority of the members
of the Committee present at a meeting at which a quorum is present, as well as
actions taken pursuant to the unanimous written consent of all of the members of
the Committee without holding a meeting, shall be deemed to be actions of the
Committee. All actions of the Committee shall be final and conclusive and shall
be binding upon the Association and all other interested parties. Any Person
dealing with the Committee shall be fully protected in relying upon any written
notice, instruction, direction or other communication signed by the Secretary of
the Committee and one member of the Committee,
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by two members of the Committee or by a representative of the Committee
authorized to sign the same in its behalf.
SECTION 4.3 COMMITTEE RESPONSIBILITIES.
Subject to the terms and conditions of the Plan and such limitations as
may be imposed by the Board, the Committee shall be responsible for the overall
management and administration of the Plan and shall have such authority as shall
be necessary or appropriate in order to carry out its responsibilities,
including, without limitation, the authority:
(a) to interpret and construe the Plan, and to determine all
questions that may arise under the Plan as to eligibility for Awards
under the Plan, the amount of Shares, if any, to be granted pursuant to
an Award, and the terms and conditions of such Award;
(b) to adopt rules and regulations and to prescribe forms for
the operation and administration of the Plan; and
(c) to take any other action not inconsistent with the
provisions of the Plan that it may deem necessary or appropriate.
ARTICLE V
---------
THE TRUST FUND
--------------
SECTION 5.1 CONTRIBUTIONS.
Wake Forest Federal Savings & Loan Association shall contribute, or cause
to be contributed, to the Trust, from time to time, such amounts of money or
property as shall be deter mined by the Board, in its discretion. No
contributions by Eligible Directors or Eligible Employees shall be permitted.
SECTION 5.2 THE TRUST FUND.
The Trust Fund shall be held and invested under the Trust Agreement with
the Trustee. The provisions of the Trust Agreement shall include provisions
conferring powers on the Trustee as to investment, control and disbursement of
the Trust Fund, and such other provi sions not inconsistent with the Plan as may
be prescribed by or under the authority of the Board. No bond or security shall
be required of any Trustee at any time in office.
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<PAGE>
SECTION 5.3 INVESTMENTS.
The Trustee shall invest the Trust Fund in Shares and in such other
investments as may be permitted under the Trust Agreement, including savings
accounts, time or other interest bearing deposits in or other interest bearing
obligations of the Association, in such proportions as shall be determined by
the Committee; provided, however, that in no event shall the Trust Fund be used
to purchase more than 22,248 Shares. Notwithstanding the immediately preceding
sen tence, the Trustee may temporarily invest the Trust Fund in short-term
obligations of, or guaranteed by, the U.S. Government or an agency thereof, or
the Trustee may retain the Trust Fund uninvested or may sell assets of the Trust
Fund to provide amounts required for purposes of the Plan.
ARTICLE VI
----------
AWARDS
------
SECTION 6.1 AWARDS TO ELIGIBLE DIRECTORS.
On the Effective Date, each Person who is then an Eligible Director shall
be granted an Award of the number of Shares specified for him or her in Column
II of Table I attached hereto.
SECTION 6.2 TO ELIGIBLE INDIVIDUALS.
Subject to such limitations as the Board may from time to time impose, the
number of Shares as to which an Eligible Individual may be granted an Award
shall be determined by the Committee in its discretion.
SECTION 6.3 AWARDS IN GENERAL.
Any Award shall be evidenced by a written notice issued by the Committee
to the Eligible Director or Eligible Employee, which notice shall:
(a) specify the number of Shares covered by the Award;
(b) specify the Award Date;
(c) specify the dates on which such Shares shall become
available for distribution to the Eligible Director or Eligible
Individual; and
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<PAGE>
(d) contain such other terms and conditions not inconsistent
with the Plan as the Board may, in its discretion, prescribe.
SECTION 6.4 SHARE ALLOCATIONS.
Upon the grant of an Award to an Eligible Director or Eligible Individual,
the Committee shall notify the Trustee of the Award and of the number of Shares
subject to the Award. Thereafter, until such time as the Shares subject to such
Award become vested or are forfeited, the books and records of the Trustee shall
reflect that such number of Shares are being held for the benefit of the Award
recipient.
SECTION 6.5 DIVIDEND RIGHTS.
Any dividends or distributions declared and paid with respect to Shares
shall be held in the Trust Fund. If, as of the record date for such dividend or
distribution, the Shares with respect to which it is paid are allocated to an
Eligible Director or Eligible Employee in connection with an Award, the
dividends or distributions shall be similarly allocated to such Eligible
Director or Eligible Individual in connection with such Award and shall be held
for distribution or forfeiture in accordance with the terms and conditions of
the Award.
SECTION 6.6 VOTING RIGHTS.
All Shares held in the Trust Fund shall be voted by the Trustee on a pro
rata basis in proportion to the manner in which Shares held by all other holders
of Shares are voted.
SECTION 6.7 TENDER OFFERS.
With respect to Shares held in the Trust Fund, the Trustee shall respond
to any tender offer, exchange offer or other offer made to holders of Shares on
a pro rata basis in proportion to the manner in which all other holders of
Shares respond to such offer.
ARTICLE VII
-----------
VESTING AND DISTRIBUTION OF SHARES
----------------------------------
SECTION 7.1 VESTING OF SHARES GRANTED TO ELIGIBLE DIRECTORS.
The Shares subject to each Award granted to Eligible Directors under the
Plan shall become vested as follows: (i) twenty percent (20%) of such Shares
shall become vested upon the
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<PAGE>
February 1 following the first anniversary of the Effective Date; (ii) 20% of
such Shares shall become vested upon the February 1 following the second
anniversary of the Effective Date; (iii) 20% of such Shares shall become vested
upon the February 1 following the third anniversary of the Effective Date; (iv)
20% of such Shares shall become vested upon the February 1 following the fourth
anniversary of the Effective Date; and (v) 20% of such Shares shall become
vested upon the February 1 following the fifth anniversary of the Effective
Date; provided, however, that the Eligible Director has remained in Service
during the period beginning on the Effective Date and ending on the applicable
anniversary of the Effective Date; and provided, further, an Award shall become
100% vested upon the Award holder's death or Disability while in Service.
SECTION 7.2 VESTING OF SHARES GRANTED TO ELIGIBLE INDIVIDUALS.
Each Award to an Eligible Individual made under the Plan shall
become vested at the times and upon the conditions specified by the Committee in
the Award notice; provided, however, that:
(a) no Award shall become vested as to any of the Shares
covered thereby prior to the first anniversary of the Effective Date;
(b) no more than 20% of the Shares covered by the Award may
become vested on or after the first anniversary of the Effective Date
and prior to the second anniversary of the Effective Date;
(c) no more than 40% of the Shares covered by the Award may
become vested on or after the second anniversary of the Effective Date
and prior to the third anniversary of the Effective Date;
(d) no more than 60% of the Shares covered by the Award may
become vested on or after the third anniversary of the Effective Date
and prior to the fourth anniversary of the Effective Date;
(e) no more than 80% of the Shares covered by the Award may
become vested on or after the fourth anniversary of the Effective Date
and prior to the fifth anniversary of the Effective Date;
(f) no Award may vested as to all of the Shares covered
thereby until the fifth anniversary of the Effective Date;
provided, however, that an Award shall become vested, and all Shares not
previously vested shall be distributed, on the date of the Award recipient's
death or Disability while in Service.
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<PAGE>
SECTION 7.3 DESIGNATION OF BENEFICIARY.
An Eligible Director or Eligible Individual who has received an Award may
designate a Beneficiary to receive any undistributed Shares that are, or become,
available for distribution on, or after, the date of his death. Such designation
(and any change or revocation of such designation) shall be made in writing in
the form and manner prescribed by the Com mittee. In the event that the
Beneficiary designated by an Eligible Director or Eligible Individual dies prior
to the Eligible Director or Eligible Individual, or in the event that no
Beneficiary has been designated, any undistributed Shares that are, or become,
available for distribution on, or after, the Eligible Director's or Eligible
Individual's death shall be paid to the executor or administrator of the
Eligible Director's or Eligible Individual's estate or other fiduciary appointed
or authorized by a court of competent jurisdiction to collect this asset. If no
court proceeding to initiate the administration or settlement of the estate has
been brought within one year after the death of the Eligible Individual or
Eligible Director and if no such executor or administrator or other person is
appointed within such time as the Committee, in its sole discretion, shall deem
reasonable (but in no event earlier than one year after such death), to such one
or more of the spouse and descendants and blood relatives of such deceased
person as the Committee may select.
SECTION 7.4 MANNER OF DISTRIBUTION.
(a) As soon as practicable following the date any Shares granted pursuant
to an Award become vested pursuant to sections 7.1 and 7.2, the Committee shall
take such actions as are necessary to cause the transfer of record ownership of
the Shares that have become vested from the Trustee to the Award holder and
shall cause the Trustee to distribute to the Award holder all property other
than Shares then being held in connection with the Shares being distributed.
(b) The Association's obligation to deliver Shares with respect to an
Award shall, if the Committee so requests, be conditioned upon the receipt of a
representation as to the investment intention of the Eligible Director or
Eligible Individual or Beneficiary to whom such Shares are to be delivered, in
such form as the Committee shall determine to be necessary or advisable to
comply with the provisions of applicable federal, state or local law. It may be
pro vided that any such representation shall become inoperative upon a
registration of the Shares or upon the occurrence of any other event eliminating
the necessity of such representation. The Association shall not be required to
deliver any Shares under the Plan prior to (i) the admission of such Shares to
listing on any stock exchange on which Shares may then be listed, or (ii) the
completion of such registration or other qualification under any state or
federal law, rule or regulation as the Committee shall determine to be necessary
or advisable.
SECTION 7.5 TAXES.
The Association, the Committee or the Trustee shall have the right to
require any person entitled to receive Shares pursuant to an Award to pay the
amount of any tax which is required to be withheld with respect to such Shares,
or, in lieu thereof, to retain, or to sell without notice, a sufficient number
of Shares to cover the amount required to be withheld.
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<PAGE>
ARTICLE VIII
------------
AMENDMENT AND TERMINATION
-------------------------
SECTION 8.1 TERMINATION.
The Board may suspend or terminate the Plan in whole or in part at any
time by giving written notice of such suspension or termination to the
Committee; provided, however, that the Plan may not be terminated while there
are outstanding Awards that may thereafter become vested. Upon the termination
of the Plan, the Trustee shall make distributions from the Trust Fund in such
amounts and to such persons as the Committee may direct and shall return the
remaining assets of the Trust Fund, if any, to the Association.
SECTION 8.2 AMENDMENT.
The Board may amend or revise the Plan in whole or in part at any time;
provided, however, that no such amendment shall authorize the issuance of
additional Shares under the Plan without the approval of the shareholders of the
Association to the extent required by law; and provided, further, that no such
amendment shall adversely affect the rights of any person in or with respect to
any Award granted hereunder prior to the date on which such amendment is adopted
or made effective, whichever is later.
SECTION 8.3 ADJUSTMENTS IN THE EVENT OF A BUSINESS REORGANIZATION.
(a) In the event of any merger, consolidation, or other business
reorganization (including but not limited to a Change of Control) in which Wake
Forest Federal Savings & Loan Association is the surviving entity, and in the
event of any stock split, stock dividend or other event generally affecting the
number of Shares held by each person who is then a holder of record of Shares,
the number of Shares held in the Trust Fund, including Shares covered by Awards,
shall be adjusted to account for such event. Such adjustment shall be effected
by multiplying such number of Shares by an amount equal to the number of Shares
that would be owned after such event by a person who, immediately prior to such
event, was the holder of record of one Share; provided, however, that the
Committee may, in its discretion, establish another appropriate method of
adjustment.
(b) In the event of any merger, consolidation, or other business
reorganization (including but not limited to a Change of Control) in which Wake
Forest Federal Savings & Loan Association is not the surviving entity, the
Trustee shall hold in the Trust Fund any money, stock, securities or other
property received by holders of record of Shares in connection with such merger,
consolidation, or other business reorganization. Any Award with respect to which
Shares had been allocated to an Eligible Director or Eligible Individual shall
be adjusted by allocating to
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<PAGE>
the Eligible Director or Eligible Individual granted such Award the amount of
money, stock, securities or other property received by the Trustee for the
Shares allocated to such Eligible Director or Eligible Individual. The vesting
and distribution of such money, stock, securities or other property thus
allocated to an Eligible Director or Eligible Individual shall continue to be
governed by Section 7.1 or 7.2, as applicable.
ARTICLE IX
----------
MISCELLANEOUS
-------------
SECTION 9.1 STATUS AS AN EMPLOYEE BENEFIT PLAN.
This Plan is not intended to satisfy the requirements for qualification
under section 401(a) of the Code or to satisfy the definitional requirements for
an "employee benefit plan" under section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended. It is intended to be a non-qualified incentive
compensation program that is exempt from the regulatory require ments of the
Employee Retirement Income Security Act of 1974, as amended. The Plan shall be
construed and administered so as to effectuate this intent.
SECTION 9.2 NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the establishment of the Plan nor any provisions of the Plan nor
any action of the Board or the Committee with respect to the Plan shall be held
or construed to confer upon any Eligible Individual any right to a continuation
of employment by the Association or upon any Eligible Director any right to a
continuation of his position as a director of the Association. The Association
reserves the right to dismiss any Eligible Individual or remove any Eligible
Director or otherwise deal with any Eligible Individual or Eligible Director to
the same extent that it could if the Plan had not been adopted.
SECTION 9.3 CONSTRUCTION OF LANGUAGE.
Whenever appropriate in the Plan, words used in the singular may be read
in the plural, words used in the plural may be read in the singular, and words
importing the masculine gender may be read as referring equally to the feminine
or the neuter. Any reference to an Article or section number shall refer to an
Article or section of this Plan unless otherwise indicated.
SECTION 9.4 GOVERNING LAW.
The Plan shall be construed, administered and enforced according to the
federal laws of the United States of America and, in the absence of controlling
federal law, according to
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the internal laws of the State of North Carolina applicable to contracts entered
into between citizens and residents of the State of North Carolina to be
performed wholly within the borders of such State.
SECTION 9.5 HEADINGS.
The headings of Articles and sections are included solely for convenience
of reference. If there is any conflict between such headings and the text of the
Plan, the text shall control.
SECTION 9.6 NON-ALIENATION OF BENEFITS.
The right to receive a benefit under the Plan shall not be subject in any
manner to anticipation, alienation or assignment, nor shall such right be liable
for or subject to debts, contracts, liabilities, engagements or torts.
SECTION 9.7 TAXES.
The Association shall have the right to deduct from all amounts paid and
property distributed with respect to an Award under the Plan any taxes required
by law to be withheld with respect to such Award, or require the person to whom
such cash or property is paid or distributed to pay the Association the amount
of any tax which the Association is required to withhold with respect to such
payment or distribution, or, in lieu thereof, to retain, or to sell without
notice, a sufficient number of Shares to cover the amount required to be
withheld.
SECTION 9.8 APPROVAL OF SHAREHOLDERS.
The Plan and all Awards granted hereunder shall be conditioned on the
approval of the Plan by the majority of the votes eligible to be cast by holders
of Shares of the Association (other than Wake Forest Bancorp, M.H.C.) at an
annual or special meeting of the holders of Shares held no earlier than October
3, 1996. No Award under the Plan shall be granted prior to such approval.
SECTION 9.9 NOTICES.
Any communication required or permitted to be given under the Plan,
including any notice, direction, designation, comment, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below, or at such other address as one such
party may by written notice specify to the other party:
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(a) If to the Committee:
Wake Forest Federal Savings & Loan Association
302 South Brooks Street, P.O. Box 707
Wake Forest, North Carolina 27588-0707
Attention: Recognition and Retention Plan Committee
(b) If to an Award recipient, to the Award recipient's address
as shown in the Association's personnel records.
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TABLE 1
================================================================================
I II
- --------------------------------------------------------------------------------
Howard Brown 954
Leelan Woodlief 954
John Lyon 954
Paul Brixhoff 953
Harold Washington 953
Watson Wilkinson 953
Fred Sandusky 953
================================================================================
-15-
July 13, 1999
Wake Forest Federal Savings & Loan Association
302 South Brooks Street
P.O. Box 707
Wake Forest, North Carolina 27588-0707
Re: 1997 Stock Option and Recognition and Retention Plans
-----------------------------------------------------
Dear Sirs:
We have acted as counsel for Wake Forest Federal Savings &
Loan Association, a federally-chartered savings & loan association (the
"Association"), in connection with the filing of a registration statement on
Form S-8 under the Securities Act of 1933, as amended ("Registration Statement")
with respect to 76,248 shares of its common stock, par value $0.01 per share
(the "Shares"), of which 54,000 shares are authorized but unissued shares which
have been reserved for issuance ("Original Issue Shares") upon the exercise of
options granted pursuant to the Wake Forest Federal Savings & Loan Association
(the "Plan"). In rendering the opinion set forth below, we do not express any
opinion concerning law other than the federal law of the United States.
We have examined originals or copies, certified or otherwise
identified, of such documents, corporate records and other instruments as we
have deemed necessary or advisable for purposes of this opinion. As to matters
of fact, we have examined and relied upon the Plan described above and, where we
have deemed appropriate, representations or certificates of officers of the
Association or public officials. We have assumed the authenticity of all
documents submitted to us as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents submitted to us as copies.
Based on the foregoing, we are of the opinion that the
Original Issue Shares that are being registered pursuant to the Registration
Statement have been duly authorized and, when issued and paid for in accordance
with the terms of the Plan, such Original Issue Shares will be validly issued,
fully paid and non-assessable.
<PAGE>
Wake Forest Federal Savings & Loan Association
July 13, 1999
Page 2
In rendering the opinion set forth above, we have not passed
upon and do not purport to pass upon the application of "doing business" or
securities or "blue-sky" laws of any jurisdiction (except federal securities
laws).
This opinion is given solely for the benefit of the
Association and purchasers of Shares under the Plan, and no other person or
entity is entitled to rely hereon without express written consent.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the references to our Firm's name therein.
Very truly yours,
THACHER PROFFITT & WOOD
by: /s/ V. Gerard Comizio
---------------------
V. Gerard Comizio
EXHIBIT 23.1
Consent of Thacher Proffitt & Wood (included in Exhibit 5.1 hereof)
EXHIBIT 23.2
Consent of McGladrey & Pullen, LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement on
Form S-8 of Wake Forest Bancshares, Inc., of our report dated October 30, 1998,
except for Note 15, as to which the date is November 16, 1998, on our audits of
the consolidated balance sheets of Wake Forest Federal Savings & Loan
Association and subsidiary as of September 30, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1998,
which report appears on page 16 in the September 30, 1998 Annual Report to
Stockholders, which is incorporated by reference into the Form 10-KSB of Wake
Forest Federal Savings & Loan Association for the year ended September 30, 1998.
/s/ McGladery & Pullen, LLP
--------------------------------
McGladery & Pullen, LLP
Raleigh, North Carolina
July 13, 1999
EXHIBIT 99.1
OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1998 Docket No. 0143
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
(Exact name of small business issuer asspecified in its charter)
FEDERALLY CHARTERED 56-0440967
State of Incorporation IRS Employer Number
302 South Brooks Street
Wake Forest, North Carolina 27587
(Address of Principal Executive Offices)
Issuer's telephone, including area code: (919) 556-5146
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Title of Class
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B contained herein or any amendment to this
Form 10-KSB. [ ]
The revenues for the issuer's fiscal year ended September 30, 1998 are
$6,016,850.
The issuer had 1,215,862 shares of common stock outstanding as of
September 30, 1998. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the common stock as of September 30, 1998 was $6,159,000 and
$7,580,000, respectively.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Stockholders for the year ended
September 30, 1998 are incorporated by reference into Parts I and II of this
Form 10-KSB.
Portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
The Exhibits incorporate by reference the Notice of Mutual Holding
Company Reorganization on Form MHC-1.
Transitional Small Business Disclosure Format (check one): Yes [ ] No: [X]
<PAGE>
TABLE OF CONTENTS
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Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS....................................................1
ITEM 2. PROPERTIES................................................................28
ITEM 3. LEGAL PROCEEDINGS.........................................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................28
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................28
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS......................................28
ITEM 7. FINANCIAL STATEMENTS......................................................29
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................29
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT.................29
ITEM 10. EXECUTIVE COMPENSATION....................................................29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................29
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K...................................30
SIGNATURES
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This annual report on Form 10-KSB contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of the Association that are subject to various
factors which could cause actual results to differ materially from those
estimates. Factors which could influence the estimates include changes in
general and local market conditions, legislative and regulatory conditions and
an adverse interest rate environment.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Wake Forest Federal Savings & Loan Association (the "Association") is a
federally chartered stock savings and loan association which conducts business
from its one office located in Wake Forest, North Carolina. The office is
located in Wake County, North Carolina. The Association was founded in 1922 as a
building and loan association. In 1982, the Association converted from a North
Carolina chartered mutual savings and loan association to a federally chartered
mutual savings and loan association. During fiscal year 1996, the Association
converted from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association, which is majority owned
by Wake Forest Bancorp, M.H.C., a federal mutual holding company. See
"Management's Discussion and Analysis-The Reorganization." The Association's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. At September 30, 1998, the Association had total assets of
$74.4 million, total deposits of $60.0 million and equity of $13.2 million.
The primary focus of the Association is to provide financing for single
family housing in its market area of northern Wake County and southern Franklin
and Granville Counties. The Association has concentrated its lending activities
on real estate loans secured by single family residential properties and
construction loans on primarily residential properties. To a significantly
lesser extent, the Association invests in commercial real estate, land,
multifamily residential and savings account loans. The Association also invests
its excess funds primarily in Federal Home Loan Bank ("FHLB") stock, Federal
Home Loan Mortgage Corporation ("FHLMC") stock, U.S. Treasury obligations, and
other short term interest-bearing deposits. The Association's principal sources
of funds are deposits and principal and interest payments on loans. The
principal source of income is interest on loans and investment securities. The
Association's principal expenses are interest paid on deposits and compensation
and benefits.
The Association's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits. The Association
also generates non-interest income such as service charges and other fees. The
Association's non-interest expenses primarily consist of compensation and
benefits, occupancy expenses, net costs of real estate owned, data processing
fees and other operating expenses. The Association's results of operations are
also significantly affected by general economic and competitive conditions
(particularly changes in market interest rates), government policies, changes in
accounting standards and actions of regulatory agencies. The Association
exceeded all of its regulatory capital requirements at September 30, 1998. See
"Regulation--Regulation of Federal Savings Association--Capital Requirements."
The Association is primarily engaged in the business of attracting
retail deposits from the general public in the Association's marketing area, and
investing those deposits, together with other sources of funds, primarily in
loans secured by one- to four-family residential real estate for retention in
its loan portfolio. For further details, see below under "Lending Activities."
REORGANIZATION
On October 23, 1995, the Board of Directors adopted the Plan of
Reorganization from Mutual Savings and Loan Association to Mutual Holding
Company (the "Plan of Reorganization"), pursuant to which the Association (i)
exchanged its federal mutual savings and loan association charter for a federal
stock savings and loan association charter and (ii) formed Wake Forest Bancorp,
M.H.C. (the "Holding Company"), a federally chartered mutual holding company
which owns and will own in excess of 50% of the common stock of the Association
so long as the Holding Company remains in mutual form (the "Reorganization"). In
connection with the Reorganization, the Association sold shares of its common
stock to certain depositors of the Association and
<PAGE>
the Association's Employee Stock Ownership Plan ("ESOP"). The Association
completed the Reorganization on April 3, 1996.
MARKET AREA AND COMPETITION
The Association is a community-oriented savings institution which
primarily gathers deposits and originates one- to four-family residential
mortgage loans and construction loans within its market area. The Association's
market area for deposit gathering and lending is concentrated in northern Wake
County and southern Franklin and Granville Counties, North Carolina.
The Association's market area has benefitted from its close proximity
to the "Research Triangle Park" (the "Park") which includes the cities of Durham
and Raleigh. The commuting distance from the Park to the town of Wake Forest is
approximately twenty miles. While most of the commercial development within the
Research Triangle Park has been in Durham County, most of the residential
development for the employees of the Park has taken place in Wake County.
Northern Wake County is expected to benefit from the continued expansion of this
area.
Currently, employment within the region varies, from a more
service-oriented industry near the Research Triangle Park to a more
agricultural/manufacturing base further away from the Park. The largest
employers in the northern Wake County area include Weavexx, Athey Products and
Mallinckrodt. Proximity to the Park, to Raleigh-Durham International Airport and
to the city of Raleigh, the state capital, should result in the future growth in
the Association's market area.
The population of the Association's market area grew rapidly during the
1980s and early 1990s and is expected to continue its growth at the same pace
over the next five years. Wake County is anticipated to grow by 16.4% over the
next five years while the town of Wake Forest is expected to grow even more
rapidly (from its current population of almost 7,000). Nearly 70% of the growth
within the region is related to residential development. The recent housing
developments within the Association's market area include a wide range of home
prices. The market area is becoming more suburbanized as evidenced by the
increasing number of residential subdivisions located within the region and the
decreasing acreage devoted to farm land.
The Association faces substantial competition for both the deposits it
accepts and the loans it makes. Located within the town of Wake Forest are
branch offices of three other depository institutions, all three of which are
commercial banks. The Association also encounters significant competition for
deposits from commercial banks, savings banks, savings and loan associations and
credit unions located in the Raleigh-Durham area. Due to the Association's size
relative to its competitors, the Association offers a more limited product line,
with an emphasis on product delivery and customer service. The Association
competes for deposits by offering a variety of customer services and deposit
accounts at competitive interest rates. The Association, as well as its
competitors, is affected by general economic conditions, particularly changes in
market interest rates, real estate market values, government policies and
regulatory authorities' actions. Changes in the ratio of the demand for loans
relative to the availability of credit may affect the level of competition from
financial institutions which may have greater resources than the Association,
but which have not generally engaged in lending activities in the Association's
market area in the past. Competition may also increase as a result of the
lifting of restrictions on the interstate operations of financial institutions.
See "Regulation."
LENDING ACTIVITIES
Loan Portfolio Composition. The Association's loan portfolio consists
primarily of conventional one- to four-family first mortgage loans and
construction loans. To a lesser extent, the Association also makes multi-family
residential loans, commercial real estate loans, land loans, and loans secured
by savings accounts at the Association.
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<PAGE>
The types of loans that the Association may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans, the supply of
money available for lending purposes and the rates offered by competitors. These
factors are in turn affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
The following table sets forth the composition of the Association's
mortgage and other loan portfolios in dollar amounts and percentages at the
dates indicated.
AT SEPTEMBER 30,
---------------------------------------------
1998 1997
------------------ ---------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------- --------- --------
(DOLLARS IN THOUSANDS)
Type of loans:
One- to four-family
residential .................... $25,479 46.02% $28,234 52.61%
Multi-family residential ....... 289 0.52% 379 0.71%
Commercial real estate ......... 5,831 10.53% 6,791 12.65%
Land ........................... 4,840 8.74% 4,611 8.59%
Construction ................... 27,587 49.83% 21,343 39.76%
Equity Lines ................... 1,296 2.34% -- --
Commercial lines of credit .. 866 1.56% -- --
Savings Account ................ 201 0.37% 284 0.53%
------ ------ ------ ------
Total loans ....................... 66,389 119.91% 61,642 114.85%
====== ====== ====== ======
Less:
Deferred loan fees ............. 160 0.29% 188 0.35%
Undisbursed portion of
loans in process ............. 10,603 19.15% 7,518 14.01%
Allowance for loan losses ...... 263 0.47% 263 0.49%
------ ------ ------ ------
11,026 19.91% 7,969 14.85%
------ ------ ------ ------
Total loans receivable, net ....... $55,363 100.00% $53,673 100.00%
====== ====== ====== ======
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<PAGE>
Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 1998. The table reflects the entire
unpaid principal balance in the maturity period that includes the final loan
payment date and, accordingly, does not give effect to periodic principal
repayments or possible prepayments. Principal repayments and prepayments totaled
$31.3 million and $22.1 million for the years ended September 30, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------------------------------
EQUITY SAVING
RESIDENTIAL RESIDENTIAL COMMERCIAL RESIDENTIAL LINE LINES OF ACCOUNT
1 TO 4-FAMILY MULTI-FAMILY REAL ESTATE LAND CONSTRUCTION(1) MORTGAGES CREDIT LOANS TOTAL
------------- ------------ ----------- ---- --------------- --------- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contractual maturity:
One year or less.... $ 4,068 $ -- $1,863 $1,201 $14,301 $1,296 $866 $136 $23,731
------- ------ ------ ------ ------- ------ ---- ---- -------
After one year:
1 year to 3 years... 15,347 -- 3,763 1,745 327 -- -- 65 21,247
3 years to 5 years.. 2,605 -- 416 1,894 -- -- -- -- 4,915
5 years to 10 years. 1,702 -- 501 -- -- -- -- -- 2,203
10 years to 20 years 1,757 -- 1,535 -- -- -- -- -- 3,292
Over 20 years....... -- 289 -- -- 109 -- -- -- 398
------- ------ ------ ------ ------- ------ ---- ---- -------
Total after one year 21,411 289 6,215 3,639 436 -- -- 65 32,055
------- ------ ------ ------ ------- ------ ---- ---- -------
Total amount due.... $25,479 $ 289 $8,078 $4,840 $14,737 $1,296 $866 201 $55,786
======= ====== ====== ====== ======= ====== ===== ==== =======
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(1) Net of undisbursed loans in process. Certain construction loans which
mature in periods beyond one year are lines of credit to contractors, the
purpose of which is to provide for construction related funds.
The following table sets forth the dollar amounts in each loan category
at September 30, 1998 that are contractually due after September 30, 1999, and
whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER SEPTEMBER 30, 1999
-----------------------------------------------
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- -----
(DOLLARS IN THOUSANDS)
One- to four-family residential.. $ 3,281 $ 18,130 $ 21,411
Multi-family residential......... 289 - 289
Commercial Real Estate........... 2,042 4,173 6,215
Land............................. 1,932 1,707 3,639
Residential Construction......... 436 - 436
Savings account loans............ 65 - 65
-------- -------- --------
Total............................ $ 8,045 $ 24,010 $ 32,055
======== ======== ========
Origination, Purchase, Sale and Servicing of Loans. The Association's
lending activities are conducted through its office in Wake Forest, North
Carolina. The Association originates both adjustable-rate mortgage loans and
fixed-rate mortgage loans. Adjustable-rate mortgage loans and fixed-rate
mortgage loans carry maximum maturities of 30 years and 15 years respectively.
The Association's ability to originate loans is dependent upon the relative
customer demand for fixed-rate or adjustable-rate mortgage loans, which is
affected by the current and expected future levels of interest rates. The
Association currently holds for its portfolio all loans it originates and, from
time to time, purchases participations in mortgage loans originated by other
institutions or affordable housing consortiums. The determination to purchase
participations in specific loans or pools of loans is based upon criteria
substantially similar to the Association's underwriting policies, which consider
the financial condition of the borrower, the location of the underlying property
and the appraised value of the property, among other factors. The Association
has no current plans to sell loans it originates. The Association does not
service loans for others and has no current plans to begin such activities.
One- to Four-Family Mortgage Lending. The Association offers both
fixed-rate and adjustable-rate mortgage loans, with maturities up to 15 years
and 30 years, respectively, which are secured by one- to four-family residences,
which generally are owner-occupied. Substantially all such loans are secured by
property located in
-4-
<PAGE>
northern Wake County and southern Franklin and Granville Counties, North
Carolina. Loan originations are generally obtained from existing or past
customers and members of the local communities. See "--Origination, Purchase,
Sale and Servicing of Loans."
At September 30, 1998, the Association's total loans were $55.4
million, of which $25.5 million, or 46.02% were one- to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 12.94%, or $3.3 million, were fixed-rate loans and
87.06%, or $22.2 million, were adjustable-rate loans. The Association offers
three to five year balloon loans, which are either called or modified based on
the Association's interest rates currently in effect at the balloon date. These
loans are similar to adjustable rate loans in that the loans generally amortize
over terms of up to 30 years but are not indexed to any widely recognized rate,
such as the one year U.S. Treasury securities rate, and do not have interest
rate caps or floors. Instead, the majority of such loans are modified at the
balloon date and the rate is adjusted to the Association's current rate offered
for similar loans being originated on such dates. For purposes of the tabular
presentations throughout this document, such loans are considered to be
adjustable. Such loans involve risks similar to more traditional adjustable rate
loans because the Association modifies the loan documents at the end of the
three and five year terms to adjust for rates currently offered by the
Association for similar loans being originated on such dates. The loans are not
generally underwritten again at modification unless the Association is aware of
collateral or ability-to-pay issues.
In view of its operating strategy, the Association adheres to its Board
approved underwriting guidelines for loan origination, which, though prudent in
approach to credit risk and evaluation of collateral, allow management
flexibility with respect to documentation of certain matters and certain credit
requirements. As a result, such underwriting guidelines in certain lending
situations are less rigid than comparable Federal National Mortgage Association
("Fannie Mae") or FHLMC underwriting guidelines. The Association's loans are
typically originated under terms, conditions and documentation which permit them
to be sold to U.S. government sponsored agencies such as the Fannie Mae or the
FHLMC however, the Association has no intention to sell loans in the secondary
market. The Association's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan. The Association offers products
with a higher loan-to-value ratio in conjunction with private mortgage
insurance. Mortgage loans originated by the Association generally include
due-on-sale clauses which provide the Association with the contractual right to
deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Association's consent. Due-on-sale clauses
are an important means of adjusting the rates on the Association's fixed-rate
mortgage loan portfolio and the Association has generally exercised its rights
under these clauses.
Construction Lending. The Association originates loans for construction
to local real estate contractors in its market area, generally with whom it has
an established relationship and to individuals for construction of one- to
four-family residences. The Association's construction loans primarily have been
made to finance the construction of one- to four-family residential properties
which are generally owner-occupied. These loans are generally fixed-rate loans
with maturities of six months with an automatic six month renewal. The
Association's policies provide that construction loans may be made in amounts up
to 80% of the appraised value of the property or the cost of construction,
whichever is less, for construction of one- to four-family residences. All
construction loans are subject to the limitation on loans-to-one-borrower and
the Association considers the location of the proposed construction in order to
avoid over-concentration in a single area. Prior to making a commitment to fund
a construction loan, the Association requires an independent appraisal of the
property by a state-certified appraiser if the requested amount exceeds
$100,000. The Association's Chairman of the Board generally inspects each
project at the commencement of construction and throughout the term of the
construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant based upon a percentage of completion. At
September 30, 1998, the Association had $17.0 million (net of undisbursed loan
funds of $10.6 million) of construction loans which amounted to 30.68% of the
Association's net loans outstanding. The largest construction loan in the
Association's portfolio at September 30, 1998 was $1.5 million, is secured by a
local church facility under construction and is performing according to its
terms.
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<PAGE>
Construction loans to individuals are typically made in connection with
the granting of the permanent loan on the property. Such loans convert to a
fully amortizing adjustable- or fixed-rate loan at the end of the construction
term. In most cases, the Association requires that the closing with respect to
permanent financing occur simultaneously with the closing of any construction
loan to an individual.
The Association's construction loans to local builders are made on
either a pre-sold or speculative (unsold) basis. However, the Association
generally limits the number of unsold homes under construction by its builders,
with the amount dependent on the reputation of the builder, the present exposure
of the builder, the location of the property, the size of the loan and prior
sales of homes in the development. The Association estimates that approximately
50% of its construction loans to builders are on a speculative basis.
Construction loans are generally considered to involve a higher degree
of credit risk than one- to four-family residential mortgage loans because
circumstances outside the borrower's control may adversely affect the market
value of the property. The Association has attempted to minimize these risks by,
among other things, limiting the extent of its construction lending as a
proportion of lending and by limiting its construction lending to primarily
residential properties. In addition, the Association has adopted underwriting
guidelines which impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk, by limiting the geographic area in which the Association will do business
to its existing market and by working with builders with whom it has established
relationships. It is also the Association's general policy to obtain personal
guarantees from the principal of its corporate borrowers on its construction
loans.
Commercial Real Estate Mortgage Lending. The Association originates
commercial real estate mortgage loans that are generally secured by properties
used for business purposes and retail facilities, such as small office
buildings, located in the Association's market area as well as a significant
number of church loans. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised value or purchase price of the property and (ii)
the Association's current loans-to-one-borrower limit. These loans are generally
originated as three or five year balloon loans with amortization periods of up
to 20 years. The Association's underwriting standards and procedures for these
loans are similar to those applicable to its construction lending, whereby the
Association considers factors such as the borrower's expertise, credit history
and profitability. At September 30, 1998, the Association's commercial real
estate mortgage portfolio was $5.8 million, or 10.53% of total loans
outstanding. The largest commercial real estate loan in the Association's
portfolio at September 30, 1998 was $795,000 and is secured by various tracts of
real estate.
Mortgage loans secured by commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. This risk is attributable to the uncertain
realization of projected income-producing cash flows which are affected by
vacancy rates, the ability to maintain rent levels against competitively-priced
properties and the ability to collect rent from tenants on a timely basis.
Because payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Association seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's income and debt service ratio.
Equity Lines and Commercial Lines of Credit. The Association originates
equity line loans on one- to four- residential properties and line of credit
loans on commercial real estate. The Association's underwriting policies require
that equity line loans on one-to four- residential properties be secured by real
estate where the Association may or may not have the first mortgage on the
property. The equity line loans on one-to four- residential properties may be
made in amounts up to 80% of the appraised value or adjusted tax value of the
property, and take into consideration any outstanding first mortgage liens in
determining the loan-to-value ratio. Currently, the Association is originating
the equity line loans on one- to four- residential properties at a special
introductory rate of 6.75%, which adjust to prime plus 1% one year from the date
of origination, and adjust for changes in prime thereafter on the first day of
the month following a change in prime. The terms on the equity line
-6-
<PAGE>
loans on one- to four- residential properties are for a period of 15 years. At
September 30, 1998, the Association's equity line portfolio was $1.3 million, or
2.34% of total loans outstanding.
The risks associated with equity line loans on one- to four-
residential properties are generally similar to the risks associated with other
forms of single-family residential lending due to the loan-to value limits
placed on such loans. The lines are revolving and may or may not be fully
disbursed at any given time.
The Association's underwriting policies require that commercial lines
of credit be secured by commercial real estate where the Association has a first
mortgage position. Commercial lines of credit are made in amounts up to 75% of
the appraised value of developed commercial real estate or 65% of the appraised
value of undeveloped land. Commercial lines of credit are made with terms of
between 3 and 10 years at prime plus 1%, with adjustments to prime made on the
first day of the month following a change in prime. At September 30, 1998, the
Association's commercial line of credit portfolio was $866,000, or 1.56% of
total loans outstanding.
The risks associated with lines of credit on commercial real estate is
substantially the same as the risks described above on the Association's other
forms of commercial real estate lending.
Other Mortgage Lending. The Association also offers loans secured by
land and multi-family residences. Land loans generally consist of residential
building lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for speculative purposes and a
minor amount of farm land. Multi-family loans generally consist of residential
properties with more than four units, typically small apartment complexes,
located in the Association's primary lending areas. The Association does not
solicit such loans which do not constitute an active part of its business, and
generally offers such loans to accommodate its present customers. At September
30, 1998, the Association's total land loan portfolio was $4.8 million or 8.74%
of total loans and its multi-family loan portfolio was $0.3 million or .52% of
total loans.
The Association requires appraisals of all properties securing
multi-family residential loans if the requested amount exceeds $100,000.
Appraisals are performed by an independent appraiser designated by the
Association, all of which are reviewed by management. The Association considers
the quality and location of the real estate, the credit of the borrower, the
cash flow of the project and the quality of management involved with the
property.
The Association originates multi-family residential loans with both
fixed and adjustable interest rates which vary as to maturity. Such loans are
typically income-producing investment loans. Loan to value ratios on the
Association's multi-family residential loans are generally limited to 75%. As
part of the criteria for underwriting these loans, the Association's general
policy is to obtain personal guarantees from the principals of its corporate
borrowers.
Multi-family residential lending entails significant additional risks
as compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand, conditions in the market for
multi-family residential properties as well as regional and economic conditions
generally.
Savings Account Loans. The Association offers loans secured by savings
accounts at the Association. Interest rates charged on such loans are set at
competitive rates, taking into consideration the amount and term of the loan and
are available in amounts up to 95% of the value of the account. Savings account
loans are reviewed and approved in conformity with standards approved by the
Association's Board of Directors. At September 30, 1998, the Association's
savings account loan portfolio totaled $0.2 million, or .37% of total loans
outstanding.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Association and reviews properties
offered as security. The Board of Directors has established the following
lending authority: the lending officers may approve loans in amounts up to
$500,000 while loans above $500,000
-7-
<PAGE>
require Board approval. The foregoing lending limits are reviewed annually and,
as needed, revised by the Board of Directors. The Board generally ratifies all
loans on a monthly basis.
For all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency, and, if necessary, additional financial information is required to be
submitted by the borrower. An appraisal of any real estate intended to secure
the proposed loan is required, which appraisal currently is performed by an
independent appraiser designated and approved by the Association. Loans of up to
$100,000 may be approved by the Association's loan officers using property tax
values and drive-by appraisals. The Board annually approves the independent
appraisers used by the Association and approves the Association's appraisal
policy. It is the Association's policy to obtain title and hazard insurance on
all real estate loans. In connection with a borrower's request for a renewal of
a mortgage loan, the Association evaluates the borrower's ability to service the
renewed loan applying an interest rate that reflects prevailing market
conditions. The current value of the underlying collateral property is
considered and the Association reserves the right to reappraise the property.
ASSET QUALITY
Non-Performing Loans. Loans are considered non-performing if they are
in foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Association with respect to delinquencies vary depending on the nature of
the loan and period of delinquency. The Association's policies generally provide
that delinquent mortgage loans be reviewed and that a written late charge notice
be mailed no later than the 30th day of delinquency. The Association's policies
provide that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Association attempts to obtain
full payment or work out a repayment schedule with the borrower to avoid
foreclosure.
It is the Association's general policy to place all loans which are 90
days past due on nonaccrual status through the establishment of a reserve for
uncollected interest unless collectibility of all delinquent interest is
assured. Exceptions to placing a loan on non-accrual status are made when the
loan officer or management believe that no loss will be incurred on such loan.
Any such exceptions are reported to the Board of Directors on a monthly basis.
Circumstances under which such an exception may be granted include when the
underlying property is being actively marketed for sale, when a sale contract
has been executed and is pending closing or when the Association and the
borrower are actively negotiating a work-out schedule and all such interest is
considered collectible.
The Association, as part of its loan review process, including the
decision whether to place a loan on nonaccrual status, attempts to determine the
underlying cause of the borrower's delinquency and ability to repay the loan.
The Association has been able to take this approach because it is a relatively
small institution and its problem loans have been historically relatively
insignificant as a percentage of the Association's total loan portfolio. As the
Association grows, it may be necessary for the Association to take a more rigid
approach and automatically place loans on non-accrual status upon becoming 90
days or more past due and evaluate only those loans that trigger certain
mechanisms that might indicate that an exception is warranted. However,
management believes that its current approach keeps it better informed as to the
progress of a problem loan and its underlying difficulties and that its
non-accrual policy results in an accurate depiction of loans that are
collectible or likely to result in a loss. There can be no assurances that the
Association will be able to maintain its problem loans at or below historical
levels.
-8-
<PAGE>
Non-Accrual and Other Past Due Loans. The following table sets forth
information regarding non-accrual loans, other past due loans and REO. There
were no troubled debt restructurings within the meaning of SFAS No. 15 at any of
the dates presented below.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1998 1997
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Accruing loans past due 90 days or more:
Single family, OneB to four-family residential $ 134 $ 189
Land.......................................... -- 7
----- -----
Total non-performing loans............................ $ 134 $ 196
===== =====
Allowance for loan losses............................. $ 263 $ 263
===== =====
Real estate owned, net................................ $ -- $ --
Ratios:
Non-accrual loans to total loans.................. -- --
Non-performing loans to total loans............... 0.24% 0.36%
Non-performing loans and real estate owned to 0.18% 0.31%
total assets....................................
Allowance for loan losses to:
Non-accrual loans............................... -- --
Non-performing loans............................ 196.79% 134.43%
Total loans..................................... 0.47% 0.49%
Contractual interest income that would have been
recognized on non-accrual loans................ $ -- $ --
Actual interest income recognized..................... -- --
----- -----
Interest income not recognized........................ $ -- $ --
====== ======
</TABLE>
Classified Assets. Federal regulations and the Association's
Classification of Assets Policy require that the Association utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Association has incorporated the Office of Thrift
Supervision ("OTS") internal asset classifications as a part of its credit
monitoring system. The Association currently classifies problem and potential
problem assets as "Special Mention," "Substandard," "Doubtful" or "Loss" assets.
An asset is considered "Substandard" if it is inadequately protected by the
current equity and paying capacity of the obligor or of the collateral pledged,
if any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "Doubtful" have all of the
weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish an allowance
for loan losses in an amount deemed prudent by management. Allowance for loan
losses ("ALL") represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies one or more assets, or
proportions thereof, as "Loss," it is required either to establish a specific
ALL equal to 100% of the amount of the asset so classified or to charge off such
amount.
A savings institution's determination as to the classification of its
assets and the amount of its ALL is subject to review by the OTS which can order
the establishment of additional allowances. The OTS, in conjunction with the
other federal banking agencies, recently adopted an interagency policy statement
on ALL.
-9-
<PAGE>
The policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of valuation guidelines. Generally, the policy statement recommends
that institutions have effective systems and controls to identify, monitor and
address asset quality problems; that management has analyzed all significant
factors that affect the collectibility of the portfolio in a reasonable manner;
and that management has established acceptable allowance evaluation processes
that meet the objectives set forth in the policy statement. While the
Association believes that it has established an adequate ALL, there can be no
assurance that regulators, in reviewing the Association's loan portfolio as part
of a future regulatory examination, will not request the Association to
materially increase its ALL, thereby negatively affecting the Association's
financial condition and earnings at that time. Although management believes that
adequate ALL have been established, actual losses are dependent upon future
events and, as such, further additions to the level of specific or ALL may
become necessary.
The Association's management reviews and classifies the Association's
assets quarterly and reports the results to the Association's Board of Directors
on a quarterly basis. The Association classifies assets in accordance with the
management guidelines described above. The Association had $320,686 and $211,685
of assets classified as Substandard and no assets classified as Special Mention,
Doubtful or Loss at September 30, 1998 and 1997, respectively.
Allowance for Loan Losses. The ALL is established through a provision
for loan losses based on management's evaluation of the risks inherent in the
Association's loan portfolio and the general economy. The ALL is maintained at
an amount management considers adequate to cover loan losses which are deemed
probable and estimable. The allowance is based upon a number of factors,
including asset classifications, economic trends, industry experience and
trends, industry and geographic concentrations, estimated collateral values,
management's assessment of the credit risk inherent in the portfolio, historical
loan loss experience, and the Association's underwriting policies. At September
30, 1998, the Association's ALL was $263,000, or .47% of total loans, as
compared to $263,000 or .49%, at September 30, 1997. The Association had
non-performing loans of $134,000 and $196,000 at September 30, 1998 and
September 30, 1997, respectively. The Association's level of nonperforming loans
has historically been low and there were no charge-offs to the ALL during 1998
or 1997. Accordingly, management elected to leave the ALL unchanged. The
Association will continue to monitor and modify its ALL as conditions dictate.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Association's ALL. These agencies may require the
Association to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination.
Real Estate Owned. Property acquired by the Association as a result of
foreclosure on a mortgage loan is classified as real estate owned ("REO") and is
initially recorded at the fair value of the property at the date of acquisition,
establishing a new cost basis with any resulting writedown charged to the
allowance for loan losses. Thereafter, an allowance for losses on REO is
established if the cost of a property exceeds its current fair value less
estimated sales costs. The Association obtains an appraisal on a REO property as
soon as practicable after it takes possession of the real property. The
Association will generally reassess the value of REO at least quarterly
thereafter. The policy for loans secured by real estate, which comprise the bulk
of the Association's portfolio, is to establish loss reserves in accordance with
the Association's asset classification process, based on GAAP. At September 30,
1998, the Association held no REO.
-10-
<PAGE>
The following table sets forth activity in the Association's ALL and
the allowance for losses on REO at or for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
(IN THOUSANDS)
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year................................. $ 263 $ 263
Provision for loan losses.................................... -- --
Charge-offs.................................................. -- --
Recoveries................................................... -- --
------ ------
Balance at end of year....................................... $ 263 $ 263
====== ======
Ratio of net charge-offs to average loans outstanding........ -- --
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
Balance at beginning of year................................. $ -- $ --
Provision for losses......................................... -- --
Recoveries................................................... -- --
Charge-offs.................................................. -- --
------ ------
Balance at end of year....................................... $ -- $ --
====== ======
</TABLE>
Accrued interest receivable on accruing loans past due by 90 days or
more amounted to $15,500 and $8,300 at September 30, 1998 and 1997,
respectively. Accordingly, if the Association had placed all such loans on
non-accrual status at those dates, interest income for the fiscal years ended
September 30, 1998 and 1997 would have decreased by $9,500 and $8,300,
respectively.
The following table sets forth the Association's ALL allocated by loan
category and the percent of loans in each category to total loans at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------------------
1998 1997
------------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
ALLOWANCE TO TOTAL TO TOTAL ALLOWANCE TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
---------- ---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four- family residential. $ 40 15.21% 38.38% $ 50 19.01% 47.99%
Multi-family residential..... 5 1.90% .44% 5 1.90% 0.61%
Commercial................... 50 19.01% 8.78% 50 19.01% 11.02%
Land......................... 30 11.41% 7.29% 30 11.41% 6.36%
Equity lines................. 5 1.90% 1.95% -- -- --
Commercial lines of credit... 5 1.90% 1.31% -- -- --
Construction................. 128 48.67% 41.55% 128 48.67% 33.56%
--- ----- ----- --- ----- -----
Total mortgage loans........... 263 100.00% 99.70% 263 100.00% 99.54%
Savings account loans.......... -- -- .30% -- -- 0.46%
--- ----- ----- --- ----- -----
Total allowance for loan losses $263 100.00% 100.00% $263 100.00% 100.00%
=== ===== ===== === ===== =====
</TABLE>
-11-
<PAGE>
INVESTMENT ACTIVITIES
The Association's investment policy permits it to invest in U.S.
government obligations, certain securities of various government-sponsored
agencies, certificates of deposit of insured banks and savings institutions,
federal funds, and overnight deposits at the FHLB. At September 30, 1998, the
Association held: FHLMC stock with an amortized cost of $15,200 and a current
market value of $767,450 and FHLB stock with a cost and market value of
$364,100. At September 30, 1998, the Association held $17.5 million in
investments, including short-term interest earning deposits.
The following table sets forth activity in the Association's
investments portfolio for the periods indicated:
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997
------------ -------------
(IN THOUSANDS)
Amortized cost at beginning of period......... $ 8,130 $12,371
Purchases/(Sales), net........................ 8,616 (4,265)
Premium and discount amortization, net........ 12 24
Amortized cost at end of period............... 16,758 8,130
Net unrealized gain(1)........................ 770 541
------- -------
Total securities, net......................... $17,528 $ 8,671
======= =======
- ----------
(1) The net unrealized gain at September 30, 1998 and 1997 relates to
available for sale securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115. The net unrealized gain is
presented in order to reconcile the "Amortized Cost" of the Association's
securities portfolio in the "Carrying Cost," as reflected in the
Statements of Financial Condition.
The following table sets forth the amortized cost and fair value of the
Association's investments at the dates indicated.
AT SEPTEMBER 30,
-----------------------------------------------
1998 1997
----------------------- ----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- --------- ----------
(IN THOUSANDS)
FHLB Overnight Deposits........... $ 14,379 $ 14,379 $ 5,262 $ 5,262
U.S. Treasury Obligations......... 2,000 2,018 2,489 2,498
Equity securities(1).............. 15 767 15 547
Federal Home Loan Bank Stock...... 364 364 364 364
Total Investments, net(2)......... $ 16,758 $ 17,528 $ 8,130 $ 8,671
======= ======= ======= =======
- ------------
(1) Equity securities consist of FHLMC common stock.
(2) The difference between "Amortized Cost" and "Fair Value" represents net
unrealized gains at September 30, 1998 and 1997 on available for sale
securities in accordance with SFAS No. 115.
-12-
<PAGE>
The following table sets forth the amortized cost and fair value of the
Association's investments, by accounting classification and by type of security,
at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------
1998 1997
---------------------- -----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Held to Maturity
Other debt securities............. $ -- $ -- $ -- $ --
-------- ---------- ---------- ----------
Total held to maturity.......... -- -- -- --
-------- ---------- ---------- ----------
Available-for-Sale:
Debt securities................... 2,000 2,018 2,489 2,498
Equity securities................. 15 767 15 547
======== ========== ========= ===========
Total available-for-sale........ 2,015 2,785 2,504 3,045
-------- ---------- --------- ----------
FHLB Overnight deposits.............. 14,379 14,379 5,262 5,262
Federal Home Loan Bank Stock......... 364 364 364 364
-------- ---------- --------- ----------
14,743 14,743 5,626 5,626
-------- ---------- --------- ----------
Total Investments, net(1)....... $ 16,758 $ 17,528 $ 8,130 $ 8,671
======== ========== ========= ==========
</TABLE>
- -------------
(1) The difference between "Amortized Cost" and "Fair Value" represents net
unrealized gains at September 30, 1998 and 1997 on available for sale
securities in accordance with SFAS No. 115.
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Association's debt
securities at September 30, 1998, by remaining period to contractual maturity.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE
-------------------------------------- -----------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
--------- ----------- ----------- ---------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury:
Due within 1 year....................... $ -- $ -- --% $ 1,500 $ 1,511 5.67%
Due after 1 year but within 5 years..... -- -- -- 500 507
Due after 5 years but within 10 years... -- -- -- -- -- 5.50%
Due after 10 years...................... -- -- -- -- -- --
Total................................. -- -- -- 2,000 2,018 --
Equity Securities....................... -- -- -- 15 767 --
FHLB Overnight Deposits................... -- -- -- 14,379 14,379 --
--------- ----------- ----------- ---------- ----------- ---------
Total................................. $ -- $ -- --% $ 16,394 $ 17,164 5.63%
========= =========== =========== ========== =========== =========
</TABLE>
-13-
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan and security repayments and prepayments and
cash flows generated from operations are the primary sources of the
Association's funds for use in lending and for other general purposes.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of regular
(passbook) savings accounts, NOW accounts, checking accounts, money market
deposit accounts, IRAs and certificates of deposit. In recent years, the
Association has offered certificates of deposit with maturities of up to 60
months. At September 30, 1998, the Association's core deposits (which the
Association considers to consist of NOW accounts and regular savings accounts)
constituted 8.68% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Association's deposits are
obtained predominantly from the areas nearby its office location. The
Association relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Association's ability to attract and retain deposits. The Association does
not use brokers to obtain deposits.
The following table presents the deposit activity of the Association
for the periods indicated.
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997
--------------- ---------------
(DOLLARS IN THOUSANDS)
Total deposits at beginning of period........ $50,056 $48,956
Net increase (decrease) before interest 6,936
credited..................................... (1,460)
Interest credited............................ 3,046 2,560
--------------- ---------------
Total deposits at end of period.............. $60,038 $50,056
=============== ===============
At September 30, 1998, the Association had approximately $10.4 million
in Jumbo certificate of deposits (accounts in amounts over $100,000) maturing as
follows:
WEIGHTED
AMOUNT AVERAGE RATE
------------ -----------------
(DOLLARS IN THOUSANDS)
Maturity Period
Within three months.................... $ 2,018 5.94%
After three but within six months...... 1,923 5.74%
After six but within 12 months......... 2,836 6.07%
After 12 months........................ 3,656 6.32%
------------
Total....................... $ 10,433 6.07%
============
-14-
<PAGE>
The following table sets forth the distribution of the Association's
deposit accounts and the related weighted average interest rates at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
--------- ------------ ----------- --------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts...... $ 3,599 6.00% 3.07% $ 3,241 6.48% 3.07%
MMDA accounts.......... 7,100 11.84% 2.50% 7,119 14.24% 3.75%
NOW accounts........... 1,277 2.13% 2.51% 1,111 2.22% 3.00%
Noninterest-bearing
accounts............... 334 .56% -- 259 0.52% --
Certificate accounts... 47,676 79.47% 5.87% 38,262 76.54% 5.82%
--------- ------------ ----------- --------- ------------ -----------
Totals........... $ 59,986 100.00% 5.15% $ 49,992 100.00% 5.27%
</TABLE>
The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at the dates indicated and the period to
maturity of the certificate accounts outstanding at September 30, 1998.
<TABLE>
<CAPTION>
TOTAL AT
PERIOD TO MATURITY AT SEPTEMBER 30, 1999 SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------- -----------------
INTEREST RATE RANGE 1999 2000 2001 THEREAFTER TOTAL 1997
- ------------------------ ------------ ------------ ------------ -------------- ----------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
3.00% to 4.99%.......... $ 600 $ -- $ -- $ -- $ 600 $ 278
5.00% to 6.99%.......... 31,805 8,176 3,375 3,506 46,862 37,789
7.00% to 8.00%.......... -- 214 -- -- 214 195
Total................ $ 32,405 $ 8,390 $ 3,375 $ 3,506 $ 47,676 $ 38,262
============ ============ ============ ============== =========== =================
</TABLE>
Borrowings. The Association historically has not used borrowings as a
source of funds. However, the Association may obtain advances from the FHLB as
an alternative to retail deposit funds and may do so in the future as part of
its operating strategy. These advances would be collateralized primarily by
certain of the Association's mortgage loans and secondarily by the Association's
investment in capital stock of the FHLB. See "Regulation--Regulation of Federal
Savings Associations--Federal Home Loan Bank System." Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Association, fluctuates from time
to time in accordance with the policies of the OTS and the FHLB. At September
30, 1998, the Association had no advances outstanding from the FHLB.
SUBSIDIARY ACTIVITIES
The Association does not have any subsidiaries.
PERSONNEL
As of September 30, 1998, the Association had nine full-time employees
and one part-time employee. In the last three years, the Association has
experienced a low turnover rate among its employees and, as of September 30,
1998, seven of the Association's employees had been with the Association for
more than six years. The employees are not represented by a collective
bargaining unit and the Association considers its relationship with its
employees to be good. See "Executive Compensation" for a description of certain
compensation and benefit programs offered to the Association's employees.
-15-
<PAGE>
REGULATION
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency. The Association's deposit
accounts are insured up to applicable limits by the SAIF and it is a member of
the FHLB of Atlanta. The Association must file reports with the OTS concerning
its activities and financial condition and it must obtain regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS conducts periodic
examinations to assess the Association's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings institution can engage and is
intended primarily for the protection of the deposit insurance fund and
depositors. The Holding Company, as a savings and loan holding company, is
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS under the federal securities laws.
The OTS has significant discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS or the Congress, could have a material adverse impact on the Holding
Company, the Association and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings institutions and it does not
purport to be a comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Association derives its lending and investment
powers from the Home Owner's Loan Act ("HOLA") and the regulations of the OTS
thereunder. Under these laws and regulations, the Association may invest in
mortgage loans secured by residential and non-residential real estate,
commercial and consumer loans, certain types of debt securities and certain
other assets. The Association may also establish service corporations that may
engage in activities not otherwise permissible for the Association, including
certain real estate equity investments and securities and insurance brokerage.
These investment powers are subject to various limitations, including (a) a
prohibition against the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories; (b) a limit of 400% of an
association's capital on the aggregate amount of loans secured by
non-residential real estate property; (c) a limit of 20% of an association's
assets on commercial loans, with the amount of commercial loans in excess of 10%
of assets being limited to small business loans; (d) a limit of 35% of an
association's assets on the aggregate amount of consumer loans and acquisitions
of certain debt securities; (e) a limit of 5% of assets on non-conforming loans
(loans in excess of the specific limitations of HOLA); and (f) a limit of the
greater of 5% of assets or an association's capital on certain construction
loans made for the purpose of financing what is or is expected to become
residential property.
Loans to One Borrower. Under HOLA, savings institutions are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings institution may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not exceeding 10% of the association's unimpaired capital and surplus, if
such loans and extensions of credit are fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. At September
30, 1998, the Association's limit on loans to one borrower was approximately
$2.0 million. At September 30, 1998, the Association's largest aggregate amount
of loans to one borrower was $1.7 million, consisting of various loans secured
by commercial and residential tracts. The second largest borrower had an
aggregate balance of approximately $1.6 million, secured by various residential
and commercial tracts. At September 30, 1998, all of the loans in both of these
lending relationships were performing in accordance with their terms.
-16-
<PAGE>
QTL Test. HOLA requires a savings institution to meet a Qualified
Thrift Lender ("QTL") test. Under the QTL test, a savings institution is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least 9 months of the most recent 12-month
period. "Portfolio assets" means, in general, an association's total assets less
the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill
and other intangible assets, and (c) the value of property used to conduct the
association's business. The term "Qualified thrift investments" includes various
types of loans made for residential and housing purposes, investments related to
such purposes, including certain mortgage-backed and related securities, and
loans for personal, family, household and certain other purposes up to 20% of
the association's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans, and small business loans. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal Revenue Code of 1986. At September 30, 1998, the
Association maintained 81.9% of its portfolio assets in qualified thrift
investments. The Association had also met the QTL test in each of the prior 12
months and, therefore, was a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB and (d)
establishing any new branch in a location not permissible for a national bank in
the association's home state. In addition, within one year of the date a savings
association ceases to meet the QTL test, any company controlling the association
would have to register under, and become subject to the requirements of, the
Association Holding Company Act of 1956, as amended ("BHC Act"). If the savings
association does not requalify under the QTL test within the three-year period
after it failed the QTL test, it would be required to terminate any activity and
to dispose of any investment not permissible for a national bank and would have
to repay as promptly as possible any outstanding advances from an FHLB. A
savings association that has failed the QTL test may requalify under the QTL
test and be free of such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings institutions
to meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets and a risk-based
capital ratio requirement of 8% of core and supplementary capital to total
risk-based assets. The FDIC and the federal banking regulators have proposed
amendments to their minimum capital regulations to provide that the minimum
leverage capital ratio for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Rating
System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. In determining the amount of risk-weighted assets for purposes of
the risk-based capital requirement, a savings institution must compute its
risk-based assets by multiplying its assets and certain off-balance sheet items
by risk-weights, which range from 0% for cash and obligations issued by the
United States Government or its agencies to 100% for consumer and commercial
loans, as assigned by the OTS capital regulation based on the risks that the OTS
has determined to be inherent in the type of asset or off-balance sheet item.
The OTS and the other federal banking regulators adopted, effective October 1,
1998, an amendment to their risk-based capital guidelines that permits insured
depository institutions to include in supplementary capital up to 45% of the
pretax net unrealized holding gains on certain available-for-sale equity
securities, as such gain are computed under the guidelines.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the ALL.
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The ALL includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets, and the amount of supplementary capital that may be
included as total capital cannot exceed the amount of core capital.
The OTS regulations require that a savings institution with "above
normal" interest rate risk, when determining its compliance with the
risk-based-capital requirement, to deduct a portion of such capital from its
total capital to account for the "above normal" interest rate risk. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
resulting from a hypothetical 2% increase or decrease in market rates of
interest, divided by the estimated economic value of the association's assets,
as calculated in accordance with guidelines set forth by the OTS. At the times
when the 3-month Treasury bond equivalent yield falls below 4%, an association
may compute its interest rate risk on the basis of a decrease equal to one-half
of that Treasury rate rather than on the basis of 2%. A savings institution
whose measured interest rate risk exposure exceeds 2% would be considered to
have "above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between the association's measured interest rate risk
and 2%, multiplied by the estimated economic value of the association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the institution's financial data on
which the interest rate risk was computed. A savings institution with assets of
less than $300 million and a risk-based capital ratio in excess of 12% is not
required, unless the OTS determines otherwise, to comply with the standard
reporting requirements for the interest rate risk component, and the institution
may provide such selected information as the OTS determines. Currently, the
Association qualifies for this exemption from the filing requirements but as
part of its interest rate risk management strategy, the Association voluntarily
files these reports with the OTS. See "Management's Discussion and Analysis of
Financial Condition and Results of OperationsCAsset/Liability Management." The
regulations also authorize the Director of the OTS to waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS has
indefinitely deferred the implementation of the IRR component in the computation
of an institution's risk-based capital requirement. The OTS continues to monitor
the IRR of individual institutions and retains the right to impose additional
capital on individual institutions.
The table below presents the Association's regulatory capital as
compared to the OTS regulatory capital requirements at September 30, 1998:
CAPITAL EXCESS
AMOUNT REQUIREMENTS CAPITAL
-------- -------------- -----------
(IN THOUSANDS)
Tangible capital............. $ 12,690 $ 1,104 $ 11,586
Core capital................. 12,690 2,944 9,746
Risk-based capital........... 12,953 3,745 9,208
A reconciliation between regulatory capital and GAAP capital at
September 30, 1998 in the accompanying financial statements is presented below:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital............................ $ 13,167 $ 13,167 $ 13,167
Net unrealized gain on available for
sale investment securities, net of tax. (477) (477) (477)
ALL included as
supplementary capital.................. -- -- 263
-------- -------------- -----------
Regulatory capital...................... $ 12,690 $ 12,690 $ 12,953
========= ============= ===========
</TABLE>
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Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days prior written notice
must be given to the OTS of a proposed capital distribution by a savings
institution, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. An association that has
capital in excess of all fully phased-in regulatory capital requirements before
and after a proposed capital distribution and that is not otherwise restricted
in making capital distributions, could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year equal to
the greater of (a) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (b) 75% of its net earnings for the previous four
quarters. Any additional capital distribution would require prior OTS approval.
In addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Association
would be prohibited from making any capital distribution if, after the
distribution, the Association failed to meet its minimum capital requirements,
as described above. See "--Prompt Corrective Regulatory Action."
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings institutions. Under the
proposed regulations, the approval of the OTS would be required only for an
association that is deemed to be in troubled condition or that is
undercapitalized or would be undercapitalized after the capital distribution. A
savings institution would be able to make a capital distribution without notice
to or approval of the OTS if it is not held by a savings and loan holding
company, is not deemed to be in troubled condition, has received either of the
two highest composite supervisory ratings, and would continue to be adequately
capitalized after such distribution. Notice would have to be given to the OTS by
any association that is held by a savings and loan holding company or that had
received a composite supervisory rating below the highest two composite
supervisory ratings. An association's capital rating would be determined under
the prompt corrective action regulations. See "--Prompt Corrective Regulatory
Action."
Other regulations of the OTS applicable to the formation of mutual
holding companies prohibit the repurchase by the Association during the three
year period following the Reorganization of any of the shares of the
Association's common stock, except (i) for an offer approved by the OTS and made
to all stockholders on a pro rata basis; (ii) for the repurchase of qualifying
shares of a director, if any; or (iii) for purchases in the open market by a
tax-qualified or non-tax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund the plan.
Liquidity. The Association is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified United States Government, state and federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Association's average
liquidity ratio for the month ended September 30, 1998 was approximately 19%
which exceeded the applicable requirements. The Association has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The deposit
insurance premium expense, including operating assessments incurred by the
Association for the fiscal years ended September 30, 1998 and 1997 totaled
$55,300 and $66,000, respectively.
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Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings institutions to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
institutions located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Internal Revenue Code of
1986 (the "Code"), which imposes qualification requirements similar to those for
a "qualified thrift lender" under HOLA. See " QTL Test." The authority for a
federal savings institution to establish an interstate branch network would
facilitate a geographic diversification of the association's activities. This
authority under HOLA and the OTS regulations preempts any state law purporting
to regulate branching by federal savings institutions.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Association received a "Satisfactory" CRA
rating in its most recent examination on June 24, 1996.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its assessment areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefitting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small savings
institutions would be assessed pursuant to a streamlined approach focusing on a
lesser range of information and performance standards. The term "small savings
institution" is defined as including associations with less than $250 million in
assets or an affiliate of a holding company with banking and thrift assets of
less than $1 billion, which would include the Association. The amended CRA
regulations clarify how an institution's CRA performance would be considered in
the application process.
Transactions with Related Parties. The Association's authority to
engage in transactions with its "affiliates" is limited by the OTS regulations
and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Association is any company that controls the Association or any
other company that is controlled by a company that controls the Association,
excluding the Association's subsidiaries other than those that are insured
depository institutions. Currently, a subsidiary of a bank that is not also a
depository institution is not treated as an affiliate of the bank for purposes
of Sections 23A and 23B, but the FRB has proposed treating any subsidiary of a
bank that is engaged in activities not permissible for bank holding companies
under the BHCA as an affiliate for purposes of Sections 23A and 23B. The OTS
regulations prohibit a savings institution (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms
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<PAGE>
and circumstances, including credit standards, that in good faith would be
offered to or would apply to non-affiliated companies.
The Association's authority to extend credit to its directors,
executive officers, and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the FRB thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the
OTS has primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings institution.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act, as amended by Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle
Community Development and Regulatory Improvement Act of 1994 ("Community
Development Act"), requires the OTS, together with the other federal bank
regulatory agencies, to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation, and compensation, fees and
benefits and such other operational and managerial standards as the agencies
deem appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA as amended. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. The OTS and the other agencies determined
that stock valuation standards were not appropriate. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose
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civil money penalties. Effective October 1, 1996, the OTS and the other federal
bank regulatory agencies adopted guidelines for identifying and monitoring asset
quality and earnings standards.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings institution to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings institutions.
For this purpose, a savings institution would be placed in one of five
categories based on the association's capital. Generally, a savings institution
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk-weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution will be treated as "adequately capitalized"
if its ratio of total capital to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association receives
the highest rating on the CAMEL financial institutions rating system). A savings
institution that has a total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings institution
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets, be acquired by a depository association holding company
or combine with another depository association. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depositary association. Under FDICIA, the
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OTS is required to appoint a receiver (or with the concurrence of the FDIC, a
conservator) for a critically undercapitalized association within 90 days after
the association becomes critically undercapitalized or, with the concurrence of
the FDIC, to take such other action that would better achieve the purposes of
the prompt corrective action provisions. Such alternative action can be renewed
for successive 90-day periods. However, if the association continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the OTS makes certain findings with which the FDIC concurs and the
Director of the OTS and the Chairman of the FDIC certify that the association is
viable. In addition, an association that is critically undercapitalized is
subject to more severe restrictions on its activities, and is prohibited,
without prior approval of the FDIC from, among other things, entering into
certain material transactions or paying interest on new or renewed liabilities
at a rate that would significantly increase the association's weighted average
cost of funds.
Where appropriate, the OTS can impose corrective action by a savings
and loan holding company under the "prompt corrective action" provisions of
FDICIA.
Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established
a new risk-based assessment system for determining the deposit insurance
assessments to be paid by insured depositary institutions. Under the new
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the reporting
period ending seven months before the assessment period. The three capital
categories consist of (a) well capitalized, (b) adequately capitalized, or (c)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Under the regulation, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. Assessment rates for both the Bank
Insurance Fund ("BIF") and the SAIF currently range from 0.00% of deposits for
an institution in the highest category (i.e., well capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%, and both the BIF and
the SAIF currently satisfy the reserve ratio requirement.
The Deposit Funds Insurance Act of 1996 (the "1996 Funds Act") expanded
the assessment base for the payments on the bonds ("FICO bonds") issued in the
late 1980s by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation to include, beginning January 1, 1997,
the deposits of both BIF- and SAIF-insured institutions. Until December 31,
1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on SAIF-assessable deposits. For the quarterly period beginning
on July 1, 1997, the annual rates of assessment for the FICO bonds was 0.0126%
for BIF-assessable deposits and 0.0630% for SAIF-assessable deposits. For the
quarterly period beginning July 1, 1998, the rates of assessment for the FICO
bonds was 0.0122% for BIF-assessable deposits and 0.0610 for SAIF-assessable
deposits.
The 1996 Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Association has not been so classified by the FDIC or
the OTS. Accordingly, assuming that the designated reserve ratio is maintained
by the BIF and by the SAIF after the collection of the special SAIF assessment,
the Association will have to pay substantially lower regular assessments on its
deposits compared to those paid in recent years, as long as the Association
maintains its regulatory status.
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The 1996 Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The 1996 Funds Act required the Secretary of the Treasury
to conduct a study of relevant factors with respect to the development of a
common charter for all insured depository institutions and abolition of separate
charters for banks and thrifts and to report the Secretary's conclusions and
findings to the Congress. The Secretary of the Treasury recommended that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. The
Secretary of the Treasury also recommended the merger of the BIF and the SAIF
irrespective of whether the thrift charter is eliminated. The most recent
version of bank modernization legislation, The Financial Services Act of 1998,
H.R. 10, which was passed by the U.S. House of Representatives in May 1998 and
was considered but not adopted by the U.S. Senate over the summer of 1998, did
not require thrift institutions to convert to bank charter. H.R. 10 also
required that the FDIC's Board of Governors report to Congress on various issues
regarding the deposit insurance funds, including such questions as the plans
being developed for the merger of the funds, an estimate of the cost of such
merger to be borne by SAIF members, and any recommendations for legislative
action to provide for an efficient merger of the funds. With the Congressional
failure to adopt H.R. 10, the future for the merger of the deposit insurance
funds is uncertain.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Association is a member of the FHLB
of Atlanta, which is one of the regional FHLBs composing the FHLB System. Each
FHLB provides a central credit facility primarily for its member institutions.
The Association, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount at least equal
to the greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20 of
its advances (borrowings) from the FHLB of Atlanta. The Association was in
compliance with this requirement with an investment in FHLB of Atlanta stock at
September 30, 1998, of $364,100. Any advances from a FHLB must be secured by
specified types of collateral, and all long-term advances may be obtained only
for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. For the fiscal years ended
September 30, 1998 and 1997 dividends from the FHLB of Atlanta to the
Association amounted to $26,000 in each year. If dividends were reduced, or
interest on future FHLB advances increased, the Association's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of FDICIA and Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") on the FHLBs will not also cause a decrease in the value
of the FHLB of Atlanta stock held by the Association.
Federal Reserve System. The Association is subject to provisions of the
FRA and the FRB's regulations pursuant to which depositary institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3% of the aggregate of transaction accounts up to $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.7 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Association is in compliance with the foregoing
reserve requirements. Because required reserves must
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be maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Association, or a pass-through account as defined by the
FRB, the effect of this reserve requirement is to reduce the Association's
interest-earning assets. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but FRB regulations require such institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Association.
REGULATION OF THE HOLDING COMPANY
General. The Holding Company is a federal mutual holding company within
the meaning of Section 10(o) of the HOLA. As such, the Holding Company is
registered with and subject to OTS examination and supervision as well as
certain reporting requirements. In addition, the OTS has enforcement authority
over the Holding Company and any of its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,
soundness, or stability of a subsidiary savings institution. Unlike bank holding
companies, federal mutual holding companies are not subject to any regulatory
capital requirements or to supervision by the Federal Reserve System.
Restrictions Applicable to Activities of Mutual Holding Companies.
Pursuant to Section 10(o) of the HOLA, a mutual holding company may engage only
in the following activities: (i) investing in the stock of a savings
institution; (ii) acquiring a mutual association through the merger of such
association into a savings institution subsidiary of such holding company or an
interim savings institution subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings institution; (iv) investing in a corporation the capital stock of which
is available for purchase by a savings institution under federal law or under
the law of any state where the subsidiary savings institution or associations
have their home offices; (v) furnishing or performing management services for a
savings institution subsidiary of such holding company; (vi) holding, managing,
or liquidating assets owned or acquired from a savings institution subsidiary of
such company; (vii) holding or managing properties used or occupied by a savings
institution subsidiary of such company; (viii) acting as trustee under a deed of
trust; (ix) any other activity (a) that the FRB, by regulation, has determined
to be permissible for bank holding companies under Section 4(c) of the BHC Act,
unless the Director of the OTS, by regulation, prohibits or limits any such
activity for savings and loan holding companies, or (b) in which multiple
savings and loan holding companies were authorized by regulation to directly
engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock
acquired in connection with a qualified stock issuance if the purchase of such
stock by such holding company is approved by the Director of the OTS. If a
mutual holding company acquires or merges with another holding company, the
holding company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed above, and
it has a period of two years to cease any non-conforming activities and divest
any non-conforming investments.
Restrictions Applicable to All Savings and Loan Holding Companies. The
HOLA prohibits a savings and loan holding company, including a federal mutual
holding company, directly or indirectly, from acquiring (i) control (as defined
under HOLA) of another savings institution (or a holding company parent thereof)
without prior OTS approval; (ii) more than 5% of the voting shares of another
savings institution (or holding company parent thereof) that is not a
subsidiary, subject to certain exceptions; (iii) through merger, consolidation,
or purchase of assets, another savings institution or a holding company thereof,
or acquiring all or substantially all of the assets of such institution (or a
holding company thereof) without prior OTS approval; or (iv) control of any
depository institution not insured by the FDIC (except through a merger with and
into the holding company's savings institution subsidiary that is approved by
the OTS).
A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except (i) in the case of certain emergency acquisitions (as defined under HOLA)
approved by the FDIC; (ii) if such holding company controls a savings
institution subsidiary that operated a home or branch office in such additional
state as of March 5, 1987, and (iii) if the laws of the state in which the
savings institution to be acquired is located
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<PAGE>
specifically authorize a savings institution chartered by that state to be
acquired by a savings institution chartered by the state where the acquiring
savings institution or savings and loan holding company is located or by a
holding company that controls such a state chartered association. The conditions
imposed upon interstate acquisitions by those states that have enacted
authorizing legislation vary. Some states impose conditions of reciprocity,
which have the effect of requiring that the laws of both the state in which the
acquiring holding company is located (as determined by the location of its
subsidiary savings institution) and the state in which the association to be
acquired is located, have each enacted legislation allowing its savings
institutions to be acquired by out-of-state holding companies on the condition
that the laws of the other state authorize such transactions on terms no more
restrictive than those imposed on the acquiror by the state of the target
association. Some of these states also impose regional limitations, which
restrict such acquisitions to states within a defined geographic region. Other
states allow full nationwide banking without any condition of reciprocity. Some
states do not authorize interstate acquisitions of savings institutions. In
evaluating an application by a holding company to acquire a savings institution,
the OTS must consider the financial and managerial resources and future
prospects of the company and savings institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community, and competitive factors.
If the savings institution subsidiary of a federal mutual holding
company fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS, the holding company must register with the FRB as a bank
holding company under the BHC Act within one year of the savings institution's
failure to so qualify. For additional information in this regard, see "--
Regulation of Federal Savings Associations--QTL Test."
For a description of certain restrictions on transactions between the
Association and its affiliates, including, without limitation, the Holding
Company, see "--Regulation of Federal Savings Associations--Transactions with
Related Parties."
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Holding Company. The Association was last
audited for its taxable year ended September 30, 1993.
For federal income tax purposes, the Association reports its income
using a taxable year ending September 30 and the accrual method of accounting.
The Association in its stock form (the "Stock Association") and the Holding
Company file separate income tax returns and each reports its income on the same
basis as the Association now reports its income. Because the Holding Company
owns less than 80% of the outstanding common stock of the Stock Association, the
Holding Company and the Stock Association are not permitted to file such returns
on a consolidated basis. The Holding Company and the Stock Association are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Stock Association's tax reserve for
bad debts discussed below.
Bad Debt Reserves. The Association, as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general, are
loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing the Association's taxable income. Pursuant to the
Small Business Job Protection Act of 1996, the Association is now recapturing
(taking into income) over a multi-year period a portion of the balance of its
bad debt reserve as of September 30, 1997.
Distributions. To the extent that the Association makes "non-dividend
distributions" to the Holding Company, such distributions will be considered to
have been made from the Association's "base year reserve," i.e., its reserve as
of September 30, 1988, and then from the Association's supplemental reserve for
losses on loans, to the extent thereof, and an amount based on the amount
distributed (but not in excess of the amount of such
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<PAGE>
reserves) will be included in the Association's income. Non-dividend
distributions include distributions in excess of the Association's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Association's current or accumulated
earnings and profits will not be so included in the Association's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Reorganization, the Association makes a non-dividend distribution to the Holding
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Association does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Association
currently has none. AMTI is adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. Thus, the Association's AMTI is increased by an
amount equal to 75% of the amount by which the Association's adjusted current
earnings exceeds its AMTI (determined without regard to this adjustment and
prior to reduction for net operating losses). The Association does not expect to
be subject to the AMT.
Although the corporate environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2.0 million has expired, under current
Administration proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.
Dividends Received Deduction. As the owner of more than 20% of the
stock of the Stock Association, the Holding Company may deduct from its income
80% of dividends received from the Stock Association. (A 70% dividends received
deduction generally applies with respect to dividends received by a corporation
if such corporation owns less than 20% of the stock of the corporation paying
the dividend).
STATE TAXATION
Under North Carolina law, the corporate income tax is 7.50% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1991, 1992, 1993 and 1994,
corporate taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise payable by it. An annual state
franchise tax is imposed at a rate of .0015 applied to the greatest of the
institution's (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) 55% of the appraised valuation
of property in North Carolina.
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ITEM 2. PROPERTIES
The Association conducts its business through its sole office, located
in Wake Forest, North Carolina, which was renovated in 1995. The Association
owns the main office with net book value for property and equipment of $459,550
as of September 30, 1998. Management believes that the Association's current
facilities are adequate to meet the present and immediately foreseeable needs of
the Association and the Holding Company. However, the Association may consider
opening a branch office in the future.
NET BOOK
LEASED OR DATE VALUE AT
OWNED ACQUIRED SEPTEMBER 30, 1998
----- -------- ------------------
(in thousands)
Main Office.................. Owned 1961 $420
302 S. Brooks Street
Wake Forest, NC 27587
ITEM 3. LEGAL PROCEEDINGS
At September 30, 1998, there were no material legal proceedings to
which the Association was a party or to which any of its property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Common Stock Information" in the
Registrant's 1998 Annual Report to Stockholders on page 44, and is incorporated
herein by reference.
Information relating to the payment of dividends by the Registrant
appears under "Common Stock Information" in the Registrant's 1998 Annual Report
to Stockholders on page 44, and is incorporated herein by reference. A dividend
declared by the Board of Directors of the Association is considered a capital
distribution from the Association to the stockholders, including Wake Forest
Bancorp, M.H.C., its mutual holding company. Under the requirements of the OTS,
there are certain restrictions on the ability of the Association to pay a
capital distribution. See "Regulation--Limitation on Capital Distributions."
The Association's dividend payout ratios were 51.7% and 44.8% and the
equity to asset ratios were 17.7% and 19.1% for years ended September 30, 1998
and 1997, respectively.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain of the above-captioned information appears under "Management's
Discussion and Analysis" in the Registrant's 1998 Annual Report to Stockholders
on pages 3 through 15 and is incorporated herein by reference.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are incorporated by reference to the
indicated pages of the 1998 Annual Report to Stockholders.
Page(s) in
Annual Report
-------------
o Independent Auditor's Report.......................................16
o Statements of Financial Condition,
September 30, 1998 and 1997...............................17
o Statements of Income,
Years Ended September 30, 1998 and 1997...................18
o Statements of Stockholders' Equity,
Years Ended September 30, 1998 and 1997................19-20
o Statements of Cash Flows,
Years Ended September 30, 1998 and 1997................21-22
o Notes to Financial Statements...................................23-43
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information relating to Directors and Executive Officers of the
Association is incorporated herein by reference to the Association's Proxy
Statement for the Annual Meeting of Shareholders to be held on February 23,
1999, on pages 9 through 12. The information related to Section 16(a) of the
Exchange Act is incorporated herein by reference to the Proxy Statement on page
18.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated
herein by reference to the Association's Proxy Statement for the Annual Meeting
of Shareholders to be held on February 23, 1999, on pages 13 through 17.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Association's
Proxy Statement for the Annual Meeting of Shareholders to be held on February
23, 1999, on pages 5 through 7.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Association's Proxy
Statement for the Annual Meeting of Shareholders to be held on February 23,
1999, on page 18.
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<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
2 Plan of Reorganization from Mutual Savings and Loan
Association to Mutual Holding Company (Incorporated
by reference to Item 2 of the Association's Notice of
Mutual Holding Company Reorganization on Form MHC-1,
as filed with the OTS on December 20, 1995 and
amended February 6, 1996 (the "Form MHC-1")).
3.1 Federal Stock Charter of the Association
(Incorporated by reference to Exhibit 2(c)(ii) of the
Form MHC-1).
3.2 Bylaws of the Association (Incorporated by reference to
Exhibit 2(c)(ii) of the Form MHC-1).
4 Common Stock Certificate of the Association
(Incorporated by reference to Exhibit 2(b)(i) of the
Form MHC-1).
10.1 Employment Agreement with Anna O. Sumerlin, President
and Chief Executive Officer (Incorporated by
reference to Exhibit 10.1 of the Annual Report on
Form 10-KSB for the year ended September 30, 1996).
10.2 Employment Agreement with Carlton E. Chappell, Vice
President, Secretary and Treasurer (Incorporated by
reference to Exhibit 10.2 of the Annual Report on
Form 10-KSB for the year ended September 30, 1996).
10.3 Employee Stock Ownership Plan of Wake Forest Federal
Savings & Loan Association (Incorporated by reference
to Exhibit 2(e)(i) of the Form MHC-1).
10.4 Wake Forest Federal Savings & Loan Association 1997
Recognition and Retention Plan (Incorporated by
reference to the Proxy Statement, dated December 23,
1996, for the 1997 Annual Meeting.)
10.5 Wake Forest Federal Savings & Loan Association 1997
Stock Option Plan (Incorporated by reference to the
Proxy Statement, dated December 23, 1996, for the
1997 Annual Meeting.)
13 1998 Annual Report to Stockholders
99 Proxy Statement for 1999 Annual Meeting of Shareholders
(Incorporated by reference pursuant to General
Instruction E(3) of Form 10-KSB and Rule 12B-23 of
the rules promulgated under the Securities Exchange
Act of 1934, as amended).
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the three month
period ended September 30, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Association has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
(Small Business Issuer)
Date: December 28, 1998 By: /s/ Anna O. Sumerlin
------------------------------------
Anna O. Sumerlin
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Anna O. Sumerlin December 21, 1998
- ------------------------------------------------- -------------------
Anna O. Sumerlin Date
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Carlton E. Chappell December 21, 1998
- ------------------------------------------------- -------------------
Carlton E. Chappell Date
Vice President, Secretary and Treasurer
/s/ Robert C. White December 21, 1998
- ------------------------------------------------- -------------------
Robert C. White Date
Chief Financial Officer and Vice President
(Principal Financial Officer)
/s/ Paul K. Brixhoff December 21, 1998
- ------------------------------------------------- -------------------
Paul K. Brixhoff - Director Date
/s/ Harold R. Washington December 21, 1998
- ------------------------------------------------- -------------------
Harold R. Washington - Director Date
31
<PAGE>
/s/ John D. Lyon December 21, 1998
- ------------------------------------------------- -------------------
John D. Lyon - Director Date
/s/ R.W. Wilkinson, III December 21, 1998
- ------------------------------------------------- -------------------
R.W. Wilkinson, III - Vice-Chairman and Director Date
/s/ Howard L. Brown December 21, 1998
- ------------------------------------------------- -------------------
Howard L. Brown -Chairman of the Board Date
and Director
/s/ Leelan A. Woodlief December 21, 1998
- ------------------------------------------------- -------------------
Leelan A. Woodlief - Director Date
/s/ William S. Wooten December 21, 1998
- ------------------------------------------------- -------------------
William S. Wooten - Director Date
/s/ Rodney M. Privette December 21, 1998
- ------------------------------------------------- -------------------
Rodney M. Privette - Director Date
32
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- --------
2 Plan of Reorganization from Mutual Savings *
and Loan Association to Mutual Holding Company
3.1 Federal Stock Charter of the Association *
3.2 Bylaws of the Association *
4 Common Stock Certificate of the Association *
10.1 Employment Agreement with Anna O. Sumerlin, ***
President and Chief Executive Officer
10.2 Employment Agreement with Carlton E. Chappell, ***
Vice President, Secretary and Treasurer
10.3 Employee Stock Ownership Plan of Wake Forest Federal *
Savings & Loan Association
10.4 Wake Forest Federal Savings & Loan Association 1997 ****
Recognition and Retention Plan
10.5 Wake Forest Federal Savings & Loan Association 1997 ****
Stock Option Plan
13 1998 Annual Report to Stockholders
99 Proxy Statement for 1999 Annual Meeting of Stockholders **
- ------------
* Incorporated herein by reference into this document from the Exhibits to
the Association's Notice of Mutual Holding Company Reorganization on Form
MHC-1, as filed with the OTS on December 20, 1995 and amended February 6,
1996.
** Incorporated herein by reference into this document, pursuant to General
Instruction E(3) of Form 10-KSB and Rule 12b-23 of the rules promulgated
under the Securities Exchange Act of 1934, as amended.
*** Incorporated herein by reference into this document from the Association's
Form 10-KSB for the year ended September 30, 1996.
**** Incorporated herein by reference to the Association's Proxy Statement for
the 1997 Annual Meeting, as filed with the OTS.
33
<PAGE>
<PAGE>
EXHIBIT 10.1
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of February ___, 1998 by and between WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, a savings and loan association organized and operating under the
federal laws of the United States and having an office at 302 South Brooks
Street, Wake Forest, North Carolina 27588-0707 ("Association") and ANNA O.
SUMERLIN, an individual residing at 10112 Ligon Mill Road, Wake Forest, North
Carolina 27587 ("Executive").
W I T N E S S E T H :
WHEREAS, the Executive currently serves the Association in the
capacity of the Chief Executive Officer; and
WHEREAS, the Association and the Executive entered into an
Employment Agreement as of April 3, 1996 ("Prior Agreement") in connection with
the Association's reorganization from a mutual savings and loan association to a
stock form savings and loan association, which is majority owned by Wake Forest
Bancorp, M.H.C. ("Mutual Holding Company"); and
WHEREAS, the Association and the Executive desire to amend and
restate the Prior Agreement in its entirety as set forth herein; and
WHEREAS, the Association desires to assure for itself the
continued availability of the Executive's services and the ability of the
Executive to perform such services with a minimum of personal distraction in the
event of a pending or threatened Change in Control (as hereinafter defined); and
WHEREAS, the Executive is willing to continue to serve the
Association on the terms and conditions hereinafter set forth; and
WHEREAS, the Association agreed in connection with the Prior
Agreement to provide the Executive with a higher position in the Association and
a raise in salary from her present position and salary in additional
consideration for the Executive entering into the covenant not to compete
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and conditions hereinafter set forth, the Association and the
Executive hereby agree as follows:
Page 1 of 19
<PAGE>
SECTION 1. EMPLOYMENT.
The Association agrees to continue to employ the Executive,
and the Executive hereby agrees to such continued employment, during the period
and upon the terms and conditions set forth in this Agreement.
SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT
PERIOD.
(a) The terms and conditions of this Agreement shall be and
remain in effect during the period of employment established under this section
2 ("Employment Period"). The Employment Period shall be for an initial term of
three years beginning on the effective date of the Prior Agreement. Prior to the
first anniversary of the effective date of the Prior Agreement and each
anniversary date thereafter (each, an "Anniversary Date"), the Board of
Directors of the Association ("Board") shall review the terms of this Agreement
and the Executive's performance of services hereunder and may, in the absence of
objection from the Executive, approve an extension of the Employment Period. In
such event, the Employment Period shall be extended to the third anniversary of
the relevant Anniversary Date. In no event, however, shall any such extension
take effect at a time when the Executive could elect to resign pursuant to
section 9(a)(i) or 11 and claim severance benefits under section 9(b).
(b) For all purposes of this Agreement, the term "Remaining
Unexpired Employment Period" as of any date shall mean the period beginning on
such date and ending on the Anniversary Date on which the Employment Period (as
extended pursuant to section 2(a) of this Agreement) is then scheduled to
expire.
(c) Nothing in this Agreement shall be deemed to prohibit the
Association from terminating the Executive's employment at any time during the
Employment Period with or without notice for any reason; PROVIDED, HOWEVER, that
the relative rights and obligations of the Association and the Executive in the
event of any such termination shall be determined under this Agreement.
SECTION 3. DUTIES.
The Executive shall serve as the President and Chief Executive
Officer of the Association, having such power, authority and responsibility and
performing such duties as are prescribed by or under the By-Laws of the
Association and as are customarily associated with such position or as assigned
by the Board acting in good faith. The Executive shall devote her full business
time and attention (other than during weekends, holidays, approved vacation
periods, and periods of illness or approved leaves of absence) to the business
and affairs of the Association and shall use her best efforts to advance the
interests of the Association.
Page 2 of 19
<PAGE>
SECTION 4. CASH COMPENSATION.
(a) In consideration for the services to be rendered by the
Executive hereunder, the Association shall pay to her a salary at an initial
annual rate of SEVENTY-FIVE THOUSAND DOLLARS ($75,000), payable in approximately
equal installments in accordance with the Association's customary payroll
practices for senior officers. Prior to each Anniversary Date occurring during
the Employment Period, the Board shall review the Executive's annual rate of
salary and may, in its discretion, approve an increase therein. In addition to
salary, the Executive may receive other cash compensation from the Association
for services hereunder at such times, in such amounts and on such terms and
conditions as the Board may determine from time to time.
(b) Prior to or within 45 days after September 30, 1996, the
Association shall pay to the Executive a bonus in the amount of THIRTY THOUSAND
DOLLARS ($30,000.00); PROVIDED, HOWEVER, that the Association's net income after
provision for income taxes, but computed without regard to extraordinary items
(including, but not limited to, special deposit insurance assessments with
respect to deposits insured through the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation) for the fiscal year ended September
30, 1996 equals or exceeds FOUR HUNDRED THOUSAND DOLLARS ($400,000.00). For
fiscal years of the Association beginning after September 30, 1996, the amount
of the bonus (if any) to be paid to the Executive shall be determined by the
Board in its sole and absolute discretion. Notwithstanding anything in this
Agreement to the contrary, the Association shall have no obligation to make any
bonus payment to the extent that the payment of such bonus will result in a net
loss for the Association for such fiscal year or cause the Association to fail
be at least "adequately capitalized" within the meaning of 12 C.F.R.
ss.565.4(b)(2).
SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated
as an employee of the Association and shall be eligible to participate in and
receive benefits under any and all qualified or non-qualified retirement,
pension, savings, profit-sharing or stock bonus plans, any and all group life,
health (including hospitalization, medical and major medical), dental, accident
and long term disability insurance plans, and any other employee benefit and
compensation plans (including, but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover executive
employees of, the Association, in accordance with the terms and conditions of
such employee benefit plans and programs and compensation plans and programs and
consistent with the Association's customary practices.
SECTION 6. INDEMNIFICATION AND INSURANCE.
(a) During the Employment Period and for a period of six (6)
years thereafter, the Association shall cause the Executive to be covered by and
named as an insured under any policy or contract of insurance obtained by it to
insure its directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the
Association
Page 3 of 19
<PAGE>
or service in other capacities at the request of the Association. The coverage
provided to the Executive pursuant to this section 6 shall be of the same scope
and on the same terms and conditions as the coverage (if any) provided to other
officers or directors of the Association.
(b) For so long as the Association is subject to regulation by
the Office of Thrift Supervision ("OTS"), the Association shall indemnify the
Executive in accordance with 12 C.F.R. ss.545.121. From and after the earliest
date on which the Association is not subject to regulation by the OTS, to the
maximum extent permitted under applicable law, during the Employment Period and
for a period six (6) years thereafter, the Association shall indemnify, and
shall cause its subsidiaries and affiliates to indemnify the Executive against
and hold her harmless from any costs, liabilities, losses and exposures to the
fullest extent and on the most favorable terms and conditions that similar
indemnification is offered to any director or officer of the Association or any
subsidiary or affiliate thereof. This section 6(b) shall not be applicable where
section 18 is applicable.
SECTION 7. OUTSIDE ACTIVITIES.
The Executive may serve as a member of the boards of directors
of such business, community and charitable organizations as she may disclose to
and as may be approved by the Board (which approval shall not be unreasonably
withheld); PROVIDED, HOWEVER, that such service shall not materially interfere
with the performance of her duties under this Agreement. The Executive may also
engage in personal business and investment activities which do not materially
interfere, and are not inconsistent with, the performance of her duties and
responsibilities hereunder; PROVIDED, HOWEVER, that such activities are not
prohibited under 12 C.F.R. ss.ss.571.7 or 571.9 or any code of conduct or
investment or securities trading policy established by the Association and
generally applicable to all similarly situated executives (including, without
limitation, any applicable conflict of interest policy adopted by the Board of
Directors as contemplated by 12 C.F.R. ss.571.7). The Executive may also serve
as an officer or director of the Mutual Holding Company on such terms and
conditions as the Association and the Mutual Holding Company may mutually agree
upon, and such service shall not be deemed to materially interfere with the
Executive's performance of her duties hereunder or otherwise to result in a
material breach of this Agreement. Executive shall not receive compensation from
the Association for service as an officer or director of the Mutual Holding
Company.
SECTION 8. WORKING FACILITIES AND EXPENSES.
The Executive's principal place of employment shall be at the
Association's executive offices at the address first above written, or at such
other location within Wake County at which the Association shall maintain its
principal executive offices, or at such other location as the Association and
the Executive may mutually agree upon. The Association shall provide the
Executive at her principal place of employment with a private office,
secretarial services and other support services and facilities suitable to her
position with the Association and necessary or appropriate in connection with
the performance of her assigned duties under this Agreement. The Association
shall reimburse the Executive for her ordinary and necessary business expenses,
including, without limitation, fees for memberships in such clubs and
organizations as the
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Executive and the Association shall mutually agree are necessary and appropriate
for business purposes, and her travel and entertainment expenses incurred in
connection with the performance of her duties under this Agreement, in each case
upon presentation to the Association of an itemized account of such expenses in
such form as the Association may reasonably require.
SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS.
(a) The Executive shall be entitled to the severance benefits
described herein in the event that her employment with the Association
terminates during the Employment Period under any of the following
circumstances:
(i) the Executive's voluntary resignation from employment with
the Association within forty-five (45) days following:
(A) the failure of the Board to appoint or re-appoint
or elect or re-elect the Executive to the office of President
and Chief Executive Officer (or a more senior office) of the
Association;
(B) the failure of the stockholders of the
Association to elect or re-elect the Executive to the Board or
the failure of the Board (or the nominating committee thereof)
to nominate the Executive for such election or re-election;
PROVIDED, HOWEVER, that such failure is not the result of a
vote cast by the Executive;
(C) the expiration of a thirty (30) day period
following the date on which the Executive gives written notice
to the Association of its material failure, whether by
amendment of the Association's Organization Certificate or
By-laws, action of the Board or the Association's stockholders
or otherwise, to vest in the Executive the functions, duties,
or responsibilities prescribed in section 3 of this Agreement
as of the date hereof, unless, during such thirty (30) day
period, the Association fully cures such failure;
(D) the expiration of a thirty (30) day period
following the date on which the Executive gives written notice
to the Association of its material breach of any term,
condition or covenant contained in this Agreement (including,
without limitation any reduction of the Executive's rate of
base salary in effect from time to time and any change in the
terms and conditions of any compensation or benefit program in
which the Executive participates which, either individually or
together with other changes, has a material adverse effect on
the aggregate value of her total
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<PAGE>
compensation package), unless, during such thirty (30) day
period, the Association fully cures such failure; or
(ii) the termination of the Executive's employment with the
Association for any other reason not described in section 10(a).
In such event, subject to section 25, the Association shall provide the benefits
and pay to the Executive the amounts described in section 9(b).
(b) Upon the termination of the Executive's employment with
the Association under circumstances described in section 9(a) of this Agreement,
the Association shall pay and provide to the Executive (or, in the event of her
death, to her estate):
(i) her earned but unpaid compensation as of the date of the
termination of her employment with the Association, such payment to be
made at the time and in the manner prescribed by law applicable to the
payment of wages but in no event later than thirty (30) days after
termination of employment;
(ii) the benefits, if any, to which she is entitled as a
former employee under the employee benefit plans and programs and
compensation plans and programs maintained for the benefit of the
Association's officers and employees;
(iii) continued group life, health (including hospitalization,
medical and major medical), dental, accident and long term disability
insurance benefits, in addition to that provided pursuant to section
9(b)(ii), and after taking into account the coverage provided by any
subsequent employer, if and to the extent necessary to provide for the
Executive, for the Remaining Unexpired Employment Period, coverage
equivalent to the coverage to which she would have been entitled under
such plans (as in effect on the date of her termination of employment,
or, if her termination of employment occurs after a Change in Control,
on the date of such Change in Control, whichever benefits are greater)
if she had continued working for the Association during the Remaining
Unexpired Employment Period at the highest annual rate of compensation
achieved during that portion of the Employment Period which is prior to
the Executive's termination of employment with the Association;
(iv) within thirty (30) days following her termination of
employment with the Association, a lump sum payment, in an amount equal
to the present value of the salary that the Executive would have earned
if she had continued working for the Association during the Remaining
Unexpired Employment Period at the highest annual rate of salary
achieved during that portion of the Employment Period which is prior to
the Executive's termination of employment with the Association, where
such present value is to be determined using a discount rate equal to
the applicable short-term federal rate prescribed under section 1274(d)
of the Internal Revenue Code of 1986 ("Code"), compounded using the
compounding period corresponding to the Association's regular payroll
periods for its officers,
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such lump sum to be paid in lieu of all other payments of salary
provided for under this Agreement in respect of the period following
any such termination;
(v) within thirty (30) days following her termination of
employment with the Association, a lump sum payment in an amount equal
to the excess, if any, of:
(A) the present value of the aggregate benefits to
which she would be entitled under any and all qualified and
non-qualified defined benefit pension plans maintained by, or
covering employees of, the Association if she had continued
working for the Association during the Remaining Unexpired
Employment Period (such benefits to be determined as of the
date of termination of employment by adding to the service
actually recognized under such plans an additional period
equal to the Remaining Unexpired Employment Period and by
adding to the compensation actually recognized under such
plans all amounts payable under sections 9(b)(i), (iv) and
(vii) to the extent such amounts would have been recognized
under such plans had the Executive Remained in service during
the Remaining Unexpired Employment Period); over
(B) the present value of the benefits to which she is
actually entitled under such defined benefit pension plans as
of the date of her termination;
where such present values are to be determined using the mortality
tables prescribed under section 415(b)(2)(E)(v) of the Code and a
discount rate, compounded monthly, equal to the annualized rate of
interest prescribed by the Pension Benefit Guaranty Corporation for the
valuation of immediate annuities payable under terminating
single-employer defined benefit plans for the month in which the
Executive's termination of employment occurs ("Applicable PBGC Rate").
(vi) within thirty (30) days following her termination of
employment with the Association, a lump sum payment in an amount equal
to the present value of the additional employer contributions (or if
greater in the case of a leveraged employee stock ownership plan or
similar arrangement, the additional assets allocable to her through
debt service, based on the fair market value of such assets at
termination of employment) to which she would have been entitled under
any and all qualified and non-qualified defined contribution plans
maintained by, or covering employees of, the Association, if she had
continued working for the Association during the Remaining Unexpired
Employment Period at the highest annual rate of compensation achieved
during that portion of the Employment Period which is prior to the
Executive's termination of employment with the Association, and making
the maximum amount of employee contributions, if any, required under
such plan or plans, such present value to be determined on the basis of
a discount rate, compounded using the compounding period that
corresponds to the
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frequency with which employer contributions are made to the relevant
plan, equal to the Applicable PBGC Rate; and
(vii) the payments that would have been made to the Executive
under any cash bonus or long-term or short-term cash incentive
compensation plan maintained by, or covering employees of, the
Association if she had continued working for the Association during the
Remaining Unexpired Employment Period and had earned the maximum bonus
or incentive award in each calendar year that ends during the Remaining
Unexpired Employment Period, such payments to be equal to the product
of:
(A) the maximum percentage rate at which an award was
ever available to the Executive under such incentive
compensation plan; multiplied by
(B) the salary that would have been paid to the
Executive during each such calendar year at the highest annual
rate of salary achieved during that portion of the Employment
Period which is prior to the Executive's termination of
employment with the Association,
such payments to be made (without discounting for early payment) within
thirty (30) days following the Executive's termination of employment.
The Association and the Executive hereby stipulate that the damages which may be
incurred by the Executive following any such termination of employment are not
capable of accurate measurement as of the date first above written and that the
payments and benefits contemplated by this section 9(b) constitute reasonable
damages under the circumstances and shall be payable without any requirement of
proof of actual damage and without regard to the Executive's efforts, if any, to
mitigate damages. The Association and the Executive further agree that the
Association may condition the payments and benefits (if any) due under sections
9(b)(iii), (iv), (v), (vi) and (vii) on the receipt of the Executive's
resignation from any and all positions which she holds as an officer, director
or committee member with respect to the Association or the Mutual Holding
Company or any subsidiary or affiliate of either of them.
SECTION 10. TERMINATION WITHOUT ADDITIONAL ASSOCIATION
LIABILITY.
In the event that the Executive's employment with the
Association shall terminate during the Employment Period on account of:
(a) the discharge of the Executive for "cause," which, for
purposes of this Agreement shall mean personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease and desist order, or any material
breach of this Agreement, in each case as measured against standards
generally
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prevailing at the relevant time in the savings and community banking
industry; PROVIDED, HOWEVER, that the Executive shall not be deemed to
have been discharged for cause unless and until the following
procedures shall have been followed:
(i) the Board shall adopt a resolution duly approved
by affirmative vote of a majority of the entire Board at a
meeting called and held for such purpose calling for the
Executive's termination for cause and setting forth the
purported grounds for such termination ("Proposed Termination
Resolution");
(ii) as soon as practicable, and in any event within
five (5) days, after adoption of such resolution, the Board
shall furnish to the Executive a written notice of termination
which shall be accompanied by a certified copy of the Proposed
Termination Resolution ("Notice of Proposed Termination");
(iii) the Executive shall be afforded a reasonable
opportunity to make oral and written presentations to the
members of the Board, on her own behalf, or through a
representative, who may be her legal counsel, to refute the
grounds set forth in the Proposed Termination Resolution at
one or more meetings of the Board to be held no sooner than
fifteen (15) days and no later than thirty (30) after the
Executive's receipt of the Proposed Termination Notice
("Termination Hearings"); and
(iv) within ten (10) days following the end of the
Termination Hearings, the Board shall adopt a resolution duly
approved by affirmative vote of a majority of the entire Board
at a meeting called and held for such purpose (A) finding that
in the good faith opinion of the Board the grounds for
termination set forth in the Proposed Termination Resolution
exist and (B) terminating the Executive's employment
("Termination Resolution"); and
(v) as promptly as practicable, and in any event
within one (1) business day after adoption of the Termination
Resolution, the Board shall furnish to the Exective written
notice of termination, which notice shall include a copy of
the Termination Resolution and specify an effective date of
termination that is not later than the date on which such
notice is given;
(b) the Executive's voluntary resignation from employment with
the Association for reasons other than those specified in section
9(a)(i);
(c) the Executive's death;
(d) a determination that the Executive is eligible for
long-term disability benefits under the Association's long-term
disability insurance program or, if there is no such program, under the
federal Social Security Act; or
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(e) the Executive's termination of employment for any reason
at or after attainment of mandatory retirement age under the
Association's mandatory retirement policy for executive officers in
effect as of the date of this Agreement;
then the Association shall have no further obligations under this
Agreement, other than the payment to the Executive (or, in the event of
her death, to her estate) of her earned but unpaid compensation as of
the date of the termination of her employment, and the provision of
such other benefits, if any, to which she is entitled as a former
employee under the employee benefit plans and programs and compensation
plans and programs maintained by, or covering employees of, the
Association.
SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL.
(a) A Change in Control of the Association ("Change in
Control") shall be deemed to have occurred upon the happening of any of the
following events:
(i) approval by the stockholders of the Association of a
transaction that would result in the reorganization, merger or
consolidation of the Association, respectively, with one or more other
persons, other than a transaction following which:
(A) at least 51% of the equity ownership interests of
the entity resulting from such transaction are beneficially
owned (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act")) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the outstanding equity ownership
interests in the Association; and
(B) at least 51% of the securities entitled to vote
generally in the election of directors of the entity resulting
from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Association;
(ii) the acquisition of all or substantially all of the assets
of the Association or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of the
outstanding securities of the Association entitled to vote generally in
the election of directors by any person or by any persons acting in
concert, or approval by the stockholders of the Association of any
transaction which would result in such an acquisition; or
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(iii) a complete liquidation or dissolution of the
Association, or approval by the stockholders of the Association of a
plan for such liquidation or dissolution; or
(iv) the occurrence of any event if, immediately following
such event, at least 50% of the members of the board of directors of
the Association do not belong to any of the following groups:
(A) individuals who were members of the Board of the
Association on the date of this Agreement; or
(B) individuals who first became members of the Board
of the Association after the date of this Agreement either:
(I) upon election to serve as a member of
the Board of directors of the Association by
affirmative vote of three-quarters of the members of
such board, or of a nominating committee thereof, in
office at the time of such first election; or
(II) upon election by the stockholders of
the Board to serve as a member of the board of
directors of the Board, but only if nominated for
election by affirmative vote of three-quarters of the
members of the board of directors of the Board, or of
a nominating committee thereof, in office at the time
of such first nomination;
PROVIDED, HOWEVER, that such individual's election or
nomination did not result from an actual or threatened
election contest (within the meaning of Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents
(within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf
of the Board of the Association;
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Association by any
employee benefit plan maintained by the Association. For purposes of this
section 11, the term "person" shall have the meaning assigned to it under
sections 13(d)(3) or 14(d)(2) of the Exchange Act.
(b) In the event of a Change in Control, the Executive shall
be entitled to the payments and benefits contemplated by section 9(b) in the
event of her termination of employment with the Association under any of the
circumstances described in section 9(a) of this Agreement or under any of the
following circumstances:
(i) resignation, voluntary or otherwise, by the Executive at
any time during the Employment Period and within ninety (90) days
following her demotion, loss of title, office or significant authority
or responsibility, or following any reduction in any element of her
package of compensation and benefits;
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(ii) resignation, voluntary or otherwise, by the Executive at
any time during the Employment Period and within ninety (90) days
following any relocation of her principal place of employment or any
change in working conditions at such principal place of employment
which is embarrassing, derogatory or otherwise materially adverse to
the Executive;
(iii) resignation, voluntary or otherwise, by the Executive at
any time during the Employment Period following the failure of any
successor to the Association in the Change in Control to include the
Executive in any compensation or benefit program maintained by it or
covering any of its executive officers, unless the Executive is already
covered by a substantially similar plan of the Association which is at
least as favorable to her; or
(iv) resignation, voluntary or otherwise, for any reason
whatsoever following the expiration of a transition period of thirty
days beginning on the effective date of the Change in Control (or such
longer period, not to exceed ninety (90) days beginning on the
effective date of the Change in Control, as the Association or its
successor may reasonably request) to facilitate a transfer of
management responsibilities.
SECTION 12. COVENANT NOT TO COMPETE.
The Executive hereby covenants and agrees that, in the event
of her termination of employment with the Association prior to the expiration of
the Employment Period, for a period of one (1) year following the date of her
termination of employment with the Association (or, if less, for the Remaining
Unexpired Employment Period), she shall not, without the written consent of the
Association, become an officer, employee, consultant, director or trustee with
executory, managerial, supervisory or strategic authority or influence at any
savings bank, savings and loan association, savings and loan holding company,
bank or bank holding company, or any direct or indirect subsidiary or affiliate
of any such entity, that entails working within one hundred (100) miles of the
headquarters of the Association on the date of the Executive's termination of
employment; PROVIDED, HOWEVER, that this section 12 shall not apply if the
Executive's emloyment is terminated by reason of voluntary resignation for the
reasons set forth in section 9(a)(i) or by reason of termination by the
Association other than for cause as provided in section 10(a) or after
attainment of mandatory retirement age pursuant to section 10(e); and PROVIDED,
FURTHER, that if the Executive's employment shall be terminated on account of
disability as provided in section 10(d) of this Agreement, this section 12 shall
not prevent the Executive from accepting any position or performing any services
if (a) she first offers, by written notice, to accept a similar position with,
or perform similar services for, the Association on substantially the same terms
and conditions and (b) the Association declines to accept such offer within ten
(10) days after such notice is given.
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SECTION 13. CONFIDENTIALITY.
Unless she obtains the prior written consent of the
Association, the Executive shall keep confidential and shall refrain from using
for the benefit of herself, or any person or entity other than the Association
or any entity which is a subsidiary of the Association or of which the
Association is a subsidiary, any material document or information obtained from
the Association, or from its parent or subsidiaries, in the course of her
employment with any of them concerning their properties, operations or business
(unless such document or information is readily ascertainable from public or
published information or trade sources or has otherwise been made available to
the public through no fault of her own) until the same ceases to be material (or
becomes so ascertainable or available); PROVIDED, HOWEVER, that nothing in this
section 13 shall prevent the Executive, with or without the Association's
consent, from participating in or disclosing documents or information in
connection with any judicial or administrative investigation, inquiry or
proceeding to the extent that such participation or disclosure is required under
applicable law.
SECTION 14. SOLICITATION.
The Executive hereby covenants and agrees that, for a period
of one (1) year following her termination of employment with the Association,
she shall not, without the written consent of the Association, either directly
or indirectly:
(a) solicit, offer employment to, or take any other action
intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any officer or employee of
the Association or any affiliate, as of the date of this Agreement, of
either of them to terminate her or his employment and accept employment
or become affiliated with, or provide services for compensation in any
capacity whatsoever to, any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making
loans, doing business within one hundred (100) miles of the
headquarters of the Association or any affiliate, as of the date of
this Agreement, of either of them;
(b) provide any information, advice or recommendation with
respect to any such officer or employee of any savings bank, savings
and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of
accepting deposits and making loans, doing business within one hundred
(100) miles of the headquarters of the Association or any affiliate, as
of the date of this Agreement, of either of them that is intended, or
that a reasonable person acting in like circumstances would expect, to
have the effect of causing any officer or employee of the Association
or any affiliate, as of the date of this Agreement, of either of them
to terminate her or his employment and accept employment or become
affiliated with, or provide services for compensation in any capacity
whatsoever to, any savings bank, savings and loan association, bank,
bank holding company, savings and loan holding company, or
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other institution engaged in the business of accepting deposits and
making loans, doing business within one hundred (100) miles of the
headquarters of the Association or any affiliate, as of the date of
this Agreement, of either of them;
(c) solicit, provide any information, advice or recommendation
or take any other action intended, or that a reasonable person acting
in like circumstances would expect, to have the effect of causing any
customer of the Association to terminate an existing business or
commercial relationship with the Association.
SECTION 15. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS.
The termination of the Executive's employment during the term
of this Agreement or thereafter, whether by the Association or by the Executive,
shall have no effect on the rights and obligations of the parties hereto under
the Association's qualified or non-qualified retirement, pension, savings,
thrift, profit-sharing or stock bonus plans, group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Association from time to time.
SECTION 16. SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding
upon the Executive, her legal representatives and testate or intestate
distributees, and the Association and its successors and assigns, including any
successor by merger or consolidation or any other person or firm or corporation
to which all or substantially all of the assets and business of the Association
may be sold or otherwise transferred. Failure of the Association to obtain from
any successor its express written assumption of the Association's obligations
hereunder at least sixty (60) days in advance of the scheduled effective date of
any such succession shall be deemed a material breach of this Agreement unless
cured within ten (10) days after notice thereof by the Executive to the
Association.
SECTION 17. NOTICES.
Any communication required or permitted to be given under this
Agreement, including any notice, direction, designation, consent, instruction,
objection or waiver, shall be in writing and shall be deemed to have been given
at such time as it is delivered personally, or five (5) days after mailing if
mailed, postage prepaid, by registered or certified mail, return receipt
requested, addressed to such party at the address listed below or at such other
address as one such party may by written notice specify to the other party:
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If to the Executive:
Ms. Anna O. Sumerlin
10112 Ligon Mill Road
Wake Forest, North Carolina 27587
If to the Association:
Wake Forest Federal Savings & Loan Association
302 South Brooks Street, P.O. 707
Wake Forest, North Carolina 27588-0707
Attention: Chairman of the Board
WITH A COPY TO:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: Lisa M. Miller, Esq.
SECTION 18. INDEMNIFICATION FOR ATTORNEYS' FEES.
The Association shall indemnify, hold harmless and defend the
Executive against reasonable costs, including legal fees, incurred by her in
connection with or arising out of any action, suit or proceeding in which she
may be involved, as a result of her efforts, in good faith, to defend or enforce
the terms of this Agreement; PROVIDED, HOWEVER, that the Executive shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding. The determination whether the Executive shall have substantially
prevailed on the merits and is therefore entitled to such indemnification, shall
be made by the court or arbitrator, as applicable. In the event of a settlement
pursuant to a settlement agreement, any indemnification payment under this
section 18 shall be made only after a determination by the members of the Board
(other than the Executive and any other member of the Board to which the
Executive is related by blood or marriage) that the Executive has acted in good
faith and that such indemnification payment is in the best interests of the
Association.
SECTION 19. SEVERABILITY.
A determination that any provision of this Agreement is
invalid or unenforceable shall not affect the validity or enforceability of any
other provision hereof.
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SECTION 20. WAIVER.
Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition. A waiver of any provision of this Agreement must be made
in writing, designated as a waiver, and signed by the party against whom its
enforcement is sought. Any waiver or relinquishment of any right or power
hereunder at any one or more times shall not be deemed a waiver or
relinquishment of such right or power at any other time or times.
SECTION 21. COUNTERPARTS.
This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
SECTION 22. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced
in accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of North
Carolina applicable to contracts entered into and to be performed entirely
within the State of North Carolina.
SECTION 23. HEADINGS AND CONSTRUCTION.
The headings of sections in this Agreement are for convenience
of reference only and are not intended to qualify the meaning of any section.
Any reference to a section number shall refer to a section of this Agreement,
unless otherwise stated.
SECTION 24. ENTIRE AGREEMENT; MODIFICATIONS.
This instrument contains the entire agreement of the parties
relating to the subject matter hereof, and supersedes in its entirety any and
all prior agreements, understandings or representations relating to the subject
matter hereof. No modifications of this Agreement shall be valid unless made in
writing and signed by the parties hereto.
SECTION 25. REQUIRED REGULATORY PROVISIONS.
The following provisions are included for the purposes of
complying with various laws, rules and regulations applicable to the
Association:
(a) Notwithstanding anything herein contained to the contrary,
in no event shall the aggregate amount of compensation payable to the
Executive under
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section 9(b) hereof (exclusive of amounts described in section 9(b)(i)
or (ii)) exceed the three times the Executive's average annual
compensation (within the meaning of OTS Regulatory Bulletin 27a or any
successor thereto) for the last five consecutive calendar years to end
prior to her termination of employment with the Association (or for her
entire period of employment with the Association if less than five
calendar years). The compensation payable to the Executive hereunder
shall be further reduced (but not below zero) if such reduction would
avoid the assessment of excise taxes on excess parachute payments
(within the meaning of section 280G of the Code).
(b) Notwithstanding anything herein contained to the contrary,
any payments to the Executive by the Association, whether pursuant to
this Agreement or otherwise, are subject to and conditioned upon their
compliance with section 18(k) of the Federal Deposit Insurance Act
("FDI Act"), 12 U.S.C. ss.1828(k), and any regulations promulgated
thereunder.
(c) Notwithstanding anything herein contained to the contrary,
if the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the affairs of the Association
pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI
Act, 12 U.S.C. ss.1818(e)(3) or 1818(g)(1), the Association's
obligations under this Agreement shall be suspended as of the date of
service of such notice, unless stayed by appropriate proceedings. If
the charges in such notice are dismissed, the Association, in its
discretion, may (i) pay to the Executive all or part of the
compensation withheld while the Association's obligations hereunder
were suspended and (ii) reinstate, in whole or in part, any of the
obligations which were suspended.
(d) Notwithstanding anything herein contained to the contrary,
if the Executive is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order
issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1), all prospective obligations of the Association
under this Agreement shall terminate as of the effective date of the
order, but vested rights and obligations of the Association and the
Executive shall not be affected.
(e) Notwithstanding anything herein contained to the contrary,
if the Association is in default (within the meaning of section 3(x)(1)
of the FDI Act, 12 U.S.C. ss.1813(x)(1), all prospective obligations of
the Association under this Agreement shall terminate as of the date of
default, but vested rights and obligations of the Association and the
Executive shall not be affected.
(f) Notwithstanding anything herein contained to the contrary,
all prospective obligations of the Association hereunder shall be
terminated, except to the extent that a continuation of this Agreement
is necessary for the continued operation of the Association: (i) by the
Director of the OTS or her designee or the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into
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an agreement to provide assistance to or on behalf of the Association
under the authority contained in section 13(c) of the FDI Act, 12
U.S.C. ss.1823(c); (ii) by the Director of the OTS or her designee at
the time such Director or designee approves a supervisory merger to
resolve problems related to the operation of the Association or when
the Association is determined by such Director to be in an unsafe or
unsound condition. The vested rights and obligations of the parties
shall not be affected.
If and to the extent that any of the foregoing provisions shall cease to be
required or by applicable law, rule or regulation, the same shall become
inoperative as though eliminated by formal amendment of this Agreement.
IN WITNESS WHEREOF, the Association has caused this Agreement
to be executed and the Executive has hereunto set her hand, all as of the day
and year first above written.
------------------------------------
ANNA O. SUMERLIN
ATTEST: WAKE FOREST FEDERAL
SAVINGS & LOAN ASSOCIATION
By By
----------------------------- ----------------------------------
Secretary Name: Odis Russell Dew
Title: Chairman of the Board
[Seal]
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STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this ________ day of February, 1998, before me personally
came Anna O. Sumerlin, to me known, and known to me to be the individual
described in the foregoing instrument, who, being by me duly sworn, did depose
and say that she resides at the address set forth in said instrument, and that
she signed her name to the foregoing instrument.
-----------------------------
Notary Public
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this ________ day of February, 1998, before me personally
came ___________________, to me known, who, being by me duly sworn, did depose
and say that he resides at ______________________________________________, that
he is a member of the Board of Directors of WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, the savings bank described in and which executed the foregoing
instrument; that he knows the seal of said mutual savings bank; that the seal
affixed to said instrument is such seal; that it was so affixed by order of the
Board of Directors of said savings bank; and that he signed his name thereto by
like order.
-----------------------------
Notary Public
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<PAGE>
EXHIBIT 10.2
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of February ___, 1998 by and between WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, a savings and loan association organized and operating under the
federal laws of the United States and having an office at 302 South Brooks
Street, Wake Forest, North Carolina 27588-0707 ("Association") and CARLTON E.
CHAPPELL, an individual residing at 1204 Jenkins Road, Wake Forest, North
Carolina 27587 ("Executive").
W I T N E S S E T H :
WHEREAS, the Executive currently serves the Association in the
capacity of Senior Vice President; and
WHEREAS, the Association and the Executive entered into an
Employment Agreement as of April 3, 1996 ("Prior Agreement") in connection with
the Association's reorganization from a mutual savings and loan association to a
stock form savings and loan association, which is majority owned by Wake Forest
Bancorp, M.H.C. ("Mutual Holding Company"); and
WHEREAS, the Association and the Executive desire to amend and
restate the Prior Agreement in its entirety, as set forth herein; and
WHEREAS, the Association desires to assure for itself the
continued availability of the Executive's services and the ability of the
Executive to perform such services with a minimum of personal distraction in the
event of a pending or threatened Change in Control (as hereinafter defined); and
WHEREAS, the Executive is willing to continue to serve the
Association on the terms and conditions hereinafter set forth; and
WHEREAS, the Association agreed in connection with the Prior
Agreement to provide the Executive with a higher position in the Association and
a raise in salary from his present position and salary in additional
consideration for the Executive entering into the covenant not to compete
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and conditions hereinafter set forth, the Association and the
Executive hereby agree as follows:
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SECTION 1. EMPLOYMENT.
The Association agrees to continue to employ the Executive,
and the Executive hereby agrees to such continued employment, during the period
and upon the terms and conditions set forth in this Agreement.
SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT
PERIOD.
(a) The terms and conditions of this Agreement shall be and
remain in effect during the period of employment established under this section
2 ("Employment Period"). The Employment Period shall be for an initial term of
three years beginning on the effective date of the Prior Agreement. Prior to the
first anniversary of the effective date of the Prior Agreement and each
anniversary date thereafter (each, an "Anniversary Date"), the Board of
Directors of the Association ("Board") shall review the terms of this Agreement
and the Executive's performance of services hereunder and may, in the absence of
objection from the Executive, approve an extension of the Employment Period. In
such event, the Employment Period shall be extended to the third anniversary of
the relevant Anniversary Date. In no event, however, shall any such extension
take effect at a time when the Executive could elect to resign pursuant to
section 9(a)(i) or 11 and claim severance benefits under section 9(b).
(b) For all purposes of this Agreement, the term "Remaining
Unexpired Employment Period" as of any date shall mean the period beginning on
such date and ending on the Anniversary Date on which the Employment Period (as
extended pursuant to section 2(a) of this Agreement) is then scheduled to
expire.
(c) Nothing in this Agreement shall be deemed to prohibit the
Association from terminating the Executive's employment at any time during the
Employment Period with or without notice for any reason; PROVIDED, HOWEVER, that
the relative rights and obligations of the Association and the Executive in the
event of any such termination shall be determined under this Agreement.
SECTION 3. DUTIES.
The Executive shall serve as the Vice President of the
Association, having such power, authority and responsibility and performing such
duties as are prescribed by or under the By-Laws of the Association and as are
customarily associated with such position or as assigned by the Board acting in
good faith. The Executive shall devote his full business time and attention
(other than during weekends, holidays, approved vacation periods, and periods of
illness or approved leaves of absence) to the business and affairs of the
Association and shall use his best efforts to advance the interests of the
Association.
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SECTION 4. CASH COMPENSATION.
(a) In consideration for the services to be rendered by the
Executive hereunder, the Association shall pay to him a salary at an initial
annual rate of FIFTY-THREE THOUSAND DOLLARS ($53,000), payable in approximately
equal installments in accordance with the Association's customary payroll
practices for senior officers. Prior to each Anniversary Date occurring during
the Employment Period, the Board shall review the Executive's annual rate of
salary and may, in its discretion, approve an increase therein. In addition to
salary, the Executive may receive other cash compensation from the Association
for services hereunder at such times, in such amounts and on such terms and
conditions as the Board may determine from time to time.
(b) Prior to or within 45 days after September 30, 1996, the
Association shall pay to the Executive a bonus in the amount of ELEVEN-THOUSAND
DOLLARS ($11,000.00); PROVIDED, HOWEVER, that the Association's net income after
provision for income taxes, but computed without regard to extraordinary items
(including, but not limited to, special deposit insurance assessments with
respect to deposits insured through the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation) for the fiscal year ended September
30, 1996 equals or exceeds FOUR HUNDRED THOUSAND DOLLARS ($400,000.00). For
fiscal years of the Association beginning after September 30, 1996, the amount
of the bonus (if any) to be paid to the Executive shall be determined by the
Board in its sole and absolute discretion. Notwithstanding anything in this
Agreement to the contrary, the Association shall have no obligation to make any
bonus payment to the extent that the payment of such bonus will result in a net
loss for the Association for such fiscal year or cause the Association to fail
to be at least "adequately capitalized" within the meaning of 12 C.F.R.
ss.565.4(b)(2).
SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated
as an employee of the Association and shall be eligible to participate in and
receive benefits under any and all qualified or non-qualified retirement,
pension, savings, profit-sharing or stock bonus plans, any and all group life,
health (including hospitalization, medical and major medical), dental, accident
and long term disability insurance plans, and any other employee benefit and
compensation plans (including, but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover executive
employees of, the Association, in accordance with the terms and conditions of
such employee benefit plans and programs and compensation plans and programs and
consistent with the Association's customary practices.
SECTION 6. INDEMNIFICATION AND INSURANCE.
(a) During the Employment Period and for a period of six (6)
years thereafter, the Association shall cause the Executive to be covered by and
named as an insured under any policy or contract of insurance obtained by it to
insure its directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the
Association
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or service in other capacities at the request of the Association. The coverage
provided to the Executive pursuant to this section 6 shall be of the same scope
and on the same terms and conditions as the coverage (if any) provided to other
officers or directors of the Association.
(b) For so long as the Association is subject to regulation by
the Office of Thrift Supervision ("OTS"), the Association shall indemnify the
Executive in accordance with 12 C.F.R. ss.545.121. From and after the earliest
date on which the Association is not subject to regulation by the OTS, to the
maximum extent permitted under applicable law, during the Employment Period and
for a period six (6) years thereafter, the Association shall indemnify, and
shall cause its subsidiaries and affiliates to indemnify the Executive against
and hold him harmless from any costs, liabilities, losses and exposures to the
fullest extent and on the most favorable terms and conditions that similar
indemnification is offered to any director or officer of the Association or any
subsidiary or affiliate thereof. This section 6(b) shall not be applicable where
section 18 is applicable.
SECTION 7. OUTSIDE ACTIVITIES.
The Executive may serve as a member of the boards of directors
of such business, community and charitable organizations as he may disclose to
and as may be approved by the Board (which approval shall not be unreasonably
withheld); PROVIDED, HOWEVER, that such service shall not materially interfere
with the performance of his duties under this Agreement. The Executive may also
engage in personal business and investment activities which do not materially
interfere with, and are not inconsistent with, the performance of his duties and
responsibilities hereunder; PROVIDED, HOWEVER, that such activities are not
prohibited under 12 C.F.R. ss.ss.571.7 or 571.9 or any code of conduct or
investment or securities trading policy established by the Association and
generally applicable to all similarly situated executives (including, without
limitation, any applicable conflict of interest policy adopted by the Board of
Directors as contemplated by 12 C.F.R. ss.571.7). The Executive may also serve
as an officer or director of Wake Forest Bancorp, M.H.C. on such terms and
conditions as the Association and Wake Forest Bancorp, M.H.C. may mutually agree
upon, and such service shall not be deemed to materially interfere with the
Executive's performance of his duties hereunder or otherwise to result in a
material breach of this Agreement. Executive shall not receive compensation from
the Association for service as an officer or director of the Mutual Holding
Company.
SECTION 8. WORKING FACILITIES AND EXPENSES.
The Executive's principal place of employment shall be at the
Association's executive offices at the address first above written, or at such
other location within Wake County at which the Association shall maintain its
principal executive offices, or at such other location as the Association and
the Executive may mutually agree upon. The Association shall provide the
Executive at his principal place of employment with a private office,
secretarial services and other support services and facilities suitable to his
position with the Association and necessary or appropriate in connection with
the performance of his assigned duties under this Agreement. The Association
shall reimburse the Executive for his ordinary and necessary business expenses,
including, without limitation, fees for memberships in such clubs and
organizations as the
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Executive and the Association shall mutually agree are necessary and appropriate
for business purposes, and his travel and entertainment expenses incurred in
connection with the performance of his duties under this Agreement, in each case
upon presentation to the Association of an itemized account of such expenses in
such form as the Association may reasonably require.
SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS.
(a) The Executive shall be entitled to the severance benefits
described herein in the event that his employment with the Association
terminates during the Employment Period under any of the following
circumstances:
(i) the Executive's voluntary resignation from employment with
the Association within forty-five (45) days following:
(A) the failure of the Board to appoint or re-appoint
or elect or re-elect the Executive to the office of Vice
President (or a more senior office) of the Association;
(B) the expiration of a thirty (30) day period
following the date on which the Executive gives written notice
to the Association of its material failure, whether by
amendment of the Association's Organization Certificate or
By-laws, action of the Board or the Association's stockholders
or otherwise, to vest in the Executive the functions, duties,
or responsibilities prescribed in section 3 of this Agreement
as of the date hereof, unless, during such thirty (30) day
period, the Association fully cures such failure;
(C) the expiration of a thirty (30) day period
following the date on which the Executive gives written notice
to the Association of its material breach of any term,
condition or covenant contained in this Agreement (including,
without limitation any reduction of the Executive's rate of
base salary in effect from time to time and any change in the
terms and conditions of any compensation or benefit program in
which the Executive participates which, either individually or
together with other changes, has a material adverse effect on
the aggregate value of his total compensation package),
unless, during such thirty (30) day period, the Association
fully cures such failure; or
(ii) the termination of the Executive's employment with the
Association for any other reason not described in section 10(a).
In such event, subject to section 25, the Association shall provide the benefits
and pay to the Executive the amounts described in section 9(b).
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<PAGE>
(b) Upon the termination of the Executive's employment with
the Association under circumstances described in section 9(a) of this Agreement,
the Association shall pay and provide to the Executive (or, in the event of his
death, to his estate):
(i) his earned but unpaid compensation as of the date of the
termination of his employment with the Association, such payment to be
made at the time and in the manner prescribed by law applicable to the
payment of wages but in no event later than thirty (30) days after
termination of employment;
(ii) the benefits, if any, to which he is entitled as a former
employee under the employee benefit plans and programs and compensation
plans and programs maintained for the benefit of the Association's
officers and employees;
(iii) continued group life, health (including hospitalization,
medical and major medical), dental, accident and long term disability
insurance benefits, in addition to that provided pursuant to section
9(b)(ii), and after taking into account the coverage provided by any
subsequent employer, if and to the extent necessary to provide for the
Executive, for the Remaining Unexpired Employment Period, coverage
equivalent to the coverage to which he would have been entitled under
such plans (as in effect on the date of his termination of employment,
or, if his termination of employment occurs after a Change in Control,
on the date of such Change in Control, whichever benefits are greater)
if he had continued working for the Association during the Remaining
Unexpired Employment Period at the highest annual rate of compensation
achieved during that portion of the Employment Period which is prior to
the Executive's termination of employment with the Association;
(iv) within thirty (30) days following his termination of
employment with the Association, a lump sum payment, in an amount equal
to the present value of the salary that the Executive would have earned
if he had continued working for the Association during the Remaining
Unexpired Employment Period at the highest annual rate of salary
achieved during that portion of the Employment Period which is prior to
the Executive's termination of employment with the Association, where
such present value is to be determined using a discount rate equal to
the applicable short-term federal rate prescribed under section 1274(d)
of the Internal Revenue Code of 1986 ("Code"), compounded using the
compounding period corresponding to the Association's regular payroll
periods for its officers, such lump sum to be paid in lieu of all other
payments of salary provided for under this Agreement in respect of the
period following any such termination;
(v) within thirty (30) days following his termination of
employment with the Association, a lump sum payment in an amount equal
to the excess, if any, of:
(A) the present value of the aggregate benefits to
which he would be entitled under any and all qualified and
non-qualified defined benefit pension plans maintained by, or
covering employees of, the Association if he had continued
working for the Association during the Remaining
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Unexpired Employment Period (such benefits to be determined as
of the date of termination of employment by adding to the
service actually recognized under such plans an additional
period equal to the Remaining Unexpired Employment Period and
by adding to the compensation actually recognized under such
plans all amounts payable under sections 9(b)(i), (iv) and
(vii) to the extent such amounts would have been recognized
under such plans had the Executive Remained in service during
the Remaining Unexpired Employment Period; over
(B) the present value of the benefits to which he is
actually entitled under such defined benefit pension plans as
of the date of his termination;
where such present values are to be determined using the mortality
tables prescribed under section 415(b)(2)(E)(v) of the Code and a
discount rate, compounded monthly, equal to the annualized rate of
interest prescribed by the Pension Benefit Guaranty Corporation for the
valuation of immediate annuities payable under terminating
single-employer defined benefit plans for the month in which the
Executive's termination of employment occurs ("Applicable PBGC Rate").
(vi) within thirty (30) days following his termination of
employment with the Association, a lump sum payment in an amount equal
to the present value of the additional employer contributions (or if
greater in the case of a leveraged employee stock ownership plan or
similar arrangement, the additional assets allocable to his through
debt service, based on the fair market value of such assets at
termination of employment) to which he would have been entitled under
any and all qualified and non-qualified defined contribution plans
maintained by, or covering employees of, the Association, if he had
continued working for the Association during the Remaining Unexpired
Employment Period at the highest annual rate of compensation achieved
during that portion of the Employ- ment Period which is prior to the
Executive's termination of employment with the Association, and making
the maximum amount of employee contributions, if any, required under
such plan or plans, such present value to be determined on the basis of
a discount rate, compounded using the compounding period that
corresponds to the frequency with which employer contributions are made
to the relevant plan, equal to the Applicable PBGC Rate; and
(vii) the payments that would have been made to the Executive
under any cash bonus or long-term or short-term cash incentive
compensation plan maintained by, or covering employees of, the
Association if he had continued working for the Association during the
Remaining Unexpired Employment Period and had earned the maximum bonus
or incentive award in each calendar year that ends during the Remaining
Unexpired Employment Period, such payments to be equal to the product
of:
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(A) the maximum percentage rate at which an award was
ever available to the Executive under such incentive
compensation plan; multiplied by
(B) the salary that would have been paid to the
Executive during each such calendar year at the highest annual
rate of salary achieved during that portion of the Employment
Period which is prior to the Executive's termination of
employment with the Association,
such payments to be made (without discounting for early payment) within
thirty (30) days following the Executive's termination of employment.
The Association and the Executive hereby stipulate that the damages which may be
incurred by the Executive following any such termination of employment are not
capable of accurate measurement as of the date first above written and that the
payments and benefits contemplated by this section 9(b) constitute reasonable
damages under the circumstances and shall be payable without any requirement of
proof of actual damage and without regard to the Executive's efforts, if any, to
mitigate damages. The Association and the Executive further agree that the
Association may condition the payments and benefits (if any) due under sections
9(b)(iii), (iv), (v), (vi) and (vii) on the receipt of the Executive's
resignation from any and all positions which he holds as an officer, director or
committee member with respect to the Association or Wake Forest Bancorp, M.H.C.
or any subsidiary or affiliate of either of them.
SECTION 10. TERMINATION WITHOUT ADDITIONAL ASSOCIATION
LIABILITY.
In the event that the Executive's employment with the
Association shall terminate during the Employment Period on account of:
(a) the discharge of the Executive for "cause," which, for
purposes of this Agreement shall mean personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease and desist order, or any material
breach of this Agreement, in each case as measured against standards
generally prevailing at the relevant time in the savings and community
banking industry; PROVIDED, HOWEVER, that the Executive shall not be
deemed to have been discharged for cause unless and until the following
procedures shall have been followed:
(i) the Board shall adopt a resolution duly approved
by affirmative vote of a majority of the entire Board at a
meeting called and held for such purpose calling for the
Executive's termination for cause and setting forth the
purported grounds for such termination ("Proposed Termination
Resolution");
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(ii) as soon as practicable, and in any event within
five (5) days after adoption of such resolution, the Board
shall furnish to the Executive a written notice of termination
which shall be accompanied by a certified copy of the Proposed
Termination Resolution ("Notice of Proposed Termination");
(iii) the Executive shall be afforded a reasonable
opportunity to make oral and written presentations to the
members of the Board, on his own behalf, or through a
representative, who may be his legal counsel, to refute the
grounds set forth in the Proposed Termination Resolution at
one or more meetings of the Board to be held no sooner than
fifteen (15) days and no later than thirty (30) after the
Executive's receipt of the Proposed Termination Notice
("Termination Hearings"); and
(iv) within ten (10) days following the end of the
Termination Hearings, the Board shall adopt a resolution duly
approved by affirmative vote of a majority of the entire Board
at a meeting called and held for such purpose of (A) finding
that in the good faith opinion of the Board the grounds for
termination set forth in the Proposed Termination Resolution
exist and (B) terminating the Executive's employment
("Termination Resolution"); and
(v) as promptly as practicable, and in any event
within one (1) business day after adoption of the Termination
Resolution, the Board shall furnish to the Executive written
notice of termination, which notice shall include a copy of
the Termination Resolution and specify an effective date of
termination that is not later than the date on which such
notice is given;
(b) the Executive's voluntary resignation from employment with
the Association for reasons other than those specified in section
9(a)(i);
(c) the Executive's death;
(d) a determination that the Executive is eligible for
long-term disability benefits under the Association's long-term
disability insurance program or, if there is no such program, under the
federal Social Security Act; or
(e) the Executive's termination of employment for any reason
at or after attainment of mandatory retirement age under the
Association's mandatory retirement policy for executive officers in
effect as of the date of this Agreement;
then the Association shall have no further obligations under this
Agreement, other than the payment to the Executive (or, in the event of
his death, to his estate) of his earned but unpaid compensation as of
the date of the termination of his
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employment, and the provision of such other benefits, if any, to which
he is entitled as a former employee under the employee benefit plans
and programs and compensation plans and programs maintained by, or
covering employees of, the Association.
SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL.
(a) A Change in Control of the Association ("Change in
Control") shall be deemed to have occurred upon the happening of any of the
following events:
(i) approval by the stockholders of the Association of a
transaction that would result in the reorganization, merger or
consolidation of the Association, respectively, with one or more other
persons, other than a transaction following which:
(A) at least 51% of the equity ownership interests of
the entity resulting from such transaction are beneficially
owned (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act")) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the outstanding equity ownership
interests in the Association; and
(B) at least 51% of the securities entitled to vote
generally in the election of directors of the entity resulting
from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Association;
(ii) the acquisition of all or substantially all of the assets
of the Association or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of the
outstanding securities of the Association entitled to vote generally in
the election of directors by any person or by any persons acting in
concert, or approval by the stockholders of the Association of any
transaction which would result in such an acquisition; or
(iii) a complete liquidation or dissolution of the
Association, or approval by the stockholders of the Association of a
plan for such liquidation or dissolution; or
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(iv) the occurrence of any event if, immediately following
such event, at least 50% of the members of the board of directors of
the Association do not belong to any of the following groups:
(A) individuals who were members of the Board of the
Association on the date of this Agreement; or
(B) individuals who first became members of the Board
of the Association after the date of this Agreement either:
(I) upon election to serve as a member of
the Board of directors of the Association by
affirmative vote of three-quarters of the members of
such board, or of a nominating committee thereof, in
office at the time of such first election; or
(II) upon election by the stockholders of
the Board to serve as a member of the board of
directors of the Board, but only if nominated for
election by affirmative vote of three-quarters of the
members of the board of directors of the Board, or of
a nominating committee thereof, in office at the time
of such first nomination;
PROVIDED, HOWEVER, that such individual's election or
nomination did not result from an actual or threatened
election contest (within the meaning of Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents
(within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf
of the Board of the Association;
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Association by any
employee benefit plan maintained by the Association. For purposes of this
section 11, the term "person" shall have the meaning assigned to it under
sections 13(d)(3) or 14(d)(2) of the Exchange Act.
(b) In the event of a Change in Control, the Executive shall
be entitled to the payments and benefits contemplated by section 9(b) in the
event of his termination of employment with the Association under any of the
circumstances described in section 9(a) of this Agreement or under any of the
following circumstances:
(i) resignation, voluntary or otherwise, by the Executive at
any time during the Employment Period and within ninety (90) days
following his demotion, loss of title, office or significant authority
or responsibility, or following any reduction in any element of his
package of compensation and benefits;
(ii) resignation, voluntary or otherwise, by the Executive at
any time during the Employment Period and within ninety (90) days
following any relocation of his principal place of employment or any
change in working conditions at such
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principal place of employment which is embarrassing, derogatory or
otherwise materially adverse to the Executive;
(iii) resignation, voluntary or otherwise, by the Executive at
any time during the Employment Period following the failure of any
successor to the Association in the Change in Control to include the
Executive in any compensation or benefit program maintained by it or
covering any of its executive officers, unless the Executive is already
covered by a substantially similar plan of the Association which is at
least as favorable to him; or
(iv) resignation, voluntary or otherwise, for any reason
whatsoever following the expiration of a transition period of thirty
days beginning on the effective date of the Change in Control (or such
longer period, not to exceed ninety (90) days beginning on the
effective date of the Change in Control, as the Association or its
successor may reasonably request) to facilitate a transfer of
management responsibilities.
SECTION 12. COVENANT NOT TO COMPETE.
The Executive hereby covenants and agrees that, in the event
of his termination of employment with the Association prior to the expiration of
the Employment Period, for a period of one (1) year following the date of his
termination of employment with the Association (or, if less, for the Remaining
Unexpired Employment Period), he shall not, without the written consent of the
Association, become an officer, employee, consultant, director or trustee with
executory, managerial, supervisory or strategic authority or influence at any
savings bank, savings and loan association, savings and loan holding company,
bank or bank holding company, or any direct or indirect subsidiary or affiliate
of any such entity, that entails working within one hundred (100) miles of the
headquarters of the Association on the date of the Executive's termination of
employment; PROVIDED, HOWEVER, that this section 12 shall not apply if the
Executive's employment is terminated by reason of voluntary resignation for the
reasons set forth in section 9(a)(i) or by reason of termination by the
Association other than for cause as provided in section 10(a) or after
attainment of mandatory retirement age pursuant to section 10(e); and provided,
further, that if the Executive's employment shall be terminated on account of
disability as provided in section 10(d) of this Agreement, this section 12 shall
not prevent the Executive from accepting any position or performing any services
if (a) he first offers, by written notice, to accept a similar position with, or
perform similar services for, the Association on substantially the same terms
and conditions and (b) the Association declines to accept such offer within ten
(10) days after such notice is given.
SECTION 13. CONFIDENTIALITY.
Unless he obtains the prior written consent of the
Association, the Executive shall keep confidential and shall refrain from using
for the benefit of himself, or any person or entity other than the Association
or any entity which is a subsidiary of the Association or of which the
Page 12 of 19
<PAGE>
Association is a subsidiary, any material document or information obtained from
the Association, or from its parent or subsidiaries, in the course of his
employment with any of them concerning their properties, operations or business
(unless such document or information is readily ascertainable from public or
published information or trade sources or has otherwise been made available to
the public through no fault of his own) until the same ceases to be material (or
becomes so ascertainable or available); PROVIDED, HOWEVER, that nothing in this
section 13 shall prevent the Executive, with or without the Association's
consent, from participating in or disclosing documents or information in
connection with any judicial or administrative investigation, inquiry or
proceeding to the extent that such participation or disclosure is required under
applicable law.
SECTION 14. SOLICITATION.
The Executive hereby covenants and agrees that, for a period
of one (1) year following his termination of employment with the Association, he
shall not, without the written consent of the Association, either directly or
indirectly:
(a) solicit, offer employment to, or take any other action
intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any officer or employee of
the Association or any affiliate, as of the date of this Agreement, of
either of them to terminate her or his employment and accept employment
or become affiliated with, or provide services for compensation in any
capacity whatsoever to, any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making
loans, doing business within one hundred (100) miles of the
headquarters of the Association or any affiliate, as of the date of
this Agreement, of either of them;
(b) provide any information, advice or recommendation with
respect to any such officer or employee of any savings bank, savings
and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of
accepting deposits and making loans, doing business within one hundred
(100) miles of the headquarters of the Association or any affiliate, as
of the date of this Agreement, of either of them that is intended, or
that a reasonable person acting in like circumstances would expect, to
have the effect of causing any officer or employee of the Association
or any affiliate, as of the date of this Agreement, of either of them
to terminate her or his employment and accept employment or become
affiliated with, or provide services for compensation in any capacity
whatsoever to, any savings bank, savings and loan association, bank,
bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making
loans, doing business within one hundred (100) miles of the
headquarters of the Association or any affiliate, as of the date of
this Agreement, of either of them;
Page 13 of 19
<PAGE>
(c) solicit, provide any information, advice or recommendation
or take any other action intended, or that a reasonable person acting
in like circumstances would expect, to have the effect of causing any
customer of the Association to terminate an existing business or
commercial relationship with the Association.
SECTION 15. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS.
The termination of the Executive's employment during the term
of this Agreement or thereafter, whether by the Association or by the Executive,
shall have no effect on the rights and obligations of the parties hereto under
the Association's qualified or non-qualified retirement, pension, savings,
thrift, profit-sharing or stock bonus plans, group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Association from time to time.
SECTION 16. SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding
upon the Executive, his legal representatives and testate or intestate
distributees, and the Association and its successors and assigns, including any
successor by merger or consolidation or any other person or firm or corporation
to which all or substantially all of the assets and business of the Association
may be sold or otherwise transferred. Failure of the Association to obtain from
any successor its express written assumption of the Association's obligations
hereunder at least sixty (60) days in advance of the scheduled effective date of
any such succession shall be deemed a material breach of this Agreement unless
cured within ten (10) days after notice thereof by the Executive to the
Association.
SECTION 17. NOTICES.
Any communication required or permitted to be given under this
Agreement, including any notice, direction, designation, consent, instruction,
objection or waiver, shall be in writing and shall be deemed to have been given
at such time as it is delivered personally, or five (5) days after mailing if
mailed, postage prepaid, by registered or certified mail, return receipt
requested, addressed to such party at the address listed below or at such other
address as one such party may by written notice specify to the other party:
If to the Executive:
Mr. Carlton E. Chappell
1204 Jenkins Road
Wake Forest, North Carolina 27587
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<PAGE>
If to the Association:
Wake Forest Federal Savings & Loan Association
302 South Brooks Street, P.O. 707
Wake Forest, North Carolina 27588-0707
Attention: Chairman of the Board
WITH A COPY TO:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: Lisa M. Miller, Esq.
SECTION 18. INDEMNIFICATION FOR ATTORNEYS' FEES.
The Association shall indemnify, hold harmless and defend the
Executive against reasonable costs, including legal fees, incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved, as a result of his efforts, in good faith, to defend or enforce the
terms of this Agreement; PROVIDED, HOWEVER, that the Executive shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding. The determination whether the Executive shall have substantially
prevailed on the merits and is therefore entitled to such indemnification, shall
be made by the court or arbitrator, as applicable. In the event of a settlement
pursuant to a settlement agreement, any indemnification payment under this
section 18 shall be made only after a determination by the members of the Board
(other than the Executive and any other member of the Board to which the
Executive is related by blood or marriage) that the Executive has acted in good
faith and that such indemnification payment is in the best interests of the
Association.
SECTION 19. SEVERABILITY.
A determination that any provision of this Agreement is
invalid or unenforceable shall not affect the validity or enforceability of any
other provision hereof.
SECTION 20. WAIVER.
Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition. A waiver of any provision of this Agreement must be made
in writing, designated as a waiver, and signed by the party against whom its
enforcement is sought. Any waiver or relinquishment of any right
Page 15 of 19
<PAGE>
or power hereunder at any one or more times shall not be deemed a waiver or
relinquishment of such right or power at any other time or times.
SECTION 21. COUNTERPARTS.
This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
SECTION 22. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced
in accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of North
Carolina applicable to contracts entered into and to be performed entirely
within the State of North Carolina.
SECTION 23. HEADINGS AND CONSTRUCTION.
The headings of sections in this Agreement are for convenience
of reference only and are not intended to qualify the meaning of any section.
Any reference to a section number shall refer to a section of this Agreement,
unless otherwise stated.
SECTION 24. ENTIRE AGREEMENT; MODIFICATIONS.
This instrument contains the entire agreement of the parties
relating to the subject matter hereof, and supersedes in its entirety any and
all prior agreements, understandings or representations relating to the subject
matter hereof. No modifications of this Agreement shall be valid unless made in
writing and signed by the parties hereto.
SECTION 25. REQUIRED REGULATORY PROVISIONS.
The following provisions are included for the purposes of
complying with various laws, rules and regulations applicable to the
Association:
(a) Notwithstanding anything herein contained to the contrary,
in no event shall the aggregate amount of compensation payable to the
Executive under section 9(b) hereof (exclusive of amounts described in
section 9(b)(i) or (ii)) exceed the three times the Executive's average
annual compensation (within the meaning of OTS Regulatory Bulletin 27a
or any successor thereto) for the last five consecutive calendar years
to end prior to his termination of employment with the Association (or
for his entire period of employment with the Association if less than
five calendar years). The compensation payable to the Executive
hereunder
Page 16 of 19
<PAGE>
shall be further reduced (but not below zero) if such reduction would
avoid the assessment of excise taxes on excess parachute payments
(within the meaning of section 280G of the Code).
(b) Notwithstanding anything herein contained to the contrary,
any payments to the Executive by the Association, whether pursuant to
this Agreement or otherwise, are subject to and conditioned upon their
compliance with section 18(k) of the Federal Deposit Insurance Act
("FDI Act"), 12 U.S.C. ss.1828(k), and any regulations promulgated
thereunder.
(c) Notwithstanding anything herein contained to the contrary,
if the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the affairs of the Association
pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI
Act, 12 U.S.C. ss.1818(e)(3) or 1818(g)(1), the Association's
obligations under this Agreement shall be suspended as of the date of
service of such notice, unless stayed by appropriate proceedings. If
the charges in such notice are dismissed, the Association, in its
discretion, may (i) pay to the Executive all or part of the
compensation withheld while the Association's obligations hereunder
were suspended and (ii) reinstate, in whole or in part, any of the
obligations which were suspended.
(d) Notwithstanding anything herein contained to the contrary,
if the Executive is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order
issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1), all prospective obligations of the Association
under this Agreement shall terminate as of the effective date of the
order, but vested rights and obligations of the Association and the
Executive shall not be affected.
(e) Notwithstanding anything herein contained to the contrary,
if the Association is in default (within the meaning of section 3(x)(1)
of the FDI Act, 12 U.S.C. ss.1813(x)(1), all prospective obligations of
the Association under this Agreement shall terminate as of the date of
default, but vested rights and obligations of the Association and the
Executive shall not be affected.
(f) Notwithstanding anything herein contained to the contrary,
all prospective obligations of the Association hereunder shall be
terminated, except to the extent that a continuation of this Agreement
is necessary for the continued operation of the Association: (i) by the
Director of the OTS or his designee or the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Association under the
authority contained in section 13(c) of the FDI Act, 12 U.S.C.
ss.1823(c); (ii) by the Director of the OTS or his designee at the time
such Director or designee approves a supervisory merger to resolve
problems related to the operation of the Association or when the
Association is determined by such Director to be in an
Page 17 of 19
<PAGE>
unsafe or unsound condition. The vested rights and obligations of the
parties shall not be affected.
If and to the extent that any of the foregoing provisions shall cease to be
required or by applicable law, rule or regulation, the same shall become
inoperative as though eliminated by formal amendment of this Agreement.
IN WITNESS WHEREOF, the Association has caused this Agreement
to be executed and the Executive has hereunto set his hand, all as of the day
and year first above written.
---------------------------------
CARLTON E. CHAPPELL
ATTEST: WAKE FOREST FEDERAL
SAVINGS & LOAN ASSOCIATION
By By
------------------------------- -------------------------------
Secretary Name:
Title:
[Seal]
Page 18 of 19
<PAGE>
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this ________ day of February, 1998, before me personally
came Carlton E. Chappell, to me known, and known to me to be the individual
described in the foregoing instrument, who, being by me duly sworn, did depose
and say that he resides at the address set forth in said instrument, and that he
signed his name to the foregoing instrument.
-----------------------------
Notary Public
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this ________ day of February, 1998, before me personally
came ___________________, to me known, who, being by me duly sworn, did depose
and say that he resides at ______________________________________________, that
he is a member of the Board of Directors of WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, the savings bank described in and which executed the foregoing
instrument; that he knows the seal of said mutual savings bank; that the seal
affixed to said instrument is such seal; that it was so affixed by order of the
Board of Directors of said savings bank; and that he signed his name thereto by
like order.
-----------------------------
Notary Public
Page 19 of 19
<PAGE>
EXHIBIT 10.3
EMPLOYEE STOCK OWNERSHIP PLAN
OF
WAKE FOREST FEDERAL
SAVINGS & LOAN ASSOCIATION
ADOPTED ON DECEMBER 6, 1995
EFFECTIVE ON APRIL 3, 1996
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TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS
SECTION 1.1 ACCOUNT........................................................................... 1
SECTION 1.2 AFFILIATED EMPLOYER............................................................... 1
SECTION 1.3 ALLOCATION COMPENSATION........................................................... 1
SECTION 1.4 BOARD............................................................................. 2
SECTION 1.5 BENEFICIARY....................................................................... 2
SECTION 1.6 BREAK IN SERVICE.................................................................. 2
SECTION 1.7 CHANGE IN CONTROL................................................................. 2
SECTION 1.8 CODE.............................................................................. 2
SECTION 1.9 COMMITTEE......................................................................... 2
SECTION 1.10 DISABILITY....................................................................... 2
SECTION 1.11 DOMESTIC RELATIONS ORDER......................................................... 2
SECTION 1.12 EFFECTIVE DATE................................................................... 3
SECTION 1.13 ELIGIBLE EMPLOYEE................................................................ 3
SECTION 1.14 ELIGIBLE PARTICIPANT............................................................. 3
SECTION 1.15 EMPLOYEE......................................................................... 3
SECTION 1.16 EMPLOYER......................................................................... 3
SECTION 1.17 EMPLOYMENT COMMENCEMENT DATE..................................................... 3
SECTION 1.18 ERISA............................................................................ 3
SECTION 1.19 ESOP CONTRIBUTION................................................................ 3
SECTION 1.20 FAIR MARKET VALUE................................................................ 3
SECTION 1.21 FAMILY MEMBER.................................................................... 4
SECTION 1.22 FINANCED SHARE................................................................... 4
SECTION 1.23 FIVE PERCENT OWNER............................................................... 4
SECTION 1.24 FORFEITURES...................................................................... 4
SECTION 1.25 FORMER PARTICIPANT............................................................... 4
SECTION 1.26 GENERAL INVESTMENT ACCOUNT....................................................... 4
SECTION 1.27 HIGHLY COMPENSATED EMPLOYEE...................................................... 4
SECTION 1.28 HOUR OF SERVICE.................................................................. 5
SECTION 1.29 INVESTMENT ACCOUNT............................................................... 5
SECTION 1.30 INVESTMENT FUND.................................................................. 6
SECTION 1.31 LOAN REPAYMENT ACCOUNT........................................................... 6
SECTION 1.32 LOAN REPAYMENT CONTRIBUTION...................................................... 6
SECTION 1.33 MATERNITY OR PATERNITY LEAVE..................................................... 6
SECTION 1.34 MILITARY SERVICE................................................................. 6
SECTION 1.35 NAMED FIDUCIARY.................................................................. 6
SECTION 1.36 OFFICER.......................................................................... 6
SECTION 1.37 PARTICIPANT...................................................................... 6
SECTION 1.38 PERIOD OF SERVICE................................................................ 6
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SECTION 1.39 PERIOD OF SEVERANCE.............................................................. 6
SECTION 1.40 PLAN............................................................................. 7
SECTION 1.41 PLAN ADMINISTRATOR............................................................... 7
SECTION 1.42 PLAN YEAR........................................................................ 7
SECTION 1.43 QUALIFIED DOMESTIC RELATIONS ORDER............................................... 7
SECTION 1.44 QUALIFIED PARTICIPANT............................................................ 7
SECTION 1.45 RETIREMENT....................................................................... 7
SECTION 1.46 SHARE............................................................................ 7
SECTION 1.47 SHARE ACQUISITION LOAN........................................................... 8
SECTION 1.48 SHARE INVESTMENT ACCOUNT......................................................... 8
SECTION 1.49 TENDER OFFER..................................................................... 8
SECTION 1.50 TOTAL COMPENSATION............................................................... 8
SECTION 1.51 TRUST............................................................................ 9
SECTION 1.52 TRUST AGREEMENT.................................................................. 9
SECTION 1.53 TRUST FUND....................................................................... 9
SECTION 1.54 TRUSTEE.......................................................................... 9
SECTION 1.55 VALUATION DATE................................................................... 9
ARTICLE II
PARTICIPATION
SECTION 2.1 ELIGIBILITY FOR PARTICIPATION.................................................... 9
SECTION 2.2 COMMENCEMENT OF PARTICIPATION..................................................... 10
SECTION 2.3 TERMINATION OF PARTICIPATION...................................................... 10
SECTION 2.4 ADJUSTMENTS TO PERIOD OF SERVICE.................................................. 10
ARTICLE III
SPECIAL PROVISIONS
SECTION 3.1 MILITARY SERVICE.................................................................. 11
SECTION 3.2 MATERNITY OR PATERNITY LEAVE...................................................... 11
SECTION 3.3 LEAVE OF ABSENCE.................................................................. 12
ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
SECTION 4.1 CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED....................................... 12
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ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
SECTION 5.1 IN GENERAL........................................................................ 12
SECTION 5.2 LOAN REPAYMENT CONTRIBUTIONS...................................................... 12
SECTION 5.3 ESOP CONTRIBUTIONS................................................................ 13
SECTION 5.4 TIME AND MANNER OF PAYMENT........................................................ 13
ARTICLE VI
SHARE ACQUISITION LOANS
SECTION 6.1 IN GENERAL........................................................................ 14
SECTION 6.2 COLLATERAL; LIABILITY FOR REPAYMENT............................................... 14
SECTION 6.3 LOAN REPAYMENT ACCOUNT............................................................ 15
SECTION 6.4 RELEASE OF FINANCED SHARES........................................................ 15
SECTION 6.5 RESTRICTIONS ON FINANCED SHARES................................................... 16
ARTICLE VII
ALLOCATION OF CONTRIBUTIONS
SECTION 7.1 ALLOCATION AMONG ELIGIBLE PARTICIPANTS............................................ 17
SECTION 7.2 ALLOCATION OF RELEASED SHARES OR OTHER PROPERTY................................... 17
SECTION 7.3 ALLOCATION OF ESOP CONTRIBUTIONS.................................................. 17
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
SECTION 8.1 OPTIONAL LIMITATIONS ON ALLOCATIONS OF ESOP CONTRIBUTIONS......................... 17
SECTION 8.2 GENERAL LIMITATIONS ON CONTRIBUTIONS.............................................. 18
ARTICLE IX
VESTING
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SECTION 9.1 VESTING........................................................................... 22
SECTION 9.2 VESTING ON DEATH, DISABILITY, RETIREMENT OR CHANGE IN CONTROL..................... 22
SECTION 9.3 FORFEITURES ON TERMINATION OF EMPLOYMENT.......................................... 22
SECTION 9.4 AMOUNTS CREDITED UPON RE-EMPLOYMENT............................................... 22
SECTION 9.5 ALLOCATION OF FORFEITURES......................................................... 23
SECTION 9.6 ACCELERATED VESTING UPON CHANGE IN CONTROL........................................ 23
ARTICLE X
THE TRUST FUND
SECTION 10.1 THE TRUST FUND.................................................................. 25
SECTION 10.2 INVESTMENTS..................................................................... 25
SECTION 10.3 DISTRIBUTIONS FOR DIVERSIFICATION OF INVESTMENTS................................. 26
SECTION 10.4 USE OF COMMINGLED TRUST FUNDS.................................................... 27
SECTION 10.5 MANAGEMENT AND CONTROL OF ASSETS................................................ 27
ARTICLE XI
VALUATION OF INTERESTS IN THE TRUST FUND
SECTION 11.1 ESTABLISHMENT OF INVESTMENT ACCOUNTS............................................. 27
SECTION 11.2 SHARE INVESTMENT ACCOUNTS........................................................ 28
SECTION 11.3 GENERAL INVESTMENT ACCOUNTS...................................................... 28
SECTION 11.4 VALUATION OF INVESTMENT ACCOUNTS................................................. 28
SECTION 11.5 ANNUAL STATEMENTS................................................................ 29
ARTICLE XII
SHARES
SECTION 12.1 SPECIFIC ALLOCATION OF SHARES.................................................... 29
SECTION 12.2 DIVIDENDS........................................................................ 29
SECTION 12.3 VOTING RIGHTS.................................................................... 29
SECTION 12.4 TENDER OFFERS.................................................................... 32
ARTICLE XIII
PAYMENT OF BENEFITS
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SECTION 13.1 IN GENERAL....................................................................... 34
SECTION 13.2 DESIGNATION OF BENEFICIARIES..................................................... 34
SECTION 13.3 DISTRIBUTIONS TO PARTICIPANTS AND FORMER PARTICIPANTS............................ 35
SECTION 13.4 MANNER OF PAYMENT................................................................ 38
SECTION 13.5 MINIMUM REQUIRED DISTRIBUTIONS................................................... 38
SECTION 13.6 DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS............................... 40
SECTION 13.7 VALUATION OF SHARES UPON DISTRIBUTION TO A PARTICIPANT........................... 41
SECTION 13.8 PUT OPTIONS...................................................................... 41
SECTION 13.9 RIGHT OF FIRST REFUSAL........................................................... 42
ARTICLE XIV
ADMINISTRATION
SECTION 14.1 NAMED FIDUCIARIES................................................................ 43
SECTION 14.2 PLAN ADMINISTRATOR............................................................... 43
SECTION 14.3 COMMITTEE RESPONSIBILITIES....................................................... 45
SECTION 14.4 CLAIMS PROCEDURE................................................................. 46
SECTION 14.5 CLAIMS REVIEW PROCEDURE.......................................................... 46
SECTION 14.8 ALLOCATION OF FIDUCIARY RESPONSIBILITIES AND EMPLOYMENT OF ADVISORS.............. 47
SECTION 14.9 OTHER ADMINISTRATIVE PROVISIONS.................................................. 47
ARTICLE XV
AMENDMENT, TERMINATION AND TAX QUALIFICATION
SECTION 15.1 AMENDMENT AND TERMINATION BY WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION...... 48
SECTION 15.2 AMENDMENT OR TERMINATION OTHER THAN BY WAKE FOREST FEDERAL
SAVINGS & LOAN ASSOCIATION...................................................... 48
SECTION 15.3 CONFORMITY TO INTERNAL REVENUE CODE.............................................. 49
SECTION 15.4 CONTINGENT NATURE OF CONTRIBUTIONS............................................... 49
ARTICLE XVI
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
SECTION 16.1 IN GENERAL....................................................................... 50
SECTION 16.2 DEFINITION OF TOP HEAVY PLAN..................................................... 50
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SECTION 16.3 DETERMINATION DATE............................................................... 51
SECTION 16.4 CUMULATIVE ACCRUED BENEFITS...................................................... 51
SECTION 16.5 KEY EMPLOYEES.................................................................... 51
SECTION 16.6 REQUIRED AGGREGATION GROUP....................................................... 52
SECTION 16.7 PERMISSIBLE AGGREGATION GROUP.................................................... 53
SECTION 16.8 SPECIAL REQUIREMENTS DURING TOP HEAVY PLAN YEARS................................. 53
ARTICLE XVII
MISCELLANEOUS PROVISIONS
SECTION 17.1 GOVERNING LAW.................................................................... 54
SECTION 17.2 NO RIGHT TO CONTINUED EMPLOYMENT................................................. 54
SECTION 17.3 CONSTRUCTION OF LANGUAGE......................................................... 54
SECTION 17.4 HEADINGS......................................................................... 54
SECTION 17.5 MERGER WITH OTHER PLANS.......................................................... 54
SECTION 17.6 NON-ALIENATION OF BENEFITS....................................................... 55
SECTION 17.7 PROCEDURES INVOLVING DOMESTIC RELATIONS ORDERS................................... 55
SECTION 17.8 LEASED EMPLOYEES................................................................. 55
SECTION 17.9 STATUS AS AN EMPLOYEE STOCK OWNERSHIP PLAN....................................... 56
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<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
OF
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
ARTICLE I
DEFINITIONS
The following definitions shall apply for the purposes of the
Plan, unless a different meaning is clearly indicated by the context:
SECTION 1.1 ACCOUNT means an account established for each
Participant to which is allocated such Participant's share, if any, of all
Financed Shares and other property that are released from the Loan Repayment
Account in accordance with section 6.4, together with his share, if any, of any
ESOP Contributions that may be made by the Employer.
SECTION 1.2 AFFILIATED EMPLOYER means any corporation which is
a member of a controlled group of corporations (as defined in section 414(b) of
the Code) that includes the Employer; any trade or business (whether or not
incorporated) that is under common control (as defined in section 414(c) of the
Code) with the Employer; any organization (whether or not incorporated) that is
a member of an affiliated service group (as defined in section 414(m) of the
Code) that includes the Employer; any leasing organization (as defined in
section 414(n) of the Code) to the extent that any of its employees are required
pursuant to section 414(n) of the Code to be treated as employees of the
Employer; and any other entity that is required to be aggregated with the
Employer pursuant to regulations under section 414(o) of the Code.
SECTION 1.3 ALLOCATION COMPENSATION during any period means
the compensation taken into account in determining the allocation of benefits
and contributions among Participants and consists of the aggregate compensation
received by an Employee from the Employer with respect to such period as
reported to the Internal Revenue Service as wages for such period pursuant to
section 6041(a) of the Code, plus the amount by which such Employee's
compensation with respect to such period has been reduced pursuant to a
compensation reduction agreement under the terms of any of the following plans
which may be maintained by the Employer:
(a) a qualified cash or deferred arrangement described in
section 401(k) of the Code;
(b) a salary reduction simplified employee pension plan
described in section 408(k) of the Code;
<PAGE>
-2-
(c) a tax deferred annuity plan described in section 403(b) of
the Code; or
(d) a cafeteria plan described in section 125 of the Code.
In no event, however, shall an Employee's Allocation Compensation for any
calendar year include any compensation in excess of $150,000. The $150,000
limitation set forth in the preceding sentence shall be indexed in accordance
with regulations prescribed under section 401(a)(17) of the Code. If there are
less than twelve (12) months in the Plan Year, the $150,000 limitation (as
adjusted) shall be prorated by multiplying such limitation by a fraction, the
numerator of which is the number of months in the Plan Year and the denominator
of which is twelve (12). For purposes of applying the foregoing limitations to
any person who is a Five Percent Owner or who is one of the ten Highly
Compensated Employees with the highest Total Compensation (determined prior to
the application of this sentence), any Allocation Compensation paid to the
spouse of such person or to any lineal descendant of such person who has not
attained age 19 on or before the last day of such calendar year shall be deemed
to have been paid to such person.
SECTION 1.4 BOARD means the Board of Directors of Wake Forest
Federal Savings & Loan Association.
SECTION 1.5 BENEFICIARY means the person or persons designated
by a Participant or Former Participant or other person entitled to a benefit
under the Plan, or otherwise determined to be entitled to a benefit under the
Plan. If more than one person is designated, each shall have an equal share
unless the person making the designation directed otherwise. The word "person"
includes an individual, a trust, an estate or any other person that is permitted
to be named as a Beneficiary.
SECTION 1.6 BREAK IN SERVICE means a Period of Severance of at
least 365 consecutive days.
SECTION 1.7 CHANGE IN CONTROL means an event described in
section 9.6(b).
SECTION 1.8 CODE means the Internal Revenue Code of 1986
(including the corresponding provisions of any succeeding law).
SECTION 1.9 COMMITTEE means the Compensation Committee
described in section 14.3.
SECTION 1.10 DISABILITY means a condition of total incapacity,
mental or physical, for further performance of duty with the Employer, which the
Plan Administrator shall have determined, on the basis of competent medical
evidence, is likely to be permanent.
SECTION 1.11 DOMESTIC RELATIONS ORDER means a judgment, decree
or order (including the approval of a property settlement) that is made pursuant
to a state domestic relations or community property law and relates to the
provision of child support, alimony payments, or
<PAGE>
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marital property rights to a spouse, child or other dependent of a Participant
or Former Participant.
SECTION 1.12 EFFECTIVE DATE means April 3, 1996.
SECTION 1.13 ELIGIBLE EMPLOYEE means an Employee who is
eligible for participation in the Plan in accordance with Article II.
SECTION 1.14 ELIGIBLE PARTICIPANT means, for any Plan Year, an
Employee who is a Participant during all or any part of such Plan Year.
SECTION 1.15 EMPLOYEE means any person, including an officer,
who is employed by the Employer.
SECTION 1.16 EMPLOYER means Wake Forest Federal Savings & Loan
Association, and any successor thereto and any Affiliated Employer which, with
the prior written approval of the Board of Directors of Wake Forest Federal
Savings & Loan Association and subject to such terms and conditions as may be
imposed by the Board of Directors of Wake Forest Federal Savings & Loan
Association, shall adopt this Plan.
SECTION 1.17 EMPLOYMENT COMMENCEMENT DATE means the date on
which a person first performs an Hour of Service, except that if an Employee
separates from service with the Employer, incurs a Break in Service and
subsequently returns to service with the Employer, his Employment Commencement
Date shall be the date on which he first performs an Hour of Service following
the Break in Service.
SECTION 1.18 ERISA means the Employee Retirement Income
Security Act of 1974, as amended from time to time (including the corresponding
provisions of any succeeding law).
SECTION 1.19 ESOP CONTRIBUTION means Shares or amounts of
money contributed to the Plan by the Employer in accordance with section 5.3.
SECTION 1.20 FAIR MARKET VALUE on any date means:
(a) with respect to a Share:
(i) the final quoted sale price on the date in
question (or, if there is no reported sale on such date, on
the last preceding date on which any reported sale occurred)
as reported in the principal consolidated reporting system
with respect to securities listed or admitted to trading on
the principal United States securities exchange on which like
Shares are listed or admitted to trading; or
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(ii) if like Shares are not listed or admitted to
trading on any such exchange, the closing bid quotation with
respect to a Share on such date on the National Association of
Securities Dealers Automated Quotation System, or, if no such
quotation is provided, on another similar system, selected by
the Committee, then in use; or
(iii) if sections 1.20(a)(i) and (ii) are not
applicable, the fair market value of a Share as determined by
an appraiser independent of the Employer and experienced and
expert in the field of corporate appraisal.
(b) with respect to property other than Shares, the fair
market value determined in the manner determined by the Trustee.
SECTION 1.21 FAMILY MEMBER means, with respect to any person,
such person's spouse and lineal ascendants or descendants and the spouses of
such lineal ascendants or descendants.
SECTION 1.22 FINANCED SHARE means: (a) a Share that has been
purchased with the proceeds of a Share Acquisition Loan, that has been allocated
to the Loan Repayment Account in accordance with section 6.3 and
that has not been released in accordance with section 6.4; or (b) a Share that
constitutes a dividend paid with respect to a Share described in section
1.22(a), that has been allocated to the Loan Repayment Account in accordance
with section 6.3 and that has not been released in accordance with section 6.4.
SECTION 1.23 FIVE PERCENT OWNER means, for any Plan Year, a
person who, during such Plan Year, owned (or was considered as owning for
purposes of section 318 of the Code): (a) more than 5% of the value of all
classes of outstanding stock of the Employer; or (b) stock possessing more than
5% of the combined voting power of all classes of outstanding stock of the
Employer.
SECTION 1.24 FORFEITURES means the amounts forfeited by
Participants and Former Participants on termination of employment prior to full
vesting, pursuant to section 9.3, less amounts credited because of
re-employment, pursuant to section 9.4.
SECTION 1.25 FORMER PARTICIPANT means a Participant whose
participation in the Plan has terminated pursuant to section 2.3.
SECTION 1.26 GENERAL INVESTMENT ACCOUNT means an Investment
Account established and maintained in accordance with Article XI.
SECTION 1.27 HIGHLY COMPENSATED EMPLOYEE means, for any Plan
Year, an Employee who:
(a) at any time during such Plan Year or the immediately
preceding Plan Year was a Five Percent Owner; or
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(b) is a member of the group consisting of the 100 Employees
and persons employed by any Affiliated Employer who received the
greatest Total Compensation for such Plan Year and during such Plan
Year:
(i) received Total Compensation for such Plan Year in
excess of $75,000 (or such higher amount as may be permitted
under section 414(q) of the Code); or
(ii) received Total Compensation for such Plan Year
that was in excess of both (A) $50,000 (or such higher amount
as may be permitted under section 414(q) of the Code) and (B)
the Total Compensation for such Plan Year of at least 80% of
the Employees and persons employed by any Affiliated Employer
for such Plan Year; or
(iii) was an Officer of the Employer or any
Affiliated Employer and received Total Compensation for such
Plan Year in excess of 50% of the amount in effect under
section 415(b)(1)(A) of the Code for such Plan Year; or
(c) during the immediately preceding Plan Year:
(i) received Total Compensation for such Plan Year in
excess of $75,000 (or such higher amount as may be permitted
under section 414(q) of the Code); or
(ii) received Total Compensation for such Plan Year
that was in excess of both (A) $50,000 (or such higher amount
as may be permitted under section 414(q) of the Code) and (B)
the Total Compensation for such Plan Year of at least 80% of
the Employees and persons employed by an Affiliated Employer
for such Plan Year; or
(iii) was an Officer of the Employer or any
Affiliated Employer and received Total Compensation for such
Plan Year in excess of 50% of the amount in effect under
section 415(b)(1)(A) of the Code for such Plan Year.
The determination of who is a Highly Compensated Employee will be made in
accordance with section 414(q) of the Code and the regulations thereunder. For
purposes of applying any provisions of the Plan applicable to Highly Compensated
Employees, any person who is a Family Member of a Five Percent Owner or one of
the ten Highly Compensated Employees with the highest Total Compensation for a
Plan Year shall not be treated as a separate person for such Plan Year, and any
Total Compensation or Allocation Compensation paid to such person for such Plan
Year, as well as his share of allocations of contributions or Shares under this
Plan, shall be attributed to the Five Percent Owner or Highly Compensated
Employee.
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SECTION 1.28 HOUR OF SERVICE means each hour for which a
person is paid, or entitled to payment, for the performance of duties for the
Employer or any Affiliated Employer.
SECTION 1.29 INVESTMENT ACCOUNT means either a General
Investment Account or a Share Investment Account.
SECTION 1.30 INVESTMENT FUND means any one of the three or
more funds as may be established from time to time by the Committee which,
together with any and all Shares and other investments held under the Plan,
constitute the Trust Fund.
SECTION 1.31 LOAN REPAYMENT ACCOUNT means an account
established and maintained in accordance with section 6.3.
SECTION 1.32 LOAN REPAYMENT CONTRIBUTION means amounts of
money contributed to the Plan by the Employer in accordance with section 5.2.
SECTION 1.33 MATERNITY OR PATERNITY LEAVE means a person's
absence from work for the Employer and all Affiliated Employers: (a) by reason
of the pregnancy of such person; (b) by reason of the birth of a child of such
person; (c) by reason of the placement of a child with the person in connection
with the adoption of such child by such person; or (d) for purposes of caring
for a child of such person immediately following the birth of the child or the
placement of the child with such person.
SECTION 1.34 MILITARY SERVICE means service in the armed
forces of the United States. It may also include, if and to the extent that the
Board so provides and if all Participants and Former Participants in like
circumstances are similarly treated, special service for the government of the
United States and other public service.
SECTION 1.35 NAMED FIDUCIARY means any person, committee,
corporation or organization as described in section 14.1.
SECTION 1.36 OFFICER means an employee who is an
administrative executive in regular and continued service with the Employer or
any Affiliated Employer; provided, however, that at no time shall more than the
lesser of (a) 50 employees or (b) the greater of: (i) 3 employees or (ii) 10% of
all employees be treated as Officers. The determination of whether an employee
is to be considered an Officer shall be made in accordance with section 416(i)
of the Code.
SECTION 1.37 PARTICIPANT means any person who has satisfied
the eligibility requirements set forth in section 2.1, who has become a
Participant in accordance with section 2.2, and whose participation has not
terminated under section 2.3.
SECTION 1.38 PERIOD OF SERVICE means a period of consecutive
days commencing on a person's Employment Commencement Date and ending on the
date a Period of Severance begins, with any adjustments required under section
2.4. Whenever used in the Plan, a Period of
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Service "of year(s)" means the quotient of the Period of Service divided by 365,
and any fractional part of a year shall for such purposes be disregarded.
SECTION 1.39 PERIOD OF SEVERANCE means a period of consecutive
days commencing with the earlier of:
(a) the date on which a person terminates service with the
Employer and all Affiliated Employers by reason of resignation,
retirement, discharge or death; or
(b) the first anniversary of the date on which a person
terminates service with the Employer and all Affiliated Employers for
any other reason including layoff, disability, leave of absence or any
other cessation of service not otherwise included as service under the
Plan;
and ending on the first date following such separation from service on which
such person performs an Hour of Service.
SECTION 1.40 PLAN means the Employee Stock Ownership Plan of
Wake Forest Federal Savings & Loan Association and Certain Affiliates as amended
from time to time. The Plan may be referred to as the "Employee Stock Ownership
Plan of Wake Forest Federal Savings & Loan Association and Certain Affiliates."
SECTION 1.41 PLAN ADMINISTRATOR means any person, committee,
corporation or organization designated in section 14.2, or appointed pursuant to
section 14.2, to perform the responsibilities of that office.
SECTION 1.42 PLAN YEAR means the period commencing on the
Effective Date and ending on December 31, 1995 and each calendar year
thereafter.
SECTION 1.43 QUALIFIED DOMESTIC RELATIONS ORDER means a
Domestic Relations Order that: (a) clearly specifies (i) the name and last known
mailing address of the Participant or Former Participant and of each person
given rights under such Domestic Relations Order, (ii) the amount or percentages
of the Participant's or Former Participant's benefits under this Plan to be paid
to each person covered by such Domestic Relations Order, (iii) the number of
payments or the period to which such Domestic Relations Order applies, and (iv)
the name of this Plan; and (b) does not require the payment of a benefit in a
form or amount that is (i) not otherwise provided for under the Plan, or (ii)
inconsistent with a previous Qualified Domestic Relations Order.
SECTION 1.44 QUALIFIED PARTICIPANT means a Participant who has
attained age 55 and who has been a Participant in the Plan for at least 10
years.
SECTION 1.45 RETIREMENT means: (a) any termination of
participation in the Plan at or after attainment of age 65; and (b) any
retirement under an applicable qualified defined
<PAGE>
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benefit plan of the Employer as in effect from time to time with entitlement to
a normal or early retirement allowance.
SECTION 1.46 SHARE means a share of any class of stock issued
by the Employer or any Affiliated Employer; provided that such share is a
"qualifying employer security" within the meaning section 409(l) of the Code and
section 407(d)(5) of ERISA.
SECTION 1.47 SHARE ACQUISITION LOAN means a loan obtained by
the Trustee in accordance with Article VI.
SECTION 1.48 SHARE INVESTMENT ACCOUNT means an Investment
Account established and maintained in accordance with Article XI.
SECTION 1.49 TENDER OFFER means a tender offer made to holders
of any one or more classes of Shares generally, or any other offer, made to
holders of any one or more classes of Shares generally, to purchase, exchange,
redeem or otherwise transfer Shares, whether for cash or other consideration.
SECTION 1.50 TOTAL COMPENSATION during any period means an
employee's aggregate total compensation paid by the Employer and any Affiliated
Employer with respect to such period, including earned income, wages, salaries,
fees for professional services actually rendered in the course of employment
with the Employer and any Affiliated Employer (including, but not limited to,
commissions paid to salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips and bonuses) but
excluding the following:
(a) contributions by the Employer and any Affiliated Employer
(i) under a deferred compensation plan to the extent not included in
the employee's gross income for the taxable year in which contributed,
or (ii) under a simplified employee pension to the extent the
contributions are excludable under section 402(h) of the Code (in
calendar years beginning after December 31, 1986) or deductible under
section 219(b)(2) of the Code (in calendar years beginning before
January 1, 1987), or (iii) for the purchase of an annuity contract
under section 403(b) of the Code (whether or not made under a salary
reduction agreement or excludable from gross income);
(b) distributions from a deferred compensation plan, whether
or not includible in the employee's gross income; and
(c) other amounts that qualify for special tax benefits under
the Code, such as premiums for group life insurance to the extent not
includible as gross income.
In addition, solely for purposes of identifying those employees who are Highly
Compensated Employees, each employee's Total Compensation shall include any
amounts by which the
<PAGE>
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employee's compensation paid by the Employer or any Affiliated Employer has been
reduced pursuant to a compensation reduction agreement under the terms of any
qualified cash or deferred arrangement described in section 401(k) of the Code,
any salary reduction simplified employee pension plan described in section
408(k) of the Code, any tax deferred annuity plan described in section 403(b) of
the Code, or any cafeteria plan described in section 125 of the Code. In no
event, however, shall an employee's Total Compensation include any compensation
in excess of $150,000 (or such higher amount as may be permitted under section
401(a)(17) of the Code). For purposes of applying the foregoing limitations to
any person who is a Five Percent Owner or who is one of the ten Highly
Compensated Employees with the highest Total Compensation (determined prior to
the application of this sentence), any Total Compensation paid to the spouse of
such person or to any lineal descendant of such person who has not attained age
19 on or before the last day of such calendar year, shall be deemed to have been
paid to such person.
SECTION 1.51 TRUST means the legal relationship created by the
Trust Agreement pursuant to which the Trustee holds the Trust Fund in trust. The
Trust may be referred to as the "Employee Stock Ownership Plan Trust of Wake
Forest Federal Savings & Loan Association and Certain Affiliates."
SECTION 1.52 TRUST AGREEMENT means the agreement between Wake
Forest Federal Savings & Loan Association and the Trustee therein named or its
successors pursuant to which the Trust Fund shall be held in trust.
SECTION 1.53 TRUST FUND means the corpus (consisting of
contributions paid over to the Trustee, and investments thereof), and all
earnings, appreciations or additions thereof and thereto, held by the Trustee
under the Trust Agreement in accordance with the Plan, less any depreciation
thereof and any payments made therefrom pursuant to the Plan.
SECTION 1.54 TRUSTEE means the Trustee of the Trust Fund from
time to time in office. The Trustee shall serve as Trustee until it is removed
or resigns from office and is replaced by a successor Trustee appointed in
accordance with the terms of the Trust Agreement.
SECTION 1.55 VALUATION DATE means the last business day of
March, June, September and December.
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ARTICLE II
PARTICIPATION
SECTION 2.1 ELIGIBILITY FOR PARTICIPATION.
(a) Only Eligible Employees may be or become Participants in
the Plan. An Employee shall be an Eligible Employee if he is a common-law
employee of an Employer and is not excluded under section 2.1(b).
(b) An Employee is not an Eligible Employee if he:
(i) is an Employee who has waived any claim to participation
in the Plan; or
(ii) is an Employee or in a unit of Employees covered by a
collective bargaining agreement with the Employer where retirement
benefits were the subject of good faith bargaining, unless such
agreement expressly provides that Employees such as he be covered under
the Plan; or
(iii) is a "leased employee" as defined in section 17.8(a).
SECTION 2.2 COMMENCEMENT OF PARTICIPATION.
Every Employee who is an Eligible Employee on the Effective
Date shall automatically become a Participant on the Effective Date. An Employee
who becomes an Eligible Employee after the Effective Date shall automatically
become a Participant on the first day of the month following the month in which
he becomes an Eligible Employee.
SECTION 2.3 TERMINATION OF PARTICIPATION.
Participation in the Plan shall cease, and a Participant shall
become a Former Participant, upon termination of employment with the Employer,
death, Disability or Retirement, failure to return to work upon the expiration
of a leave of absence granted by the Employer pursuant to section 3.3 or
becoming an Employee who is excluded under section 2.1(b).
SECTION 2.4 ADJUSTMENTS TO PERIOD OF SERVICE.
(a) The Period of Service of an Employee shall include any
period during which the Employee is separated from the service of the Employer
and all Affiliated Employers if such period is less than 365 consecutive days
measured from the date on which such Employee
<PAGE>
terminates service and ending with the first date following such termination for
which the Employer is credited with an Hour of Service.
(b) The Period of Service of an Employee who returns to the
service of the Employer and all Affiliated Employers following a separation from
service shall commence with the first date following such separation from
service for which the Employer is credited with an Hour of Service, and he shall
be given credit for any Period of Service prior to such separation, except that
if such separation includes a Break in Service, such credit shall not be given
until he completes a Period of Service of one year following such Break in
Service. If an Employee returns to the service of the Employer or any Affiliated
Employer following a separation from service from the Employer and any
Affiliated Employer of greater than five consecutive years, then such Employee
shall forfeit any Period of Service prior to such separation.
(c) The Period of Service of an Employee who is absent on
Maternity or Paternity Leave shall exclude any period of such absence that
occurs after the first anniversary of the commencement of such absence.
(d) An Employee's Period of Service shall also be adjusted to
the extent required by the Family and Medical Leave Act or any regulations
promulgated thereunder.
ARTICLE III
SPECIAL PROVISIONS
SECTION 3.1 MILITARY SERVICE.
In the case of a termination of employment of any Employee to
enter directly into Military Service, the entire period of his absence shall be
treated, for purposes of vesting and eligibility for participation (but not,
except as required by law, for purposes of eligibility to share in allocations
of contributions in accordance with Article VII), as if he had worked for the
Employer during the period of his absence. In the event of the re-employment of
such person by the Employer within a period of not more than six months:
(a) after he becomes entitled to release or discharge, if he
has entered into the armed forces; or
(b) after such service terminates, if he has entered into
other service defined as Military Service;
such period, also, shall be deemed to be Military Service.
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SECTION 3.2 MATERNITY OR PATERNITY LEAVE.
(a) Subject to section 3.2(b), in the event of an Employee's
absence from work in the service of the Employer and all Affiliated Employers
for a period:
(i) that commences on or after October 1, 1985;
(ii) for which the person is not paid or entitled to payment
by the Employer or any Affiliated Employer;
(iii) that constitutes Maternity or Paternity Leave; and
(iv) that exceeds one year;
then solely for purposes of determining when a Break in Service has occurred or
when a Period of Severance of five years has occurred for purposes of section
9.4, the period of such an absence commencing on the first anniversary of such
absence and ending on the second anniversary of the commencement of such absence
(or, if earlier, on the last day of such absence) shall not be treated as a
Period of Severance.
(b) Notwithstanding anything in the Plan to the contrary, this
section 3.2 shall not apply unless the person furnishes to the Plan
Administrator such information as the Plan Administrator may reasonably require
in order to establish: (i) that the person's absence is one described in section
3.2(a); and (ii) the number of working days during such absence.
SECTION 3.3 LEAVE OF ABSENCE.
In the event of temporary absence from work in the service of
the Employer and all Affiliated Employers for any period of two years or less
for which a Participant shall have been granted a leave of absence by the
Employer, the entire period of his absence shall be treated for purposes of
vesting and eligibility for participation (but not for purposes of eligibility
to share in the allocation of contributions in accordance with Article VII), as
if he had worked for the Employer during the period of his absence. Absence from
work for a period greater than, or failure to return to work upon the expiration
of, the period of leave of absence granted by the Employer shall terminate
participation in the Plan as of the date on which such period ended. In granting
leaves of absence for purposes of the Plan, all Employees in like circumstances
shall be similarly treated.
<PAGE>
ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
SECTION 4.1 CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED.
Participants shall not be required, nor shall they be
permitted, to make contributions to the Plan.
ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
SECTION 5.1 IN GENERAL.
Subject to the limitations of Article VIII, for each Plan
Year, the Employer shall contribute to the Plan the amount, if any, determined
by the Board, but in no event less than the amount described in section 5.2(a).
The amount contributed for any Plan Year shall be treated as a Loan Repayment
Contribution, an ESOP Contribution, or a combination thereof, in accordance with
the provisions of this Article V.
SECTION 5.2 LOAN REPAYMENT CONTRIBUTIONS.
For each Plan Year, a portion of the Employer's contributions,
if any, to the Plan for such Plan Year equal to the sum of:
(a) the minimum amount required to be added to the Loan
Repayment Account in order to provide adequate funds for the payment of
the principal and interest then required to be repaid under the terms
of any outstanding Share Acquisition Loan obtained by the Trustee; plus
(b) the additional amount, if any, designated by the Committee
to be applied to the prepayment of principal or interest under the
terms of any outstanding Share Acquisition Loan obtained by the
Trustee;
shall be treated as a Loan Repayment Contribution for such Plan Year. A Loan
Repayment Contribution for a Plan Year shall be allocated to the Loan Repayment
Account and shall be applied by the Trustee, in the manner directed by the
Committee, to the payment of accrued interest and to the reduction of the
principal balance of any Share Acquisition Loan obtained by the Trustee that is
outstanding on the date on which the Loan Repayment Contribution is made.
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To the extent that a Loan Repayment Contribution for a Plan Year results in a
release of Financed Shares in accordance with section 6.4, such Shares shall be
allocated among the Accounts of Eligible Participants for such Plan Year in
accordance with section 7.2.
SECTION 5.3 ESOP CONTRIBUTIONS.
In the event that the amount of the Employer's contributions
to the Plan for a Plan Year exceeds the amount of the Loan Repayment
Contributions for such Plan Year, such excess shall be treated as an ESOP
Contribution and shall be allocated among the Accounts of the Eligible
Participants for such Plan Year in accordance with section 7.3.
SECTION 5.4 TIME AND MANNER OF PAYMENT.
(a) Payment of contributions made pursuant to this Article V
shall be made:
(i) in cash, in the case of a Loan Repayment Contribution; and
(ii) in cash, in Shares or in a combination of cash and
Shares, in the case of an ESOP Contribution.
(b) Contributions made pursuant to this Article V for a Plan
Year shall be paid to the Trust Fund on or before the due date (including any
extensions thereof) of the Employer's federal income tax return for its taxable
year during which such Plan Year ends. All such contributions shall be allocated
to the Accounts of the Eligible Participants, in the case of an ESOP
Contribution, or to the Loan Repayment Account, in the case of a Loan Repayment
Contribution, as soon as is practicable following the payment thereof to the
Trust Fund.
ARTICLE VI
SHARE ACQUISITION LOANS
SECTION 6.1 IN GENERAL.
The Committee may, with the prior approval of the Board,
direct the Trustee to obtain a Share Acquisition Loan on behalf of the Plan, the
proceeds of which shall be applied on the earliest practicable date:
(a) to purchase Shares; or
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(b) to make payments of principal or interest, or a
combination of principal and interest, with respect to such Share
Acquisition Loan; or
(c) to make payments of principal and interest, or a
combination of principal and interest, with respect to a previously
obtained Share Acquisition Loan that is then outstanding.
Any such Share Acquisition Loan shall be obtained on such terms and conditions
as the Committee may approve; provided, however, that such terms and conditions
shall provide for the payment of interest at no more than a reasonable rate and
shall permit such Share Acquisition Loan to satisfy the requirements of section
4975(d)(3) of the Code and section 408(b)(3) of ERISA.
SECTION 6.2 COLLATERAL; LIABILITY FOR REPAYMENT.
(a) The Committee may direct the Trustee to pledge, at the
time a Share Acquisition Loan is obtained, the following assets of the Plan as
collateral for such Share Acquisition Loan:
(i) any Shares purchased with the proceeds of such Share
Acquisition Loan and any earnings attributable thereto;
(ii) any Financed Shares then pledged as collateral for a
prior Share Acquisition Loan which is repaid with the proceeds of such
Share Acquisition Loan and any earnings attributable thereto; and
(iii) pending the application thereof to purchase Shares or
repay a prior Share Acquisition Loan, the proceeds of such Share
Acquisition Loan and any earnings attributable thereto.
Except as specifically provided in this section 6.2(a), no assets of the Plan
shall be pledged as collateral for the repayment of any Share Acquisition Loan.
(b) No person entitled to payment under a Share Acquisition
Loan shall have any right to the assets of the Plan except for:
(i) Financed Shares that have been pledged as collateral for
such Share Acquisition Loan pursuant to section 6.2(a);
(ii) Loan Repayment Contributions made pursuant to section
5.2; and
(iii) earnings attributable to Financed Shares described in
section 6.2(b)(i) and to Loan Repayment Contributions described in
section 6.2(b)(ii).
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Except in the event of a default or a refinancing pursuant to which an existing
Share Acquisition Loan is repaid, the aggregate amount of all payments of
principal and interest made by the Trustee with respect to all Share Acquisition
Loans obtained on behalf of the Plan shall at no time exceed the aggregate
amount of all Loan Repayment Contributions theretofore made plus the aggregate
amount of all earnings (other than dividends paid in the form of Shares)
attributable to Financed Shares and to such Loan Repayment Contributions.
(c) Any Share Acquisition Loan shall be without recourse
against the Plan and Trust.
SECTION 6.3 LOAN REPAYMENT ACCOUNT.
In the event that one or more Share Acquisition Loans shall be
obtained, a Loan Repayment Account shall be established under the Plan. The Loan
Repayment Account shall be credited with all Shares acquired with the proceeds
of a Share Acquisition Loan, all Loan Repayment Contributions and all earnings
(including dividends paid in the form of Shares) or appreciation attributable to
such Shares and Loan Repayment Contributions. The Loan Repayment Account shall
be charged with all payments of principal and interest made by the Trustee with
respect to any Share Acquisition Loan, all Shares released in accordance with
section 6.4 and all losses, depreciation or expenses attributable to Shares or
to other property credited thereto. The Financed Shares, as well as any earnings
thereon, shall be allocated to such Loan Repayment Account and shall be
accounted for separately from all other amounts contributed under the Plan.
SECTION 6.4 RELEASE OF FINANCED SHARES.
As of the last day of each Plan Year during which a Share
Acquisition Loan is outstanding, a portion of the Financed Shares purchased with
the proceeds of such Share Acquisition Loan and allocated to the Loan Repayment
Account shall be released. The number of Financed Shares released in any such
Plan Year shall be equal to the amount determined according to one of the
following methods:
(a) by computing the product of: (i) the number of Financed
Shares purchased with the proceeds of such Share Acquisition Loan and
allocated to the Loan Repayment Account immediately before the release
is effected; multiplied by (ii) a fraction, the numerator of which is
the aggregate amount of the principal and interest payments (other than
payments made upon the refinancing of a Share Acquisition Loan as
contemplated by section 6.1(c)) made with respect to such Share
Acquisition Loan during such Plan Year, and the denominator of which is
the aggregate amount of all principal and interest remaining to be paid
with respect to such Share Acquisition Loan as of the first day of such
Plan Year; or
(b) by computing the product of: (i) the number of Financed
Shares purchased with the proceeds of such Share Acquisition Loan and
allocated to the
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Loan Repayment Account immediately before the release is effected;
multiplied by (ii) a fraction, the numerator of which is the aggregate
amount of the principal payments (other than payments made upon the
refinancing of a Share Acquisition Loan as contemplated by section
6.1(c)) made with respect to such Share Acquisition Loan during such
Plan Year, and the denominator of which is the aggregate amount of all
of principal remaining to be paid with respect to such Share
Acquisition Loan as of the first day of such Plan Year; provided,
however, that the method described in this section 6.4(b) may be used
only if the Share Acquisition Loan does not extend for a period in
excess of 10 years after the date of origination and only to the extent
that principal payments on such Share Acquisition Loan are made at
least as rapidly as under a loan of like principal amount with a like
interest rate and term requiring level amortization of principal and
interest.
The method to be used shall be specified in the documents governing the Share
Acquisition Loan or, if not specified therein, prescribed by the Committee, in
its discretion. In the event that property other than, or in addition to,
Financed Shares shall be held in the Loan Repayment Account and pledged as
collateral for a Share Acquisition Loan, then the property to be released
pursuant to this section 6.4 shall be property having a Fair Market Value
determined by applying the method to be used to the Fair Market Value of all
property pledged as collateral for such Share Acquisition Loan; provided,
however, that no property other than Financed Shares shall be released pursuant
to this section 6.4 unless all Financed Shares have previously been released.
SECTION 6.5 RESTRICTIONS ON FINANCED SHARES.
Except to the extent required under any applicable law, rule
or regulation, no Shares purchased with the proceeds of a Share Acquisition Loan
shall be subject to a put, call or other option, or to any buy-sell or similar
arrangement, while held by the Trustee or when distributed from the Plan. The
provisions of this section 6.5 shall continue to apply in the event that this
Plan shall cease to be an employee stock ownership plan, within the meaning of
section 4975(e)(7) of the Code.
ARTICLE VII
ALLOCATION OF CONTRIBUTIONS
SECTION 7.1 ALLOCATION AMONG ELIGIBLE PARTICIPANTS.
Subject to the limitations of Article VIII, ESOP Contributions
for a Plan Year made in accordance with section 5.3 and Financed Shares and
other property that are released from the Loan Repayment Account for a Plan Year
in accordance with section 6.4 shall be allocated among the Eligible
Participants for such Plan Year, in the manner provided in this Article VII.
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SECTION 7.2 ALLOCATION OF RELEASED SHARES OR OTHER PROPERTY.
Subject to the limitations of Article VIII, in the event that
Financed Shares or other property are released from the Loan Repayment Account
for a Plan Year in accordance with section 6.4, such released Shares or other
property shall be allocated among the Accounts of the Eligible Participants for
the Plan Year in the proportion that each such Eligible Participant's Allocation
Compensation for the portion of the Plan Year during which he was a Participant
bears to the aggregate Allocation Compensation of all Eligible Participants for
the portion of the Plan Year during which they were Participants.
SECTION 7.3 ALLOCATION OF ESOP CONTRIBUTIONS.
Subject to the limitations of Article VIII, in the event that
the Employer makes an ESOP Contribution for a Plan Year, such ESOP Contribution
shall be allocated among the Accounts of the Eligible Participants for such Plan
Year in the proportion that each such Eligible Participant's Allocation
Compensation for the portion of the Plan Year during which he was a Participant
bears to the aggregate Allocation Compensation of all Eligible Participants for
the portion of such Plan Year during which they were Eligible Participants.
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
SECTION 8.1 OPTIONAL LIMITATIONS ON ALLOCATIONS OF ESOP
CONTRIBUTIONS.
If, for any Plan Year, the application of sections 7.2 and 7.3
would result in more than one-third of the number of Shares or of the amount of
money or property to be allocated thereunder being allocated to the Accounts of
Eligible Participants for such Plan Year who are also Highly Compensated
Employees for such Plan Year, then the Committee may, but shall not be required
to, direct that this section 8.1 shall apply in lieu of sections 7.2 and 7.3. If
the Committee gives such a direction, then the Committee shall impose a maximum
dollar limitation on the amount of Allocation Compensation that may be taken
into account for each Eligible Participant. The dollar limitation which shall be
imposed shall be the limitation which produces the result that the aggregate
Allocation Compensation taken into account for Eligible Participants who are
Highly Compensated Employees, constitutes exactly one-third of the aggregate
Allocation Compensation taken into account for all Eligible Participants. In
determining whether more than one-third of the number of Shares or of the amount
of money or property to be allocated under the Plan for a Plan Year would be
allocated to the Highly Compensated Employees, any allocation to be made to the
Account of a Family Member of a Highly Compensated Employee who is either
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a Five Percent Owner or one of the ten Highly Compensated Employees with the
highest Total Compensation, shall be treated as an allocation to such Highly
Compensated Employee.
SECTION 8.2 GENERAL LIMITATIONS ON CONTRIBUTIONS.
(a) No amount shall be allocated to a Participant's Account
under this Plan for any Limitation Year, to the extent that such an allocation
would result in an Annual Addition of an amount greater than the lesser of (i)
$30,000 (or such other amount as is permissible under section 415(c)(1)(A) of
the Code, or (ii) 25% of the Participant's Total Compensation for such
Limitation Year.
(b) In the case of a Participant who may be entitled to
benefits under any qualified defined benefit plan (whether or not terminated)
now in effect or ever maintained by the Employer, such Participant's Annual
Additions under this Plan shall, in addition to the limitations provided under
section 8.2(a), be further limited so that the sum of the Participant's Defined
Contribution Plan Fraction plus his Defined Benefit Plan Fraction does not
exceed 1.0 for any Limitation Year; provided, however, that for any Limitation
Year ending prior to January 1, 1983, the sum of his Defined Contribution Plan
Fraction plus his Defined Benefit Plan Fraction shall not exceed 1.4; and
provided further, that this limitation shall only apply if and to the extent
that the benefits under the Employer's Retirement Plan are not limited so that
such sum is not exceeded.
(c) For purposes of this section 8.2, the following special
definitions shall apply:
(i) Annual Addition means the sum of the following amounts
allocated on behalf of a Participant for a Limitation Year:
(A) all contributions by the Employer (including
contributions made under a salary reduction agreement
pursuant to sections 401(k), 408(k) or 403(b) of the Code)
under any qualified defined contribution plan (other than
this Plan) maintained by the Employer, as well as the
Participant's allocable share, if any, of any forfeitures
under such plans; plus
(B) (I) for Limitation Years that began prior to
January 1, 1987, the lesser of (1) 50% of the Participant's
voluntary nondeductible contributions to all qualified
defined contribution plans maintained by the Employer, or
(2) the amount by which the Participant's nondeductible
voluntary contributions to such plans exceeds 6% of his
Total Compensation; and (II) for Limitation Years that begin
after December 31, 1986, all of the Participant's voluntary
nondeductible contributions to such plans; plus
(C) all ESOP Contributions under this Plan; plus
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(D) except as hereinafter provided in this section
8.2(c)(i), a portion of the Employer's Loan Repayment
Contributions to the Plan for such Limitation Year which
bears the same proportion to the total amount of the
Employer's Loan Repayment Contributions for the Limitation
Year that the number of Shares (or the Fair Market Value of
property other than Shares) allocated to the Participant's
Account pursuant to section 7.2 or 8.1, whichever is
applicable, bears to the aggregate number of Shares (or Fair
Market Value of property other than Shares) so allocated to
all Participants for such Limitation Year.
Notwithstanding section 8.2(c)(i)(D), if, for any Limitation Year, the
aggregate amount of ESOP Contributions allocated to the Accounts of the
individuals who are Highly Compensated Employees for such Limitation
Year, when added to such Highly Compensated Employees' allocable share
of any Loan Repayment Contributions for such Limitation Year, does not
exceed one-third of the total of all ESOP Contributions and Loan
Repayment Contributions for such Limitation Year, then that portion, if
any, of the Loan Repayment Contributions for such Limitation Year that
is applied to the payment of interest on a Share Acquisition Loan shall
not be included as an Annual Addition. In determining whether more than
one-third of the number of Shares or of the amount of money or property
to be allocated under the Plan for a Plan Year would be allocated to
the Highly Compensated Employees, any allocation to be made to the
Account of a Family Member of a Highly Compensated Employee who is
either a Five Percent Owner or one of the ten Highly Compensated
Employees with the highest Total Compensation, shall be treated as an
allocation to such Highly Compensated Employee.
(ii) Employer means Wake Forest Federal Savings & Loan
Association, and all members of a controlled group of corporations, as
defined in section 414(b) of the Code, as modified by section 415(h)
of the Code, all commonly controlled trades or businesses, as defined
in section 414(c) of the Code, as modified by section 415(h) of the
Code, all affiliated service groups, as defined in section 414(m) of
the Code, of which Wake Forest Federal Savings & Loan Association is a
member, as well as any leasing organization, as defined in section
17.8, that employs any person who is considered an employee under
section 17.8 and any other entity that is required to be aggregated
with the Employer pursuant to regulations under section 414(o) of the
Code.
(iii) Defined Benefit Plan Fraction means, for any Participant
for any Limitation Year, a fraction, the numerator of which is the
Projected Annual Benefit (determined as of the end of such Limitation
Year) of the Participant under any qualified defined benefit plans
(whether or not terminated) maintained by the Employer for the current
and all prior Limitation Years, and the denominator of which is as
follows: (A) for Limitation Years ending prior to January 1, 1983, the
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lesser of (I) the dollar limitation in effect under section 415(b)(1)
(A) of the Code for such Limitation Year, or (II) the amount which may
be taken into account under section 415(b)(1)(B) of the Code with
respect to such Participant for such Limitation Year; and (B) in all
other cases, the lesser of (I) (except as provided in section 16.8(b)
for a Top Heavy Plan Year) the product of 1.25 multiplied by the
dollar limitation in effect under section 415(b)(1)(A) of the Code for
such Limitation Year, or (II) the product of 1.4 multiplied by the
amount which may be taken into account under section 415(b)(1)(B) of
the Code with respect to such Participant for such Limitation Year.
(iv) Defined Contribution Plan Fraction means, for any
Participant for any Limitation Year, a fraction (A) the numerator of
which is the sum of such Participant's Annual Additions (determined as
of the end of such Limitation Year) under this Plan and any other
qualified defined contribution plans (whether or not terminated)
maintained by the Employer for the current and all prior Limitation
Years, and (B) the denominator of which is as follows: (I) for
Limitation Years ending prior to January 1, 1983, the sum of the
lesser of the following amounts for such Limitation Year and for each
prior Limitation Year during which such Participant was employed by
the Employer: (1) the Maximum Permissible Amount for such Limitation
Year (without regard to section 415(c)(6) of the Code), or (2) the
amount which may be taken into account under section 415(c)(1)(B) of
the Code with respect to such Participant for such Limitation Year;
and (II) in all other cases, the sum of the lesser of the following
amounts for such Limitation Year and for each prior Limitation during
which such Participant was employed by the Employer: (1) (except as
provided in section 16.8(b) for a Top Heavy Plan Year) the product of
1.25 multiplied by the Maximum Permissible Amount for such Limitation
Year (determined without regard to section 415(c)(6) of the Code), or
(2) the product of 1.4 multiplied by the amount which may be taken
into account under section 415(c)(1)(B) of the Code (or section
415(c)(7) of the Code, if applicable) with respect to such Participant
for such Limitation Year; provided, however, that the Plan
Administrator may, at his election, adopt the transition rule set
forth in section 415(e)(6) of the Code in making the computation set
forth in this section 8.2(c)(iv). If the sum of a Participant's
Defined Benefit Plan Fraction and Defined Contribution Plan Fraction
exceeded 1.0 as of September 30, 1983, then such Participant's Defined
Contribution Plan Fraction shall be determined under regulations to be
prescribed by the Secretary of the Treasury so that the sum of the
fractions does not exceed 1.0.
(v) Limitation Year means the Plan Year; provided, however, that
if the Employer changes the Limitation Year, the new Limitation Year
shall begin on a date within the Limitation Year in which the
amendment is made.
(vi) Maximum Permissible Amount means (A) $25,000 (or such higher
amount as may be permitted under section 415(d) of the Code because of
cost of living increases) for Limitation Years beginning prior to
January 1, 1983, and (B)
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the greater of (I) $30,000, or (II) 25% of the dollar limitation in
effect under section 415(b)(1)(A) of the Code for Limitation Years
beginning on or after January 1, 1983.
(vii) Projected Annual Benefit means a Participant's annual
retirement benefit (adjusted to the actuarial equivalent of a straight
life annuity if expressed in a form other than a straight life or
qualified joint and survivor annuity) under any qualified defined
benefit plan maintained by the Employer, whether or not terminated,
assuming that the Participant will continue employment until the later
of current age or normal retirement age under such plan, and that the
Participant's Total Compensation for the Limitation Year and all other
relevant factors used to determine benefits under such plan will
remain constant for all future Limitation Years.
(d) When a Participant's Annual Addition to this Plan must be
reduced to satisfy the limitations of section 8.2(a) or (b), such reduction
shall be applied first to ESOP Contributions; and second, if necessary, to
Shares allocated as a result of a Loan Repayment Contribution which are included
as an Annual Addition. The amount by which any Participant's Annual Addition to
this Plan is reduced shall be allocated in accordance with Articles V and VII as
a contribution by the Employer in the next succeeding Limitation Year.
(e) Prior to determining a Participant's actual Total
Compensation for a Limitation Year, the Employer may determine the limitations
under this section 8.2 for a Participant on the basis of a reasonable estimation
of the Participant's Total Compensation for the Limitation Year that is
uniformly determined for all Participants who are similarly situated. As soon as
it is administratively feasible after the end of the Limitation Year, the
limitations of this section 8.2 shall be determined on the basis of the
Participant's actual Total Compensation for the Limitation Year.
ARTICLE IX
VESTING
SECTION 9.1 VESTING.
Subject to the provisions of section 9.6(a), the balance
credited to each Employee's Account shall become vested in accordance with the
following schedule:
Period of Service Vested
In Years Percentage
less than 3 0%
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3 or more 100%
SECTION 9.2 VESTING ON DEATH, DISABILITY, RETIREMENT OR CHANGE IN CONTROL.
Any previously unvested portion of the remainder of the
balance credited to the Account of a Participant or of a person who is a Former
Participant solely because he is excluded from participation under section
2.1(b) shall become fully vested in him immediately upon attainment of age 65,
or, if earlier, upon the termination of his participation by reason of death,
Disability, Retirement or upon the occurrence of a Change in Control of the
Employer.
SECTION 9.3 FORFEITURES ON TERMINATION OF EMPLOYMENT.
Upon the termination of employment of a Participant or Former
Participant for any reason other than death, Disability, Retirement, that
portion of the balance credited to his Account which is not vested at the date
of such termination shall be forfeited as of the last Valuation Date for the
Plan Year in which such termination of employment occurs. The proceeds of such
forfeitures, less amounts, if any, required to be credited because of
re-employment pursuant to section 9.4, shall be treated as Forfeitures and shall
be disposed of as provided in section 9.5.
SECTION 9.4 AMOUNTS CREDITED UPON RE-EMPLOYMENT.
If an Employee forfeited any amount of the balance credited to
his Account upon his termination of employment with the Employer, and is
re-employed prior to the occurrence of a Period of Severance of five years,
then:
(i) an amount equal to the Fair Market Value of the Shares
forfeited, determined as of the date of forfeiture; and
(ii) the amount credited to his General Investment Account that
was forfeited, determined as of the date of forfeiture;
shall be credited back to his Account from the proceeds of forfeitures which are
redeemed pursuant to section 9.3 during the Plan Year in which he is
re-employed, unless such proceeds are insufficient, in which case the Employer
shall make an additional contribution in the amount of such deficiency.
SECTION 9.5 ALLOCATION OF FORFEITURES.
Any Forfeitures that occur during a Plan Year shall be used to
reduce the contributions required of the Employer under the Plan and shall be
treated as Loan Repayment
<PAGE>
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Contributions and ESOP Contributions in the proportions designated by the
Committee in accordance with Article V.
SECTION 9.6 ACCELERATED VESTING UPON CHANGE IN CONTROL
(a) The balance credited to each Participant's Account shall
become 100% vested upon the occurrence of a Change in Control of the Employer.
(b) A Change in Control of the Employer shall be deemed to
have occurred upon the happening of any of the following events:
(i) approval by the stockholders of Wake Forest Federal
Savings & Loan Association of a transaction that would result in the
reorganization, merger or consolidation of Wake Forest Federal Savings
& Loan Association with one or more other persons, other than a
transaction following which:
(A) at least 51% of the equity ownership interests of
the entity resulting from such transaction are beneficially
owned (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934 "Exchange Act") in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the outstanding equity ownership
interests in Wake Forest Federal Savings & Loan Association;
and
(B) at least 51% of the securities entitled to vote
generally in the election of directors of the entity resulting
from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of Wake Forest Federal
Savings & Loan Association
(ii) the acquisition of all or substantially all of the assets
of Wake Forest Federal Savings & Loan Association or beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of the outstanding securities of Wake
Forest Federal Savings & Loan Association entitled to vote generally in
the election of directors by any person or by any persons acting in
concert, or approval by the stockholders of Wake Forest Federal Savings
& Loan Association of any transaction which would result in such an
acquisition;
<PAGE>
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(iii) a complete liquidation or dissolution of Wake Forest
Federal Savings & Loan Association, or approval by its stockholders of
a plan for such liquidation or dissolution;
(iv) the occurrence of any event if, immediately following
such event, at least 50% of the members of the Board of Wake Forest
Federal Savings & Loan Association do not belong to any of the
following groups;
(A) individuals who were members of the Board of Wake
Forest Federal Savings & Loan Association on the Effective
Date of this Plan; or
(B) individuals who first became members of the Board
of Wake Forest Federal Savings & Loan Association after the
Effective Date of this Plan either:
(I) upon election to serve as a member of
such Board by affirmative vote of three-quarters of
the members of such Board, or of a nominating
committee thereof, in office at the time of such
first election; or
(II) upon election by the stockholders of
Wake Forest Federal Savings & Loan Association to
serve as a member of the Board of Wake Forest Federal
Savings & Loan Association, but only if nominated for
election by affirmative vote of three-quarters of the
members of the Board, or of a nominating committee
thereof, in office at the time of such first
nomination;
PROVIDED, HOWEVER, that such individual's election or
nomination did not result from an actual or threatened
election contest (within the meaning of Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents
(within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf
of the Board of Wake Forest Federal Savings & Loan
Association.
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of Wake Forest Federal Savings
& Loan Association, an Affiliated Employer, or a subsidiary of either of them,
by Wake Forest Federal Savings & Loan Association, an Affiliated Employer, or a
subsidiary of either of them, or by any employee benefit plan maintained by any
of them. For purposes of this section 9.6(b), the term "person" shall have the
meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act.
ARTICLE X
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THE TRUST FUND
SECTION 10.1 THE TRUST FUND.
The Trust Fund shall be held and invested under the Trust
Agreement with the Trustee. The provisions of the Trust Agreement shall vest
such powers in the Trustee as to investment, control and disbursement of the
Trust Fund, and such other provisions not inconsistent with the Plan, including
provision for the appointment of one or more "investment managers" within the
meaning of section 3(38) of ERISA to manage and control (including acquiring and
disposing of) all or any of the assets of the Trust Fund, as the Board may from
time to time authorize. Except as required by ERISA, no bond or other security
shall be required of any Trustee at any time in office.
SECTION 10.2 INVESTMENTS.
(a) Except to the extent provided to the contrary in section
10.3, the Trust Fund shall be invested in:
(i) Shares;
(ii) units of interest in such Investment Funds as may be
established from time to time by the Committee; and
(iii) such other investments as may be permitted under the
Trust Agreement;
in such proportions as shall be determined by the Committee or, if so provided
under the Trust Agreement, as directed by one or more investment managers or by
the Trustee, in its discretion; provided, however, that the investments of the
Trust Fund shall consist primarily of Shares. Notwithstanding the immediately
preceding sentence, the Trustee may temporarily invest the Trust Fund in
short-term obligations of, or guaranteed by, the United States Government or an
agency thereof, or may retain uninvested, or sell investments to provide,
amounts of cash required for purposes of the Plan.
(b) Initially, the value of each unit in each Investment Fund
shall be $1, and one unit in any such Investment Fund shall be credited to each
Participant or Former Participant, or the Beneficiary of a deceased Participant
or Former Participant, for each $1 applicable to the purchase for him of units
in such Investment Fund. Thereafter, the Plan Administrator shall determine the
value of units in each such Investment Fund as of each Valuation Date by
dividing the fair market value of all property in each such Investment Fund as
of such Valuation Date (after deducting any expenses or other amounts then
properly chargeable against the particular Investment Fund) by the number of
units then outstanding in each such Investment Fund, and making such other
adjustments as shall be necessary to properly reflect transactions occurring
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subsequent to the immediately preceding Valuation Date. For the purposes of this
Article X, fractions of units computed to three decimal places, as well as whole
units, in any of the Investment Funds may be redeemed or purchased for the
credit of Employees, Participants or Former Participants or their Beneficiaries.
SECTION 10.3 DISTRIBUTIONS FOR DIVERSIFICATION OF INVESTMENTS.
(a) Notwithstanding section 10.2, each Qualified Participant
may:
(i) during the first 90 days of each of the first four Plan
Years to begin after the Plan Year in which he first becomes a
Qualified Participant, elect that such percentage of the balance
credited to his Account as he may specify, but in no event more
than 25% of the balance credited to his Account, be distributed
to him pursuant to this section; and
(ii) during the first 90 days of the fifth Plan Year to
begin after the Plan Year in which he first becomes a Qualified
Participant or of any Plan Year thereafter, elect that such
percentage of the balance credited to his Account as he may
specify, but in no event more than 50% of the balance credited to
his Account, be distributed to him pursuant to this section.
For purposes of an election under this section 10.3, the balance credited to a
Participant's Account shall be the balance credited to his Account determined as
of the last Valuation Date to occur in the Plan Year immediately preceding the
Plan Year in which such election is made.
(b) An election made under section 10.3(a) shall be made in
writing, in the form and manner prescribed by the Plan Administrator, and shall
be filed with the Plan Administrator during the election period specified in
section 10.3(a). As soon as is practicable, and in no case later than 90 days,
following the end of the election period during which such election is made, the
Plan Administrator shall take such actions as are necessary to cause the
specified percentage of the balance credited to the Account of the Qualified
Participant making the election to be distributed to such Qualified Participant.
(c) An election made under section 10.3(a) may be changed or
revoked at any time during the election period described in section 10.3(a)
during which it is initially made. In no event, however, shall any election
under this section 10.3 result in more than 25% of the balance credited to the
Participant's Account being distributed to the Participant, if such election is
made during a Plan Year to which section 10.3(a)(i) applies, or result in more
than 50% of the balance distributed to the Participant, if such election is made
during the Plan Year to which section 10.3(a)(ii) applies or thereafter.
<PAGE>
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SECTION 10.4 USE OF COMMINGLED TRUST FUNDS.
Subject to the provisions of the Trust Agreement, amounts held
in the Trust Fund may be invested in:
(a) any commingled or group trust fund described in section
401(a) of the Code and exempt under section 501(a) of the Code; or
(b) any common trust fund exempt under section 584 of the Code
maintained exclusively for the collective investment of the assets of
trusts that are exempt under section 501(a) of the Code;
provided that the trustee of such commingled, group or common trust fund is a
bank or trust company.
SECTION 10.5 MANAGEMENT AND CONTROL OF ASSETS.
All assets of the Plan shall be held by the Trustee in trust
for the exclusive benefit of Participants, Former Participants and their
Beneficiaries. No part of the corpus or income of the Trust Fund shall be used
for, or diverted to, purposes other than for the exclusive benefit of
Participants, Former Participants and their Beneficiaries, and for defraying
reasonable administrative expenses of the Plan and Trust Fund. No person shall
have any interest in or right to any part of the earnings of the Trust Fund, or
any rights in, to or under the Trust Fund or any part of its assets, except to
the extent expressly provided in the Plan.
ARTICLE XI
VALUATION OF INTERESTS IN THE TRUST FUND
SECTION 11.1 ESTABLISHMENT OF INVESTMENT ACCOUNTS.
The Plan Administrator shall establish, or cause to be
established, for each person for whom an Account is maintained a Share
Investment Account and a General Investment Account. Such Share Investment
Accounts and General Investment Accounts shall be maintained in accordance with
this Article XI.
SECTION 11.2 SHARE INVESTMENT ACCOUNTS.
The Share Investment Account established for a person in
accordance with section 11.1 shall be credited with: (a) all Shares allocated to
such person's Account; (b) all Shares purchased
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with amounts of money or property allocated to such person's Account; (c) all
dividends paid in the form of Shares with respect to Shares credited to his
Account; and (d) all Shares purchased with amounts credited to such person's
General Investment Account. Such Share Investment Account shall be charged with
all Shares that are sold or exchanged to acquire other investments or to provide
cash and with all Shares that are distributed in kind.
SECTION 11.3 GENERAL INVESTMENT ACCOUNTS.
The General Investment Account that is established for a
person in accordance with section 11.1 shall be credited with: (a) all amounts,
other than Shares, allocated to such person's Account; (b) all dividends paid in
a form other than Shares with respect to Shares credited to such person's Share
Investment Account; (c) the proceeds of any sale of Shares credited to such
person's Share Investment Account; and (d) any earnings attributable to amounts
credited to such person's General Investment Account. Such General Investment
Account shall be charged with all amounts credited thereto that are applied to
the purchase of Shares, any losses or depreciation attributable to amounts
credited thereto, any expenses allocable thereto and any distributions of
amounts credited thereto.
SECTION 11.4 VALUATION OF INVESTMENT ACCOUNTS.
(a) The Plan Administrator shall determine, or cause to be
determined, the aggregate value of each person's Share Investment Account as of
each Valuation Date by multiplying the number of Shares credited to such Share
Investment Account on such Valuation Date by the Fair Market Value of a Share on
such Valuation Date.
(b) The Plan Administrator shall determine, or cause to be
determined, the aggregate value of each person's General Investment Account as
of each Valuation Date as follows:
(i) To the extent that all or a portion of such person's
General Investment Account is invested in one or more of the Investment
Funds, the Plan Administrator shall multiply the number of units in
each Investment Fund credited to such person as of the immediately
preceding Valuation Date by the value of a unit in such Investment Fund
as of the current Valuation Date.
(ii) To the extent that all or a portion of such person's
General Investment Account is invested in investments other than the
Investment Funds, the Plan Administrator shall adjust the balance in
such manner as it shall deem appropriate to reflect earnings, losses,
expenses, benefit payments and other transactions properly chargeable
to such Account.
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SECTION 11.5 ANNUAL STATEMENTS.
There shall be furnished, by mail or otherwise, at least once
in each Plan Year to each person who would then be entitled to receive all or
part of the balance credited to any Account if the Plan were then terminated, a
statement of his interest in the Plan as of such date as shall be selected by
the Plan Administrator, which statement shall be deemed to have been accepted as
correct and be binding on such person unless the Plan Administrator receives
written notice to the contrary within 30 days after the statement is mailed or
furnished to such person.
ARTICLE XII
SHARES
SECTION 12.1 SPECIFIC ALLOCATION OF SHARES.
All Shares purchased under the Plan shall be specifically
allocated to the Share Investment Accounts of Participants, Former Participants
and their Beneficiaries in accordance with section 11.2, with the exception of
Financed Shares, which shall be allocated to the Loan Repayment Account.
SECTION 12.2 DIVIDENDS.
(a) Dividends paid with respect to Shares held under the Plan
shall be credited to the Loan Repayment Account, if paid with respect to
Financed Shares. Such dividends shall be: (i) applied to the payment of
principal and accrued interest with respect to any Share Acquisition Loan, if
paid in cash; or (ii) held in the Loan Repayment Account as Financed Shares for
release in accordance with section 6.4, if paid in the form of Shares.
(b) Dividends paid with respect to Shares allocated to a
person's Share Investment Account shall be credited to such person's Share
Investment Account. Cash dividends credited to a person's General Investment
Account shall be, at the direction of the Board, either: (i) held in such
General Investment Account and invested in accordance with sections 10.2 and
11.2; (ii) distributed immediately to such person; (iii) distributed to such
person within 90 days of the close of the Plan Year in which such dividends were
paid; or (iv) used to make payments of principal or interest on a Share
Acquisition Loan; PROVIDED, HOWEVER, that the Fair Market Value of Financed
Shares released from the Loan Repayment Account equals or exceeds the amount of
the dividend.
SECTION 12.3 VOTING RIGHTS.
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(a) Each person shall direct the manner in which all voting
rights appurtenant to Shares allocated to his Share Investment Account will be
exercised, provided that such Shares were allocated to his Share Investment
Account as of the applicable record date. Such person shall, for such purpose,
be deemed a "named fiduciary" within the meaning of section 402(a)(2) of ERISA.
Such a direction shall be given by completing and filing with the inspector of
elections, the Trustee or such other person who shall be independent of the
Employer as the Committee shall designate, at least 10 days prior to the date of
the meeting of holders of Shares at which such voting rights will be exercised,
a written direction in the form and manner prescribed by the Committee. The
inspector of elections, the Trustee or such other person designated by the
Committee shall tabulate the directions given on a strictly confidential basis,
and shall provide the Committee with only the final results of the tabulation.
The final results of the tabulation shall be followed by the Committee in
directing the Trustee as to the manner in which such voting rights shall be
exercised. The Plan Administrator shall make a reasonable effort to furnish, or
cause to be furnished, to each person for whom a Share Investment Account is
maintained all annual reports, proxy materials and other information known by
the Plan Administrator to have been furnished by the issuer of the Shares, or by
any solicitor of proxies, to the holders of Shares.
(b) To the extent that any person shall fail to give
instructions with respect to the exercise of voting rights appurtenant to Shares
allocated to his Share Investment Account:
(i) the Trustee shall, with respect to each matter to be voted
upon: (A) cast a number of affirmative votes equal to the product of
(I) the number of allocated Shares for which no written instructions
have been given, multiplied by (II) a fraction, the numerator of which
is the number of allocated Shares for which affirmative votes will be
cast in accordance with written instructions given as provided in
section 12.3(a) and the denominator of which is the aggregate number of
affirmative and negative votes which will be cast in accordance with
written instructions given as aforesaid, and (B) cast a number of
negative votes equal to the excess (if any) of (I) the number of
allocated Shares for which no written instructions have been given over
(II) the number of affirmative votes being cast with respect to such
allocated Shares pursuant to section 12.3(b)(i)(A); or
(ii) if the Trustee shall determine that it may not,
consistent with its fiduciary duties, vote the allocated Shares for
which no written instructions have been given in the manner described
in section 12.3(b)(i), it shall vote such Shares in such manner as it,
in its discretion, may determine to be in the best interests of the
persons to whose Share Investment Accounts such Shares have been
allocated.
(c) (i) The voting rights appurtenant to Financed Shares shall
be exercised as follows with respect to each matter as to which holders of
Shares may vote:
(A) a number of votes equal to the product of (I) the total
number of votes appurtenant to Financed Shares allocated to the Loan
Repayment Account on the applicable record date; multiplied by (II) a
fraction, the numerator of which is the total number of affirmative
votes cast by Participants, Former Participants and the Beneficiaries
of deceased Former Participants with respect to such matter pursuant to
section 12.3(a) and the denominator of which is the total number of
affirmative and negative votes cast by Participants, Former
Participants and
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the Beneficiaries of deceased Former Participants, shall be cast in
the affirmative; and
(B) a number of votes equal to the excess of (I) the total number
of votes appurtenant to Financed Shares allocated to the Loan
Repayment Account on the applicable record date, over (II) the number
of affirmative votes cast pursuant to section 12.3(c)(i)(A) shall be
cast in the negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.3(c)(i) shall be applied separately with respect to each class
of Shares.
(ii) If voting rights are to be exercised with respect to
Financed Shares as provided in section 12.3(c)(i)(A) and (B) at a time when
there are no Shares allocated to the Share Investment Accounts of Participants,
Former Participants and the Beneficiaries of deceased Former Participants, then
the voting rights appurtenant to Financed Shares shall be exercised as follows
with respect to each matter as to which holders of Shares may vote:
(A) Each person who is a Participant on the applicable record
date and who was a Participant on the last day of the Plan Year ending
on or immediately prior to such record date will be granted a number of
votes equal to the quotient, rounded to the nearest integral number, of
(I) such Participant's Allocation Compensation for the Plan Year ending
on or immediately prior to such record date (or for the portion of such
Plan Year during which he was a Participant); divided by (II)
$1,000.00; and
(B) a number of votes equal to the product of (I) the total
number of Financed Shares allocated to the Loan Repayment Account on
the applicable record date; multiplied by (II) a fraction, the
numerator of which is the total number of votes that are cast in the
affirmative with respect to such matter pursuant to section
12.3(c)(ii)(A) and the denominator of which is the total number of
votes that are cast either in the affirmative or in the negative with
respect to such matter pursuant to section 12.3(c)(ii)(A), shall be
cast in the affirmative; and
(C) a number of votes equal to the excess of (I) the total
number of Financed Shares allocated to the Loan Repayment Account on
the applicable record date, over (II) the number of affirmative votes
cast with respect to such matter pursuant to section 12.3(c)(ii)(B),
shall be cast in the negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.3(c)(ii) shall be applied separately with respect to each class
of Shares.
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SECTION 12.4 TENDER OFFERS.
(a) Each person shall direct whether Shares allocated to his
Share Investment Account will be delivered in response to any Tender Offer. Such
person shall, for such purpose, be deemed a "named fiduciary" within the meaning
of section 402(a)(2) of ERISA. Such a direction shall be given by completing and
filing with the Trustee or such other person who shall be independent of the
Employer as the Committee shall designate, at least 10 days prior to the latest
date for exercising a right to deliver Shares pursuant to such Tender Offer, a
written direction in the form and manner prescribed by the Committee. The
Trustee or other person designated by the Committee shall tabulate the
directions given on a strictly confidential basis, and shall provide the
Committee with only the final results of the tabulation. The final results of
the tabulation shall be followed by the Committee in directing the number of
Shares to be delivered. The Plan Administrator shall make a reasonable effort to
furnish, or cause to be furnished, to each person for whom a Share Investment
Account is maintained, all information known by the Plan Administrator to have
been furnished by the issuer or by or on behalf of any person making such Tender
Offer, to the holders of Shares in connection with such Tender Offer.
(b) To the extent that any person shall fail to give
instructions with respect to Shares allocated to his Share Investment Account:
(i) the Trustee shall (A) tender or otherwise offer for purchase,
exchange or redemption a number of such Shares equal to the product of
(I) the number of allocated Shares for which no written instructions
have been given, multiplied by (II) a fraction, the numerator of which
is the number of allocated Shares tendered or otherwise offered for
purchase, exchange or redemption in accordance with written
instructions given as provided in section 12.4(a) and the denominator
of which is the aggregate number of allocated Shares for which written
instructions have been given as aforesaid, and (B) withhold a number
of Shares equal to the excess (if any) of (I) the number of allocated
Shares for which no written instructions have been given over (II) the
number of Shares being tendered or otherwise offered pursuant to
section 12.4(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent
with its fiduciary duties, exercise the tender or other rights
appurtenant to allocated Shares for which no written instructions have
been given in the manner described in section 12.4(b)(i), it shall
tender, or otherwise offer, or withhold such Shares in such manner as
it, in its discretion, may determine to be in the best interests of
the persons to whose Share Investment Accounts such Shares have been
allocated.
(c) In the case of any Tender Offer, any Financed Shares held
in the Loan Repayment Account shall be dealt with as follows:
(i) If such Tender Offer occurs at a time when there are no
Shares allocated to the Share Investment Accounts of Participants,
Former Participants and
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the Beneficiaries of deceased Former Participants, then the
disposition of the Financed Shares shall be determined as follows:
(A) each person who is a Participant on the applicable
record date and who was a Participant on the last day of the
Plan Year ending on or immediately prior to such record date
will be granted a number of tender rights equal to the
quotient, rounded to the nearest integral number, of (I)
such Participant's Allocation Compensation for the Plan Year
ending on or immediately prior to such record date (or for
the portion of such Plan Year during which he was a
Participant), divided by (II) $1,000.00; and
(B) on the last day for delivering Shares or otherwise
responding to such Tender Offer, a number of Shares equal to
the product of (I) the total number of Financed Shares
allocated to the Loan Repayment Account on the last day of
the effective period of such Tender Offer; multiplied by
(II) a fraction, the numerator of which is the total number
of tender rights exercised in favor of the delivery of
Shares in response to the Tender Offer pursuant to section
12.4(c)(i)(A) and the denominator of which is the total
number of tender rights that are exercisable in response to
the Tender Offer pursuant to section 12.4(c)(i)(A), shall be
delivered in response to the Tender Offer; and
(C) a number of Shares equal to the excess of (I) the
total number of Financed Shares allocated to the Loan
Repayment Account on the last day of the effective period of
such Tender Offer; over (II) the number of Shares to be
delivered in response to the Tender Offer pursuant to
section 12.4(c)(i)(B), shall be withheld from delivery.
(ii) If such Tender Offer occurs at a time when the voting
rights appurtenant to such Financed Shares are to be exercised in
accordance with section 12.3(c)(i), then:
(A) on the last day for delivering Shares or otherwise
responding to such Tender Offer, a number of Financed Shares
equal to the product of (I) the total number of Financed
Shares allocated to the Loan Repayment Account on the last
day of the effective period of such Tender Offer; multiplied
by (II) a fraction, the numerator of which is the total
number of Shares delivered from the Share Investment
Accounts of Participants, Former Participants and the
Beneficiaries of deceased Former Participants in response to
such Tender Offer pursuant to section 12.4(a), and the
denominator of which is the total number of Shares allocated
to the Share Investment Accounts of Participants, Former
Participants and Beneficiaries of deceased Former
Participants immediately prior to the last day for
delivering Shares or otherwise responding to such Tender
Offer, shall be delivered; and
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(B) a number of Financed Shares equal to the excess of
(I) the total number of Financed Shares allocated to the
Loan Repayment Account on the last day for delivering Shares
or otherwise responding to such Tender Offer; over (II) the
number of Financed Shares to be delivered pursuant to
section 12.4(c)(ii)(A), shall be withheld from delivery.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.4(c) shall be applied separately with respect to each class of
Shares.
ARTICLE XIII
PAYMENT OF BENEFITS
SECTION 13.1 IN GENERAL.
The balance credited to a Participant's or Former
Participant's Account under the Plan shall be paid only at the times, to the
extent, in the manner and to the persons provided in this Article XIII.
SECTION 13.2 DESIGNATION OF BENEFICIARIES.
(a) Subject to section 13.2(b), any person entitled to a
benefit under the Plan may designate a Beneficiary to receive any amount to
which he is entitled that remains undistributed on the date of his death. Such
person shall designate his Beneficiary (and may change or revoke any such
designation) in writing in the form and manner prescribed by the Plan
Administrator. Such designation, and any change or revocation thereof, shall be
effective only if received by the Plan Administrator prior to such person's
death and shall become irrevocable upon such person's death.
(b) A Participant or Former Participant who is married
shall automatically be deemed to have designated his spouse as his Beneficiary,
unless, prior to the time such designation would, under section 13.2(a), become
irrevocable:
(i) the Participant or Former Participant designates an
additional or a different Beneficiary in accordance with this
section 13.2; and
(ii) (A) the spouse of such Participant or Former
Participant consents to such designation in a writing that
acknowledges the effect of such consent and is witnessed by a
Plan representative or a notary public; or (B) the spouse of such
Participant or Former Participant has previously consented to
such designation by signing a written waiver of any right to
consent to any designation made by the
<PAGE>
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Participant or Former Participant, and such waiver acknowledged the
effect of the waiver and was witnessed by a Plan representative or a
notary public; or (C) it is established to the satisfaction of a Plan
representative that the consent required under section 13.2(b)(ii)(A)
may not be obtained because such spouse cannot be located or because
of other circumstances permitted under regulations issued by the
Secretary of the Treasury.
(c) In the event that a Beneficiary entitled to payments
hereunder shall die after the death of the person who designated him but prior
to receiving payment of his entire interest in the Account of the person who
designated him, then such Beneficiary's interest in the Account of such person,
or any unpaid balance thereof, shall be paid as provided in section 13.3 to the
Beneficiary who has been designated by the deceased Beneficiary, or if there is
none, to the executor or administrator of the estate of such deceased
Beneficiary, or if no such executor or administrator is appointed within such
time as the Plan Administrator, in his sole discretion, shall deem reasonable,
to such one or more of the spouse and descendants and blood relatives of such
deceased Beneficiary as the Plan Administrator may select. If a person entitled
to a benefit under the Plan and any of the Beneficiaries designated by him shall
die in such circumstances that there shall be substantial doubt as to which of
them shall have been the first to die, for all purposes of the Plan, the person
who made the Beneficiary designation shall be deemed to have survived such
Beneficiary.
(d) If no Beneficiary survives the person entitled to the
benefit under the Plan or if no Beneficiary has been designated by such person,
such benefit shall be paid to the executor or administrator of the estate of
such person, or if no such executor or administrator is appointed within such
time as the Plan Administrator, in his sole discretion, shall deem reasonable,
to such one or more of the spouse and descendants and blood relatives of such
deceased person as the Plan Administrator may select.
SECTION 13.3 DISTRIBUTIONS TO PARTICIPANTS AND FORMER
PARTICIPANTS.
(a)(i) Subject to the provisions of section 13.5 with respect
to required minimum distributions, the vested portion of the balance credited to
a Participant's or a Former Participant's Account shall be distributed to him
commencing as of the last Valuation Date to occur in the Plan Year in which the
Participant or Former Participant terminates employment with the Employer or
attains age 65, whichever is later; unless the Participant or Former Participant
elects otherwise pursuant to section 13.3(a)(ii), and the payment, or first in a
series of payments, is actually made within three months following such
Valuation Date.
(ii) A Participant or Former Participant may, upon request on
a form provided by the Plan Administrator and filed with the Plan Administrator
not later than 15 days prior to the date on which his employment with the
Employer terminates, elect that his vested interest in his Account be paid
commencing as of any earlier or later Valuation Date after his termination of
employment, but in no event later than the last Valuation Date to occur in the
calendar year in
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which the Participant or Former Participant attains age 70 1/2, in which case
the payment, or first in a series of payments, shall be made within three months
following such Valuation Date.
(b)(i) Subject to section 13.3(b)(ii), the vested portion of
the balance credited to the Account of a Participant or Former Participant will
be paid to him, commencing as of the Valuation Date determined under section
13.3(a), in substantially equal annual installments over a fixed period equal to
the greater of:
(A) five years; or
(B) if the vested portion of the balance credited to the
Account of the Participant or Former Participant, determined as
of the Valuation Date determined under section 13.3(a), is
greater than $500,000 (or such larger amount as may be prescribed
by the Secretary of the Treasury pursuant to section 409(o) of
the Code), the sum of five years plus the lesser of (I) five
additional years, or (II) one additional year for each $100,000
(or fraction thereof) by which the vested portion of the balance
credited to the Participant's or Former Participant's Account
exceeds $500,000 (or such larger amount as may be prescribed by
the Secretary of the Treasury pursuant to section 409(o) of the
Code).
(ii) A Participant or Former Participant may, upon request on
a form provided by the Plan Administrator and filed with the Plan Administrator
not later than 15 days prior to the date on which his employment terminates,
elect that the vested portion of the balance credited to his Account be paid,
commencing as of the Valuation Date determined under section 13.3(a):
(A) in substantially equal annual installments over a fixed
period not to exceed the lesser of (I) 10 years, or (II) the life
expectancy of the Participant or Former Participant, or, if his
Beneficiary is a natural person, the joint life and last survivor
expectancy of the Participant or Former Participant and his
Beneficiary; or
(B) subject to section 13.4, in a lump sum payment.
(c) If any person entitled to a benefit under the Plan dies
before his entire benefit has been distributed to him, then the
remainder of such benefit shall be paid to the Beneficiary
designated by him under section 13.2 either:
(i) in a lump sum distribution as of the Valuation Date next
following the date of his death, and the amount thereof shall be
based upon the vested portion of the balance credited to his
Account as of such Valuation Date; or
(ii) if, prior to the death of the Participant or Former
Participant whose vested Account is being distributed, an
election pursuant to section 13.3(b)(ii)(B) is in effect for him,
in a lump sum distribution as of the Valuation Date specified in
such election, or, if earlier, as of the latest Valuation Date
that would permit
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payment to be made within five years after the Participant's or Former
Participant's death, and the amount thereof shall be based upon the
vested portion of the balance credited to his Account as of such
Valuation Date; or
(iii) if, prior to the death of the Participant or Former
Participant whose vested Account is being distributed, an election
pursuant to section 13.3(b)(ii)(A) is in effect for him:
(A) over the period and at the times set forth in such
election, if distribution has begun prior to the
Participant's or Former Participant's death; or
(B) commencing at the time set forth in such election
and over the period set forth in such election (or, if less,
over a period equal to the life expectancy of the
Beneficiary of the deceased Participant or Former
Participant), if the deceased Participant's or Former
Participant's spouse is his Beneficiary and distribution has
not begun prior to the deceased Participant's or Former
Participant's death; or
(C) commencing on the date specified in such election
(or, if earlier, the last Valuation Date that will permit
payment to begin within one year after the deceased
Participant's or Former Participant's death) and over the
period set forth in such election (or, if less, over a
period equal to the life expectancy of the Beneficiary of
the deceased Participant or Former Participant), if the
deceased Participant's or Former Participant's Beneficiary
is a natural person other than his spouse and distribution
has not begun prior to the deceased Participant's or Former
Participant's death;
and the amount thereof shall be based upon the vested portion of the
balance credited to his Account as of the Valuation Dates as of which
payments are determined; or
(iv) upon written application of the Beneficiary made in such
form and manner as the Plan Administrator may prescribe, at another
time or in another manner permitted under section 13.3(a) or (b),
subject to the following limitations:
(A)(I) If such Beneficiary is a natural person other
than the spouse of the deceased Participant or Former
Participant whose vested Account is being distributed, a
distribution that commences within one year after such
deceased Participant's or Former Participant's death shall be
made over a fixed period that does not exceed the life
expectancy of such Beneficiary when distribution commences.
(II) If such Beneficiary is the spouse of the
deceased Participant or Former Participant whose vested
Account is being distributed, a
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distribution that commences no later than the later of: (1)
the date on which the deceased Participant or Former
Participant would have attained age 70 1/2 had he lived; or
(2) the first anniversary of the death of such deceased
Participant or Former Participant; shall be made over a
fixed period that does not exceed the life expectancy of
such Beneficiary when distribution commences.
(III) In all other cases where the spouse of the
deceased Participant or Former Participant whose vested
Account is being distributed is not the Beneficiary, payment
must be completed within five years after the death of such
deceased Participant or Former Participant.
(B) In cases where distribution has commenced prior to
the death of the deceased Participant or Former Participant
whose vested Account is being distributed, distribution must
be completed as least as rapidly as under the method in
effect prior to such deceased Participant's or Former
Participant's death.
SECTION 13.4 MANNER OF PAYMENT.
(a) Subject to section 13.4(b), payments of distributions made
pursuant to section 13.3 or section 13.5 shall be paid, in accordance with the
written direction of the person requesting the payment, in whole Shares, in
cash, or in a combination of cash and whole Shares. Such written direction shall
be given in such form and manner as the Plan Administrator may prescribe. If no
such direction is given, then payment shall be made in the maximum number of
whole Shares that may be acquired with the amount of the payment, plus, if
necessary, an amount of money equal to any remaining amount of the payment that
is less than the Fair Market Value of a whole Share.
(b) No distribution of a lump sum payment shall be made in
cash to the extent that the making of such distribution, when combined with all
other distributions to be made in cash as of the same Valuation Date, would
require the sale of Shares constituting 1% or more of all outstanding Shares;
provided, however, that this section 13.4(b) shall not apply to or in respect of
a Participant or Former Participant:
(i) following such Participant's or Former Participant's
termination of employment with the Employer on account of his
Retirement or Disability; or
(ii) following such Participant's or Former Participant's
65th birthday; or
(iii) following the death of such Participant or Former
Participant.
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SECTION 13.5 MINIMUM REQUIRED DISTRIBUTIONS.
(a) Required minimum distributions of a Participant's or
Former Participant's Account shall commence no later than:
(i) if the Participant or Former Participant attained age 70
1/2 prior to January 1, 1988 and was not a Five Percent Owner at
any time during the Plan Year ending in the calendar year in
which he attained age 70 1/2, during any of the four preceding
Plan Years or during any subsequent years, the later of (A) the
calendar year in which he attains or attained age 70 1/2 or (B)
the calendar year in which he terminates employment with the
Employer; or
(ii) if the Participant or Former Participant attained age
70 1/2 prior to January 1, 1988 and is or was a Five Percent
Owner at any time during the Plan Year ending in the calendar
year in which he attained age 70 1/2, or during any of the four
preceding Plan Years or during any subsequent years, the later of
(A) the calendar year in which he attains age 70 1/2 or (B) the
calendar year in which he first becomes a Five Percent Owner; or
(iii) in all other cases, the calendar year in which the
Participant or Former Participant attains age 70 1/2.
(b) The required minimum distributions contemplated by section
13.5(a) shall be made as follows:
(i) The minimum required distribution to be made for the
calendar year for which the first minimum distribution is
required shall be no later than April 1st of the immediately
following calendar year and shall be equal to the quotient
obtained by dividing (A) the vested balance credited to the
Participant's or Former Participant's Account as of the last
Valuation Date to occur in the calendar year immediately
preceding the calendar year in which the first minimum
distribution is required (adjusted to account for any additions
thereto or subtractions therefrom after such Valuation Date but
on or before December 31st of such calendar year); by (B) the
Participant's or Former Participant's life expectancy (or, if his
Beneficiary is a natural person, the joint life and last survivor
expectancy of him and his Beneficiary); and
(ii) the minimum required distribution to be made for each
calendar year following the calendar year for which the first
minimum distribution is required shall be made no later than
December 31st of the calendar year for which the distribution is
required and shall be equal to the quotient obtained by dividing
(A) the vested balance credited to the Participant's or Former
Participant's Account as of the last Valuation Date to occur in
the calendar year prior to the calendar year for which the
distribution is required (adjusted to account for any additions
thereto or subtractions therefrom after such Valuation Date but
on or before December
<PAGE>
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31st of such calendar year and, in the case of the
distribution for the calendar year immediately following the
calendar year for which the first minimum distribution is
required, reduced by any distribution for the prior calendar
year that is made in the current calendar year); by (B) the
Participant's or Former Participant's life expectancy (or,
if his Beneficiary is a natural person, the joint life and
last survivor expectancy of him and his Beneficiary).
For purposes of this section 13.5, the life expectancy of a Participant or
Former Participant (or the joint life and last survivor expectancy of a
Participant or Former Participant and his designated Beneficiary) for the
calendar year in which the Participant or Former Participant attains age 70 1/2
shall be determined on the basis of Tables V and VI, as applicable, of section
1.72-9 of the Income Tax Regulations as of the Participant's or Former
Participant's and Beneficiary's birthday in such year. Such life expectancy or
joint life and last survivor expectancy for any subsequent year shall be equal
to the excess of (1) the life expectancy or joint life and last survivor
expectancy for the year in which the Participant or Former Participant attains
age 70 1/2, over (2) the number of whole years that have elapsed since the
Participant or Former Participant attained age 70 1/2.
(c) Payment of the distributions required to be made to a
Participant or Former Participant under this section 13.5 shall be made in
accordance with section 13.4.
SECTION 13.6 DIRECT ROLLOVER OF ELIGIBLE ROLLOVER
DISTRIBUTIONS.
(a) A Distributee may elect, at the time and in the manner
prescribed by the Plan Administer, to have any portion of an Eligible Rollover
Distribution paid directly to an Eligible Retirement Plan specified by the
Distributee in a Direct Rollover.
(b) The following rules shall apply with respect to Direct
Rollovers made pursuant to this section 13.6:
(i) A Participant may only elect to make a Direct Rollover of
an Eligible Rollover Distribution if such Eligible Rollover
Distribution (when combined with other Eligible Rollover Distributions
made or to be made in the same calendar year) is reasonably expected to
be at least $200;
(ii) If a Participant elects a Direct Rollover of a portion of
an Eligible Rollover Distribution, that portion must be equal to at
least $500; and
(iii) A Participant may not divide his or her Eligible
Rollover Distribution into separate distributions to be transferred to
two or more Eligible Retirement Plans.
(c) For purposes of this section 13.6 and any other applicable
section of the Plan, the following definitions shall have the following
meanings:
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(i) "Direct Rollover" means a payment by the Plan to the
Eligible Retirement Plan specified by the Distributee.
(ii) "Distributee" means an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's spouse or former spouse who is the alternate payee under a
Qualified Domestic Relations Order are considered Distributees with
regard to the interest of the spouse or former spouse.
(iii) "Eligible Retirement Plan" means an individual
retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) or the Code,
an annuity plan described in section 403(a) of the Code, or a qualified
trust described in section 401(a) of the Code that accepts the
Distributee's Eligible Rollover Distribution. However, in the case of
an Eligible Rollover Distribution to the current or former spouse who
is the alternative payee under a Qualified Domestic Relations Order or
to a surviving spouse, an Eligible Retirement Plan is an individual
retirement account or individual retirement annuity.
(iv) "Eligible Rollover Distribution" means any distribution
of all or any portion of the balance to the credit of the Distributee,
except that an Eligible Rollover Distribution does not include: any
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the Distributee or the joint lives (or joint life
expectancies) of the Distributee's designated Beneficiary, or for a
specified period of ten (10) years or more; any distribution to the
extent such distribution is required under section 401(a)(9) of the
Code; and the portion of any distribution that is not includible in
gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
SECTION 13.7 VALUATION OF SHARES UPON DISTRIBUTION TO A
PARTICIPANT.
Notwithstanding any contrary provision in this Article XIII,
in the event that all or a portion of a payment of a distribution to a
Participant is to be made in cash, such Participant shall only be entitled to
receive the proceeds of the Shares allocated to his Account that are sold in
connection with such distribution and which are valued as of the date of such
sale.
SECTION 13.8 PUT OPTIONS.
(a) Subject to section 13.8(c) and except as provided
otherwise in section 13.8(b), each Participant or Former Participant to whom
Shares are distributed under the Plan, each Beneficiary of a deceased
Participant or Former Participant, including the estate of a deceased
Participant or Former Participant, to whom Shares are distributed under the
Plan, and each person to whom such a Participant, Former Participant or
Beneficiary gives Shares that have been
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distributed under the Plan shall have the right to require the Employer to
purchase from him all or any portion of such Shares. A person shall exercise
such right by delivering to the Employer a written notice, in such form and
manner as the Employer may by written notice to such person prescribe, setting
forth the number of Shares to be purchased by the Employer, the number of the
stock certificate evidencing such person's ownership of such Shares, and the
effective date of the purchase. Such notice shall be given at least 30 days in
advance of the effective date of purchase, and the effective date of purchase
specified therein shall be, either within the 60 day period that begins on the
date on which the Shares to be purchased by the Employer were distributed from
the Plan or within the 60 day period that begins on the first day of the Plan
Year immediately following the Plan Year in which the Shares to be purchased by
the Employer are distributed from the Plan. As soon as practicable following its
receipt of such a notice, the Employer shall take such actions as are necessary
to purchase the Shares specified in such notice at a price per Share equal to
the Fair Market Value of a Share determined as of the Valuation Date coincident
with or immediately preceding the effective date of the purchase.
(b) The Employer shall have no obligation to purchase any
Share (i) pursuant to a notice that is not timely given, or on an effective date
of purchase that is not within the periods prescribed in section 13.8(a) or (ii)
following the earliest date on which Shares are publicly traded on an
established market.
(c) This section 13.8 shall not apply so long as the Employer
is prohibited by law from redeeming or purchasing its own securities
SECTION 13.9 RIGHT OF FIRST REFUSAL.
(a) Subject to section 13.9(d), for any period during which
Shares are not publicly traded in any established market, no person who owns
Shares that were distributed from the Plan, other than a person to whom such
Shares were sold in compliance with this section 13.9, shall sell such Shares to
any person other than the Employer without first offering to sell such Shares to
the Employer in accordance with this section 13.9.
(b) In the event that a person to whom this section 13.9
applies shall receive and desire to accept from a person other than the Employer
an offer to purchase Shares to which this section 13.9 applies, he shall furnish
to the Employer a written notice which shall:
(i) include a copy of such offer to purchase;
(ii) offer to sell to the Employer the Shares subject to
such offer to purchase at a price per Share that is equal to the
greater of:
(A) the price per Share specified in such offer to
purchase; or
(B) the Fair Market Value of a Share as of the
Valuation Date coincident with or immediately preceding the
date of such notice;
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and otherwise upon the same terms and conditions as those
specified in such offer to purchase; and
(iii) include an indication of his intention to accept such
offer to purchase if the Employer does not accept his offer to
sell.
Such person shall refrain from accepting such offer to purchase for a period of
fourteen days following the date on which such notice is given.
(c) Subject to section 13.9(d), the Employer shall have the
right to purchase the Shares covered by the offer to sell contained in a notice
given pursuant to section 13.9(b), on the terms and conditions specified in such
notice, by written notice given to the party making the offer to sell not later
than the fourteenth day after the notice described in section 13.9(b) is given.
If the Employer does not give such a notice during the prescribed fourteen day
period, then the person owning such Shares may accept the offer to purchase
described in the notice.
(d) This section 13.9 shall not apply so long as the Employer
is prohibited by law from redeeming or purchasing its own securities
ARTICLE XIV
ADMINISTRATION
SECTION 14.1 NAMED FIDUCIARIES.
The term "Named Fiduciary" shall mean (but only to the extent
of the responsibilities of each of them) the Plan Administrator, the Committee,
the Board and the Trustee. This Article XIV is intended to allocate to each
Named Fiduciary the responsibility for the prudent execution of the functions
assigned to him or it, and none of such responsibilities or any other
responsibility shall be shared by two or more of such Named Fiduciaries.
Whenever one Named Fiduciary is required by the Plan or Trust Agreement to
follow the directions of another Named Fiduciary, the two Named Fiduciaries
shall not be deemed to have been assigned a shared responsibility, but the
responsibility of the Named Fiduciary giving the directions shall be deemed his
sole responsibility, and the responsibility of the Named Fiduciary receiving
those directions shall be to follow them insofar as such instructions are on
their face proper under applicable law.
SECTION 14.2 PLAN ADMINISTRATOR.
There shall be a Plan Administrator, who shall be the Senior
Human Resources Officer of the Employer, or such Employee or officer as may be
designated by the Committee, as hereinafter provided, and who shall, subject to
the responsibilities of the Committee and the
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Board, have the responsibility for the day-to-day control, management, operation
and administration of the Plan (except trust duties). The Plan Administrator
shall have the following responsibilities:
(a) To maintain records necessary or appropriate for the
administration of the Plan;
(b) To give and receive such instructions, notices, information,
materials, reports and certifications to the Trustee as may be
necessary or appropriate in the administration of the Plan;
(c) To prescribe forms and make rules and regulations consistent
with the terms of the Plan and with the interpretations and other
actions of the Committee;
(d) To require such proof of age or evidence of good health of an
Employee, Participant or Former Participant or the spouse of either,
or of a Beneficiary as may be necessary or appropriate in the
administration of the Plan;
(e) To prepare and file, distribute or furnish all reports, plan
descriptions, and other information concerning the Plan, including,
without limitation, filings with the Secretary of Labor and
communications with Participants, Former Participants and other
persons, as shall be required of the Plan Administrator under ERISA;
(f) To determine any question arising in connection with the
Plan, and the Plan Administrator's decision or action in respect
thereof shall be final and conclusive and binding upon the Employer,
the Trustee, Participants, Former Participants, Beneficiaries and any
other person having an interest under the Plan; provided, however,
that any question relating to inconsistency or omission in the Plan,
or interpretation of the provisions of the Plan, shall be referred to
the Committee by the Plan Administrator and the decision of the
Committee in respect thereof shall be final;
(g) Subject to the provisions of section 14.5, to review and
dispose of claims under the Plan filed pursuant to section 14.4;
(h) If the Plan Administrator shall determine that by reason of
illness, senility, insanity, or for any other reason, it is
undesirable to make any payment to a Participant, Former Participant,
Beneficiary or any other person entitled thereto, to direct the
application of any amount so payable to the use or benefit of such
person in any manner that he may deem advisable or to direct in his
discretion the withholding of any payment under the Plan due to any
person under legal disability until a representative competent to
receive such payment in his behalf shall be appointed pursuant to law;
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(i) To discharge such other responsibilities or follow such
directions as may be assigned or given by the Committee or the Board;
and
(j) To perform any duty or take any action which is allocated
to the Plan Administrator under the Plan.
The Plan Administrator shall have the power and authority necessary or
appropriate to carry out his responsibilities. The Plan Administrator may resign
only by giving at least 30 days' prior written notice of resignation to the
Committee, and such resignation shall be effective on the date specified in such
notice.
SECTION 14.3 COMMITTEE RESPONSIBILITIES.
The Committee shall, subject to the responsibilities of the
Board, have the following responsibilities:
(a) To review the performance of the Plan Administrator;
(b) To hear and decide appeals, pursuant to the claims
procedure contained in section 14.5 of the Plan, taken from the
decisions of the Plan Administrator;
(c) To hear and decide questions, including interpretation
of the Plan, as may be referred to the Committee by the Plan
Administrator;
(d) To review the performance of the Trustee and such
investment managers as may be appointed in or pursuant to the
Trust Agreement in investing, managing and controlling the assets
of the Plan;
(e) To the extent required by ERISA, to establish a funding
policy and method consistent with the objectives of the Plan and
the requirements of ERISA, and to review such policy and method
at least annually;
(f) To report and make recommendations to the Board
regarding changes in the Plan, including changes in the operation
and management of the Plan and removal and replacement of the
Trustee and such investment managers as may be appointed in or
pursuant to the Trust Agreement;
(g) To designate an Alternate Plan Administrator to serve in
the event that the Plan Administrator is absent or otherwise
unable to discharge his responsibilities;
(h) To remove and replace the Plan Administrator or
Alternate, or both of them, and to fill a vacancy in either
office;
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(i) To the extent provided under and subject to the
provisions of the Trust Agreement, to appoint "investment
managers" as defined in section 3(38) of ERISA to manage and
control (including acquiring and disposing of) all or any of the
assets of the Plan;
(j) With the prior approval of the Board, to direct the
Trustee to obtain one or more Share Acquisition Loans;
(k) To develop and provide procedures and forms necessary to
enable Participants to give voting and tendering directions on a
confidential basis;
(l) To discharge such other responsibilities or follow such
directions as may be assigned or given by the Board; and
(m) To perform any duty or take any action which is
allocated to the Committee under the Plan.
The Committee shall have the power and authority necessary or appropriate to
carry out its responsibilities.
SECTION 14.4 CLAIMS PROCEDURE.
Any claim relating to benefits under the Plan shall be filed
with the Plan Administrator on a form prescribed by him. If a claim is denied in
whole or in part, the Plan Administrator shall give the claimant written notice
of such denial, which notice shall specifically set forth:
(a) The reasons for the denial;
(b) The pertinent Plan provisions on which the denial was
based;
(c) Any additional material or information necessary for the
claimant to perfect his claim and an explanation of why such
material or information is needed; and
(d) An explanation of the Plan's procedure for review of the
denial of the claim.
In the event that the claim is not granted and notice of denial of a claim is
not furnished by the 30th day after such claim was filed, the claim shall be
deemed to have been denied on that day for the purpose of permitting the
claimant to request review of the claim.
SECTION 14.5 CLAIMS REVIEW PROCEDURE.
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Any person whose claim filed pursuant to section 14.5 has been
denied in whole or in part by the Plan Administrator may request review of the
claim by the Committee, upon a form prescribed by the Plan Administrator. The
claimant shall file such form (including a statement of his position) with the
Committee no later than 60 days after the mailing or delivery of the written
notice of denial provided for in section 14.5, or, if such notice is not
provided, within 60 days after such claim is deemed denied pursuant to section
14.5. The claimant shall be permitted to review pertinent documents. A decision
shall be rendered by the Committee and communicated to the claimant not later
than 30 days after receipt of the claimant's written request for review.
However, if the Committee finds it necessary, due to special circumstances (for
example, the need to hold a hearing), to extend this period and so notifies the
claimant in writing, the decision shall be rendered as soon as practicable, but
in no event later than 120 days after the claimant's request for review. The
Committee's decision shall be in writing and shall specifically set forth:
(a) The reasons for the decision; and
(b) The pertinent Plan provisions on which the decision is
based.
Any such decision of the Committee shall be binding upon the claimant and the
Employer, and the Plan Administrator shall take appropriate action to carry out
such decision.
SECTION 14.8 ALLOCATION OF FIDUCIARY RESPONSIBILITIES AND
EMPLOYMENT OF ADVISORS.
Any Named Fiduciary may:
(a) Allocate any of his or its responsibilities (other than
trustee responsibilities) under the Plan to such other person or
persons as he or it may designate, provided that such allocation and
designation shall be in writing and filed with the Plan Administrator;
(b) Employ one or more persons to render advice to him or it
with regard to any of his or its responsibilities under the Plan; and
(c) Consult with counsel, who may be counsel to the Employer.
SECTION 14.9 OTHER ADMINISTRATIVE PROVISIONS.
(a) Any person whose claim has been denied in whole or in part
must exhaust the administrative review procedures provided in section 14.5 prior
to initiating any claim for judicial review.
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(b) No bond or other security shall be required of a member of
the Committee, the Plan Administrator, or any officer or Employee of the
Employer to whom fiduciary responsibilities are allocated by a Named Fiduciary,
except as may be required by ERISA.
(c) Subject to any limitation on the application of this
section 14.9(c) pursuant to ERISA, neither the Plan Administrator, nor a member
of the Committee, nor any officer or Employee of the Employer to whom fiduciary
responsibilities are allocated by a Named Fiduciary, shall be liable for any act
of omission or commission by himself or by another person, except for his own
individual willful and intentional malfeasance.
(d) The Plan Administrator or the Committee may, except with
respect to actions under section 14.5, shorten, extend or waive the time (but
not beyond 60 days) required by the Plan for filing any notice or other form
with the Plan Administrator or the Committee, or taking any other action under
the Plan.
(e) The Plan Administrator or the Committee may direct that
the costs of services provided pursuant to section 14.6, and such other
reasonable expenses as may be incurred in the administration of the Plan, shall
be paid out of the funds of the Plan unless the Employer shall pay them.
(f) Any person, group of persons, committee, corporation or
organization may serve in more than one fiduciary capacity with respect to the
Plan.
(g) Any action taken or omitted by any fiduciary with respect
to the Plan, including any decision, interpretation, claim denial or review on
appeal, shall be conclusive and binding on all interested parties and shall be
subject to judicial modification or reversal only to the extent it is determined
by a court of competent jurisdiction that such action or omission was arbitrary
and capricious and contrary to the terms of the Plan.
ARTICLE XV
AMENDMENT, TERMINATION AND TAX QUALIFICATION
SECTION 15.1 AMENDMENT AND TERMINATION BY WAKE FOREST FEDERAL
SAVINGS & LOAN ASSOCIATION.
The Employer expects to continue the Plan indefinitely, but
specifically reserves the right, in its sole discretion, at any time, by
appropriate action of the Board, to amend, in whole or in part, any or all of
the provisions of the Plan and to terminate the Plan at any time. Subject to the
provisions of section 15.2, no such amendment or termination shall permit any
part of the Trust Fund to be used for or diverted to purposes other than for the
exclusive benefit of Participants, Former Participants, Beneficiaries or other
persons entitled to benefits, and no such
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amendment or termination shall reduce the accrued benefit of any Participant,
Former Participant, Beneficiary or other person who may be entitled to benefits,
without his consent. In the event of a termination or partial termination of the
Plan, or in the event of a complete discontinuance of the Employer's
contributions to the Plan, the Accounts of each affected person shall forthwith
become nonforfeitable and shall be payable in accordance with the provisions of
Article XIII.
SECTION 15.2 AMENDMENT OR TERMINATION OTHER THAN BY WAKE
FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
In the event that a corporation or trade or business other
than Wake Forest Federal Savings & Loan Association shall adopt this Plan, such
corporation or trade or business shall, by adopting the Plan, empower Wake
Forest Federal Savings & Loan Association to amend or terminate the Plan,
insofar as it shall cover employees of such corporation or trade or business,
upon the terms and conditions set forth in section 15.1; provided, however, that
any such corporation or trade or business may, by action of its board of
directors or other governing body, amend or terminate the Plan, insofar as it
shall cover employees of such corporation or trade or business, at different
times and in a different manner. In the event of any such amendment or
termination by action of the board of directors or other governing body of such
a corporation or trade or business, a separate plan shall be deemed to have been
established for the employees of such corporation or trade or business, and the
assets of such plan shall be segregated from the assets of this Plan at the
earliest practicable date and shall be dealt with in accordance with the
documents governing such separate plan.
SECTION 15.3 CONFORMITY TO INTERNAL REVENUE CODE.
The Employer has established the Plan with the intent that the
Plan and Trust will at all times be qualified under section 401(a) and exempt
under section 501(a) of the Code and with the intent that contributions under
the Plan will be allowed as deductions in computing the net income of the
Employer for federal income tax purposes, and the provisions of the Plan and
Trust Agreement shall be construed to effectuate such intentions. Accordingly,
notwith-
standing anything to the contrary hereinbefore provided, the Plan and the Trust
Agreement may be amended at any time without prior notice to Participants,
Former Participants, Beneficiaries or any other persons entitled to benefits, if
such amendment is deemed by the Board to be necessary or appropriate to
effectuate such intent.
SECTION 15.4 CONTINGENT NATURE OF CONTRIBUTIONS.
(a) All ESOP Contributions to the Plan are conditioned upon
the issuance by the Internal Revenue Service of a determination that the Plan
and Trust are qualified under section 401(a) of the Code and exempt under
section 501(a) of the Code. If the Employer applies to the Internal Revenue
Service for such a determination within 90 days after the date on which it files
its federal income tax return for its taxable year that includes the last day of
the Plan Year in
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which the Plan is adopted, and if the Internal Revenue Service issues a
determination that the Plan and Trust are not so qualified or exempt, all ESOP
Contributions made by the Employer prior to the date of receipt of such a
determination may, at the election of the Employer, be returned to the Employer
within one year after the date of such determination.
(b) All ESOP Contributions and Loan Repayment Contributions to
the Plan are made upon the condition that such ESOP Contributions and Loan
Repayment Contributions will be allowed as a deduction in computing the net
income of the Employer for federal income tax purposes. To the extent that any
such deduction is disallowed, the amount disallowed may, at the election of the
Employer, be returned to the Employer within one year after the deduction is
disallowed.
(c) Any contribution to the Plan made by the Employer as a
result of a mistake of fact may, at the election of the Employer, be returned to
the Employer within one year after such contribution is made.
ARTICLE XVI
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
SECTION 16.1 IN GENERAL.
As of the Determination Date for each Plan Year, the Plan
Administrator shall determine whether the Plan is a Top Heavy Plan in accordance
with the provisions of this Article XVI. If, as of such Determination Date, the
Plan is a Top Heavy Plan, then the Plan Year immediately following such
Determination Date shall be a Top Heavy Plan Year and the special provisions of
this Article XVI shall be in effect; provided, however, that if, as of the
Determination Date for the Plan Year in which the Effective Date occurs, the
Plan is a Top Heavy Plan, such Plan Year shall be a Top Heavy Plan Year, and the
provisions of this Article XVI shall be given retroactive effect for such Plan
Year.
SECTION 16.2 DEFINITION OF TOP HEAVY PLAN.
(a) Subject to section 16.2(c), the Plan is a Top Heavy Plan
if, as of a Determination Date: (i) it is not a member of a Required Aggregation
Group, and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key
Employees exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all
Employees (excluding former Key Employees), former Employees (excluding former
Key Employees and other former Employees who have not performed any services for
the Employer or any Affiliated Employer during the immediately preceding five
Plan Years), and their Beneficiaries.
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(b) Subject to section 16.2(c), the Plan is a Top Heavy Plan
if, as of a Determination Date: (i) the Plan is a member of a Required
Aggregation Group, and (ii)(A) the sum of the Cumulative Accrued Benefits of all
Key Employees under all plans that are members of the Required Aggregation Group
exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all Employees
(excluding former Key Employees), former Employees (excluding former Key
Employees and other former Employees who have not performed any services for the
Employer or any Affiliated Employer during the immediately preceding five Plan
Years), and their Beneficiaries under all plans that are members of the Required
Aggregation Group.
(c) Notwithstanding sections 16.2(a) and 16.2(b), the Plan is
not a Top Heavy Plan if, as of a Determination Date: (i) the Plan is a member of
a Permissible Aggregation Group, and (ii)(A) the sum of the Cumulative Accrued
Benefits of all Key Employees under all plans that are members of the
Permissible Aggregation Group does not exceed 60% of (B) the sum of the
Cumulative Accrued Benefits of all Employees (excluding former Key Employees),
former Employees (excluding former Key Employees and other former Employees who
have not performed any services for the Employer or any Affiliated Employer
during the immediately preceding five Plan Years), and their Beneficiaries under
all plans that are members of the Permissible Aggregation Group.
SECTION 16.3 DETERMINATION DATE.
The Determination Date for the Plan Year in which the
Effective Date occurs shall be the last day of such Plan Year, and the
Determination Date for each Plan Year beginning after the Plan Year in which the
Effective Date occurs shall be the last day of the preceding Plan Year. The
Determination Date for any other qualified plan maintained by the Employer for a
plan year shall be the last day of the preceding plan year of each such plan,
except that in the case of the first plan year of such plan, it shall be the
last day of such first plan year.
SECTION 16.4 CUMULATIVE ACCRUED BENEFITS.
(a) An individual's Cumulative Accrued Benefits under this
Plan as of a Determination Date are equal to the sum of:
(i) the balance credited to such individual's Account under
this Plan as of the most recent Valuation Date preceding the
Determination Date;
(ii) the amount of any ESOP Contributions or Loan Repayment
Contributions made after such Valuation Date but on or before the
Determination Date; and
(iii) the amount of any distributions of such individual's
Cumulative Accrued Benefits under the Plan during the five year period
ending on the Determination Date.
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For purposes of this section 16.4(a), the computation of an individual's
Cumulative Accrued Benefits, and the extent to which distributions, rollovers
and transfers are taken into account, will be made in accordance with section
416 of the Code and the regulations thereunder.
(b) For purposes of this Plan, the term "Cumulative Accrued
Benefits" with respect to any other qualified plan, shall mean the cumulative
accrued benefits determined for purposes of section 416 of the Code under the
provisions of such plans.
(c) For purposes of determining the top heavy status of a
Required Aggregation Group or a Permissible Aggregation Group, the Cumulative
Accrued Benefits under this Plan and the Cumulative Accrued Benefits under any
other plan shall be determined as of the Determination Date that falls within
the same calendar year as the Determination Dates for all other members of such
Required Aggregation Group or Permissible Aggregation Group.
SECTION 16.5 KEY EMPLOYEES.
(a) For purposes of the Plan, the term Key Employee means any
employee or former employee of the Employer or any Affiliated Employer who is at
any time during the current Plan Year or was at any time during the immediately
preceding four Plan Years:
(i) a Five Percent Owner;
(ii) a person who would be described in section 1.23 if the
number "1%" were substituted for the number "5%" in section 1.23 and
who has an annual Total Compensation from the Employer and any
Affiliated Employer of more than $150,000;
(iii) an Officer of the Employer or any Affiliated Employer
who has an annual Total Compensation greater than 50% of the amount in
effect under section 415(b)(1)(A) of the Code for any such Plan Year;
or
(iv) one of the ten persons owning the largest interests in
the Employer and having an annual Total Compensation from the Employer
or any Affiliated Employer in excess of the dollar limitation in effect
under section 415(c)(1)(A) of the Code for such Plan Year.
(b) For purposes of section 16.5(a):
(i) for purposes of section 16.5(a)(iii), in the event the
Employer or any Affiliated Employer has more officers than are
considered Officers, the term Key Employee shall mean those officers,
up to the maximum number, with the highest annual compensation in any
one of the five consecutive Plan Years ending on the Determination
Date; and
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(ii) for purposes of section 16.5(a)(iv), if two or more persons
have equal ownership interests in the Employer, each such person shall
be considered as having a larger ownership interest than any such
person with a lower annual compensation from the Employer or any
Affiliated Employer.
(c) For purposes of section 16.5(a): (i) a person's compensation
from Affiliated Employers shall be aggregated, but his ownership
interests in Affiliated Employers shall not be aggregated; (ii) an
employee shall only be deemed to be an officer if he has the power and
responsibility of a person who is an officer within the meaning of
section 416 of the Code; and (iii) the term Key Employee shall also
include the Beneficiary of a deceased Key Employee.
SECTION 16.6 REQUIRED AGGREGATION GROUP.
For purposes of this Article XVI, a Required Aggregation Group
shall consist of (a) this Plan; (b) any other qualified plans maintained by the
Employer and any Affiliated Employers that cover Key Employees; and (c) any
other qualified plans that are required to be aggregated for purposes of
satisfying the requirements of sections 401(a)(4) or 410(b) of the Code.
SECTION 16.7 PERMISSIBLE AGGREGATION GROUP.
For purposes of this Article XVI, a Permissible Aggregation
Group shall consist of (a) the Required Aggregation Group and (b) any other
qualified plans maintained by the Employer and any Affiliated Employers;
provided, however, that the Permissible Aggregation Group must satisfy the
requirements of sections 401(a)(4) and 410(b) of the Code.
SECTION 16.8 SPECIAL REQUIREMENTS DURING TOP HEAVY PLAN YEARS.
(a) Notwithstanding any other provision of the Plan to the
contrary, for each Top Heavy Plan Year, in the case of a Participant (other than
a Key Employee) on the last day of such Top Heavy Plan Year who is not also a
participant in another qualified plan which satisfies the minimum contribution
and benefit requirements of section 416 of the Code with respect to such
Participant, the sum of the ESOP Contributions and Loan Repayment Contributions
made with respect to such Participant, when expressed as a percentage of his
Total Compensation for such Top Heavy Plan Year, shall not be less than 3% of
such Participant's Total Compensation for such Top Heavy Plan Year or, if less,
the highest combined rate, expressed as a percentage of Total Compensation at
which ESOP Contributions and Loan Repayment Contributions were made on behalf of
a Key Employee for such Top Heavy Plan Year. The Employer shall make an
additional contribution to the Account of each Participant to the extent
necessary to satisfy the foregoing requirement.
(b) For any Top Heavy Plan Year, the number "1.0" shall be
substituted for the number "1.25" in sections 8.2(c)(iii) and 8.2(c)(iv), except
that:
<PAGE>
-55-
(i) this section 16.8(b) shall not apply to any individual for
a Top Heavy Plan Year that is not a Super Top Heavy Plan Year if the
requirements of section 16.8(a) would be satisfied for such Super Top
Heavy Plan Year if the number "4%" were substituted for the number 3%
in section 16.8(a); and
(ii) this section 16.8(b) shall not apply to an individual for
a Top Heavy Plan Year if, during such Top Heavy Plan Year, there are no
ESOP Contributions or Loan Repayment Contributions allocated to such
individual under this Plan, there are no contributions under any other
qualified defined contribution plan maintained by the Employer, and
there are no accruals for such individual under any qualified defined
benefit plan maintained by the Employer.
For purposes of this section 16.8(b), the term Super Top Heavy Plan Year means a
Top Heavy Plan Year in which the Plan would meet the definitional requirements
of sections 16.2(a) or 16.2(b) if the term "90%" were substituted for the term
"60%" in sections 16.2(a), 16.2(b) and 16.2(c).
ARTICLE XVII
MISCELLANEOUS PROVISIONS
SECTION 17.1 GOVERNING LAW.
The Plan shall be construed, administered and enforced
according to the laws of the State of North Carolina without giving effect to
the conflict of laws principles thereof, except to the extent that such laws are
preempted by federal law.
SECTION 17.2 NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the establishment of the Plan, nor any provisions of
the Plan or of the Trust Agreement establishing the Trust Fund nor any action of
the Plan Administrator, the Committee or the Trustee, shall be held or construed
to confer upon any Employee any right to a continuation of employment by the
Employer. The Employer reserves the right to dismiss any Employee or otherwise
deal with any Employee to the same extent as though the Plan had not been
adopted.
SECTION 17.3 CONSTRUCTION OF LANGUAGE.
Wherever appropriate in the Plan, words used in the singular
may be read in the plural, words used in the plural may be read in the singular,
and words importing the masculine gender may be read as referring equally to the
feminine and the neuter. Any reference to an
<PAGE>
-56-
Article or section number shall refer to an Article or section of the Plan,
unless otherwise indicated.
SECTION 17.4 HEADINGS.
The headings of Articles and sections are included solely for
convenience of reference. If there is any conflict between such headings and the
text of the Plan, the text shall control.
SECTION 17.5 MERGER WITH OTHER PLANS.
The Plan shall not be merged or consolidated with, nor
transfer its assets or liabilities to, any other plan unless each Participant,
Former Participant, Beneficiary and other person entitled to benefits, would (if
that plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit he would
have been entitled to receive if the Plan had terminated immediately before the
merger, consolidation or transfer.
SECTION 17.6 NON-ALIENATION OF BENEFITS.
(a) Except as provided in section 17.6(b), the right to
receive a benefit under the Plan shall not be subject in any manner to
anticipation, alienation or assignment, nor shall such right be liable for or
subject to debts, contracts, liabilities or torts. Should any Participant,
Former Participant or other person attempt to anticipate, alienate or assign his
interest in or right to a benefit, or should any person claiming against him
seek to subject such interest or right to legal or equitable process, all the
interest or right of such Participant or Former Participant or other person
entitled to benefits in the Plan shall cease, and in that event such interest or
right shall be held or applied, at the direction of the Plan Administrator, for
or to the benefit of such Participant or Former Participant, or other person or
his spouse, children or other dependents in such manner and in such proportions
as the Plan Administrator may deem proper.
(b) This section 17.6 shall not prohibit the Plan
Administrator from recognizing a Domestic Relations Order that is determined to
be a Qualified Domestic Relations Order in accordance with section 17.7.
SECTION 17.7 PROCEDURES INVOLVING DOMESTIC RELATIONS ORDERS.
Upon receiving a Domestic Relations Order, the Plan
Administrator shall segregate in a separate account or in an escrow account or
separately account for the amounts payable to any person pursuant to such
Domestic Relations Order, pending a determination whether such Domestic
Relations Order constitutes a Qualified Domestic Relations Order, and shall give
notice
<PAGE>
-57-
of the receipt of the Domestic Relations Order to the Participant or Former
Participant and each other person affected thereby. If, within 18 months after
receipt of such Domestic Relations Order, the Plan Administrator, a court of
competent jurisdiction or another appropriate authority determines that such
Domestic Relations Order constitutes a Qualified Domestic Relations Order, the
Plan Administrator shall direct the Trustee to pay the segregated amounts (plus
any interest thereon) to the person or persons entitled thereto under the
Qualified Domestic Relations Order. If it is determined that the Domestic
Relations Order is not a Qualified Domestic Relations Order or if no
determination is made within the prescribed 18-month period, the segregated
amounts shall be distributed as though the Domestic Relations Order had not been
received, and any later determination that such Domestic Relations Order
constitutes a Qualified Domestic Relations Order shall be applied only with
respect to benefits that remain undistributed on the date of such determination.
The Plan Administrator shall be authorized to establish such reasonable
administrative procedures as he deems necessary or appropriate to administer
this section 17.7. This section 17.7 shall be construed and administered so as
to comply with the requirements of section 401(a)(13) of the Code.
SECTION 17.8 LEASED EMPLOYEES.
(a) Subject to section 17.8(b), a leased employee shall be
treated as an Employee for purposes of the Plan. For purposes of this section
17.8, the term "leased employee" means any person (i) who would not, but for the
application of this section 17.8, be an Employee and (ii) who pursuant to an
agreement between the Employer and any other person ("leasing organization") has
performed for the Employer (or for the Employer and related persons determined
in accordance with section 414(n)(6) of the Code), on a substantially full-time
basis for a period of at least one year, services of a type historically
performed by employees in the business field of the Employer.
(b) For purposes of the Plan:
(i) contributions or benefits provided to the leased employee
by the leasing organization which are attributable to services
performed for the Employer shall be treated as provided by the
Employer; and
(ii) section 17.8(a) shall not apply to a leased employee if:
(A) the number of leased employees performing
services for the Employer does not exceed 20% of the number of
the Employer's Employees who are not Highly Compensated
Employees; and
(B) such leased employee is covered by a money
purchase pension plan providing (I) a nonintegrated
contribution rate of at least 10% of the leased employee's
compensation; (II) immediate participation; (III) full and
immediate vesting; and (IV) coverage for all of the employees
of
<PAGE>
-58-
the leasing organization (other than employees who perform
substantially all of their services for the leasing
organization).
SECTION 17.9 STATUS AS AN EMPLOYEE STOCK OWNERSHIP PLAN.
It is intended that the Plan constitute an "employee stock
ownership plan," as defined in section 4975(e)(7) of the Code and section
407(d)(6) of ERISA. The Plan shall be construed and administered to give effect
to such intent.
<PAGE>
EXHIBIT 13
TABLE OF CONTENTS
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Selected Financial Data 1
Report to Stockholders 2
Management's Discussion and Analysis 3 - 13
Independent Auditor's Report 14
Financial Statements:
Statements of financial condition at September 30, 1998 and 1997 15
Statements of income for years ended September 30, 1998 and 1997 16
Statements of stockholders' equity for the years ended September 30, 1998 and 1997 17 - 18
Statements of cash flows for the years ended September 30, 1998 and 1997 19 - 20
Notes to financial statements 21 - 41
Corporate Information 42 - 43
</TABLE>
1
<PAGE>
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of the Association that are subject to various
factors which could cause actual results to differ materially from those
estimates. Factors which could influence the estimates include changes in
general and local market conditions, legislative and regulatory conditions, and
an adverse interest rate environment.
2
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 74,360 $ 63,453 $ 61,812 $ 55,136 $ 47,822
Investments (1) 17,528 8,671 12,742 8,140 5,857
Loans receivable, net 55,363 53,673 47,821 45,377 40,895
Deposits 60,038 50,056 48,956 48,090 41,630
Stockholders' equity (2) 13,167 12,121 11,721 6,893 6,016
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
(in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and dividend income $ 5,983 5,183 $ 4,859 $ 4,122 $ 3,468
Interest expense 3,072 2,590 2,730 2,187 1,609
-----------------------------------------------------------
Net interest income 2,911 2,593 2,129 1,935 1,859
Provision for loan losses 180 18
Noninterest income 34 56 37 62 66
Noninterest expense 1,264 1,195 1,291 665 738
-----------------------------------------------------------
Income before income taxes 1,681 1,454 875 1,152 1,169
Income tax expense 620 543 322 431 448
-----------------------------------------------------------
Net income $ 1,061 911 $ 553 $ 721 $ 721
===========================================================
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Basic earnings per share (2) $ 0.91 $ 0.79 $ 0.15 $ -- $ --
Diluted earnings per share (2) 0.89 0.78 0.15 -- --
Dividends per share (2) 0.46 0.35 0.14 -- --
Selected Other Data:
Return on average assets 1.28% 1.47% .92% 1.43% 1.53%
Return on average equity 7.26% 7.55% 5.78% 11.00% 12.62%
Interest rate spread 3.40% 3.32% 2.83% 3.28% 3.60%
Net interest margin 4.26% 4.32% 3.69% 3.92% 4.02%
Allowance for loan losses to
nonperforming loans (3) 196.79% 134.43% 124.64% 189.21% 89.25%
Nonperforming loans to total loans .24% .36% .40% .27% .20%
</TABLE>
- -----------
(1) Includes interest earning deposits and investment securities
(2) On April 3, 1996, Wake Forest Federal Savings & Loan Association
reorganized from a federal chartered mutual savings association to a
federal chartered stock savings association. Earnings per share for 1996
is based on earnings from April 3, 1996 to September 30, 1996 divided by
the weighted average number of shares outstanding during the same period.
(3) Nonperforming loans include mortgage loans delinquent more than 90 days.
(4) Average balances are derived from month-end balances.
4
<PAGE>
REPORT TO STOCKHOLDERS
On April 3, 1996, Wake Forest Federal reorganized from a mutual to stock form of
ownership. In connection with the reorganization, Wake Forest Bancorp, M. H. C.,
a mutual holding company was formed. The Board of Directors and Management of
Wake Forest Bancorp, M.H.C. committed themselves during this conversion of Wake
Forest Federal Savings & Loan Association to maximize shareholder value by
continuing to build a strong and profitable institution. This report
demonstrates that a combination of growth and quarterly cash dividends
contributed to a significant increase in shareholder value during 1998. The
Board of Directors declared regular dividends of $ .10 per share during the
first quarter, and $ .12 per share during the second, third and fourth quarters.
Total assets of Wake Forest Federal Savings & Loan Association at September 30,
1998 were $74.4 million compared to $63.5 million at September 30, 1997, an
increase of approximately $10.9 million or 17.2%. This increase was principally
due to an increase in interest bearing deposits of approximately $9.1 million.
Earnings for the year ended September 30, 1998 were $1.1 million, a 20.7%
increase above 1997 earnings of $911,400. 1998 earnings were improved over the
prior year as a a result of a higher average balance of loans outstanding and an
increased yield received on the loan portfolio. Wake Forest Federal continues to
experience solid growth in all aspects of it's operations.
Loan demand remains very strong in our primary lending area of Wake, Franklin
and Granville counties and management of your Association is committed to
continue growing the Association's loan portfolio in a prudent manner. We also
intend to remain competitive with our savings products to ensure continued
growth and profitabilty. We, the management, directors and employees look
forward to continue serving our local market as a community-oriented financial
institution. We thank each stockholder for investing in Wake Forest Federal and
pledge our efforts to enhance the value of your investment through the safe and
sound operations of your Association. We seek your support and suggestions on
how we can provide the highest quality service to both our customers and our
stockholders.
Respectfully,
/s/ Anna O. Sumerlin
----------------------------------
Anna O. Sumerlin
President & Chief Executive Officer
5
<PAGE>
GENERAL
Wake Forest Federal Savings & Loan Association (the "Association" or "Wake
Forest Federal") was reorganized from a federally chartered mutual savings
association to a federally chartered stock association on April 3, 1996. As a
part of the reorganization, the Association formed a mutual holding company,
Wake Forest Bancorp, M.H.C. (the "MHC"), which was issued a controlling interest
in the Association's common stock. The MHC consist of depositors and certain
borrowers of the Association. The MHC's Board of Directors, which is currently
the same as the Association's Board of Directors, will generally be able to
control the outcome of most matters presented to the stockholders of the
Association for resolution by vote except for certain matters related to stock
compensation plans, a vote regarding conversion of the mutual holding company to
stock form, or other matters which require a vote only by the minority
stockholders. The MHC is registered as a savings and loan holding company and is
subject to regulation, examination, and supervision by the Office of Thrift
Supervision (the "OTS").
The principal business of the Association is accepting deposits from the general
public and using those deposits and other sources of funds primarily to make
loans secured by real estate and to a lesser extent, other forms of collateral
located in the Association's primary market area of Wake, Franklin and Granville
counties in North Carolina.
Wake Forest Federal's results of operations depend primarily on its net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. The Association's
operations are also affected by noninterest income, such as miscellaneous income
from loans, customer deposit account service charges, and other sources of
revenue. The Association's principal operating expenses, aside from interest
expense, consist of compensation and related benefits, federal deposit insurance
premiums, office occupancy costs, and other general and administrative expenses.
The following discussion and analysis is intended to assist readers in
understanding the results of operations in 1998 and 1997 and changes in
financial position for the years ended September 30, 1998 and 1997,
respectively.
FINANCIAL CONDITION
Total assets increased by $10.9 million during 1998, from $63.5 million at
September 30, 1997 to $74.4 million at September 30, 1998. The increase resulted
primarily due to an increase in interest-bearing deposits of $9.1 million and
net growth in the loan portfolio of $1.7 million. The increase in assets was
funded by an increase of $10 million in deposits. Total investments, including
short term interest-earning deposits and U.S. Treasury obligations increased by
$8.9 million, primarily as a result of the net growth of the interest bearing
deposits. The investment securities portfolio, which amounted to $3.1 million at
September 30, 1998, contains available for sale securities with an unrealized
gain of $769,450. The gain reflects an increase of approximately $229,300 over
the net unrealized gain on available for sale securities at September 30, 1997,
primarily as a result of gains in the equity markets during 1998.
6
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION (CONTINUED)
Loans receivable increased by approximately $1.7 million during 1998 to $55.4
million at September 30, 1998. Loan demand in the Association's primary lending
markets continues to be strong. The economic base in the Association's primary
lending areas has increased over the last several years, mostly due to the
continuing growth in the Research Triangle/Wake County area and the expansion of
it's population base into surrounding communities such as Wake Forest. Savings
deposits increased by approximately $10 million during 1998 and totaled $60
million at September 30, 1998. This was a planned increase and less expensive
way to increase liquidity without utilizing borrowed funds. The Association had
no outstanding borrowings during 1998 or 1997, other than the loan by the
Employee Stock Ownership Plan of the Association (the "ESOP") to purchase shares
of stock in the Association, which is shown as a liability of Wake Forest
Federal. The Association has borrowing capacity through the Federal Home Loan
Bank of Atlanta.
The Association's return on average assets was 1.28% and 1.47% and its return on
average equity was 7.26% and 7.55% for 1998 and 1997, respectively. The decrease
in return on average assets is primarily due to an increase the Association's
interest-bearing deposits held at the Federal Home Loan Bank and the difference
in yield between those deposits and loans.
The Association is required to meet certain capital requirements as established
by the OTS. At September 30, 1998, the Association's capital was significantly
in excess of regulatory capital requirements (See Note 11 to the financial
statements).
RESULTS OF OPERATING
NET INCOME
Wake Forest Federal's net income for the years ended September 30, 1998 and 1997
was $1,060,900 and $911,400 respectively. Net income in 1998 was higher than the
earnings reported in 1997 primarily due to a change in the mix of loan portfolio
to shorter term higher yield loans. Net interest income in 1998 was higher than
1997 by $318,750. Additionally, noninterest expenses increased by $68,900. These
net increases in earnings were partially offset by an increase in income taxes
of $77,500.
7
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities outstanding
during the period.
Net interest income increased by $318,750 or 12% to $2,911,300 for the year
ended September 30, 1998 from $2,592,550 reported in 1997. The increase in net
interest income during 1998 was attributable primarily to an increase in the
Association's shorter term higher yield loans which were funded primarily from
lower yield interest-bearing deposits. The Association's net interest rate
spread increased from 3.32% in 1997 to 3.40% in 1998.
8
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTEREST INCOME
Total interest income increased to $5,983,250 for 1998 from $5,182,800 in 1997,
an increase of $800,450 or 15%. In addition to an increase in the average
balance of higher yield loans, the average balance of total interest earning
assets increased by approximately $8.3 million from the previous year. These
increases were the primary factors for the increase in the Association's
interest income. The Association's overall yield on interest earning assets was
8.75% in 1998 as compared with 8.63% in 1997.
INTEREST EXPENSE
Total interest expense increased to $3,071,950 in 1998 from $2,590,250 in 1997,
a increase of $481,700 or 18.6%. During 1998, the Association's average balance
of outstanding deposits increased by approximately $8.6 million from 1997. In
addition, during 1998, the Association's cost of funds increased to 5.36%, up
from 5.31% in 1997. The increase in the average balance of deposits was a
contributing factor in the increase in interest expense during 1998.
PROVISION FOR LOAN LOSSES
There were no provisions for loan losses during 1998 or 1997. The Association's
management determined that its loan loss allowances were adequate and,
accordingly, no additional provisions were provided. There were no loans charged
off against the allowances during either year.
The provision, which is charged to operations, and the resulting loan loss
allowances are amounts Wake Forest Federal's management believes will be
adequate to absorb losses on existing loans that may become uncollectible. Loans
are charged off against the allowance when management believes that
collectibility is unlikely. An evaluation to increase the provision and
resulting allowances is based on factors, such as changes in the nature and
volume of the loan portfolio, overall portfolio quality, and current economic
conditions. Wake Forest Federal has adopted policies which it believes provides
for prudent and adequate levels of loan loss allowances.
The Association's level of nonperforming loans, defined as loans past due 90
days or more, are relatively insignificant as percentage of total loans
outstanding and amounted to .24% and .36% at September 30, 1998
9
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
and 1997, respectively. Management believes such loans are adequately
collateralized and should foreclosure be necessary, no losses are expected.
NONINTEREST INCOME
Noninterest income amounted to $33,600 and $56,450 in 1998 and 1997,
respectively. Noninterest income consists primarily of service charges and fees
associated with the Association's loan and savings accounts as well as income
from real estate owned. The Association's level of noninterest income decreased
during 1998 primarily due to gains on the sale of real estate acquired in
settlement of loans in 1997.
10
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
NONINTEREST EXPENSE
Noninterest expense consists primarily of operating expenses for compensation
and related benefits, occupancy, federal insurance premiums and operating
assessments, and data processing charges as well as expenses associated with
real estate owned. Noninterest expenses amounted to $1,264,150 and $1,195,250 in
1998 and 1997, respectively.
Compensation and related benefits increased from $667,650 in 1997 to $781,500 in
1998. The primary causes for the increase were an increase in base salaries and
related bonuses and expenses associated with the ESOP and RRP plans.
Occupancy expense and data processing and outside service expense changed
nominally from 1997 to 1998. Other operating expense decreased from $339,150
during 1997 to 281,750 during 1998, a decrease of $57,400. The decrease in other
operating expense was a continuation of expenses associated with the Conversion
in 1996 which carried forward to 1997.
INCOME TAXES
The Association's effective income tax rate was 36.9% and 37.3% in 1998 and 1997
respectively. The differences in rates were due to changes in the components of
permanent tax differences.
CAPITAL RESOURCES AND LIQUIDITY
During 1998 Wake Forest Federal declared dividends of $.10 per share for the
first quarter, $.12 per share for the for each of its last three quarters of
operations. Although the Association anticipates that it will continue to
declare cash dividends on a regular basis, the Board of Directors will continue
to review its policy on the payment of dividends on an ongoing basis, and such
payment will be subject to future earnings, cash flows, capital needs, and
regulatory restrictions.
The objective of the Association's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities to enhance stockholders' value. More specifically,
liquidity ensures that adequate funds are available to meet deposit withdrawals,
fund loan and capital expenditure commitments, maintain reserve requirements,
pay operating expenses, and provide funds
11
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
for debt service, dividends to stockholders, and other institutional
commitments. Funds are primarily provided through financial resources from
operating activities, expansion of the deposit base, repayments received on
loans, borrowings, the sale or maturity of investments, or the ability to raise
equity capital. During the year ended September 30, 1998, cash, a significant
source of liquidity, increased to approximately $15.3 million. Cash flow
resulting from internal operating activities provided increases of $1,262,700 in
cash during the year ended September 30, 1998. Also, financing activities have
provided Wake Forest Federal with sources of funds for asset growth and
liquidity. For the year ended September 30, 1998, deposits grew by approximately
$10 million. Such funds were used primarily to fund investment and loan growth.
The Association's ability to generate deposits has historically been sufficient
to fund its loan demand and provide for adequate liquidity without the need to
access other forms of credit availability. In addition, the Association has a
readily available source of credit through its borrowing capacity at the Federal
Home Loan Bank of Atlanta. Cash provided by operating and financing activities
is used by Wake Forest Federal to originate new loans to customers, to maintain
the Association's liquid investment portfolios, and to meet short term liquidity
requirements. During 1998 and 1997, loans outstanding increased by $1.7 million
and $5.9 million, respectively. The Association purchased approximately $500,000
in investment securities during 1998 and 1997, respectively. There were
maturities of $1.0 million in investment securities during 1998, none in 1997.
Regulations of the OTS require a savings institution to maintain a
specified liquidity ratio (presently 4.0%) of cash, accrued interest receivable
on unpledged assets that qualify as liquid assets and specified unpledged
securities to net withdrawable deposit accounts and borrowings due in one year
or less. The Association's liquidity ratio at September 30, 1998, as computed
under OTS regulations, was considerably in excess of such requirements. Given
its excess liquidity and its ability to borrow from the Federal Home Loan Bank,
the Association believes that it will have sufficient funds available to meet
anticipated future loan commitments, unexpected deposit withdrawals, and other
cash requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles (GAAP), which require
the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Association are primarily monetary in nature and changes in interest rates have
a greater impact on the Association's performance than do the effects of
inflation.
12
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
FUTURE REPORTING REQUIREMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income, which the
Association will be required to adopt beginning in the fiscal year ended of
September 30, 1999.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Statement does not require a specific format for
that financial statement but requires the display of an amount representing
total comprehensive income for the period in that financial statement. The
Statement requires (a) classification of items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Adoption of SFAS No. 130 will have no effect on the Association 's net income,
but will require that net income be combined with unrealized gains or losses on
available for sale securities to report comprehensive income.
13
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
ASSET/LIABILITY MANAGEMENT
Wake Forest Federal's asset/liability management, or interest rate risk
management, is focused primarily on evaluating and managing the Bank's net
interest income given various risk criteria. Factors beyond Wake Forest
Federal's control, such as the effects of changes in market interest rates and
competition, may also have an impact on the management of interest rate risk.
In the absence of other factors, Wake Forest Federal's overall yield on
interest-earning assets will increase as will its cost of funds on its
interest-bearing liabilities when market rates increase over an extended period
of time. Inversely, Wake Forest Federal's yields and cost of funds will decrease
when market rates decline. Wake Forest Federal is able to manage these swings to
some extent by attempting to control the maturities or rate adjustments of its
interest-earning assets and interest-bearing liabilities over given periods of
time. Wake Forest Federal's "gap" is typically described as the difference
between the amounts of such assets and liabilities which reprice within a period
of time. In a declining interest rate environment a negative gap, or a situation
where Wake Forest Federal's interest-bearing liabilities subject to repricing
exceed the level of interest-earning assets which will mature or reprice, has a
favorable impact on Wake Forest Federal's net interest income. Conversely, an
increase in general market rates will tend to adversely affect Wake Forest
Federal's net interest income.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on Wake Forest Federal's
operations, management has implemented an asset/liability program designed to
improve Wake Forest Federal's interest rate gap. The program primarily
emphasizes the origination of adjustable rate mortgage loans which are held for
investment purposes, the origination of loans which meet secondary market
requirements and can therefore be sold if and when management deems such sales
advisable, the investment of excess cash in short or intermediate term
interest-earning assets, and the solicitation of checking or transaction deposit
accounts which are less sensitive to changes in interest rates and can be
repriced rapidly.
The following Market Risk Analysis table reflects maturities of interest rate
sensitive assets and liabilities over the next five years.
14
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Market Risk Analysis
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
---------------- ----------------- --------------- -------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans-fixed:
Balance ............. $ 27,629,150 $ 66,850 $ 513,900 $ 155,050 $ 65,400 $ 6,956,300
Interest rate ........ 9.24% 6.67% 9.50% 9.32% 9.41% 9.35%
Loans-variable(1):
Balance ............. 6,992,100 8,787,150 11,872,000 2,268,450 688,550 393,950
Interest rate ........ 8.18% 8.66% 8.87% 8.77% 8.62% 8.13%
Investments(2):
Balance ............. 16,258,800 499,650 -- -- -- --
Interest rate ........ 5.44% 5.50% -- -- -- --
Liabilities:
Deposits(3)
Balance ............. 12,310,800 -- -- -- -- --
Interest rate ........ 2.60% -- -- -- -- --
Deposits-certificates:
Balance ............. 32,404,600 8,389,650 3,374,700 1,448,350 2,058,150 --
Interest rate ........ 5.78% 6.12% 5.90% 6.24% 5.93% --
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------
Year Ended December 31,
------------------------------------------------------
Total Fair Value
------------------------ ---------------------------
<S> <C> <C>
Assets:
Loans-fixed:
Balance ............. 35,386,650 $35,382,600
Interest rate ........ 9.27% --
Loans-variable(1):
Balance ............. 31,002,200 31,002,200
Interest rate ........ 8.64% --
Investments(2):
Balance ............. 16,758,450 17,527,900
Interest rate ........ 5.44% --
Liabilities:
Deposits(3)
Balance ............. 12,310,800 12,310,800
Interest rate ........ 2.60% --
Deposits-certificates:
Balance ............. 47,675,450 47,951,450
Interest rate ........ 5.87% --
</TABLE>
(1) Maturities of variable rate loans based on contractual maturity except
equity line mortgages and lines of credit, which are based on next
repricing date
(2) Includes interest bearing deposits and investment securities at carrying
value
(3) Includes passbook accounts and money market accounts
15
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of the Association's interest earning
assets and interest bearing liabilities The table distinguishes between (i)
changes in net interest income attributable to volume (changes in volume
multiplied by the prior period's interest rate), (ii) changes in net interest
income attributable to rate (changes in interest rates multiplied by the prior
period's volume), and (iii) mixed changes in volume multiplied by changes in
rates).
<TABLE>
<CAPTION>
Year ended September 30,
1998 vs. 1997
--------------------------------------------------------------
Increase (Decrease) Attributable to
--------------------------------------------------------------
Volume Rate Rate/Volume Net
--------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits $ 252 $ 14 $ 9 $275
Investment securities 19 (11) (2) 6
Loans receivable 304 201 14 519
----- ----- ----- -----
Total 575 204 21 800
----- ----- ----- -----
Liabilities:
Interest-bearing liabilities:
ESOP Debt (5) -- -- (5)
Passbook savings 10 -- -- 10
NOW and MMDA Accounts (5) (7) -- (12)
Certificates of deposit 492 (3) (1) 488
----- ----- ----- -----
Total 492 (10) (1) 481
----- ----- ----- -----
Net interest incom $ 83 $214 $ 22 $319
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
1998 vs. 1997
---------------------------------------------------------------------------
Increase (Decrease) Attributable to
---------------------------------------------------------------------------
Volume Rate Rate/Volume Net
------------------ --------------------------------------------------------
In Thousands)
<S> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits $(146) $(10) $ 2 $(154)
Investment securities 124 (12) (18) 94
Loans receivable 265 112 7 384
----- ----- ----- -----
Total 243 90 (9) 324
----- ----- ----- -----
Liabilities:
Interest-bearing liabilities:
ESOP Debt 6 1 -- 7
Passbook savings 9 -- (1) 8
NOW and MMDA Accounts 11 (13) (1) (3)
Certificates of deposit (54) (101) 3 (152)
----- ----- ----- -----
Total (28) (113) 1 (140)
----- ----- ----- -----
Net interest incom $ 271 $203 $ (10) $ 464
===== ===== ===== =====
</TABLE>
16
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Average Balances, Interest, Yields and Costs
The following table sets forth certain information relating to he Association's
average balance sheets and reflects the average yield on assets and average cost
of liabilities at and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused a material
difference in the information presented.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
At September 30, 1998 1998
----------------------------------------------------------------------------------------
Average Average Balance Interest Average
Actual Balance Yield/Cost Yield/Cost
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits $ 14,379 5.75% $ 12,588 $ 699 5.55%
Investment securities 3,149 4.65% 3,500 181 5.17%
Loans receivable(1) 55,363 8.96% 52,257 5,103 9.77%
---------- ---------- ---------
Total interest-earning assets 72,891 8.14% 68,345 $ 5,983 8.75%
---------
Non-interest-earning assets 1,469 3,109
--------- ---------
Total $ 74,360 $ 71,454
========== ==========
Liabilities and retained earnings:
Interest-bearing liabilities:
ESOP Debt $ 265 8.50% $ 294 $ 26 8.50%
Passbook accounts 3,599 3.07% 3,338 100 3.00%
NOW and MMDA accounts 8,378 2.50% 8,289 303 3.66%
Certificates of deposit 47,675 5.89% 45,423 2,643 5.82%
---------- ---------- ---------
Total interest-bearing liabilities 59,917 5.17% 57,344 $ 3,072 5.36%
---------
Non-interest-bearing liabilities 1,276 1,552
Stockholders' Equity 13,167 12,558
---------- ----------
Total $ 74,360 $ 71,454
========== ==========
Net interest income and interest rate
spread(2) 2.97% $ 2,911 3.40%
=========
Net yield on interest-earing
assets(3) 3.99% 4.26%
Ratio of interest-earning assets to
interest-bearing liabilities 121.65% 119.18%
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1997
----------------------------------------------------------
Average Balance Interest Average
Yield/Cost
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits $ 7,896 $ 424 5.37%
Investment securities 3,162 175 5.53%
Loans receivable(1) 49,004 4,584 9.35%
---------- ---------
Total interest-earning assets 60,062 $ 5,183 8.63%
---------
Non-interest-earning assets 1,913
----------
Total $ 61,975
==========
Liabilities and retained earnings:
Interest-bearing liabilities:
ESOP Debt $ 353 $ 30 8.50%
Passbook accounts 3,019 90 2.98%
NOW and MMDA accounts 8,432 315 3.74%
Certificates of deposit 36,979 2,155 5.83%
---------- ---------
Total interest-bearing liabilities 48,783 $ 2,590 5.31%
---------
Non-interest-bearing liabilities 1,116
Stockholders' Equity 12,076
----------
Total $ 61,975
==========
Net interest income and interest rate
spread(2) $ 2,593 3.32%
=========
Net yield on interest-earing
assets(3) 4.32%
Ratio of interest-earning assets to
interest-bearing liabilities 123.12%
</TABLE>
(1) Balance is net of deferred loan fees and loans in process. Non-accrual
loans are included in the balances.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income
dividend by average interest-earning assets.
YEAR 2000 ISSUE
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Association and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Association's direct control and with whom the Association electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and credit
bureau information) are likely to be affected. Furthermore, if computer systems
are not adequately changed to identify the Year 2000, many computer applications
could fail or create erroneous results. As a result, many calculations which
rely on the date field information, such as interest payment or due dates and
other operating functions, will generate results which could be significantly
misstated, and the Association could experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
17
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
In addition, non-information technology systems, such as equipment like
telephones and copiers may also contain embedded technology which controls its
operation and which may be effected by the Year 2000 Problem. When the Year 2000
arrives, systems, including some of those with embedded chips, may not work
properly because of the way they store date information. They may not be able to
deal with the date 01/01/00, and may not be able to deal with operational
"cycles" such as "do X every 100 days". Thus, even non-information technology
systems may affect the normal operations of the Association upon the arrival of
the Year 2000.
Under certain circumstances, failure to adequately address the Year 2000 Problem
could adversely affect the viability of the Association's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Association's products, services and competitive condition.
In order to address the Year 2000 Issue and to minimize its potential adverse
impact, management has begun a process to identify areas that will be affected
by the Year 2000 Problem, assess its potential impact on the operations of the
Association, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. A
committee of senior officers of the Association has been formed to evaluate the
effects that the upcoming Year 2000 could have on computer programs utilized by
the Association. The Association's plan is divided into the five phases:
(1) Awareness. Define the problem, obtain executive level support and
develop an overall strategy. This phase was completed in April 1998.
(2) Assessment. Identify all systems and the criticality of the systems.
This phase was completed in June 1998.
(3) Renovation. Program enhancements, hardware and software upgrades,
system replacements, and vendor certifications. This phase is in
process and with a scheduled completion date of December 1998.
(4) Validation. Test and verify system changes and coordinate with outside
parties. This phase is in process with a scheduled completion date of
April 1999.
(5) Implementation. Components certified as Year 2000 compliant and moved
to production. This phase is in process with a scheduled completion
date of July 1999.
18
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Third party vendors provide the majority of software used by the Association.
All of the Association's vendors are aware of the Year 2000 situation, and each
has assured the Association that it is currently working to have its software
compliant by July 1999, and testing for the critical applications began in April
1998. This will enable the Association to devote substantial time to the testing
to the upgraded systems prior to the arrival of the millennium. The Association
utilizes the service of a third party vendor to provide the software which is
used to process and maintain most mortgage and deposit customer-related
accounts. This vendor has provided the Company with a software version which has
been certified to be Year 2000 compliant. Testing by the Association is underway
to verify compliance for its application and usage. The Association presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Problem will be mitigated without causing a material
adverse impact on the operations of the Association. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Problem could have an impact on the operations of the Association.
In addition, monitoring and managing the Year 2000 project will result in
additional direct and indirect costs to the Association. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance, and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhances. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. The Association has spent approximately $32,000 on Year 2000
related costs to date and estimates that it will spend an additional $35,000 for
Year 2000 compliance. Both direct and indirect costs of addressing the Year 2000
Problem will be charged to earnings as incurred. The Association does not
believe that such costs will have a material effect on results of operations.
However, there can be no guarantee that the systems of other companies on which
the Association's systems rely will be timely converted, or that a failure to
convert by another company or a conversion that is incompatible with the
Association's systems, would not have material adverse effect on the
Association.
The costs of the project and the date on which the Association plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Wake Forest Federal Savings & Loan Association
Wake Forest, North Carolina
We have audited the accompanying statements of financial condition of Wake
Forest Federal Savings & Loan Association as of September 30, 1998 and 1997 and
the related statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wake Forest Federal Savings &
Loan Association as of September 30, 1998 and 1997 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
October 30, 1998, except for Note
15, as to which the date is
November 16, 1998.
20
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash:
Interest-bearing deposits $ 14,378,700 $ 5,262,400
Noninterest-bearing deposits 932,650 542,250
-------------------------------
15,311,350 5,804,650
-------------------------------
Investment securities (Note 2):
Available for sale, at market value 2,785,100 3,044,650
FHLB stock 364,100 364,100
Loans receivable, net (Note 3) 55,363,450 53,672,500
Accrued interest receivable, investments 25,550 35,400
Property and equipment, net (Note 4) 459,550 492,150
Prepaid expenses and other assets 51,350 39,950
-------------------------------
Total assets $ 74,360,450 $ 63,453,400
===============================
LIABILITIES AND EQUITY
Liabilities:
Savings accounts (Note 5) $ 60,037,950 $ 50,055,750
Accounts payable and accrued expenses 303,200 309,650
Dividends payable 145,900 119,100
Note payable - ESOP (Note 9) 264,850 323,700
Deferred income taxes (Note 10) 170,600 106,100
Redeemable common stock held by the ESOP, net of
unearned ESOP shares (Note 9) 270,750 417,900
-------------------------------
Total liabilities 61,193,250 51,332,200
-------------------------------
Commitments and contingencies (Note 12)
Stockholders' Equity (Note 11):
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, $.01 par value, authorized 5,000,000 shares;
issued and outstanding 1,215,862 in 1998 and 1,191,200
in 1997 12,000 11,900
Additional paid-in-capital 4,772,950 4,592,750
Net unrealized gain on available for sale securities, net
of tax (Note 2) 477,100 334,950
Retained earnings, substantially restricted (Note 11) 7,905,150 7,181,600
-------------------------------
Total stockholders' equity 13,167,200 12,121,200
-------------------------------
$ 74,360,450 $ 63,453,400
===============================
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 5,103,450 $ 4,583,850
Investment securities 180,950 175,150
Interest-bearing deposits 698,850 423,800
--------------------------------
5,983,250 5,182,800
--------------------------------
Interest expense:
Savings accounts (Note 5) 3,046,000 2,559,700
Borrowings 25,950 30,550
--------------------------------
3,071,950 2,590,250
--------------------------------
NET INTEREST INCOME 2,911,300 2,592,550
--------------------------------
Noninterest income: 33,600 56,450
--------------------------------
Noninterest expense:
Compensation and benefits (Notes 6,7, 8, and 9) 781,500 667,650
Occupancy 44,950 37,550
Federal insurance premiums
and operating assessments 55,300 66,000
Data processing and outside service fees 100,650 84,900
Other operating expense 281,750 339,150
--------------------------------
1,264,150 1,195,250
--------------------------------
INCOME BEFORE INCOME TAXES 1,680,750 1,453,750
--------------------------------
Income taxes (Note 10):
Current 642,500 456,550
Deferred (22,650) 85,800
--------------------------------
619,850 542,350
--------------------------------
NET INCOME $ 1,060,900 $ 911,400
================================
Basic earnings per share $ 0.91 $ 0.79
================================
Diluted earnings per share $ 0.89 $ 0.78
================================
Dividends paid per share $ 0.46 $ 0.35
================================
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
RETAINED ADDITIONAL UNREALIZED
COMMON PAID IN GAIN ON RETAINED
STOCK CAPITAL SECURITIES EARNINGS TOTAL
- --------------------------------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $ 11,900 $ 4,565,900 $ 229,700 $ 6,913,750 $ 11,721,250
911,400 911,400
Net income for 1997 -- -- -- 26,850
Contributions to ESOP (Note 9) -- 26,850 -- (226,650) (226,650)
-- -- -- (416,900) (416,900)
Market value adjustment for redeemable
common stock eld by ESOP -- -- 105,250 -- 105,250
------------ -------------- ---------- --------- ------------
Cash dividends ($0.35 per share)
Net unrealized gain on securities
Balance at September 30, 1997 11,900 4,592,750 334,950 7,181,600 12,121,200
Net income for 1998 -- -- -- 1,060,900 1,060,900
Contributions to ESOP (Note 9) -- 55,000 -- -- 55,000
Market value adjustment for redeemable
common stock held by ESOP -- -- -- 206,050 206,050
Issuance of stock to the RRP
(Note 7) 200 283,400 -- -- 283,600
Deferral of RRP shares issued but not
earned (Note 7) (150) (222,050) -- -- (222,200)
Amortization of earned RRP shares (Note 7) -- 33,100 -- -- 33,100
Stock options exercised (2,414 shares) 50 30,750 -- -- 30,800
Cash dividends ($0.46 per share) -- -- -- (543,400) (543,400)
Net unrealized gain on securities -- -- 142,150 -- 142,150
------------------------------- ----------------------------------------------
Balance at September 30, 1998 $ 12,000 $ 4,772,950 $ 477,100 $ 7,905,150 $ 13,167,200
=============================== ==============================================
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,060,900 $ 911,400
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation 35,700 44,500
Gain on disposal of real estate acquired
in settlement of loans -- (17,000)
Amortization of discounts on investments (11,650) (14,050)
Amortization of unearned RRP shares 56,750 --
ESOP compensation expense credited to
paid-in-capital 55,000 26,850
Deferred income taxes (22,650) 85,800
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable 9,850 (2,850)
Prepaid expenses and other assets (6,400) 25,000
Income tax refund receivable (4,950) 25,500
Increase (decrease) in:
Accounts payable and accrued expenses 31,300 (227,300)
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,203,850 857,850
-------------------------------
Cash Flows From Investing Activities
Principal collected on loans 31,343,900 22,073,850
Mortgage loans purchased (90,000) (155,000)
Loans originated (32,944,850) (28,108,000)
Purchase of investment securities (499,500) (510,200)
Proceeds from maturing investment securities 1,000,000 --
Purchases of property and equipment (3,100) (4,250)
Proceeds from sale of real estate acquired
in settlement of loans -- 390,200
-------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,193,550) (6,313,400)
<PAGE>
1997 1996
- --------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Cash dividends paid (516,600) (381,200)
Payments received on excercised options 30,800 --
Net increase in savings accounts 9,982,200 1,100,250
-------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,496,400 719,050
-------------------------------
NET INCREASE (DECREASE) IN CASH 9,506,700 (4,736,500)
Cash:
Beginning 5,804,650 10,541,150
-------------------------------
Ending $ 15,311,350 $ 5,804,650
=================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,083,600 $ 2,575,950
=================================
Income taxes $ 649,950 $ 414,800
=================================
Supplemental Schedule of Noncash Investing
and Financing Activities:
Net RRP shares issued $ 94,500 $ --
=================================
Fair value of ESOP shares in excess of
unearned ESOP shares charged to retained earnings $ 206,050 $ (226,650)
=================================
Dividends accrued $ 145,900 $ 119,100
=================================
Change in unrealized gain (loss) on available for sale
securities, net of tax effect $ 142,150 $ 105,250
=================================
Transfers from loans to real estate
acquired in settlement of loans $ -- $ 337,650
=================================
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Association is a federally chartered stock savings and
loan association, and its principal activities consist of obtaining savings
deposits and providing mortgage credit to customers in its primary market area,
the counties of northern Wake and southern Franklin and Granville, North
Carolina. The Association's primary regulator is the Office of Thrift
Supervision (OTS) and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC). The
majority of the Association's common stock (approximately 52%) is owned by Wake
Forest Bancorp M.H.C., a mutual holding company. Members of the mutual holding
company consist of depositors and certain borrowers of the Association, who have
the sole authority to elect the board of directors of the mutual holding
company. The mutual holding company is registered as a savings and loan holding
company and is subject to regulation, examination, and supervision by the OTS.
A summary of the Association's significant accounting policies follows:
Use of estimates in preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts or
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash: For purposes of reporting cash flows, the Association considers all
interest-bearing deposits with maturities of less than three months at
acquisition, noninterest-bearing deposits, and cash on hand to be cash. At
times, the Association maintains deposits in correspondent banks in amounts that
may be in excess of the FDIC insurance limit.
Investment securities: The Association carries its investments at fair market
value or amortized cost depending on its classification of such securities.
Classification of securities and the Association's accounting policies are as
follows:
Securities held to maturity: Securities classified as held to maturity
are those debt securities the Association has both the intent and
ability to hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premiums or
accretion of discounts, computed by a method which approximates the
interest method, over their contractual lives. The Association
currently has no securities which are classified as held to maturity.
Securities available for sale: Securities classified as available for
sale are those debt securities that the Association intends to hold for
an indefinite period of time but not necessarily to maturity and equity
securities not classified as held for trading. Any decision to sell a
security classified as available for sale would be based on various
factors, including significant movements in interest rates, changes in
the maturity mix of its securities, liquidity needs and other
significant factors. Securities available for sale are carried at fair
value. Unrealized gains and losses are reported as a separate component
of equity, net of related tax effects. Realized gains and losses are
included in earnings.
25
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment securities (continued):
Securities held for trading: Trading securities are held in
anticipation of short-term market gains. Such securities are carried at
fair value with realized and unrealized gains and losses included in
earnings. The Association currently has no securities which are
classified as trading.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses and net deferred loan origination fees. The
Association's loan portfolio consists principally of mortgage loans
collateralized by first trust deeds on single family residences, other
residential property, commercial property and land.
Loan fees: The Association receives fees for originating mortgage loans. The
Association defers all loan fees less certain direct costs as an adjustment to
yield with subsequent amortization into income over the life of the related
loan.
Allowance for loan losses: A provision for loan losses is charged to operations
based on the Association's evaluation of the potential and inherent risk of
losses in its loan portfolio. Such evaluation includes a review of loans for
which full collectibility appears doubtful and other factors, including the
nature and volume of the portfolio, overall loan quality, and current economic
conditions, which in the Association's judgment deserve recognition in
estimating such potential losses. Provisions not specifically identified are
based on the Association's experience and other factors. While management uses
the best information available to make evaluations, future adjustments may be
necessary, if economic or other conditions differ substantially from the
assumptions used.
The Association establishes specific loan loss allowances for impaired loans if
it is doubtful that all principal and interest due according to the loan terms
will be collected. An allowance is recorded if the present value of the loan's
future cash flows, discounted using the loan's effective interest rate, is less
than the carrying value of the loan. An impaired loan can also be valued at its
fair value in the market place or on the basis of its underlying collateral if
the loan is primarily collateral dependent. If foreclosure is imminent, and the
loan is collateral dependent, the loan is valued based upon the fair value of
the underlying collateral.
The Association had no loans outstanding during the years ended September 30,
1998 and 1997 which it considers to be impaired. Therefore, there is no specific
allowance for impaired loans at September 30, 1998 and 1997.
26
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
Interest income: The Association does not record interest on loans delinquent 90
days or more unless in the opinion of management, collectibility is assured. If
collectibility is not certain, the Association establishes a reserve for
uncollected interest. Interest collected while the loan is in such status is
credited to income in the period received. If the loan is brought to a status in
which it is no longer delinquent 90 days, the reserve for uncollected interest
is reversed and interest income is recognized. The Association anticipates that
it will account for interest on impaired loans in a similar fashion in the
future if and when it has impaired loans. Such interest when ultimately
collected is credited to income in the period received.
27
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, equipment and depreciation: Property and equipment are stated at cost
less accumulated depreciation. The Association computes depreciation primarily
by use of the straight-line method.
Real estate acquired in settlement of loans: Real estate acquired through, or in
lieu of, loan foreclosure is initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of cost or fair value minus costs to sell. Revenue and expenses from holding the
properties and additions or recoveries to the valuation allowance are included
in operations.
Income taxes: Deferred income taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by valuation
allowances if in the opinion of management it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Earnings per share: The Association adopted Statement of Financial Accounting
Standard (SFAS) No. 128 during 1998. This statement requires dual presentation
of basic and diluted earnings per share (EPS) with a reconciliation of the
numerator and denominator of the EPS computations. Basic earnings per share
amounts are based on the weighted average shares of common stock outstanding.
Diluted earnings per share assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per
share. Shares owned by the Association's ESOP that have not been committed to be
released are not considered to be outstanding for the purposes of computing
earnings per share. Accordingly, this presentation has been adopted for both
periods presented. There were no adjustments required to net income for all
periods presented in the computation of diluted earnings per share. The basic
and diluted weighted average shares outstanding for 1998 and 1997 are as
follows:
28
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DILUTED
1998 1997
-----------------------------
<S> <C> <C>
WEIGHTED AVERAGE OUTSTANDING SHARES USED FOR BASIC EPS 1,169,464 1,158,014
Plus incremental shares from assumed issuances pursuant to
stock options and stock award plans 24,178 6,405
-----------------------------
Weighted average outstanding shares used for diluted EPS 1,193,642 1,164,419
=============================
</TABLE>
Off-balance-sheet risk and credit risk: The Association is a party to financial
instruments with off-balance-sheet risk such as commitments to extend credit.
Management assesses the risk related to these instruments for potential loss.
The Association lends primarily on one-to-four family residential loans
throughout its primary lending area, Wake, Franklin and Granville counties of
North Carolina.
29
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value of financial instruments: Estimated fair values have been determined
by the Association using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates for the fair value of the
Association's financial instruments are not necessarily indicative of the
amounts the Association could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair value amounts. The fair value estimates are based
on pertinent information available to management as of September 30, 1998.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Association in estimating its fair value disclosures for financial instruments:
Cash and accrued interest receivable: The carrying amounts reported in the
statement of financial condition approximate those assets' fair values.
Investment securities: The fair values of investment securities are
determined based on quoted market values. For the Association's investment in
Federal Home Loan Bank stock, no ready market exists and it has no quoted
market value. For disclosure purposes, such stock is assumed to have a fair
value which is equal to its cost.
Loans receivable: The fair value for all loans, except short-term
construction loans, has been estimated by discounting projected future cash
flows using the current rate at which loans with similar maturities would be
made to borrowers with similar credit ratings. Certain prepayment assumptions
were made to the Association's portfolio of long-term fixed rate mortgage
loans. The fair value of construction loans is assumed to be equal to their
recorded amounts because such loans have relatively short terms and fluctuate
with prime.
Deposits: The fair value of deposits with no stated maturities is estimated
to be equal to the amount payable on demand at September 30, 1998. The fair
value of certificates of deposit is based upon the discounted value of future
contractual cash flows. The discount rate is estimated using rates offered on
September 30, 1998 for deposits of similar remaining maturities.
30
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
ESOP note payable: The fair value of the ESOP note is assumed to be equal to
its recorded amount because the terms of the note are similar to the terms
the Association could currently obtain for comparable debt instruments.
Off-balance-sheet commitments: Because the Association's commitments, which
consist entirely of loan commitments, are either short-term in nature or subject
to immediate repricing, no fair value has been assigned to these
off-balance-sheet items.
Future Reporting Requirements: The Financial Accounting Standards Board has
issued SFAS No. 130, Reporting Comprehensive Income which the Association will
be required to adopt subsequent to September 30, 1998.
31
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Future Reporting Requirements (continued):
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Statement does not require a specific format for
that financial statement but requires the display of an amount representing
total comprehensive income for the period in that financial statement. The
Statement requires (a) classification of items of other comprehensive income by
their nature in a financial statement and (b) display of the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Adoption of SFAS No. 130 will have no effect on the Association 's net income,
but will require that net income be combined with unrealized gains or losses on
available for sale securities to report comprehensive income.
INVESTMENT SECURITIES
The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Marketable equity securities:
FHLMC stock $ 15,200 $ 752,250 $ -- $ 767,450
</TABLE>
32
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury obligations 2,000,450 17,200 -- 2,017,650
------------------------------------------------------
2,015,650 769,450 -- 2,785,100
------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank stock 364,100 -- -- 364,100
------------------------------------------------------
$2,379,750 $ 769,450 $ -- $ 3,149,200
======================================================
</TABLE>
33
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Marketable equity securities:
FHLMC stock $ 15,200 $ 531,350 $ -- $ 546,550
Debt securities:
U.S. Treasury obligations 2,489,250 8,850 -- 2,498,100
-------------------------------------------------------
2,504,450 540,200 -- 3,044,650
-------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank stock 364,100 -- -- 364,100
-------------------------------------------------------
$ 2,868,550 $ 540,200 $ -- $ 3,408,750
=======================================================
</TABLE>
The amortized cost and estimated market values of available for sale debt
securities at September 30, 1998 by contractual maturity are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------------------------
<S> <C> <C>
Due in one year or less $ 1,500,800 $ 1,511,100
Due in one year through five years 499,650 506,550
----------------------------
$ 2,000,450 $ 2,017,650
============================
</TABLE>
34
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
There were no sales of investment securities during the years ended September
30, 1998 and 1997.
The change during 1998 and 1997 in net unrealized gains and losses associated
with available for sale securities is as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Balance in equity component, beginning of year $ 334,950 $ 229,700
Change in unrealized gains 229,250 169,700
Change in related deferred income taxes (87,100) (64,450)
----------------------------
Balance in equity component, end of year $ 477,100 $ 334,950
============================
</TABLE>
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The Association, as a member of the Federal Home Loan Bank system, is required
to maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to the greater of 1% of its outstanding home loans or one-twentieth
of its outstanding advances. No ready market exists for the bank stock and it
has no quoted market value. For disclosure purposes, such stock is assumed to
have a market value which is equal to cost.
LOANS RECEIVABLE
Loans receivable consist of the following:
1998 1997
--------------------------------
First mortgage loans:
Single family, one-to-four units $ 25,479,350 $ 28,234,000
35
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Multifamily, residential 289,400 379,000
Commercial real estate 5,830,600 6,791,000
Land 4,840,200 4,611,000
Residential construction 25,339,700 18,082,000
Commercial construction 2,246,850 3,261,000
Lines of credit 865,950 --
----------------------------
64,892,050 61,358,000
Equity line mortgages 1,295,800 --
Loans on savings accounts 201,000 283,900
----------------------------
66,388,850 61,641,900
----------------------------
Less:
Undisbursed portion of loans in process 10,602,600 7,518,300
Allowance for loan losses 263,000 263,000
Deferred loan fees 159,800 188,100
----------------------------
11,025,400 7,969,400
----------------------------
$ 55,363,450 $ 53,672,500
============================
Weighted average yield on loans receivable 8.96% 8.86%
============================
</TABLE>
At September 30, 1998 and 1997, the Association's level of general valuation
allowances for loan losses amounted to $263,000. There were no provisions for
loan losses made or charge-offs of any loans during the years ended September
30, 1998 and 1997.
36
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3. LOANS RECEIVABLE (CONTINUED)
The Association does not accrue interest on loans past due 90 days or more if,
in the opinion of management, collectibility is in doubt. Such interest is
removed from income through the establishment of a reserve for uncollected
interest. At September 30, 1998 and 1997, a reserve for uncollected interest on
loans delinquent more than 90 days was not established because management
expects that all such interest is fully collectible. The balance of accruing
loans past due more than 90 days was approximately $133,650 and $195,600 at
September 30, 1998 and 1997, respectively.
There were no transactions in the Association's allowance for losses on real
estate acquired in settlement of loans during 1998 and 1997.
Shareholders of the Association and officers and directors, including their
families and companies of which they are principal owners, are considered to be
related parties. These related parties were loan customers of, and had other
transactions with the Association in the ordinary course of business. In
management's opinion, these loans and transactions were on the same terms as
those for comparable loans and transactions with nonrelated parties during the
years ended September 30, 1998 and 1997
Aggregate loan transactions with related parties during the years ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Beginning balance $ 8,247,800 $ 85,500
New loans 101,250 175,000
Reductions (7,400) (12,700)
-----------------------------------
Ending balance $ 8,341,650 $ 247,800
-----------------------------------
Maximum balance during the year $ 349,050 $ 251,950
===================================
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1998 and 1997 are summarized as follows:
37
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Land $ 20,950 $ 20,950
Office buildings and improvements 584,300 584,300
Furniture and fixtures 172,900 169,800
-------------------------------
778,150 775,050
Less accumulated depreciation (318,600) (282,900)
-------------------------------
$ 459,550 $ 492,150
===============================
</TABLE>
SAVINGS ACCOUNTS
Savings accounts at September 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Passbook accounts, weighted average rate of 3.07%
(3.07% in 1997) $ 3,599,150 $ 3,240,700
MMDA accounts, weighted average rate of 2.50%
(3.75% in 1997) 7,100,300 7,118,700
NOW accounts, weighted average rate of 2.51%
(3.00% in 1997) 1,277,400 1,111,400
Noninterest-bearing accounts 333,950 259,400
-------------------------------
12,310,800 11,730,200
-------------------------------
Certificate of deposit accounts:
3.00% to 4.99% 599,600 278,100
5.00% to 6.99% 46,862,300 37,789,250
7.00% to 8.00% 213,550 194,800
-------------------------------
47,675,450 38,262,150
-------------------------------
</TABLE>
38
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued interest on savings 51,700 63,350
-------------------------------
$ 60,037,950 $ 50,055,700
===============================
Weighted average cost of savings 5.15% 5.27%
===============================
</TABLE>
Certificates of deposit by range of rate and maturity at September 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNTS MATURING DURING
-----------------------------------------------------------------------------
Rate Range 1999 2000 2001 Thereafter Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00% to 5.00% $ 599,600 $ -- $ -- $ -- $ 599,600
5.01% to 7.00% 31,805,000 8,176,100 3,374,700 3,506,500 46,862,300
7.01% to 8.00% -- 213,550 -- -- 213,550
-----------------------------------------------------------------------------
$ 32,404,600 $ 8,389,650 $ 3,374,700 $ 3,506,500 $47,675,450
=============================================================================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 included in the table above is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MATURITY PERIOD: 1998
----------------
<S> <C>
Within three months $ 2,018,200
After three months but within six months 1,922,800
After six months but within twelve months 2,835,800
After twelve months but within twenty four months 2,007,500
After twenty four months 1,648,400
----------------
$ 10,432,700
================
</TABLE>
39
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 5. SAVINGS ACCOUNTS (CONTINUED)
Interest expense on savings accounts for the years ended September 30, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Passbook accounts $ 100,050 $ 89,750
MMDA and NOW accounts 302,750 314,550
Certificate of deposit accounts 2,662,100 2,165,600
--------------- ----------------
3,064,900 2,569,900
Forfeitures (18,900) (10,200)
--------------- ----------------
$ 3,046,000 $ 2,559,700
=============== ================
Eligible savings deposits are insured to $100,000 by the Savings Association
Insurance Fund (SAIF) which is administered by the FDIC.
</TABLE>
EMPLOYEES AND DIRECTORS BENEFIT PLANS
The Association has a noncontributory 401k plan for substantially all employees.
The Association has no obligation to make contributions to the plan, but pays
administrative costs of the Plan. There were no costs associated with the Plan
during 1998 and 1997.
The Association adopted a nonqualified noncontributory retirement plan covering
its directors during 1996. Retirement plan expense is computed based on the
discounted present value of expected future payments over the expected service
years for the directors. Under the plan, directors will receive upon retirement,
monthly payments for ten years in amounts not to exceed $5,000 annually. Other
stipulations and limitations based on years of service, death and disability,
change of control, and early termination apply. Expense associated with the plan
amounted to $39,250 and $65,750 for 1998 and 1997, respectively.
The Association has also entered into employment agreements with its two key
executives. The agreements provide for a three year term, but upon each
anniversary, the agreements automatically extend so that the terms shall always
be three years, unless either party gives notice that the agreement will not be
renewed. Performance reviews by a committee of the Board will be conducted
annually and the agreements can be terminated by the Association at anytime for
cause as defined in the agreements. The agreements provide for a base salary
plus performance bonus to be determined annually. In the event of termination
other than for cause, the employees are entitled to a lump sum cash payment in
an amount equal to the present value of the base salary, bonus payments, and
other benefits described in the agreements through the remainder of the term.
40
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
RECOGNITION AND RETENTION PLAN
During 1997, the Association's shareholders approved the Wake Forest Federal
Savings and Loan Association 1997 Recognition and Retention Plan (the "RRP")
whereby 22,248 shares of common stock would be awarded to employees. The RRP
shares vest over a five year period, beginning one year from date of stockholder
approval. Accelerated vesting may occur in certain circumstances as disclosed in
the plan documents. In January, 1998, the Association issued shares of common
stock from authorized but unissued shares to fund the plan and transferred 4,450
shares or 20% to participants. The remaining shares were transferred into a
trust account to be issued to participants at the annual vesting date. Expense
associated with the plan for years ended September 30, 1998 and 1997 was $56,750
and $37,800, respectively.
STOCK OPTION PLAN
During 1997, the Association's shareholders approved a Stock Option Plan
providing for the grant of incentive stock options to officers, directors, and
key employees providing services to the Association.
A summary of the status of the Stock Option Plan at September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1996 -- $ --
Granted 54,000 12.75
Exercised -- --
Forfeited -- --
--------------------------------
Outstanding at September 30, 1997 54,000 12.75
Granted -- --
Exercised (2,414) 12.75
Forfeited -- --
--------------------------------
Outstanding at September 30, 1998 51,586 $ 12.75
================================
</TABLE>
The options were granted on January 22, 1997 and become exercisable at the rate
of 20% annually for five years during such periods of services as an employee,
officer, or director, expiring after ten years. Accelerated vesting may occur in
certain circumstances as disclosed in the plan documents.
41
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
Grants of options under the plan are accounted for following Accounting
Principles Board (APB) Opinion No. 25 and related interpretations. Accordingly,
no compensation cost has been recorded. In 1995, the Financial Accounting
Standards Board issued Standard No. 123, which requires disclosures concerning
the fair value of options and encourages accounting recognition for options
using the fair value method. The Association has elected to apply the
disclosure-only provisions of the Statement. However, had compensation cost been
recorded based on the fair value of awards at the grant date ($8.38 per share),
the pro forma impact on the Association's net income and net income per common
share would have been approximately $60,000 and $0.05 per basic and dilutive
share for 1998 and 1997.
42
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8. STOCK OPTION PLAN (CONTINUED)
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions for 1997:
dividend rate of 1.56%; risk-free interest rates of 5.88%; expected lives of 7
years; and price volatility of 29.94%.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Association has an ESOP to benefit substantially all employees. In 1996, the
ESOP purchased 41,200 shares of common stock with the proceeds from a loan from
a third party financial institution. The note requires quarterly principal
payments of $14,714 plus interest at the lending institution's prime rate (8.50%
at September 30, 1998) until March, 2003. The Association is expected to make
quarterly contributions to the ESOP in amounts sufficient to allow the ESOP to
make its scheduled principal and interest payments on the note. The ESOP shares
are pledged as collateral for the debt. As the debt is repaid, shares are
released from collateral and allocated to active employees, based on the
proportion of debt service paid in the year. The debt of the ESOP is recorded as
debt in the Association's accompanying balance sheet.
At September 30, 1998, future principal payments are due as follows:
1999 $ 58,856
2000 58,856
2001 58,856
2002 58,856
2003 29,426
---------------
$ 264,850
===============
As shares are released from collateral, the Association reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for EPS computations.
The Association makes cash contributions to the ESOP sufficient to amortize the
debt, but records expense based upon the fair value of the shares allocated to
plan participants each year. The difference between the cash contributions and
the amount expensed is credited or charged to additional paid-in capital. ESOP
compensation expense was $116,650 and $85,700 for the years ended September 30,
1998 and 1997, respectively.
43
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) (CONTINUED)
The ESOP has a put option which requires that the Association repurchase its
common stock from participants in the ESOP who are eligible to receive benefits
under the terms of the plan and elect to receive cash in exchange for their
common stock. The Association is required to reflect as a liability the maximum
possible cash obligation to redeem the shares, which is the fair value of such
shares, whether allocated or unallocated. The initial purchase of common stock
by the ESOP is treated as a reduction in stockholder's equity and as a liability
for the put option. The liability for the put option has been reduced to the
extent of the unearned ESOP shares at September 30, 1998. The liability for the
put option at September 30, 1998, based upon the fair value of the ESOP shares
at that time of $13.00, was $270,750. The liability for the put option will
fluctuate based upon the fair value of the shares with the resulting increase or
decrease reflected as change to retained earnings.
Shares of the Association held by the ESOP at September 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Shares held by the ESOP 41,200 41,200
Shares released for allocation (14,710) (8,826)
--------------------------------
Unreleased (unearned) shares 26,490 32,374
================================
Fair value of unreleased (unearned) shares $ 344,370 $ 582,750
================================
</TABLE>
NOTE 10. INCOME TAXES
At September 30, 1998 and 1997, retained earnings contain certain additions to
bad debt reserves for income tax purposes of approximately $1,434,000, the
balance at September 30, 1998, for which no deferred taxes have been provided
because the Association does not intend to use these reserves for purposes other
than to absorb losses. The amount of deferred taxes on such tax bad debt
reserves which is unrecorded amounted to approximately $545,000 at September 30,
1998 and 1997. If amounts which qualified as bad debt deductions are used for
purposes other than to absorb losses or adjustments arising from the carryback
of net operating losses, income taxes may be imposed at the then existing rates.
INCOME TAXES (CONTINUED)
Deferred income taxes consist of the following components as of September 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Deferred tax assets:
Loan loss allowances $ 99,950 $ 99,950
Deferred loan fees 22,950 36,150
</TABLE>
44
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Health insurance accrual 15,850 15,900
MRP expense accrual 14,400
Retirement plan accrual 64,600 44,100
-------------------------------
217,750 196,100
-------------------------------
Deferred tax liabilities:
Tax bad debt reserves 71,850 71,850
Excess accumulated tax depreciation 24,100 25,100
Unrealized net appreciation, investments 292,400 205,250
-------------------------------
388,350 302,200
-------------------------------
$ (170,600) $ (106,100)
===============================
</TABLE>
45
<PAGE>
NOTE 10. INCOME TAXES (CONTINUED)
Income tax expense differs from the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Statutory federal income tax rate 34.00% 34.00%
Increase (decrease) in income taxes resulting from:
Nontaxable income, net (0.10) (0.10)
State income taxes, net of federal benefit 2.68 3.29
Other, net 0.30 0.12
-------------------------------
36.88% 37.31%
===============================
</TABLE>
CAPITAL
Concurrent with the reorganization in 1996, the Association has established a
liquidation account in an amount equal to its net worth as reflected in its
latest statement of financial condition used in its final offering circular. The
liquidation account will be maintained for the benefit of eligible deposit
account holders and supplemental eligible deposit account holders who continue
to maintain their deposit accounts in the Association after the reorganization.
Only in the event of a complete liquidation will eligible deposit account
holders and supplemental eligible deposit account holders be entitled to receive
a liquidation distribution from the liquidation account adjusted for
transactions since the reorganization. Dividends paid by the Association
subsequent to the reorganization cannot be paid from this liquidation account.
The Association may not declare or pay a cash dividend on its common stock if
its net worth would thereby be reduced below either the aggregate amount then
required for the liquidation account or the minimum regulatory capital
requirements imposed by federal regulations.
46
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11. CAPITAL (CONTINUED)
The Association is subject to the capital requirements established by the Office
of Thrift Supervision (OTS). The OTS requires that the Association meet three
separate capital standards; tangible capital of at least 1.5% of total assets,
core capital of at least 4% of total assets, and risk-based capital of at least
8% of risk-weighted assets. At September 30, 1998, the Association met and
exceeded all of the capital requirements described above as shown in the table
below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
REQUIREMENT REQUIREMENT REQUIREMENT
------------------------------------------------
<S> <C> <C> <C>
Equity (GAAP) $ 13,167,200 $ 13,167,200 $ 13,167,200
Net unrealized gain on investment securities (477,100) (477,100) (477,100)
Supplemental capital items:
General valuation allowances -- -- 263,000
------------------------------------------------
Regulatory capital 12,690,100 12,690,100 12,953,100
Minimum capital requirement 1,104,100 2,944,350 3,745,100
------------------------------------------------
Excess regulatory capital $ 11,586,000 $ 9,745,750 $ 9,208,000
================================================
SEPTEMBER 30, 1998
------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
REQUIREMENT REQUIREMENT REQUIREMENT
------------------------------------------------
<S> <C> <C> <C>
Total assets at September 30, 1998 less fair
market value adjustment of securities $ 73,608,200 $ 73,608,200 --
Risk-weighted assets at September 30, 1998 -- -- $ 46,813,800
Capital as a percentage of assets:
Actual 17.07% 17.07% 27.67%
Required 1.50 4.00 8.00
------------------------------------------------
Excess 15.57% 13.07% 19.67%
================================================
</TABLE>
Under the OTS prompt corrective action regulations, a savings association is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6.0%, and its ratio of core capital to total average assets is at least
5.0%. The Association meets all of the above requirements and is considered to
be well capitalized under the prompt corrective action regulations.
47
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK
The Association 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.
These financial instruments include commitments to extend credit and the
undisbursed portion of construction loans. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Association has in particular
classes of financial instruments.
The Association's 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 notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At September 30, 1998
the Association had outstanding loan commitments amounting to $2,358,300. The
undisbursed portion of construction loans amounted to $10,602,600 and unused
lines of credit amounted to $986,300 at September 30, 1998.
The Association evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held is the underlying real
estate.
48
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Association's financial instruments at September 30, 1998. See Note 1 for a
description of the Association's accounting policies and the limitations of its
disclosures in reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
SEPTEMBER 30
1998 1997
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 15,311,350 $ 15,311,350 $ 5,804,650 $ 5,804,650
Investment securities:
Available for sale 2,785,100 2,785,100 3,044,650 3,044,650
FHLB stock 364,100 364,100 364,100 364,100
Loans receivable 55,363,450 55,359,400 53,672,500 53,652,450
Accrued interest receivable 25,550 25,550 35,400 35,400
Financial liabilities:
Savings accounts 60,037,950 60,262,250 50,055,750 50,137,300
Note payable - ESOP 264,850 264,850 323,700 323,700
</TABLE>
MUTUAL HOLDING COMPANY DATA
The following is a summary of the condensed financial statements of Wake Forest
Bancorp, M.H.C. as of and for the periods indicated:
49
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 526,900 299,400
Accrued dividends receivable, Wake Forest Federal 76,200 63,500
Income tax refund receivable -- 7,800
Investment in Wake Forest Federal 5,007,700 4,442,150
---------------------------------
$ 5,610,800 $ 4,812,850
=================================
Liabilities and Equity:
Liabilities:
Accounts payable and accrued expenses $ 10,500 $ 10,500
---------------------------------
Equity:
Capitalization by Wake Forest Federal 106,350 106,350
Equity in Wake Forest Federal 3,854,700 3,854,750
Retained earnings 1,639,250 841,250
---------------------------------
5,600,300 4,802,350
---------------------------------
$ 5,610,800 $ 4,812,850
=================================
</TABLE>
50
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Interest income $ 19,650 $ 8,700
Dividend income, Wake Forest Federal 292,100 222,250
Equity in earnings of Wake Forest Federal 565,550 485,850
Accounting and tax expense (12,700) (22,700)
Attorney Fees (21,100) (14,150)
Director's fees (43,500) (13,200)
Exam Expense (1,450) --
Franchise Tax (550) --
---------------------------------
798,000 666,750
---------------------------------
</TABLE>
51
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 14. MUTUAL HOLDING COMPANY DATA (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 798,000 $ 666,750
Noncash income items:
Equity in earnings of Wake Forest Federal (565,600) (485,850)
Change in assets and liabilities:
(Increase) in accrued dividends receivable (12,700) (19,050)
Decrease/(Increase) in income tax refund receivable 7,800 (7,800)
Increase in accounts payable 9,400
--------------------------------
Net cash provided by operating activities 227,500 163,450
Cash - beginning 299,400 135,950
--------------------------------
Cash - ending $ 526,900 $ 299,400
================================
</TABLE>
52
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 15. SUBSEQUENT EVENT
On November 16, 1998, the Board of Directors approved an Agreement and Plan of
Reorganization (the Plan of Reorganization). The Plan of Reorganization provides
for the establishment of Wake Forest Bancshares, Inc. (the Stock Holding
Company) as a stock holding company parent of the Association, which stock
holding company will be majority owned by Wake Forest Bancorp, MHC (the MHC),
the Association's mutual holding company. The reorganization into the "two-tier"
mutual holding company structure (the Reorganization) under the Plan of
Reorganization is also subject to approval by stockholders of the Association
and by regulatory authorities.
In the Reorganization, each outstanding share of Association Common Stock will
be converted into one share of common stock, par value $.01 per share, of the
Stock Holding Company (Holding Company Common Stock) and the holders of
Association Common Stock will become the holders of all of the outstanding
Holding Company Common Stock. Accordingly, as a result of the Reorganization,
the Association's minority shareholders will become minority shareholders of the
Stock Holding Company. The Stock Holding Company was incorporated solely for the
purpose of becoming a savings and loan holding company and has no prior
operating history. The Reorganization will have no impact on the operations of
the Association or the MHC. The Association will continue its operations at the
same locations, with the same management, and subject to all the rights,
obligations and liabilities of the Association existing immediately prior to the
Reorganization.
The Board of Directors of the Association presently intends to capitalize the
Stock Holding Company with up to $100,000. Future capitalization of the Stock
Holding Company will depend upon dividends declared by the Association based on
future earnings, or the raising of additional capital by the Stock Holding
Company through a future issuance of securities, debt or by other means. The
Board of Directors of the Stock Holding Company has no present plans or
intentions with respect to any future issuance of securities or debt at this
time. Furthermore, as long as it is in existence, the MHC must own at least a
majority of the Stock Holding Company's outstanding voting stock.
53
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE 15. SUBSEQUENT EVENT (CONTINUED)
The Reorganization will be treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and financial statements of the Stock Holding Company
immediately following the Reorganization will be substantially the same as those
of the Association immediately prior to consummation of the Reorganization, all
of which will be shown on the Stock Holding Company's books at their historical
recorded values.
COMMON STOCK INFORMATION
The Association's stock began trading on April 3, 1996. There are 1,215,862
shares of common stock outstanding of which approximately 44% were held by 252
stockholders of record on September 30, 1998. The MHC, ESOP and RRP Trust hold
approximately 56%. There is no established market for the stock, excluding
occasional quotations, although the stock is quoted on the OTC Electronic
Bulletin Board under the symbol "WAKE." The table below reflects the stock
trading and dividend payment frequency of the Association for the years ended
September 30, 1998 and 1997, based upon information provided to management of
the Association by certain securities firms effecting transactions in the
Association's stock on an agency basis.
<TABLE>
<CAPTION>
STOCK PRICE
---------------------------------
DIVIDENDS HIGH LOW
--------------- --------------- ---------------
<S> <C> <C> <C>
1998:
First Quarter $ 0.10 $ 23 1/2 $ 19 1/4
Second Quarter 0.12 23 1/2 20 5/8
Third Quarter 0.12 23 1/4 18
Fourth Quarter 0.12 21 1/2 13
1997:
First Quarter $ 0.07 $ 14 $ 12 1/2
Second Quarter 0.08 14 1/4 12 3/4
Third Quarter 0.10 15 13 1/2
Fourth Quarter 0.10 20 14 3/8
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
EXECUTIVE OFFICERS
<S> <C> <C>
Anna O. Sumerlin Carlton Chappell
President and CEO Vice President/Secretary -
Treasurer
DIRECTORS
Howard Brown R. W. Wilkinson III John D. Lyon
Chairman of the Board Vice Chairman of the Board
Rodney M. Privette Anna O. Sumerlin Harold R. Washington
Paul Brixhoff Leelan A. Woodlief William S. Wooten
STOCK TRANSFER AGENT ANNUAL MEETING
ChaseMellon Shareholder Services The 1998 annual meeting of stockholders of
450 W. 33rd St. 15th Floor Wake Forest Federal Savings & Loan Association
New York, NY 10001 will be held at 2:00 pm on February 23, 1999 at
the Wake Forest Police and Justice Center at
SPECIAL LEGAL COUNSEL 401 Elm Ave, Wake Forest, NC.
Thacher, Proffitt & Wood FORM 10-K
1500 K Street N.W. A copy of Form 10-KSB as filed with the Office
Washington, DC 20005 of Thrift Supervision will be furnished without
INDEPENDENT AUDITORS charge to stockholders upon written request to
Wake Forest Federal Savings & Loan Association
McGladrey & Pullen, LLP PO Box 1167, Wake Forest, N.C. 27588
2418 Blue Ridge Road
PO Box 10366 CORPORATE OFFICE:
Raleigh, N.C. 27605
302 S. Brooks St.
Wake Forest, N.C., 27587
</TABLE>
55
<PAGE>
PROXY STATEMENT
EXHIBIT 99 TO
EXHIBIT 99.1
January 21, 1999
Dear Shareholder:
You are cordially invited to attend the 1999 Annual Meeting of
Shareholders (the "Annual Meeting") of Wake Forest Federal Savings & Loan
Association (the "Association"), which will be held on February 23, 1999 at 2:00
p.m., local time, at the Wake Forest Police and Justice Center, 401 Elm Avenue,
Wake Forest, North Carolina.
The attached Notice of the 1999 Annual Meeting of Shareholders and
Proxy Statement describe the formal business to be transacted at the Annual
Meeting. Directors and officers of the Association, as well as a representative
of McGladrey & Pullen, LLP, the accounting firm appointed by the Board of
Directors to be the Association's independent auditors for the fiscal year
ending September 30, 1999, will be present at the Annual Meeting to respond to
appropriate questions.
The Board of Directors of the Association has determined that an
affirmative vote on each matter to be considered at the Annual Meeting is in the
best interests of the Association and its shareholders and unanimously
recommends a vote "FOR" each of these matters.
Please complete, sign and return the enclosed proxy card promptly
whether or not you plan to attend the Annual Meeting. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE NUMBER OF SHARES YOU OWN. VOTING BY PROXY WILL NOT PREVENT YOU
FROM VOTING IN PERSON AT THE ANNUAL MEETING, BUT WILL ASSURE THAT YOUR VOTE IS
COUNTED IF YOU ARE UNABLE TO ATTEND. IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE
NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM
YOUR RECORD HOLDER TO ATTEND AND TO VOTE PERSONALLY AT THE ANNUAL MEETING.
EXAMPLES OF SUCH DOCUMENTATION INCLUDE A BROKER'S STATEMENT, LETTER OR OTHER
DOCUMENT CONFIRMING YOUR OWNERSHIP OF SHARES OF THE ASSOCIATION.
On behalf of the Board of Directors and the employees of Wake Forest
Federal Savings & Loan Association, we thank you for your continued support.
Sincerely yours,
Anna O. Sumerlin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
302 S. BROOKS STREET, P.O. BOX 707
WAKE FOREST, NORTH CAROLINA 27588-0707
(919) 556-5146
NOTICE OF THE 1999 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 23, 1999
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Shareholders of
Wake Forest Federal Savings & Loan Association (the "Association") will be held
at the Wake Forest Police and Justice Center, 401 Elm Avenue, Wake Forest, North
Carolina, on February 23, 1999 at 2:00 p.m., local time, to consider and vote
upon the:
1. Election of two directors for terms of three years each;
2. Approval of the Agreement and Plan of Reorganization (the "Plan
of Reorganization") providing for the establishment of Wake
Forest Bancshares, Inc. (the "Stock Holding Company") as a stock
holding company parent of the Association which stock holding
company will be majority owned by Wake Forest Bancorp, M.H.C.
(the "MHC"), the Association's mutual holding company. Pursuant
to the Plan of Reorganization: (i) the Association will become a
wholly owned subsidiary of the Stock Holding Company which will
become a majority owned subsidiary of the MHC, and (ii) each
outstanding share of common stock, par value $.01 per share, of
the Association will be converted into one share of common stock,
par value $.01 per share, of the Stock Holding Company;
3. Ratification of the appointment of McGladrey & Pullen, LLP as
independent auditors for the fiscal year ending September 30,
1999; and
4. Authorization of the Board of Directors, in its discretion, to
direct the vote of proxies upon such matters as may properly come
before the Annual Meeting, and any adjournment or postponement
thereof, including, without limitation, a motion to adjourn the
Annual Meeting. Please note that the Association is not aware of
any such business.
The Board of Directors has fixed December 29, 1998 as the record date
for the determination of shareholders entitled to notice of and to vote at the
Annual Meeting and any adjournment or postponement thereof. Only shareholders of
record at the close of business on that date will be entitled to notice of and
to vote at the Annual Meeting and any adjournment or postponement thereof.
By Order of the Board of Directors,
Carlton E. Chappell
Wake Forest, North Carolina VICE PRESIDENT, SECRETARY
January 21, 1999 AND TREASURER
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER OF SHARES YOU OWN. THE
BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND MARK THE ENCLOSED PROXY CARD
PROMPTLY AND RETURN IT IN THE ENCLOSED ENVELOPE. RETURNING THE PROXY CARD WILL
NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE ANNUAL MEETING.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GENERAL INFORMATION......................................................................................1
General.........................................................................................1
Summary of Proposals............................................................................1
Record Date and Voting Rights...................................................................3
Vote Required...................................................................................4
Vote by MHC.....................................................................................4
Revocability of Proxies.........................................................................4
Solicitation of Proxies.........................................................................4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................5
Principal Shareholders of the Association.......................................................5
Security Ownership of Management................................................................6
MARKET FOR THE COMMON STOCK..............................................................................7
DIVIDEND POLICY..........................................................................................7
PROPOSAL 1 - ELECTION OF DIRECTORS.......................................................................8
General.........................................................................................8
Vote Required...................................................................................8
Information as to Nominees and Continuing Directors.............................................8
Nominees for Election as Director...............................................................9
Continuing Directors............................................................................9
Meetings and Committees of the Board of Directors of the Association...........................10
Executive Officers.............................................................................11
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS........................................................12
Directors' Compensation........................................................................12
Executive Compensation.........................................................................13
Employment Agreements..........................................................................13
Benefits.......................................................................................14
Stock Options .................................................................................16
Transactions with Certain Related Persons......................................................17
Section 16(a) Beneficial Ownership Reporting Compliance........................................17
PROPOSAL 2 - AGREEMENT AND PLAN OF REORGANIZATION.......................................................18
General........................................................................................18
Reasons for and Risks of the Reorganization....................................................18
OTS Approval Process...........................................................................20
Plan of Reorganization.........................................................................20
Effective Date.................................................................................22
Optional Exchange of Stock Certificates........................................................22
Rights of Dissenting Shareholders..............................................................22
Tax Consequences...............................................................................23
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Consequences Under Federal Securities Laws.....................................................24
Conditions to the Reorganization...............................................................24
Amendment, Termination or Waiver...............................................................24
Business of the Association....................................................................25
Business of the Stock Holding Company..........................................................25
Management of the Stock Holding Company........................................................26
Comparison of Shareholder Rights and Certain Anti-Takeover Provisions..........................27
Regulation of the Stock Holding Company........................................................30
Description of Capital Stock of The Stock Holding Company......................................32
Common Stock...................................................................................32
Preferred Stock................................................................................33
Accounting Treatment...........................................................................33
Vote Required..................................................................................33
Recommendation.................................................................................34
PROPOSAL 3 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS...............................35
General...............................................................................35
Vote Required.........................................................................35
PROPOSAL 4 - AUTHORIZATION OF THE BOARD OF DIRECTORS TO DIRECT THE VOTE UPON
OTHER MATTERS.........................................................................36
General...............................................................................36
Vote Required.........................................................................36
ADDITIONAL INFORMATION.........................................................................37
Notice of Business to be Conducted at Annual Meeting..................................37
Date for Submission of Shareholder Proposals..........................................37
AVAILABLE INFORMATION..........................................................................37
FINANCIAL INFORMATION..........................................................................38
LEGAL MATTERS..................................................................................38
OTHER MATTERS..................................................................................38
EXHIBITS
A. Agreement and Plan of Reorganization
B. Charter of Wake Forest Bancshares, Inc.
C. Bylaws of Wake Forest Bancshares, Inc.
D. Section 552.14 of OTS Regulations
</TABLE>
-ii-
<PAGE>
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
PROXY STATEMENT FOR THE
1999 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 23, 1999
GENERAL INFORMATION
GENERAL
This Proxy Statement/Prospectus and accompanying proxy card are being
furnished to the shareholders of Wake Forest Federal Savings & Loan Association
(the "Association") in connection with the solicitation of proxies by the Board
of Directors of the Association from holders of the shares of the Association's
issued and outstanding common stock, par value $.01 per share (the "Common
Stock"), as of the close of business on December 29, 1998 (the "Record Date"),
for use at the 1999 Annual Meeting of Shareholders of the Association (the
"Annual Meeting") to be held on February 23, 1999 at the Wake Forest Police and
Justice Center, 401 Elm Avenue, Wake Forest, North Carolina, at 2:00 p.m., local
time and at any adjournment or postponement thereof. This Proxy
Statement/Prospectus, together with the enclosed proxy card, is first being
mailed to shareholders on or about January 21, 1999.
On April 3, 1996, the Association completed its reorganization into the
mutual holding company form (the "MHC Reorganization") and offering of shares of
its Common Stock (the "Offering"). As a result of the MHC Reorganization, the
Association became a stock savings and loan association and Wake Forest Bancorp,
M.H.C. (the "MHC") was issued 635,000 shares of Common Stock which as of the
Record Date constituted approximately 52% of the total issued and outstanding
shares of the Association.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS, OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE
SHARES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF INVESTMENT.
SUMMARY OF PROPOSALS
At the Annual Meeting, in addition to the election of directors,
shareholders of the Association are being asked to approve the Agreement and
Plan of Reorganization providing for the establishment of an interim stock
holding company and to ratify the appointment of McGladrey and Pullen, LLP as
independent auditors for the fiscal year ending September 30, 1999. These
proposals and the potential effects on the shareholders of the Association are
summarized below.
1
<PAGE>
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. The reorganization
into the two-tier mutual holding company structure (the "Reorganization") will
be accomplished under the Plan of Reorganization, which was unanimously approved
by the Board of Directors on November 16, 1998. Pursuant to the Plan of
Reorganization, the Association will become a wholly owned subsidiary of Wake
Forest Bancshares, Inc. (the "Stock Holding Company"), a newly formed stock
corporation which will be majority owned by the MHC. In the Reorganization, each
outstanding share of the Association's Common Stock will be converted into one
share of common stock, par value $.01 per share, of the Stock Holding Company
("Holding Company Common Stock") and the holders of the Association's Common
Stock will become the holders of all of the outstanding Holding Company Common
Stock. Accordingly, as a result of the Reorganization, the Association's
Minority Shareholders (as defined below) will become minority shareholders of
the Stock Holding Company and the balance of the issued and outstanding shares
of the Stock Holding Company will be owned by the MHC. The Stock Holding Company
will be incorporated solely for the purpose of becoming a savings and loan
holding company and has no prior operating history. The Reorganization will have
no impact on the operations of the Association or the MHC. The Association will
continue its operations at the same locations, with the same management, and
subject to all the rights, obligations and liabilities of the Association
existing immediately prior to the Reorganization.
The Board of Directors of the Association believes that the formation
of the Stock Holding Company as a subsidiary of the MHC will be in the best
interests of shareholders and will offer greater operating flexibility than is
currently available to the Association in its existing mutual holding company
structure. More specifically, the Board of Directors of the Association believes
that the formation of the Stock Holding Company will provide the Association
with an enhanced ability to invest in other financial institutions or business
enterprises, facilitate mergers and acquisitions and provide the ability to
engage in stock repurchases. See "Proposal 2 - Agreement and Plan of
Reorganization - Reasons for and Risks of the Reorganization."
As a result of the Reorganization, holders of the Association's Common
Stock, whose rights are presently governed by federal law and the OTS's Rules
and Regulations as well as by the Charter and Bylaws of the Association, will
become shareholders of the Stock Holding Company, a federally chartered
corporation. Accordingly, their rights will also be governed by federal law and
the OTS's Rules and Regulations, as well as by the Charter and Bylaws of the
Stock Holding Company, and any conditions set forth in the OTS order approving
the Reorganization. See "Proposal 2 - Agreement and Plan of Reorganization - OTS
Policy and the Notice of Proposed Rulemaking." Management believes that the
Stock Holding Company will generally be subject to the same corporate governance
regulations as those to which the Association is subject.
A number of provisions in the Charter and Bylaws of the Association and
the Stock Holding Company deal with matters of corporate governance and certain
rights of shareholders. Provisions in the Stock Holding Company's Charter and
Bylaws relating to the calling of a special meeting of shareholders, nomination
of directors and new business provisions, removal of directors, cumulative
voting for the election of directors, staggered directors' terms, the amendment
of the Stock Holding Company's Charter and Bylaws, and certain statutory
provisions relating to stock ownership and transfer, may make it difficult for
shareholders to influence the Stock Holding Company or the Association or
replace all of incumbent management even if the MHC is no longer in existence.
In addition, certain provisions of the Charter and Bylaws of the Association and
the Stock Holding Company that are not identical and certain other statutory and
regulatory provisions might be deemed to have potential antitakeover effects. A
vote in favor of the Agreement and Plan of Reorganization also includes a vote
in favor of the Charter and Bylaws of the Stock
2
<PAGE>
Holding Company which include certain anti-takeover provisions. For a summary of
these provisions and their potential effects on shareholders, see "Proposal 2 -
Agreement and Plan of Reorganization - Comparison of Shareholder Rights and
Certain Anti-Takeover Provisions."
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. The Board of
Directors has appointed the firm of McGladrey & Pullen, LLP to act as
independent auditors for the Association for the fiscal year ending September
30, 1999, subject to ratification by the Association's shareholders. A
representative of McGladrey & Pullen, LLP is expected to be present at the
Annual Meeting and will be given an opportunity to make a statement if he or she
desires to do so and will be available to respond to appropriate questions. No
determination has been made as to what action the Board of Directors would take
if the shareholders do not ratify the appointment. See "Proposal 3 -
Ratification of Appointment of Independent Auditors."
AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION, TO DIRECT
THE VOTE UPON OTHER MATTERS. The Board of Directors is not aware of any other
business that may properly come before the Annual Meeting. The Board seeks the
authorization of the shareholders of the Association, in the event matters
properly come before the meeting, including, but not limited to, the
consideration of whether to adjourn the Annual Meeting once called to order and
to direct the manner in which those shares represented at the Annual Meeting by
proxies solicited pursuant to this Proxy Statement/Prospectus shall be voted. A
vote in favor of proposal 4 is a vote to allow the directors of the Association
to adjourn the Annual Meeting in order to solicit additional shareholder votes
in favor of these proposals, or for other reasons. As to all such matters, the
Board intends that it would direct the voting of such shares in the manner
determined by the Board, in its discretion, and in the exercise of its duties
and responsibilities, to be in the best interests of the Association and its
shareholders, taken as a whole.
RECORD DATE AND VOTING RIGHTS
The Board of Directors of the Association has fixed the close of
business on December 29, 1998 as the record date for the determination of the
Association's shareholders entitled to notice of and to vote at the Annual
Meeting. Accordingly, only holders of record of shares of Common Stock at the
close of business on such date will be entitled to vote at the Annual Meeting.
On the Record Date, there were 1,215,862 shares of Common Stock issued and
outstanding, of which 580,862 shares of Common Stock were held by persons other
than the MHC (the "Minority Shareholders"). The presence, in person or by proxy,
of the holders of at least a majority of the total number of outstanding shares
of Common Stock entitled to vote at the Annual Meeting is necessary to
constitute a quorum thereat.
Each holder of shares of Common Stock outstanding on the Record Date
will be entitled to one vote for each share held of record (other than Excess
Shares as defined below) at the Annual Meeting and at any adjournment or
postponement thereof. As provided in the Association's Federal Stock Charter,
record holders of Common Stock who beneficially own in excess of 10% of the
outstanding shares of Common Stock ("Excess Shares") shall not be entitled to
vote Excess Shares. A person or entity is deemed to beneficially own shares
owned by an affiliate or associate as well as by persons acting in concert with
such person or entity.
All properly executed proxies received by the Association will be voted
in accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE
GIVEN, EXECUTED PROXIES WILL BE VOTED FOR ELECTION OF EACH OF THE TWO NOMINEES
FOR DIRECTOR, AND FOR EACH OTHER PROPOSAL IDENTIFIED IN THE NOTICE OF THE 1999
ANNUAL MEETING OF SHAREHOLDERS. Management is not aware of any matters other
than those set forth
3
<PAGE>
in the Notice of the 1999 Annual Meeting of Shareholders that may be brought
before the Annual Meeting. If any other matters properly come before the Annual
Meeting, the persons named in the accompanying proxy card will vote the shares
represented by all properly executed proxies on such matters in such manner as
shall be determined by a majority of the Board of Directors of the Association.
IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN
NAME, YOU WILL NEED APPROPRIATE DOCUMENTATION FROM YOUR SHAREHOLDER OF RECORD TO
VOTE PERSONALLY AT THE ANNUAL MEETING. Examples of such documentation would
include a broker's statement, letter or other document that will confirm your
ownership of shares of the Association.
VOTE REQUIRED
Directors are elected by a plurality of the votes cast with a quorum
present. The affirmative vote of the holders of a majority of the total
outstanding shares of Common Stock is required for the approval of the Agreement
and Plan of Reorganization providing for the establishment of Wake Forest
Bancshares, Inc. as a stock holding company parent of the Association ("Plan of
Reorganization"). The affirmative vote of the holders of a majority of the total
votes present in person or by proxy at the Annual Meeting is required to ratify
the appointment of the independent auditors. See "--Voted Required" set forth in
the discussion of each proposal.
VOTE BY MHC
As indicated above and under "Security Ownership of Certain Beneficial
Owners and Management," the MHC owns approximately 52% of the shares of Common
Stock entitled to vote at the Annual Meeting. The MHC has indicated to the
Association that it intends to vote such shares of Common Stock FOR the election
of the Association's nominees for director, FOR the approval of the Plan of
Reorganization and FOR the ratification of the appointment of the independent
auditors thereby ensuring a quorum at the Annual Meeting, and the likelihood of
the election of such nominees, the approval of the Plan of Reorganization and
the ratification of the appointment of the independent auditors.
REVOCABILITY OF PROXIES
A proxy may be revoked at any time before it is voted by filing a
written revocation of the proxy with the Secretary of the Association or by
submitting a duly executed proxy bearing a later date. A proxy also may be
revoked by attending and voting at the Annual Meeting or any adjournment or
postponement thereof, if a written revocation is filed with the Secretary of the
Annual Meeting prior to the voting of such proxy.
SOLICITATION OF PROXIES
The Association will bear the costs of soliciting proxies from its
shareholders. In addition to the use of mail, proxies may be solicited by
officers, directors or employees of the Association, by telephone or through
other forms of communication. The Association will also request persons, firms
and corporations holding shares in their names or in the name of their nominees,
which are beneficially owned by others, to send proxy materials to and obtain
proxies from such beneficial owners, and will reimburse such holders for
reasonable expenses incurred in connection therewith.
4
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS OF THE ASSOCIATION
The following table sets forth, as of December 29, 1998, the record
date ("Record Date") certain information as to Common Stock beneficially owned
by persons owning in excess of 5% of the outstanding shares of Common Stock of
the Association. Management knows of no person, except as listed below, who
beneficially owned more than 5% of the Association's outstanding shares of
Common Stock as of the Record Date. Except as otherwise indicated, the
information provided in the following table was obtained from filings with the
Office of Thrift Supervision (the "OTS") and with the Association pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Addresses
provided are those listed in the filings as the address of the person authorized
to receive notices and communications. For purposes of the table below and the
table set forth under "Security Ownership of Management," in accordance with
Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial
owner, for purposes of this table, of any shares of Common Stock (1) over which
he has or shares, directly or indirectly, voting or investment power, or (2) of
which he has the right to acquire beneficial ownership at any time within 60
days after the Record Date. As used herein, "voting power" is the power to vote
or direct the voting of shares and "investment power" includes the power to
dispose or direct the disposition of such shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT
-------------------- -------------------- --------------------
<S> <C> <C>
Wake Forest Bancorp, M.H.C. 635,000 52.2%
302 S. Brooks Street, P.O. Box 707
Wake Forest, North Carolina 27588-0707
</TABLE>
5
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares
of Common Stock beneficially owned by each director of the Association, by each
named executive officer of the Association identified in the Summary
Compensation Table included elsewhere herein, and all directors and executive
officers of the Association as a group as of the Record Date. Except as
otherwise indicated, each person and each group shown in the table has sole
voting and investment power with respect to the shares of Common Stock
indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
POSITION WITH OF BENEFICIAL COMMON STOCK
NAME THE ASSOCIATION OWNERSHIP(1)(2) OUTSTANDING
--------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Anna O. Sumerlin Director, President and Chief 23,034(3) 1.89%
Executive Officer
Paul K. Brixhoff Director 6,308(4) *
John D. Lyon Director 15,103(5) 1.24%
Harold R. Washington Director 2,808(6 *
R.W. Wilkinson, III Director and Vice-Chairman 5,808(7) *
William S. Wooten Director 1,325 *
Howard L. Brown Director, Chairman of 6,308(8) *
the Board
Leelan A. Woodlief Director 4,308(9) *
Rodney M. Privette Director 100 *
All directors and executive officers as a group (10) persons 91,592 7.53%
</TABLE>
- ---------------------
* Less than one percent.
(1) See "Principal Shareholders of the Association" for a definition of
"beneficial ownership." All persons shown in the above table have sole
voting and investment power, except as otherwise indicated.
(2) The figures shown for Ms. Sumerlin do not include 26,490 shares held in
trust pursuant to the Employee Stock Ownership Plan of Wake Forest Federal
Savings & Loan Association ("ESOP") that have not been allocated to any
individual's account and as to which Ms. Sumerlin shares voting power with
other ESOP participants and the Association's Compensation Committee
(consisting of Messrs. Woodlief, Brown and Wilkinson (the "ESOP
Committee"). The figure shown for all directors and executive officers as a
group includes such 26,490 shares as to which the members of the ESOP
Committee may be deemed to have sole investment power, except in limited
circumstances, thereby causing each Committee member to be deemed a
beneficial owner of such shares. Each of the members of the ESOP Committee
disclaims beneficial ownership of such shares and, accordingly, such shares
are not attributed to the members of the ESOP Committee individually. See
"Compensation of Directors and Executive Officers-- Benefits-- Employee
Stock Ownership Plan and Trust." (3) Includes 8,495 shares as to which Ms.
Sumerlin may be deemed to share voting and investment power; includes
options to purchase 5,400 shares of Common Stock at $12.75 per share option
plan granted under the Wake Forest Savings & Loan Association 1997 Stock
Option Plan ("Option Plan"); includes 2,226 shares of Common Stock granted
under the Wake Forest Savings & Loan Association 1997 Recognition and
Retention Plan ("RRP"); includes 4,782 shares of Common Stock allocated to
Ms. Sumerlin under the ESOP as to which she has voting power, but no
investment power except in limited circumstances; includes 2,181 shares of
Common Stock held in Ms. Sumerlin's IRA account.
(4) Includes options to purchase 926 shares of Common Stock at $12.75 per share
option plan granted under the Wake Forest Savings & Loan Association 1997
Stock Option Plan ("Option Plan") and 382 shares of Common Stock granted
under the RRP.
(footnotes continued on following page)
6
<PAGE>
(5) Includes 7,095 shares as to which Mr. Lyon may be deemed to share voting
and investment power; includes options to purchase 926 shares of Common
Stock at $12.75 per share granted under the Option Plan and 382 shares of
Common Stock granted under the RRP.
(6) Includes options to purchase 926 shares of Common Stock at $12.75 per share
granted under the Option Plan and 382 shares of Common Stock granted under
the RRP. (7) Includes 900 shares as to which Mr. Wilkinson may be deemed to
share voting and investment power; includes options to purchase 926 shares
of Common Stock at $12.75 per share granted under the Option Plan and 382
shares of Common Stock granted under the RRP.
(8) Includes options to purchase 926 shares of Common Stock at $12.75 per share
granted under the Option Plan and 382 shares of Common Stock granted under
the RRP. (9) Includes options to purchase 926 shares of Common Stock at
$12.75 per share granted under the Option Plan and 382 shares of Common
Stock granted under the RRP.
MARKET FOR THE COMMON STOCK
The Association had 1,215,862 shares of common stock outstanding at the Record
Date, of which 539,662 shares were held by 252 holders of record. The MHC and
ESOP hold the remaining 676,200 shares There is no established market for the
Association's common stock, excluding occasional quotations, although the
Association's common stock is quoted on the OTC Electronic Bulletin Board under
the symbol "WAKE." The table below reflects the stock trading and dividend
payment frequency of the Association for the years ended September 30, 1998 and
1997. Stock prices reflect bid prices between broker-dealers, prior to any
markups, markdowns or commissions, is based upon information provided to
management of the Association by certain securities firms effecting transactions
in the Association's stock on an ongoing basis, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
STOCK PRICE
---------------------------------------------
QUARTER ENDED DIVIDENDS HIGH LOW
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1998................... $0.12 $21 1/2 $13
June 30, 1998........................ 0.12 23 1/4 18
March 31, 1998....................... 0.12 23 1/2 20 5/8
December 31, 1997.................... 0.10 23 1/2 19 1/4
September 30, 1997................... 0.10 20 14 3/8
June 30, 1997........................ 0.10 15 13 1/2
March 31, 1997....................... 0.08 14 1/4 12 3/4
December 31, 1996.................... 0.07 14 12 1/2
</TABLE>
DIVIDEND POLICY
The Association has paid quarterly cash dividends every quarter since the
completion of the MHC Reorganization and minority stock offering in April 1996.
It is the intention of the Stock Holding Company to continue to pay cash
dividends. Dividends paid by the Stock Holding Company will be determined by the
Stock Holding Company's Board of Directors and will be based upon its
consolidated financial condition, results of operations, tax considerations,
economic conditions, regulatory restrictions which affect the payment of
dividends by the Association to the Stock Holding Company, and other factors.
There can be no assurance that dividends will be paid on the Common Stock or
that, if paid, such dividends will not be reduced or eliminated in the future.
See "Proposal 2 -- Approval of the Agreement and Plan of Reorganization --
Comparison of Shareholder Rights and Certain Anti-Takeover Provisions -- Payment
of
7
<PAGE>
Dividends" for information regarding regulatory restrictions on the
Association's ability to pay dividends or make cash contributions to the Stock
Holding Company.
The MHC may elect to waive the right to receive all dividends paid by the
Association, OTS regulations require the MHC to notify the OTS of any proposed
waiver of the right to receive dividends, and the right to waive any such
dividend is subject to non-objection by the OTS. The MHC has not waived the
right to receive any dividends paid by the Association thus far, although it
determines whether to do so on a quarterly basis and may elect to waive
dividends in the future.
--------------------------------------
PROPOSAL 1
ELECTION OF DIRECTORS
--------------------------------------
GENERAL
The Federal Stock Charter and Bylaws of the Association provide for the
election of directors by the shareholders. For this purpose, the Board of
Directors of the Association is divided into three classes, as nearly equal in
number as possible. The terms of office of the members of one class expire, and
a successor class is to be elected, at each annual meeting of shareholders.
There are currently nine directors of the Association.
The terms of two directors expire at the Annual Meeting. Each of the
two incumbent directors, R. W. Wilkinson, III and Howard L. Brown has been
nominated by the Nominating Committee of the Board of Directors to be re-elected
at the Annual Meeting for a three-year term expiring at the annual meeting of
shareholders to be held in 2002, or when their successors are otherwise duly
elected and qualified. The terms of the remaining two classes of directors
expire at the annual meetings of shareholders to be held in 2000 and 2001,
respectively, or when their successors are otherwise duly elected and qualified.
Each nominee has consented to being named in this Proxy Statement and to serve
if elected.
In the event that any nominee for election as a director at the Annual
Meeting is unable or declines to serve, which the Board of Directors has no
reason to expect, the persons named in the Proxy Card will vote with respect to
a substitute nominee designated by the present Board of Directors.
VOTE REQUIRED
Directors are elected by a plurality of the votes cast in person or by
proxy at the Annual Meeting. The holders of Common Stock may not vote their
shares cumulatively for the election of directors. Shares underlying broker
non-votes will not be counted as having been voted in person or by proxy and
will have no effect on the election of directors. The MHC intends to vote for
the election of the Association's nominees for director thereby ensuring a
quorum and the likelihood of the election of such nominees.
INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS
The following table sets forth certain information with respect to each
nominee for election as a director and each director whose term does not expire
at the Annual Meeting ("Continuing Director"). There are no arrangements or
understandings between the Association and any director or nominee pursuant to
8
<PAGE>
which such person was elected or nominated to be a director of the Association.
For information with respect to security ownership of directors, see "Security
Ownership of Certain Beneficial Owners and Management -- Security Ownership of
Management."
<TABLE>
<CAPTION>
DIRECTOR TERM POSITION(S) HELD WITH THE
NOMINEES AGE(1) SINCE EXPIRES ASSOCIATION
- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Howard L. Brown............... 71 1986 1999 Director and Chairman
of the Board
R.W. Wilkinson, III........... 70 1992 1999 Director and Vice-
Chairman
CONTINUING DIRECTORS
- --------------------
Anna O. Sumerlin.............. 52 1993 2000 Director, President and
Chief Executive Officer
Paul K. Brixhoff.............. 77 1970 2000 Director
Harold R. Washington.......... 73 1969 2000 Director
Leelan A. Woodlief............ 72 1988 2001 Director
John D. Lyon.................. 61 1988 2001 Director
William S. Wooten............. 41 1997 2001 Director
Rodney M. Privette............ 43 1997 2001 Director
</TABLE>
- ---------------------
(1) As of the Record Date.
The principal occupation and business experience of each nominee for
election as director and each Continuing Director are set forth below. Unless
otherwise indicated, each of the following persons has held his present position
for the last five years.
NOMINEES FOR ELECTION AS DIRECTOR
HOWARD L. BROWN has served as Chairman of the Board of Directors since
1996 and as a Director of the Association since 1986. He served as Vice Chairman
of the Board of Directors from 1992 to 1996. Mr. Brown is the former owner of an
oil distribution company and has been retired since 1988.
R.W. WILKINSON, III has served as a Director of the Association since
1992. From 1979 to 1988, he served as Managing Officer, Executive Vice President
and Corporate Secretary-Treasurer and from 1963 to 1979, Mr. Wilkinson served as
Assistant Manager of the Association. Mr. Wilkinson was elected Vice-Chairman
of the Board of Directors of the Association in 1997.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" THE NOMINEES FOR ELECTION AS DIRECTORS.
CONTINUING DIRECTORS
ANNA O. SUMERLIN has served as the Association's President and Chief
Executive Officer since 1995. Prior to that, Ms. Sumerlin served as the Managing
Officer, Executive Vice President, Corporate Secretary
9
<PAGE>
and Treasurer from 1988 to 1995 and as the Assistant Manager and Assistant
Secretary-Treasurer beginning in 1979. She was elected to the Board of Directors
in 1993.
PAUL K. BRIXHOFF has served as a Director of the Association since
1970. He retired from the automotive parts supply business in 1982.
HAROLD R. WASHINGTON has served as a Director of the Association since
1969. He is the former owner of an automobile distributorship and retired in
1980.
JOHN D. LYON has served as a Director of the Association since 1988. He
has owned an independent, state-certified appraisal company for the past four
years and has owned and managed a real estate portfolio for over 26 years. Mr.
Lyon also has close to 31 years of retail management experience.
WILLIAM S. WOOTEN has served as a director of the Association since
1997. He has operated a successful dental practice in Wake Forest, North
Carolina since 1982. Mr. Wooten is a life-long resident of Wake Forest, North
Carolina.
RODNEY M. PRIVETTE is President and a general agent of Privette
Insurance Company in Rolesville, North Carolina. Mr. Privette specializes in
life insurance, retirement planning and property and casualty insurance and has
over 22 years experience in this field. Mr. Privette has served on the
Rolesville Fire Department since 1975 and as Fire Chief since 1992.
LEELAN A. WOODLIEF has served as a Director of the Association since
1988. He is in retail management and is semi-retired from Woodlief Supply
Company, a farming supply store, and has over 48 years experience in the
agriculture and insurance businesses.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF THE ASSOCIATION
The Board of Directors meets on a monthly basis and may have additional
special meetings upon the request of the Chairman of the Board. During the
fiscal year ended September 30, 1998 the Board of Directors met 12 times. No
current director attended fewer than 75% of the total number of Board meetings
and committee meetings of which such director was a member.
The Board of Directors of the Association has established the following
committees:
The Nominating Committee for fiscal year 1998 was chaired by Director
Wilkinson, with Directors Washington and Sumerlin as members. Membership changes
annually. This committee nominates candidates for Board membership. The
Nominating Committee met once in fiscal 1998. In accordance with the
Association's Bylaws, no nominations for election as director, except those made
by the Nominating Committee, shall be voted upon at the Annual Meeting unless
properly made by a shareholder in accordance with the procedures set forth below
under "Additional Information -- Notice of Business to be Conducted at Annual
Meeting."
The Compensation Committee is chaired by Director Woodlief, with
Directors Brown and Wilkinson as members. This committee establishes the
compensation of the Chief Executive Officer, approves the compensation of other
officers and determines compensation and benefits to be paid to employees of the
Association. It also sets directors' fees and bonuses. The committee met seven
times in 1998 as requested
10
<PAGE>
by the Board of Directors. The Compensation Committee met twice in fiscal 1998.
The Compensation Committee also acts as the ESOP Committee, and meets to review
the Association's ESOP. The Compensation Committee is currently acting as the
Option Plan Committee and the RRP Committee. Each member of the Compensation
Committee is a "Disinterested Director" within the meaning of Section 162(m) of
the Internal Revenue Code of 1986 (the "Code") and Rule 16b-3 promulgated under
the Exchange Act.
EXECUTIVE OFFICERS
The following individuals are executive officers of the Association and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
POSITION HELD WITH THE
NAME AGE ASSOCIATION
- ---- ----- -----------
<S> <C> <C>
Anna O. Sumerlin 52 President and Chief
Executive Officer
Carlton E. Chappell 67 Vice President, Secretary
and Treasurer
Robert C. White 42 Chief Financial Officer,
Vice President
</TABLE>
The executive officers of the Association are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, or removal by the Board of Directors. The Association
has entered into Employment Agreements with certain of its executive officers
which set forth the terms of their employment. See "Compensation of Directors
and Executive Officers -- Employment Agreements."
Biographical information of the executive officers of the Association
who are not directors is set forth below.
CARLTON E. CHAPPELL has served as the Association's Vice President,
Secretary and Treasurer since 1996 and as the Association's Senior Vice
President since 1988. Prior to 1988, Mr. Chappell served as a Director of the
Association for 15 years. Mr. Chappell has over 36 years of business sales
experience.
ROBERT C. WHITE began employment with the Association on December 1,
1998 as Chief Financial Officer and Vice President. Prior to joining the
Association, Mr. White served as CFO and Senior Vice President of United Federal
Savings Bank in Rocky Mount, N.C. from April, 1997 to September, 1998. In
September of 1998, United Federal was acquired in a merger transaction. Prior to
his employment with United Federal, Mr. White was a partner in the CPA firm of
McGladrey & Pullen, LLP in Raleigh, N.C. He was with the CPA firm for nineteen
years and was in charge of the local office's financial institutions practice.
11
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. Currently, each non-employee director of the
Association receives a fee of $500 per meeting attended except for the Chairman
who receives $600 per meeting attended. Directors are not compensated for
attending committee meetings. In addition, each non-employee director who has
attended a minimum of 75% of the aggregate number of Association Board meetings
and meetings of Association Board committees of which he is a member called
during the respective calendar year, will receive an annual retainer fee of
$2,500, payable in December. The aggregate amount of fees paid to such directors
by the Association for the year ended September 30, 1998, was approximately
$43,540. Directors are also covered by the Option Plan and RRP. See "--
Benefits--Stock Option Plan," and "-- Recognition and Retention Plan."
DIRECTORS' RETIREMENT PLAN. The Association has adopted a nonqualified
Retirement Plan for Board Members of the Association (the "Directors' Retirement
Plan"), which will provide benefits to each eligible outside director commencing
on his termination of Board service at or after age 65. Each outside director
who serves or has agreed to serve as an outside director automatically becomes a
participant in the Directors' Retirement Plan. An eligible outside director
retiring at or after age 65 will be paid an annual retirement benefit equal to
the lesser of the amount of the aggregate compensation for services as a
director (excluding stock compensation) paid to him for the 12-month period
immediately prior to his termination of Board service or $5,000, multiplied by a
fraction, the numerator of which is the number of his years of service as an
outside director (including service as a director or trustee of the Association
or any predecessor) and the denominator of which is 10. An individual who
terminates Board service after having served as an outside director for 10 years
may elect to begin collecting benefits under the Directors' Retirement Plan at
or after attainment of age 50, but the annual retirement benefits payable to him
will be reduced pursuant to the Directors' Retirement Plan's early retirement
reduction formula to reflect the commencement of benefit payments prior to age
65. Benefits are paid for a fixed period of 10 years. Upon a change in control,
participants will receive an immediate lump sum distribution of their benefit.
OTHER ARRANGEMENTS. Mr. Lyon's state-certified independent appraisal
company is one of the appraisers designated by the Association to perform
appraisals. A fee of $300 per appraisal is charged to the borrower. In fiscal
year 1998, Mr. Lyon's appraisal company received $26,850 in appraisal fees.
12
<PAGE>
EXECUTIVE COMPENSATION
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Association for services rendered in all capacities during the
fiscal years ended September 30, 1998, 1997 and 1996, to the President and Chief
Executive Officer of the Association. No other executive officer of the
Association had salary and bonus during the fiscal year ended September 30, 1998
aggregating in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
---------------------- ------ -------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
SALARY COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR ($)(1) BONUS($) ($)(2) ($)(3) (#) ($) ($)(4)
- --------------------------------- ---- ------ -------- ------------ ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anna O. Sumerlin, President and Chief 1998 85,000 50,000 -- -- -- -- 21,072
Executive Officer 1997 79,000 40,000 -- 70,915 13,500 -- 34,535
1996 75,000 30,000 -- -- -- -- 18,341
</TABLE>
- -------------
(1) Includes amounts, if any, deferred pursuant to Section 401(k) of the Code
under the Association's 401(k) Plan.
(2) For 1998, 1997 and 1996, there were no: (a) perquisites with an aggregate
value for any named individual in excess of the lesser of $50,000 or 10% of
the total of the individual's salary and bonus for the year; (b) payments
of above-market preferential earnings on deferred compensation; (c)
payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock.
(3) Pursuant to the RRP, Ms. Sumerlin was awarded 5,562 shares of restricted
stock effective as of January 22, 1997, which vests in five annual
installments commencing January 22, 1998. Dividends attributable to such
shares will be distributed with such shares when they become vested. The
dollar amount shown in the table for 1997 is based on the fair market value
of the shares on January 22, 1997. No additional grants of restricted stock
were made to Ms. Sumerlin during the fiscal year ended September 30, 1998.
(4) Includes (i) the dollar value of premiums, if any, paid by the Association
with respect to term life insurance (other than group term insurance
coverage under a plan available to substantially all salaried employees)
for the benefit of the executive officer and (ii) the fair market value of
1,756, 1,716 and 1,310 shares allocated to the executive officer under the
ESOP on December 31, 1998, 1997 and 1996, respectively, based on a closing
price of $12.00, $20.125 and $14.00, on December 31, 1998, 1997, and 1996,
respectively. See "--Benefits--Employee Stock Ownership Plan and Trust."
EMPLOYMENT AGREEMENTS
The Association is a party to an Employment Agreement with each of Ms.
Sumerlin and Mr. Chappell ("Senior Executive(s)"). These Employment
Agreements establish the respective duties and compensation of the Senior
Executives and are intended to ensure that the Association will be able to
maintain a stable and competent management base. The continued success of
the Association depends to a significant degree on the skills and
competence of the Senior Executives.
The Employment Agreements provide for three-year terms. The Employment
Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors may,
with the Senior Executive's concurrence, extend the Employment Agreements
for an additional year, so that the remaining terms shall be three years,
after conducting a performance evaluation of the Senior Executive. The
Employment Agreements provide that the Senior Executive's base salary will
be reviewed annually. It is anticipated that this review will be performed
by the Compensation Committee of the Board and the Senior Executive's base
salary may be increased on the basis of her or his job performance and the
overall performance of the Association. The base salaries for Ms. Sumerlin
and Mr. Chappell, as of September 30, 1998 were $85,000 and $59,000,
respectively. Each Senior Executive may
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<PAGE>
receive a bonus based upon achievement of prescribed performance criteria. In
addition to base salary, the Employment Agreements provide for, among other
things, entitlement to participation in stock, retirement and welfare benefit
plans and eligibility for fringe benefits applicable to executive personnel such
as fees for club and organization memberships deemed appropriate by the
Association and the Senior Executive. The Employment Agreements provide for
termination by the Association at any time for cause as defined in the
Employment Agreements. In the event the Association chooses to terminate the
Senior Executive's employment for reasons other than for cause, or in the event
of the Senior Executive's resignation from the Association upon: (i) failure to
re-appoint, elect or re-elect the Senior Executive to her or his current
offices; (ii) a material change in the Senior Executive's functions, duties or
responsibilities; (iii) a relocation of the Senior Executive's principal place
of employment outside Wake County without the Senior Executive's consent; (iv)
liquidation or dissolution of the Association; (v) a change of control; or (vi)
a breach of the Employment Agreement by the Association, the Senior Executive
or, in the event of death, her or his beneficiary is entitled to a lump sum cash
payment in an amount equal to the base salary and bonus payments, and the
additional contributions or benefits under any employee benefit plans of the
Association or the MHC that the Senior Executive would have earned during the
remaining terms of the Employment Agreements. The Association would also
continue the Senior Executive's life, health and disability insurance coverage
for the remaining terms of the Employment Agreements.
The Association's Employment Agreements restrict the dollar amount of
compensation and benefits payable to a Senior Executive in the event of
termination following a "change in control" to three times the Senior
Executive's average annual compensation for the previous five calendar years. In
general, for purposes of the Employment Agreements and the plans maintained by
the Association, a "change in control" will generally be deemed to occur when a
person or group of persons acting in concert acquires beneficial ownership of
25% or more of any class of equity security, such as Common Stock of the
Association, or in the event of a tender offer, exchange offer, merger or other
form of business combination, sale of assets or contested election of directors
which results in a change in control of the majority of the Board of Directors
of the Association. The Senior Executives are entitled to reimbursement of
certain costs incurred in negotiating, interpreting or enforcing the Employment
Agreements. Each Employment Agreement also provides for the Association to
indemnify the Senior Executive to the fullest extent allowable under federal
law.
Cash and benefits paid to a Senior Executive under the Employment
Agreements together with payments under other benefit plans following a "change
in control" of the Association may constitute an "excess parachute" payment
under Section 280G of the Code, resulting in the imposition of a 20% excise tax
on the recipient and the denial of the deduction for such excess amounts to the
Association.
BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Association has
established and adopted, for the benefit of eligible employees, an ESOP and
related trust. All salaried employees of the Association are eligible to become
participants in the ESOP. The ESOP purchased 41,200 shares of Common Stock
issued in connection with the Reorganization and Offering. In order to fund the
ESOP's purchase of such Common Stock, the ESOP borrowed funds from an
unaffiliated lender equal to the balance of the aggregate purchase price of the
Common Stock. Although contributions to the ESOP are discretionary, the
Association intends to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirement on the debt.
This loan is for a term of seven years, bears interest at the prime rate, and
calls for
14
<PAGE>
level annual payments of principal plus accrued interest designed to amortize
the loan over its term. Prepayments are also permitted. The loan due from the
ESOP is reflected on the Company's balance sheet.
Shares purchased by the ESOP were pledged as collateral for the loan,
and are held in a suspense account until released for allocation among
participants in the ESOP as the loan is repaid. The pledged shares will be
released annually from the suspense account in an amount proportional to the
repayment of the ESOP loan for each plan year. The released shares will be
allocated among the accounts of participants on the basis of the participant's
compensation for the year of allocation. Benefits generally become 100% vested
after three years of service; prior to such time, benefits are 0% vested.
Participants also become immediately vested upon termination of employment due
to death, retirement at age 65, permanent disability or upon the occurrence of a
change in control. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Vested benefits may be paid
in a single sum or installment payments and are payable upon death, retirement
at age 65, disability or separation from service.
The ESOP Committee, which is currently comprised of members of the
Compensation Committee, may instruct the trustee regarding investment of funds
contributed to the ESOP. The ESOP trustee, subject to its fiduciary duty, must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Under the ESOP, unallocated shares will be voted
in a manner calculated to most accurately reflect the instructions it has
received from participants regarding the allocated stock as long as such vote is
in accordance with the provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). The ESOP may purchase additional shares of Common
Stock in the future.
STOCK OPTION PLAN. The Wake Forest Federal Savings & Loan Association
1997 Stock Option Plan ("Option Plan") was adopted by the Association and
approved by its shareholders at the 1997 Annual Meeting. The Association
reserved 54,000 shares of Common Stock ("Option Shares") for issuance upon the
exercise of options and, as of the Record Date, options have been granted to
eligible executives and directors with respect to such Option Shares. Option
Shares may be authorized and unissued shares or shares previously issued and
reacquired by the Association. Any Option Shares subject to grants under the
Option Plan which expire or are terminated, forfeited or canceled without having
been exercised or vested in full, shall again be available for purposes of the
Option Plan.
Any employee of the Association or any affiliate approved by the Board
who is selected by the Option Committee is eligible to participate in the Option
Plan as an "Eligible Individual." As of the Record Date, there were nine
Eligible Individuals. Members of the Board of Directors of the Association or
any affiliate approved by the Board who are not employees or officers of the
Association or such affiliate are eligible to participate as an "Eligible
Director." As of the Record Date, there were eight Eligible Directors.
The Option Plan provides for the grant of options which qualify for
favorable federal income tax treatment as "incentive stock options" ("ISOs"),
and non-qualified stock options which do not so qualify ("NQSOs"). ISOs are
subject to certain restrictions under the Code. In general, options granted
under the Plan will be exercisable for a period of ten years after the date of
grant (or for a shorter period ending three months after the option holder's
termination of employment for reasons other than death, disability or retirement
or discharge for cause, one year after termination of service due to death,
disability or retirement, or immediately upon termination for cause). In no
event may an option be granted with an exercise price per share that is less
than fair market value of a share of Common Stock when the option is granted.
The Option Plan provides for an option holder's right to exercise his option
grant to be suspended during any period when the option holder is the subject of
a pending proceeding to terminate his or her employment for cause. If an
15
<PAGE>
option expires during such suspension, the Association will, upon the employee's
reinstatement, pay damages equal to the value of the expired Options less the
exercise price.
Upon the exercise of an option, the exercise price must be paid in
full. Payment may be made in cash or in such other consideration as the Option
Committee deems appropriate, including, but not limited to, Common Stock already
owned by the option holder or Option Shares to be acquired by the option holder
upon exercise of the option.
STOCK OPTIONS
The following table provides certain information with respect to the
number of shares of Common Stock represented by outstanding options held by the
Named Executive Officers as of September 30, 1998. Also reported are the values
for "in-the-money" options which represent the positive spread between the
exercise price of any such existing stock options and the year-end price of the
Common Stock, which was $13.00 per share.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT FISCAL
AT FISCAL YEAR END (#) YEAR END ($)(1)
------------------------ ----------------
SHARES ACQUIRED VALUE
ON EXERCISE REALIZED
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anna O. Sumerlin -- -- 2,700/10,800 675/2,700
</TABLE>
- ---------------
(1) Ms. Sumerlin has 13,500 options exercisable at $12.75 per share. As of
September 30, 1998, the closing price of the Common Stock as reported on the
OTC Bulletin Board was $13.00. Ms. Sumerlin did not exercise any of her
options during the fiscal year ended September 30, 1998.
RECOGNITION AND RETENTION PLAN. The Wake Forest Federal Savings & Loan
Association 1997 Recognition and Retention Plan was adopted by the Association
and approved by its shareholders at the 1997 Annual Meeting. The Association has
established a trust ("Trust") to purchase up to 22,248 shares of the
Association's Common Stock which may be used for awards granted under the RRP.
Any employee of the Association or any affiliate approved by the Board
who is selected by the RRP Committee is eligible to participate in the RRP as an
"Eligible Individual." As of the Record Date, there were nine Eligible
Individuals. Members of the Board of Directors of the Association or any
affiliate approved by the Board who are not employees or officers of the
Association or such affiliate are eligible to participate as an "Eligible
Director." As of the Record Date, there were eight Eligible Directors. As of the
Record Date, awards have been granted with respect to all of the share awards
under the Plan.
Stock subject to awards is held in trust pursuant to the RRP until
vested. An individual to whom an award is granted is credited with cash
dividends with respect to stock subject to Awards granted to him whether or not
vested. Awards generally vest at a rate of 20% over a five-year period. However,
any shares covered by the award will become 100% vested as of the date of the
recipient's death or disability. If an individual covered by an award ceases to
be a director, an advisory director or director emeritus for reasons other than
death or disability, the individual forfeits all rights to his unvested shares
remaining in the RRP trust. Individuals may designate a beneficiary to receive
distributions on account of death. The RRP Committee will exercise voting rights
with respect to shares in the Trust in a manner that reflects the votes
16
<PAGE>
or responses of all other shareholders and will respond to any tender offer,
exchange offer or other offer made to shareholders.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association's authority to engage in transactions with its
"affiliates" is limited by OTS regulations and by Sections 23A and 23B of the
Federal Reserve Act (the "FRA"). This authority is derived from 12 U.S.C.
ss.1468 of the Home Owners Loan Act ("HOLA"). Section 23A of the FRA limits
the aggregate amount of transactions with any individual affiliate to 10% of
the capital and surplus of the savings association and limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus.
The Association's authority to extend credit to its directors,
executive officers, and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRB and Regulation O of the FRB thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) do not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Association's capital. The Association intends that any
transactions in the future between the Association and its executive officers,
directors, holders of 10% or more of the shares of any class of its common stock
and affiliates thereof, will contain terms no less favorable to the Association
than could have been obtained by it in arm's-length negotiations with
unaffiliated persons and will be approved by a majority of independent outside
directors of the Association not having any interest in the transaction.
The Association has made loans or extended credit to its executive
officers and directors and also to certain persons related to executive officers
and directors. All such loans were made by the Association in the ordinary
course of business and were not made more favorable terms, nor did they involve
more than the normal risk of collectibility or present unfavorable features. The
outstanding principal balance of such loans to directors, executive officers and
their associates totaled $341,650, or 2.59%, of the Association's total equity
at September 30, 1998.
The appraisal firm owned by a director of the Association conducts
certain appraisals for the Association and receives fees therefor and another
director of the Association is compensated for performing construction
inspections. See "-- Directors' Compensation -- Other Arrangements."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Association's executive
officers and directors, and persons who own more than 10% of Common Stock to
file with the OTS reports of ownership and changes of ownership. Officers,
directors and greater than 10% shareholders are required by the regulations of
the OTS and the Securities Exchange Commission ("SEC") to furnish the
Association with copies of all Section 16(a) forms they file. The Association
knows of no other person other than the MHC who owns 10% or more of the
Association's Common Stock.
Mr. Lyon failed to file a Form 4 in a timely manner reporting the
purchase of 175 shares of Common Stock of the Association. This transaction has
been reported on Form 5 and Mr. Lyon is now current in his Section 16(a)
filings.
17
<PAGE>
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, the Association
believes that all other filing requirements applicable to its executive
officers, directors and greater than 10% beneficial owners were complied with,
as of September 30, 1998.
------------------------------------------------------------------
PROPOSAL 2
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------------------------------------
GENERAL
The reorganization into the "two-tier" mutual holding company structure
(the "Reorganization") will be accomplished under the Plan of Reorganization,
which was unanimously approved by the Board of Directors on November 16, 1998.
Pursuant to the Plan of Reorganization, the Association will become a wholly
owned subsidiary of Wake Forest Bancshares, Inc. (the "Stock Holding Company"),
a newly formed stock corporation which will be majority owned by Wake Forest
Bancorp, M.H.C. (the "MHC"). In the Reorganization, each outstanding share of
Association Common Stock will be converted into one share of common stock, par
value $.01 per share, of the Stock Holding Company ("Holding Company Common
Stock") and the holders of Association Common Stock will become the holders of
all of the outstanding Holding Company Common Stock. Accordingly, as a result of
the Reorganization, the Association's Minority Shareholders will become minority
shareholders of the Stock Holding Company. The Stock Holding Company was
incorporated solely for the purpose of becoming a savings and loan holding
company and has no prior operating history. The Reorganization will have no
impact on the operations of the Association or the MHC. The Association will
continue its operations at the same locations, with the same management, and
subject to all the rights, obligations and liabilities of the Association
existing immediately prior to the Reorganization. ALTHOUGH THE REORGANIZATION IS
SUBJECT TO THE APPROVAL OF THE OTS, OTS APPROVAL, AS WELL AS ANY OTHER
REGULATORY APPROVALS, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
REORGANIZATION BY THE OTS, OR OTHER REGULATORY AGENCIES.
REASONS FOR AND RISKS OF THE REORGANIZATION
REASONS FOR THE STOCK HOLDING COMPANY REORGANIZATION. The Board of
Directors of the Association believes that the formation of the Stock Holding
Company as a subsidiary of the MHC will be in the best interests of shareholders
and will offer greater operating flexibility than is currently available to the
Association in its existing mutual holding company structure. The MHC does not
operate as a traditional holding company at the present time because it is a
mutual organization and represents only the mutual ownership interest in the
Association. Establishing the Stock Holding Company as a subsidiary of the MHC
will permit the Stock Holding Company to conduct activities and make investments
for the benefit of all shareholders. Management believes that it will also
provide enhanced ability to invest through the Stock Holding Company, facilitate
mergers, acquisitions and stock repurchases, all as described below.
ENHANCED ABILITY TO INVEST THROUGH THE STOCK HOLDING COMPANY. Under the
existing mutual holding company structure the MHC cannot make investments in
other financial institutions or business enterprises for the benefit of all
shareholders of the Association, and the Association itself is limited by law or
regulation in its permissible investment activities. For example, if the MHC
invests in 5% of the common stock of another bank or thrift holding company, any
gain on such investment would accrue only to the MHC. The
18
<PAGE>
Reorganization will permit the entity that issues stock (i.e., the Stock Holding
Company) to make investments, diversify business activities, or acquire other
financial institutions for the benefit of all shareholders. No specific
investments, new business activities or acquisitions by the Stock Holding
Company are planned at the present time.
FACILITATE MERGERS AND ACQUISITIONS. The Reorganization will also
facilitate the approval and completion of mergers and acquisitions since the
Stock Holding Company, acting as the sole shareholder of the Association, will
be able to approve mergers and acquisitions involving the Association. This is
consistent with the way other stock holding companies are able to approve
mergers of their bank or savings institution subsidiaries. Moreover, the
Reorganization will enable the Stock Holding Company to acquire other financial
institutions and to operate them as separate subsidiaries for the benefit of all
shareholders of the Stock Holding Company.
STOCK REPURCHASES. The Reorganization will enable the Stock Holding
Company to repurchase Holding Company Common Stock. In recent years, the
repurchase of stock has been an important, if not essential, means for banks and
savings institutions to enhance shareholder value and invest capital resources.
Historically, the Association has used the bad debt reserve method of accounting
for bad debts for tax purposes. Under recent changes in the federal tax law, the
Association is required to recapture (I.E., take into income) a portion of its
tax bad debt reserves accumulated for tax purposes subsequent to September 30,
1988, but is not required to recapture its tax bad debt reserves for earlier
periods (the "base year reserves"). However, certain distributions and
redemptions, such as stock repurchases, by a thrift institution would result in
an additional recapture of a portion of the institutions's bad debt reserves,
including the base year reserves. Thus, if the Association were to repurchase
any of its outstanding common stock, it would be required to recapture all or
part of its tax bad debt reserves, including its base year reserves. The Stock
Holding Company, however, will be permitted to repurchase Holding Company Common
Stock without causing a recapture of the Association's tax bad debt reserves.
Dividends paid by the Association to the Stock Holding Company will also result
in a recapture of the Association's tax bad debt reserves to the extent such
dividends exceed the Association's current and accumulated earning and profits,
as computed for federal income tax purposes. The Association does not intend to
pay dividends to the Stock Holding Company in excess of such earnings and
profits, and the Stock Holding Company has no current plan to commence a
repurchase program immediately after the conclusion of the Reorganization. The
Stock Holding Company, however, may implement a stock repurchase program in the
future as another alternative to enhancing shareholder value and investing
capital resources.
STOCK HOLDING COMPANY POWERS. The Association may engage only in those
activities that are permissible for federal savings associations under the Home
Owners' Loan Act ("HOLA") and applicable regulations thereunder. Pursuant to the
OTS policy, the Stock Holding Company will be subject to the same restrictions,
including, but not limited, to activity limitations applicable to the MHC under
Section 10(o)5 of the HOLA and the regulations promulgated thereunder. The Stock
Holding Company will be permitted to engage in activities that are not
permissible for the Association, such as making investments in up to 5% of the
common stock of another financial institution. The Stock Holding Company
generally would be permitted to engage in the activities that are permissible
for bank holding companies under the Bank Holding Company Act (i.e., activities
that are closely related to banking) and activities permitted for service
corporations of a federally-chartered savings association. See "Stock Holding
Company Regulation" herein.
RISKS OF THE REORGANIZATION. Management believes that there are
substantial benefits that will be achieved through the Reorganization, as
discussed above. In addition, because the federal charter pursuant to which the
Stock Holding Company is to be incorporated was only recently created by the
OTS, there are no judicial interpretations with respect to corporate governance
matters with respect to such charter. The OTS has stated that the corporate
governance of the Stock Holding Company would be governed by
19
<PAGE>
corporate governance matters that are precedents applicable to a federal savings
association. However, there can be no assurance that any such court would apply
such law or as to what other sources of precedent a court may look to.
OTS APPROVAL PROCESS
Based on recent OTS approvals of similar transactions, the Association
believes that OTS approval of the Reorganization will be subject to certain
conditions that may include, among others, the following: prior to consummation
of the Reorganization, the Stock Holding Company must obtain a federal charter
from the OTS and submit bylaws acceptable to the OTS; the Stock Holding Company
is subject to the provisions of OTS regulations pertaining to minority stock
issuances as if it were a former mutual savings association that reorganized
into a mutual holding company structure; the Stock Holding Company is subject to
the same restrictions (including, but not limited to, the activities
limitations) to which the MHC is subject under federal law and OTS regulations;
the Stock Holding Company must hold all of the issued and outstanding common
stock of the Association, and the Association may not issue any other class of
equity security; the Stock Holding Company and the Association must obtain
approval from the OTS prior to issuing any securities; the Stock Holding Company
must comply with OTS procedures applicable to federal stock associations
regarding any proposed amendments to its charter and bylaws; the Stock Holding
Company shall cease any activity, reverse any action, or amend any provision of
its charter or bylaws, to which the OTS objects as being contrary to the OTS
regulations in effect at the time of OTS approval of the Reorganization, or as
subsequently amended; and if the MHC undertakes a mutual-to-stock conversion,
OTS policies regarding purchases of stock in the conversion will apply to
shareholders of the Stock Holding Company. ALTHOUGH THE REORGANIZATION IS
SUBJECT TO THE APPROVAL OF THE OTS, OTS APPROVAL, AS WELL AS ANY OTHER
REGULATORY APPROVALS, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
REORGANIZATION BY THE OTS, OR OTHER REGULATORY AGENCIES.
PLAN OF REORGANIZATION
The Reorganization will be accomplished under the Plan of
Reorganization, which is attached as Exhibit C hereto. The following discussion
is qualified in its entirety by reference to the Plan of Reorganization. The
Plan of Reorganization was unanimously approved by the Board of Directors on
November 16, 1998.
The Stock Holding Company is a newly organized federally chartered
corporation which was formed by the Association solely for the purpose of
effecting the Reorganization. Therefore, the Stock Holding Company has no prior
operating history. The Plan of Reorganization is by and among the Stock Holding
Company, the Association, and Interim, a to-be-formed interim federal stock
savings association.
The Reorganization and the establishment of the Stock Holding Company
will be accomplished as follows: (i) the Association will organize the Stock
Holding Company as a wholly owned subsidiary (ii) the Stock Holding Company will
organize an interim federal stock savings association ("Interim") as a wholly
owned subsidiary; (iii) Interim will merge into the Association, with the
Association as the surviving corporation; (iv) in connection with the merger in
step (iii) above, all of the issued and outstanding shares of Holding Company
Common Stock held by the Association will be canceled, all of the issued and
outstanding shares of Association Common Stock will be converted by operation of
law into an equal number of shares of Holding Company Common Stock, and the
issued and outstanding shares of Interim, all of which are held by the Stock
Holding Company, will automatically be converted by operation of law into common
stock of the Association. As a result of steps (ii) and (iii) above, the
Association will become the wholly owned subsidiary of the Stock Holding
Company, the Stock Holding Company will become the majority
20
<PAGE>
owned subsidiary of the MHC, and Minority Shareholders will become minority
shareholders of the Stock Holding Company.
The following diagram sets forth the Association's current mutual
holding company structure: [GRAPHIC OMITTED]
The following diagram sets forth the Association's proposed mutual
holding company structure following completion of the Reorganization:
[GRAPHIC OMITTED]
21
<PAGE>
The Board of Directors of the Association presently intends to
capitalize the Stock Holding Company with up to $100,000, subject to the
approval of the OTS. Future capitalization of the Stock Holding Company will
depend upon dividends declared by the Association based on future earnings, or
the raising of additional capital by the Stock Holding Company through a future
issuance of securities, debt or by other means. The Board of Directors of the
Stock Holding Company has no present plans or intentions with respect to any
future issuance of securities or debt at this time. Furthermore, as long as it
is in existence, the MHC must own at least a majority of the Stock Holding
Company's outstanding voting stock.
After the Reorganization, the Association will continue its existing
business and operations as a wholly-owned subsidiary of the Stock Holding
Company and the consolidated capitalization, assets, liabilities, and form of
financial statements of the Stock Holding Company immediately following the
Reorganization will be substantially the same as those of the Association
immediately prior to consummation of the Reorganization. The Federal Stock
Charter and the Bylaws of the Association will continue in effect, and will not
be affected in any manner by the Reorganization. The name "Wake Forest Federal
Savings & Loan Association" will continue to be utilized. The corporate
existence of the Association will continue unaffected and unimpaired by the
Reorganization.
EFFECTIVE DATE
The "Effective Date" of the Reorganization will be the date upon which
the Articles of Combination are filed with and endorsed by the OTS. Although
management of the Association does not anticipate any significant delays in
obtaining the OTS's endorsement of the Articles, the effects of any such delays
on holders of Association Common Stock cannot be determined at this time.
ALTHOUGH THE REORGANIZATION IS SUBJECT TO THE APPROVAL OF THE OTS, OTS APPROVAL,
AS WELL AS ANY OTHER REGULATORY APPROVALS, DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE REORGANIZATION BY THE OTS, OR OTHER REGULATORY AGENCIES.
OPTIONAL EXCHANGE OF STOCK CERTIFICATES
After the Effective Date stock certificates evidencing shares of
Association Common Stock will represent, by operation of law, the same number of
shares of Holding Company Common Stock. Former holders of Association Common
Stock will not be required to exchange their Association Common Stock
certificates for Holding Company Common Stock certificates, but will have the
option to do so. DO NOT SEND YOUR STOCK CERTIFICATES TO THE ASSOCIATION AT THIS
TIME. Any shareholder desiring more information about such exchange may request
additional information from the Association by writing the Secretary of the
Association at the address given above.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Section 552.14 of the OTS Regulations (the "Dissent
Regulations"), a shareholder of a federally chartered savings association that
engages in a merger transaction shall have the right to demand from the savings
association the payment of the fair or appraised value of his or her stock in
the savings association, subject to the satisfaction of specified procedural
requirements. For purposes of these OTS rules, the Reorganization will be a
"merger transaction." Therefore, each holder of Association Common Stock as of
the Record Date who objects to the Reorganization and who does not vote in favor
of the Plan of Reorganization is entitled to the rights and remedies of
dissenting shareholders provided in the Dissent Regulation which is set forth in
Exhibit D hereto, and the following summary of such rights and remedies is
qualified in its entirety by reference to such Exhibit.
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The dissenting shareholder shall deliver to the Association, before
voting on the Plan of Reorganization at the Annual Meeting on February 23, 1999,
a written demand identifying himself or herself and stating his or her intention
to demand appraisal of and payment for the fair cash value of the shares owned
by such shareholder. Such demand must be in addition to and separate from any
proxy or vote against the Plan of Reorganization by the shareholder. Thereafter,
the shareholder shall comply with the procedural requirements set forth in the
dissent regulation, or, generally, lose all rights under such regulation. The
Stock Holding Company will provide written notice of the effective date of the
Reorganization as required by 12 C.F.R. ss. 552.14(c)(3)(i). Within ten days
after the effective date of the Reorganization, the Stock Holding Company will
make a written offer to the dissenting shareholder to pay for his or her shares
at a price deemed to be fair by the Stock Holding Company. The fair value for a
share shall be determined as of the effective date of the Reorganization and in
computing fair value, any appreciation or depreciation in market value resulting
from the proposal shall be excluded.
If within sixty days of the effective date of the Reorganization the
Holding Company and the dissenting shareholder do not agree as to the fair
value, then such shareholder may file a petition with the OTS, for a
determination of the fair market value. Failure to file such petition shall be
deemed an acceptance of the terms offered under the Plan of Reorganization.
Within sixty days of the effective date of Reorganization, each shareholder
demanding appraisal and payment under the Dissent Regulation shall submit to the
transfer agent his or her certificates of stock for notation thereon. Any
shareholder who fails to submit his or her stock certificates for such notation
shall no longer be entitled to appraisal rights and shall be deemed to have
accepted the terms offered under the Plan of Reorganization.
HOLDERS OF ASSOCIATION COMMON STOCK SHOULD BE AWARE THAT THEIR FAILURE
TO PROCEED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 552.14 OF THE OTS
REGULATIONS WILL RESULT IN THE LOSS OF ALL DISSENTERS' RIGHTS AND RESULT IN
THEIR BEING BOUND BY THE REORGANIZATION. The shares held by an Association
shareholder who has lost his or her dissenters' rights by failing to comply with
the regulatory procedures will be converted into shares of the Stock Holding
Company as though such shareholder had assented to the Plan of
Reorganization.
TAX CONSEQUENCES
The Association will receive an opinion (the "Tax Opinion") of its
special counsel, Thacher Proffitt & Wood, Washington, D.C., as to certain
federal income tax consequences of the Reorganization. This opinion of counsel,
which is not binding upon the Internal Revenue Service (the "Service"), provides
substantially as follows: (i) the merger of Interim with and into the
Association will constitute a reorganization under Section 368 of the Code, and
the Stock Holding Company, the Association and Interim will each be a "party to
a reorganization" within the meaning of Section 368(b) of the Code, provided
that the merger of Interim with and into the Association qualifies as a
statutory merger under applicable law, and provided further that after the
transaction the Association will hold substantially all of the assets of Interim
and Association shareholders exchange solely for Stock Holding Company voting
stock at least 80 percent of the combined voting power of all classes of
Association stock entitled to vote and at least 80 percent of all other classes
of Association stock; (ii) no gain or loss will be recognized by Association
shareholders on the exchange of Association Common Stock solely for the Holding
Company Common Stock; (iii) no gain or loss will be recognized by the Stock
Holding Company on the receipt by it of Association Common Stock solely in
exchange for Holding Company Common Stock; (iv) the tax basis of the Holding
Company Common Stock received by the Association's shareholders will be the same
as the basis of the Association Common Stock surrendered in exchange therefor;
(v) the holding period of the Holding Company Common Stock to be received by
Association shareholders will include the holding period of the Association
Common Stock surrendered in exchange therefor, provided the Association Common
Stock was held as a capital asset
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on the date of the exchange; and (vi) no gain or loss will be recognized by
Association shareholders as a result of conversion of their option to purchase
Common Stock into options to purchase Holding Company Common Stock.
The Tax Opinion will not be binding on the Service, and there can be no
assurance that the Service will not contest the conclusions expressed therein.
The Tax Opinion may be based in part upon certain factual assumptions and upon
certain representations made, and certificates delivered, by the Association,
the Association Holding Company and certain of the Association shareholders,
officers and other persons, which representations and certificates Thacher
Proffitt & Wood will assume to be true, correct and complete. If such
representations or certificates are inaccurate, the Tax Opinion could be
adversely affected.
Each Association shareholder should consult his own tax counsel as to
specific federal, state and local tax consequences of the Reorganization, if
any, to such shareholder.
CONSEQUENCES UNDER FEDERAL SECURITIES LAWS
The Association Common Stock is registered under Section 12 of the
Exchange Act of 1934, as amended, as administered by the OTS. Upon consummation
of the Reorganization, the Stock Holding Company will register the Common Stock
under the Section 12 of the Exchange Act as administered by the SEC. The
Exchange Act will apply to the Stock Holding Company to the same degree that it
currently applies to the Association, except that the powers, functions and
duties to administer and enforce the Exchange Act requirements regarding
periodic and other reports, proxies, tender offers, and short swing profits, and
certain other requirements of the Exchange Act that are vested in the OTS as
regards securities of insured savings associations such as the Association, are
vested in the SEC as regards securities of corporations such as the Stock
Holding Company.
The issuance of the Common Stock in connection with the Reorganization
is exempt from registration under section 3(a)(12) of the Securities Act of
1933, as amended.
CONDITIONS TO THE REORGANIZATION
The Plan of Reorganization sets forth a number of conditions to the
completion of the Reorganization, including: (i) approval of the Plan of
Reorganization by the holders of a majority of the outstanding shares of
Association Common Stock; (ii) receipt of an opinion of counsel that the
Reorganization will be treated as a non-taxable transaction for federal income
tax purposes; and (iii) receipt of all required approvals.
The MHC, which owns a majority of the outstanding shares of Association
Common Stock, intends to vote its shares in favor of the Plan of Reorganization.
The Association has received an opinion of special counsel that the
Reorganization will be treated as a non-taxable transaction for federal income
tax purposes.
AMENDMENT, TERMINATION OR WAIVER
The Board of Directors of the Association may cause the Plan of
Reorganization to be amended or terminated if the Board determines for any
reason that such amendment or termination would be advisable. Such amendment or
termination may occur at any time prior to the filing of Articles of Combination
with the OTS, provided that no such amendment may be made to the Plan of
Reorganization after shareholder approval if such amendment is deemed to be
materially adverse to the shareholders of the Association. Additionally, any of
the terms or conditions of the Plan of Reorganization may be waived by the party
which
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is entitled to the benefit thereof. In addition, material changes, if any,
necessary to obtain such approval may require a resolicitation of shareholder
approval.
BUSINESS OF THE ASSOCIATION
The Association is a federally chartered savings association
headquartered in Wake Forest, North Carolina. The Association's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Association
is a member of the Federal Home Loan Bank System. At September 30, 1998, the
Association had total assets of $74.4 million, total deposits of $60.0 million,
and shareholders' equity of $13.2 million.
The principal business of the Association is accepting deposits from
the general public and using those deposits and other sources of funds primarily
to make loans secured by real estate and to a lesser extent, other forms of
collateral located in the Association's primary market area of Wake, Franklin
and Granville counties in North Carolina.
The Association's results of operations depend primarily on its net
interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
The Association's operations are also affected by noninterest income, such as
miscellaneous income from loans, customer deposit account service charges, and
other sources of revenue. The Association's principal operating expenses, aside
from interest expense, consist of compensation and related benefits, office
occupancy costs, and other general and administrative expenses.
The Association's principal executive office is located at 302 South
Brooks Street, P.O. Box 707, Wake Forest, North Carolina 27588-0707 and its
telephone number at that address is (919) 556-5146.
BUSINESS OF THE STOCK HOLDING COMPANY
GENERAL. The Stock Holding Company will be formed upon completion of
the Reorganization and currently has no business activities. Upon the completion
of the Reorganization, the Association will become a wholly owned subsidiary of
the Stock Holding Company and each shareholder of the Association will become a
shareholder of the Stock Holding Company with the same ownership interest
therein as such shareholder's ownership interest in the Association immediately
prior to the Reorganization.
Immediately upon consummation of the Reorganization, it is expected
that the Stock Holding Company will not engage in any business activity other
than to hold all of the voting stock of the Association. The Stock Holding
Company does not presently have any arrangements or understandings regarding any
acquisition or merger opportunities. It is anticipated, however, that in the
future that the Stock Holding Company may pursue other investment opportunities,
including possible diversification through acquisitions and mergers.
PROPERTY. The Stock Holding Company is not expected initially to own or
lease real or personal property. Instead, it intends to utilize the premises,
equipment and furniture of the Association without the direct payment of any
rental fees to the Association.
LEGAL PROCEEDINGS. The Stock Holding Company is not a party to any
legal proceeding.
EMPLOYEES. At the present time, the Stock Holding Company does not
intend to employ any persons other than its management. It will utilize the
support staff of the Association from time to time. If the Stock
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Holding Company acquires other savings institutions or pursues other lines of
business, it may hire additional employees at such time.
COMPETITION. It is expected that immediately following the
Reorganization, the primary business of the Stock Holding Company will be the
ownership of the Association Common Stock. Therefore, until such time as the
Stock Holding Company pursues other investment opportunities, the competitive
conditions to be faced by the Stock Holding Company will be the same as those
faced by the Association.
MANAGEMENT OF THE STOCK HOLDING COMPANY
DIRECTORS. The directors of the Stock Holding Company are, and upon
completion of the Reorganization will continue to be, the same persons who are
at present the directors of the Association. The three-year terms of the
directors are staggered to provide for the election of approximately one-third
of the board members each year.
EXECUTIVE OFFICERS. The executive officers of the Stock Holding Company
are, and upon completion of the Reorganization will be the same persons who are
at present the executive officers of the Association.
REMUNERATION. Since the formation of the Stock Holding Company, none of
its executive officers or directors has received any remuneration from the Stock
Holding Company. It is expected that unless and until the Stock Holding Company
becomes actively involved in additional businesses, no compensation will be paid
to its directors and officers in addition to compensation paid to them by the
Association. However, the Stock Holding Company may determine that separate and
additional compensation is appropriate in the future.
EMPLOYEE BENEFIT PLANS. As the directors, officers and employees of the
Stock Holding Company will not initially be compensated by the Stock Holding
Company but will continue to serve and be compensated by the Association, no
separate benefit plans for directors, officers and employees of the Stock
Holding Company are anticipated at this time. The Stock Holding Company will
assume the ESOP, the Option Plan and the RRP, which will continue to cover
directors, officers and employees of the Association pursuant to the same terms
as in effect under the plans as maintained by the Association. The Association
will continue to maintain its other benefit programs. See "Proposal 1 --
Election of Directors -- Benefits."
INDEMNIFICATION OF OFFICERS AND DIRECTORS AND LIMITATION OF LIABILITY.
OTS regulations require the Association to indemnify its directors, officers and
employees against legal and other expenses incurred in defending lawsuits
brought or threatened against them by reason of the performance as a director,
officer, or employee. Indemnification may be made to such person only if final
judgment on the merits is in his favor or in case of (i) settlement, (ii) final
judgment against him, or (iii) final judgment in his favor, other than on the
merits, if a majority of the disinterested directors of the Association
determine that he was acting in good faith within the scope of his employment or
authority as he could reasonably have perceived it under the circumstances and
for a purpose he could have reasonably believed under the circumstances was in
the best interests of the Association or its shareholders. If a majority of the
disinterested directors of the Association concludes that in connection with an
action any person ultimately may become entitled to indemnification, the
directors may authorize payment of reasonable costs and expenses arising from
defense or settlement of such action. The Association is required to give the
OTS at least 60 days' notice of its intention to make indemnification and no
indemnification shall be made if the OTS objects to the Association in writing.
The Association currently has insurance coverage for its directors and officers,
and the Association's management anticipates that the Stock Holding Company will
be able to obtain such coverage for its directors and officers.
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OTS regulations require that the Stock Holding Company will be subject
to the same regulations described above, to which the Association is subject.
The Bylaws of both the Association and the Stock Holding Company reflect the OTS
regulations on indemnification.
Under the Bylaws of both the Association and the Stock Holding Company,
an indemnified person may be reimbursed for any amount for which that person
becomes liable under a judgment in such action and for all reasonable costs and
expenses, including attorneys' fees, actually paid or incurred by that person in
defending or settling such action, or in enforcing his or her rights under the
Bylaws of the Association or the Stock Holding Company if he or she attains a
favorable judgment in such enforcement action.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Stock
Holding Company, the Stock Holding Company has been informed that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In addition, federal
banking regulations restrict the Association or the Stock Holding Company from
indemnifying officers and directors for civil monetary penalties or judgments
resulting from administrative or civil actions instituted by any federal banking
agency, or any other liability or legal expense with regard to any
administrative proceeding or civil action instituted by any federal banking
agency, which results in a final order or settlement pursuant to which such
person is assessed a civil money penalty, removed from office or prohibited from
participating in the conduct of the affairs of an insured depository
institution, or required to cease and desist from or take certain actions.
COMPARISON OF SHAREHOLDER RIGHTS AND CERTAIN ANTI-TAKEOVER PROVISIONS
INTRODUCTION. As a result of the Reorganization, holders of Association
Common Stock, whose rights are presently governed by federal law and the OTS's
Rules and Regulations, as well as the Charter and Bylaws of the Association,
will become shareholders of the Stock Holding Company, a federally chartered
corporation. Accordingly, their rights will be also be governed by federal law
and the OTS's Rules and Regulations as well as by the Charter and Bylaws of the
Stock Holding Company, as well as any conditions set forth in the OTS order
approving the Reorganization. Management believes that the Stock Holding Company
will generally be subject to the same corporate governance regulations as those
to which the Association is subject.
A number of provisions in the Charter and Bylaws of the Association and
the Stock Holding Company deal with matters of corporate governance and certain
rights of shareholders. Provisions in the Stock Holding Company's Charter and
Bylaws relating to the calling of a special meeting of shareholders, nomination
of directors and new business provisions, removal of directors, cumulative
voting for the election of directors, staggered directors' terms, the amendment
of the Stock Holding Company's Charter and Bylaws, and certain statutory
provisions relating to stock ownership and transfer, may make it difficult for
shareholders to influence the Stock Holding Company or the Association or
replace all of incumbent management even if the MHC is no longer in existence.
The following discussion is a general summary and comparison of certain
provisions of the Charter and Bylaws of the Association and the Stock Holding
Company that are not identical and certain other statutory and regulatory
provisions some of which might be deemed to have potential antitakeover effects.
The Charter and Bylaws of the Stock Holding Company are attached hereto as
Exhibits B and C, respectively, and should be reviewed for more detailed
information. It may be necessary for the Stock Holding Company to amend the
Charter and Bylaws in order to obtain regulatory approval. Material changes, if
any, may require a resolicitation of shareholder approval.
PAYMENT OF DIVIDENDS. OTS regulations currently impose limitations upon
capital distributions by savings associations, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger, and other distributions charged
against
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capital. At least 30-days prior written notice must be given to the OTS of a
proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after the prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(a) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (capital in excess of
an association's fully phased-in capital requirements) at the beginning of the
calendar year, or (b) 75% of its net earnings for the previous four quarters.
Any additional capital distribution would require prior OTS approval. In
addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Association
would be prohibited from making any capital distribution if, after the
distribution, the Association failed to meet its minimum capital requirements,
as described above. The Association is a Tier 1 institution under the OTS
capital distribution regulation.
In order to make distributions under these safe harbors, a Tier I
institution must submit 30 days' written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 Institution deemed
to be in need of more than normal supervision by the OTS MAY have additional
limitations imposed by the OTS on its ability to make a capital distribution.
The ability of the Association to pay dividends on Association Common
Stock is restricted by tax considerations related to thrift institutions and by
federal regulations applicable to savings associations. Income appropriated to
bad debt reserves and deducted for federal income tax purposes may not be used
to pay cash dividends without the payment of federal income taxes by the
Association on the amount of such income removed from reserves for such purpose
at the then current income tax rate. Additionally, the Association is precluded
from paying dividends on its Association Common Stock if its regulatory capital
would thereby be reduced below the regulatory capital requirements prescribed
for savings associations. The Association currently satisfies its applicable
regulatory capital requirements.
After the Reorganization, the Stock Holding Company's principal source
of income will initially consist of its equity in the earnings, if any, of the
Association. Although the Stock Holding Company will not be subject to the above
dividend restrictions regarding dividend payments to its shareholders, the
restrictions on the Association's ability to pay dividends to the Stock Holding
Company will continue in effect.
The payment of future cash dividends by the Association, and thus by
the Stock Holding Company, will continue to depend upon the 's earnings,
financial condition and capital requirements, as well as the tax and regulatory
considerations discussed herein. The Association's Board of Directors considers
many factors including the 's profitability, maintenance of adequate capital,
the Association's current and anticipated future income, outstanding loan
commitments, adequacy of loan loss reserves, cash flow requirements and economic
conditions prior to declaring a dividend. Moreover, before declaring a dividend,
the Board of Directors must determine that the Association will exceed its
regulatory capital requirements after the payment of the dividend. The MHC may
elect to waive the right to receive all dividends paid by the Association. OTS
regulations require the MHC to notify the OTS of any proposed waiver of the
right to receive dividends, and the right to waive any such dividend is subject
to non-objection by the OTS. The MHC has not waived the right to receive any
dividends paid by the Association thus far, although it determines whether to do
so on a quarterly basis and may elect to waive dividends in the future.
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SPECIAL MEETINGS OF SHAREHOLDERS. For a period of five years following
completion of the MHC Reorganization on April 3, 1996, special meetings of the
Association's shareholders relating to a change in control of the Association or
an amendment to the Charter of the Association may be called only by the
Association's Board of Directors. Special meetings of the Association's
shareholders for other purposes may be called by the chairman of the board, the
president or a majority of the Board of Directors. The Charter of the Stock
Holding Company contains a similar provision that is not limited to a five year
period, but provides that special meetings of the shareholders of the Stock
Holding Company relating to change in control of the Stock Holding Company or
amendments to its Charter shall be called only upon direction of the Board of
Directors of the Stock Holding Company.
CUMULATIVE VOTING. Cumulative voting entitles each shareholder to cast
a number of votes in the election of directors equal to the number of such
shareholder's shares of common stock multiplied by the number of directors to be
elected, and to distribute such votes among one or more of the nominees to be
elected. Both the Charter of the Stock Holding Company and the Charter of the
Association state that cumulative voting for the election of directors is not
permitted although the Association's provision is applicable only for a period
of five years following completion of MHC Reorganization. The absence of
cumulative voting rights means that the holders of a majority of the shares
voted at a meeting of shareholders may elect all directors of the Association
and the Stock Holding Company thereby precluding minority shareholder
representation on the Association's and Stock Holding Company's Boards of
Directors. Because the MHC owns a majority of the Association Common Stock, and
will own a majority of the Common Stock, the MHC is able to elect all of the
directors of the Association's Board of Directors, and after the Reorganization
will be able to elect all of the members of Stock Holding Company's Board of
Directors.
RIGHTS OF SHAREHOLDERS TO DISSENT. Shareholders of the Association have
dissenters' appraisal rights in connection with certain combinations of the
Association if such shareholder has not voted in favor of the combination and
complies with the procedural requirements of federal regulations. A shareholder
of the Association does not have dissenters' rights of appraisal if, generally,
such shareholder receives cash and/or securities listed on a national securities
exchange in exchange for Association securities in the combination, and the
Association's stock is listed on a national securities exchange or shareholder
approval of the combination is not required. Management believes that the OTS
may require that the Stock Holding Company provide similar dissenters' appraisal
rights, although the Stock Holding Company will not provide such rights if the
OTS does not require it to do so. Shareholders of the Association who do not
vote in favor of the Plan of Reorganization will be entitled to dissenters'
rights. See "-- Rights of Dissenting Shareholders."
RESTRICTIONS IN THE STOCK HOLDING COMPANY'S CHARTER AND BYLAWS. A
number of provisions of the Stock Holding Company's Charter and Bylaws deal with
matters of corporate governance and certain rights of shareholders. The
following discussion is a general summary of certain provisions of the Stock
Holding Company's Charter and Bylaws and certain other statutory and regulatory
provisions relating to stock ownership and transfers, and business combinations,
which might be deemed to have potential anti-takeover effects. These provisions
may have the effect of discouraging a future takeover attempt or change of
control which is not approved by the Board of Directors but which a majority of
individual Stock Holding Company shareholders may deem to be in their best
interests or in which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, shareholders who desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Stock Holding Company more difficult. The following
description of the material provisions of the Charter and Bylaws of the Stock
Holding Company is necessarily general and reference should be made in each case
to such Charter and Bylaws, which are attached hereto as Exhibits B and C,
respectively.
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MUTUAL HOLDING COMPANY OWNERSHIP. So long as the MHC is in existence,
the MHC must own at least a majority of the outstanding voting stock of the
Association, and following the Reorganization, of the Stock Holding Company. The
MHC currently is able to elect the Association's directors and direct the
affairs and business operations of the Association, and after the
Reorganization, will be able to elect the Stock Holding Company's directors and
direct the affairs and business operations of the Stock Holding Company.
LIMITATION ON VOTING RIGHTS. The Charters of both the Association and
the Stock Holding Company provide that, for a period of five years from the
effective date of the Association's mutual holding company reorganization, no
person (other than the MHC) may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of equity
security of the Association or the Stock Holding Company, respectively. Each
share beneficially owned in violation of the foregoing percentage limitation
will not be counted as shares entitled to vote, will not be voted by any person
or counted as voting shares in connection with any matter submitted to
shareholders for a vote. The limitation does not apply to: a transaction in
which either the Association or the Stock Holding Company forms a holding
company without change in the respective beneficial ownership interest of each
of its shareholders, respectively; the purchase of shares by underwriters in
connection with a public offering; or the purchase of shares by a tax-qualified
employee stock benefit plan.
REGULATION OF THE STOCK HOLDING COMPANY
The Stock Holding Company will be registered with and be subject to OTS
examination and supervision as well as certain reporting requirements. In
addition, the operations of the Stock Holding Company are subject to regulations
promulgated by the OTS from time to time. As an FDIC-insured subsidiary of a
savings and loan holding company, the Association will be subject to certain
restrictions in dealing with the Stock Holding Company and with other persons
affiliated with the Stock Holding Company, and will continue to be subject to
examination and supervision by the OTS and the FDIC. The Stock Holding Company
will be regulated as a mutual holding company within the meaning of the HOLA.
The activities of a mutual holding company are generally limited to those
permitted for multiple savings and loan holding companies. In addition, the
Stock Holding Company has certain broader powers than its parent mutual holding
company, including the ability establishing a service corporation. The powers
and restrictions to which the Stock Holding Company will be subject are
discussed in detail below.
Pursuant to Section 10(o) of the HOLA, a mutual holding company
(including the Stock Holding Company) may engage only in the following
activities: (i) investing in the stock of a savings institution; (ii) acquiring
a mutual association through the merger of such association into a savings
institution subsidiary of such holding company or an interim savings institution
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings institution; (iv)
investing in a corporation the capital stock of which is available for purchase
by a savings institution under federal law or under the law of any state where
the subsidiary savings institution or associations have their home offices; (v)
furnishing or performing management services for a savings institution
subsidiary of such holding company; (vi) holding, managing, or liquidating
assets owned or acquired from a savings institution subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings institution
subsidiary of such company; (viii) acting as trustee under a deed of trust; (ix)
any other activity (a) that the FRB, by regulation, has determined to be
permissible for bank holding companies under Section 4(c) of the BHC Act, unless
the Director of the OTS, by regulation, prohibits or limits any such activity
for savings and loan holding companies, or (b) in which multiple savings and
loan holding companies were authorized by regulation to directly engage on March
5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
holding company is approved by the Director of the OTS. If a mutual holding
company acquires or merges with another holding company, the holding company
acquired or the holding company resulting from such merger or acquisition
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may only invest in assets and engage in activities listed above, and it has a
period of two years to cease any non-conforming activities and divest any
non-conforming investments.
In addition to the activities set forth above, the Stock Holding
Company may utilize its authority under section 10(o)(5) of HOLA and 12 C.F.R.
575.10(a)(6) to acquire subsidiaries engaged in (i) any activity authorized
under 12 C.F.R. Part 559, i.e. a service corporation or (ii) activities approved
for service corporations of state-chartered savings associations where the Stock
Holding Company's subsidiary has its home office.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from (i) acquiring control (as defined under HOLA) of another
insured institution (or holding company thereof) without prior OTS approval;
(ii) acquiring more than 5% of the voting shares of another insured institution
(or holding company thereof) which is not a subsidiary, subject to certain
exceptions; (iii) acquiring through merger, consolidation or the purchase of
assets, another savings institution or holding company thereof, or acquiring all
or substantially all of the assets of such institution (or holding company
thereof) without prior OTS approval; or (iv) acquiring control of any depository
institution not insured by FDIC except through a merger with and into the
holding company's savings institution subsidiary that is approved by the OTS. A
savings and loan holding company may acquire up to 15% of the voting shares of
an undercapitalized savings institution. A savings and loan holding company may
not acquire as a separate subsidiary an insured institution that has its
principal office outside of the state where the principal office of its
subsidiary institution is located, except (i) in the case of certain emergency
acquisitions approved by the FDIC, (ii) if the holding company controlled (as
defined) such insured institution as of March 5, 1987, or (iii) if the laws of
the state in which the insured institution to be acquired is located
specifically authorize a savings institution chartered by that state to be
acquired by a savings institution chartered by the state where the acquiring
savings institution or savings and loan holding company is located, or by a
holding company that controls such a state chartered institution. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of such holding company's voting shares may, except with the prior
approval of the OTS, acquire control of any savings association that is not a
subsidiary of such holding company. If the OTS approves such an acquisition, any
holding company controlled by such officer, director or person shall be subject
to the activities limitations that apply to multiple savings and loan holding
companies, unless certain supervisory exceptions apply.
The mid-tier stock holding company will 'stand in the shoes' of the
parent mutual holding company, or in certain circumstances, the subsidiary
savings association. Thus, the mid-tier stock holding company would generally be
subject to the same restrictions and limitations that are currently applicable
to the mutual holding company and its savings association subsidiary. These
regulations include the following provisions:
(i) The mid-tier stock holding company will be subject to the same
restrictions as the mutual holding company on pledges of stock of the savings
association subsidiary, and the proceeds of any loan secured by the savings
association's stock must be infused into the savings association.
(ii) The mid-tier stock holding company will be subject to the same
dividend waiver restrictions as those imposed on the savings association.
Accordingly, in waiving any dividend paid by the mid-tier stock holding company,
the mutual holding company will be required to follow the same procedures it
currently follows in waiving dividends paid by the savings association.
(iii) The mid-tier stock holding company will be subject to the same
restrictions on indemnification and employment contracts as those imposed on the
mutual holding company.
31
<PAGE>
(iv) The mid-tier stock holding company must be federally chartered.
The requirements for the federal charter which will be modeled after the charter
and bylaws of federal stock savings associations. See "Comparison of Shareholder
Rights and Certain Anti-Takeover Provisions."
(v) The mid-tier stock holding company will be subject to the current
restrictions on the issuances of securities by savings association subsidiaries.
Generally, the mid-tier stock holding company may not issue stock to the public,
whether by way of a merger or otherwise, without affording the mutual members a
priority subscription right to purchase the stock.
(vi) All stock offerings by the mid-tier stock holding company must
receive prior OTS approval.
(vii) The mid-tier stock holding company must own 100% of the stock of
the subsidiary savings association.
(viii) The mid-tier stock holding company will be permitted to engage
in stock repurchase programs provided the mid-tier stock holding company
complies with OTS regulations relating to repurchases by subsidiary savings
associations. Absent unusual circumstances, for purposes of the three year
restriction on repurchases, the OTS will generally permit the mid-tier stock
holding company to 'tack on' or include the period that the shares initially
issued by the savings association were outstanding.
(ix) In the event of a mutual to stock conversion of the mutual holding
company, minority shareholders of the mid-tier stock holding company would be
able to exchange their shares for shares of the converted mutual holding company
in the same manner that minority shareholders of a subsidiary savings
association currently are able. The OTS will continue to use the "fair and
reasonable" standard in evaluating the terms of such exchange.
DESCRIPTION OF CAPITAL STOCK OF THE STOCK HOLDING COMPANY
The Stock Holding Company is authorized to issue 5,000,000 shares of
Common Stock having a par value of $.01 per share and 1,000,000 shares of serial
preferred stock, no par value per share (the "Preferred Stock"). The Stock
Holding Company currently will issue a number of shares Common Stock equal to
the number of shares of Association Common Stock outstanding immediately prior
to the Reorganization, and will issue no shares of Preferred Stock in the
Reorganization. Each share of the Common Stock will have the same relative
rights as, and will be identical in all respects with, each other share of
Common Stock.
THE COMMON STOCK OF THE STOCK HOLDING COMPANY WILL REPRESENT
NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC OR ANY GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The payment of dividends by the Stock Holding Company is
subject to limitations which are imposed by law and applicable regulation. The
holders of Common Stock of the Stock Holding Company will be entitled to receive
and share equally in such dividends as may be declared by the Board of Directors
of the Stock Holding Company out of funds legally available therefor. If the
Stock Holding Company issues Preferred Stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to dividends.
32
<PAGE>
VOTING RIGHTS. The holders of Holding Company Common Stock will possess
exclusive voting rights in the Stock Holding Company. They will elect the Stock
Holding Company's Board of Directors and act on such other matters as are
required to be presented to them under OTS Rules and Regulations or as are
otherwise presented to them by the Board of Directors. If the Stock Holding
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Association, the Stock Holding Company, as holder of the Association's
capital stock, would be entitled to receive, after payment or provision for
payment of all debts and liabilities of the Association (including all deposit
accounts and accrued interest thereon) and after distribution of the balance in
the special liquidation account established in connection with the Association's
MHC Reorganization, all assets of the Association available for distribution. In
the event of liquidation, dissolution or winding up of the Stock Holding
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Stock Holding Company available for distribution. If Preferred
Stock is issued, the holders thereof may have a priority over the holders of the
Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Holding Company Common Stock will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Holding Company Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Stock Holding Company's authorized Preferred
Stock will be issued in the Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without shareholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
ACCOUNTING TREATMENT
The Reorganization will be treated similar to a pooling of interests
for accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and financial statements of the Stock Holding Company
immediately following the Reorganization will be substantially the same as those
of the Association immediately prior to consummation of the Reorganization, all
of which will be shown on the Stock Holding Company's books at their historical
recorded values. Since the Reorganization will not result in a change in such
financial statements, this document does not include financial statements of the
Association or the Stock Holding Company.
VOTE REQUIRED
Approval of the Plan of Reorganization requires the affirmative vote of
the holders of a majority of total outstanding shares of Association Common
Stock. Any such shareholder approval, if obtained, will be valid for eleven
months subsequent to the Annual Meeting. If regulatory approval is not obtained
prior to such time, the Association will be required to resolicit shareholder
approval.
Failure to vote or a vote to abstain is equivalent to voting against
the Plan of Reorganization. The Board of Directors recommends a vote "FOR" the
approval of the Plan of Reorganization.
33
<PAGE>
Shares as to which the "ABSTAIN" box has been selected on the Proxy
Card will be counted as present and entitled to vote and, accordingly, will have
the effect of a vote against Proposal 2. Shares underlying broker non-votes will
not be counted as having been voted in person or by proxy and will have the same
effect as a vote against Proposal 2.
The MHC intends to vote for the proposal to approve and adopt the Plan
of Reorganization, thereby insuring a quorum and the likelihood of approval of
the Plan of Reorganization.
THIS DESCRIPTION OF THE PROPOSED STOCK HOLDING COMPANY FOR THE
ASSOCIATION DOES NOT PURPORT TO BE COMPLETE, BUT IS QUALIFIED IN ITS ENTIRETY BY
THE PLAN OF REORGANIZATION AND CHARTER AND BYLAWS OF THE STOCK HOLDING COMPANY
ATTACHED AS EXHIBITS A, B AND C, RESPECTIVELY, TO THIS PROXY
STATEMENT/PROSPECTUS.
RECOMMENDATION
The Board of Directors of the Association believes that the
Reorganization will enhance the ability of the Association and the Stock Holding
Company to undertake mergers and acquisitions, enable the Stock Holding Company
to repurchase Holding Company Common Stock as market conditions permit, and
provide the Stock Holding Company greater flexibility to diversify its business
activities. THE BOARD OF DIRECTORS OF THE ASSOCIATION HAS UNANIMOUSLY APPROVED
THE REORGANIZATION AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE PLAN OF
REORGANIZATION.
34
<PAGE>
------------------------------------------------------------------
PROPOSAL 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
------------------------------------------------------------------
GENERAL
The Board of Directors has appointed the firm of McGladrey & Pullen,
LLP to act as independent auditors for the Association for the fiscal year
ending September 30, 1999, subject to ratification of such appointment by the
Association's shareholders. A representative of McGladrey & Pullen, LLP is
expected to be present at the Annual Meeting and will be given an opportunity to
make a statement if he or she desires to do so and will be available to respond
to appropriate questions. No determination has been made as to what action the
Board of Directors would take if the shareholders do not ratify the appointment.
VOTE REQUIRED
The ratification of the appointment of the Board of Directors of
McGladrey & Pullen, LLP, independent auditors ("Proposal 2") requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock represented in person or by proxy at the Annual Meeting and
entitled to vote thereon. Accordingly, shares as to which the "ABSTAIN" box has
been selected on the Proxy Card will be counted as present and entitled to vote
and will have the effect of a vote against Proposal 3. Shares underlying broker
non-votes will not be counted as having been voted in person or by proxy and
will have no effect on the vote for Proposal 3. The MHC intends to vote for the
ratification of the appointment of McGladrey & Pullen, LLP thereby ensuring a
quorum and the likelihood of the ratification of the appointment of the
independent auditors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS.
35
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL 4
AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION, TO
DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE ANNUAL MEETING, AND ANY ADJOURNMENT OR
POSTPONEMENT THEREOF, INCLUDING, WITHOUT LIMITATION,
A MOTION TO ADJOURN THE ANNUAL MEETING
- --------------------------------------------------------------------------------
GENERAL
The Board of Directors is not aware of any other business that may
properly come before the Annual Meeting. The Board seeks the authorization of
the shareholders of the Association, in the event matters properly come before
the meeting, including, but not limited to, the consideration of whether to
adjourn the Annual Meeting once called to order and to direct the manner in
which those shares represented at the Annual Meeting by proxies solicited
pursuant to this Proxy Statement shall be voted. As to all such matters, the
Board intends that it would direct the voting of such shares in the manner
determined by the Board, in its discretion, and in the exercise of its duties
and responsibilities, to be in the best interests of the Association and its
shareholders, taken as a whole.
VOTE REQUIRED
The authorization of the Board of Directors, in its discretion, to vote
upon such other business as may properly come before the Annual Meeting
("Proposal 3") requires the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock represented in person or by proxy at the
Annual Meeting and entitled to vote thereon. Accordingly, shares as to which the
"ABSTAIN" box has been selected on the Proxy Card will be counted as present and
entitled to vote and will have the effect of a vote against Proposal 4. Shares
underlying broker non-votes will not be counted as having been voted in person
or by proxy and will have no effect on the vote for Proposal 4. The MHC intends
to vote for the authorization of the Board of Directors to vote upon such other
business as may properly come before the Annual Meeting thereby ensuring a
quorum and the likelihood of the approval of Proposal 4.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION, TO DIRECT THE VOTE
OF THE PROXIES UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL
MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF, INCLUDING, WITHOUT
LIMITATION, A MOTION TO ADJOURN THE ANNUAL MEETING.
36
<PAGE>
ADDITIONAL INFORMATION
NOTICE OF BUSINESS TO BE CONDUCTED AT ANNUAL MEETING
The Bylaws of the Association provide an advance notice procedure for a
shareholder to properly bring business before an annual meeting or to nominate
any person for election to the Board of Directors. The shareholder must be a
shareholder of record and have given timely notice thereof in writing to the
Secretary of the Association. To be timely, a shareholder's notice must be
delivered to or received by the Secretary not later than five days prior to the
date of the annual meeting. A shareholder's notice to the Secretary shall set
forth such information as required by the Bylaws of the Association. Nothing in
this paragraph shall be deemed to require the Association to include in its
proxy statement and proxy card relating to an annual meeting any shareholder
proposal or nomination which does not meet all of the requirements for inclusion
established by the SEC in effect at the time such proposal or nomination is
received. See "--Date For Submission of Shareholder Proposals."
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the Association's
proxy statement and proxy card relating to the Association's 2000 Annual Meeting
of Shareholders must be received by the Association by September 5, 1999,
pursuant to the proxy soliciting regulations of the SEC. Nothing in this
paragraph shall be deemed to require the Association to include in its proxy
statement and proxy card for such meeting any shareholder proposal which does
not meet the requirements of the SEC in effect at the time. Any such proposal
will be subject to 17 C.F.R. ss.240.14a-8 of the Rules and Regulations
promulgated by the SEC under the Exchange Act.
AVAILABLE INFORMATION
This proxy statement is also a prospectus of the Stock Holding Company
delivered in compliance with the Securities Act of 1933, as amended ("Securities
Act"). The Association has filed with the OTS an application to form a mid-tier
holding company on Form H-(e)1 (the "Application"). This Proxy
Statement/Prospectus does not contain all the information set forth in the
Application, certain parts of which are omitted in accordance with the rules and
regulations of the OTS. The Application may be inspected at the offices of the
OTS without charge at the principal office of the OTS, 1700 G Street, NW,
Washington, DC 20552 and at the office of the Regional Director of the Southeast
Region of the OTS located at 1475 Peachtree Street, NE, Atlanta, Georgia
30348-5217. Copies of all or any part of the Application may be obtained upon
payment of a fee prescribed by the OTS. For further information pertaining to
the Stock Holding Company and the securities offered hereby, reference is made
to the Application, including the exhibits filed as a part thereof. The
summaries or descriptions of documents, statutes or regulations in this Proxy
Statement/Prospectus do not purport to be complete. Reference is made to the
copies of such documents attached to this Proxy Statement/Prospectus or
otherwise filed as part of the Application and to such statutes or regulations
for a full and complete statement of their provisions, and such summaries and
descriptions are qualified in their entirety by such reference.
The Proxy Statement/Prospectus has been filed by Association with the
OTS, under the Exchange Act. The Association Company has also filed reports and
other information with the OTS under the Exchange Act. Such information can be
inspected and copied at the OTS.
37
<PAGE>
FINANCIAL INFORMATION
No financial statement disclosure is included herein because, in
accordance with the rules of the Commission: (i) the only parties to the
Reorganization (other than the Association) are the Stock Holding Company and
its wholly-owned subsidiary, Wake Forest Interim Savings Bank neither of which
has any significant assets or liabilities; (ii) the Stock Holding Company's only
substantial asset if the Reorganization is effected will be cash and its
investment in the Association; and (iii) the consolidated financial statements
of the Stock Holding Company immediately after the Reorganization will be
substantially identical to the financial statements of the immediately before
the Reorganization. The Reorganization will be characterized and accounted for
at historical cost in a manner similar to a "pooling of interest" for financial
reporting and related purpose.
LEGAL MATTERS
The validity of the Stock Holding Company Common Stock to be issued
pursuant to the Reorganization will be passed upon for the Stock Holding Company
by Thacher Proffitt & Wood, Washington, D.C.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Board of
Directors of the Association does not know of any other matters to be brought
before the shareholders at the 1999 Annual Meeting. See "Proposal 4 --
Authorization of the Board of Directors, in its discretion, to Direct the Vote
of the Proxies upon such Other Matters Incident to the Conduct of the Annual
Meeting as may Properly Come Before the Annual Meeting, and any Adjournment or
Postponement Thereof, including, without limitation, a Motion to Adjourn the
Annual Meeting."
A copy of the 1998 Annual Report to Shareholders, including the
financial statements prepared in conformity with generally accepted accounting
principles, for the fiscal year ended September 30, 1998 accompanies this Proxy
Statement. The financial statements have been audited by McGladrey & Pullen,
LLP, whose report appears in the Annual Report. SHAREHOLDERS MAY OBTAIN, FREE OF
CHARGE, A COPY OF THE ANNUAL REPORT ON FORM 10-KSB FILED WITH THE OTS (WITHOUT
EXHIBITS) BY WRITING TO CARLTON E. CHAPPELL, WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, 302 SOUTH BROOKS STREET, P.O. BOX 707, WAKE FOREST, NORTH CAROLINA
27588-0707 OR BY CALLING (919) 556-5146.
By Order of the Board of Directors,
Carlton E. Chappell
VICE PRESIDENT, SECRETARY AND TREASURER
Wake Forest, North Carolina
January 21, 1999
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN
THE ACCOMPANYING PROXY CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED.
38
EXHIBIT 99.2
OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
Washington D.C. 20552
FORM 10-QSB
[U] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to ______
Office of Thrift Supervision Docket Number: 0143
Wake Forest Federal Savings and Loan Association
------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0440967
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 South Brooks Street
Wake Forest, North Carolina 27587
---------------------------------
(Address of principal executive office) (Zip code)
(919)-556-5146
--------------
(Registrant's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check U whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of February 1, 1999 there were issued and outstanding 1,215,862 shares of the
Registrant's common stock, $.01 par value Transitional Small Business Disclosure
Format: Yes [_] No [x]
1
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of financial condition at December 31, 1998 (unaudited)
and September 30, 1998 1
Statements of income for the three months ended December 31, 1998
and December 31, 1997 (unaudited) 2
Statements of comprehensive income for the three months ended
December 31, 1998 and December 31, 1997 (unaudited) 3
Statements of cash flows for the three months ended December 31,
1998 and December 31, 1997 (unaudited) 4
Notes to financial statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis of Financial Condition 9-16
and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
Cash and short-term cash investments $ 17,010,200 $ 15,311,350
Investment securities:
Available for sale, at estimated market value 2,512,300 2,785,100
FHLB stock 364,100 364,100
Loans receivable, net 55,496,350 55,363,450
Accrued interest receivable, investments 39,050 25,550
Property and equipment, net 455,300 459,550
Prepaid expenses and other assets 46,000 51,350
------------- ------------
Total Assets $ 75,923,300 $ 74,360,450
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 61,062,650 $ 60,037,950
Accrued expenses and other liabilities 296,000 303,200
Dividends payable 145,900 145,900
Note payable- ESOP 250,150 264,850
Income taxes payable 159,750 --
Deferred income taxes 256,050 170,600
Redeemable common stock held by the ESOP
net of unearned ESOP shares 244,250 270,750
Total liabilities 62,414,750 61,193,250
Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $ .01, authorized 5,000,000 shares,
issued and outstanding 1,215,862 shares 12,150 12,000
Additional paid-in capital 4,790,650 4,772,950
Unrealized gain on securities available for sale, net of tax 616,500 477,100
Retained earnings, substantially restricted 8,089,250 7,905,150
-------------- --------------
Total stockholders' equity 13,508,550 13,167,200
-------------- --------------
Total liabilities and stockholders' equity $ 75,923,300 $ 74,360,450
============== ==============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest and dividend income:
Loans $ 1,321,400 $ 1,257,250
Investment securities 36,450 41,400
Short-term cash investments 193,950 133,000
---------- ----------
TOTAL INTEREST INCOME 1,551,800 1,431,650
---------- ----------
Interest expense:
Interest on deposits 805,950 701,450
Interest on ESOP debt 5,300 6,650
---------- ----------
811,250 708,100
---------- ----------
NET INTEREST INCOME 740,550 723,550
---------- ----------
Noninterest income:
Service charges and fees 8,550 7,700
Other 1,800 1,900
---------- ----------
10,350 9,600
---------- ----------
Noninterest expense:
Compensation and benefits 160,550 158,650
Occupancy 7,500 7,600
Federal insurance and operating assessments 14,650 13,050
Data processing and outside service fees 28,500 22,300
Other operating expense 82,550 75,150
---------- ----------
293,750 276,750
---------- ----------
INCOME BEFORE INCOME TAXES 457,150 456,400
Income taxes 171,350 180,250
---------- ----------
NET INCOME $ 285,800 $ 276,150
========== ==========
Basic earnings per share $ 0.24 $ 0.24
========== ==========
Diluted earnings per share $ 0.24 $ 0.23
========== ==========
Dividends paid per share $ 0.12 $ 0.10
========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSSOCIATION
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income $ 285,800 $ 276,150
---------- ----------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period 139,400 58,750
Less: reclassification adjustment for gains included in
net income -- --
---------- ----------
OTHER COMPREHENSIVE INCOME 139,400 58,750
---------- ----------
COMPREHENSIVE INCOME $ 425,200 $ 334,900
========== ==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income $ 285,800 $ 276,150
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,750 8,800
ESOP contribution expense charged to paid-in capital 3,700 13,700
Amortization of discounts/premiums on investment securities (2,350)
Amortization of unearned ESOP shares 14,700 14,700
Amortization of unearned RRP shares 14,150
Changes in assets and liabilities:
Prepaid expenses and other assets 5,350 9,600
Accrued interest receivable (13,500) (7,250)
Income tax refund receivable 13,300
Accrued expenses and other liabilities (7,200) (21,750)
Income taxes payable 159,750 166,950
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 468,150 474,200
---------- ----------
Cash Flows From Investing Activities
Net (increase) decrease in loans receivable (132,900) 804,850
Maturity of available for sale investment securities 500,000
Purchase of property and equipment (3,500) (600)
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 363,600 804,250
---------- ----------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 1,024,700 5,372,300
Principal payments on ESOP debt (14,700) (14,700)
Dividends paid (142,900) (119,100)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 867,100 5,238,500
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,698,850 6,516,950
Cash and cash equivalents:
Beginning 15,311,350 5,804,650
---------- ----------
Ending $ 17,010,200 $ 12,321,600
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 790,500 $ 735,900
========== ==========
Supplemental Disclosure of Noncash transactions:
Increase in ESOP put option charged to retained earnings $ 41,200 $ 108,150
Increase in unrealized gain on investment securities 224,850 58,750
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NATURE OF BUSINESS
The Association is located in Wake Forest, North Carolina and it's principal
activities consist of obtaining savings deposits and providing mortgage credit
to customers in its primary market area, the counties of Wake, Franklin and
Granville, North Carolina. The Association's primary regulator is the Office of
Thrift Supervision and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
On October 23, 1995, the Board of Directors of Wake Forest Federal Savings and
Loan Association adopted a Plan of Reorganization and the Stock Issuance Plan
(collectively the "Plans") under which the Association exchanged its federal
mutual savings and loan charter for a federal stock savings and loan charter,
conducted a minority stock offering, and formed Wake Forest Bancorp MHC, a
mutual holding company which owns at least 51% of the common stock to be issued
by the Association. The Association conducted its minority stock offering in
February and March of 1996 and the closing occurred on April 3, 1996. The
Association issued 515,000 shares in the minority stock offering and issued an
additional 41,200 shares to its Employee Stock Ownership Plan (the "ESOP") and
635,000 shares to the mutual holding company.
Members of the mutual holding company consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the mutual holding company for as long as it remains in mutual
form. Initially, the mutual holding company's principal assets consisted of
shares of the Association's common stock received in the reorganization and
$100,000 in cash received from the Association. The mutual holding company has
since received its proportional share of dividends declared and paid by the
Association, and such funds are invested in deposits with the Association. The
mutual holding company, which by law must own in excess of 50% of the stock of
the Association, currently has an ownership interest of 52.2% of the
Association. The mutual holding company is registered as a savings and loan
holding company and is subject to regulation, examination, and supervision by
the Office of Thrift Supervision (the "OTS").
NOTE 2. REORGANIZATION
On November 16, 1998, the Board of Directors of the Association approved an
Agreement and Plan of Reorganization (the Plan of Reorganization). The Plan of
Reorganization provides for the establishment of Wake Forest Bancshares, Inc.
(the Stock Holding Company) as a stock holding company parent of the
Association. The stock holding company will be majority owned by Wake Forest
Bancorp, MHC (the MHC), the Association's mutual holding company. The
reorganization into the "two-tier" mutual holding company structure (the
Reorganization) under the Plan of Reorganization is subject to approval by
stockholders of the Association at the Association's annual meeting to be held
on February 23, 1999 and by regulatory authorities.
If approved, as a part of the Reorganization, each outstanding share of
Association's common stock will be converted into one share of common stock, par
value $.01 per share, of the Stock Holding Company, and the holders of the
Association's common stock will become the holders of all of the outstanding
shares of the
7
<PAGE>
Holding Company's common stock. Accordingly, as a result of the Reorganization,
the Association's minority shareholders will become minority shareholders of the
Stock Holding Company.
REORGANIZATION (CONTINUED)
The Stock Holding Company was incorporated solely for the purpose of becoming a
savings and loan holding company and has no prior operating history. The
Reorganization will have no impact on the operations of the Association or the
MHC. The Association will continue its operations at the same location, with the
same management, and subject to all the rights, obligations and liabilities of
the Association existing immediately prior to the Reorganization.
The Board of Directors of the Association presently intends to capitalize the
Stock Holding Company with up to $100,000. Future capitalization of the Stock
Holding Company will depend upon dividends declared by the Association based on
future earnings, or the raising of additional capital by the Stock Holding
Company through a future issuance of securities, debt or by other means. The
Board of Directors of the Stock Holding Company has no present plans or
intentions with respect to any future issuance of securities or debt at this
time. Furthermore, as long as it is in existence, the MHC must own at least a
majority of the Stock Holding Company's outstanding voting stock.
The Reorganization will be treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and expenses of the Stock Holding Company immediately
following the Reorganization will be substantially the same as those of the
Association immediately prior to consummation of the Reorganization, all of
which will be shown on the Stock Holding Company's books at their historical
recorded values.
BASIS OF PRESENTATION
The accompanying unaudited financial statements (except for the statement of
financial condition at September 30, 1998, which is audited) have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Regulation S-B. Accordingly, they do not include all
of the information required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The results of operations for the three month
period ended December 31, 1998 is not necessarily indicative of the results of
operations that may be expected for the Association's fiscal year ending
September 30, 1999.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Association's September 30, 1998 Annual Report.
During the current quarter, the Association adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement was adopted effective October 1, 1998 as explained in Note 6 below.
DIVIDENDS DECLARED
On December 21, 1998, the Board of Directors of the Association declared a
dividend of $0.12 a share for stockholders of record as of December 31, 1998 and
payable on January 11, 1999. The dividends declared were accrued and reported as
dividends payable on the December 31, 1998 Statement of Financial Condition.
Wake Forest Bancorp, Inc., the mutual holding company, did not waive the receipt
of dividends declared by the Association.
8
<PAGE>
EARNINGS PER SHARE
The Association adopted statement of Financial Accounting Standard No. 128
during the quarter ended December 31, 1997. This statement requires dual
presentation of basic and diluted EPS with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings per share amounts are based
on the weighted average shares of common stock outstanding. Diluted earnings per
share assume the conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. This presentation has
been adopted for all periods presented. The weighted average shares used to
compute EPS were 1,175,410 and 1,176,816 for basic and diluted EPS,
respectively, for the three months ended December 31, 1998 and 1,160,298 and
1,193,563 for basic and diluted EPS, respectively, for the three months ended
December 31, 1997. There were no adjustments required to net income for either
quarter in the computation of diluted earnings per share. The reconciliation of
weighted average shares outstanding for the computation of basic and diluted
earnings per share for the quarters ended December 31, 1998 and 1997 is
presented below.
<TABLE>
<CAPTION>
1988 1997
---------- ----------
<S> <C> <C>
Weighted average shares outstanding for Basic EPS 1,175,410 1,160,298
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 1,406 33,265
Weighted average shares outstanding for diluted EPS 1,176,816 1,193,563
========== ===========
</TABLE>
NOTE 6. ADOPTION OF SFAS STATEMENT NO. 130
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income," which the
Association was required to adopt as of October 1, 1998. The Statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and to display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. Other comprehensive income
refers to revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but excluded from net
income, and are therefore included in changes in equity. Other comprehensive
income includes all such changes in equity other than those resulting from
investments by owners and distributions to owners.
SFAS No. 130 does not require a specific format for displaying comprehensive
income and its components in a financial statement other than it must be
displayed with the same prominence as other financial statements that constitute
a full set of financial statements. The Association has elected to display
comprehensive income in a separate statement of comprehensive income that begins
with net income. The
9
<PAGE>
only item of other comprehensive income that the Association currently has is
associated with changes in unrealized gains and losses on securities classified
as available for sale. The tax effects related to the components of other
comprehensive income are shown below for the three month periods ended December
31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended December 31, 1998
------------------------------------------------
Before Tax Tax Net-of-Tax
Amount Expense Amount
-------------- --------------- -------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 224,850 $ (85,450) $ 139,400
============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997
------------------------------------------------
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- --------------- -------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 94,750 $ (36,000) $ 58,750
============== =============== ==============
</TABLE>
10
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1998:
Total assets increased by $1.6 million to $75.9 million at December 31, 1998
from $74.3 million at September 30, 1998. Total assets increased during the
three months ended December 31, 1998 primarily due to an increase in deposits of
approximately $1.0 million, earnings for the quarter of $285,800, and
appreciation in the Association's investment in available for sale securities of
$224,850. The deposit increase created an increase in cash and short term cash
investments of $1.7 million for the quarter.
Net loans receivable increased by $132,900 to $55.5 million at December 31, 1998
from $55.4 million at September 30, 1998. The increase was caused primarily by
an increase in construction lending. Assuming interest rates remain fairly
stable, management believes that its loan portfolio has potential for continued
growth because the Association operates in lending markets that have had
sustained loan demand over the past several years.
However, there can be no assurances that such loan demand can or will continue.
Investment securities decreased by $272,800 to $2.9 million at December 31, 1998
from $3.2 million at September 30, 1998. The decrease is attributable to a
maturing $500,000 bond during the quarter, and was partially offset by
unrealized quarterly gains of $224,850 in the Association's portfolio of
investment securities. At the end of the current quarter, the Association
invested $5.0 million in time deposits, which have maturities throughout 1999.
These time deposits currently have interest rates which are excess of daily-rate
deposits, and are reported as short-term investments in the Association's
statement of financial condition at December 31, 1998.
The Association had no borrowings outstanding during the quarter other than the
loan incurred by the ESOP for purchase of common stock in the Offering. The ESOP
borrowed $412,000 for its purchase of stock from an outside financial
institution on April 3, 1996. During the three month period ended December 31,
1998, the Association made principal payments totaling $14,700 plus interest on
the ESOP note, reducing the outstanding balance of the note to $250,150 at
December 31, 1998. The Association is committed to making retirement plan
contributions sufficient to amortize the debt over its seven year term, and as
such, has reported the debt on its balance sheet. The Association recorded
retirement plan contributions of approximately $20,000 during the three month
period ended December 31, 1998 for principal and interest payments on the debt.
The Association also reported $3,700 in additional retirement plan expense and
credited paid-in capital equal to the increase in the fair value of its common
stock on ESOP shares allocated to participants in the Plan during the three
month period ended December 31, 1998. The Association has recorded a liability
of $244,250 at December 31, 1998 for the ESOP put option.
11
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
There were no changes in the Association's capital structure during the three
month period ended December 31, 1998. Retained earnings increased by $184,100 to
$8.1 million at December 31, 1998 from $7.9 million at September 30, 1998. The
increase is attributable to the Association's earnings during the three month
period ended December 31, 1998, reduced by $142,900 in dividends declared during
the three month period ended December 31, 1998 and a $41,200 credit to retained
earnings to reflect the change in the fair value of the ESOP shares subject to
the put option. At December 31, 1998, the Association's regulatory capital
amounted to $12.9 million, which as a percentage of total assets was 17.21%, and
was considerably in excess of the regulatory capital requirements at such date.
ASSET QUALITY:
The Association's level of nonperforming loans, defined as loans past due 90
days or more, as a percentage of loans outstanding, was .23% at December 31,
1998 and .24% at September 30, 1998. The Association's level of nonperforming
loans has remained consistently low in relation to prior periods and total loans
outstanding. The Association did not charge off any loans during the three month
period ended December 31, 1998, and had no foreclosed properties outstanding at
any time during the current quarter. As a result, and based on management's
analysis of the adequacy of its allowances, no provision for additional loan
loss allowances was made during the three month period ended December 31, 1998.
The Association's loan loss allowance was $263,000 at December 31, 1998, which
was 205.45% of total nonperforming loans outstanding on such date.
12
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
1997:
GENERAL. Net income for the three month period ended December 31, 1998 was
$285,800, or $9,650 more than the $276,150 earned during the same period in
1997. As discussed below, minor increases in net interest income between the
comparable periods coupled with minor increases in noninterest expenses was
primarily responsible for the change in net income.
INTEREST INCOME. Interest income increased by $120,150 from $1,431,650 for the
three months ended December 31, 1997 to $1,551,800 for the three months ended
December 31, 1998. The increase was attributable primarily to an overall
increase in the volume of interest-earning assets outstanding, which were
approximately $7.5 million higher during the three month period ended December
31, 1998 than the comparable period in 1997. The Association's yield on interest
earning assets decreased from 8.25% for the quarter ending December 31, 1997 to
7.85% for the current quarter. The decrease occurred primarily due to a overall
decline in market interest rates (the majority of the Association's loans have
3-5 year adjustable features or are tied to Prime) and an increase in the volume
of short-term interest earning assets (with lower yields) during the current
quarter as compared with the same period last year.
INTEREST EXPENSE. Interest expense increased by $103,150 from $708,100 for the
three months ended December 31, 1997 to $811,250 for the three months ended
December 31, 1998. The increase was primarily the result of an increase in
volume of interest bearing deposits, which increased by approximately $7.0
million during the three months ended December 31, 1998 as compared with the
three months ended December 31, 1997. The increase in interest expense
associated with the increase in outstanding deposits was partially offset by a
lower cost of funds, which declined from 5.32% for the quarter ending December
31, 1997 to 5.19% for the current quarter.
NET INTEREST INCOME. Net interest income increased by $17,000 from $723,550 for
the three months ended December 31, 1997 to $740,550 for the three months ended
December 31, 1998. As explained above, the increase resulted primarily from an
increase in the volume of interest earning assets coupled with a decline in the
Association's interest rate spread between the periods.
13
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
1997 (Continued):
PROVISION FOR LOAN LOSSES. No provisions for loan losses were made during the
three month periods ended December 31, 1998 and 1997. Provisions, which are
charged to operations, and the resulting loan loss allowances are amounts the
Association's management believes will be adequate to absorb potential losses on
existing loans that may become uncollectible. Loans are charged off against the
allowance when management believes that collectibility is unlikely. The
evaluation to increase or decrease the provision and resulting allowances is
based both on prior loan loss experience and other factors, such as changes in
the nature and volume of the loan portfolio, overall portfolio quality, and
current economic conditions.
The Association's level of nonperforming loans remained consistently low in
relation to prior periods and total loans outstanding during the three month
period ended December 31, 1998. In addition, the Association did not charge-off
any loans or acquire any foreclosed properties during the three month period
ended December 31, 1998.
At December 31, 1998, the Association's level of general valuation allowances
for loan losses amounted to $263,000, which management believes is adequate to
absorb any existing inherent losses in its loan portfolio.
NONINTEREST EXPENSE. Noninterest expense increased by $17,000 to $293,750 for
the three month period ended December 31, 1998 from $276,750 for the comparable
quarter in 1997. Although there was no significant dollar increase in any
category of noninterest expense between the quarters, the higher percentage
increase in data processing expense during the three month period ended December
31, 1998 as compared with the same period in 1997 was caused primarily due to
certain "Year 2000" related costs and an increased volume of outstanding
customer accounts. The expenses associated with the formation of the stock
holding company described in Note 2 to the Financial Statements will cause other
operating expenses to be marginally higher during the remainder of fiscal year
1999.
14
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the three month period ended December 31, 1998, cash and cash
equivalents, a significant source of liquidity, increased by approximately $1.7
million. Proceeds from the Association's operations contributed an $468,150 in
cash during the period. Additionally, maturing investments was the source of
$500,000 in increased cash. An increase in deposits of approximately $1.0
million, offset by dividends paid of $142,900 was the source of approximately
$867,000 of cash from financing activities.
As a federally chartered savings association, Wake Forest Federal must maintain
a daily average balance of liquid assets equal to at least 4% of withdrawable
deposits and short-term borrowings. The Association's liquidity ratio at
December 31, 1998, as computed under OTS regulations, was considerably in excess
of such requirements. Given its excess liquidity and its ability to borrow from
the Federal Home Loan Bank, the Association believes that it will have
sufficient funds available to meet anticipated future loan commitments,
unexpected deposit withdrawals, and other cash requirements.
YEAR 2000 ISSUE:
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Association and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Association's direct control and with whom the Association electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and credit
bureau information) are likely to be affected.
15
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
Furthermore, if computer systems are not adequately changed to identify the Year
2000, many computer applications could fail or create erroneous results. As a
result, many calculations which rely on the date field information, such as
interest, payment or due dates and other operating functions, will generate
results which could be significantly misstated, and the Association could
experience a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
In addition, non-information technology systems, such as equipment like
telephones and copiers may also contain embedded technology which controls its
operation and which may be effected by the Year 2000 Problem. When the Year 2000
arrives, systems, including some of those with embedded chips, may not work
properly because of the way they store date information. They may not be able to
deal with the date 01/01/00, and may not be able to deal with operational
'cycles' such as 'do X every 100 days'. Thus, even non-information technology
systems may affect the normal operations of the Association upon the arrival of
the Year 2000. Under certain circumstances, failure to adequately address the
Year 2000 Problem could adversely affect the viability of the Association's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 Problem could result in a significant
adverse impact on the Association's products, services and competitive
condition.
In order to address the Year 2000 Issue and to minimize its potential adverse
impact, management has begun a process to identify areas that will be affected
by the Year 2000 Problem, assess its potential impact on the operations of the
Association, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. A
committee of senior officers of the Association has been formed to evaluate the
effects that the upcoming Year 2000 could have on computer programs utilized by
the Association. The Association's plan is divided into the five phases:
(1) Awareness. Define the problem, obtain executive level support and
develop an overall strategy. This phase was completed in April 1998.
(2) Assessment. Identify all systems and the criticality of the systems.
This phase was completed in June 1998.
(3) Renovation. Program enhancements, hardware and software upgrades,
system replacements, and vendor certifications. This phase was
completed in December 1998.
(4) Validation. Test and verify system changes and coordinate with outside
parties. This phase is in process with a scheduled completion date of
April 1999.
(5) Implementation. Components certified as Year 2000 compliant and moved
to production. This phase is in process with a scheduled completion
date of July 1999.
16
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
Third party vendors provide the majority of software used by the Association.
All of the Association's vendors are aware of the Year 2000 situation, and each
has assured the Association that it is currently working to have its software
compliant by July 1999, and testing for the critical applications began in April
1998. This will enable the Association to devote substantial time to the testing
of the upgraded systems prior to the arrival of the millennium. The Association
utilizes the service of a third party vendor to provide the software which is
used to process and maintain most mortgage and deposit customer-related
accounts. This vendor has provided the Association with a software version which
has been certified to be Year 2000 compliant. Testing by the Association is
underway to verify compliance for its application and usage. The Association
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Problem will be mitigated without causing a
material adverse impact on the operations of the Association. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Problem could have an impact on the operations of the Association.
In addition, monitoring and managing the Year 2000 project will result in
additional direct and indirect costs to the Association. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance, and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. The Association has spent approximately $42,000 on Year 2000
related costs to date and estimates that it will spend an additional $24,000 for
Year 2000 compliance. Both direct and indirect costs of addressing the Year 2000
Problem will be charged to earnings as incurred. The Association does not
believe that such costs will have a material effect on results of operations.
However, there can be no guarantee that the systems of other companies on which
the Association's systems rely will be timely converted, or that a failure to
convert by another company or a conversion that is incompatible with the
Association's systems, would not have a material adverse effect on the
Association.
The costs of the project and the date on which the Association plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will
17
<PAGE>
be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Statements herein regarding estimated future expense levels and other matters
may constitute forward-looking statements under the federal securities laws.
Such statements are subject to certain risks and uncertainties. Undue reliance
should not be placed on this information. These estimates are based on the
current expectations of management, which may change in the future due to a
large number of potential events, including unanticipated future developments.
19
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Association is not engaged in any legal proceedings at the
present time. From time to time, the Association is a party to
legal proceedings within the normal course of business wherein
it enforces its security interest in loans made by it, and
other matters of a similar nature.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable
b) No reports on Form 8-K were filed for the period
covered by this report
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
Dated February 1, 1999 By: /s/ Anna O. Sumerlin
------------------------------ ------------------------------
Anna O. Sumerlin
President and CEO
Dated February 1, 1999 By: /s/ Robert C. White
------------------------------ ------------------------------
Robert C. White
Chief Financial Officer and VP
20
EXHIBIT 99.3
OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
Washington D.C. 20552
FORM 10-QSB
[U] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Office of Thrift Supervision Docket Number: 0143
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0440967
-------------- ----------
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
---------------------------------
(Address of principal executive office) (Zip code)
(919)-556-5146
--------------
(Registrant's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check U whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of May 10, 1999 there were issued and outstanding 1,215,862 shares of the
Registrant's common stock, $.01 par value
Transitional Small Business Disclosure Format: Yes [_] No [X]
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
CONTENTS
Pages
-----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Statements of financial condition at March 31, 1999 (unaudited) and
September 30, 1998 1
Statements of income for the three months ended March 31, 1999
and March 31, 1998 (unaudited) 2
Statements of income for the six months ended March 31, 1999
and March 31, 1998 (unaudited) 3
Statements of comprehensive income for the three and six months
ended March 31,1999 and March 31, 1998 (unaudited) 4
Statements of cash flows for the six months ended March 31, 1999
and March 31, 1998 (unaudited) 5 - 6
Notes to financial statements (unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
March 31, September 30,
ASSETS 1999 1998
- --------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 12,011,100 $ 15,311,350
Investment securities:
Available for sale, at estimated market value 3,390,600 2,785,100
FHLB stock 364,100 364,100
Loans receivable, net 58,729,750 55,363,450
Accrued interest receivable 78,900 25,550
Property and equipment, net 452,000 459,550
Prepaid expenses and other assets 53,550 51,350
-------------------------------
Total Assets $ 75,080,000 $ 74,360,450
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 60,268,800 $ 60,037,950
Accrued expenses and other liabilities 359,000 303,200
Dividends payable 145,900 145,900
Note payable- ESOP 235,400 264,850
Deferred income taxes 205,300 170,600
Redeemable common stock held by the ESOP
net of unearned ESOP shares 259,000 270,750
TOTAL LIABILITIES 61,473,400 61,193,250
Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $ .01, authorized 5,000,000 shares,
issued and outstanding 1,215,862 shares 12,150 12,150
Additional paid-in capital 4,807,800 4,772,800
Unrealized gain on securities available for sale, net of tax 542,000 477,100
Retained earnings, substantially restricted 8,244,650 7,905,150
Total stockholders' equity 13,606,600 13,167,200
-------------------------------
Total liabilities and stockholders' equity $ 75,080,000 $ 74,360,450
===============================
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 1,369,100 $ 1,251,300
Investment securities 37,600 51,100
Short-term cash investments 152,500 168,800
-----------------------------
TOTAL INTEREST INCOME 1,559,200 1,471,200
-----------------------------
Interest expense:
Interest on deposits 754,300 756,150
Interest on ESOP debt 4,850 6,800
-----------------------------
759,150 762,950
-----------------------------
NET INTEREST INCOME 800,050 708,250
Noninterest income: -----------------------------
Service charges and fees 7,650 8,200
Other 1,300 --
-----------------------------
8,950 8,200
-----------------------------
Noninterest expense:
Compensation and benefits 180,350 176,450
Occupancy 8,800 10,750
Federal insurance and operating assessments 15,250 12,950
Data processing and outside service fees 23,400 26,450
Other operating expense 97,850 100,700
-----------------------------
325,650 327,300
-----------------------------
INCOME BEFORE INCOME TAXES 483,350 389,150
Income taxes 184,850 146,000
-----------------------------
Net income $ 298,500 $ 243,150
Basic earnings per share $ 0.26 $ 0.21
=============================
Diluted earnings per share $ 0.26 $ 0.20
=============================
Dividends paid per share $ 0.12 $ 0.12
=============================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 2,690,500 $ 2,508,550
Investment securities 74,050 92,500
Short-term cash investments 346,450 301,800
-----------------------------
TOTAL INTEREST INCOME 3,111,000 2,202,850
-----------------------------
Interest expense:
Interest on deposits 1,560,250 1,457,600
Interest on ESOP debt 10,150 13,450
-----------------------------
1,570,400 1,471,050
-----------------------------
NET INTEREST INCOME 1,540,600 1,431,800
-----------------------------
Noninterest income:
Service charges and fees 16,200 15,900
Other 3,100 1,900
-----------------------------
19,300 17,800
-----------------------------
Noninterest expense:
Compensation and benefits 340,900 335,100
Occupancy 16,300 18,350
Federal insurance and operating assessments 29,900 26,000
Data processing and outside service fees 51,900 48,750
Other operating expense 180,400 175,850
-----------------------------
619,400 604,050
-----------------------------
INCOME BEFORE INCOME TAXES 940,500 845,550
Income taxes 356,200 326,250
-----------------------------
NET INCOME $ 584,300 $ 519,300
=============================
Basic earnings per share $ 0.50 $ 0.45
=============================
Diluted earnings per share $ 0.50 $ 0.43
=============================
Dividends paid per share $ 0.24 $ 0.22
=============================
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net income $ 298,500 $ 243,150
----------- ----------
Other comprehensive income, net of tax:
Unrealized gains (losses) or securities: (74,500) 52,900
Unrealized holding gains arising during the period
Less: reclassification adjustment for gains included in
net income -- --
----------- ----------
OTHER COMPREHENSIVE INCOME (74,500) 52,900
----------- ----------
COMPREHENSIVE INCOME $ 224,000 296,050
=========== =======
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
Net income $ 584,300 $ 519,300
----------- ----------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period 64,900 111,650
Less: reclassification adjustment for gains included in
net income -- --
----------- ----------
OTHER COMPREHENSIVE INCOME 64,900 111,650
----------- ----------
COMPREHENSIVE INCOME $ 649,200 $ 630,950
=========== ==========
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 584,300 $ 519,300
Adjustment to rconcile net income to net
cash provided by operating activities:
Depreciation 15,550 17,600
Gain on sale of real estate acquired in settlement of loans -- --
Amortization of discounts/premiums on investment securities (750) --
Deferred income taxes (5,100) --
ESOP contribution expense charged to paid-in capital (6,600) 29,950
Amoritization of unearned ESOP shares and deferred stock
awards 57,800 43,550
Changes in assets and liabilities:
Prepaid Expesnes and other assets (2,200) (49,850)
Accrued interest receivable (53,350) (6,750)
Income tax refund receivable -- (26,300)
Accrued expenses and other liabilities 55,800 31,400
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 658,650 558,900
-----------------------------
Cash Flows From Investing Activities
Net (increase) decrease in loans recievables (3,366,300) 873,500
Purchase of available for sale investment securities (1,500,000) --
Maturity of available for sale investment securities 1,000,000 --
Purchase of property and equipment (8,000) (600)
-----------------------------
NET CASH PROVIDED BY AND (USED IN) INVESTING ACTIVITIES (3,874,300) 872,900
-----------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 230,850 8,061,300
Principle payments on ESOP debt (29,450) (29,400)
Dividends paid (286,000) (238,200)
-----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (84,600) 7,793,700
NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS (3,300,250) 9,225,500
Cash and cash equivalents:
Beginning 15,311,350 5,804,650
-----------------------------
Ending $12,011,100 $15,030,150
=============================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemntal Disclosure od Cash Flow Information
Cash Payment of Interest $ 1,562,900 $ 1,470,410
=============================
Cash payments of taxes $ 349,300 $ 245,100
=============================
Supplemental Disclosure of Noncash transzctions:
Increase (decrease) ESOP put option charged to
retained earnings $ (11,750) $ 144,200
Increase in unrealized gain on investment securities 64,900 111,650
Issuance of RRP stock awards -- 283,450
</TABLE>
See Notes to Financial Statements
8
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NATURE OF BUSINESS
The Association is located in Wake Forest, North Carolina and it's principal
activities consist of obtaining savings deposits and providing mortgage credit
to customers in its primary market area, the counties of Wake, Franklin and
Granville, North Carolina. The Association's primary regulator is the Office of
Thrift Supervision and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
On October 23, 1995, the Board of Directors of Wake Forest Federal Savings and
Loan Association adopted a Plan of Reorganization and the Stock Issuance Plan
(collectively the "Plans") under which the Association exchanged its federal
mutual savings and loan charter for a federal stock savings and loan charter,
conducted a minority stock offering, and formed Wake Forest Bancorp MHC, a
mutual holding company which owns at least 51% of the common stock to be issued
by the Association. The Association conducted its minority stock offering in
February and March of 1996 and the closing occurred on April 3, 1996. The
Association issued 515,000 shares in the minority stock offering and issued an
additional 41,200 shares to its Employee Stock Ownership Plan (the "ESOP") and
635,000 shares to the mutual holding company.
Members of the mutual holding company consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the mutual holding company for as long as it remains in mutual
form. Initially, the mutual holding company's principal assets consisted of
shares of the Association's common stock received in the reorganization and
$100,000 in cash received from the Association. The mutual holding company has
since received its proportional share of dividends declared and paid by the
Association, and such funds are invested in deposits with the Association. The
mutual holding company, which by law must own in excess of 50% of the stock of
the Association, currently has an ownership interest of 52.2% of the
Association. The mutual holding company is registered as a savings and loan
holding company and is subject to regulation, examination, and supervision by
the Office of Thrift Supervision (the "OTS").
NOTE 2. REORGANIZATION
On November 16, 1998, the Board of Directors of the Association approved an
Agreement and Plan of Reorganization (the Plan of Reorganization). The Plan of
Reorganization provides for the establishment of Wake Forest Bancshares, Inc.
(the Stock Holding Company) as a stock holding company parent of the
Association. The stock holding company will be majority owned by Wake Forest
Bancorp, MHC (the MHC), the Association's mutual holding company. The
reorganization into the "two-tier" mutual holding company structure (the
Reorganization) under the Plan of Reorganization was approved by the
Association's stockholders at their annual meeting held on February 23, 1999 and
by regulatory authorities on April 9, 1999. The formation of the Stock Holding
Company is expected to be consummated pursuant to the Plan of Reorganization
during April, 1999.
9
<PAGE>
NOTE 2. REORGANIZATION (CONTINUED)
As a part of the Reorganization, each outstanding share of Association's common
stock will be converted into one share of common stock, par value $.01 per
share, of the Stock Holding Company, and the holders of the Association's common
stock will become the holders of all of the outstanding shares of the Holding
Company's common stock. Accordingly, as a result of the Reorganization, the
Association's minority shareholders will become minority shareholders of the
Stock Holding Company.
The Stock Holding Company, which will be incorporated in April, 1999, is being
formed solely for the purpose of becoming a savings and loan holding company and
has no prior operating history. The Reorganization will have no impact on the
operations of the Association or the MHC. The Association will continue its
operations at the same location, with the same management, and subject to all
the rights, obligations and liabilities of the Association existing immediately
prior to the Reorganization.
The Board of Directors of the Association presently intends to capitalize the
Stock Holding Company with up to $100,000. Future capitalization of the Stock
Holding Company will depend upon dividends declared by the Association based on
future earnings, or the raising of additional capital by the Stock Holding
Company through a future issuance of securities, debt or by other means. The
Board of Directors of the Stock Holding Company has no present plans or
intentions with respect to any future issuance of securities or debt at this
time. Furthermore, as long as it is in existence, the MHC must own at least a
majority of the Stock Holding Company's outstanding voting stock.
The Reorganization will be treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and expenses of the Stock Holding Company immediately
following the Reorganization will be substantially the same as those of the
Association immediately prior to consummation of the Reorganization, all of
which will be shown on the Stock Holding Company's books at their historical
recorded values.
NOTE 3. BASIS OF PRESENTATION
The accompanying unaudited financial statements (except for the statement of
financial condition at September 30, 1998, which is audited) have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Regulation S-B. Accordingly, they do not include all
of the information required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The results of operations for the six month period
ended March 31, 1999 is not necessarily indicative of the results of operations
that may be expected for the Association's fiscal year ending September 30,
1999.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Association's September 30, 1998 Annual Report.
During the first quarter of 1999, the Association adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement was adopted effective October 1, 1998 as explained in Note 6 below.
10
<PAGE>
NOTE 4. DIVIDENDS DECLARED
On February 23, 1999, the Board of Directors of the Association declared a
dividend of $0.12 a share for stockholders of record as of March 31, 1999 and
payable on April 9, 1999. The dividends declared were accrued and reported as
dividends payable in the March 31, 1999 Statement of Financial Condition. Wake
Forest Bancorp, Inc., the mutual holding company, did not waive the receipt of
dividends declared by the Association.
NOTE 5. EARNINGS PER SHARE
The Association adopted statement of Financial Accounting Standard No. 128
during the quarter ended December 31, 1997. This statement requires dual
presentation of basic and diluted EPS with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings per share amounts are based
on the weighted average shares of common stock outstanding. Diluted earnings per
share assume the conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. This presentation has
been adopted for all periods presented. There were no adjustments required to
net income for either quarter in the computation of diluted earnings per share.
The reconciliation of weighted average shares outstanding for the computation of
basic and diluted earnings per share for the quarters and six month periods
ended March 31, 1999 and 1998 is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31: 1999 1998
--------------------------------
<S> <C> <C>
Weighted average shares outstanding for Basic EPS 1,178,013 1,166,959
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans - 29,289
Weighted average shares outstanding for diluted EPS 1,178,013 1,196,248
================================
SIX MONTHS ENDED MARCH 31:
Weighted average shares outstanding for Basic EPS 1,176,697 1,165,653
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 368 28,685
Weighted average shares outstanding for diluted EPS 1,177,065 1,194,338
================================
</TABLE>
11
<PAGE>
NOTE 6. ADOPTION OF SFAS STATEMENT NO.130
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income," which the
Association was required to adopt as of October 1, 1998. The Statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and to display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. Other comprehensive income
refers to revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but excluded from net
income, and are therefore included in changes in equity. Other comprehensive
income includes all such changes in equity other than those resulting from
investments by owners and distributions to owners.
SFAS No. 130 does not require a specific format for displaying comprehensive
income and its components in a financial statement other than it must be
displayed with the same prominence as other financial statements that constitute
a full set of financial statements. The Association has elected to display
comprehensive income in a separate statement of comprehensive income that begins
with net income. The only item of other comprehensive income that the
Association currently has is associated with changes in unrealized gains and
losses on securities classified as available for sale.
12
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND SEPTEMBER 30, 1998:
Total assets increased by $719,550 to $75.1 million at March 31, 1999 from $74.4
million at September 30, 1998. Total assets increased during the six months
ended March 31, 1999 primarily due to an increase in deposits of approximately
$230,850 and internally generated earnings. An increase in net loans receivable
of $3.4 million during the period from October 1, 1998 to March 31, 1999 was
funded primarily by utilizing cash and cash equivalents, which decreased by $3.3
million during the six months ended March 31, 1999.
Net loans receivable increased by $3,366,300 to $58.7 million at March 31, 1999
from $55.4 million at September 30, 1998. The increase occurred primarily due to
continued strong demand in residential construction loans in and around Wake
Forest. Assuming interest rates remain fairly stable, management believes that
its loan portfolio has potential for continued growth because the Association
operates in lending markets that have had sustained consistent loan demand over
the past several years. Wake Forest Federal is located in the town of Wake
Forest, which is approximately 20 miles from Raleigh and the Research Triangle
Park (the "Triangle"), areas which have grown substantially over the last
decade. The current trend is for increased residential development in and around
Wake Forest for individuals and families which work in the Triangle. However,
there can be no assurances that such trends and loan demand can or will
continue.
Investment securities increased by $605,500 to $3.8 million at March 31, 1999
from $3.2 million at September 30, 1998. During the six months ended March 31,
1999, the Association bought $1.5 million in available for sale investment
securities and received $1.0 million in funds from maturing investments. The
remaining increase is attributable to an increase in the unrealized appreciation
of the Association's available for sale investment securities portfolio. The
Association's investment portfolio consists of U.S. Government and Agency
securities, FHLMC common stock, and stock in the Federal Home Loan Bank of
Atlanta.
Deposits increased by $230,850 to $60.3 million at March 31, 1999 from $60.0
million at September 30, 1998. The increase is part of a relatively steady trend
in deposit growth over the last few years caused primarily by economic growth in
the area. Due to the Association's current high level of short term liquid
assets and current market rates for these short term investments and other
alternative investments in one to three year maturity category, the Association
has decreased deposit rates on its certificates of deposits offered to deposit
customers during the last six months. The Association's current policy for
pricing such certificates of deposit will likely result in limited deposit
growth.
The Association had no borrowings outstanding during the quarter other than the
loan incurred by the ESOP, the Association's retirement plan trust for
employees, for purchase of common stock in connection with the Association's
public stock offering in 1996. The ESOP borrowed $412,000 for its purchase of
stock from an unaffiliated financial institution on April 3, 1996. During the
six month period ended March 31, 1999, the Association made principal payments
totaling $29,450 plus interest on the ESOP note, reducing the outstanding
balance of the note to $235,400 at March 31, 1999.
13
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND
SEPTEMBER 30, 1998 (CONTINUED):
The Association is committed to making retirement plan contributions sufficient
to amortize the debt over its seven year term, and as such, has reported the
debt in it's Statement of Financial Condition. The Association recorded
retirement plan contributions of approximately $39,600 during the six month
period ended March 31, 1999 for principal and interest payments on the debt. The
Association also reported $6,600 in additional retirement plan expense and
credited paid-in capital equal to the increase in the fair value of its common
stock on ESOP shares allocated to participants in the Plan during the six month
period ended March 31, 1999. The ESOP has a put option which requires that the
Association repurchase its common stock from participants in the ESOP who are
eligible to receive benefits under the terms of the plan and elect to receive
cash in exchange for their common stock. The Association is required to reflect
as a liability the maximum possible cash obligation to redeem the shares, which
is the fair value of such shares, whether allocated or unallocated. The put
option liability can be reduced by the unearned ESOP shares, the cost of shares
not eligible for allocation to plan participants. The Association has recorded a
net liability of $259,000 at March 31, 1999 for the ESOP put option.
Retained earnings increased by $339,500 to $8.2 million at March 31, 1999 from
$7.9 million at September 30, 1998. The increase is attributable to the
Association's earnings during the six month period ended March 31, 1999, reduced
by $286,000 in dividends declared during the six month period ended March 31,
1999 and increased by $41,200 credit to retained earnings to reflect the change
in the fair value of the ESOP shares subject to the put option. Additional paid
in capital increased by $35,000 primarily as a result of the amortization of the
deferred stock awards associated with the Association's Recognition and
Retention Plan. At March 31, 1999, the Association's regulatory capital amounted
to $13.1 million, which as a percentage of total assets was 17.61%, and was
considerably in excess of the regulatory capital requirements at such date.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1999 AND 1998:
GENERAL. Net income for the three month period ended March 31, 1999 was
$298,500, or $55,350 more than the $243,150 earned during the same period in
1998. Net income for the six month period ended March 31, 1999 of $584,300
exceeded the income for the same period in 1998 of $519,300 by $65,000. As
discussed below, changes in net interest income between the comparable periods
was primarily responsible for the increase in net income.
INTEREST INCOME. Interest income increased by $88,000 from $1,471,200 for the
three months ended March 31, 1998 to $1,559,200 for the three months ended March
31, 1999. Interest income increased by $208,150 from $2,902,850 for the six
months ended March 31, 1998 to $3,111,000 for the six months ended March 31,
1999. The increase was attributable primarily to an overall increase in the
volume and mix of interest-earning assets outstanding, which were higher during
the three and six month periods ended March 31, 1999 than the comparable period
in 1998. The volume of interest-earning assets was higher during the three and
six month periods ended March 31, 1999 as a result of an increase in deposits,
and because the mix of those resulting funds was more heavily invested in loans
and investment securities, which typically have higher yields than short term
interest earning deposits. The overall yield on interest earning assets was
7.98% and 7.95% for the three and six months ended March 31, 1999.
14
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1999 AND 1998:
INTEREST EXPENSE. Interest expense decreased by $3,800 from $762,950 for the
three months ended March 31, 1998 to $759,150 for the three months ended March
31, 1999. Interest expense increased by $99,350 from $1,471,050 for the six
months ended March 31, 1998 to $1,570,400 for the six months ended March 31,
1999. The decrease in interest expense for the current quarter was primarily the
result of an decrease in interest rates paid on deposits between the quarters.
The Association's cost of funds was 5.11% and 5.33% for the three months ended
March 31, 1999 and 1998, respectively. The Association's cost of funds was 5.17%
and 5.39% for the six months ended March 31, 1999 and 1998, respectively, and
the increase in interest expense between the six month periods is attributable
solely to an increase in the average balance of deposits outstanding.
NET INTEREST INCOME. Net interest income increased by $91,800 from $708,250 for
the three months ended March 31, 1998 to $800,050 for the three months ended
March 31, 1999. Net interest income increased by $108,800 from $1,431,800 for
the six months ended March 31, 1998 to $1,540,600 for the six months ended March
31, 1999. The increase resulted primarily from an increase in the volume and mix
of interest earning assets coupled with a decline in the Association's cost of
funds between the periods.
PROVISION FOR LOAN LOSSES. No provisions for loan losses were made during the
three and six month periods ended March 31, 1999 and 1998. Provisions, which are
charged to operations, and the resulting loan loss allowances are amounts the
Association's management believes will be adequate to absorb potential losses on
existing loans that may become uncollectible. Loans are charged off against the
allowance when management believes that collectibility is unlikely. The
evaluation to increase or decrease the provision and resulting allowances is
based both on prior loan loss experience and other factors, such as changes in
the nature and volume of the loan portfolio, overall portfolio quality, and
current economic conditions. While Management uses the best information
available to make the evaluations, future adjustments to the allowance may be
necessary, if economic or other conditions differ substantially from the
assumptions used.
The Association's level of non-performing loans remained low in relation to
prior periods and total loans outstanding during the three and six month periods
ended March 31, 1999. In addition, the Association did not charge-off any loans
during the three or six month periods ended March 31, 1999.
At March 31, 1999, the Association's level of general valuation allowances for
loan losses amounted to $263,000, which management believes is adequate to
absorb any existing inherent losses in its loan portfolio.
NONINTEREST EXPENSE. Noninterest expense decreased by $1,650 to $325,650 for the
three month period ended March 31, 1999 from $327,300 for the comparable quarter
in 1998. Noninterest expense increased by $15,350 for the six month period ended
March 31, 1999 to $619,400 from $604,050 for the six month period ended March
31, 1998. There were no significant changes in any category of noninterest
expense during the current quarter as compared to the same quarter a year
earlier. The $15,350 increase in noninterest expense for the six month period
ended March 31, 1999 as compared with the same period in 1998 resulted from
minor across the board increases in administrative expenses associated with
slightly higher levels of customer activity in 1999.
15
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ASSET QUALITY:
The Association's level of nonperforming loans, defined as loans past due 90
days or more, as a percentage of loans outstanding, was .22% and .24% at March
31, 1999 and September 30, 1998, respectively. The Association has no other
nonperforming assets at March 31, 1999. During the three and six month periods
ended March 31, 1999 and 1998, the Association's level of nonperforming loans
has remained consistently low in relation to prior periods and total loans
outstanding. The Association did not charge off any loans during the six month
periods ended March 31, 1999 and 1998. As a result, and based on management's
analysis of the adequacy of its allowances, no provision for additional loan
loss allowances was made during the six month period ended March 31, 1999.
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the six month period ended March 31, 1999, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $3.3 million.
Proceeds from the Association's operations contributed $658,650 in cash during
the period. Cash was utilized to fund loan originations, which net of
repayments, increased by $3.4 during the six month period ended March 31, 1999.
Investments also increased by $500,000 during the current six month period, and
thus utilized cash. Dividends paid to stockholders of $286,000, offset by an
increase in deposits of approximately $230,850, represented an additional use of
cash.
As a federally chartered savings association, Wake Forest Federal must maintain
minimum liquidity requirements. The Association's liquidity ratio at March 31,
1999 was considerably in excess of such requirements. Given its excess liquidity
and its ability to borrow from the Federal Home Loan Bank, the Association
believes that it will have sufficient funds available to meet anticipated future
loan commitments, unexpected deposit withdrawals, and other cash requirements.
YEAR 2000 ISSUE:
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Association and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information.
16
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
Software, hardware, and equipment both within and outside the Association's
direct control and with whom the Association electronically or operationally
interfaces (e.g. third party vendors providing data processing, information
system management, maintenance of computer systems, and credit bureau
information) are likely to be affected. Furthermore, if computer systems are not
adequately changed to identify the Year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations which rely on
the date field information, such as interest, payment or due dates and other
operating functions, could generate results which would be misstated, and the
Association could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
In addition, non-information technology systems, such as equipment like
telephones and copiers may also contain embedded technology which controls its
operation and which may be effected by the Year 2000 Problem. When the Year 2000
arrives, systems, including some of those with embedded chips, may not work
properly because of the way they store date information. They may not be able to
deal with the date 01/01/00, and may not be able to deal with operational
'cycles' such as 'do X every 100 days'. Thus, even non-information technology
systems may affect the normal operations of the Association upon the arrival of
the Year 2000. Under certain circumstances, failure to adequately address the
Year 2000 Problem could adversely affect the viability of the Association's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 Problem could result in a significant
adverse impact on the Association's products, services and competitive
condition.
In order to address the Year 2000 Issue and to minimize its potential adverse
impact, management has identified areas that could be affected by the Year 2000
Problem and assessed their potential impact on the operations of the
Association. The Association continues to monitor the progress of third party
software vendors who are addressing the matter, and testing changes provided by
these vendors. Wake Forest Federal has also developed a contingency plan for
critical systems which may not be effectively reprogrammed. A committee of
senior officers of the Association has been formed to evaluate the effects that
the upcoming Year 2000 issue could have on computer programs utilized by the
Association. The Association's plan is divided into the five phases:
(1) Awareness. Define the problem, obtain executive level support and
develop an overall strategy. This phase was completed in April 1998.
(2) Assessment. Identify all systems and the criticality of the systems.
This phase was completed in June 1998.
(3) Renovation. Program enhancements, hardware and software upgrades,
system replacements, and vendor certifications. This phase was
completed in December 1998.
(4) Validation. Test and verify system changes and coordinate with outside
parties. This phase is in process with a scheduled completion date of
June 1999.
(5) Implementation. Components certified as Year 2000 compliant and moved
to production. This phase is in process with a scheduled completion
date of August 1999.
17
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
Third party vendors provide the majority of software used by the Association.
All of the Association's vendors are aware of the Year 2000 situation, and each
has assured the Association that its software is either Year 2000 compliant or
is currently working to have its software compliant by the early fall of 1999.
Testing for the critical applications began in April 1998. The Association
utilizes the service of a third party vendor to provide the software which is
used to process and maintain most mortgage and deposit customer-related
accounts. This vendor has provided the Association with a software version which
has been certified to be Year 2000 compliant. Testing by the Association is and
has been underway to verify compliance for its application and usage. The
Association presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Problem will be mitigated without
causing a material adverse impact on the operations of the Association. However,
if such modifications and conversions are not made, or are not completed timely,
the Year 2000 Problem could have an impact on the operations of the Association.
The Association's contingency plan, in the event of a major software failure
associated with processing customer accounts, calls for the temporary reversion
to a manual record keeping system. The Association currently maintains manual
ledger cards on most types of customer accounts and could operate in such a
manner for a reasonably short period of time. Manual transactions would
subsequently be inputted with prior effective processing dates back onto the
software once the date issues are resolved.
In addition, monitoring and managing the Year 2000 project will result in
additional direct and indirect costs to the Association. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance, and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. The Association has spent approximately $53,000 on Year 2000
related costs to date and estimates that it will spend an additional $37,000 for
Year 2000 compliance. Both direct and indirect costs of addressing the Year 2000
Problem will be charged to earnings as incurred. The Association does not
believe that such costs will have a material effect on results of operations.
However, there can be no guarantee that the systems of other companies on which
the Association's systems rely will be timely converted, or that a failure to
convert by another company or a conversion that is incompatible with the
Association's systems, would not have a material adverse effect on the
Association.
The costs of the project and the date on which the Association plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
18
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Statements herein regarding estimated future expense levels and other matters
may constitute forward-looking statements under the federal securities laws.
Such statements are subject to certain risks and uncertainties including changes
in general and local market conditions, legislative and regulatory conditions
and an adverse interest rate environment. Undue reliance should not be placed on
this information. These estimates are based on the current expectations of
management, which may change in the future due to a large number of potential
events, including unanticipated future developments.
<PAGE>
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Association is not engaged in any legal proceedings at the present
time other than legal proceedings within the normal course of business
to enforce its security interest in a loan.
Item 2. Changes in Securities and Use of Proceeds
The Association received regulatory approval on April 9, 1999 to
reorganize, establishing a mid-tier stock holding company (See note 2 to
the financial statements). As a part of the reorganization, each
shareholder of the Association will receive one share of common stock in
the Wake Forest Bancshares, Inc. (the stock holding company) for each
share owned in the Association. Exchange of existing certificates is not
required, however new certificates with a new cusip number will be
issued for future purchases of the stock holding company's stock.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On February 23, 1999, the annual meeting of stockholders was held to
consider and vote upon the election of two directors of the Association,
to vote upon the proposal to approve the Agreement and Plan of
Reorganization (see note 2 to the financial statements), and to ratify
the appointment of McGladrey & Pullen LLP as independent auditors for
the Association for the fiscal year ending September 30, 1999.
All items were approved by the stockholders as shown below: Vote
concerning the election of directors of the Association:
FOR AGAINST WITHHELD TOTAL
--- ------- -------- -----
Wilkinson, III 1,071,993 0 6,350 1,078,343
Lyon 1,071,993 0 6,350 1,078,343
Vote concerning approval of the Agreement and Plan of Reorganization:
FOR AGAINST ABSTAINED TOTAL
--- ------- --------- -----
942,506 5,000 500 948,006
Vote concerning ratification of McGladrey & Pullen, LLP as independent
auditors for the year ended September 30, 1999:
FOR AGAINST ABSTAINED TOTAL
--- ------- --------- -----
1,074,793 0 3,550 1,078,343
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable
b) No reports on Form 8-K were filed for the period covered by this
report
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
Dated May 10, 1999 By: /s/ Anna O. Sumerlin
-------------------------- -------------------------------
Anna O. Sumerlin
President and CEO
Dated May 10, 1999 By: /s/ Robert C. White
-------------------------- -------------------------------
Robert C. White
Vice President and CFO
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST FEDERAL SAVINGS AND LOAN ASSOCIATION
Dated April 30, 1999 By: /s/ Anna O. Sumerlin
-------------------------- -------------------------------
Anna O. Sumerlin
President and CEO
Dated April 30, 1999 By: /s/ Robert C. White
-------------------------- -------------------------------
Robert C. White
Vice President and CFO
21
