U.S. Securities and Exchange Commission
Washington, D.C. 20549
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, 1999
Commission File Number 000-25999
WAKE FOREST BANCSHARES, INC.
(Name of small business issuer in its charter)
FEDERALLY CHARTERED 56-2131079
State or other jurisdiction of IRS Employer Identification No.
Incorporation
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
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 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 |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-KSB or
any amendment to this Form 10-KSB. |X|
The revenues for the issuer's fiscal year ended September 30, 1999 are
$6,245,650.
The issuer had 1,190,462 shares of common stock outstanding as of
September 30, 1999. 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 December 21 , 1999 was $5,562,000 and
$6,136,000, respectively.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Stockholders for the year ended
September 30, 1999 are incorporated by reference into Parts I and II of this
Form 10-KSB.
Portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS....................................................................... 1
ITEM 2. PROPERTIES.................................................................................... 29
ITEM 3. LEGAL PROCEEDINGS............................................................................. 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 29
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS....................................... 29
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.......................................................... 29
ITEM 7. FINANCIAL STATEMENTS.......................................................................... 30
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................................ 30
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.......................................... 30
ITEM 10. EXECUTIVE COMPENSATION........................................................................ 30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................................ 30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 30
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K....................................................... 31
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 Company 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.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Wake Forest Bancshares, Inc. (the "Company") is a federally-chartered
stock holding company for Wake Forest Federal Savings & Loan Association (the
"Association"), 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 Company was formed on
May 7, 1999 pursuant to an Agreement and Plan of Reorganization whereby the
Company exchanged its common stock for all outstanding common stock of the
Association. The Company is a majority owned subsidiary of Wake Forest Bancorp.
M.H.C., a federal mutual holding company (the "MHC"). 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.
The Association is the Company's sole subsidiary. 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, 1999, the Company had total assets of $72.4 million, total
deposits of $57.7 million and equity of $13.5 million.
The Company conducts no business other than holding stock in the
Association, investing dividends received from the Association, repurchasing its
common stock from time to time, and distributing dividends on its common stock
to its shareholders.
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 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 and Agency 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, 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, 1999. 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."
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<PAGE>
REORGANIZATION
On October 23, 1995, the Board of Directors adopted the Plan of
Reorganization from Mutual Savings and Loan Association to Mutual Holding
Company, 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 "MHC"), a
federally chartered mutual holding company which owned in excess of 50% of the
common stock of the Association. In connection with the reorganization, the
Association sold shares of its common stock to certain depositors of the
Association and the Association's Employee Stock Ownership Plan ("ESOP"). The
Association completed the reorganization on April 3, 1996.
The Board of Directors of the Association approved an Agreement and
Plan of Reorganization (the "Plan of Reorganization") November 16, 1998. The
Plan of Reorganization provided for the establishment of Wake Forest Bancshares,
Inc. as a stock holding company parent of the Association. The Company is
majority owned (approximately 53%) by the MHC. The reorganization into the
"two-tier" mutual holding company structure (the "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
Company was consummated on May 7, 1999.
As part of the Reorganization each outstanding share of Association's
common stock was converted into one share of common stock par value $.01 per
share of the Company and the holders of the Association's common stock became
the holders of all the outstanding shares of the Company's common stock.
Accordingly, as a result of the Reorganization, the Association's minority
shareholders became minority shareholders of the Company. The Company was formed
solely for the purpose of becoming a savings and loan holding company and is
regulated by the Office of Thrift Supervision (the "OTS"). It had no prior
operating history. The Reorganization had no impact on the operations of the
Association or the MHC. The Association continues to operate 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 capitalized the Company with
$100,000. Future capitalization of the Company will depend upon dividends
declared by the Association based on future earnings or the raising of
additional capital by the Company through a future issuance of securities, debt
or by other means. The Board of Directors of the 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 Company's outstanding voting stock.
The Reorganization was treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and expenses of the Company immediately following the
Reorganization were substantially the same as those of the Association
immediately prior to consummation of the Reorganization, all of which were shown
on the Company's books at their historical recorded values.
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 Chapel
Hill, 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.
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<PAGE>
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.
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------------------------------------- ----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of loans:
One- to four-family
residential............................ $24,394 39.71% $ 25,479 46.04%
Multi-family residential................. 184 0.30 289 0.52
Commercial real estate................... 8,460 13.76 5,831 10.53
Land..................................... 8,232 13.39 4,840 8.74
Commercial Construction.................. 2,351 3.82 2,247 4.06
Residential Construction................. 24,693 40.17 25,340 45.77
Equity Line Mortgages.................... 3,107 5.05 1,296 2.34
Lines of Credit.......................... 2,719 4.42 866 1.56
Savings Account.......................... 222 0.36 201 0.36
------- ------ --------- ------
Total loans................................. $74,362 120.98% $ 66,389 119.92%
======= ====== ========= ======
Less:
Deferred loan fees....................... 172 0.28% 160 0.29%
Undisbursed portion of
loans in process...................... 12,460 20.27% 10,602 19.15%
Allowance for loan losses................ 263 0.43% 263 0.48%
------ ----- ------ -----
12,895 20.98% 11,025 19.92%
------ ----- ------ -----
Total loans receivable, net................. $61,467 100.00% $ 55,364 100.00%
======= ====== ========= ======
</TABLE>
Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 1999. 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
$45.8 million and $31.3 million for the years ended September 30, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
------------------------------------------------------------------------------------------------------------
RESIDENTIAL RESIDENTIAL EQUITY SAVINGS
1 TO 4- MULTI- COMMERCIAL COMMERCIAL RESIDENTIAL LINE LINES OF ACCOUNT
FAMILY FAMILY REAL ESTATE LAND CONSTRUCTION(1) CONSTRUCTION(1) MORTGAGES CREDIT LOANS TOTAL
------ ------ ----------- ---- --------------- --------------- --------- ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contractual maturity:
One year or less....... $ 3,193 $ - $ - $1,307 $1,556 $24,693 $ - $2,719 $141 $33,609
------- ---- ------ ------ ------ ------- ------ ------ ---- -------
After one year:
1 year to 3 years... 15,658 - - 1,774 - - - - 69 17,501
3 years to 5 years.. 3,179 - 101 278 - - - - 12 3,570
5 years to 10 years. 1,326 - 1,139 4,512 - - - - - 6,977
10 years to 20 years 1,038 - 4,560 361 795 - 3,107 - - 9,861
Over 20 years....... - 184 2,660 - - - - - - 2,844
------- ---- ------ ------ ------ ------- ------ ------ ---- -------
Total after one year 21,201 184 8,460 6,925 795 - 3,107 - 81 40,753
------- ---- ------ ------ ------ ------- ------ ------ ---- -------
Total amount due....... 24,394 184 8,460 8,232 2,351 24,693 3,107 2,719 222 74,362
Less undisbursed loans. - - - (1,168) (1,111) (10,181) - - - (12,460)
------- ---- ------ ------ ------ ------- ------ ------ ---- -------
Net loans outstanding.. $24,394 $184 $8,460 $7,064 $1,240 $14,512 $3,107 $2,719 $222 $61,902
======= ==== ====== ====== ====== ======= ====== ====== ==== =======
</TABLE>
(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, 1999 that are contractually due after September 30, 2000, and
whether such loans have fixed interest rates or adjustable interest rates.
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<PAGE>
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 2000
-------------------------------------------------------
FIXED RATES ADJUSTABLE RATES TOTAL
-------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family residential.......................... $3,240 $17,961 $21,201
Multi-family residential................................. 184 - 184
Commercial Real Estate................................... 630 7,830 8,460
Land..................................................... 2,762 4,163 6,925
Commercial Construction.................................. 795 - 795
Residential Construction................................. - - -
Equity line mortgages.................................... - 3,107 3,107
Lines of credit.......................................... - - -
Savings account loans.................................... 81 - 81
------ ------- --------
Total.................................................... $7,692 $33,061 $ 40,753
====== ======= ========
</TABLE>
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 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, 1999, the Association's total loans were $61.5
million, of which $24.4 million, or 39.71% were one- to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 13.11%, or $3.2 million, were fixed-rate loans and
86.89%, or $21.2 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
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<PAGE>
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.
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
$125,000. 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, 1999, the Association had $14.5 million (net of undisbursed loan
funds of $10.2 million) of residential construction loans which amounted to
23.58% of the Association's net loans outstanding. The largest residential
construction loan in the Association's portfolio at September 30, 1999 was
$731,000, is secured by a single family residence under construction and is
performing according to its terms.
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
75% of its construction loans to builders are on a speculative basis.
The Association also originates construction loans on commercial
properties. The underwriting requirements are similar to those required for
construction loans on residential properties. However, the loan to value may not
exceed 75% of the property's appraised value, certain debt service and income
ratios are considered, and financial projections and business plans are
reviewed. At September 30, 1999, the Association had $1.2 million (net of
undisbursed loan funds of $1.1 million) of commercial construction loans which
amounted to 1.95% of the Association's net loans outstanding. The largest
commercial construction loan in the Association's portfolio at September 30,
1999 was $1.6 million, is secured by commercial strip office and shopping
center, and is performing according to its terms.
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
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<PAGE>
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, 1999, the Association's commercial real
estate mortgage portfolio was $8.5 million, or 13.76% of total loans
outstanding. The largest commercial real estate loan in the Association's
portfolio at September 30, 1999 was $1.5 million and is secured by a local
church property.
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. At September 30, 1999, the Association was
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 loans
on one- to four- residential properties are for a period of 15 years. At
September 30, 1999, the Association's equity line portfolio was $3.1 million, or
5.05% 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, 1999, the
Association's commercial line of credit portfolio was $2.7, or 4.42% of total
loans outstanding.
- 7 -
<PAGE>
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 or to fulfill
commitments to affordable housing consortiums. At September 30, 1999, the
Association's total land loan portfolio was $8.2 million or 13.39% of total
loans and its multi-family loan portfolio was $184,000 or 0.30% of total loans.
The Association requires appraisals of all properties securing
multi-family residential loans if the requested amount exceeds $125,000.
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, 1999, the Association's
savings account loan portfolio totaled $222,000 or 0.36% 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 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
$125,000 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
- 8 -
<PAGE>
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 sales, when a sales 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.
- 9 -
<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,
-------------------------------------------
1999 1998
-------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans: $ - $ -
Accruing loans past due 90 days or more:
Single family, One- to four-family residential. 294 134
----- -----
Total non-performing loans............................. $ 294 $ 134
===== =====
Allowance for loan losses.............................. $ 263 $ 263
===== =====
Real estate owned, net................................. $ - $ -
===== =====
Ratios:
Non-accrual loans to total loans................... - -
Non-performing loans to total loans................ 0.48% 0.24%
Non-performing loans and real estate owned to
total assets..................................... 0.41% 0.18%
Allowance for loan losses to:
Non-accrual loans................................ - -
Non-performing loans............................. 89.51% 196.79%
Total loans...................................... 0.42% 0.47%
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.
- 10 -
<PAGE>
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. 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 $293,800 and $320,686
of assets classified as Substandard and no assets classified as Special Mention,
Doubtful or Loss at September 30, 1999 and 1998, 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, 1999, the Association's ALL was $263,000, or .43% of total loans, as
compared to $263,000 or .48%, at September 30, 1998. The Association had
non-performing loans of $293,800 and $134,000 at September 30, 1999 and
September 30, 1998, respectively. The Association's level of nonperforming loans
has historically been low and there were no charge-offs to the ALL during 1999
or 1998. 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,
1999, the Association held no REO.
- 11 -
<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,
--------------------------------------------
1999 1998
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
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 $28,300 and $15,500 at September 30, 1999 and 1998,
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, 1999 and 1998 would have decreased by $12,800 and $9,500,
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,
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------
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 $ 35 13.31% 32.80% $ 40 15.21% 38.38%
Multi-family residential...... 3 1.14 0.24 5 1.90 0.44
Commercial real estate........ 55 20.91 11.38 50 19.01 8.78
Land.......................... 37 14.07 11.07 30 11.41 7.29
Commercial construction....... 10 3.80 3.16 10 3.80 3.38
Residential construction...... 113 42.97 33.21 118 44.87 38.17
Equity line mortgages ........ 5 1.90 4.18 5 1.90 1.95
Lines of Credit............... 5 1.90 3.66 5 1.90 1.31
---- ------- ------- ---- ------- -------
Total mortgage loans............ 263 100.00 99.70 263 100.00 99.70
Savings account loans........... - - 0.30 - - 0.30
---- ------- ------- ---- ------- -------
Total allowance for loan losses. $ 263 100.00% 100.00% $ 263 100.00% 100.00%
===== ====== ====== ====== ====== ======
</TABLE>
- 12 -
<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, 1999, the
Association held: FHLMC stock with an amortized cost of $15,200 and a current
market value of $806,200 and FHLB stock with a cost and market value of
$280,400. At September 30, 1999, the Association held $9.6 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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1999 1998
---------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Amortized cost at beginning of period................ $16,758 $ 8,130
Purchases/(Sales), net............................... (7,885) 8,616
Premium and discount amortization, net............... (1) 12
------- --------
Amortized cost at end of period...................... 8,872 16,758
Net unrealized gain(1)............................... 763 770
------- --------
Total securities, net................................ $ 9,635 $ 17,528
======= ========
</TABLE>
- ----------
(1) The net unrealized gain at September 30, 1999 and 1998 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 to 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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------
1999 1998
------------------------ ------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Overnight Deposits............ $5,827 $5,827 $14,379 $14,379
U.S. Treasury Obligations.......... 2,750 2,722 2,000 2,018
Equity securities(1)............... 15 806 15 767
Federal Home Loan Bank Stock....... 280 280 364 364
------ ------ ------- -------
Total Investments, net(2).......... $8,872 $9,635 $16,758 $17,528
====== ====== ======= =======
</TABLE>
- -----------------
(1) Equity securities consist of FHLMC common stock.
(2) The difference between "Amortized Cost" and "Fair Value" represents net
unrealized gains at September 30, 1999 and 1998 on available for sale
securities in accordance with SFAS No. 115.
- 13 -
<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,
----------------------------------------------------
1999 1998
------------------------ ------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held to Maturity
Other debt securities $ - $ - $ - $ -
------ ------ ------- -------
Total held to maturity - - - -
------ ------ ------- -------
Available-for-Sale:
Debt securities... 2,750 2,722 2,000 2,018
Equity securities. 15 806 15 767
------ ------ ------- -------
Total available-for-sale 2,765 3,528 2,015 2,785
------ ------ ------- -------
FHLB Overnight deposits.......... 5,827 5,827 14,379 14,379
------ ------ ------- -------
Federal Home Loan Bank Stock..... 280 280 364 364
------ ------ ------- -------
Total Investments, net(1) $8,872 $9,635 $16,758 $17,528
====== ====== ======= =======
</TABLE>
- ----------
(1) The difference between "Amortized Cost" and "Fair Value" represents net
unrealized gains at September 30, 1998 and 1998 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, 1999, by remaining period to contractual maturity.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
------------------------------------------------------------------------------------------
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.................... $ - $ - -% $ 500 $ 501 5.50%
Due after 1 year but within 5 years.. - - - 2,250 2,221 5.44
Due after 5 years but within 10 years - - - - - -
Due after 10 years................... - - - - - -
---- ---- --- ----- ----- ----
Total............................. - - - 2,750 2,722 -
Equity Securities....................... - - - 15 806 -
FHLB Overnight Deposits................. - - - 5,827 5,827 -
---- ---- ------ ------ ----
Total............................. $ - $ - -% $8,592 $9,355 5.45%
==== ==== === ====== ====== ====
</TABLE>
- 14 -
<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, 1999, the Association's core deposits (which the
Association considers to consist of NOW accounts, money market deposit accounts
and regular savings accounts) constituted 22.91% 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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1999 1998
------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total deposits at beginning of period.......... $60,038 $50,056
Net increase (decrease) before interest (4,315) 6,936
credited.......................................
Interest credited.............................. 1,931 3,046
----- -----
Total deposits at end of period................ $57,654 $60,038
======= =======
</TABLE>
At September 30, 1999, the Association had approximately $10.2 million
in Jumbo certificate of deposits (accounts in amounts over $100,000) maturing as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
----------------------------------------------
(DOLLARS IN THOUSANDS)
Maturity Period
- --------------------------------------------------------------
<S> <C> <C>
Within three months........................................... $ 2,305 5.32%
After three but within six months............................. 1,915 5.72
After six but within twelve months............................ 1,939 5.29
After twelve but within twenty-four months.................... 2,538 5.51
After twenty-four months...................................... 1,526 5.88
--------
Total.............................................. $ 10,223 5.52%
========
</TABLE>
- 15 -
<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,
------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------
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....... $3,554 6.17% 3.00% 3,599 6.00% 3.00%
MMDA accounts........... 7,923 13.76% 4.15% 7,100 11.84% 3.50%
NOW accounts............ 1,413 2.45% 2.50% 1,277 2.13% 2.50%
Noninterest-bearing
accounts................ 304 0.53% - 334 0.56% -
Certificate accounts.... 44,402 77.09% 5.35% 47,676 79.47% 5.87%
------ ----- ------ -----
Totals $57,596 100.0% 4.98% 59,986 100.00% 5.15%
======= ===== ====== ======
</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, 1999.
<TABLE>
<CAPTION>
TOTAL AT
PERIOD TO MATURITY AT SEPTEMBER 30, 1999 SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------
INTEREST RATE RANGE 2000 2001 2002 THEREAFTER TOTAL 1998
- -------------------------- ------------- -------------- -------------- ---------------- -------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
3.00% to 5.00%........... $12,474 $ 4,095 $ 248 $ 102 $16,919 $ 600
5.01% to 7.00%........... 13,472 7,475 1,918 4,514 27,379 46,862
7.01% to 8.00%........... 104 - - - 104 214
------- ------- ------ ------ ------- -------
Total................. $26,050 $11,570 $2,166 $4,616 $44,402 $47,676
======= ======= ====== ====== ======= =======
</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, 1999, neither the Company nor the Association had any borrowings
outstanding.
PERSONNEL
As of September 30, 1999, the Company had no employees who were
compensated through the Company.
As of September 30, 1999, the Association had eleven full-time
employees. In the last three years, the Association has experienced a low
turnover rate among its employees and, as of September 30, 1999, 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.
- 16 -
<PAGE>
REGULATION
The Company, MHC and the Association are 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 Company and the MHC, as a savings and loan holding companies,
are required to file certain reports with, and otherwise comply with, the rules
and regulations of the OTS.
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 Company, the Association or the MHC.
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, 1999, the Association's limit on loans to one borrower
was approximately $2.0 million. At September 30, 1999, the Association's largest
aggregate amount of loans to one borrower was $2.0 million, consisting of
various loans secured by farm and residential tracts. The second largest
borrower had an aggregate balance of approximately $2.0 million, secured by
various residential and commercial tracts. At September 30, 1999, all of the
loans in both of these lending relationships were performing in accordance with
their terms.
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
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<PAGE>
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, 1999, the
Association maintained 73.96% 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. The ALL includible 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.
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<PAGE>
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 Operations--Asset/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, 1999:
<TABLE>
<CAPTION>
CAPITAL EXCESS
AMOUNT REQUIREMENTS CAPITAL
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tangible capital.............................. $12,475 $1,075 $11,400
Core capital.................................. 12,475 2,149 10,326
Risk-based capital............................ 12,738 4,016 8,722
</TABLE>
A reconciliation between regulatory capital and GAAP capital at
September 30, 1999 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.................................. $ 13,468 $ 13,468 $ 13,468
Standalone equity in Holding Company.......... (520) (520) (520)
Net unrealized gain on available for
sale investment securities, net of tax....... (473) (473) (473)
Allowance for loan losses included as
supplementary capital........................ - - 263
--------- --------- ---------
Regulatory capital............................ $ 12,475 $ 12,475 $ 12,738
========= ========= =========
</TABLE>
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<PAGE>
Limitation on Capital Distributions. Effective April 1, 1999, the OTS
amended its capital distribution regulations to reduce regulatory burdens on
savings associations. The regulations being replaced, which were effective
throughout 1998, established 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 cashout
merger, and other distributions charged against capital. At least 30-days
written notice to the OTS was required for a proposed capital distribution by a
savings association, and capital distributions in excess of specified earnings
or by certain institutions were subject to approval by the OTS. An association
that had capital in excess of all fully phased in regulatory capital
requirements before and after a proposed capital distribution and that was 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 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 distributions
would require prior OTS approval. Under the amendments adopted by the OTS,
certain savings associations will be permitted to pay capital distributions
during a calendar year that do not exceed the association's net income for that
year plus its retained net income for the prior two years, without notice to, or
the approval of, the OTS. However, a savings association subsidiary of a savings
and loan holding company, such as the Association, will continue to have to file
a notice unless the specific capital distribution requires an application. 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 Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to meet its minimum capital requirements, as described above.
See "--Prompt Corrective Regulatory Action."
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, 1999 was approximately 18.02%
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 OTS has adopted
amendments to its regulations, effective January 1, 1999, that are intended to
assess savings associations on a more equitable basis. The new regulations will
base the assessment for an individual savings association on three components:
the size of the association, on which the basic assessment would be based; the
association's supervisory condition, which would result in an additional
assessment based of a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
would result in an additional assessment based of a percentage of the basic
assessment for any savings association that managed over $1.0 billion in trust
assets, serviced for others loans aggregating more than $1.0 billion, or had
certain off-balance sheet assets aggregating more than $1.0 billion. In order to
avoid a disproportionate impact on the smaller savings institutions, which are
those whose total assets never exceeded $100.0 million, the new regulations
provide that the portion of the assessment based on asset size will be the
lesser of the assessment under the amended regulations or the regulations before
the amendment. Management believes that any change in its rate of OTS
assessments under the amended regulations will not be material. The deposit
insurance premium expense, including operating assessments incurred by the
Association for the fiscal years ended September 30, 1999 and 1998 totaled
$59,850 and $55,300, respectively.
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<PAGE>
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 15, 1998.
The CRA regulations establish an assessment system that bases an
association's rating on its actual performance in meeting community needs. In
particular, the assessment system focuses 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 and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.
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<PAGE>
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. 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 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.
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<PAGE>
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 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
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<PAGE>
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. The Association's SAIF assessment
just for first quarter of year 2000 will be 2.12% for FICO.
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.
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.
- 24 -
<PAGE>
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, 1999, of $280,400. 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, 1999 and 1998 dividends from the FHLB of Atlanta to the
Association amounted to $24,500 and $26,000 respectively. 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 $46.5 million. The amount of
aggregate transaction accounts in excess of $46.5 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 $4.9 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 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 OTS HOLDING COMPANIES
General. The Company and the MHC are federal holding companies
chartered under Section 10(o) of the HOLA. As such, the Company and the MHC are
registered with and subject to OTS examination and supervision as well as
certain reporting requirements. In addition, the OTS has enforcement authority
over the Company, the MHC and any of their 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
- 25 -
<PAGE>
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 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 Company and
the MHC, see "-- Regulation of Federal Savings Associations --Transactions with
Related Parties."
- 26 -
<PAGE>
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 Company, the Association or the MHC. The Association was last
audited for its taxable year ended September 30, 1993.
For federal income tax purposes, the Company and the Association report
their income using a taxable year ending September 30 and the accrual method of
accounting. The Company, the Association in its stock form (the "Stock
Association") and the MHC file separate income tax returns and each reports its
income on the same basis as the Association now reports its income. Because the
MHC owns less than 80% of the outstanding common stock of the Company, the MHC
and the Company are not permitted to file such returns on a consolidated basis.
The Company and the Stock Association may file their returns on a consolidated
basis, but during 1999 have elected to file separately. The Company and the
Stock Association have entered into a tax sharing agreement which governs the
apportionment of taxable income between the entities. The Company, the MHC 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, 1998.
Distributions. To the extent that the Association makes "non-dividend
distributions" to the 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 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 includible 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.
- 27 -
<PAGE>
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 Company, the MHC may deduct from its income 80% of dividends
received from the Company. (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 7.25% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of .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.
- 28 -
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through its sole office, located in
Wake Forest, North Carolina, which was renovated in 1995. The Company owns the
main office with net book value for property and equipment of $452,000 as of
September 30, 1999. Management believes that the Company's current facilities
are adequate to meet the present and immediately foreseeable needs of the
Company, the Association and the MHC. However, the Company may consider opening
a branch office in the future.
<TABLE>
<CAPTION>
NET BOOK
VALUE AT
LEASED OR DATE SEPTEMBER 30,
OWNED ACQUIRED 1999
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Main Office................... Owned 1961 $420
302 S. Brooks Street
Wake Forest, NC 27587
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
At September 30, 1999, there were no material legal proceedings to
which the Company 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 Company's common equity and
related stockholder matters appears under "Common Stock Information" in the
Company's 1999 Annual Report to Stockholders on page 44, and is incorporated
herein by reference.
Information relating to the payment of dividends by the Company appears
under "Common Stock Information" in the Company's 1999 Annual Report to
Stockholders on page 44, and is incorporated herein by reference. A dividend
declared by the Board of Directors of the Company is considered a capital
distribution from the Company 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 Company to pay a capital
distribution. See "Regulation--Limitation on Capital Distributions."
The Association's dividend payout ratios were 47.1% and 51.7% and the
equity to asset ratios were 18.4% and 17.6% for years ended September 30, 1999
and 1998, 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 1999 Annual Report to Stockholders
on pages 3 through 16 and is incorporated herein by reference.
- 29 -
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are incorporated by reference to the
indicated pages of the 1999 Annual Report to Stockholders.
<TABLE>
<CAPTION>
Page(s) in
Annual Report
-------------
<S> <C>
o Independent Auditor's Report.........................................................17
o Consolidated Statements of Financial Condition,
September 30, 1999 and 1998.................................................18
o Consolidated Statements of Income,
Years Ended September 30, 1999 and 1998.....................................19
o Consolidated Statements of Stockholders' Equity,
Years Ended September 30, 1999 and 1998.....................................20-21
o Consolidated Statements of Cash Flows,
Years Ended September 30, 1999 and 1998.....................................22-23
o Notes to Consolidated Financial Statements...........................................24-43
</TABLE>
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
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on February 22, 2000 ("Proxy
Statement"), on pages 8 through 10. 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 Company's Proxy Statement on pages 13 through 17.
- 30 -
<PAGE>
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 Company's Proxy
Statement on pages 6 through 7 under the heading "Security Ownership of
Beneficial Owners and Management".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Company's Proxy
Statement on page 17.
- 31 -
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Plan of Reorganization (Incorporated by reference to
Exhibit 2.1 of the Company's Registration Statement
on Form 8-A, filed with the SEC on May 7, 1999).
3.1 Federal Stock Charter of the Company (Incorporated by
reference to Exhibit 3.1 of the Form 8-A filed with
the SEC on May 7, 1999).
3.2 Bylaws of the Company (Incorporated by reference to
Exhibit 3.2 of the Form 8-A filed with the SEC on May
7, 1999 ).
4.3 Common Stock Certificate of the Company (Incorporated
by reference to Exhibit 4.3 of the Form 8-A filed
with the SEC on May 7, 1999).
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 Employment Agreement with Robert C. White, Vice
President and Chief Financial Officer.
10.4 Employee Stock Ownership Plan of Wake Forest Federal
Savings & Loan Association.
10.5 Wake Forest Federal Savings & Loan Association 1997
Recognition and Retention Plan (Incorporated by
reference to the Form S-8 filed with the SEC on
July 27, 1999).
10.6 Wake Forest Federal Savings & Loan Association 1997
Stock Option Plan (Incorporated by reference to the
Form S-8 filed with SEC on July 27, 1999).
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Company (Incorporated by
reference to Part 1 - "General" and
"Reorganization").
27 Financial Data Schedule (filed in electronic format
only)
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three month period ended
September 30, 1999.
- 32 -
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
WAKE FOREST BANCSHARES, INC.
(Small Business Issuer)
Date: December 20, 1999 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.
<TABLE>
<S> <C>
/s/ Anna O. Sumerlin December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Anna O. Sumerlin Date
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Carlton E. Chappell December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Carlton E. Chappell Date
Vice President, Secretary and Treasurer
/s/ Robert C. White December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Robert C. White Date
Chief Financial Officer and Vice President
(Principal Financial Officer)
</TABLE>
- 33 -
<PAGE>
<TABLE>
<S> <C>
/s/ Paul K. Brixhoff December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Paul K. Brixhoff - Director Date
/s/ Harold R. Washington December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Harold R. Washington - Director Date
/s/ John D. Lyon December 20, 1999
- ----------------------------------------------------- -------------------------------------------
John D. Lyon - Director Date
/s/ R.W. Wilkinson, III December 20, 1999
- ----------------------------------------------------- -------------------------------------------
R.W. Wilkinson, III - Vice-Chairman and Director Date
/s/ Howard L. Brown December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Howard L. Brown -Chairman of the Board Date
and Director
/s/ Leelan A. Woodlief December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Leelan A. Woodlief - Director Date
/s/ William S. Wooten December 20, 1999
- ----------------------------------------------------- -------------------------------------------
William S. Wooten - Director Date
/s/ Rodney M. Privette December 20, 1999
- ----------------------------------------------------- -------------------------------------------
Rodney M. Privette - Director Date
</TABLE>
- 34 -
EXHIBIT 10.1
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
April 3, 1999 by and between WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION, a
savings and loan association organized and operating under 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").
WHEREAS, the Executive currently serves the Association in the capacity
of the Chief Executive Officer; 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 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:
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.
(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 this Agreement. Prior to the
first anniversary of the effective date of this 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.
1
<PAGE>
(b) 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 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.
SECTION 4. CASH COMPENSATION .
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 EIGHTY-NINE THOUSAND FIVE HUNDRED DOLLARS ($89,500), 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, including bonuses,
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.
SECTION 5. EMPLOYMENT BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated as an
employee of the Association 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 consistent with the Association's
customary practices.
2
<PAGE>
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 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 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) To the maximum extent permitted under applicable law (including 12
C.F.R. 545.121 to the extent applicable), 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 of 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 with the performance of her duties hereunder; provided, however, that
such activities are not prohibited under 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. 571.7) The Executive may also serve as an officer or
director of the Mutual Holding Company and the Stock Holding Company on such
terms and conditions as the Association and the Mutual Holding Company or the
Stock 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.
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 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 membership 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 ninety (90) days following:
(A) the failure of the Board to appoint or re-appoint
or elect or reelect 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 reelect the Executive to the Board or
the failure of the Board (or the nominating committee thereof)
to nominate the Executive for such election or reelection;
provided, however, that such failure is not the result of 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 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)- (Termination for
"Cause").
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In such event, subject to section 25, the Association shall provide the benefits
and pay to the Executive in 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 a period of three (3) years, 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.
(iv) with thirty (30) days following her termination of employment with
the Association, a lump sum payment, in an amount equal to three (3)
times the Executive's highest annual rate of salary, including bonuses
and stock awards included as W-2 wages, achieved during the Employment
Period.
(v) within thirty (30) days following her termination of employment
with the Association, a lump sum payment in an amount equal to:
(A) the present value of the aggregate benefits to
which she would be entitled under any and all qualified and
non-qualified retirement plans, maintained by, or covering
employees of the Association as if she were 100% vested at
date of termination. Present value is to be determined in
accordance with IRC Section 280G. In the case of the
Association's leveraged Employee Stock Ownership Plan, the
additional assets allocable to her will be computed based
upon: (1) the fair market value of such assets at termination
of employment, assuming she were 100% vested in the Plan, and
(2) the Association made the maximum amount of employee
contributions required under the Plan during the remaining
debt service period, and (3) the Executive had continued
working for the Association at the highest rate of pay during
the Employment Period.
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(vi) at the election of the Association's Board of Directors made
within thirty (30) days following her termination of employment with
the Association, upon surrender of stock options or appreciation rights
granted such Executive under any stock option or appreciation rights
plan covering employees of the Association, a lump sum payment equal to
the product of:
(A) the excess of (1) the fair market value of a
share of stock of the same class as the stock subject to the
option or appreciation right, determined as of the date of
termination of employment, over (2) the exercise price per
share for such option or appreciation right, as specified in
or under the relevant plan or program; multiplied by
(B) the number of shares with respect to which
options or appreciation rights are being surrendered.
For purposes of this section 9(b)(vi), the Executive shall be deemed fully
vested in all options and appreciation rights under any stock option or
appreciation rights plan or program maintained by, or covering employees of the
Association, even if she is not vested under such plan or program.
(vii) at the election of the Association's Board of Directors made with
thirty (30) days following the Executive's termination of employment
with the Association, upon surrender of any shares awarded to the
Executive under any restricted stock plan maintained by, or covering
employees of the Association, a lump sum payment in an amount equal to
the product of:
(A) the fair market value of a share of stock of the
same class of stock granted under such plan, determined as of
the date of the Executive's termination of employment;
multiplied by
(B) the number of shares which are being surrendered.
For purposes of this section 9(b)(vii), the Executive shall be deemed fully
vested in all shares awarded under any restricted stock plan maintained by, or
covering employees of, the Association, even if she is not vested under such
plan or program.
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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 described under section 9(b) on the
receipt of the Executive's resignation from any and all positions which she
holds as an officer or employee of the Association, the Mutual Holding Company,
or the Stock Holding Company.
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 she shall have received
a written notice of termination from the Board, which notice shall be
given to the Executive not later than five (5) business days after the
Board adopts, and shall be accompanied by, a resolution duly approved
by affirmative vote a 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 nor more than thirty (30) days after notice to
the Executive), at which meeting there shall be a reasonable
opportunity for the Executive to make oral and written presentations to
the members of the Board, on her own behalf, or through a
representative, who may be 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 Executive for cause; or
(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 not 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;
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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 interest 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) or 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:
(1) upon election to serve as a
member 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-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 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;
(ii) resignation, voluntary or otherwise, by the Executive at
anytime during the Employment Period and within ninety (90)
days following relocation of her principal place of employment
(Wake Forest, North Carolina) or any change in working
conditions at such principal place of employment which is
embarrassing, derogatory or otherwise materially adverse to
the Executive;
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(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, 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 of affiliate of any such
entity, that entails working within 50 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 for the reasons set forth in section 9(a) or section 11; 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.
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 an
affiliate of the Association, 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
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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 her 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 with 50 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 50 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 her 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 50 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.
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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:
If to the Executive:
Anna O. Sumerlin
10112 Ligon Mill Road
Wake Forest, North Carolina 27587
If to the Association:
Wake Forest Federal Savings and Loan Association
302 S. Brooks Street, P.O. Box 1167
Wake Forest, North Carolina, 27588
Attention: Chairman of the Board
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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, or in a settlement. For purposes of this Agreement, any settlement
agreement which provides for payment of any amounts in settlement of the
Association's obligations hereunder shall be conclusive evidence of the
Executive's entitlement to indemnification hereunder, and any such
indemnification payments shall be in addition to amounts payable pursuant to
such settlement agreement, unless such settlement agreement expressly provides
otherwise.
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 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.
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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), (vi) and (vii)) exceed three times the Executive's
average annual compensation 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). "Annual compensation" is defined to include any cash bonuses and
the value of stock awards vested during a calendar year under any
restricted stock plan maintained by, or covering employees of the
Association, which are reportable as taxable wages.
(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. 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. 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.
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(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. 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
DI Act, 12 U.S.C. 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 Office of Thrift Supervision ("OTS") or her 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. 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.
SECTION 26. EFFECTIVE DATE.
This Agreement shall take effect April 3, 1999.
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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.
/s/ Anna O. Sumerlin
-------------------------------
Anna O. Sumerlin
ATTEST: WAKE FOREST FEDERAL
SAVINGS AND LOAN ASSOCIATION
By /s/ Carlton E. Chappell By /s/ Howard L. Brown
------------------------ ----------------------------
Secretary Name: Howard R. Brown
Title: Chairman of the Board
[Seal]
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STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this 8 day of April, 1999, 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 is said instrument and that she signed her name
to the foregoing instrument.
/s/ Carolyn D. Clark
--------------------------
Notary Public
STATE OF NORTH CAROLINA )
:ss.:
COUNTY OF WAKE )
On this 8 day of April, 1999, before me personally came Howard
L. Brown, to me known, who, being by me duly sworn, did depose and say that he
resides at 900 Averette Road, Wake Forest, North Carolina, 27587, that he is
Chairman of the Board of Directors of WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, the savings institution described in and which executed the
foregoing instrument; that he knows the seal of said savings institution; 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 institution, and that he signed
his name thereto by like order.
/s/ /Carolyn D. Clark
------------------------
Notary Public
17
EXHIBIT 10.2
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
April 3, 1999 by and between WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION, a
savings and loan association organized and operating under 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").
WHEREAS, the Executive currently serves the Association in the capacity
of Secretary, Treasurer, and
Vice President; 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 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:
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.
(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 this Agreement. Prior to the
first anniversary of the effective date of this 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.
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(b) 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 Secretary, Treasurer, and 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.
SECTION 4. CASH COMPENSATION .
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 SIXTY-TWO THOUSAND DOLLARS ($62,000), 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, including bonuses, 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.
SECTION 5. EMPLOYMENT BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated as an
employee of the Association 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 consistent with the Association's
customary practices.
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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 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 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) To the maximum extent permitted under applicable law (including 12
C.F.R. 545.121 to the extent applicable), 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 of 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 the performance of his duties hereunder; provided, however, that
such activities are not prohibited under 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. 571.7) The Executive may also serve as an officer or
director of the Mutual Holding Company and the Stock Holding Company on such
terms and conditions as the Association and the Mutual Holding Company or the
Stock Holding Company 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.
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 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 membership 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 ninety (90) days following:
(A) the failure of the Board to appoint or re-appoint
or elect or reelect the Executive to the office of Secretary,
Treasurer, and 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)- (Termination for
"Cause").
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In such event, subject to section 25, the Association shall provide the benefits
and pay to the Executive in 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 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 a period of three (3) years, 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.
(iv) with thirty (30) days following his termination of employment with
the Association, a lump sum payment, in an amount equal to three (3)
times the Executive's highest rate of annual salary, including bonuses
and stock awards included as W-2 wages, achieved during the Employment
Period.
(v) within thirty (30) days following his termination of employment
with the Association, a lump sum payment in an amount equal to:
(A) the present value of the aggregate benefits to
which he would be entitled under any and all qualified and
non-qualified retirement plans, maintained by, or covering
employees of the Association as if he were 100% vested at date
of termination. Present value is to be determined in
accordance with IRC Section 280G. In the case of the
Association's leveraged Employee Stock Ownership Plan, the
additional assets allocable to him will be computed based
upon: (1) the fair market value of such assets at termination
of employment, assuming he were 100% vested in the Plan, and
(2) the Association made the maximum amount of employee
contributions required under the Plan during the remaining
debt service period, and (3) the Executive had continued
working for the Association at the highest rate of pay during
the Employment Period.
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(vi) at the election of the Association's Board of Directors made
within thirty (30) days following his termination of employment with
the Association, upon surrender of stock options or appreciation rights
granted such Executive under any stock option or appreciation rights
plan covering employees of the Association, a lump sum payment equal to
the product of:
(A) the excess of (1) the fair market value of a share of
stock of the same class as the stock subject to the option or
appreciation right, determined as of the date of termination
of employment, over (2) the exercise price per share for such
option or appreciation right, as specified in or under the
relevant plan or program; multiplied by
(B) the number of shares with respect to which options or
appreciation rights are being surrendered.
For purposes of this section 9(b)(vi), the Executive shall be deemed fully
vested in all options and appreciation rights under any stock option or
appreciation rights plan or program maintained by, or covering employees of the
Association, even if he is not vested under such plan or program.
(vii) at the election of the Association's Board of Directors
made with thirty (30) days following the Executive's
termination of employment with the Association, upon surrender
of any shares awarded to the Executive under any restricted
stock plan maintained by, or covering employees of the
Association, a lump sum payment in an amount equal to the
product of:
(A) the fair market value of a share of stock of the
same class of stock granted under such plan,
determined as of the date of the Executive's
termination of employment; multiplied by
(B) the number of shares which are being surrendered.
For purposes of this section 9(b)(vii), the Executive shall be deemed fully
vested in all shares awarded under any restricted stock plan maintained by, or
covering employees of, the Association, even if he is not vested under such plan
or program.
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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 described under section 9(b) on the
receipt of the Executive's resignation from any and all positions which he holds
as an officer or employee of the Association, the Mutual Holding Company, or the
Stock Holding Company.
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 he shall have received
a written notice of termination from the Board, which notice shall be
given to the Executive not later than five (5) business days after the
Board adopts, and shall be accompanied by, a resolution duly approved
by affirmative vote a 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 nor more than thirty (30) days after notice to
the Executive), at which meeting there shall be a reasonable
opportunity for the Executive to make oral and written presentations to
the members of the Board, on his own behalf, or through a
representative, who may be 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 Executive for cause; or
(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 not 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;
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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 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 interest 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) or 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:
(1) upon election to serve as a member 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-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 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
anytime during the Employment Period and within ninety (90)
days following relocation of his principal place of employment
(Wake Forest, North Carolina) or any change in working
conditions at such principal place of employment which is
embarrassing, derogatory or otherwise materially adverse to
the Executive;
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(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, 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 of affiliate of any such entity,
that entails working within 50 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 for
the reasons set forth in section 9(a) or section 11; 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 an
affiliate of the Association, 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
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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 with 50 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 50 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 50 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.
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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:
Carlton E. Chappell
1204 Jenkins Road
Wake Forest, North Carolina 27587
If to the Association:
Wake Forest Federal Savings and Loan Association
302 S. Brooks Street, P.O. Box 1167
Wake Forest, North Carolina, 27588
Attention: Chairman of the Board
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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, or in a settlement. For purposes of this Agreement, any settlement
agreement which provides for payment of any amounts in settlement of the
Association's obligations hereunder shall be conclusive evidence of the
Executive's entitlement to indemnification hereunder, and any such
indemnification payments shall be in addition to amounts payable pursuant to
such settlement agreement, unless such settlement agreement expressly provides
otherwise.
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 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.
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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), (vi) and (vii)) exceed three times the Executive's
average annual compensation 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 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). "Annual compensation" is defined to include any cash bonuses and
the value of stock awards vested during a calendar year under any
restricted stock plan maintained by, or covering employees of the
Association, which are reportable as taxable wages.
(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. 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. 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.
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(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. 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
DI Act, 12 U.S.C. 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 Office of
Thrift Supervision ("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. 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 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.
SECTION 26. EFFECTIVE DATE.
This Agreement shall take effect April 3, 1999.
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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.
/s/ Carlton E. Chappell
-------------------------------
Carlton E. Chappell
ATTEST: WAKE FOREST FEDERAL
SAVINGS AND LOAN ASSOCIATION
By /s/ Carlton Chappell By /s/ Howard L. Brown
------------------------ ----------------------------
Secretary Name: Howard R. Brown
Title: Chairman of the Board
[Seal]
16
STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this 8th day of April, 1999, 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 is said instrument and that he signed his name
to the foregoing instrument.
/s/ Carolyn D. Clark
---------------------------
Notary Public
STATE OF NORTH CAROLINA )
:ss.:
COUNTY OF WAKE )
On this 8th day of April, 1999, before me personally came Howard L.
Brown, to me known, who, being by me duly sworn, did depose and say that he
resides at 900 Averette Road, Wake Forest, North Carolina, 27587, that he is
Chairman of the Board of Directors of WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, the savings institution described in and which executed the
foregoing instrument; that he knows the seal of said savings institution; 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 institution, and that he signed
his name thereto by like order.
/s/ Carolyn D. Clark
---------------------------
Notary Public
17
EXHIBIT 10.3
WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
April 3, 1999 by and between WAKE FOREST FEDERAL SAVINGS & LOAN ASSOCIATION, a
savings and loan association organized and operating under federal laws of the
United States and having an office at 302 South Brooks Street, Wake Forest,
North Carolina 27588-0707 ("Association") and ROBERT C. WHITE, an individual
residing at 6054 Bridgetender Circle, Rocky Mount, North Carolina 27803
("Executive").
WHEREAS, the Executive currently serves the Association in the capacity
of the Chief Financial Officer; 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 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:
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.
(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 this Agreement. Prior to the
first anniversary of the effective date of this 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.
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(b) 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 Vice President and Chief Financial 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 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.
SECTION 4. CASH COMPENSATION .
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 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, including bonuses, 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.
SECTION 5. EMPLOYMENT BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated as an
employee of the Association 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 consistent with the Association's
customary practices.
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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 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 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) To the maximum extent permitted under applicable law (including 12
C.F.R. 545.121 to the extent applicable), 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 of 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 the performance of his duties hereunder; provided, however, that
such activities are not prohibited under 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. 571.7) The Executive may also serve as an officer or
director of the Mutual Holding Company and the Stock Holding Company on such
terms and conditions as the Association and the Mutual Holding Company or the
Stock Holding Company 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.
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 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 membership 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 ninety (90) days following:
(A) the failure of the Board to appoint or re-appoint or elect
or reelect the Executive to the office of Vice President and
Chief Financial Officer (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)- (Termination for
"Cause").
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In such event, subject to section 25, the Association shall provide the benefits
and pay to the Executive in 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 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 a period of three (3) years, 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.
(iv) with thirty (30) days following his termination of employment with
the Association, a lump sum payment, in an amount equal to three (3)
times the Executive's highest rate of annual salary, including bonuses
and stock awards included as W-2 wages, achieved during the Employment
Period.
(v) within thirty (30) days following his termination of employment
with the Association, a lump sum payment in an amount equal to:
(A) the present value of the aggregate benefits to which he
would be entitled under any and all qualified and
non-qualified retirement plans, maintained by, or covering
employees of the Association as if he were 100% vested at date
of termination. Present value is to be determined in
accordance with IRC Section 280G. In the case of the
Association's leveraged Employee Stock Ownership Plan, the
additional assets allocable to him will be computed based
upon: (1) the fair market value of such assets at termination
of employment, assuming he were 100% vested in the Plan, and
(2) the Association made the maximum amount of employee
contributions required under the Plan during the remaining
debt service period, and (3) the Executive had continued
working for the Association at the highest rate of pay during
the Employment Period.
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(vi) at the election of the Association's Board of Directors made
within thirty (30) days following his termination of employment with
the Association, upon surrender of stock options or appreciation rights
granted such Executive under any stock option or appreciation rights
plan covering employees of the Association, a lump sum payment equal to
the product of:
(A) the excess of (1) the fair market value of a share of
stock of the same class as the stock subject to the option or
appreciation right, determined as of the date of termination
of employment, over (2) the exercise price per share for such
option or appreciation right, as specified in or under the
relevant plan or program; multiplied by
(B) the number of shares with respect to which options or
appreciation rights are being surrendered.
For purposes of this section 9(b)(vi), the Executive shall be deemed fully
vested in all options and appreciation rights under any stock option or
appreciation rights plan or program maintained by, or covering employees of the
Association, even if he is not vested under such plan or program.
(vii) at the election of the Association's Board of Directors
made with thirty (30) days following the Executive's
termination of employment with the Association, upon surrender
of any shares awarded to the Executive under any restricted
stock plan maintained by, or covering employees of the
Association, a lump sum payment in an amount equal to the
product of:
(A) the fair market value of a share of stock of the
same class of stock granted under such plan,
determined as of the date of the Executive's
termination of employment; multiplied by
(B) the number of shares which are being surrendered.
For purposes of this section 9(b)(vii), the Executive shall be deemed fully
vested in all shares awarded under any restricted stock plan maintained by, or
covering employees of, the Association, even if he is not vested under such plan
or program.
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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 described under section 9(b) on the
receipt of the Executive's resignation from any and all positions which he holds
as an officer or employee of the Association, the Mutual Holding Company, or the
Stock Holding Company.
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 he shall have received
a written notice of termination from the Board, which notice shall be
given to the Executive not later than five (5) business days after the
Board adopts, and shall be accompanied by, a resolution duly approved
by affirmative vote a 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 nor more than thirty (30) days after notice to
the Executive), at which meeting there shall be a reasonable
opportunity for the Executive to make oral and written presentations to
the members of the Board, on his own behalf, or through a
representative, who may be 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 Executive for cause; or
(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 not 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;
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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 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 interest 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) or 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:
(1) upon election to serve as a member 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-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 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
anytime during the Employment Period and within ninety (90)
days following relocation of his principal place of employment
(Wake Forest, North Carolina) or any change in working
conditions at such principal place of employment which is
embarrassing, derogatory or otherwise materially adverse to
the Executive;
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(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, 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 of affiliate of any such entity,
that entails working within 50 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 for
the reasons set forth in section 9(a) or section 11; 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 an
affiliate of the Association, 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
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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 with 50 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 50 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 50 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.
11
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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:
Robert C. White
6054 Bridgetender Circle
Rocky Mount, North Carolina 27803
If to the Association:
Wake Forest Federal Savings and Loan Association
302 S. Brooks Street, P.O. Box 1167
Wake Forest, North Carolina, 27588
Attention: Chairman of the Board
12
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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, or in a settlement. For purposes of this Agreement, any settlement
agreement which provides for payment of any amounts in settlement of the
Association's obligations hereunder shall be conclusive evidence of the
Executive's entitlement to indemnification hereunder, and any such
indemnification payments shall be in addition to amounts payable pursuant to
such settlement agreement, unless such settlement agreement expressly provides
otherwise.
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 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.
13
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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), (vi) and (vii)) exceed three times the Executive's
average annual compensation 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 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). "Annual compensation" is defined to include any cash bonuses and
the value of stock awards vested during a calendar year under any
restricted stock plan maintained by, or covering employees of the
Association, which are reportable as taxable wages.
(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. 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. 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.
14
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(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. 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
DI Act, 12 U.S.C. 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 Office of
Thrift Supervision ("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. 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 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.
SECTION 26. EFFECTIVE DATE.
This Agreement shall take effect April 3, 1999.
15
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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.
/s/ Robert C. White
-------------------------
Robert C. White
ATTEST: WAKE FOREST FEDERAL
SAVINGS AND LOAN ASSOCIATION
By /s/ Carlton Chappell By /s/ Howard R. Brown
--------------------------- -----------------------------
Secretary Name: Howard R. Brown
Title: Chairman of the Board
[Seal]
16
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STATE OF NORTH CAROLINA )
: ss.:
COUNTY OF WAKE )
On this 8th day of April, 1999, before me personally came Robert C.
White, 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 is said instrument and that he signed his name
to the foregoing instrument.
/s/ Carolyn D. Clark
----------------------------
Notary Public
STATE OF NORTH CAROLINA )
:ss.:
COUNTY OF WAKE )
On this 8th day of April, 1999, before me personally came Howard L.
Brown, to me known, who, being by me duly sworn, did depose and say that he
resides at 900 Averette Road, Wake Forest, North Carolina, 27587, that he is
Chairman of the Board of Directors of WAKE FOREST FEDERAL SAVINGS & LOAN
ASSOCIATION, the savings institution described in and which executed the
foregoing instrument; that he knows the seal of said savings institution; 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 institution, and that he signed
his name thereto by like order.
/s/ Carolyn D. Clark
-----------------------------
Notary Public
EMPLOYEE STOCK OWNERSHIP PLAN
OF
WAKE FOREST FEDERAL
SAVINGS & LOAN ASSOCIATION
Adopted on December 6, 1995
Effective on April 3, 1996
<PAGE>
TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS
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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
Section 1.39 Period of Severance.................................................................. 6
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(i)
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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
</TABLE>
ARTICLE V
(ii)
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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
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
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(iii)
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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
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
</TABLE>
(iv)
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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
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
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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
</TABLE>
(vi)
<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;
(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.
<PAGE>
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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 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.
<PAGE>
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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
(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
<PAGE>
-4-
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 ter minated 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
(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
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(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.
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.
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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 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.
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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 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 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
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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.
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
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(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 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
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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.
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.
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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.
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
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(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. 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:
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(a) to purchase Shares; or
(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).
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.
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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 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 Acquisi tion 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.
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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.
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
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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 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:
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(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 volun tary
nondeductible contributions to such plans; plus
(C) all ESOP Contributions under this Plan; plus
(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
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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
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) the greater of (I) $30,000, or (II)
25% of the dollar
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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%
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
<PAGE>
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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 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:
<PAGE>
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(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;
(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
<PAGE>
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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
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;
<PAGE>
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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
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
<PAGE>
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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.
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 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
<PAGE>
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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.
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.
<PAGE>
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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.
(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:
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(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 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
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(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.
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 tabula tion. 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
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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 the Beneficiaries of deceased Former Par
ticipants, 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 sepa rately 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 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.
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(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 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
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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 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
<PAGE>
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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 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
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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.
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
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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 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:
(i) "Direct Rollover" means a payment by the Plan to the
Eligible Retirement Plan specified by the Distributee.
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(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 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
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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;
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.
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(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 responsibil ities 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 Fidu
ciary 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 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;
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(f) To determine any question arising in connection with the
Plan, and the Plan Ad ministrator'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;
(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;
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(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 Ad ministrator 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;
(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
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(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.
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.
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(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.
(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 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
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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 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.
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(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.
(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.
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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.
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;
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(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 of ficers,
up to the maximum number, with the highest annual compensation in any
one of the five con secutive Plan Years ending on the Determination
Date; and
(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.
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(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:
(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
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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 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.
<PAGE>
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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 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 the leasing organization (other than employees who per form
substantially all of their services for the leasing
organization).
<PAGE>
-50-
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.
CONTENTS
<TABLE>
<CAPTION>
PAGE
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
SELECTED CONSOLIDATED FINANCIAL DATA 1
- -------------------------------------------------------------------------------------------------------------------
REPORT TO STOCKHOLDERS 2
- -------------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 3 - 16
- -------------------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 17
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated statements of financial condition at September 30, 1999 and 1998 18
Consolidated statements of income for years ended September 30, 1999 and 1998 19
Consolidated statements of stockholders' equity for the years ended
September 30, 1999 and 1998 20 - 21
Consolidated Statements of cash flows for the years ended September 30, 1999 and 1998 22 - 23
- -------------------------------------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 - 43
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION 44
- -------------------------------------------------------------------------------------------------------------------
CORPORATE INFORMATION 45
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
WAKE FOREST BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 72,396 $ 74,360 $ 63,453 $ 61,812 $55,136
Investments (1) 9,635 17,528 8,671 12,742 8,140
Loans receivable, net 61,467 55,363 53,673 47,821 45,377
Deposits 57,654 60,038 50,056 48,956 48,090
Stockholders' equity (2) 13,468 13,167 12,121 11,721 6,893
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and dividend income $ 6,204 $ 5,983 $ 5,183 $4,859 $4,122
Interest expense 3,027 3,072 2,590 2,730 2,187
------------------------------------------------------------------------
Net interest income 3,177 2,911 2,593 2,129 1,935
Provision for loan losses -- -- -- -- 180
Noninterest income 42 34 56 37 62
Noninterest expense 1,275 1,264 1,195 1,291 665
------------------------------------------------------------------------
Income before income taxes 1,944 1,681 1,454 875 1,152
Income tax expense 741 620 543 322 431
------------------------------------------------------------------------
Net income $ 1,203 $ 1,061 $ 911 $ 553 $ 721
========================================================================
Basic earnings per share (2) $ 1.02 $ 0.91 $ 0.79 $0.15 $ --
Diluted earnings per share (2) 1.02 0.89 0.78 0.15 -
Dividends per share (2) 0.48 0.46 0.35 0.14 --
Dividend payout ratio (2) 47.06% 51.69% 44.87% 93.33% --
Selected Other Data:
Return on average assets (4) 1.62% 1.28% 1.47% .92% 1.43%
Return on average equity (4) 8.83% 7.26% 7.55% 5.78% 11.00%
Interest rate spread (4) 3.38% 3.39% 3.32% 2.83% 3.28%
Average equity to average assets (4) 18.35% 17.63% 19.47% 15.92% 13.00%
Net interest margin (4) 4.37% 4.26% 4.32% 3.69% 3.92%
Allowance for loan losses to
nonperforming loans (3) 89.51% 196.79% 134.43% 124.64% 189.21%
Nonperforming loans to total loans (3) .48% .24% .36% .40% .27%
</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.
1
<PAGE>
REPORT TO STOCKHOLDERS
On May 7, 1999, Wake Forest Federal Savings and Loan Association formed Wake
Forest Bancshares, Inc. as a stock holding company parent of the Association. As
a part of the reorganization, each outstanding share of Association's common
stock was converted into one share of common stock of the Company. Holders of
the Association's common stock became holders of all of the outstanding shares
of the Company's common stock. The Company is majority owned by Wake Forest
Bancorp, M.H.C., the Association's mutual holding company. The reorganization
into the "two-tier" mutual holding company structure 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 new structure provides us with
enhanced operating opportunities unavailable to a standalone thrift which may be
pursued in the future.
The Board of Directors and management of Wake Forest Bancshares, Inc. primary
commitment is to maximize shareholder value by building a strong and profitable
institution. This report demonstrates that during 1999, our continuing
commitment to that goal was achieved. The Company reported record earnings in
1999 of $1.2 million, or $1.02 per share. Both return on assets and equity
increased during the current year. The Association's loan portfolio increased by
approximately 11% during the year and asset quality continues to remain strong.
The Company declared regular dividends of $0.12 per share during each quarter of
the current year, a generous 47% of total 1999 earnings.
Loan demand remains very strong in our primary lending area of Wake, Franklin
and Granville counties and management is committed to continuing to grow the
Association's loan portfolio in a prudent manner. We also intend to remain
competitive with our deposit products to ensure continued growth and
profitability. We, the management, directors and employees, are committed to
serving our local market as a community-oriented financial institution. We thank
each stockholder for investing in the Company and are grateful for the
opportunity to enhance the value of your investment through the safe and sound
operation of the Company. We encourage your comments and suggestions and truly
appreciate your support and business.
Respectfully,
/s/ Anna O. Sumerlin
----------------------------
Anna O. Sumerlin
President & Chief Executive Officer
2
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
The Board of Directors of Wake Forest Federal Savings and Loan Association
("Wake Forest Federal" or the "Association") approved an Agreement and Plan of
Reorganization (the "Plan of Reorganization") on November 16, 1998. The Plan of
Reorganization provided for the establishment of Wake Forest Bancshares, Inc.
(the "Company") as a stock holding company parent of the Association. The
Company is majority owned (approximately 53%) by Wake Forest Bancorp, M.H.C.,
(the "MHC") the Association's mutual holding company. The reorganization into
the "two-tier" mutual holding company structure (the "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 Company was consummated on May 7, 1999.
As a part of the Reorganization, each outstanding share of Association's common
stock was converted into one share of common stock, par value $.01 per share, of
the Company, and the holders of the Association's common stock became the
holders of all of the outstanding shares of the Company's common stock.
Accordingly, as a result of the Reorganization, the Association's minority
shareholders became minority shareholders of the Company. The Company was formed
solely for the purpose of becoming a savings and loan holding company and is
regulated by the Office of Thrift Supervision (the "OTS"). It had no prior
operating history. The Reorganization had no impact on the operations of the
Association or the MHC. The Association continues to operate 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 capitalized the Company with $100,000.
Future capitalization of the Company will depend upon dividends declared by the
Association based on future earnings, or the raising of additional capital by
the Company through a future issuance of securities, debt or by other means. The
Board of Directors of the 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
Company's outstanding voting stock.
The Reorganization was treated similar to a pooling of interests for accounting
purposes. Therefore, the consolidated capitalization, assets, liabilities,
income and expenses of the 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 Company's
books at their historical recorded values.
The MHC's Board of Directors, which is currently the same as the Association's
and the Company's Board of Directors, will generally be able to control the
outcome of most matters presented to the stockholders of the Company 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 OTS.
3
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
The Company conducts no business other than holding stock in the Association,
investing dividends received from the Association, repurchasing its common stock
from time to time, and distributing dividends on its common stock to its
shareholders. 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 fees 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 and changes in financial position at and
for the years ended September 30, 1999 and 1998.
FINANCIAL CONDITION
Total assets decreased by $2.0 million during 1999, from $74.4 million at
September 30, 1998 to $72.4 million at September 30, 1999. The decrease in total
assets resulted primarily from a decrease of $2.4 million in customer deposits.
Total investments, including short term interest-earning deposits and U.S.
Treasury and agency obligations decreased by $7.9 million during the current
year, primarily as a result of the net growth of the Association's loan
portfolio and a decrease in customer deposits. The investment securities
portfolio, which amounted to $3.8 million at September 30, 1999, contains
available for sale securities with net unrealized gains of $762,650. The net
gain reflects a decrease of approximately $6,800 over the net unrealized gain on
available for sale securities at September 30, 1998, primarily as a result of
unrealized losses on certain U.S. Treasury and agency bonds during 1999.
Loans receivable increased by approximately $6.1 million during 1999 from $55.4
million at September 30, 1998 to $61.5 million at September 30, 1999. 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 its population base into
surrounding communities such as Wake Forest.
Customer deposits decreased by approximately $2.4 million during 1999 and
totaled $57.7 million at September 30, 1999. The decrease was planned because of
the excess liquidity that the Association held for the greater part of the year.
When overall interest rates began to rise during the current period, the
Association allowed a certain amount of maturing deposits to leave rather than
match rates offered by competition. During the last quarter, the Association
began to more aggressively price its deposits to meet rising loan demand.
4
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
The Company had no outstanding borrowings during 1999 or 1998, other than the
loan by the Employee Stock Ownership Plan of the Association (the "ESOP") to
purchase shares of stock in the Company, which is shown as a liability of the
Company. The Company has borrowing capacity through the Association's ability to
borrow funds from the Federal Home Loan Bank (the "FHLB") of Atlanta. This
capacity is currently set at 12% of the Association's total assets, subject to
available collateral.
The Company's return on average assets was 1.62% and 1.28% and its return on
average equity was 8.83% and 7.26% for 1999 and 1998, respectively. The increase
in the returns on average assets and average equity during 1999 was primarily
due to a change in the volume and mix of the Company's interest earning assets.
During the current period, the Association's loan portfolio increased and funds
on deposit at the Federal Home Loan Bank of Atlanta decreased in comparison to
average balances maintained in 1998. The overall increase in the volume of loans
outstanding and as a result, interest earning assets, caused interest income to
rise during 1999.
The Company and the Association are required to meet certain capital
requirements as established by the OTS. At September 30, 1999, all capital
requirements were met. (See Note 11 to the consolidated financial statements).
RESULTS OF OPERATING
Net Income. The Company's net income for the years ended September 30, 1999 and
1998 was $1,202,550 and $1,060,900, respectively. Net income in 1999 was higher
than the earnings reported in 1998 primarily due to an increase in the volume
and a change in the mix of interest earning assets, with higher yielding loans
comprising a greater percentage of interest earning assets during 1999.
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 $265,900 or 9.13% to $3.2 million for the year
ended September 30, 1999 from $2.9 million reported in 1998. The rise in net
interest income during 1999 was attributable primarily to an overall increase in
interest earnings assets, with the greatest increase occurring in higher
yielding loans. The average balance of interest earning assets and loans
receivable increased by approximately $4.9 million and $6.9 million,
respectively, during 1999. The increase in the volume of loans outstanding
during 1999 allowed net interest income to rise despite a slight narrowing in
interest rate spread. The Company's interest rate spread decreased from 3.39% in
1998 to 3.38% in 1999.
5
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATING
Interest Income. Total interest income increased to $6.2 million for 1999 from
$6.0 million in 1998, an increase of $220,650. The rise in interest income
during 1999 was primarily attributable to a $6.9 million increase in the average
balance of loans outstanding in 1999. Interest income rose despite a 28 basis
point decline in the Company's overall yield on interest earning assets which
was 8.47% in 1999 as compared with 8.75% in 1998. A significant dollar amount of
the Association's loan portfolio is tied to prime, which decreased by 75 basis
points in the fall of 1998 before rising by 50 basis points during the summer of
1999.
Interest Expense. Total interest expense decreased to $3.0 million in 1999 from
$3.1 million in 1998, a decrease of $45,250. During 1999, the Association's
average balance of outstanding deposits increased by approximately $2.2 million
from 1998. However, during 1999, the Association's cost of funds decreased by 27
basis point, from 5.36% in 1998 to 5.09% in 1999. The decrease in cost of funds
and corresponding decrease in interest expense was directly related to a decline
in general market rates during the greater part of 1999. The decline in the
Association's cost of funds more than offset the added interest expense created
by an increase in average outstanding deposits during 1999.
Provision for Loan Losses. There were no provisions for loan losses during 1999
or 1998. 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 the Association'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 non-performing loans, defined as loans past due 90
days or more, are relatively insignificant as percentage of total loans
outstanding and amounted to .48% and .24% at September 30, 1999 and 1998,
respectively. Management believes that such loans are adequately collateralized
and that the Association's loan loss allowances are adequate to absorb the loss,
if any, that might result from foreclosure.
Noninterest Income. Noninterest income amounted to $41,750 and $33,600 in 1999
and 1998, respectively. Noninterest income consists primarily of service charges
and fees associated with the Association's loan and deposit accounts.
6
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATING
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums, OTS operating assessments, and data processing charges. Noninterest
expenses amounted to $1,274,950 and $1,264,150 in 1999 and 1998, respectively.
Compensation and related benefits increased from $698,700 in 1998 to $748,550 in
1999. The increase was primarily due to annual increases in base salaries and
related bonuses and by the addition of two new employees during 1999.
Occupancy expense, federal insurance premiums, OTS operating assessments, and
data processing expense changed nominally from 1998 to 1999. Other operating
expense decreased from $368,600 in 1998 to $323,300 during 1999, a decrease of
$45,300. The decrease in other operating expense was due primarily to a decision
by management in 1999 to allocate additional professional and board of director
expenses to the MHC. The allocations appropriately reflect the costs associated
with the mutual holding company's majority ownership in the Company.
Income Taxes. The Company's effective income tax rate was 38.1% and 36.9% in
1999 and 1998, respectively. The differences in rates were due to changes in the
components of permanent tax differences.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated 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 Company are primarily monetary in nature and changes in interest rates
have a greater impact on the Company's performance than do the effects of
inflation.
7
<PAGE>
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 (changes in volume multiplied by
changes in rates).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1999 VS. 1998 1998 VS 1997
---------------------------------------- ----------------------------------------
INCREASE (DECREASE) ATTRIBUTABLE TO INCREASE (DECREASE) ATTRIBUTABLE TO
---------------------------------------- ----------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME NET VOLUME RATE VOLUME NET
------ ---- ------ --- ------ ---- ------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earnings assets:
Interest-bearing deposits .......... $ (79) $ (71) $ 8 $(142) $ 252 $ 14 $ 9 $ 275
Investment securities .............. (27) 20 (3) (10) 19 (11) (2) 6
Loans receivable ................... 671 (263) (35) 373 304 201 14 519
----- ----- ----- ----- ----- ----- ----- -----
Total ........................ 565 (314) (30) 221 575 204 21 800
----- ----- ----- ----- ----- ----- ----- -----
Liabilities:
Interest-bearing liabilities:
ESOP debt .......................... $ (5) $ (2) $ -- $ (7) $ (5) $ -- $ -- $ (5)
Passbook savings ................... 3 -- -- 3 10 -- -- 10
NOW and MMDA accounts .............. 47 (20) (3) 24 (5) (7) -- (12)
Certificates of deposit ............ 47 (110) (2) (65) 492 (3) (1) 488
----- ----- ----- ----- ----- ----- ----- -----
Total ........................ 92 (132) (5) (45) 492 (10) (1) 481
----- ----- ----- ----- ----- ----- ----- -----
Net Interest income .......... $ 473 $(182) $ (25) $ 266 $ 83 $ 214 $ 22 $ 319
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
8
<PAGE>
AVERAGE BALANCES, INTEREST, YIELDS AND COSTS
The following table sets forth certain information relating to the
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, 1999 1999 1998
------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE
ACTUAL AVERAGE YIELD/ AVERAGE YIELD/
BALANCE YIELD/COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ---------- ------- -------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Assets:
Interest-earnings assets:
Interest-bearing deposits.............. $ 5,827 5.25% $11,169 $ 557 4.99% $12,588 $ 699 5.55%
Investment securities.................. 3,808 5.64% 2,974 171 5.75% 3,500 181 5.17%
Loans receivable(1).................... 61,467 8.65% 59,124 5,476 9.26% 52,257 5,103 9.77%
------- ------- ------ ------- ------
Total interest-earning assets.............. 71,102 8.24% 73,267 $6,204 8.47% 68,345 5,983 8.75%
Non-interest-earning assets................ 1,294 1,154 ------ 3,109 ------
------- ------- -------
Total............................... $72,396 $74,421 $71,454
======= ======= =======
Liabilities and retained earnings:
Interest-bearing liabilities:
ESOP Debt.............................. $ 206 8.25% $ 238 19 7.98% $ 294 $ 26 8.50%
Passbook accounts...................... 3,554 3.00% 3,433 103 3.00% 3,338 100 3.00%
NOW and MMDA accounts.................. 9,336 3.90% 9,565 327 3.42% 8,289 303 3.66%
Certificates of deposit................ 44,402 5.35% 46,226 2,578 5.58% 45,423 2,643 5.82%
------- ------- ------ ------- ------
Total interest-bearing liabilities......... 57,498 4.98% 59,462 $3,027 5.09% 57,344 $3,072 5.36%
------ ------
Non interest-bearing liabilities........... 1,430 1,333 1,552
Stockholders' Equity....................... 13,468 13,626 12,558
------- ------- ------
Total...............................$72,396 $74,421 $71,454
======= ======= =======
Net interest income and interest
rate spread (2)......................... 3.26% $3,177 3.38% $2,911 3.39%
====== ======
Net yield on interest-earning
assets(3)............................... 4.21% 4.34% 4.26%
Ratio of interest-earning assets
to interest-bearing liabilities......... 123.66% 123.22% 119.18%
- --------------------
(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 divided by average interest-earning assets.
</TABLE>
9
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
The Company (the Association, previous to the Company's formation on May 7,
1999) declared dividends of $.12 per share for each quarter during 1999.
Although the Company anticipates that it will continue to declare cash dividends
on a regular basis, the Board of Directors will review its policy on the payment
of dividends on an ongoing basis, and such payment may be subject to dividends
received from the Association to the Company, future earnings, cash flows,
capital needs, and regulatory restrictions.
The objective of the Company'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 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 current year, cash, a significant source of liquidity, decreased by
approximately $9.8 million, and amounted to $6.5 million at September 30, 1999.
Cash flow resulting from internal operating activities provided increases of
$1.4 million in cash during the year ended September 30, 1999. Cash flows from
investing activities utilized $7.8 million in cash during the current year, with
a net growth in loans of $6.0 million being the primary use. During 1999,
financing activities also utilized cash. Total financing activities of the
Company required $3.4 million in cash, with net deposit withdrawals of $2.4
million creating the largest use. 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 FHLB of Atlanta, currently equal to
approximately $8.5 million. Cash provided by operating and financing activities
is used to originate new loans to customers, to maintain the Association's
liquid investment portfolios, and to meet short term liquidity requirements.
During 1999, the Association purchased approximately $2.3 million in investment
securities and had $1.5 million in investment securities mature. In addition,
the Association purchases short term interest earning time deposits with
maturities of 30 days to 364 days from the FHLB of Atlanta. At September 30,
1999, cash in the Company's consolidated balance sheet includes $1.5 million in
time deposits which all mature prior to December 31, 1999.
OTS regulated institutions, including the Association, are required to maintain
a specified liquidity ratio (presently 4.0%) of cash 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, 1999, as computed
under OTS regulations, was in excess of such requirements. Given its current
liquidity and its ability to borrow from the Federal Home Loan Bank of Atlanta,
the Company believes that it will have sufficient funds available to meet
anticipated future loan commitments, unexpected deposit withdrawals, and other
cash requirements.
10
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Interest rate risk can have a material market risk impact on the operating
results of the Company due to the potential of economic losses associated with
future changes in interest rates. These economic losses can be reflected as a
loss of future net interest income and/or loss of current fair market values of
interest sensitive financial instruments. Interest rate risk is the most
significant market risk affecting the Company.
Other types of market risk, such as foreign currency and commodity price risk,
do not arise in the normal course of the Company's business activities. In
addition, the Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. The Company's asset and
liability management objectives are to (i) improve the rate sensitivity of its
interest-earning assets in relation to interest-bearing liabilities, and (ii)
maintain an appropriate ratio of interest-sensitive assets to interest-sensitive
liabilities with comparable maturities. Management realizes certain risks are
inherent and that the goal is to minimize interest rate risk.
In the absence of other factors, the Company'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.
Conversely, Company's yields and cost of funds will decrease when market rates
decline. The Company is able to manage these swings to some extent by attempting
to control the maturities or repricing adjustments of its interest-earning
assets and interest-bearing liabilities over given periods of time. The
Company'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 the
Company's interest-bearing liabilities subject to repricing exceed the level of
interest-earning assets which will mature or reprice, has a favorable impact on
the Company's net interest income. Conversely, an increase in general market
rates will tend to adversely affect the Company's net interest income.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to improve the
Company's interest rate gap. The program primarily emphasizes the origination of
balloon and other short term loans, such as construction and home equity loans,
that are held for investment purposes. In addition, the program emphasizes
investing in short or intermediate term investment securities, and the
solicitation of checking or transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.
The Board of Directors is responsible for reviewing the Company's asset and
liability policies. On a quarterly basis, the Board reviews interest rate risk
and trends. Management of the Company is responsible for administering the
policies established by the Board with respect to asset and liability goals and
strategies.
The following Market Risk Analysis table reflects maturities of interest rate
sensitive assets and liabilities over the next five years.
11
<PAGE>
MARKET RISK ANALYSIS
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
--------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans - fixed:
Balance $15,988,000 $ 1,130,900 $ 536,550 $ 38,050 $ 48,950 $4,046,550 $21,789,000 $21,980,500
Interest Rate 8.73% 9.25% 9.24% 9.46% 10.89% 9.66% 8.94% -
Loans - variable (1):
Balance 9,995,850 8,082,200 14,922,050 3,667,000 2,975,700 35,500 39,678,300 39,678,300
Interest rate 8.57% 8.84% 8.32% 8.49% 8.13% 8.25% 8.49% -
Investments (2):
Balance 6,622,500 2,250,000 - - - - 9,635,150 9,635,150
Interest rate 5.32% 5.44% - - - - 5.35% -
Liabilities:
Deposits (3):
Balance 12,890,050 - - - - - 12,890,050 12,890,050
Interest rate 3.67% - - - - - 3.67% -
Deposits - certificates:
Balance 26,050,500 11,570,200 2,166,050 2,220,500 2,395,200 - 44,402,450 45,032,950
Interest rate 5.21% 5.30% 6.01% 5.80% 5.58% - 5.35% -
</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
(3) Includes passbook accounts, NOW accounts and money market accounts
12
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 may recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations are subject to
risk for the Year 2000 Problem due to the nature of its financial information
processing.
Software, hardware, and equipment both within and outside the Company'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) may
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 Company
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 Company 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 Company'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 Company'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 Company.
The Company has been monitoring the progress of third party software vendors who
have been addressing the matter, and has tested changes provided by these
vendors.
13
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
YEAR 2000 ISSUE
A committee of senior officers of the Company was formed to evaluate the effects
that the upcoming Year 2000 issue could have on computer programs utilized by
the Company. The Company'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 was completed in June 1999.
(5) Implementation. Components certified as Year 2000 compliant and moved
to production. This phase was completed in June 1999.
Third party vendors provide the majority of software used by the Company. All of
the Company's vendors are aware of the Year 2000 situation, and each has assured
the Company that its software is now Year 2000 compliant. Testing for the
critical applications began in April 1998. The Company utilizes the services 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 Company has been completed to verify compliance
for its application and usage. The Company presently believes that with the
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 Company. However, if such modifications and conversions have
remaining undetected bugs, the Year 2000 Problem could have an impact on the
operations of the Company.
The Company's business resumption 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 Company 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 into the software once the date issues are resolved.
In addition, monitoring and managing the Year 2000 project has resulted in
additional direct and indirect costs to the Company. Direct costs include
charges by third party software vendors for product enhancements and costs
involved in testing software products for Year 2000 compliance. Indirect costs
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans.
14
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
YEAR 2000 ISSUE
The Company has spent approximately $92,000 on Year 2000 related costs to date
and estimates that it will spend an additional $12,000 for Year 2000 compliance.
Both direct and indirect costs of addressing the Year 2000 Problem will be
charged to earnings as incurred. The Company does not believe that such costs
will have a material effect on its results of operations. However, there can be
no guarantee that the systems of other vendors on which the Company's systems
rely will be Y2K compliant, and thus have a material adverse effect on the
Company.
The remaining costs of the project and the Company's assertion of being Y2K
compliant 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 ability to
locate and correct all relevant computer codes, power and telephone line
failures, and similar uncertainties.
FUTURE REPORTING REQUIREMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement, which is effective for years
beginning after June 15, 2000, establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company does not believe that the statement will have any impact on its
financial position or operating results because the Company does not currently
hold or intend to invest in derivative instruments.
RECENT LEGISLATION
Landmark financial services legislation, titled the "Graham-Leach Bliley Act"
was signed into law by President Clinton on November 12, 1999. The Act removes
many of the barriers between banking, insurance, and investment banking. It also
provides for significant changes in how the Federal Home Loan Bank system
operates and will allow for improved access to the system's credit facilities.
The Act also prevents unitary thrift holding companies from being sold to
commercial firms and provides expanded powers for mutual holding companies. The
Company has not reviewed all aspects of the Act, but believes that the
legislation will not have a material impact on the current operations of the
Company.
15
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Forward-looking statements based on management's current views and assumptions,
are made in certain areas of this Management's Discussion and Analysis and
elsewhere in this report to shareholders. These statements, consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results and
those presently anticipated or projected. The words "aim," "believe," "expect,"
"anticipate," "intend," and "estimate" and other expressions which indicate
future events and trends identify forward-looking statements. Among the various
factors which could cause actual results to differ materially from those
estimates include changes in general and local economic conditions, demand in
the Company's local real estate market, legislative and regulatory conditions,
and an adverse interest rate environment.
16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Wake Forest Bancshares, Inc.
Wake Forest, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Wake Forest Bancshares, Inc. and subsidiary as of September 30, 1999 and 1998
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wake Forest Bancshares, Inc.
and subsidiary as of September 30, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Raleigh, North Carolina /s/ McGladrey & Pullen, LLP
October 27, 1999
17
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash:
Interest-bearing deposits $ 5,827,000 $14,378,700
Noninterest-bearing deposits 674,050 932,650
----------------------------------------
6,501,050 15,311,350
----------------------------------------
Investment securities (Note 2):
Available for sale, at market value 3,527,750 2,785,100
FHLB stock 280,400 364,100
Loans receivable, net (Note 3) 61,467,300 55,363,450
Accrued interest receivable 101,850 25,550
Property and equipment, net (Note 4) 452,000 459,550
Prepaid expenses and other assets 65,200 51,350
----------------------------------------
Total assets $ 72,395,550 $74,360,450
========================================
LIABILITIES AND EQUITY
Liabilities:
Deposits (Note 5) $ 57,653,900 $60,037,950
Accounts payable and accrued expenses 387,350 303,200
Dividends payable 143,700 145,900
Note payable - ESOP (Note 9) 206,000 264,850
Deferred income taxes (Note 10) 160,800 170,600
Redeemable common stock held by the ESOP, net of
unearned ESOP shares (Note 9) 375,950 270,750
----------------------------------------
Total liabilities 58,927,700 61,193,250
----------------------------------------
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 1,215,862 shares 12,150 12,150
Additional paid-in-capital 4,843,600 4,772,800
Accumulated other comprehensive income 472,900 477,100
Retained earnings, substantially restricted (Note 11) 8,490,850 7,905,150
Less: Treasury stock acquired (Note 11) (351,650) --
----------------------------------------
Total stockholders' equity 13,467,850 13,167,200
----------------------------------------
$ 72,395,550 $74,360,450
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 5,476,150 $5,103,450
Investment securities 171,200 180,950
Interest-bearing deposits 556,550 698,850
---------------------------------------
6,203,900 5,983,250
---------------------------------------
Interest expense:
Deposits (Note 5) 3,007,350 3,046,000
Borrowings 19,350 25,950
---------------------------------------
3,026,700 3,071,950
---------------------------------------
NET INTEREST INCOME 3,177,200 2,911,300
---------------------------------------
Noninterest income 41,750 33,600
---------------------------------------
Noninterest expense:
Compensation and benefits (Notes 6, 7, 8, and 9) 748,550 698,700
Occupancy 39,900 40,900
Federal insurance premiums and operating assessments 59,850 55,300
Data processing and outside service fees 103,350 100,650
Other operating expense 323,300 368,600
---------------------------------------
1,274,950 1,264,150
---------------------------------------
INCOME BEFORE INCOME TAXES 1,944,000 1,680,750
---------------------------------------
Income taxes (Note 10):
Current 748,650 642,500
Deferred (7,200) (22,650)
---------------------------------------
741,450 619,850
---------------------------------------
NET INCOME $ 1,202,550 $1,060,900
=======================================
Basic earnings per share $ 1.02 $ 0.91
=======================================
Diluted earnings per share $ 1.02 $ 0.89
=======================================
Dividends paid per share $ 0.48 $ 0.46
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN
STOCK CAPITAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at September 30, 1997 ..................................... $ 11,900 $ 4,592,750
Comprehensive income:
Net income for 1998 ......................................... -- --
Net change in unrealized gain on securities ................. -- --
TOTAL COMPREHENSIVE INCOME
Contributions to ESOP (Note 9) .............................. -- 55,000
Market value adjustment for redeemable common stock
held by ESOP .............................................. -- --
Issuance of stock to the RRP (Note 7) ....................... 200 283,400
Deferral of RRP shares issued but not earned (Note 7) ....... (222,200)
Amortization of earned RRP shares (Note 7) .................. -- 33,100
Stock options exercised (2,414 shares) ...................... 50 30,750
Cash dividends ($0.46 per share) ............................ -- --
----------------------------------
Balance at September 30, 1998 ..................................... 12,150 4,772,800
Comprehensive income:
Net income for 1999 ......................................... -- --
Net change in unrealized (loss) on securities ............... -- --
TOTAL COMPREHENSIVE INCOME
Contributions to ESOP (Note 9) .............................. -- 14,050
Market value adjustment for redeemable common stock
held by ESOP .............................................. -- --
Amortization of earned RRP shares (Note 7) .................. 56,750
Cash dividends ($0.48 per share) ............................ -- --
Acquisition of 25,400 shares of common stock for the treasury -- --
-----------------------------------
Balance at September 30, 1999 ..................................... $ 12,150 $ 4,843,600
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TREASURY
COMPREHENSIVE RETAINED STOCK
INCOME EARNINGS ACQUIRED TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 ..................................... $ 334,950 $ 7,181,600 $ -- $ 12,121,200
Comprehensive income:
Net income for 1998 ......................................... -- 1,060,900 -- 1,060,900
Net change in unrealized gain on securities ................. 142,150 -- -- 142,150
----------
TOTAL COMPREHENSIVE INCOME ............................. 1,203,050
----------
Contributions to ESOP (Note 9) .............................. -- -- -- 55,000
Market value adjustment for redeemable common stock
held by ESOP -- 206,050 -- 206,050
Issuance of stock to the RRP (Note 7) -- -- -- 283,600
Deferral of RRP shares issued but not earned (Note 7) -- -- -- (222,200)
Amortization of earned RRP shares (Note 7) -- -- -- 33,100
Stock options exercised (2,414 shares) -- -- -- 30,800
Cash dividends ($0.46 per share) -- (543,400) -- (543,400)
---------------------------------------------------------
Balance at September 30, 1998 ..................................... 477,100 7,905,150 -- 13,167,200
Comprehensive income:
Net income for 1999 ......................................... -- 1,202,550 -- 1,202,550
Net change in unrealized (loss) on securities ............... (4,200) -- -- (4,200)
TOTAL COMPREHENSIVE INCOME ............................. 1,198,350
Contributions to ESOP (Note 9) .............................. -- -- -- 14,050
Market value adjustment for redeemable common stock
held by ESOP -- (46,350) -- (46,350)
Amortization of earned RRP shares (Note 7) -- -- -- 56,750
Cash dividends ($0.48 per share) -- (570,500) -- (570,500)
Acquisition of 25,400 shares of common stock for the treasury -- -- (351,650) (351,650)
-----------------------------------------------------------
Balance at September 30, 1999 .................................... $ 472,900 $ 8,490,850 $ (351,650) $ 13,467,850
===========================================================
</TABLE>
21
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,202,550 $ 1,060,900
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation 33,200 35,700
Amortization of premiums (discounts) on investments 550 (11,650)
Amortization of unearned RRP shares 56,750 56,750
Amortization of unearned ESOP shares 58,850 58,850
ESOP compensation expense credited to
paid-in-capital 14,050 55,000
Deferred income taxes (7,200) (22,650)
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (76,300) 9,850
Prepaid expenses and other assets (13,850) (11,350)
Increase (decrease) in:
Accounts payable and accrued expenses 84,150 31,300
---------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,352,750 1,262,700
---------------------------------------
Cash Flows From Investing Activities
Principal collected on loans 45,803,000 31,343,900
Mortgage loans purchased (70,000) (90,000)
Loans originated (51,836,850) (32,944,850)
Purchase of FHLB time deposits (3,500,000) --
Maturities of FHLB time deposits 2,500,000 --
Purchase of available for sale investment securities (2,250,000) (499,500)
Maturities of available for sale investment securities 1,500,000 1,000,000
Redemption of FHLB stock 83,700 --
Purchases of property and equipment (25,650) (3,100)
---------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,795,800) (1,193,550)
---------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
<S> <C> <C>
Cash dividends paid $ (572,700) $ (516,600)
Payments received on exercised options -- 30,800
Principal payments on ESOP note payable (58,850) (58,850)
Purchase of treasury stock (351,650) --
Net increase (decrease) in savings accounts (2,384,050) 9,982,200
---------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,367,250) 9,437,550
---------------------------------------
NET INCREASE (DECREASE) IN CASH (9,810,300) 9,506,700
Cash:
Beginning 15,311,350 5,804,650
---------------------------------------
Ending $ 5,501,050 $15,311,350
=======================================
Cash and cash Equivalents:
Cash $ 674,050 $ 932,650
Interest bearing overnight funds 4,327,000 14,378,700
Time deposit with original maturity less than 90 days 500,000 --
---------------------------------------
Total cash and cash equivalents 5,501,050 15,311,350
Time deposits with original maturities greater than 90 days 1,000,000 --
=======================================
Cash and interest bearing deposits $ 6,501,050 $15,311,350
=======================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,027,100 $ 3,083,600
=======================================
Income taxes $ 724,300 $ 649,950
=======================================
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) credited to retained earnings $ (46,350) $ 206,050
=======================================
Dividends accrued $ 143,700 $ 145,900
=======================================
Change in unrealized gain (loss) on available for sale
securities, net of tax effect $ (4,200) $ 142,150
=======================================
</TABLE>
23
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Wake Forest Bancshares, Inc. (the "Company") is located in
Wake Forest, North Carolina and it is the parent stock holding company of Wake
Forest Federal Savings and Loan Association (the "Association"), it's only
subsidiary. The Company conducts no business other than holding stock in the
Association, investing dividends received from the Association, repurchasing its
common stock from time to time, and distributing dividends on its common stock
to its shareholders. The Association'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
Company and 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).
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 provided for the establishment of Wake Forest
Bancshares, Inc. as a stock holding company parent of the Association. The
Company is majority owned (approximately 53%) by Wake Forest Bancorp, M.H.C.,
(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 Company was consummated pursuant to the Plan of
Reorganization on May 7, 1999.
As a part of the Reorganization, each outstanding share of Association's common
stock was converted into one share of common stock, par value $.01 per share, of
the Company, and the holders of the Association's common stock became the
holders of all of the outstanding shares of the Company's common stock.
Accordingly, as a result of the Reorganization, the Association's minority
shareholders became minority shareholders of the Company. The Company was formed
solely for the purpose of becoming a savings and loan holding company and had no
prior operating history. The Reorganization had no impact on the operations of
the Association or the MHC. The Association continues to operate 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 capitalized the Company with $100,000.
Future capitalization of the Company will depend upon dividends declared by the
Association based on future earnings, or the raising of additional capital by
the Company through a future issuance of securities, debt or by other means. The
Board of Directors of the 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
Company's outstanding voting stock.
The Reorganization was treated similar to a pooling of interests for accounting
purposes. Therefore, the consolidated capitalization, assets, liabilities,
income and expenses of the 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 Company's
books at their historical recorded values.
24
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A summary of the Company's significant accounting policies follows:
Basis of financial statement presentation: 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.
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") Statement No. 130, Reporting Comprehensive Income. Statement
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components, but has no effect on the Company's net income or
total stockholders' equity. Statement No. 130 requires unrealized gains and
losses on the Company's available-for-sale securities, which prior to adoption
were reported separately in stockholders' equity, to be included in
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130. The Company has no other items
of other comprehensive income.
Consolidation: The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Wake Forest Federal Savings and Loan
Association. All significant intercompany accounts and transactions have
eliminated in consolidation.
Cash: For purposes of reporting cash flows, the Company 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 Company carries its investments at fair market value
or amortized cost depending on its classification of such securities.
Classification of securities and the Company's accounting policies are as
follows:
Securities held to maturity: Securities classified as held to maturity
are those debt securities the Company 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 Company 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 Company 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 adjusted for amortization of premiums or accretion of discounts.
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 BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (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 Company 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, 1999 and 1998 which it considers to be impaired.
Therefore, there is no specific allowance for impaired loans at September 30,
1999 and 1998.
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.
Property, equipment and depreciation: Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by use of the
straight-line method.
26
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Association had no real estate acquired in settlement of
loans during 1999 or 1998.
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: Statement of Financial Accounting Standard (SFAS) No. 128
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 Company's Employee Stock Ownership Plan
(the "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. No adjustments
were required to net income for any period presented in the computation of
diluted earnings per share. The basic and diluted weighted average shares
outstanding for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------
<S> <C> <C>
Weighted average outstanding shares used for basic EPS 1,177,248 1,169,464
Plus incremental shares from assumed issuances pursuant to
stock options and stock award plans 360 24,178
------------------------------------
Weighted average outstanding shares used for diluted EPS 1,177,608 1,193,642
====================================
</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 properties
throughout its primary lending area, Wake, Franklin and Granville counties of
North Carolina.
27
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED 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 Company 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
Company's financial instruments are not necessarily indicative of the amounts
the Company 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, 1999. 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
Company 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.
Deposits: The fair value of deposits with no stated maturities is estimated
to be equal to the amount payable on demand. 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 for deposits of
similar remaining maturities.
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
that could currently be obtained 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.
28
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. INVESTMENT SECURITIES
The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
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 $ 791,000 $ -- $ 806,200
Debt securities:
U.S. Treasury and agency securities 2,749,900 -- (28,350) 2,721,550
------------------------------------------------------------------
2,765,100 791,000 (28,350) 3,527,750
------------------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank stock 280,400 -- -- 280,400
------------------------------------------------------------------
$ 3,045,500 $ 791,000 $ (28,350) $ 3,808,150
==================================================================
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
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>
29
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market values of available for sale debt
securities at September 30, 1999 by contractual maturity are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
-----------------------------------
<S> <C> <C>
Due in one year or less $ 499,900 $ 500,800
Due in one year through five years 2,250,000 2,220,750
-----------------------------------
$ 2,749,900 $2,721,550
===================================
</TABLE>
There were no sales of investment securities during the years ended September
30, 1999 and 1998.
The change during 1999 and 1998 in net unrealized gains and losses associated
with available for sale securities is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Balance in equity component, beginning of year $ 477,100 $ 334,950
Change in unrealized gains (6,800) 229,250
Change in related deferred income taxes 2,600 (87,100)
----------------------------------
Balance in equity component, end of year $ 472,900 $ 477,100
==================================
</TABLE>
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.
30
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
First mortgage loans:
Single family, one-to-four units $ 24,394,050 $25,479,350
Multifamily, residential 183,800 289,400
Commercial real estate 8,460,250 5,830,600
Land 8,231,950 4,840,200
Residential construction 24,693,100 25,339,700
Commercial construction 2,351,000 2,246,850
Lines of credit 2,718,650 865,950
--------------------------------------
71,032,800 64,892,050
Equity line mortgages 3,106,600 1,295,800
Loans on savings accounts 222,350 201,000
--------------------------------------
74,361,750 66,388,850
--------------------------------------
Less:
Undisbursed portion of loans in process 12,460,100 10,602,600
Allowance for loan losses 263,000 263,000
Deferred loan fees 171,350 159,800
--------------------------------------
12,894,450 11,025,400
--------------------------------------
$ 61,467,300 $55,363,450
======================================
Weighted average yield on loans receivable 8.65% 8.96%
======================================
</TABLE>
At September 30, 1999 and 1998, 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, 1999 and 1998.
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, 1999 and 1998, 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 $293,800 and $133,650 at
September 30, 1999 and 1998, respectively.
31
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)
Shareholders of the Company with 10% or more ownership 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
non-related parties during the years ended September 30, 1999 and 1998.
Aggregate loan transactions with related parties during the years ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Beginning balance $ 341,650 $ 247,800
New loans 13,800 101,250
Reductions (59,200) (7,400)
---------------------------------------
Ending balance $ 296,250 $ 341,650
=======================================
Maximum balance during the year $ 341,650 $ 349,050
=======================================
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Land $ 20,950 $ 20,950
Office buildings and improvements 601,550 584,300
Furniture and fixtures 181,300 172,900
---------------------------------------
803,800 778,150
Less accumulated depreciation (351,800) (318,600)
---------------------------------------
$ 452,000 $ 459,550
=======================================
</TABLE>
32
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. DEPOSITS
Deposits at September 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Passbook accounts, weighted average rate of 3.00%
(3.00% in 1998) $ 3,554,050 $3,599,150
MMDA accounts, weighted average rate of 4.15%
(3.50% in 1998) 7,922,800 7,100,300
NOW accounts, weighted average rate of 2.50%
(2.50% in 1998) 1,413,200 1,277,400
Noninterest-bearing accounts 303,500 333,950
--------------------------------------
13,193,550 12,310,800
--------------------------------------
Certificate of deposit accounts:
3.00% to 5.00% 16,919,050 599,600
5.01% to 7.00% 27,379,050 46,862,300
7.01% to 8.00% 104,350 213,550
--------------------------------------
44,402,450 47,675,450
--------------------------------------
Accrued interest on deposits 57,900 51,700
--------------------------------------
$ 57,653,900 $60,037,950
======================================
Weighted average cost of deposits 4.93% 5.15%
======================================
</TABLE>
Certificates of deposit by range of rate and maturity at September 30, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
Amounts Maturing During
------------------------------------------------------------------------------------------
Rate Range 2000 2001 2002 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00% to 5.00% $ 12,474,200 $4,095,000 $ 247,650 $ 102,200 $16,919,050
5.01% to 7.00% 13,471,950 7,475,200 1,918,400 4,513,500 27,379,050
7.01% to 8.00% 104,350 -- -- -- 104,350
------------------------------------------------------------------------------------------
$ 26,050,500 $11,570,200 $2,166,050 $4,615,700 $44,402,450
==========================================================================================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 included in the table above is as follows:
Maturity Period:
<TABLE>
<CAPTION>
<S> <C>
Within three months $ 2,304,600
After three months but within six months 1,914,550
After six months but within twelve months 1,939,400
After twelve months but within twenty four months 2,538,200
After twenty four months 1,526,400
---------------------
$ 10,223,150
=====================
</TABLE>
33
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. DEPOSITS (CONTINUED)
Interest expense on deposits for the years ended September 30, 1999 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Passbook accounts $ 103,300 $ 100,050
MMDA and NOW accounts 327,500 302,750
Certificate of deposit accounts 2,584,800 2,662,100
---------------------------------------
3,015,600 3,064,900
Forfeitures (8,250) (18,900)
---------------------------------------
$ 3,007,350 $3,046,000
=======================================
</TABLE>
Eligible deposits are insured to $100,000 by the Savings Association Insurance
Fund (SAIF) which is administered by the FDIC.
NOTE 6. 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 1999 and 1998.
The Association has a non-qualified noncontributory retirement plan covering its
directors. 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 $30,300 and $39,250 for 1999 and 1998, respectively.
The Association has also entered into employment agreements with its three 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 as described and determined in the agreements.
34
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. RECOGNITION AND RETENTION PLAN
The Company has a Recognition and Retention Plan (the "RRP") whereby 22,248
shares of common stock were awarded to employees and directors. In January,
1998, the Association issued shares of common stock from authorized but unissued
shares to fund the plan. The RRP shares vest over a five year period and at
September 30, 1999, 40% of the shares had vested. Accelerated vesting may occur
in certain circumstances as disclosed in the plan documents. Compensation
expense is incurred over the vesting period. Expense associated with the plan
for years ended September 30, 1999 and 1998 was $49,000 and $56,750,
respectively.
NOTE 8. STOCK OPTION PLAN
The Company has a stock option plan for the benefit of its officers, directors,
and key employees.
A summary of the status of the stock option plan at September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS: SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted -- --
Exercised -- --
Forfeited -- --
----------------------------------------
Outstanding at September 30, 1999 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. Options are
exercisable at the fair value on the date of grant. At September 30, 1999 and
1998, 19,186 and 8,386 options, respectively, were exercisable at the weighted
average exercise price of $12.75 per share.
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 Company has elected to apply the
disclosure-only provisions of the Statement.
35
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. STOCK OPTION PLAN (CONTINUED)
However, had compensation cost been recorded based on the fair value ($8.38 per
share) of awards at the grant date, the pro forma impact on the Company's net
income and net income per common share would have been to reduce such amounts by
approximately $55,000 and $0.05 per basic and dilutive share, respectively, for
1999 and 1998. 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
when the options were granted: dividend rate of 1.56%; risk-free interest rates
of 5.88%; expected lives of 7 years; and price volatility of 29.94%.
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Association has an ESOP to benefit substantially all employees. The ESOP has
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 (8.25%
at September 30, 1999) 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. Dividends on unallocated shares may be
used by the ESOP to repay the debt and are not reported as dividends in the
financial statements. 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 Company's
accompanying consolidated balance sheet.
At September 30, 1999, future principal payments are due as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 58,856
2001 58,856
2002 58,856
2003 29,432
------------------
$ 206,000
=====================
</TABLE>
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 $76,150 and $116,650 for the years ended September 30,
1999 and 1998, respectively.
The ESOP has a put option which requires that the Company 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 Company 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 the end of each fiscal year end. The liability
for the put option at September 30, 1999, based upon the fair value of the ESOP
shares at that time of $14.125, was $375,950. 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.
36
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) (CONTINUED)
Shares of the Company held by the ESOP at September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Shares held by the ESOP 41,200 41,200
Shares released for allocation (20,600) (14,710)
---------------------------------------
Unreleased (unearned) shares 20,600 26,490
=======================================
Fair value of unreleased (unearned) shares $ 290,950 $ 344,350
=======================================
</TABLE>
NOTE 10. INCOME TAXES
At September 30, 1999 and 1998, retained earnings contain certain additions to
bad debt reserves for income tax purposes of approximately $1,434,000, the
balance at September 30, 1988, 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 the deferred taxes on such tax bad debt
reserves which is unrecorded amounted to approximately $545,000 at September 30,
1999 and 1998. 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.
The Association also must recapture its tax bad debt reserves which have
accumulated since 1988 (the "base year") amounting to approximately $189,000.
The tax associated with the recaptured reserves is approximately $72,000 and is
being paid out over a six year period beginning with the current period. At
September 30, 1999, the remaining liability associated with the recaptured
reserves is approximately $59,900. Deferred income taxes have been established
for the taxes associated with the recaptured reserves.
Income tax expense differs from the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Statutory federal income tax rate 34.00% 34.00%
Increase (decrease) in income taxes resulting from:
Nontaxable income, net -- (0.10)
State income taxes, net of federal benefit 3.15 2.68
Other, net 0.99 0.30
--------------------------------------
38.14% 36.88%
======================================
</TABLE>
37
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. INCOME TAXES (CONTINUED)
Deferred income taxes consist of the following components as of September 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan loss allowances $ 99,950 $ 99,950
Deferred loan fees 20,800 22,950
Health insurance accrual 15,850 15,850
MRP expense accrual -- 14,400
Retirement plan accrual 74,250 64,600
--------------------------------------
210,850 217,750
--------------------------------------
Deferred tax liabilities:
Tax bad debt reserves 59,900 71,850
Excess accumulated tax depreciation 21,950 24,100
Unrealized net appreciation, investments 289,800 292,400
--------------------------------------
371,650 388,350
--------------------------------------
$ (160,800) $ (170,600)
======================================
</TABLE>
NOTE 11. 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 to the
Company subsequent to the reorganization cannot be paid from this liquidation
account.
Subject to applicable law, the Board of Directors of the Company and the
Association may each provide for the payment of dividends. Future declarations
of cash dividends, if any, by the Company may depend upon dividend payments by
the Association to the Company. During 1999, the Association paid upstream
dividends to the Company amounting to $868,000. Subject to regulations
promulgated by the OTS, the Association will not be permitted to pay dividends
on its common stock if its net worth would be reduced below the amount required
for the liquidation account or its minimum regulatory capital requirements. In
addition, as an institution which is considered well capitalized under the OTS's
Prompt Corrective Action regulations, the Association may pay a cash dividend to
Wake Forest Bancshares, Inc., with prior notification to the OTS, if the total
amount of all capital distributions (including the proposed distribution) for
the applicable calendar year does not exceed the Association's net income for
the year plus retained net income (net income minus capital distributions) for
the preceding two years. However, the OTS retains the right to deny any capital
distribution if it raises safety and soundness concerns.
38
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED 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 3% of total assets, and risk-based capital of at least
8% of risk-weighted assets. At September 30, 1999, the Association met and
exceeded all of the capital requirements described above as shown in the table
below:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
REQUIREMENT REQUIREMENT REQUIREMENT
---------------------------------------------------------
<S> <C> <C> <C>
Equity (GAAP) $ 13,467,850 $ 13,467,850 $ 13,467,850
Standalone equity of Wake Forest Bancshares, Inc. (520,350) (520,350) (520,350)
Net unrealized gain on investment securities (472,900) (472,900) (472,900)
Supplemental capital items:
General valuation allowances -- -- 263,000
---------------------------------------------------------
Regulatory capital 12,474,600 12,474,600 12,737,600
Minimum capital requirement 1,074,500 2,149,000 4,015,650
---------------------------------------------------------
Excess regulatory capital $ 11,400,100 $ 10,325,600 $ 8,721,950
=========================================================
Total assets at September 30, 1999 less fair
market value adjustment of securities $ 71,632,850 $ 71,632,850 --
Risk-weighted assets at September 30, 1999 -- -- $ 50,195,600
Capital as a percentage of assets:
Actual 17.41% 17.41% 25.38%
Required 1.50 3.00 8.00
-------------------------------------------------------
Excess 15.91% 14.41% 17.38%
=======================================================
</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.
On June 21, 1999, the Board of Directors of the Company approved the adoption of
stock repurchase program authorizing the Company to repurchase up to 60,793
shares or 5.00% of its outstanding common stock. The repurchases will be made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purposes as permitted by applicable law. At
September 30, 1999, the Company had repurchased 25,400 shares of its common
stock. The program continues until terminated by the Board of Directors.
39
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. 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 statement of financial condition. 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, 1999
the Association had outstanding loan commitments amounting to $1,709,000. The
undisbursed portion of construction loans amounted to $12,460,100 and unused
lines of credit amounted to $3,219,000 at September 30, 1999.
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.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at September 30, 1999 and 1998. See Note 1
for a description of the Company's accounting policies and the limitations of
its disclosures in reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
September 30,
1999 1998
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 6,501,050 $ 6,501,050 $ 15,311,350 $15,311,350
Available for sale investment securities 3,527,750 3,527,750 2,785,100 2,785,100
FHLB stock 280,400 280,400 364,100 364,100
Loans receivable 61,467,300 61,658,800 55,363,450 55,359,400
Accrued interest receivable 101,850 101,850 25,550 25,550
Financial liabilities:
Deposits 57,653,900 58,284,400 60,037,950 60,262,250
Note payable - ESOP 206,000 206,000 264,850 264,850
</TABLE>
40
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. MUTUAL HOLDING COMPANY FINANCIAL DATA
The MHC owns approximately 53% of the Company's common stock. 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.
The following is a summary of the condensed financial statements of Wake Forest
Bancorp, M.H.C. as of and for the periods indicated:
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 691,000 $ 526,900
Accrued dividends receivable, subsidiary 76,200 76,200
Investment in Wake Forest Bancshares, Inc. 4,726,850 --
Investment in Wake Forest Federal -- 4,404,450
---------------------------------------
$ 5,494,050 $ 5,007,550
=======================================
Liabilities and Equity:
Liabilities:
Accounts payable and accrued expenses $ 11,200 $ 10,500
---------------------------------------
Equity:
Capitalization by Wake Forest Federal 106,350 106,350
Equity in Wake Forest Federal -- 3,854,700
Equity in Wake Forest Bancshares, Inc. 3,854,700 --
Retained earnings 1,521,800 1,036,000
---------------------------------------
5,482,850 4,997,050
---------------------------------------
$ 5,494,050 $ 5,007,550
=======================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Interest income $ 30,400 $ 19,650
Equity in earnings of subsidiary 627,300 565,550
Accounting and tax expense (19,800) (12,700)
Attorney Fees (43,750) (21,100)
Director's fees (84,950) (43,500)
Other (23,400) (2,000)
---------------------------------------
$ 485,800 $ 505,900
=======================================
</TABLE>
41
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Cash Flows from Operating Activities: 1999 1998
---------------------------------------
<S> <C> <C>
Net income $ 485,800 $ 505,900
Noncash income items:
Equity in earnings of Wake Forest Federal (627,300) (565,550)
Change in assets and liabilities:
(Increase) in accrued dividends receivable -- (12,700)
Decrease in income tax refund receivable -- 7,800
Decrease in investment in subsidiary - dividends 304,900 292,050
Increase in accounts payable 700 --
---------------------------------------
Net cash provided by operating activities 164,100 227,500
Cash and cash equivalents- beginning 526,900 299,400
------------------------------------
Cash and cash equivalents- ending $ 691,000 $ 526,900
====================================
</TABLE>
NOTE 15. PARENT COMPANY ONLY FINANCIAL DATA
The following is a summary of the condensed financial statements of Wake Forest
Bancshares, Inc. for the periods indicated:
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash and cash equivalents $ 522,900
Accrued dividends receivable, Wake Forest Federal 143,700
Investment in Wake Forest Federal 12,982,500
----------------------
$ 13,649,100
======================
Liabilities:
Accrued dividends payable $ 143,700
Income taxes payable 2,550
----------------------
146,250
----------------------
Equity:
Common stock 12,150
Additional paid-in capital 13,715,850
Retained earnings 126,500
Treasury stock acquired (351,650)
----------------------
13,502,850
----------------------
$ 13,649,100
======================
</TABLE>
42
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
FOR THE PERIOD FROM MAY 7, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
<S> <C>
Interest income $ 6,550
Equity in earnings of Wake Forest Federal 412,100
Miscellaneous expense (50)
Income tax expense (2,500)
====================
Net income $ 416,100
====================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 7, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
<S> <C>
Cash Flows from Operating Activities:
Net income $ 416,100
Noncash income items:
Equity in earnings of Wake Forest Federal (412,100)
Change in assets and liabilities:
(Increase) in accrued dividends receivable (143,700)
Increase in accrued dividends payable 143,700
Increase in income tax payable 2,550
--------------------
Net cash provided by operating activities 6,550
--------------------
Cash Flows from Financing Activities:
Treasury stock acquired (351,650)
Dividends received from Wake Forest Federal 868,000
--------------------
Net cash provided from financing activities 516,350
--------------------
Increase in cash 522,900
--------------------
Cash and cash equivalents- beginning --
--------------------
Cash and cash equivalents- ending $ 522,900
====================
</TABLE>
NOTE 16. RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been reclassified to
conform with classifications used in 1999.
43
<PAGE>
COMMON STOCK INFORMATION
The Company's stock (previously as Wake Forest Federal Savings and Loan
Association) began trading on April 3, 1996. There are 1,190,462 shares of
common stock outstanding (net of treasury shares) of which approximately 41%
were held by 252 stockholders of record on September 30, 1999. The MHC, ESOP and
RRP Trust hold approximately 59%. The Company's stock is not actively traded,
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 Company's stock for the years ended September 30, 1999 and
1998, based upon information provided to management of the Company by certain
securities firms effecting transactions in the Company's stock on an agency
basis.
<TABLE>
<CAPTION>
Stock Price
------------------------------------
Dividends High Low
----------------- ----------------- ------------------
<S> <C> <C> <C>
1999:
First Quarter $ 0.12 $ 16 $ 10 1/2
Second Quarter 0.12 15 11
Third Quarter 0.12 13 1/4 11 1/4
Fourth Quarter 0.12 14 7/8 11 3/4
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
</TABLE>
44
<PAGE>
CORPORATE INFORMATION
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
Anna O. Sumerlin Carlton E.Chappell Robert C. White
PRESIDENT AND CEO VICE PRESIDENT/SECRETARY, TREASURER VICE PRESIDENT AND CFO
DIRECTORS
Howard Brown Rodney M. Privette R. W. Wilkinson III
CHAIRMAN OF THE BOARD VICE CHAIRMAN OF THE BOARD
John D. Lyon Paul Brixhoff Anna O. Sumerlin
Harold R. Washington William S. Wooten Leelan A. Woodlief
STOCK TRANSFER AGENT SPECIAL LEGAL COUNSEL INDEPENDENT AUDITORS
ChaseMellon Shareholder Services Thacher, Proffitt & Wood McGladrey & Pullen, LLP
450 W. 33rd St. 10th Floor 1700 Pennsylvania Ave. N.W. 2418 Blue Ridge Road
New York, NY 10001 Washington, DC 20006 PO Box 10366
Raleigh, N.C. 27605
CORPORATE OFFICE
302 S. Brooks St.
Wake Forest, N.C. 27587
ANNUAL MEETING
THE 2000 ANNUAL MEETING OF STOCKHOLDERS OF WAKE FOREST
BANCSHARES, INC. WILL BE HELD AT 2:00 PM ON TUESDAY,
FEBRUARY 22, 2000 AT THE WAKE FOREST POLICE AND JUSTICE
CENTER AT 401 ELM AVENUE, WAKE FOREST, N.C.
FORM 10-KSB
A COPY OF FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS
UPON WRITTEN REQUEST TO WAKE FOREST BANCSHARES, INC., P O BOX
1167, WAKE FOREST, N.C. 27588.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Wake Forest
Bancshares, Inc. and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 674
<INT-BEARING-DEPOSITS> 5,827
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,528
<INVESTMENTS-CARRYING> 280
<INVESTMENTS-MARKET> 280
<LOANS> 61,467
<ALLOWANCE> 263
<TOTAL-ASSETS> 72,396
<DEPOSITS> 57,654
<SHORT-TERM> 0
<LIABILITIES-OTHER> 531
<LONG-TERM> 206
0
0
<COMMON> 12
<OTHER-SE> 13,456
<TOTAL-LIABILITIES-AND-EQUITY> 72,396
<INTEREST-LOAN> 5,476
<INTEREST-INVEST> 171
<INTEREST-OTHER> 557
<INTEREST-TOTAL> 6,204
<INTEREST-DEPOSIT> 3,007
<INTEREST-EXPENSE> 3,027
<INTEREST-INCOME-NET> 3,177
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,275
<INCOME-PRETAX> 1,944
<INCOME-PRE-EXTRAORDINARY> 1,944
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,203
<EPS-BASIC> 1.02
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 4.34
<LOANS-NON> 0
<LOANS-PAST> 294
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 294
<ALLOWANCE-OPEN> 263
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 263
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 263
</TABLE>
