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As Filed With The Securities And Exchange Commission on July 28, 2000.
Registration No. 333-______
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN COMMUNITY BANCSHARES, INC.
(Name of small business issuer in its charter)
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North Carolina 6712 56-2179531
(State or Jurisdiction of Organization) (Primary Standard Industrial Code) (IRS Employer Identification No.)
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2593 West Roosevelt Boulevard
Monroe, North Carolina 28111-0418
(704) 225-8444
(Address and telephone number of principal executive offices)
Randy P. Helton, President
2593 West Roosevelt Boulevard
Monroe, North Carolina 28111-0418
(704) 225-8444
(Name, address and telephone number of agent for service)
Copies to:
Anthony Gaeta, Jr., Esq. Brian T. Atkinson, Esq.
Erik Gerhard, Esq. Moore & Van Allen, PLLC
Gaeta & Glesener, P.A. 100 North Tryon Street
808 Salem Woods Drive, Suite 201 Floor 47
Raleigh, NC 27615 Charlotte, NC 28202
(919) 845-2558 (704) 331-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an Offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same Offering. [_]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
Title of Each
Class of Proposed Maximum Proposed Maximum Amount of
Securities Amount to Offering Price Aggregate Registration
to be Registered be Registered Per Share (1) Offering Price Fee
---------------- ------------- ------------- -------------- ------------
Common Stock 1,000,000 $8.50 $8,500,000 $2,244
$1.00 par
(1) Estimated solely for the purpose of calculating the registration fee, based
upon the average of the bid and asked prices of the Common Stock on the Nasdaq
Small Cap Market on July 26, 2000 in accordance with Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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[PROSPECTUS COVER PAGE]
PROSPECTUS
________, 2000
AMERICAN COMMUNITY BANCSHARES, INC.
COMMON STOCK
PURCHASE PRICE $____ PER SHARE
1,000,000 Shares (Maximum)
500,000 Shares (Minimum)
We are the parent company for American Community Bank, a North Carolina
community bank that opened for business in November 1998.
American Community Bancshares, Inc.
American Community Bank
Post Office Box 5035
Monroe, North Carolina 28111-5035
(704) 225-8444
Trading Market
Our Common Stock is currently traded on the Nasdaq SmallCap Market under the
symbol "ACBA."
The Offering
American Community Bancshares, Inc. ("Bancshares") is offering a minimum of
500,000 shares and a maximum of 1,000,000 shares of its $1.00 par value Common
Stock ("Common Stock") for sale at $____ per share (the "Offering"). During the
first four weeks of the Offering, we will offer the Common Stock in the
communities where we have existing or proposed banking offices. Afterward,
Wachovia Securities, Inc., a broker-dealer located in Charlotte, North Carolina
("Wachovia Securities") will offer any remaining shares of Common Stock on a
"best efforts" basis. Funds collected during the Offering will be placed in
escrow at ________ until the minimum of 500,000 shares is sold. We plan to use
the proceeds from the Offering to enhance our capital and liquidity positions,
fund our expansion plans, including the establishment of additional branch
offices in and around Union and Mecklenburg Counties, and for general corporate
purposes. This Offering will end on December 31, 2000, unless extended.
Total of Total of
Per Share Minimum Maximum
--------- -------- --------
Public Offering Price $ ___ $ ___ $ ___
Estimated Expenses of the Offering $ ___ $ ___ $ ___
Proceeds to Bancshares $ ___ $ ___ $ ___
THIS INVESTMENT INVOLVES RISK. IT IS NOT A DEPOSIT OR AN ACCOUNT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER GOVERNMENT AGENCY.
SOME OF THE RISKS OF THIS INVESTMENT ARE DESCRIBED UNDER THE CAPTION "RISK
FACTORS" BEGINNING ON PAGE __.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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[INSIDE FRONT COVER OF PROSPECTUS]
[MAP]
OFFICE LOCATIONS
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Main Office Wal-Mart Superstore Office Sunset Office
2593 West Roosevelt Blvd. 2406 West Roosevelt Blvd. 120 Sunset Drive
Monroe, NC Monroe, NC Monroe, NC
Indian Trail Office Marshville Office Matthews-Mint Hill
13860 East Independence Blvd. 7001 East Marshville Blvd. Office
Indian Trail, NC Marshville, NC 7200 Matthews-Mint Hill Road
Mint Hill, NC
Mountain Island Office
Mount Holly-Huntersville Road
Charlotte, NC
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WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any exhibits to
our registration statement incorporated by reference in this Prospectus. If you
want more information, write or call us at:
American Community Bancshares, Inc.
American Community Bank
Post Office Box 5035
Monroe, North Carolina 28111-5035
(704) 225-8444
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended ("1934 Act") and as required by the 1934 Act we file
reports, proxy statements and other information with the Securities and Exchange
Commission ("SEC"). Reports, proxy statements and other information filed by us
may be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549
and at the SEC's regional offices located at 7 World Trade Center, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Our SEC filings are also available to the public on the SEC
Internet site at http://www.sec.gov.
Prior to our formation as the holding company for the Bank in April 2000, the
Bank was subject to the informational requirements of the 1934 Act and filed
reports, proxy statements and other information with the FDIC. The Bank's
filings with the FDIC may be inspected and copied, after paying a prescribed
fee, at the FDIC's public reference facilities at the Registration, Disclosure
and Securities Operations Unit, 550 17/th/ Street, NW, Room 6043, Washington, DC
20429.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed business
information and the financial statements and related notes that appear elsewhere
in this Prospectus. Market and industry data used in this Prospectus are based
on independent industry publications, other publicly available information or
the good faith belief of our management. Although we believe that these sources
are reliable, the accuracy and completeness of the information is not guaranteed
and has not been independently verified. All references to "we" or "us" or "our"
in this Prospectus mean American Community Bancshares, Inc. and American
Community Bank collectively, except where it is clear that we mean only the
parent holding company or only the Bank.
AMERICAN COMMUNITY BANCSHARES, INC.
AND AMERICAN COMMUNITY BANK
Business
American Community Bancshares, Inc. ("Bancshares") is a bank holding company
formed in April 2000 to own all of the Common Stock of American Community Bank
(the "Bank"), a North Carolina-chartered bank that opened for business as a
community bank in Monroe, Union County, North Carolina in November 1998. At
this time, Bancshares does not engage in any business activities on its own. It
only owns the Bank which engages in the commercial banking business. At June
30, 2000, Bancshares had total assets of $105.1 million, total deposits of $83.3
million and shareholders' equity of $11.2 million.
The Bank's Market Area
We operate in the Southern Piedmont area of North Carolina, principally in Union
and Mecklenburg Counties. As of June 30, 2000, the most recent date for which
figures were available, these two counties had a combined population of
approximately one million. As of December 31, 1999, the two-county area had an
unemployment rate of 2.3%.
Executive Offices
American Community Bancshares, Inc.
American Community Bank
2593 West Roosevelt Boulevard
Monroe, North Carolina 28111-0418
(704) 225-8444
Management
Randy P. Helton, 45, is our President and Chief Executive Officer. A lifelong
resident of Charlotte, North Carolina, he has approximately 23 years of banking
experience. He is a
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graduate of UNCC, the Executive Program at UNC-Chapel Hill and a graduate of the
Corporate Financial Management Program at Harvard Business School. Until 1998,
when he joined the current directors who were the original organizers of the
Bank, Mr. Helton was a Vice President in the Private Banking Group of First
Union National Bank in Charlotte, North Carolina, a position he assumed in 1994.
Prior thereto he was Senior Vice President and City Executive of Charlotte with
American Commercial Savings Bank, Monroe which was acquired by First Union
National Bank in 1994.
Dan R. Ellis, Jr., 44, is our Senior Vice President, Chief Financial Officer and
Secretary, a position he has held since the Bank began operating. He is a long
time resident of Union County. Until 1998, Mr. Ellis was a partner with
Accupointe of Charlotte, North Carolina.
Randy Adcock, 44, Senior Vice President and Monroe City Executive, is a life
long resident of Union County and a 23 year banking veteran. He was formerly
with Bank of Union (acquired by First Charter National Bank) in Monroe, North
Carolina as a commercial loan officer.
Farrell Richardson, 59, Senior Vice President and Regional Business Development
Officer, is a life long resident of Union County and a 28 year banking veteran.
He formerly was with Bank of Union (acquired by First Charter National Bank) as
Branch Manager of the Indian Trail Branch.
Mike Cochrane, 48, Senior Vice President and Matthews/Mint Hill City Executive,
is a life long resident of Mint Hill, North Carolina and a 23 year banking
veteran. He formerly was with South Trust Bank of North Carolina as a
commercial loan officer in Mint Hill, North Carolina.
Jeff Coley, 41, Senior Vice President and City Executive of Marshville, is a
life long resident of Mint Hill and a 20 year banking veteran. He formerly was
a Branch Manager with BB&T in Marshville, North Carolina.
Steve Barnes, 45, Senior Vice President and City Executive of Indian Trail, is a
life long resident of Union County and a 20 year banking veteran. He formerly
was with First Charter National Bank as a loan officer in the Indian Trail
office.
Dwight Henry, 62, Senior Vice President and City Executive of Mountain Island,
is a life long resident of Charlotte and a 28 year banking veteran. He
previously was employed by First Charter National Bank as a commercial loan
officer in the Oakdale community.
Don Singleton, 48, Senior Vice President and senior loan officer, is a 27 year
banking veteran and was previously employed by Wachovia Bank as a senior loan
officer.
Mary Margaret Nance, 48, Senior Vice President and Operations Officer, is a 20
year banking veteran and was previously employed by Bank of Union (acquired by
First Charter National Bank) as Compliance and Loan Review Officer. Prior to
that she was employed by NationsBank (now Bank of America) in a similar role.
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The Offering
Securities Offered for Sale Shares of Common Stock, $1.00 par value, of
American Community Bancshares, Inc.
Number of Shares Being Offered A minimum of 500,000 and a maximum of
1,000,000.
Offering Price $____ per share.
How to Subscribe Prior to _____, 2000, use only the
Subscription Offer Form attached to this
Prospectus; thereafter, you may also contact
any office of IJL Wachovia, a division of
Wachovia Securities, Inc.
Number of Shares to be A minimum of 1,992,062 and a maximum of
Outstanding after the 2,492,062 shares, not including an additional
Offering 298,410 shares that are reserved for
Bancshares' stock option plans.
Dividend Policy We do not intend to pay any cash dividends in
the foreseeable future.
Use of Proceeds We intend to use the net proceeds from the
Offering to provide additional liquidity,
fund our expansion plans and general
corporate purposes.
Risk Factors You should read the "Risk Factors" section
beginning on page 5 before deciding to invest
in the Offering.
Trading Market/Symbol Nasdaq SmallCap Market/ACBA
Summary Consolidated Financial and Other Data
The summary consolidated financial and other data presented below should be read
in conjunction with, and is qualified in its entirety by reference to, the
audited financial statements of the Bank for the year ended December 31, 1999
and the period November 16, 1998 to December 31, 1998 and related notes, and to
the unaudited consolidated financial statements of Bancshares for the six months
ended June 30, 2000 and 1999. These financial statements can be found at the end
of this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this Prospectus.
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At or for the Six Months At or for the Period
Ended June 30, Ended December 31,
2000 1999 1999 1998 (5)
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(In thousands, except per share data)
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CONSOLIDATED OPERATING DATA:
Interest income $ 3,705 $ 1,277 $ 3,457 $ 137
Interest expense 1,841 441 1,424 22
-------- ------- ------- --------
Net interest income 1,864 836 2,033 115
Provision for loan losses 401 449 742 71
-------- ------- ------- --------
Net interest income after provision for
loan losses 1,463 387 1,291 44
Noninterest income 364 233 493 1
Noninterest expense 2,160 1,272 2,684 174
-------- ------- ------- --------
Loss before income taxes (333) (652) (900) (129)
Income taxes - - - -
-------- ------- ------- --------
Net loss $ (333) $ (652) $ (900) $ (129)
======== ======= ======= ========
CONSOLIDATED BALANCE SHEET DATA:
Total assets $105,051 $43,323 $73,594 $ 20,353
Investments (1) 12,538 6,597 8,718 14,721
Loans, net of allowance for loan losses 87,089 35,092 58,493 4,709
Deposits 83,264 31,345 54,987 7,678
Borrowings (2) 10,201 - 6,700 -
Shareholders' equity 11,219 11,801 11,553 12,453
PER SHARE DATA:
Basic and diluted net loss (3)(4) $ (0.76) $ (3.82) $ (0.60) $ (0.09)
Book Value $ 7.52 $ 7.91(3) $ 7.74 $ 8.35(3)
SELECTED OTHER DATA:
Return on average assets (5) -0.76% -3.82% -1.99% -
Return on average equity (5) -5.82% -10.74% -7.50% -
Average equity to average assets (5) 13.10% 35.53% 26.56% -
Net yield on average interest-earning
assets (5) 4.50% 5.19% 4.81% -
Average interest-earnings assets to
average interest-bearing liabilities (5) 124.14% 172.80% 146.63% -
Ratio of non-interest expense to average
total assets (5) 4.95% 7.45% 5.94% -
Nonperforming loans to total assets - - - -
Nonperforming loans to total loans - - - -
Allowance for loan losses to total loans 1.34% 1.46% 1.37% 1.49%
Number of full service branches in
operation 5 3 3 2
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(1) Consists of interest-earning deposits with banks, investment securities
available for sale, and stock in Federal Home Loan Bank (the "FHLB").
(2) Consists of federal funds purchased, advances from the FHLB and capital
lease obligations.
(3) Adjusted to reflect the dilutive effect of the 20% stock dividend in 1999.
(4) Computed based on the weighted average number of shares outstanding during
each period.
(5) The Bank commenced operations on November 16, 1998. Because of the short
period of operations during 1998, certain of the operating ratios and
percentages under the caption "Selected Other Data" are not considered to
be meaningful for 1998 and are therefore not included above.
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RISK FACTORS
In connection with this Offering, you should consider carefully all of the
information in this Prospectus and, in particular, the following factors:
We Do Not Plan to Pay Cash Dividends in the Immediate, Foreseeable Future.
We do not expect to pay dividends on our Common Stock in the immediate,
foreseeable future. You should not buy shares in this Offering if you need
dividend income from this investment. Currently and in the immediate future,
Bancshares will have no significant assets other than its ownership of the Bank,
and the only source of funds for paying dividends to shareholders will be
dividends Bancshares receives from the Bank. The Bank is prohibited from paying
cash dividends until November 2001 unless special permission is received from
the North Carolina Commissioner of Banks. This is a common prohibition for new
banks chartered under North Carolina law. Also, the Bank may not generate
sufficient earnings to enable it to continue to grow and also pay dividends to
Bancshares. Even if it does, Bancshares' board of directors would not be
required to pay dividends to shareholders. Also, there are other regulatory
requirements which may limit our ability to pay cash dividends.
If the Bank Experiences Greater Loan Losses Than Anticipated, It Will Have an
Adverse Effect on Our Net Income and Our Ability to Fund Our Growth Strategy.
The risk of nonpayment of loans is inherent in banking. If we experience greater
nonpayment levels than anticipated, our earnings and overall financial
condition, as well as the value of our Common Stock, could be adversely
affected.
We continuously strive to manage our credit risk, and we also maintain an
allowance for loan losses to provide for loan defaults and nonperformance.
However, we cannot assure you that our monitoring, procedures and policies will
reduce certain lending risks or that our allowance for loan losses will be
adequate to cover actual losses. In addition, as a result of the rapid growth in
our loan portfolio, loan losses may be greater than management's estimates of
the appropriate level for the allowance. Loan losses can cause insolvency and
failure of a financial institution and, in such an event, our shareholders could
lose their entire investment. In addition, future provisions for loan losses
could materially and adversely affect our results of operations.
Our Operations and Profitability Will be Affected by the Local Economy.
We operate primarily in the Southern Piedmont area of North Carolina,
principally Union and Mecklenburg Counties. While the economy in this area
generally has been healthy in recent years, an economic downturn in the area
would probably have a significant negative impact on us.
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In Order to be Profitable, We Must Compete Successfully With Other Financial
Institutions Which Have Greater Resources and Capabilities Than We Do.
The banking business is extremely competitive. Most of our competitors are
larger and have greater resources than we do and have been in existence a longer
period of time. We will have to overcome historical bank-customer relationships
to attract customers away from our competition. We compete with the following
types of institutions:
- other commercial banks - securities brokerage firms
- savings banks - mortgage brokers
- thrifts - insurance companies
- credit unions - mutual funds
- consumer finance companies - trust companies
Some of our competitors are not regulated as extensively as we are and,
therefore, may have greater flexibility in competing for business. Some of these
competitors are subject to similar regulation but have the advantages of larger
established customer bases, higher lending limits, extensive branch networks,
numerous automated teller machines, a greater advertising-marketing budget or
other factors.
Our legal lending limit is determined by applicable law. The size of the loans
which we offer to our customers may be less than the size of the loans that most
of our competitors are able to offer. This limit may affect to some degree our
ability to seek relationships with the larger businesses in our market. We
satisfy loan requests in excess of our lending limit ($_____) through the sale
of participations in such loans to other banks. However, we cannot assure you
that we will be successful in attracting or maintaining customers seeking larger
loans or that we will be able to engage in the sale of participations in such
loans on terms we consider favorable.
Our Need to Comply with Extensive and Complex Governmental Regulation Could Have
an Adverse Effect on Our Business, and Our Operations and Profitability Will Be
Affected by Federal Policies Outside of Our Control.
The banking industry is subject to extensive regulation by state and federal
banking authorities. Many of these regulations are intended to protect
depositors, the public or the FDIC insurance funds, not shareholders. Regulatory
requirements will affect our lending practices, capital structure, investment
practices, dividend policy and many other aspects of our business. These
requirements may constrain our rate of growth. Regulations affecting financial
institutions are undergoing continuous change, and such changes could adversely
affect us. Sometimes, these changes are applied retroactively. In addition, the
burden imposed by these federal and state regulations may place banks in
general, and us specifically, at a competitive disadvantage compared to less
regulated competitors.
In addition, various aspects of the banking industry and our operations will be
affected by federal economic and monetary policies, which are outside our
control. Changes in federal economic and monetary policies may adversely affect
our ability to attract deposits, make loans and achieve satisfactory interest
spreads.
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You Will Suffer Immediate Dilution in the Net Tangible Book Value of Your
Investment.
If you purchase our Common Stock in this Offering, you will realize an immediate
dilution of approximately $____ in net tangible book value per share of Common
Stock, based on our June 30, 2000 shareholders' equity and assuming an Offering
price of $____ per share and the maximum sales agents' commission.
The Loss of One or More Key Executives Could Seriously Impair Our Ability to
Implement Our Strategy.
For the foreseeable future, we will depend upon the services of Randy P. Helton,
our President and Chief Executive Officer, as well as other senior management we
employ. The loss of services of Mr. Helton may have a material adverse effect on
our operations. To protect against such a loss, we have applied for a key-man
life insurance policy covering Mr. Helton in the amount of $1 million. We cannot
assure you that the policy will be issued or that we will be able to maintain it
on satisfactory terms. In an effort to maintain Mr. Helton's employment, we
entered into a five-year employment agreement with Mr. Helton in April 1998. If
Mr. Helton or any other key employee were no longer employed by us, it could
impair our ability to implement our growth strategy. In addition, if we are
unable to hire qualified and experienced personnel to adequately staff our
anticipated growth, our operating results would be adversely affected. To
protect the Bank, Mr. Helton and a number of our key executives have entered
into employment agreements with the Bank that would, in most circumstances,
prohibit the executive from competing with the Bank in our market areas should
they leave the Bank's employ.
Our Management Owns a Substantial Portion of Our Common Stock, and Their
Interests May Conflict With Yours.
As of December 31, 1999, our directors and executive officers beneficially owned
approximately 18.3% of our Common Stock. Upon completion of this Offering, we
expect that our directors and executive officers will beneficially own
approximately ___% of our Common Stock. Accordingly, such persons will be in a
position to exercise substantial influence over our affairs and may impede the
acquisition of control by a third party. We cannot assure you that the interests
of our directors, executive officers and key employees will always align
precisely with your interest as a holder of our Common Stock.
Changes in Interest Rates Could Have an Adverse Effect on Our Net Income.
Our profitability is based in part on the difference or "spread" between the
interest rates we earn on investments and loans and the interest rates we pay on
deposits and other interest-bearing liabilities. Like most banking institutions,
our net interest spread and margin is affected by general economic conditions
and other factors that influence market interest rates and by our ability to
respond to changes in interest rates. At any given time, our assets and
liabilities are affected differently by a given change in interest rates,
principally because we do not match the maturities of our loans and investments
precisely with our deposits and other funding sources. As a result, an increase
or decrease in interest rates could have a material adverse effect on our net
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income, capital and liquidity. As of June 30, 2000, we had a negative interest
rate gap of 3.10% of earning assets in the one-year time frame. This means our
earnings would be adversely affected by periods of rising interest rates because
during such periods the interest expense paid on deposits and borrowings will
generally increase more rapidly than the interest income earned on loans and
investments. However, most of the assets repricing in the Bank's one year or
less category are variable rate loans and investments that can be repriced
immediately should rates increase. Conversely, the liabilities in the one year
or less category are fixed rate time deposits or borrowings that reprice all
during the year. Due to this asset and liability mix, the Bank is in fact asset
sensitive and should benefit from rising rates even though as of June 30, 2000
the "gap" analysis indicates a negative gap for year one. For information
regarding our interest rate risk sensitivity and our negative interest rate gap
at June 30, 2000 as computed on various future time horizons, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
ASSET/LIABILITY MANAGEMENT." While management intends to take measures to
mitigate interest rate risk, we cannot assure you that such measures will be
effective in minimizing our exposure to interest rate risk.
In addition to affecting interest income and expense, changes in interest rates
also can affect the value of a financial institution's interest-earning assets,
which consist of fixed- and adjustable-rate instruments (such as loans and
investments). Generally, the value of fixed-rate instruments fluctuates
inversely with changes in interest rates. Changes in interest rates also can
affect the average life of, and demand for, loans and mortgage-related
securities. In a declining interest rate environment, for example, a financial
institution is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates on the
paid-off loans.
We May Be Unsuccessful in Implementing or Managing our Growth Strategy.
Bancshares intends to expand its business through selective de novo branch
-- ----
openings and possible acquisitions. There can be no assurance that we will be
able to consummate, or if consummated, successfully integrate, any future de
--
novo branch openings or acquisitions, and there can be no assurance that we will
----
not incur disruption and unexpected expenses in integrating any such
transactions. Although we currently have no such agreements or understandings,
either written or oral, in the normal course of business we evaluate potential
transactions that would compliment or expand our banking business. In doing so,
we compete with other potential bidders, many of which have greater financial
and operational resources. There can be no assurance that we will be able to
successfully negotiate, finance or integrate any such transactions. Furthermore,
the process of evaluating, negotiating and integrating transactions may divert
our time and attention as well as our resources. There can be no assurance that
any given de novo branch or whole business opening or acquisition, when and if
-- ----
consummated, will not have a material adverse effect on our business, results of
operations or financial condition.
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If We Are Unable to Make Technological Improvements Necessary to Compete for
Customers, Our Ability to Grow as Anticipated Will Be Adversely Affected.
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend in part on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations.
We are preparing to allow customers to perform certain banking transactions over
the Internet, but we have no operating history with Internet banking. In
addition, many of our competitors have substantially greater resources to invest
in technological improvements. Such technology may permit competitors to perform
certain functions at a lower cost than we can perform them. We cannot assure you
that we will be able to implement new technology-driven products and services
effectively or be successful in marketing such products and services to our
customers.
Anti-Takeover Provisions in Our Articles of Incorporation Could Reduce the
Likelihood That You Will Receive a Takeover Premium.
Certain provisions of state and federal law and our articles of incorporation
and by-laws will make it more difficult for anyone to acquire control of us
without our board of directors' approval. In many cases, shareholders receive a
premium for their shares in a change in control, and these provisions could make
it somewhat less likely that a change in control will occur or that you will
receive a premium for your shares if a change in control does occur.
FORWARD LOOKING STATEMENTS
Some of the statements in this Prospectus discuss future expectations, contain
projections of results of operations or financial condition or state other
"forward-looking" information. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. We based
the forward-looking information on various factors and using numerous
assumptions.
Important factors that may cause actual results to differ from those
contemplated by forward-looking statements include, for example:
- the success or failure of our efforts to implement our business strategy;
- the effect of changing economic conditions;
- changes in government regulations, tax rates and similar matters;
- our ability to attract and retain quality employees; and
- other risks which may be described in our future filings with the SEC.
We do not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements.
9
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the sale of the minimum of 500,000 shares and
maximum of 1,000,000 shares of Common Stock we are Offering will be a minimum of
approximately $___ million and a maximum of approximately $____ million,
assuming an offering price of $____ per share and after deducting estimated
sales commissions and offering expenses.
We intend to use these net proceeds to: (i) enhance the Bank's liquidity
position; (ii) provide funding or capital to the Bank to support additional
branch locations and other corporate purposes; (iii) initiate new businesses or
acquire other financially related businesses or banks; and (iv) general
corporate purposes.
At the current time, we do not have any agreements nor are we engaged in any
negotiations to make any acquisitions, but are constantly evaluating
opportunities to do so.
The net proceeds will initially be invested in short-term investment grade
securities until such time as management can deploy the proceeds as described
above.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market Information
Bancshares' Common Stock is currently being traded on the Nasdaq SmallCap Market
under the symbol "ACBA." It began trading on this market on July 17, 2000.
Prior thereto, it was traded on the OTC Bulletin Board System. The prices
reflected below are for Bancshares since April 28, 2000, the date of its
organization. For dates prior thereto, the prices reflect the shares of Common
Stock of the Bank. The following table gives the high and low sales prices for
the calendar quarters indicated and are adjusted to reflect our 20% stock
dividend paid in December 1999:
SALE PRICE
High Low
------- -------
1999
----
First Quarter $ 9.20 $ 7.50
Second Quarter 10.41 8.30
Third Quarter 10.80 9.60
Fourth Quarter 12.50 10.00
2000
----
First Quarter $13.00 $ 9.65
Second Quarter 10.87 8.25
Third Quarter (Through ___, 2000)
10
<PAGE>
The over-the-counter quotations prior to July 17, 2000 reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
Holders
There are approximately 1,650 holders of our Common Stock.
DIVIDEND POLICY
We initially expect that our earnings, if any, will be retained to finance our
growth and that we will pay no cash dividends for the foreseeable future. As a
condition to receipt of its charter from the North Carolina Banking Commission,
the Bank is prohibited from paying dividends until November 2001. This is a
standard and common condition which may be waived by the North Carolina
Commissioner of Banks. We may consider payment of dividends after November
2001. However, the declaration of dividends is at the discretion of the board
of directors, and we cannot assure you that dividends will be declared at any
time. If and when dividends are declared, they will be largely dependent upon
the earnings of the Bank.
As a banking corporation organized under North Carolina law, the Bank is
restricted as to the maximum amount of dividends it may pay to Bancshares.
North Carolina law prohibits the Bank from declaring or paying dividends unless
the Bank's capital surplus is at least 50% of its paid-in capital. In addition,
regulatory authorities may limit payment of dividends by any bank when it is
determined that such a limitation is in the public interest and is necessary to
ensure financial soundness of the Bank. The North Carolina Commissioner of
Banks and the FDIC are also authorized to prohibit the payment of dividends by
the Bank under certain circumstances. See "Supervision and Regulation -
Regulation of the Bank -- Miscellaneous." Such requirements and policies may
limit Bancshares' ability to obtain dividends from the Bank for its cash needs,
including payment of dividends to our shareholders and the payment of operating
expenses.
Bancshares is organized under the North Carolina Business Corporation Act, which
prohibits the payment of a dividend if, after giving it effect, the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if the corporation were
to be dissolved, to satisfy the preferential rights upon dissolution of any
preferred shareholders. In addition, the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") may impose restrictions on
dividends paid by Bancshares.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on an
actual basis and on a pro forma basis as adjusted to give effect to this
Offering, assuming an Offering price of $____ per share. You should read this
information together with our consolidated financial statements and related
notes, which are included elsewhere in this Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
At June 30, 2000
--------------------------------------------
Actual Minimum (1) Maximum (1)
------------ -------------- --------------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 1,000,000
shares authorized, none issued. -- -- --
Common Stock, $1.00 par value, 9,000,000
shares authorized, 1,492,062, 1,992,062
and 2,492,062 shares issued and
outstanding. $ 1,492,062 $1,992,062 $2,492,062
Additional paid-in capital 11,089,597
Accumulated deficit (1,361,916)
-----------
Total Shareholders' Equity $11,219,134
===========
CAPITAL RATIOS:
Leverage 12.85%
Tier 1 Risk-Based 11.96%
Total Risk-Based 13.21%
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our selected
financial statements and the related notes presented elsewhere in this
Prospectus, as well as our historical financial statements which appear at the
end of this Prospectus.
Certain statements in this section constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 (the "1933 Act")
and Section 21E of the 1934 Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of Bancshares to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statement.
OVERVIEW
From our opening, the Bank has focused on developing products and services and a
branch network that will enable both sustained growth and the attainment of
profitability over the long term. The Bank opened on November 16, 1998 in a
temporary facility adjacent to the permanent headquarters office at 2593 West
Roosevelt Boulevard in Monroe that opened in December of 1999. Within three
weeks of the Bank's initial opening, a second office was opened on Sunset Drive
in Monroe. This second office initially operated as a limited service facility
but now
12
<PAGE>
provides a full array of banking services. During 1999, the Bank opened an
additional full-service branch located on Highway 74 in Indian Trail, North
Carolina and in January 2000 opened a full service branch on Highway 74 in the
Wal-Mart Superstore in Monroe, North Carolina. (U.S. Highway 74 is one of North
Carolina's most traveled east-west corridors.) In March 2000, the Bank opened
another full service branch located on Highway 74 in Marshville, North Carolina.
The Bank currently has branch applications [pending] for offices in two new
markets: the Matthews-Mint Hill area east of Charlotte and Coulwood-Oakdale-
Mountain Island area west of Charlotte.
While location is a primary factor in building a successful banking location, it
is the Bank's philosophy that the individuals who manage and staff a branch are
of the greatest importance. Toward that end, the Bank has seen to it that each
of its branches is managed by a veteran banker with a strong and proven track
record in that market area. The resultant mix of strong banking professionals
in strategic locations has enabled the Bank to experience rapid growth.
As is typical of de novo institutions, the Bank has incurred net losses during
-- ----
its initial periods of operations, with total net losses aggregating to an
accumulated deficit of less than $1.4 million at June 30, 2000. Within that
same period, provisions for additions to the Bank's allowance for loan losses
have exceeded $1.2 million. Exclusive of loan loss provisions, the aggregate
net loss for the period from its opening through June 30, 2000 totals $147,000.
Most of the Bank's income to date has consisted of interest and fees generated
through traditional loan, investment and deposit activities. However, the Bank
has also focused efforts on other areas of revenue generation such as mortgage
origination, factoring and deposit-related charge fees. These fee related
income items accounted for approximately 9% of gross revenue for the six months
ended June 30, 2000.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000
December 31, 1999 and December 31, 1998
The Bank commenced operations on November 16, 1998 with total capital of $12.6
million, consisting principally of liquid assets. During its initial weeks of
operations, the Bank generated customer deposits of $7.7 million and net loans
receivable of $4.7 million, ending the year 1998 with total assets of $20.4
million. The Bank maintained strong growth throughout 1999, ending the year
with total assets at $73.6 million, net loans receivable of $58.5 million,
customer deposits of $55.0 million, and total shareholders' equity of $11.6
million. Management believes that the growth in all areas has been of good
quality, particularly in lending where the Bank incurred no loan charge-offs
during the year, and where there were no non-accrual or restructured loans at
the end of the year.
The Bank has maintained this level of overall growth during the first six months
of 2000. At June 30, total assets have increased by $31.5 million or 42.7% to
$105.1 million. Net loans receivable have grown by $28.6 million or 48.9% to
$87.1 million while total customer deposits have increased by $28.3 million or
51.4% to $83.3 million. Asset quality continues to be of high
13
<PAGE>
quality. While the Bank did incur net loan charge-offs of $27,000 during the six
months, there were no non-accrual or restructured loans at the end of the
period.
COMPARISON OF RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2000 and 1999
Net Loss. The Bank generated a net loss of $333,000 or $.22 per share for the
six months ended June 30, 2000, representing a significant improvement over the
net loss of $652,000 or $.44 per share generated during the first six months of
1999. The loss is a result of the Bank's aggressive branching strategy.
Management believes it is important to build a strong infrastructure in the
early years of its formation, thus providing and maximizing the efficiencies of
its operation. The improvement has resulted principally from the Bank's growth,
as both net interest income and non-interest income have increased substantially
during the current period.
Net Interest Income. Net interest income for the first six months of 2000 was
$1.9 million as compared with $836,000 during the first six months of 1999, with
the increase resulting principally from the higher level of interest-earning
assets during the current period. Interest- earning assets averaged $82.8
million during the six months ended June 30, 2000 as compared with $32.2 million
during the first six months of 1999.
Provision for Loan Losses. The provision for loan losses was $401,000 and
$449,000, respectively, for the six months ended June 30, 2000 and 1999. The
allowance for loans losses at June 30, 2000 represented 1.34% of loans
outstanding with no non-accrual or restructured loans outstanding at that date.
Non-Interest Income. Non-interest income increased from $233,000 for the six
months ended June 30, 1999 to $364,000 for the six months ended June 30, 2000,
an increase of $131,000. Income from mortgage operations totaled $195,000 for
the six months ended 1999, declining to $106,000 for the same period of the
current year principally as a result of higher interest rates and a reduced
demand for mortgage loans. However, this decrease was more than offset by
increased service charges on deposit accounts, which grew from $38,000 to
$214,000, and by other non-interest income of $43,000 earned during the current
period.
Non-Interest Expense. Total non-interest expense was $2.2 million and $1.3
million, respectively, for the six months ended June 30, 2000 and 1999. This
increase of $888,000 is attributable to the Bank's rapid growth, to the larger
numbers of personnel and branches in operation during the current period, and to
increased occupancy costs associated with the Bank's permanent headquarters
facility that was occupied during December of 1999 and the opening of the branch
at the Wal-Mart Superstore in Monroe and completion of the Indian Trail Branch
on Highway 74.
Provision for Income Taxes. The Bank made no provision for income taxes during
the six months ended June 30, 2000 and 1999, as potential future tax benefits
arising from operating losses incurred have been offset by increases to the
valuation allowance associated with deferred tax assets. It is expected that as
the Bank becomes profitable and begins to demonstrate a
14
<PAGE>
sustained pattern of profitability, the valuation allowance will be adjusted
accordingly with the benefit reflected in net income.
For the Year Ended December 31, 1999 and the Period Ended December 31, 1998
Net Loss. The Bank generated a net loss in 1999 of $900,000 compared to a net
loss in 1998 (approximately six weeks of operations) of $129,000. The Bank's net
loss in 1998 was significantly impacted by the low level of earning assets and
start-up expenses for the Bank. The net loss in 1999 was principally impacted by
non-interest expenses of $2.7 million and the provision for loan losses of
$742,000.
Net Interest Income. Net interest income for 1999 was $2.0 million with a
related interest rate spread of 3.23%. The Bank's average yield on interest-
earning assets during the year was 8.17% while the average rate on interest-
bearing liabilities was 4.94%. Yield and rate data for 1998 are not particularly
meaningful due to the short period of operations of the Bank.
Provision for Loan Losses. The Bank's provision for loan losses in 1999 was
$742,000 and in 1998 was $71,000. At December 31, the allowance for loan losses
was $813,000 for 1999 and $71,000 for 1998, or 1.37% and 1.49%, respectively, of
loans outstanding. Management believes the level of the allowance for loan
losses is adequate to cover future potential loan losses in the portfolio. At
December 31, 1999, the Bank has no non-accrual or restructured loans.
Other Income. Non-interest income in 1999 consists principally of service
charges and other fee income and income from mortgage operations. The Bank has
not had any gains or losses on investment security transactions.
Other Expenses. Total non-interest expense increased from $174,000 in 1998 to
$2.7 million in 1999, principally because the Bank was open for business
throughout 1999 as opposed to the six week period of operations in 1998. The
Bank also opened an additional branch during 1999 resulting in an increase in
personnel costs and occupancy.
Provision for Income Taxes. The Bank had no income tax expense or benefit in
1999 or 1998, principally due to the incurrence of net operating losses and
adjustments to the valuation allowance associated with deferred tax assets. It
is expected that as the Bank becomes profitable and begins to demonstrate a
sustained pattern of profitability, the valuation allowance will be adjusted
accordingly with the benefit reflected in net income.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability management, or interest rate risk management, program
is focused primarily on evaluating and managing the composition of its assets
and liabilities in view of various interest rate scenarios. Factors beyond the
Bank's control, such as market interest rates and competition, may also have an
impact on the Bank's interest income and interest expense.
In the absence of other factors, the yield or return associated with the Bank's
earning assets generally will increase from existing levels when interest rates
rise over an extended period of time
15
<PAGE>
and, conversely, interest income will decrease when interest rates decline. In
general, interest expense will increase when interest rates rise over an
extended period of time and, conversely, interest expense will decrease when
interest rates decline.
Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, the Bank calculates an interest rate "gap." Interest rate "gap" analysis
is a common, though imperfect, measure of interest rate risk, which measures the
relative dollar amounts of interest-earning assets and interest-bearing
liabilities which reprice within a specific time period, either through maturity
or rate adjustment. The "gap" is the difference between the amounts of such
assets and liabilities that are subject to repricing. A "positive" gap for a
given period means that the amount of interest-earning assets maturing or
otherwise repricing within that period exceeds the amount of interest-bearing
liabilities maturing or otherwise repricing within the same period. Accordingly,
in a declining interest rate environment, an institution with a positive gap
would generally be expected, absent the effects of other factors, to experience
a decrease in the yield on its assets greater than the decrease in the cost of
its liabilities and its income should be negatively affected. Conversely, the
cost of funds for an institution with a positive gap would generally be expected
to increase more slowly than the yield on its assets in a rising interest rate
environment, and such institution's net interest income generally would be
expected to be positively affected by rising interest rates. Changes in interest
rates generally have the opposite effect on an institution with a "negative
gap."
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2000, which are projected
to reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Money market
deposit accounts and negotiable order of withdrawal or other transaction
accounts are assumed to pay out over a five-year decay schedule. In making the
gap computations, standard assumptions regarding prepayment rates and deposit
decay rates have been used for interest-earning assets and interest-bearing
liabilities. In addition, the table reflects scheduled principal payments, which
will be received throughout the lives of the loans. The interest rate
sensitivity of the Bank's assets and liabilities illustrated in the following
table would vary substantially if different assumptions were used or if actual
experience differs from that indicated by such assumptions.
16
<PAGE>
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 2000
----------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
--------- ----------- ----------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable:
Loans to individuals $ 2,479 $ 1,742 $ 2,996 $ - $ 7,217
Home equity lines of credit 6,582 - - - 6,582
Commercial and industrial loans 15,902 3,108 11,422 70 30,502
Real estate - mortgage loans 24,657 348 17,289 1,681 43,975
Interest earning deposits with banks 12,139 - - - 12,139
Investment securities available for sale - 149 - - 149
Federal Home Loan Bank stock - - - 250 250
------- -------- ------- ------- --------
Total interest-earning assets $61,759 $ 5,347 $31,707 $ 2,001 $100,814
======= ======== ======= ======= ========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand $ 5,192 $ 10,380 $ 1,355 $ - $ 16,927
Time 51,194 5,912 33 - 57,139
Borrowings/(1)/ 8,500 - - 1,701 10,201
------- -------- ------- ------- --------
Total interest-bearing liabilities $64,886 $ 16,292 $ 1,388 $ 1,701 $ 84,267
======= ======== ======= ======= ========
INTEREST SENSITIVITY GAP PER
PERIOD $(3,127) $(10,945) $30,319 $ 300 $ 16,547
CUMULATIVE INTEREST
SENSITIVITY GAP $(3,127) $(14,072) $16,247 $16,547 $ 16,547
CUMULATIVE GAP AS A
PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS (3.10%) (13.96%) 16.12% 16.41% 16.41%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
CUMULATIVE INTEREST-
BEARING LIABILITIES 95.18% 82.67% 119.68% 119.64% 119.64%
</TABLE>
/(1)/ Includes advances from the Federal Home Loan Bank, federal funds purchased
and capital lease obligations.
17
<PAGE>
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 ("net
interest-earning balance"). The following table sets forth information relating
to average balances of the Bank's assets and liabilities for the six months
ended June 30, 2000 and 1999 and for the year ended December 31, 1999. The table
reflects the average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing income or expense by the daily
average balance of interest-earning assets or interest-bearing liabilities,
respectively) as well as the net yield on interest-earning assets (which
reflects the impact of the net interest-earning balance).
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------
At June 30, 2000 2000 1999
-------------------- ---------------------------- --------------------------------
Average Average Average Average Average
Balance Rate Balance Interest Rate Balance Interest Rate
-------- --------- ------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest earning assets:
Interest-earning deposits with
banks $ 12,139 7.10% $ 10,393 $ 270 5.20% $ 10,990 $ 242 4.40%
Investments/(1)/ 399 7.38% 320 12 7.50% 50 1 4.00%
Loans 87,089 9.15% 72,069 3,423 9.50% 21,174 1,034 9.77%
-------- -------- -------- -------- -------- --------- ---------- ---------
Total interest-earning assets 99,627 8.89% 82,782 3,705 8.95% 32,214 1,277 7.93%
-------- -------- -------- ---------- ---------
Other assets 5,424 4,549 1,944
-------- -------- ---------
Total assets $105,051 $ 87,331 $ 34,158
======== ======== =========
Interest-bearing liabilities:
Deposits $ 74,066 5.69% $ 59,968 1,612 5.38% $ 18,642 441 4.73%
Borrowings/(2)/ 10,201 7.40% 6,719 229 6.82% - - -
-------- -------- -------- -------- -------- --------- ---------- ---------
Total interest-earning liabilities 84,267 5.90% 66,687 1,841 5.52% 18,642 441 4.73%
-------- -------- -------- ---------- ---------
Non-interest-bearing deposits 9,198 8,913 3,233
Other liabilities 367 294 145
Shareholders' equity 11,219 11,437 12,138
-------- -------- ---------
Total liabilities and shareholders'
equity $105,051 $ 87,331 $ 34,158
======== ======== =========
Net interest income and interest
rate spread 2.99% $ 1,864 3.43% $ 836 3.20%
======== ======== ======== ========== =========
Net yield on average interest-earning
assets 4.50% 5.19%
======== =========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 124.14% 172.80%
======== =========
</TABLE>
(1) includes investment securities and Federal Home Loan Bank stock
(2) includes federal funds purchased, advances from the Federal Home Loan Bank,
and capital lease obligation
18
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------------------------
Average Average
Balance Interest Rate
------------ --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits with banks $ 8,228 $ 366 4.45%
Investments/(1)/ 666 29 4.35%
Loans 33,396 3,062 9.17%
------------ --------------- ---------------
Total interest-earning assets 42,290 3,457 8.17%
--------------- ---------------
Other assets 2,908
------------
Total assets $ 45,198
============
Interest-bearing liabilities:
Deposits $ 28,413 1,398 4.92%
Borrowings/(2)/ 428 26 6.07%
------------ --------------- ---------------
Total interest-bearing liabilities 28,841 1,424 4.94%
--------------- ---------------
Non-interest-bearing deposits 4,156
Other liabilities 198
Shareholders' equity 12,003
------------
Total liabilities and shareholders' equity $ 45,198
============
Net interest income and interest rate spread $ 2,033 3.23%
=============== ===============
Net yield on average interest-earning assets 4.81%
===============
Ratio of average interest-earning assets to
average interest-bearing liabilities 146.63%
============
</TABLE>
(1) includes investment securities and Federal Home Loan Bank stock
(2) includes federal funds purchased, advances from the Federal Home Loan Bank,
and capital lease obligation
19
<PAGE>
VOLUME/RATE VARIANCE ANALYSIS
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. The table distinguishes between (i) changes attributable to
volume (changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
(iii) the change attributable to both rate and volume (changes in rate
multiplied by changes in volume), and (iv) total change (the sum of the previous
columns).
Six Months Ended June 30, 2000 vs. 1999
Increase (Decrease) Due to
------------------------------------------
Rate/
Volume Rate Volume Total
---------- -------- ---------- --------
(Dollars in thousands)
Interest income:
Interest-earning deposits
with banks $ (13) $ 43 $ (2) $ 28
Investments 5 1 5 11
Loans 2,485 (28) (68) 2,389
---------- -------- ---------- --------
Total interest-earning
assets 2,477 16 (65) 2,428
---------- -------- ---------- --------
Interest expense:
Deposits 978 60 133 1,171
Borrowings 229 - - 229
---------- -------- ---------- --------
Total interest-bearing
liabilities 1,207 60 133 1,400
---------- -------- ---------- --------
Change in net interest
income $ 1,270 $ (44) $ (198) $ 1,028
========== ======== ========== ========
20
<PAGE>
ASSET QUALITY
Management considers the Company's asset quality to be of primary importance.
The allowance for loan losses, which is utilized to absorb actual losses in the
loan portfolio, is maintained at a level sufficient to provide for estimated
potential charge-offs of non-collectible loans. The loan portfolio is analyzed
periodically in an effort to identify potential problems before they actually
occur. The Company's allowance for loan losses is also analyzed quarterly by
management. This analysis includes a methodology that segments the loan
portfolio by selected loan types and considers the current status of the
portfolio, historical charge-off experience, current levels of delinquent,
impaired and non-performing loans, as well as economic and inherent risk
factors. The provision for loan losses represents a charge against income in an
amount necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
The following table allocates the allowance for loan losses by loan category at
the dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
At June 30, 2000 1999 1998
---------------------- ----------------------------------- ----------------------------------
Percent of Percent Percent of Percent Percent of Percent
allowance of loans allowance of loans allowance of loans
Amount of to total to gross Amount of to total to gross Amount of to total to gross
allowance allowance loans allowance allowance loans allowance allowance loans
--------- ---------- --------- --------- ----------- ----------- --------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Loans to individuals $ 178 15.00% 8.18% $ 122 15.00% 47.17% $ 22 30.99% 8.24%
Home equity lines
of credit 59 4.97% 7.46% 41 5.00% 6.52% 3 4.23% 4.69%
Commercial and
industrial loans 570 48.02% 34.55% 407 50.00% 38.33% 42 59.15% 58.07%
Real estate -
mortgage loans 380 32.01% 49.81% 244 30.00% 7.98% 4 5.63% 29.00%
--------- ---------- --------- --------- ----------- ----------- --------- ----------- ----------
Total allowance for
loan losses $ 1,187 100.00% 100.00% $ 813 100.00% 100.00% $ 71 100.00% 100.00%
========= ========== ========= ========= =========== =========== ========= =========== ==========
</TABLE>
21
<PAGE>
The following table contains an analysis of the allowance for loan losses,
including the amount of charge-offs and recoveries by loan type, for the six-
months ended June 30, 2000 and 1999 and for the periods ended December 31, 1999
and 1998.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
For the six months For the periods ended
ended June 30, December 31,
-------------------- ---------------------
2000 1999 1999 1998
--------- --------- --------- ----------
(In thousands, except ratios)
Balance, beginning of period $ 813 $ 71 $ 71 $ -
Charge-offs:
Loans to individuals 7 - - -
Home equity lines of credit - - - -
Commercial and industrial loans 20 - - -
Real estate - mortgage loans - - - -
--------- --------- --------- ----------
27 - - -
--------- --------- --------- ----------
Recoveries - - - -
--------- --------- --------- ----------
Net charge-offs 27 - - -
Provision charged to operations 401 449 742 71
--------- --------- --------- ----------
Balance, end of period $ 1,187 $ 520 $ 813 $ 71
========= ========= ========= ==========
Percentage of net charge-offs
to average loans 0.04% 0.00% 0.00% 0.00%
========= ========= ========= ==========
Percentage of allowance to
period-end loans 1.34% 1.46% 1.37% 1.49%
========= ========= ========= ==========
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate, and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due. Management believes
the allowance for loan losses is sufficient to absorb known risks in the
portfolio. No assurance can be given that economic conditions will not adversely
affect borrowers and result in increased losses. The Bank had no non-performing
assets at either June 30, 2000, June 30, 1999, December 31, 1999, or December
31, 1998. In addition, there were no other loans that (i) represent or result
from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources or (ii)
represent material credits about which management has information that causes
them to have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.
22
<PAGE>
CAPITAL RESOURCES
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The FDIC and the Federal Reserve, the primary regulators of
the Bank and the Company, respectively, have adopted minimum capital regulations
or guidelines that categorize components and the level of risk associated with
various types of assets. Financial institutions are expected to maintain a level
of capital commensurate with the risk profile assigned to its assets in
accordance with these guidelines. As shown in the following table, the Company
and the Bank both maintained capital levels exceeding the minimum levels for
"well capitalized" banks and bank holding companies.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
At June 30, At December 31,
-----------------------------------------------
2000 1999 1998
---------------------- -----------------------------------------------
Amount Percent Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- -----------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk
weighted assets
Consolidated $ 12,391 13.21% $ - - $ - -
Bank 12,391 13.21% 12,365 19.53% 12,524 151.69%
Tier 1 capital to risk
weighted assets
Consolidated 11,219 11.96% - - - -
Bank 11,219 11.96% 11,552 18.25% 12,453 150.83%
Tier 1 capital to average
assets
Consolidated 11,219 12.85% - - - -
Bank 11,219 12.85% 11,552 18.52% 12,453 61.18%
</TABLE>
23
<PAGE>
LIQUIDITY
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of the Bank's asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Loan repayments, deposit
growth, federal funds purchased and borrowings from the Federal Home Loan Bank
are presently the main sources of the Bank's liquidity. The Bank's primary uses
of liquidity are to fund loans and to make investments.
As of June 30, 2000, liquid assets (cash due from banks and interest-earning
bank deposits) were approximately $13.6 million, which represents 12.9% of total
assets and 14.5% of total deposits and borrowings. Supplementing this liquidity,
the Bank has available lines of credit from a correspondent bank of
approximately $3.5 million. At June 30, 2000, outstanding commitments to extend
credit were $4.9 million and available line of credit balances totaled $9.4
million. Management believes that the combined aggregate liquidity position of
the Bank is sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals in the near term.
Certificates of deposit represented 68.6% of the Bank's total deposits at June
30, 2000. The Bank's growth strategy will include efforts focused on increasing
the relative volume of transaction deposit accounts, as the branch network is
expanded, making it more convenient for our banking customers. Certificates of
deposit of $100,000 or more represented 28.6% of the Bank's total deposits at
year-end. These deposits are generally considered rate sensitive, but management
believes most of them are relationship-oriented. While the Bank will need to pay
competitive rates to retain these deposits at maturity, there are other
subjective factors that will determine the Bank's continued retention of those
deposits.
INVESTMENT ACTIVITIES
At June 30, 2000, the Company's investments consisted of a U.S. Government
agency security and Federal Home Loan Bank stock. The agency security, with an
amortized cost of $150,000, is classified as available for sale and is presented
in the financial statements at its market value of $149,391 at June 30, 2000.
This security has a yield of 6.75% and matures on February 15, 2002. The
Company's investment in stock of the Federal Home Loan Bank, which is required
of every member and is redeemable only by the Federal Home Loan Bank, was
$250,000 with a yield of 7.65% at June 30, 2000.
ACCOUNTING AND REGULATORY MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that the Company recognize
all
24
<PAGE>
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. The Company will adopt SFAS No. 133 on
January 1, 2001, as required. Given that the Company has no investments in
derivative instruments, management of the Company believes that adoption of SFAS
No. 133 will not have a material impact on the Company's balance sheet or the
related statements of income and changes in shareholders' equity.
IMPACT OF INFLATION AND CHANGING PRICES
A financial institution has assets and liabilities that are distinctly different
from those of a company with substantial investments in plant and inventory
because the major portion of its assets are monetary in nature. As a result, a
bank's performance may be significantly influenced by changes in interest rates.
Although the banking industry is more affected by changes in interest rates than
by inflation in the prices of goods and services, inflation is a factor which
may influence interest rates. However, the frequency and magnitude of interest
rate fluctuations do not necessarily coincide with changes in the general
inflation rate. Inflation does affect operating expenses in that personnel
expenses and the cost of supplies and outside services tend to increase more
during periods of high inflation.
BUSINESS
General
Bancshares is a bank holding company that owns all of the Common Stock of the
Bank, a North Carolina-chartered bank with deposit accounts insured by the Bank
Insurance Fund ("BIF") of the FDIC. Bancshares was incorporated on February 16,
2000 as a North Carolina-chartered corporation and became the holding company
for the Bank on April 28, 2000. To become the Bank's holding company, Bancshares
received approval of the Federal Reserve Board as well as the Bank's
shareholders. Upon receiving such approvals, each share of the Common Stock of
the Bank was exchanged on a one-for-one basis for shares of the Common Stock of
Bancshares.
The Bank was incorporated on November 13, 1998, as a North Carolina-chartered
commercial bank. The Bank opened for business on November 16, 1998, at a
temporary location at 2581 West Roosevelt Boulevard, Monroe, North Carolina. On
December 7, 1998, the Bank opened a branch at 120 East Sunset Drive, Monroe,
North Carolina, that essentially functions as a limited service facility, taking
deposits and providing banking services not connected with making loans.
In 1999, the Bank opened a full service branch in Indian Trail, North Carolina
and in January 2000 opened a full service branch in the Wal-Mart Superstore in
Monroe, North Carolina. The Bank also opened a full service branch in
Marshville, North Carolina in March 2000 and has branch applications pending for
offices in two new markets: the Matthews-Mint Hill area in southeast Charlotte
and Coulwood-Oakdale-Mountain Island area in west Charlotte. The Bank's
permanent headquarters building in Monroe was opened in November 1999 at 2593
West Roosevelt Boulevard.
25
<PAGE>
The Bank entered into a fee sharing agreement with Factorworks, Inc., Newnan,
Georgia to utilize its factoring software program in providing factoring
services for its commercial customers. The Bank also has mortgage originators at
its branches to provide full service mortgage lending in its market area. All
mortgage loans are sold in the secondary market with servicing released.
The Bank operates for the primary purpose of serving the banking needs of
individuals, and small to medium-sized businesses in its market area. While
numerous banks in our market have chosen to focus on the affluent and high net
worth individuals, we have chosen to focus on middle income households and the
entrepreneurial segment of our market. The Bank offers a range of banking
services including checking and savings accounts, commercial, consumer and
personal loans, mortgage and factoring services and other associated financial
services. The Bank has also targeted the growing Hispanic market as a marketing
niche they intend to pursue.
Strategy
The Bank has expanded aggressively since its opening for business in November
1998. Because of its strong capital position created during its incorporation
stage, the Bank had the requisite capital needed to permit it to immediately
branch and quickly established a second branch in Monroe. The Bank's branching
strategy has been opportunistic: it has sought to establish branch offices in
areas where there are opportunities to hire successful local bankers who have a
loyal following of deposit and loan customers. The Bank to date has centered
each of its branch offices around such a successful banker. Management also
believes it is important in the early formation years to build branches that
will provide convenience and efficiencies in its operational infrastructure. The
Bank only recently has chosen to compete in the Charlotte market area by
identifying local bankers and establishing branches in the Coulwood-Oakdale-
Mountain Island and Matthews-Mint Hill areas of Charlotte. Charlotte is an
extremely competitive banking market with numerous nation-wide and community
banks in existence. The Bank's strategy is to surround Charlotte and to take
advantage of opportunities that present themselves in both new geographic and
new product markets. The Bank reorganized itself into the holding company form
of organization to give it the greatest legal flexibility to take advantage of
any opportunities that might arise.
Lending Activities
General. The Bank offers a broad array of lending services, including real
-------
estate, commercial and consumer loans, equity lines of credit, to individuals
and small-to-medium size businesses and other organizations that are located in
or conduct a substantial portion of their business in the Bank's market areas.
The Bank's total loans at June 30, 2000 were $87.1 million or 87.4% of total
earning assets. The Bank also makes secured construction loans for owner
occupied and to home builders, which are typically secured by first mortgages.
At June 30, 2000, the Bank had no large loan concentrations (exceeding 10% of
its portfolio) in any particular industry.
Loan Composition. The following table sets forth, at the dates indicated, the
----------------
composition of the Bank's loan portfolio and the related percentage composition.
26
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------
At June 30, 2000 1999 1998
---------------- ---- ----
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Loans to individuals $ 7,217 8.29% $ 4,735 8.09% $1,386 29.43%
Home equity lines of credit 6,582 7.56% 3,865 6.61% 224 4.76%
Commercial and industrial loans 30,502 35.02% 22,731 38.86% 2,776 58.95%
Real estate - mortgage loans 43,975 50.49% 27,975 47.83% 394 8.37%
------- ------ ------- ------ ------ ------
Total loans 88,276 101.36% 59,306 101.39% 4,780 101.51%
LESS
Allowance for loan losses (1,187) (1.36%) (813) (1.39%) (71) (1.51%)
------- ------ ------- ------ ------ ------
$87,089 100.00% $58,493 100.00% $4,709 100.00%
======= ====== ======= ====== ====== ======
</TABLE>
Loans categorized above as "commercial and industrial" include commercial
building construction such as offices, warehouses and investment properties,
etc. and are secured by various commercial collateral including real estate,
accounts receivable and inventory and equipment. The Bank also provides lines of
credit, equipment financing, inventory and working capital loans that are not
secured by real estate. The Bank's lending limit at June 30, 2000 was $1.7
million, and the few loans made in excess of the legal lending limit are sold as
participations with other financial institutions.
The category under home equity lines of credit includes home equity lines and
overdraft protection and the category under loans to individuals includes cars,
boats, luxury items and unsecured loans.
The Bank is an active home mortgage lender and each of its offices has trained
lending personnel to originate home mortgage loans. All such residential
mortgage loans are made specifically for resale in the secondary market. The
Bank has also entered into an arrangement with Whitley Mortgage Associates, Inc.
(see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") to enable it to satisfy
special lending requests of its borrowing customers that it is incapable of
providing as one of its product lines.
The Bank offers a credit card on an agency basis as an accommodation to its
customers. At such time as the Bank believes there will be sufficient volume, it
intends to review this product and may offer credit cards as a principal,
thereby underwriting the credit risks associated with card holders. The Bank has
three ATM facilities attached to three of its existing banking offices and
intends to expand this to each of its offices in the near future. The Bank's ATM
cards are linked to the nationwide Cirrus(R), Plus(R) and Star(R) systems,
allowing the Bank's customers to withdraw funds from any ATM machine honoring
these systems.
27
<PAGE>
Factorworks(R)
The Bank has entered into a fee sharing arrangement with Factorworks, Inc.,
Newnan, Georgia to utilize its software to provide accounts receivable financing
to its customers. Utilization of the Factorworks software eliminates significant
credit risk and is less labor intensive. This factoring arrangement provides for
a 20% hold-back of the factored invoice until payment is received. Further, the
Bank does not engage in any collection efforts and all delinquent loans after 90
days are required to be substituted with other acceptable invoices. Customers
utilizing this product and service are normally small businesses whose accounts
receivable are from creditworthy corporations or governmental agencies which
minimizes the credit risk to the Bank. Personal guarantees are required on all
lines. All loan officers have been trained to offer the Factorworks product with
the Bank earning a fee as well as interest on its factoring portfolio.
Internet Banking
The Bank has a web site at "www.americancommunitybank.com". The Bank intends to
introduce on line banking during the fourth quarter 2000. In the spring, 2000,
the Bank was awarded the OMNI award by the Kirchman Corporation, the nation's
largest provider of banking software. This award was granted to the Bank in
honor of its commitment to technology.
Deposits
The Bank offers a variety of deposit programs to individual and to small-to-
medium size businesses and other organizations at interest rates generally
competitive with local market conditions. The following table sets forth the mix
of depository accounts at the Bank as a percentage of total deposits at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
June 30, 2000 1999 1998
--------------------------------------- ---- ----
Weighted Percent Weighted Percent Weighted Percent
Average Total Average Total Average Total
Amount Cost Deposits Amount Cost Deposits Amount Cost Deposits
------ ---- -------- ------- ---- -------- ------ ---- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEMAND DEPOSITS
Demand, NOW, Money market $24,281 2.22% 29.16% $18,327 2.24% 33.33% $2,941 1.99% 38.31%
Savings 1,844 2.25% 2.22% 889 2.25% 1.62% 93 2.25% 1.21%
------- ---- ------ ------- ---- ------ ------ ---- ------
Total demand deposits 26,125 2.22% 31.38% 19,216 2.24% 34.95% 3,034 2.00% 39.52%
------- ---- ------ ------- ---- ------ ------ ---- ------
CERTIFICATE ACCOUNTS WITH
ORIGINAL TIME DEPOSITS
Over $100,000 23,791 6.43% 28.57% 17,205 5.69% 31.29% 2,491 5.50% 32.44%
Other 33,348 6.31% 40.05% 18,566 5.61% 33.76% 2,153 5.25% 28.04%
------- ---- ------ ------- ---- ------ ------ ---- ------
Total time deposits 57,139 6.36% 68.62% 35,771 5.65% 65.05% 4,644 5.38% 60.48%
------- ---- ------ ------- ---- ------ ------ ---- ------
Total deposits $83,264 5.06% 100.00% $54,987 4.46% 100.00% $7,678 4.05% 100.00%
======= ==== ====== ======= ==== ====== ====== ==== ======
</TABLE>
28
<PAGE>
The following table indicates the amount of the Bank's certificates of deposit
by interest rate and by time remaining until maturity as of June 30, 2000.
<TABLE>
<CAPTION>
More than 1 year More than 3 years
1 year or less to 3 years to 5 years More than 5 years Total
-------------- ---------- ---------- ----------------- -----
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of $100,000
or more $20,380 6.35% $3,411 6.92% $-- -0-% $ -- -0- $23,791 6.43%
Certificates of less than
$100,000 30,830 6.27% 2,485 6.82% 33 4.50% $ -- -0- 33,348 6.31%
------- ---- ------ ---- --- ---- ---- ---- ------- ----
$51,210 6.30% $5,896 6.88% $33 4.50% $ -- 0.00% $57,139 6.36%
======= ==== ====== ==== === ==== ==== ==== ======= ====
</TABLE>
Other Funding Sources
Short-term borrowed funds consist of federal funds purchased and advances from
the Federal Home Loan Bank with original maturities of less than one year.
Long-term debt consists solely of obligations under a capitalized lease for the
Bank's main office facility. The following table summarizes balance and rate
information for short-term borrowed funds and the capital lease obligation as of
the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for the Six Months At or for the Year
Ended June 30, Ended December 31,
-------------- ------------------
2000 1999 1999 1998
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
AMOUNTS OUTSTANDING AT END OF PERIOD:
FEDERAL FUNDS PURCHASED:
Amount $3,500 $ -- $ -- $ --
Weighted average rate 7.38% -- -- --
CAPITALIZED LEASE OBLIGATION:
Amount $1,701 $ -- $1,700 $ --
Weighted average rate 8.23% -- 8.23% --
ADVANCES FROM THE FEDERAL HOME LOAN BANK:
Amount $5,000 $ -- $5,000 $ --
Weighted average rate 7.13% -- 6.07% --
MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END:
Federal funds purchased $3,500 $ -- $ -- $ --
Capitalized lease obligation 1,701 -- 1,701 --
Advances from the Federal Home Loan Bank 5,000 -- 5,000 --
AVERAGES DURING THE PERIOD:
Federal funds purchased
Average balance $ 19 $ -- $ -- $ --
Weighted average rate 7.38% -- -- --
Capitalized lease obligation
Average balance $1,700 $ -- $ 213 $ --
Weighted average rate 8.23% -- 8.23% --
Advances from the Federal Home Loan Bank
Average balance $5,000 $ -- $ 428 $ --
Weighted average rate 6.33% -- 6.07% --
</TABLE>
29
<PAGE>
The Bank periodically uses brokered deposits as consistent with asset and
liability management policies of the Bank.
Competition
Commercial banking in North Carolina is extremely competitive in large part due
to statewide branching. We compete in our market areas with some of the largest
banking organizations in the state and the country and other financial
institutions, such as federally and state-chartered savings and loan
institutions and credit unions, as well as consumer finance companies, mortgage
companies and other lenders engaged in the business of extending credit or
taking investment monies such as mutual funds and brokerage firms. Many of our
competitors have broader geographic markets and higher lending limits than us
and are also able to provide more services and make greater use of media
advertising. In Union County, there are currently 28 offices of 8 different
commercial banks (including the largest banks in North Carolina). As an example,
immediately to the west of Union County is Mecklenburg County and Charlotte,
home of Bank of America, First Union and numerous other banks of varying sizes.
While we typically do not compete directly for loans with these larger, nation-
wide banks, our deposit products are influenced by them. We do compete more
directly with mid-size and small community banks that have offices in our market
areas. There are also a number of new community banks in Mecklenburg and Union
Counties that have a direct competitive effect as borrowers tend to "shop" the
terms of their loans and deposits. As of June 30, 1999, we accounted for 3.8% of
total deposits by commercial banks in Union County.
The enactment of legislation authorizing interstate banking has caused great
increases in the size and financial resources of some of our competitors. In
addition, as a result of interstate banking, out-of-state commercial banks have
acquired North Carolina banks and heightened the competition among banks in
North Carolina. For example, South Trust Bank, Birmingham, Alabama, a large
multi-state financial institution has branches throughout North Carolina,
including Mecklenburg County.
Despite the competition in our market areas, we believe that we have certain
competitive advantages that distinguish us from our competition. We believe that
our primary competitive advantages are our bankers, each of whom is well known
in his or her community with strong personal and business ties to that community
with a loyal customer following. Our bankers each have a strong local identity
and affiliation with their communities. We offer customers modern, high-tech
banking without forsaking community values such as prompt, personal service and
friendliness. We also have established local advisory boards in each of our
communities to help us better understand their needs and to be "ambassadors" of
the Bank in those communities. We offer many personalized services and attract
customers by being responsive and sensitive to their individualized needs. We
also rely on goodwill and referrals from shareholders and satisfied customers,
as well as traditional marketing to attract new customers. To enhance a positive
image in the community, we support and participate in local events and our
officers and directors serve on boards of local civic and charitable
organizations. As an example, Special Olympics of Union County recently honored
the Bank as the "Business of the Year" for our sponsorship and volunteer efforts
and the Bank received the 1999 United Way Top New Campaign award for Union
County.
30
<PAGE>
Union County also is home to a large Hispanic population and the Bank is working
with the government of Mexico to provide affordable and safe wire transfer
services from residents living in the United States to their relatives in
Mexico. The Bank has signed an agreement with Telecomm USA Ltd. in conjunction
with Telecommunicaciones de Mexico. For a fee paid to the Bank, the service
allows Mexican citizens working in the United States to present U.S. dollars at
the Bank's branches for transfer to individuals in Mexico. This transfer uses a
"smart card" that is held by the Mexican national and encoded with the necessary
information to legally effect the transfer. Additionally, to better serve the
Hispanic population, the Bank's branch in the Wal-Mart Superstore in Monroe is
staffed with bilingual tellers and targets the fast growing Hispanic market.
Because the Wal-Mart Superstore branch is open seven days a week (the only Union
County bank to offer seven days a week banking), international transfers and all
other banking services can be completed at times other than traditional banking
hours.
As a community service providing a competitive edge, the Bank sponsors small
business seminars and features various speakers on topics of interest to growing
small businesses. The Bank attempts to bring together in one place a variety of
experts to discuss timely issues of importance to business owners regarding such
matters as e-commerce, investments, estate and retirement planning. This social
setting also provides small business owners with an opportunity to network with
other small business owners in our communities. Further, through its Kidz Club,
the Bank offers savings accounts designed for young savers. Lastly, the Bank has
developed a Senior Citizens account for customers 50 years and older. Named the
"Golden Eagle Account" this product offers free travelers checks, free safe
deposit box, interest on daily balances, free wallet-style checks, free
quarterly breakfasts with guest speakers and quarterly day trips. The Bank
sponsors the quarterly day trips as a way to attract Senior Citizens' accounts
and to further tie them in their loyalty to the Bank.
Properties
The following table sets forth the location of our main office and branch
offices, as well as certain information relating to these offices to date.
<TABLE>
<CAPTION>
Approximate
Office Location Year Opened Square Footage Owned or Leased
--------------- ----------- -------------- ---------------
<S> <C> <C> <C>
Main Office 1999 11,250 Leased
2593 West Roosevelt Boulevard
Monroe, NC 28110
Indian Trial Branch 1999 3,850 Leased
13860 East Independence Boulevard
Indian Trial, NC 28079
Sunset Branch 1999 450 Leased
120 East Sunset Drive
Monroe, NC 28110
Wal-Mart Superstore Branch 2000 600 Leased
2406 West Roosevelt Boulevard
Monroe, NC 28110
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Approximate
Office Location Year Opened Square Footage Owned or Leased
--------------- ----------- -------------- ---------------
<S> <C> <C> <C>
Marshville Branch 2000 3,000 Leased
7001 East Marshville Boulevard
Marshville, NC 28103
Matthews-Mint Hill 2000 1,300 Leased
7200 Matthews-Mint Hill Road
Mint Hill, NC 28227
Mountain Island Branch 2000 1,400 Leased
Mount Holly-Huntersville Road
Charlotte, NC
</TABLE>
The Bank has entered into a Commercial Lease Agreement with TyPar Realty, Inc.
for the lease of a two-story building constructed by L. C. Tyson Construction,
Inc. This building serves as the main office of both Bancshares and the Bank.
TyPar Realty, Inc. and L. C. Tyson Construction, Inc. are related interests of
Carlton Tyson, a director of the Bank. The lease is for thirty years commencing
in 1999 with increases every five years plus taxes and other common area
expenses. The Bank has a right of first refusal to lease the remainder of the
building as it becomes available and to purchase the building should it be
offered for sale. This lease was entered into at arms-length and at then current
market rates. The lease has been reviewed by an independent third party real
estate appraiser for assurance that the terms of the lease are not more
favorable than would be engaged with any other party. Additionally, after a
sealed bid process, L. C. Tyson Construction, Inc., also a related interest of
Mr. Tyson, was awarded, as low bidder, the construction contract for the Bank's
permanent building in Marshville. The Bank believes the terms of that contract
are favorable to the Bank. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Employees
As of June 30, 2000, we had approximately 50 full-time employees and
approximately 2 part-time employees. None of these employees are covered by a
collective bargaining agreement. We consider relations with our employees to be
good.
Litigation
There are no pending legal proceedings to which the Bank or Bancshares is a
party, or of which any of their property is the subject.
MANAGEMENT
Directors
Bancshares' Board of Directors consists of seven directors. The Bylaws of the
Corporation provide that its Board of Directors shall consist of between seven
and twenty members, as determined by the Board of Directors or the shareholders
and if nine or more members, they
32
<PAGE>
shall be staggered into terms of one, two and three years in as equal a number
as possible. Certain information regarding the current directors who serve as
both directors of Bancshares and the Bank is set forth below:
<TABLE>
<CAPTION>
Bancshares/Bank Principal Occupation and
Name and Age Director Since Term Expires Business Experience During Past Five Years
------------ -------------- ------------ -------------------------------------------
<S> <C> <C> <C>
Thomas J. Hall 2000/1998 2001 President of Hall Group, Inc., Charlotte, NC (real estate holding company)
(53)
Larry S. Helms 2000/1998 2001 Owner, Larry S. Helms and Associates (insurance), Monroe, North Carolina;
(55) former manager, BellSouth Telecommunications, Charlotte, North Carolina,
1996-1970. (insurance surety bond company)
Randy P. Helton 2000/1998 2001 President and Chief Executive Officer of Bancshares and the Bank; former
(44) Vice President of the Private Banking Group, First Union National Bank,
Charlotte, NC; former Senior Vice President, American Commercial
Savings Bank, Monroe, NC
Kenneth W. Long 2000/1998 2001 Chief Executive Officer, Click Tactics, Inc., Charlotte, NC (internet direct
(52) marketing)
L. Steven Phillips 2000/1998 2001 Chief Executive Officer, Charlotte GreenCorp, Inc., Charlotte, NC (landscape
(48) consultant).
David D. Whitley 2000/1998 2001 President, Whitley Mortgage Associates, Inc., Monroe, NC (mortgage broker
(53) and origination)
</TABLE>
In addition to the above mentioned directors, the following individuals serve as
directors of the Bank.
<TABLE>
<CAPTION>
Bank
Director Term
Name and Age Since Expires Principle Occupation and Business Experience During Past Five Years
------------- ----- ------- -------------------------------------------------------------------
<S> <C> <C> <C>
Zebulon Morris, Jr. 1998 2001 President of Morris Enterprises, Incorporated. (real estate holding company)
(62)
L. Carlton Tyson 1998 2001 President, Tyson Group, Monroe, NC (real estate development)
(58)
H. L. "Ben" Williams 1998 2001 Private Investor; former Chief Executive Officer, Monroe Appearance Corporation,
(54) Monroe, NC
</TABLE>
Director Relationships
No director is a director of any company with a class of securities registered
pursuant to Section 12 of the 1934 Act or subject to the requirements of Section
15(d) of the 1934 Act, or any company registered as an investment company under
the Investment Company Act of 1940.
Director Compensation
Board Fees. As of January 2000, each director (other than directors who also are
----------
salaried employees of the Bank) received no compensation.
33
<PAGE>
1999 Nonstatutory Stock Option Plan for Directors. The shareholders of the Bank
-------------------------------------------------
ratified the 1999 Nonqualified Stock Option Plan for Directors (the
"Nonstatutory Option Plan") at the 1999 Annual Meeting of Shareholders pursuant
to which options on 149,205 shares of the Bank's Common Stock are available for
issuance to members of the Bank's Board of Directors and the board of any
subsidiary of the Bank. On April 14, 1999, all options were granted under the
Nonstatutory Option Plan. Upon it becoming the holding company for the Bank,
Bancshares adopted the Nonstatutory Stock Option Plan.
Executive Officers
Set forth below is certain information regarding the Bank's and Bancshares'
executive officers as of June 30, 2000.
<TABLE>
<CAPTION>
Name Age Position(s) Held Business Experience
---- --- ---------------- -------------------
<S> <C> <C> <C>
Randy P. Helton 45 President and Chief Former Vice President of the Private Banking Group,
Executive Officer of Bank First Union National Bank, Charlotte, NC;
and Bancshares former Senior Vice President and City
Executive of Charlotte, American Commercial Savings
Bank, Monroe, NC
William R. Adcock 44 Senior Vice Former commercial loan officer, First Charter
President/Monroe City National Bank (previously Bank of Union),
Executive of Bank Monroe, NC
Steve Barnes 45 Senior Vice President/Indian Former loan officer, First Charter National Bank,
Trail City Executive of Bank Indian Trail, NC
Richard M. Cochrane 48 Senior Vice Former commercial loan officer, South Trust
President/Matthews-Mint Mint Hill, NC
Hill City Executive
of Bank
Jeff Coley 41 Senior Vice Former Branch Manager, BB&T, Marshville,
President/Marshville City NC
Executive of Bank
Dan R. Ellis, Jr. 44 Senior Vice President, Former Partner, Accupointe, Inc., Monroe, NC;
Secretary and Chief Financial former Vice President and Chief Financial
Officer of Bank and Officer, Coresource, Inc., Charlotte, NC
Bancshares
Dwight Henry 62 Senior Vice Former commercial loan officer, First Charter
President/Mountain Island National Bank in Charlotte, NC.
City Executive of Bank
Mary Margaret Nance 48 Senior Vice President/Bank Former Compliance and Loan Review Officer,
Operations Officer First Charter National Bank (previously Bank of
Union).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Name Age Position(s) Held Business Experience
---- --- ---------------- -------------------
<S> <C> <C> <C>
Farrell Richardson 59 Senior Vice Former Vice President First Charter National
President/Regional Business Bank (previously Bank of Union), Indian Trail,
Development Officer NC
of Bank
Donald A. Singleton 48 Senior Vice President/Senior Former Senior Vice President, Wachovia Bank,
Credit Lender N.A., Greenville, SC
of Bank
</TABLE>
Employment Agreement
The Bank has entered into an employment agreement dated April 15, 1998 with
Randy P. Helton, President and Chief Executive Officer, to establish his duties
and compensation and to provide for his continued employment with the Bank. The
employment agreement provides for an initial term of employment of five years
renewable annually for an additional one year term upon the affirmative decision
of the Bank's Board of Directors. The employment agreement provides for an
annual base salary of $110,000 to be reviewed by the Board of Directors not less
often than annually. In addition, the employment agreement provides for
discretionary bonuses, participation in other pension and profit-sharing
retirement plans maintained by the Bank on behalf of its employees, as well as
fringe benefits normally associated with the officer's office or made available
to all other employees. The employment agreement provides that the officer may
be terminated with or without cause, as defined in the employment agreement, by
the Bank, and otherwise be terminated by the Bank (subject to vested rights) or
by the officer. The employment agreement provides that in the event of a
"termination event" following a change in control of the Bank, the officer shall
be able to terminate the agreement within 24 months of a "termination event" and
receive 299% of his base amount of compensation. A "termination event" will
occur if (i) the officer is assigned any duties or responsibilities that are
inconsistent with his position, duties, responsibilities or status at the time
of the change in control or with his reporting responsibilities or title with
the Bank in effect at the time of the change in control; (ii) the officer's
annual base salary rate is reduced below the annual amount in effect as of the
change in control; (iii) the officer's life insurance, medical or
hospitalization insurance, disability insurance, stock option plans, deferred
compensation plans, management retention plans, retirement plans or similar
plans or benefits being provided by the Bank to the officer as of the date of
the change in control are reduced in their level, scope or coverage, or any such
insurance, plans or benefits are eliminated, unless such reduction or
elimination applies proportionately to all salaried employees of the Bank who
participated in such benefits prior to the change in control; or (iv) the
officer is transferred to a location outside of Monroe, North Carolina without
the officer's express written consent. A change in control of the Bank will
occur if (i) any individual or entity, directly or indirectly, acquires
beneficial ownership of voting securities or acquires irrevocable proxies or any
combination of voting securities and irrevocable proxies, representing 25% or
more of any class of voting securities of the Bank, or acquires control in any
manner of the election of a majority of the directors of the Bank; (ii) the Bank
is consolidated or merged with or into another corporation, association or
entity where the Bank is not the surviving corporation; or (iii) all or
substantially all of the assets of the Bank are sold or otherwise transferred to
or are acquired by any other corporation, association or other person, entity or
group.
35
<PAGE>
Following a termination of Mr. Helton's employment other than a termination by
us without cause and other than upon Mr. Helton's death or disability or a
termination by Mr. Helton for other than good reason, Mr. Helton will be
prohibited from engaging in a business in competition with us or soliciting our
customers for a period of two years after the date of termination.
Summary Compensation Table
The following table shows the cash and certain other compensation paid to or
received or deferred by Randy P. Helton for services rendered in all capacities
during the fiscal years 1999 and 1998. No other executive officer of Bancshares
or the Bank received compensation for 1999 which exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
Awards Payouts
------ -------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Options (#) Compensation ($)(1)
--------------------------- ---- ---------- ----------- -------------------
<S> <C> <C> <C> <C>
Randy P. Helton, President and 1999 $116,000 65,684 2,146
Chief Executive Officer 1998 $110,000 -- --
</TABLE>
(1) Includes life insurance premiums and Bank contribution to 401(k) Plan.
Stock Options
The shareholders approved the 1999 Incentive Stock Option Plan (the "Incentive
Option Plan") at the 1999 Annual Meeting of Shareholders pursuant to which
options on 149,205 shares of the Bank's Common Stock are available for issuance
to employees of the Bank and of any subsidiary of the Bank. Upon it becoming the
holding company for the Bank, Bancshares adopted the Incentive Option Plan. The
following table contains information with regard to grants of stock options
during 1999 to Randy P. Helton, President and Chief Executive Officer of
Bancshares and the Bank.
Stock Option Grants in 1999
Individual Grants
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Options Granted Exercise or
Options to Employees Base Price Expiration
Name Granted (#)(1) in 1999 Per Share ($) Date
---- -------------- ------- ------------ ----
<S> <C> <C> <C> <C>
Randy P. Helton 65,684 36.19% $9.17 2009
</TABLE>
(1) Stock options granted under the Nonstatutory Option Plan vest upon grant.
Options granted under the Incentive Option Plan vest 20% per year commencing in
April, 2000.
36
<PAGE>
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999 December 31, 1999 (1)
----------------- ---------------------
Shares Acquired Value
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
----- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Randy P. Helton -0- -0- -0- / 65,684 -0- / $210,512
</TABLE>
(1) At December 31, 1999 the Common Stock was traded at $12.375.
401(K) Savings Plan
In 1999, the Bank adopted a tax-qualified savings plan (the "Savings Plan")
which covers all current full-time employees and any new full-time employees who
have been employed for twelve months and who have attained the age of 21. Under
the Savings Plan, a participating employee may contribute up to 20% of his or
her base salary (not to exceed $10,000) on a tax-deferred basis through salary
reduction as permitted under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"). A participant's contributions and the Bank's
matching and profit sharing contributions under the Savings Plan will be held in
trust accounts for the benefit of participants. A participant is at all times
100% vested with respect to his or her own contributions and the Bank's safe
harbor contributions under the Savings Plan, and becomes 100% vested in
discretionary contributions after completing six years of service with the Bank.
The value of a participant's accounts under the Savings Plan becomes payable to
him or her in full upon retirement, total or permanent disability or termination
of employment for any other reason, or becomes payable to a designated
beneficiary upon a participant's death. The Savings Plan also will contain
provisions for withdrawals in the event of certain hardships. A participant's
contributions, safe harbor and discretionary contributions of the Bank, and any
income accrued on such contributions, are not subject to federal or state taxes
until such time as they are withdrawn by the participant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of business with certain of its current directors, nominees for
director, executive officers and their associates. All loans included in such
transactions were made on substantially the same terms, including interest
rates, repayment terms and collateral, as those prevailing at the time such
loans were made for comparable transactions with other persons, and do not
involve more than the normal risk of collectibility or present other unfavorable
features.
L. Carlton Tyson's realty company, TyPar Realty, Inc., leased space to us for
our temporary modular unit and we paid the realty company $3,300 per month in
rental fees from June 1998 to March 1999. Mr. Tyson's construction company, L.C.
Tyson Construction, Inc., performed $51,300 in upfitting and site work for the
modular unit. TyPar Realty, Inc. constructed our headquarters building in
Monroe, North Carolina on property owned by Mr. Tyson. The first
37
<PAGE>
floor is leased to us for 30 years (11,250 square feet) at a rental of $19,237
per month, subject to 7% increases every five years. We obtained an independent
third party appraisal of the lease and believe its terms are fair and reasonable
to us.
We have entered into a referral agreement with Whitley Mortgage Associates, Inc.
("Whitley Mortgage"), an affiliate of David D. Whitley. Under such arrangement,
we will refer to Whitley Mortgage any loan requests for residential construction
or permanent lending that we are not able to provide to our customers because of
the particular nature of the loan request. We will perform all of the loan
origination services, credit and background check and other administrative
services and, if the loan is made by or through Whitley Mortgage, we will obtain
a fee. By entering into this arrangement, we expand the scope of our products
and services without incurring additional overhead, we satisfy customers with
particular financial needs and add to our fee income.
Click Tactics, Inc., a related interest of Kenneth W. Long, a director of
Bancshares and the Bank, is an Internet direct marketing company in its startup
phase. Small business customers can access the direct marketing fulfillment
capabilities of Click Tactics, Inc. through numerous web sites. The Bank has
agreed to participate in the Click Tactics, Inc. network. There is no charge to
the Bank for this participation and the Bank will earn fees for any customers
who access Click Tactics, Inc. through the Bank's web site. This service is in
its formative stages and the level of fee income that may be generated for the
Bank is unknown at this time.
All such transactions have been negotiated on an arms-length basis at terms no
more favorable than would otherwise be obtained from an independent third party.
Beneficial Ownership of Voting Securities
As of December 31, 1999, no shareholder owned more than 5% of Bancshares' Common
Stock.
As of December 31, 1999, the beneficial ownership of Bancshares' Common Stock by
directors of Bancshares' and the Bank individually, and by directors and
executive officers of Bancshares and the Bank as a group, was as follows:
38
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name of Beneficial Owner Ownership (1)(2) Class (3)
------------------------ ---------------- ---------
<S> <C> <C>
Thomas J. Hall 24,790 1.51
Larry S. Helms 24,919 1.52
Randy P. Helton 22,646 1.38
Kenneth W. Long 56,138 3.42
Zebulon Morris, Jr. 24,790 1.51
L. Steven Phillips 33,716 2.05
L. Carlton Tyson 27,022 1.65
David D. Whitley 20,292 1.24
H. L. Williams, Jr. 24,790 1.51
Gregory N. Wylie 29,750 1.81
All Directors and
Executive Officers
as a group (15 persons) 300,433 18.30
</TABLE>
(1) Except as otherwise noted, to the best knowledge of Bancshares' management,
the above individuals and group exercise sole voting and investment power with
respect to all shares shown as beneficially owned other than the following
shares as to which such powers are shared: Mr. Helton - 720 shares, Mr. Long --
240 shares, Mr. Tyson -- 11,040 shares, and Mr. Whitley-- 4,327 shares.
(2) Included in the beneficial ownership tabulations are the following options
to purchase shares of Common Stock of Bancshares: Mr. Hall -- 12,790 shares, Mr.
Helms -- 12,919 shares, Mr. Helton -- 11,684 shares, Mr. Long -- 29,106 shares,
Mr. Morris -- 12,790 shares, Mr. Phillips --17,396 shares, Mr. Tyson -- 13,942
shares, Mr. Whitley -- 10,470 shares, Mr. Williams --12,790 shares and
Mr. Wylie --15,350 shares.
(3) The calculation of the percentage of class beneficially owned by each
individual and the group is based on the sum of (i) a total of 1,492,062
outstanding shares of Common Stock outstanding as of June 30, 2000, and (ii)
149,237 options exercisable within 60 days of December 31, 1999.
SUPERVISION AND REGULATION
Regulation of the Bank
The Bank is extensively regulated under both federal and state law. Generally,
these laws and regulations are intended to protect depositors and borrowers, not
shareholders. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable law or
regulation may have a material effect on the business of Bancshares and the
Bank.
39
<PAGE>
State Law. The Bank is subject to extensive supervision and regulation by the
---------
North Carolina Commissioner of Banks (the "Commissioner"). The Commissioner
oversees state laws that set specific requirements for bank capital and regulate
deposits in, and loans and investments by, banks, including the amounts, types,
and in some cases, rates. The Commissioner supervises and performs periodic
examinations of North Carolina-chartered banks to assure compliance with state
banking statutes and regulations, and the Bank is required to make regular
reports to the Commissioner describing in detail the resources, assets,
liabilities and financial condition of the Bank. Among other things, the
Commissioner regulates mergers and consolidations of state-chartered banks, the
payment of dividends, loans to officers and directors, record keeping, types and
amounts of loans and investments, and the establishment of branches.
Deposit Insurance. As a member institution of the FDIC, the Bank's deposits are
-----------------
insured up to a maximum of $100,000 per depositor through the Bank Insurance
Fund (the "BIF"), administered by the FDIC, and each member institution is
required to pay semi-annual deposit insurance premium assessments to the FDIC.
The BIF assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. Banks with no premium are subject to an annual statutory
minimum assessment.
Capital Requirements. The federal banking regulators have adopted certain risk-
--------------------
based capital guidelines to assist in the assessment of the capital adequacy of
a banking organization's operations for both transactions reported on the
balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1," or core capital, includes common equity,
qualifying noncumulative perpetual preferred stock and minority interests in
equity accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions. "Tier 2," or supplementary capital,
includes among other things, limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations and less
required deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant. As of December 31, 1999, the Bank was
classified as "well-capitalized" with Tier 1 and Total Risk-Based Capital of
18.25% and 19.53% respectively.
The federal banking agencies have adopted regulations specifying that they will
include, in their evaluations of a bank's capital adequacy, an assessment of the
bank's interest rate risk ("IRR")
40
<PAGE>
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization's IRR management include a measurement of board of director
and senior management oversight, and a determination of whether a banking
organization's procedures for comprehensive risk management are appropriate for
the circumstances of the specific banking organization.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the shareholders.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December
-------------------------------------------------------------
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the FDIA and made significant revisions to several other federal
banking statutes. FDICIA provides for, among other things:
- publicly available annual financial condition and management reports
for certain financial institutions, including audits by independent
accountants,
- the establishment of uniform accounting standards by federal banking
agencies,
- the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with
greater scrutiny and restrictions placed on depository institutions
with lower levels of capital,
- additional grounds for the appointment of a conservator or receiver,
and
- restrictions or prohibitions on accepting brokered deposits, except
for institutions which significantly exceed minimum capital
requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
41
<PAGE>
FDICIA provides the federal banking agencies with significantly expanded powers
to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Miscellaneous. The dividends that may be paid by the Bank are subject to legal
-------------
limitations. In accordance with North Carolina banking law, dividends may not be
paid unless the Bank's capital surplus is at least 50% of its paid-in capital.
Shareholders of banks may be compelled by the Commissioner pursuant to North
Carolina law to invest additional capital in the event their bank's capital
shall have become impaired by losses or otherwise. Failure to pay such an
assessment could result in a forced sale of a shareholder's bank stock.
The earnings of the Bank will be affected significantly by the policies of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
which is responsible for regulating the United States money supply in order to
mitigate recessionary and inflationary pressures. Among the techniques used to
implement these objectives are open market transactions in United States
government securities, changes in the rate paid by banks on bank borrowings, and
changes in reserve requirements against bank deposits. These techniques are used
in varying combinations to influence overall growth and distribution of bank
loans, investments, and deposits, and their use may also affect interest rates
charged on loans or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and money markets, as well as the effect of actions by monetary and
fiscal authorities, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of the
Bank.
The Bank cannot predict what legislation might be enacted or what regulations
might be adopted, or if enacted or adopted, the effect thereof on the Bank's
operations.
Regulation of Bancshares
Federal Regulation. Bancshares is subject to examination, regulation and
------------------
periodic reporting under the Bank Holding Company Act (the "BHC Act"), as
administered by the Federal Reserve Board. The Federal Reserve Board has adopted
capital adequacy guidelines for bank holding companies on a consolidated basis.
Bancshares is required to obtain the prior approval of the Federal Reserve Board
to acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior Federal Reserve
42
<PAGE>
Board approval is required for Bancshares to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than five percent of any class of voting shares
of such bank or bank holding company.
The merger or consolidation of Bancshares with another bank, or the acquisition
by Bancshares of assets of another bank, or the assumption of liability by
Bancshares to pay any deposits in another bank, will require the prior written
approval of the primary federal bank regulatory agency of the acquiring or
surviving bank under the federal Bank Merger Act. The decision is based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHC Act. In addition, in certain such cases an application to, and the
prior approval of, the Federal Reserve Board under the BHC Act and/or the North
Carolina Banking Commission may be required.
Bancshares is required to give the Federal Reserve Board prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of Bancshares' consolidated net worth. The
Federal Reserve Board may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, Federal Reserve Board order or directive, or
any condition imposed by, or written agreement with, the Federal Reserve Board.
Such notice and approval is not required for a bank holding company that would
be treated as "well capitalized" under applicable regulations of the Federal
Reserve Board, that has received a composite "1" or "2" rating at its most
recent bank holding company inspection by the Federal Reserve Board, and that is
not the subject of any unresolved supervisory issues.
The status of Bancshares as a registered bank holding company under the BHC Act
does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging in, or
acquiring five percent or more of any class of voting securities of any company
engaged in, non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve
Board has determined by regulation to be so closely related to banking as to be
a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to
promote community welfare; and
- acquiring a savings and loan association.
In evaluating a written notice of such an acquisition, the Federal Reserve Board
will consider various factors, including among others the financial and
managerial resources of the notifying
43
<PAGE>
bank holding company and the relative public benefits and adverse effects which
may be expected to result from the performance of the activity by an affiliate
of such company. The Federal Reserve Board may apply different standards to
activities proposed to be commenced de novo and activities commenced by
-------
acquisition, in whole or in part, of a going concern. The required notice period
may be extended by the Federal Reserve Board under certain circumstances,
including a notice for acquisition of a company engaged in activities not
previously approved by regulation of the Federal Reserve Board. If such a
proposed acquisition is not disapproved or subjected to conditions by the
Federal Reserve Board within the applicable notice period, it is deemed approved
by the Federal Reserve Board.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines
--------------------
in its examination and regulation of bank holding companies. If capital falls
below minimum guidelines, a bank holding company may, among other things, be
denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies:
- a leverage capital requirement expressed as a percentage of total
assets;
- a risk-based requirement expressed as a percentage of total risk-
weighted assets; and
- a Tier 1 leverage requirement expressed as a percentage of total
assets.
The leverage capital requirement consists of a minimum ratio of total capital to
total assets of 6%, with an expressed expectation that banking organizations
generally should operate above such minimum level. The risk-based requirement
consists of a minimum ratio of total capital to total risk-weighted assets of
8%, of which at least one-half must be Tier 1 capital (which consists
principally of shareholders' equity). The Tier 1 leverage requirement consists
of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-
rated companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
The Federal Reserve Board's regulations provide that the foregoing capital
requirements will generally be applied on a bank-only (rather than a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets. On a pro forma basis, assuming the
issuance and sale of the ______ shares of Common Stock offered in this
Prospectus at $___ per share, our leverage capital ratio, risk-based capital
ratio and Tier 1 leverage ratio immediately after the Offering, in each case as
calculated on a consolidated basis and a bank-
44
<PAGE>
only basis under the Federal Reserve Board's capital guidelines, would be ____%,
____% and ____%, respectively, significantly exceeding the minimum requirements.
FDICIA requires the federal bank regulatory agencies biennially to review risk-
based capital standards to ensure that they adequately address interest rate
risk, concentration of credit risk and risks from non-traditional activities
and, since adoption of the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act"), to do so taking into account the
size and activities of depository institutions and the avoidance of undue
reporting burdens. In 1995, the agencies adopted regulations requiring as part
of the assessment of an institution's capital adequacy the consideration of (a)
identified concentrations of credit risks, (b) the exposure of the institution
to a decline in the value of its capital due to changes in interest rates and
(c) the application of revised conversion factors and netting rules on the
institution's potential future exposure from derivative transactions.
In addition, the agencies in September 1996 adopted amendments to their
respective risk-based capital standards to require banks and bank holding
companies having significant exposure to market risk arising from, among other
things, trading of debt instruments, (1) to measure that risk using an internal
value-at-risk model conforming to the parameters established in the agencies'
standards and (2) to maintain a commensurate amount of additional capital to
reflect such risk. The new rules were adopted effective January 1, 1997, with
compliance mandatory from and after January 1, 1998.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), depository institutions are liable to the FDIC for losses suffered
or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law is applicable to the extent that
Bancshares maintains as a separate subsidiary a depository institution in
addition to the Bank.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions imposed by the Federal Reserve Act on any extension
of credit to, or purchase of assets from, or letter of credit on behalf of, the
bank holding company or its subsidiaries, and on the investment in or acceptance
of stocks or securities of such holding company or its subsidiaries as
collateral for loans. In addition, provisions of the Federal Reserve Act and
Federal Reserve Board regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank,
Bancshares, any subsidiary of Bancshares and related interests of such persons.
Moreover, subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements (with the holding company or any of its
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
Any loans by a bank holding company to a subsidiary bank are subordinate in
right of payment to deposits and to certain other indebtedness of the subsidiary
bank. In the event of a bank holding company's bankruptcy, any commitment by the
bank holding company to a federal bank regulatory agency to maintain the capital
of a subsidiary bank would be assumed by the
45
<PAGE>
bankruptcy trustee and entitled to a priority of payment. This priority would
also apply to guarantees of capital plans under FDICIA.
Branching
Under the Riegle Act, the Federal Reserve Board may approve bank holding company
acquisitions of banks in other states, subject to certain aging and deposit
concentration limits. As of June 1, 1997, banks in one state may merge with
banks in another state, unless the other state has chosen not to implement this
section of the Riegle Act. These mergers are also subject to similar aging and
deposit concentration limits.
North Carolina "opted-in" to the provisions of the Riegle Act. Since July 1,
1995, an out-of-state bank that did not already maintain a branch in North
Carolina was permitted to establish and maintain a de novo branch in North
Carolina, or acquire a branch in North Carolina, if the laws of the home state
of the out-of-state bank permit North Carolina banks to engage in the same
activities in that state under substantially the same terms as permitted by
North Carolina. Also, North Carolina banks may merge with out-of-state banks,
and an out-of-state bank resulting from such an interstate merger transaction
may maintain and operate the branches in North Carolina of a merged North
Carolina bank, if the laws of the home state of the out-of-state bank involved
in the interstate merger transaction permit interstate merger.
Recent Legislative Developments
Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999, which was signed
into law on November 12, 1999, will allow a bank holding company to qualify as a
"financial holding company" and, as a result, be permitted to engage in a
broader range of activities that are "financial in nature" and in activities
that are determined to be incidental or complementary to activities that are
financial in nature. The Gramm-Leach-Bliley Act amends the BHC Act to include a
list of activities that are financial in nature, and the list includes
activities such as underwriting, dealing in and making a market in securities,
insurance underwriting and agency activities and merchant banking. The Federal
Reserve Board is authorized to determine other activities that are financial in
nature or incidental or complementary to such activities. The Gramm-Leach-Bliley
Act also authorizes banks to engage through financial subsidiaries in certain of
the activities permitted for financial holding companies.
On September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (the "Growth Act"), was enacted which contained a comprehensive
approach to recapitalize the FDIC's Savings Association Insurance Fund (the
"SAIF") and to assure payment of the Financing Corporation (the "FICO")
obligations. All of the Bank's deposits are insured by the FDIC's BIF. Under the
Growth Act, banks with deposits that are insured under the BIF are required to
pay a portion of the interest due on bonds that were issued by FICO to help
shore up the ailing Federal Savings and Loan Insurance Corporation in 1987. The
Growth Act stipulates that the BIF assessment rate to contribute toward the FICO
obligations must be equal to one-fifth the SAIF assessment rate through year-end
2000, or until the insurance funds are merged, whichever occurs first. The
amount of FICO debt service to be paid by all BIF-insured institutions is
approximately $0.0126 per $100 of BIF-insured deposits for each year from 1997
46
<PAGE>
through 2000 when the obligation of BIF-insured institutions increases to
approximately $0.0240 per $100 of BIF-insured deposits per year through the year
2019, subject in all cases to adjustments by the FDIC on a quarterly basis. The
Growth Act also contained provisions protecting banks from liability for
environmental clean-up costs; prohibiting credit unions sponsored by Farm Credit
System banks; easing application requirements for most bank holding companies
when they acquire a thrift or a permissible non-bank operation; easing Fair
Credit Reporting Act restrictions between bank holding company affiliates; and
reducing the regulatory burden under the Real Estate Settlement Procedures Act,
the Truth-in-Savings Act, the Truth-in-Lending Act and the Home Savings Mortgage
Disclosure Act.
DESCRIPTION OF CAPITAL STOCK
The following is a summary of the material provisions of Bancshares' Articles of
Incorporation and Bylaws.
General
The Articles of Incorporation of Bancshares authorize the issuance of 10,000,000
shares of capital stock, consisting of 9,000,000 shares of Common Stock, par
value $1.00 per share, and 1,000,000 shares of preferred stock at no par value.
Upon completion of the Offering, assuming the maximum number of shares are sold,
there will be 2,492,062 shares of Common Stock outstanding and no shares of
preferred stock issued and outstanding. Up to an additional 298,412 shares of
Common Stock will be issuable upon exercise of outstanding options granted under
the Incentive Stock Option Plan and Nonstatutory Stock Option Plan. See
"MANAGEMENT - Director Compensation - 1999 Nonstatutory Stock Option Plan for
Directors" and "MANAGEMENT - Stock Options".
Common Stock
Dividend Rights. As a North Carolina corporation, Bancshares is not be directly
---------------
subject to the restrictions on the payment of dividends applicable to the Bank.
Holders of shares of Bancshares' Common Stock are entitled to receive such cash
dividends as the Board of Directors of Bancshares may declare out of funds
legally available therefor. However, the payment of dividends by Bancshares will
be subject to the restrictions of North Carolina law applicable to the
declaration of dividends by a business corporation. Under such provisions, cash
dividends may not be paid if a corporation will not be able to pay its debts as
they become due in the usual course of business after making such cash dividend
distribution or the corporation's total assets would be less than the sum of its
total liabilities plus the amount that would be needed to satisfy certain
liquidation preferential rights. The ability of Bancshares to pay dividends to
the holders of shares of Bancshares' Common Stock is, at least at the present
time, completely dependent upon the amount of dividends the Bank pays to
Bancshares.
Voting Rights. Each share of Bancshares' Common Stock entitles the holder
-------------
thereof to one vote on all matters upon which shareholders have the right to
vote. In addition, if the Board of Directors of Bancshares consists of nine or
more directors, its members will be classified so that
47
<PAGE>
approximately one-third of the directors will be elected each year. Shareholders
of Bancshares are not entitled to cumulate their votes for the election of
directors.
Liquidation Rights. In the event of any liquidation, dissolution or winding up
------------------
of Bancshares, the holders of shares of Bancshares' Common Stock are entitled to
receive, after payment of all debts and liabilities of Bancshares, all remaining
assets of Bancshares available for distribution in cash or in kind. In the event
of any liquidation, dissolution or winding up of the Bank, Bancshares, as the
holder of all shares of Bank Common Stock, would be entitled to receive payment
of all debts and liabilities of the Bank (including all deposits and accrued
interest thereon) and all remaining assets of the Bank available for
distribution in cash or in kind.
Preemptive Rights; Redemption. Holders of shares of Bancshares' Common Stock are
-----------------------------
not entitled to preemptive rights with respect to any shares that may be issued.
Bancshares' Common Stock is not subject to call or redemption.
Preferred Stock
The authorized preferred stock is available for issuance from time to time at
the discretion of the Board of Directors without shareholder approval. The Board
of Directors has the authority to prescribe for each series of preferred stock
it establishes the number of shares in that series, the number of votes (if any)
to which the shares in that series are entitled, the consideration for the
shares in that series, and the designations, powers, preferences and other
rights, qualifications, limitations or restrictions of the shares in that
series. Depending upon the rights prescribed for a series of preferred stock,
the issuance of preferred stock could have an adverse effect on the voting power
of the holders of Common Stock and could adversely affect holders of Common
Stock by delaying or preventing a change in control, making removal of our
present management more difficult or imposing restrictions upon the payment of
dividends and other distributions to the holders of Common Stock.
Authorized But Unissued Shares
North Carolina law does not require shareholder approval for any issuance of
authorized shares. Authorized but unissued shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of authorized but unissued shares may be to enable the board of
directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of us by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management and possibly deprive the
shareholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices.
Certain Articles and Bylaw Provisions Having Potential Anti-Takeover Effects
General. The following is a summary of the material provisions of Bancshares'
-------
Articles of incorporation and Bylaws which address matters of corporate
governance and the rights of shareholders. Certain of these provisions may delay
or prevent takeover attempts not first approved by the Board of Directors of
Bancshares (including takeovers which certain
48
<PAGE>
shareholders may deem to be in their best interests). These provisions also
could delay or frustrate the removal of incumbent directors or the assumption of
control by shareholders. All references to the Articles of Incorporation and
Bylaws are to the Bancshares' Articles of Incorporation and Bylaws in effect as
of the date of this Prospectus.
Classification of the Board of Directors. The Bylaws provide that if the number
----------------------------------------
of directors is nine or more (the number of directors is currently 7), the Board
of Directors of Bancshares shall be divided into three classes, Class I, Class
II and Class III, which shall be as nearly equal in number as possible. If so
classified, each director shall serve for a term ending on the date of the third
annual meeting of shareholders following the annual meeting at which the
director was elected (except for certain initial directors whose terms may be
shorter than three years as necessary to effect the classification process). A
director elected to fill a vacancy shall serve only until the next meeting of
shareholders at which directors are elected. If the Board of Directors of
Bancshares becomes classified, approximately one-third of the members of the
Board of Directors of Bancshares will be elected each year, and two annual
meetings will be required for Bancshares' shareholders to change a majority of
the members constituting the Board of Directors of Bancshares.
Removal of Directors; Filling Vacancies. Bancshares' Articles of Incorporation
---------------------------------------
provide that shareholders may remove one or more of the directors with cause
which includes (i) criminal prosecution and conviction during the course of a
director's service as a director of Bancshares of an act of fraud embezzlement,
theft, or personal dishonesty, (ii) the prosecution and conviction of any
criminal offense involving dishonesty or breach of trust, or (iii) the
occurrence of any event resulting in a director being excluded from coverage, or
having coverage limited as to the director when compared to other covered
directors under any of the fidelity bonds or insurance policies covering its
directors, officers or employees. Vacancies occurring in the Board of Directors
of Bancshares may be filled by the shareholders or a majority of the remaining
directors, even though less than a quorum, or by the sole remaining director.
Amendment of Bylaws. Subject to certain restrictions described below, either a
-------------------
majority of the Board of Directors or the shareholders of Bancshares may amend
or repeal the Bylaws. A bylaw adopted, amended or repealed by the shareholders
may not be readopted, amended or repealed by the Board of Directors of
Bancshares. Generally, the shareholders of Bancshares may adopt, amend, or
repeal the Bylaws in accordance with the North Carolina Business Corporations
Act (the "NCBCA").
The Board of Directors is permitted by Bancshares' Articles of Incorporation to
consider other constituents besides the shareholders if faced with a proposal
that could cause a change in control. Such constituents are employees,
depositors, customers, creditors and the communities in which Bancshares and its
subsidiaries conduct business. Further, the Board is permitted to evaluate the
competence, experience and integrity of any proposed acquiror as well as the
prospects for success of such a takeover proposal from a regulatory perspective.
Special Meetings of Shareholders. Bancshares' Bylaws provide that special
--------------------------------
meetings of shareholders may be called only by the President or Board of
Directors of Bancshares.
49
<PAGE>
Certain Provisions of North Carolina Law
Bancshares is subject to the North Carolina Shareholder Protection Act (the
"Shareholder Protection Act") and the North Carolina Control Share Acquisition
Act (the "Control Share Act"), each of which, if applicable, would hinder the
ability of a third party to acquire control of either company. The Shareholder
Protection Act generally requires that, unless certain "fair price" and other
conditions are met, the affirmative vote of the holders of 95% of the voting
shares of a corporation is necessary to adopt or authorize a business
combination with any other entity, if that entity is the beneficial owner,
directly or indirectly, of more than 20% of the voting shares of the
corporation. The Control Share Act provides that any person or party who
acquires "control shares" (defined as a number of shares which, when added to
other shares held, gives the holder voting power in the election of directors
equal to 20%, 33 1/3% or a majority of all voting power) may only vote those
shares if the remaining shareholders of the corporation, by resolution, permit
those shares to be voted. If the shareholders of the corporation permit the
"control shares" to be accorded voting rights and the holder of the "control
shares" has a majority of all voting power for the election of directors, the
other shareholders of the corporation have the right to the redemption of their
shares at the fair value of the shares as of the date prior to the date on which
the vote was taken which gave voting rights to the "control shares." The
provisions of the Shareholder Protection Act and the Control Share Act may have
the effect of discouraging a change of control by allowing minority shareholders
to prevent a transaction favored by a majority of the shareholders. The primary
purpose of these provisions is to encourage negotiations with the board of
directors of a company by groups or corporations interested in acquiring control
of the company.
The acquisition of more than ten percent (10%) of the outstanding Bancshares'
Common Stock may, in certain circumstances, be subject to the provisions of the
Change in Bank Control Act of 1978 (the "Change in Bank Control Act"). The FDIC
has also adopted a regulation pursuant to the Change in Bank Control Act which
generally requires persons who at any time intend to acquire control of an FDIC-
insured state-chartered non-member bank, either directly or indirectly through
an acquisition of control of its holding company, to provide 60 days prior
written notice and certain financial and other information to the FDIC. Control
for the purpose of this Act exists in situations in which the acquiring party
has voting control of at least twenty-five percent (25%) of any class of voting
stock or the power to direct the management or policies of the bank or the
holding company. However, under FDIC regulations, control is presumed to exist
where the acquiring party has voting control of at least ten percent (10%) of
any class of voting securities if (a) the bank or holding company has a class of
voting securities which is registered under Section 12 of the 1934 Act, or (b)
the acquiring party would be the largest holder of a class of voting shares of
the bank or the holding company. The statute and underlying regulations
authorize the FDIC to disapprove a proposed acquisition on certain specified
grounds.
Prior approval of the Federal Reserve Board would be required for any
acquisition of control of the Bank or Bancshares by any bank holding company
under the BHC Act. Control for purposes of the BHC Act would be based on, among
other things, a twenty-five percent (25%) voting stock test or on the ability of
the holding company otherwise to control the election of a majority of the Board
of Directors of Bancshares. As part of such acquisition, the acquiring company
50
<PAGE>
(unless already so registered) would be required to register as a bank holding
company under the BHC Act.
The 1934 Act requires that a purchaser of any class of a corporation's
securities registered under the Exchange Act notify the SEC and such corporation
within ten days after its purchases exceed five percent of the outstanding
shares of that class of securities. This notice must disclose the background and
identity of the purchaser, the source and amount of funds used for the purchase,
the number of shares owned and, if the purpose of the transaction is to acquire
control of the corporation, any plans to alter materially the corporation's
business or corporate structure. In addition, any tender offer to acquire a
corporation's securities is subject to the limitations and disclosure
requirements of the 1934 Act.
Indemnification of Directors and Officers
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to our directors, officers and controlling persons under the
provisions discussed above or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the 1934 Act and is, therefore, unenforceable.
Registrar and Transfer Agent
The registrar and transfer agent for our Common Stock will be Registrar and
Transfer Company, Cranford, New Jersey.
Shares Eligible for Future Sale
Upon completion of the Offering, we expect to have 2,492,062 shares of Common
Stock outstanding assuming the maximum number of shares are sold, all of which
either will have been registered with the SEC under the 1933 Act or will have
been outstanding for a sufficient period of time so that they will be eligible
for resale without registration under the 1933 Act unless they were acquired by
our directors, executive officers or other affiliates (collectively,
"affiliates"). Our affiliates generally will be able to sell shares of the
Common Stock only in accordance with the limitations of Rule 144 under the 1933
Act.
In general, under Rule 144 as currently in effect, an affiliate (as defined in
Rule 144) may sell shares of Common Stock within any three-month period in an
amount limited to the greater of 1% of our outstanding shares of Common Stock or
the average weekly trading volume in our Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
As of June 30, 2000, we had outstanding options under our stock option plans to
purchase an aggregate of 298,412 shares of our Common Stock at an exercise price
equal to or less than the public Offering price of the Common Stock, as
specified on the cover page of this Prospectus.
51
<PAGE>
Prior to the Offering, the Common Stock has been trading on the Nasdaq SmallCap
Market, and we cannot predict the effect, if any, that sales of shares or the
availability of shares for sale will have on the prevailing market price of the
Common Stock after completion of the Offering. Nevertheless, sales of
substantial amounts of Common Stock in the public market could have an adverse
effect on prevailing market prices.
METHOD OF SUBSCRIPTION/PLAN OF DISTRIBUTION
Bancshares has engaged Wachovia Securities to sell a portion of the Common Stock
being offered through this Offering on a best efforts basis. The management of
Bancshares will conduct the Offering during the first four week period primarily
in the areas in which our banking offices are located. During this four week
period, purchasers may use the Subscription Offer Form attached to this
Prospectus. Thereafter, Wachovia Securities will commence its marketing efforts
primarily through the offices of its retail brokerage division, IJL Wachovia.
Wachovia Securities can, with our consent, engage other agents to sell our
Common Stock. Wachovia Securities will receive a commission of 5% of the
Offering price for all shares sold by it plus a financial advisory fee of
$50,000 if we successfully reach our 500,000 share minimum with Wachovia
Securities' assistance. If any other agents sell any Common Stock through an
engagement with Wachovia Securities, they will receive a portion of that
commission.
LEGAL OPINIONS
Gaeta & Glesener, P.A., Raleigh, North Carolina, will pass upon the legality of
the securities offered by this Prospectus for us.
EXPERTS
The audited financial statements of the Bank as of December 31, 1999 and 1998,
included in this Prospectus, have been audited by Dixon Odom PLLC, independent
public accountants, as indicated in their report with respect thereto and
included herein in reliance upon the authority of said firm as experts in giving
said report.
52
<PAGE>
AMERICAN COMMUNITY BANCSHARES, INC.
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
AMERICAN COMMUNITY BANK
Independent Auditors' Report....................................................... F-2
Balance Sheets as of December 31, 1999 and 1998.................................... F-3
Statements of Operations for the years ended December 31, 1999 and 1998............ F-4
Statements of Shareholders' Equity for the years ended December 31, 1999 and 1998.. F-5
Statements of Cash Flows for the years ended December 31, 1999 and 1998............ F-6
Notes to Financial Statements...................................................... F-7
AMERICAN COMMUNITY BANCSHARES, INC.
Consolidated Balance Sheets at June 30, 2000 and 1999 (Unaudited) F-22
Consolidated Statements of Operations for the six months ended June 30, 2000
and 1999 (Unaudited)............................................................. F-23
Consolidated Statements of Shareholders' Equity for the six months
ended June 30, 2000 and 1999 (Unaudited)......................................... F-24
Consolidated Statements of Cash Flows for the six months ended June 30, 2000
and 1999 (Unaudited)............................................................. F-25
Notes to Consolidated Financial Statements (Unaudited)............................. F-26
</TABLE>
F-1
<PAGE>
[LETTERHEAD OF DIXON ODOM PLLC]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors
American Community Bank
Monroe, North Carolina
We have audited the accompanying balance sheets of American Community Bank as of
December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1999 and the
period from November 16, 1998 (date of opening) through December 31, 1998. These
financial statements are the responsibility of the Bank'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 audits 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 American Community Bank at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the year ended December 31, 1999 and the period from November 16, 1998 (date
of opening) through December 31, 1998 in conformity with generally accepted
accounting principles.
Sanford, North Carolina
February 17, 2000
F-2
<PAGE>
AMERICAN COMMUNITY BANK
BALANCE SHEETS
December 31, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 1,809,053 $ 302,999
Interest-earning deposits with banks 8,468,104 14,683,825
Loans (Note C) 59,306,451 4,779,844
Allowance for loan losses (Note C) (813,000) (71,000)
----------- -----------
NET LOANS 58,493,451 4,708,844
Loans held for sale 1,072,261 -
Accrued interest receivable 299,000 63,975
Bank premises and equipment (Note D) 2,844,358 474,582
Federal Home Loan Bank stock, at cost 250,000 37,400
Other assets 357,880 81,213
----------- -----------
TOTAL ASSETS $73,594,107 $20,352,838
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $ 7,308,760 $ 1,060,842
Savings 888,949 93,008
Money market and NOW 11,018,250 1,879,968
Time (Note E) 35,771,251 4,644,091
----------- -----------
TOTAL DEPOSITS 54,987,210 7,677,909
Advances from Federal Home Loan Bank (Note F) 5,000,000 -
Capital lease obligation (Note G) 1,700,000 -
Accrued expenses and other liabilities 354,377 222,300
----------- -----------
TOTAL LIABILITIES 62,041,587 7,900,209
----------- -----------
Shareholders' Equity (Notes J and L)
Common stock, $5 par value, 10,000,000
shares authorized; 1,492,062 and
1,243,385 shares issued and outstanding
at December 31, 1999 and 1998, respectively 7,460,315 6,216,925
Additional paid-in capital 5,121,344 6,364,734
Accumulated deficit (1,029,139) (129,030)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 11,552,520 12,452,629
----------- -----------
Commitments (Notes G, H and M)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $73,594,107 $20,352,838
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AMERICAN COMMUNITY BANK
STATEMENTS OF OPERATIONS
Year Ended December 31, 1999 and the Period from November 16, 1998 (Date of
Opening) through December 31, 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans $ 3,062,029 $ 43,511
Investments 28,690 -
Interest-earning deposits with banks 366,128 93,590
----------- -----------
TOTAL INTEREST INCOME 3,456,847 137,101
----------- -----------
INTEREST EXPENSE
Money market, NOW and savings deposits 237,536 4,527
Time deposits 1,160,029 17,718
Borrowings 26,135 -
----------- -----------
TOTAL INTEREST EXPENSE 1,423,700 22,245
----------- -----------
NET INTEREST INCOME 2,033,147 114,856
PROVISION FOR LOAN LOSSES (Note C) 742,000 71,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,291,147 43,856
----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts 148,964 1,255
Mortgage operations 340,427 -
Other 3,617 20
----------- -----------
TOTAL NON-INTEREST INCOME 493,008 1,275
----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,287,396 74,720
Occupancy and equipment 513,211 44,372
Other (Note K) 883,657 55,069
----------- -----------
TOTAL NON-INTEREST EXPENSE 2,684,264 174,161
----------- -----------
LOSS BEFORE INCOME TAXES (900,109) (129,030)
INCOME TAXES (Note I) - -
----------- -----------
NET LOSS $ (900,109) $ (129,030)
=========== ===========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $(.60) $(.09)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 1,492,062 1,492,062
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
AMERICAN COMMUNITY BANK
STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, 1999 and the Period from November 16, 1998 (Date of
Opening) through December 31, 1998
===============================================================================
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated Total
----------------------
Shares Amount capital deficit equity
---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, November 16, 1998 1,243,385 $6,216,925 $ 6,364,734 $ - $12,581,659
Net loss - - - (129,030) (129,030)
--------- ---------- ----------- ----------- -----------
Balance, December 31, 1998 1,243,385 6,216,925 6,364,734 (129,030) 12,452,629
Net loss - - - (900,109) (900,109)
Common stock issued pursuant to
20% stock dividend 248,677 1,243,390 (1,243,390) - -
--------- ---------- ----------- ----------- -----------
Balance, December 31, 1999 1,492,062 $7,460,315 $ 5,121,344 $(1,029,139) $11,552,520
========= ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN COMMUNITY BANK
STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 and the Period from November 16, 1998 (Date of
Opening) through December 31, 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (900,109) $ (129,030)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 159,375 12,678
Provision for loan losses 742,000 71,000
Increase in loans held for sale (1,072,261) -
Change in assets and liabilities:
Increase in accrued interest receivable (235,025) (63,975)
Increase in other assets (276,667) (27,551)
Increase (decrease) in accrued expenses and other
liabilities 132,077 (188,471)
------------ -----------
NET CASH USED BY OPERATING ACTIVITIES (1,450,610) (325,349)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans from originations and repayments (54,526,607) (4,779,844)
Purchases of bank premises and equipment (829,151) (59,624)
Purchase of Federal Home Loan Bank stock (212,600) (37,400)
------------ -----------
NET CASH USED BY INVESTING ACTIVITIES (55,568,358) (4,876,868)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits 16,182,141 3,033,818
Net increase in time deposits 31,127,160 4,644,091
Advances from Federal Home Loan Bank 5,000,000 -
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,309,301 7,677,909
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,709,667) 2,475,692
CASH AND CASH EQUIVALENTS, BEGINNING 14,986,824 12,511,132
------------ -----------
CASH AND CASH EQUIVALENTS, ENDING $ 10,277,157 $14,986,824
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 1,296,448 $ 4,875
============ ===========
Income taxes paid $ - $ 21,500
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Acquisition of bank premises and equipment through
obligation under capital lease $ 1,700,000 $ -
============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE A - ORGANIZATION AND OPERATIONS
American Community Bank (the "Bank") was incorporated on November 13, 1998 and
began banking operations on November 16, 1998. The Bank is engaged in general
commercial and retail banking in Union County, North Carolina, operating under
the banking laws of North Carolina and the rules and regulations of the Federal
Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The
Bank undergoes periodic examinations by those regulatory authorities.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for losses on loans.
Cash Equivalents
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet captions
"cash and due from banks" and "interest-earning deposits with banks."
Securities Held to Maturity
Bonds and notes for which the Bank has the positive intent and ability to hold
to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
Securities Available for Sale
Available-for-sale securities are reported at fair value and consist of bonds
and notes not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses on available-for-sale securities
are reported as a net amount in other comprehensive income. Gains and losses on
the sale of available-for-sale securities are determined using the specific-
identification method. Declines in the fair value of individual held-to-maturity
and available-for-sale securities below their cost that are other than temporary
would result in write-downs of the individual securities to their fair value.
Such write-downs would be included in earnings as realized losses. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
F-7
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are reported at their outstanding principal adjusted
for any charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans and unamortized premiums or discounts on purchased
loans. Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
Allowance for Loan Losses
The provision for loan losses is based upon management's estimate of the amount
needed to maintain the allowance for loan losses at an adequate level. In making
the evaluation of the adequacy of the allowance for loan losses, management
gives consideration to current and anticipated economic conditions, statutory
examinations of the loan portfolio by regulatory agencies, delinquency
information and management's internal review of the loan portfolio. Loans are
considered impaired when it is probable that all amounts due under the
contractual terms of the loan will not be collected. The measurement of impaired
loans that are collateral dependent is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
or upon the fair value of the collateral if readily determinable. If the
recorded investment in the loan exceeds the measure of fair value, a valuation
allowance is established as a component of the allowance for loan losses. While
management uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if conditions differ substantially
from the assumptions used in making the evaluations. In addition, regulatory
examiners may require the Bank to recognize changes to the allowance for loan
losses based on their judgments about information available to them at the time
of their examination.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Repairs and maintenance costs are charged to operations as incurred,
and additions and improvements to premises and equipment are capitalized. Upon
sale or retirement, the cost and related accumulated depreciation are removed
from the accounts and any gains or losses are reflected in current operations.
F-8
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets are also recognized for operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which the temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
if it is more likely than not that the tax benefits will not be realized.
Stock Compensation Plans
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the Bank's
stock option plans have no intrinsic value at the grant date and, under Opinion
No. 25, no compensation cost is recognized for them. The Bank has elected to
continue with the accounting methodology in Opinion No. 25 and, as a result, has
provided pro forma disclosures of net income and earnings per share and other
disclosures as if the fair value based method of accounting had been applied.
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which established standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Bank to classify items of
other comprehensive income by their nature in a separate financial statement or
as a component of the statement of operations or the statement of shareholders'
equity and display the accumulated balance of other comprehensive income
separately in the shareholders' equity section of the balance sheet. The Bank
adopted SFAS No. 130 upon commencement of operations in 1998, as required.
Per Share Results
During 1999, the Bank paid a 20% stock dividend. Basic and diluted net loss per
common share has been computed by dividing net loss for the period by the
weighted average number of shares of common stock outstanding during the period
after retroactively adjusting for the stock dividend.
F-9
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Bank relate solely to
outstanding stock options and are determined using the treasury stock method.
The Bank's outstanding stock options did not have a dilutive effect on the
computation of earnings per share; therefore, for 1999 and 1998, basic and
diluted earnings per share are the same amounts.
Federal Home Loan Bank Stock
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Recent Accounting Pronouncements
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. This Statement
generally provides for matching the timing of the recognition of the gain or
loss on derivatives designated as hedging instruments with the recognition of
the changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in fair
value will be recognized in net income in the period of change. Management
anticipates that this Statement will not materially affect the Bank's financial
statements.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation. The reclassifications had no effect on net
income or shareholders' equity as previously reported.
F-10
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE C - LOANS
Following is a summary of loans at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
Amount Percent Amount Percent
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Real estate - mortgage loans $27,975,255 47.83% $ 394,600 8.38%
Home equity lines of credit 3,865,430 6.61% 223,771 4.75%
Commercial and industrial
loans 22,730,439 38.86% 2,775,578 58.95%
Loans to individuals 4,735,327 8.09% 1,385,895 29.43%
----------- ------ ---------- ------
Subtotal 59,306,451 101.39% 4,779,844 101.51%
Allowance for loan losses 813,000 1.39% 71,000 1.51%
----------- ------ ---------- ------
Total $58,493,451 100.00% $4,708,844 100.00%
=========== ====== ========== ======
</TABLE>
Loans are primarily made in Union County, North Carolina. Real estate loans can
be affected by the condition of the local real estate market. Commercial and
installment loans can be affected by the local economic conditions.
There were no nonaccrual, restructured or impaired loans at December 31, 1999
and 1998.
The Bank has granted loans to certain directors and executive officers of the
Bank and their related interests. Such loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other borrowers and, in management's opinion,
do not involve more than the normal risk of collectibility. All loans to
directors and executive officers or their interests are submitted to the Board
of Directors for approval. A summary of loans to directors, executive officers
and their related interests follows:
<TABLE>
<S> <C>
Loans to directors and officers as a group at January 1, 1999 $ 100,000
Disbursements during year ended December 31, 1999 6,066,436
Amounts collected during year ended December 31, 1999 (323,225)
----------
Loans to directors and officers as a group at December 31, 1999 $5,843,211
==========
</TABLE>
At December 31, 1999, the Bank had pre-approved but unused lines of credit
totaling $638,000 to directors, executive officers and their related interests.
F-11
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE C - LOANS (Continued)
An analysis of the allowance for loan losses follows:
1999 1998
-------- -------
Balance at beginning of period $ 71,000 $ -
-------- -------
Provision charged to operations 742,000 71,000
-------- -------
Charge-offs - -
Recoveries - -
-------- -------
Net charge-offs - -
-------- -------
Balance at end of period $813,000 $71,000
======== =======
NOTE D - BANK PREMISES AND EQUIPMENT
Following is a summary of Bank premises and equipment at December 31, 1999 and
1998:
1999 1998
----------- ---------
Buildings and leasehold improvements $1,996,792 $ 31,480
Furniture and equipment 1,019,619 455,780
---------- --------
3,016,411 487,260
Less accumulated depreciation and amortization (172,053) (12,678)
---------- --------
Total $2,844,358 $474,582
========== ========
Depreciation and amortization amounting to $159,375 for the year ended December
31, 1999 and $12,678 for the period ended December 31, 1998 is included in
occupancy and equipment expense.
NOTE E - DEPOSITS
Time deposits in denominations of $100,000 or more were $17,205,572 at December
31, 1999.
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
Less than $ 100,000
$ 100,000 or more Total
----------- ----------- -----------
2000 $17,921,592 $16,870,707 $34,792,299
2001 591,100 100,000 691,100
2002 36,553 234,865 271,418
2003 - - -
2004 16,434 - 16,434
----------- ----------- -----------
Total $18,565,679 $17,205,572 $35,771,251
=========== =========== ===========
F-12
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Atlanta consisted of the following
6.07% due on May 30, 2000 $5,000,000
==========
Pursuant to collateral agreements with the Federal Home Loan Bank, advances are
secured by specific qualifying first mortgage loans with carrying amounts of
$8,560,000 at December 31, 1999
The Bank also has an available line of credit totaling $3.5 million from a
correspondent bank at December 31, 1999.
NOTE G - LEASES
Operating Leases
The Bank has entered into operating leases for the land on which its main office
is located and for other branch facilities. These leases have terms from five to
thirty years. Future rentals under these leases are as follows:
2000 $ 98,029
2001 99,129
2002 99,129
2003 98,629
2004 90,629
Thereafter 2,577,118
----------
Total $3,062,663
==========
Capital Lease Obligation
The Bank leases its main office facility under a capitalized lease. Leases that
meet the criteria for capitalization under generally accepted accounting
principles are recorded as assets and the related obligations are reflected as
obligations under capital leases on the accompanying balance sheets.
Amortization of property under capital lease is included in depreciation
expense. Included in premises and equipment at December 31, 1999 is $1.7 million
as the capitalized cost of the Bank's main office.
F-13
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE G - LEASES (Continued)
At December 31, 1999, aggregate future minimum lease payments due under this
capital lease obligation are as follows:
2000 $ 138,372
2001 138,372
2002 138,372
2003 138,372
2004 138,372
Thereafter 4,257,197
-----------
Total minimum lease payments 4,949,057
Less amount representing interest (3,249,057)
-----------
Present value of net minimum lease payments $ 1,700,000
===========
Both the operating and capital leases regarding the Bank's main office discussed
above are leased from a director. Prior to the main facility being completed in
November 1999, the Bank leased land for its temporary banking facility from that
same director. During 1999 and 1998, respectively, total lease payments of
$55,975 and $16,500 were paid to this director under these leases.
NOTE H - OTHER COMMITMENTS AND CONTRACTS
The Bank has entered into a non-cancelable contract with a third party for data
processing services. The estimated future minimum payments required under this
contract for the years ending December 31 are as follows:
2000 $ 150,000
2001 180,000
2002 198,000
2003 210,000
---------
Total $ 738,000
=========
The above future payments are based upon the anticipated future growth of the
Bank and can therefore vary from the above estimates in any year.
F-14
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE I - INCOME TAXES
No income tax provision is included in operating results for 1999 and 1998
because net deferred tax assets of approximately $266,000 and $358,000,
respectively, generated during the periods have been offset by increases to the
valuation allowance established to fully reserve potential future tax benefits
for which realization is not certain. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Significant components of deferred taxes at December 31, 1999 and 1998:
1999 1998
------ ------
Allowance for loan losses $ 266,000 $ 28,000
Pre-opening costs and expenses 221,000 330,000
Net operating loss 160,000 -
--------- ---------
Total deferred tax assets 647,000 358,000
Valuation allowance (624,000) (358,000)
--------- ---------
Net deferred tax assets 23,000 -
Deferred tax liabilities resulting
from depreciation differences (23,000) -
--------- ---------
Net recorded deferred tax assets $ - $ -
========= = =========
NOTE J - INITIAL CAPITALIZATION
In accordance with North Carolina banking laws, one dollar ($1.00) per share
subscribed was paid into an organizational expense fund to defray the expenses
of organization of the Bank. Upon the granting of the Bank's charter, the
unexpended balance of the organizational expense fund was transferred to the
permanent surplus of the Bank. A summary of the Bank's initial capitalization,
including the transactions in the organizational expense fund, is as follows:
<TABLE>
<S> <C>
Organizational expense fund established at $1.00 per share subscribed $ 1,243,385
Less brokerage fees and commissions 267,246
Less pre-opening costs and expenses, net of interest income 828,330
-----------
Amount contributed to additional paid-in capital upon chartering of the
Bank 147,809
Proceeds from stock sale at $10.00 per share subscribed 12,433,850
-----------
Total initial capitalization $12,581,659
===========
</TABLE>
F-15
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE K - OTHER NON-INTEREST EXPENSE
The major components of other non-interest expense for the year ended December
31, 1999 and the period ended December 31, 1998 are as follows:
1999 1998
-------- -------
Postage, printing and office supplies $165,280 $21,330
Advertising and promotion 169,641 13,138
Travel, meals, dues and subscriptions 132,568 5,841
Telephone 37,585 4,441
Other 128,806 4,059
Data processing and technology 110,791 2,892
Professional fees and contracted services 138,986 3,368
-------- -------
Total $883,657 $55,069
======== =======
NOTE L - REGULATORY MATTERS
The Bank, as a North Carolina banking corporation, may pay cash dividends only
out of undivided profits as determined pursuant to North Carolina General
Statutes. However, regulatory authorities may limit payment of dividends by any
bank when it is determined that such limitation is in the public interest and is
necessary to ensure financial soundness of the Bank.
The Bank is subject to various regulatory capital requirements administered by
federal and state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-16
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE L - REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, as prescribed by
regulations, of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. As of December 31, 1999 and 1998, the Bank exceeds
all capital adequacy requirements to which it is subject, as set forth below:
<TABLE>
<CAPTION>
To be well
For capital capitalized under prompt
Actual adequacy purposes corrective action provisions
--------------- ------------------ ----------------------------
As of December 31, 1999: Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ----- ------------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets) $12,365 19.53% * $5,065 * 8.0% * $6,331 * 10.0%
Tier I Capital (to Risk-
Weighted Assets) 11,552 18.25% * 2,532 * 4.0% * 3,798 * 6.0%
Tier I Capital (to
Average Assets) 11,552 18.52% * 2,495 * 4.0% * 3,118 * 5.0%
To be well
For capital capitalized under prompt
Actual adequacy purposes corrective action provisions
--------------- ------------------ ----------------------------
As of December 31, 1998: Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ----- ------------ ------
(Dollars in thousands)
Total Capital (to Risk-
Weighted Assets) $12,524 151.69% * $ 661 * 8.0% * $ 826 * 10.0%
Tier I Capital (to Risk-
Weighted Assets) 12,453 150.83% * 330 * 4.0% * 495 * 6.0%
Tier I Capital (to
Average Assets) 12,453 61.18% * 814 * 4.0% * 1,018 * 5.0%
</TABLE>
NOTE M - OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
* more than or equal to
F-17
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
================================================================================
NOTE M - OFF-BALANCE SHEET RISK (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank, upon extension of credit is based on management's
credit evaluation of the borrower. Collateral obtained varies but may include
real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amounts of the Bank's exposure to off-balance sheet
risk as of December 31, 1999 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $3,591,000
Undisbursed lines of credit 9,376,000
Undisbursed portion of construction loans 6,647,000
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments include cash and due from banks, interest-earning deposits
with banks, loans held for sale, loans, Federal Home Loan Bank stock, deposit
accounts, and advances from Federal Home Loan Bank. Fair value estimates are
made at a specific moment in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Bank's entire holdings of a particular financial instrument. Because no active
market readily exists for a portion of the Bank's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Due from Banks and Interest-earning Deposits with Banks
The carrying amounts for cash and due from banks and interest-earning
deposits with banks approximate fair value because of the short maturities
of those instruments.
Loans Held for Sale
Fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.
F-18
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
===============================================================================
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans
For certain homogenous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock approximates fair value
based on the redemption provisions of the Federal Home Loan Bank.
Deposits
The fair value of demand deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the
rates currently offered for instruments of similar remaining maturities.
Advances from Federal Home Loan Bank
The fair value of advances from the Federal Home Loan Bank is based upon
the discounted value when using current rates at which borrowings of
similar maturity could be obtained.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk discussed
in Note M, it is not practicable to estimate the fair value of future
financing commitments.
The carrying amounts and estimated fair values of the Bank's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 1,809,053 $ 1,809,053 $ 302,999 $ 302,999
Interest-earning deposits with
banks 8,468,104 8,468,104 14,683,825 14,683,825
Loans 58,493,451 58,238,000 4,708,844 4,708,844
Loans held for sale 1,072,261 1,072,261 - -
Federal Home Loan Bank stock 250,000 250,000 37,400 37,400
Financial liabilities:
Deposits 54,987,210 52,854,000 7,677,909 7,677,909
Advances from Federal Home
Loan Bank 5,000,000 5,010,000 - -
</TABLE>
F-19
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
===============================================================================
NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS
401(k) Retirement Plan
The Bank has adopted a 401(k) retirement plan that covers all eligible
employees. The Bank matches contributions of 3.0% of each employee's salary.
Contributions are funded when accrued. Expenses totaled approximately $21,776
for the year ended December 31, 1999 and $-0- during the period ended December
31, 1998.
Stock Option Plans
During 1999 the Bank adopted, with shareholder approval, an Employee Stock
Option Plan (the "Employee Plan") and a Director Stock Option Plan (the
"Director Plan"). Each plan makes available options to purchase 149,206 shares
of the Bank's common stock for an aggregate number of common shares reserved for
options of 298,412. The weighted-average exercise price of all options granted
to date is $9.19. The options granted under the Director Plan vested immediately
at the time of grant, while the options granted under the Employee Plan vest
over a five-year period. All unexercised options expire ten years after the date
of grant. A summary of the Bank's option plans as of and for the year ended
December 31, 1999, after retroactively adjusting for the stock dividend paid in
1999, is as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
--------------------- ---------------------
Shares Weighted Weighted
available average average
for future Number exercise Number exercise
grants outstanding price outstanding price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
At adoption 298,412 - $ - - $ -
Options granted (298,412) 298,412 9.19 149,206 9.17
Options exercised - - - - -
Options forfeited - - - - -
---------- ----------- -------- ----------- --------
At December 31, 1999 - 298,412 $ 9.19 149,206 $ 9.17
========== =========== ======== =========== ========
</TABLE>
No compensation cost is recognized by the Bank when stock options are granted
because the exercise price equals the market price of the underlying common
stock on the date of grant. If the Bank had used the fair value-based method of
accounting for stock options for 1999, its pro forma net loss and net loss per
common share would have been $1.3 million and $.87, respectively. Fair values
were estimated on the date of grant using the Black-Scholes option pricing
model, assuming a risk-free interest rate of 4.75%, a dividend yield of 0%,
volatility of 5.0%, and an expected life of five years.
F-20
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
===============================================================================
NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employment Agreement
The Bank has entered into an employment agreement with its chief executive
officer to ensure a stable and competent management base. The agreement provides
for a five-year term, but the agreement may be extended for an additional year
at the end of the initial term and annually thereafter. The agreement provides
for benefits as spelled out in the contracts and cannot be terminated by the
Board of Directors, except for cause, without prejudicing the officer's rights
to receive certain vested rights, including compensation. In the event of a
change in control of the Bank and in certain other events, as defined in the
agreement, the Bank or any successor to the Bank will be bound to the terms of
the contract.
F-21
<PAGE>
AMERICAN COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
===============================================================================
AMERICAN COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 2000 and 1999
===============================================================================
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ -----------
<S> <C> <C>
Cash and due from banks $ 1,419,185 $ 561,931
Interest-earning deposits with banks 12,139,059 6,536,420
Investment securities available for sale, at fair value 149,391 -
Loans 88,275,821 35,612,002
Allowance for loan losses (1,187,000) (520,000)
------------ -----------
NET LOANS 87,088,821 35,092,002
Accrued interest receivable 522,498 160,712
Bank premises and equipment 3,332,152 741,278
Federal Home Loan Bank stock, at cost 250,000 61,100
Other assets 150,079 169,492
------------ -----------
TOTAL ASSETS $105,051,185 $43,322,935
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $ 9,198,473 $ 3,743,034
Savings 1,843,967 553,753
Money market and NOW 15,082,768 5,279,714
Time 57,138,945 21,768,275
------------ -----------
TOTAL DEPOSITS 83,264,153 31,344,776
Federal funds purchased 3,500,000 -
Advances from the Federal Home Loan Bank 5,000,000 -
Capital lease obligation 1,700,834 -
Accrued expenses and other liabilities 367,064 177,619
------------ -----------
TOTAL LIABILITIES 93,832,051 31,522,395
------------ -----------
Shareholders' Equity
Preferred stock, 2000, no par value, 1,000,000 shares
authorized; none issued; 1999, none authorized
Common stock, 2000, $1 par value, 9,000,000 shares
authorized, 1,492,062 shares issued and outstanding;
1999, $5 par value, 10,000,000 shares authorized
1,243,385 shares issued and outstanding 1,492,062 6,216,925
Additional paid-in capital 11,089,597 6,364,734
Accumulated deficit (1,361,916) (781,119)
Accumulated other comprehensive loss (609) -
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 11,219,134 11,800,540
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,051,185 $43,322,935
============ ===========
</TABLE>
F-22
<PAGE>
AMERICAN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended June 30, 2000 and 1999
================================================================================
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans $3,423,039 $1,034,150
Investments 11,966 1,112
Interest-earning deposits with banks 270,370 241,538
---------- ----------
TOTAL INTEREST INCOME 3,705,375 1,276,800
---------- ----------
INTEREST EXPENSE
Money market, NOW and savings deposits 274,154 67,098
Time deposits 1,338,073 374,139
Borrowings 228,885 -
---------- ----------
TOTAL INTEREST EXPENSE 1,841,112 441,237
---------- ----------
NET INTEREST INCOME 1,864,263 835,563
PROVISION FOR LOAN LOSSES 401,129 449,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,463,134 386,563
---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts 214,415 38,354
Mortgage operations 106,228 195,084
Other 43,038 -
---------- ----------
TOTAL NON-INTEREST INCOME 363,681 233,438
---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,020,359 643,284
Occupancy and equipment 318,159 190,496
Other 821,074 438,310
---------- ----------
TOTAL NON-INTEREST EXPENSE 2,159,592 1,272,090
---------- ----------
LOSS BEFORE INCOME TAXES (332,777) (652,089)
INCOME TAXES - -
---------- ----------
NET LOSS $ (332,777) (652,089)
========== ==========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (0.22) $ (0.44)
========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 1,492,062 1,492,062
========== ==========
</TABLE>
See accompanying notes.
F-23
<PAGE>
AMERICAN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Six Months Ended June 30, 2000 and 1999
===============================================================================
<TABLE>
<CAPTION>
Accumulated
Additional other
Common stock paid-in Accumulated comprehensive Total
-----------------------
Shares Amount capital deficit loss equity
--------- ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 1,243,385 $ 6,216,925 $ 6,364,734 $ (129,030) $ - $12,452,629
Net loss - - - (652,089) - (652,089)
--------- ----------- ----------- ----------- ------------- -----------
Balance at June 30, 1999 1,243,385 $ 6,216,925 $ 6,364,734 $ (781,119) $ - $11,800,540
========= =========== =========== =========== ============= ===========
Balance at January 1, 2000 1,492,062 $ 7,460,310 $ 5,121,349 $(1,029,139) $ - $11,552,520
-----------
Comprehensive loss
Net loss - - - (332,777) - (332,777)
Unrealized holding losses
on available-for-sale
securities - - - - (609) (609)
----------- ------------- -----------
Total comprehensive loss (332,777) (609) (333,386)
----------- ------------- -----------
Formation of American
Community Bancshares,
Inc. (Note A) - (5,968,248) 5,968,248 - - -
--------- ----------- ----------- ----------- ------------- -----------
Balance at June 30, 2000 1,492,062 $ 1,492,062 $11,089,597 $(1,361,916) $ (609) $11,219,134
========= =========== =========== =========== ============= ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
AMERICAN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2000 and 1999
===============================================================================
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (332,777) $ (652,089)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 134,660 59,433
Provision for losses on loans 401,129 449,000
Changes in assets and liabilities:
Increase in accrued interest receivable (223,498) (96,737)
Decrease in loans held for sale 1,072,261 -
(Increase) decrease in other assets 207,801 (88,279)
Increase (decrease) in accrued expenses and
other liabilities 13,521 (44,681)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,273,097 (373,353)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank stock - (23,700)
Purchase of investment securities available for sale (150,000) -
Net increase in loans (28,996,499) (30,832,158)
Purchase of bank premises and equipment (622,454) (326,129)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (29,768,953) (31,181,987)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in federal funds purchased 3,500,000 -
Net increase in demand deposits 6,909,249 6,542,683
Net increase in time deposits 21,367,694 17,124,184
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,776,943 23,666,867
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,281,087 (7,888,473)
CASH AND CASH EQUIVALENTS, BEGINNING 10,277,157 14,986,824
------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 13,558,244 $ 7,098,351
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 1,764,498 $ 378,382
============ ============
</TABLE>
See accompanying notes.
F-25
<PAGE>
AMERICAN COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000 and 1999
================================================================================
NOTE A - ORGANIZATION AND OPERATIONS
In April 2000, American Community Bancshares, Inc. ("Bancshares") was formed as
a holding company for American Community Bank. Upon formation, one share of
Bancshares' $1 par value common stock was exchanged for each of the then
outstanding 1,492,062 shares of American Community Bank's $5 par value common
stock. Bancshares currently has no operations and conducts no business on its
own other than owning American Community Bank.
NOTE B - BASIS OF PRESENTATION
All adjustments considered necessary for a fair presentation of the results for
interim periods presented have been included (such adjustments are normal and
recurring in nature). Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. The accompanying unaudited interim consolidated
financial statements should be read in conjunction with the audited financial
statements included elsewhere herein.
F-26
<PAGE>
For Company Use (Do Not Fill In) Paid with Subscription $ __________
No. of Shares Requested ___________ Refund (if any) $ __________
No. of Shares Accepted ___________ Balance Due $ __________
SUBSCRIPTION OFFER
American Community Bancshares, Inc.
Monroe, North Carolina
The undersigned, having received and reviewed the Prospectus dated ______, 2000,
of American Community Bancshares, Inc. (the "Company"), a bank holding company
organized under the laws of the State of North Carolina, and in sole reliance on
the information contained therein, hereby subscribes for
_______________________________ shares of the Common Stock (par value $1.00 per
share) of the Company at a price of $____ per share. The minimum subscription is
100 shares and the maximum is 5% of the aggregate shares subscribed in the
Offering, unless such maximum number is waived by the Board of Directors.
The subscription is paid herewith, in United States dollars either by check,
draft or money order drawn to the order of "American Community Bancshares, Inc.
Escrow Account."
Mail subscriptions and payment to:
American Community Bancshares, Inc.
Attention: Escrow Agent
Post Office Box 5035
Monroe, North Carolina 28111-5035
In connection with this subscription, the undersigned acknowledges and agrees
that:
1. This Subscription Offer may not be canceled, terminated or revoked by the
undersigned before December 31, 2000, unless extended by the Company until
February 28, 2001.
2. The Company reserves the right to accept this Subscription Offer for a
lesser number of shares than the number noted above, or to reject it altogether,
for any reason or no reason, whether or not the subscriptions of other
subscribers are treated differently. Subscriptions may be accepted at any time.
The Company also reserves the right to cancel accepted Subscription Offers for
any reason or no reason until the date the shares purchased through this
Offering are issued. Acceptances must be in writing and are legally effective
and binding when mailed to the address shown on this Subscription Offer, or in
the case of a subscriber whose address has changed and who has provided the new
address to the Company in writing, to the new address. If the subscription is
accepted in part, the undersigned agrees to purchase the accepted number of
shares subject to the terms of this Subscription Offer. A refund, with no
interest or income thereon, will be made of all amounts received for
subscriptions not accepted. This subscription is nonassignable and
nontransferable, except with the written consent of the Company.
3. All funds paid under this Subscription Offer will be held in the Escrow
Account as provided in the Prospectus with ______________, __________, North
Carolina ("_______") and will be forwarded directly to _____ by 12:00 noon of
the next business day after receipt. If by December 31, 2000 (unless extended
to February 28, 2001), the Company has not received subscriptions for at least
500,000 shares of its Common Stock, a refund of the funds paid under this
Subscription Offer, without interest or income thereon, will be returned to the
subscribers. (See " METHOD OF SUBSCRIPTION/ PLAN OF DISTRIBUTION" in the
Prospectus.)
4. All terms of the Prospectus of the Company dated _________, 2000 are
incorporated herein by reference. The undersigned has read the Prospectus and
understood it, or has had it explained to him/her by his/her legal
representative, and acknowledges the terms and conditions under which this
Offering is made as more fully set forth in such Prospectus. In making a
decision to purchase shares, the undersigned is relying solely upon the
representations contained in the Prospectus, and confirms by his/her signature
below that this Subscription Offer is made in accordance therewith.
5. The undersigned will not purchase or otherwise acquire, directly or
indirectly, a beneficial interest in more than 5% of the aggregate shares to be
outstanding after the Offering unless such limit is waived by the Board of
Directors.
6. SUBSTITUTE FORM W-9: Under penalties of perjury, I certify that (1) the
Social Security Number or Taxpayer Identification Number given below is correct;
and (2) I am not subject to backup withholding. (INSTRUCTION: YOU MUST CROSS OUT
ITEM (2) DIRECTLY ABOVE IF YOU HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE
SERVICE THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF UNDER-REPORTING
INTEREST OR DIVIDENDS ON YOUR TAX RETURN.)
7. By his/her initials below, the subscriber acknowledges and agrees that:
<PAGE>
(1) THESE SECURITIES ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER AGENCY OR PERSON AND ARE
SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL; (2) THESE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, THE FDIC, THE NORTH CAROLINA BANKING COMMISSION, OR ANY OTHER
REGULATORY BODY, NOR HAS ANY REGULATORY BODY PASSED ON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS, AND THAT ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL; AND
(3) SUBSCRIBER HAS RECEIVED AND READ A COPY OF THE PROSPECTUS BEFORE SIGNING
THIS SUBSCRIPTION OFFER.
If this Subscription Offer is being processed through a registered broker-dealer
that by execution hereof such broker-dealer is authorized to transfer sufficient
funds as indicated above from my account with such broker-dealer to ________ as
Escrow Agent.
Instruction: Each subscriber must place initials on the line below to indicate
that he/she has read the above paragraphs.
___________ (Subscriber's Initials) ____________ (Subscriber's Initials)
Subscriber has signed this Subscription Offer on the date indicated beside
his/her signature below, and hereby requests that certificates evidencing shares
of Common Stock purchased pursuant to this Subscription Offer be registered in
the name and form of ownership described below.
_______________________________________(SEAL) ______________________________
(Signature) (Date)
_______________________________________(SEAL) ______________________________
(Additional Signature, if required) (Date)
Complete all blanks on this Subscription Offer Form and make check or money
order in the amount of $_____ for each share subscribed payable to "American
Community Bancshares, Inc. Escrow Account" and mail subscription and check to:
American Community Bancshares, Inc.
Attn: Escrow Agent
Post Office Box 5035
Monroe, North Carolina 28111-5035
Any questions concerning subscriptions or the Offering may be directed to the
above address or to (704) 225-8444.
STOCK REGISTRATION INFORMATION
(PLEASE PRINT)
________________________________________________________________________________
Name(s) in which stock is to be registered
________________________________________________________________________________
Address (Street or Post Office Box)
________________________________________________________________________________
City, State, and Zip Code
(___)___________________(___)___________________________________________________
Daytime Phone Evening Phone Taxpayer ID (Social Security Number)
Legal form of ownership:
( ) Individual ( ) Joint Tenants with Right of Survivorship
( ) Tenants in Common ( ) Uniform Transfers to Minors
( ) Other _____________________
<PAGE>
[OUTSIDE BACK COVER]
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary
Risk Factors 1,000,000 Shares (Maximum)
Use of Proceeds 500,000 Shares (Minimum)
Market for Common Stock and Related
Shareholder matters
Dividend Policy [AMERICAN COMMUNITY
Capitalization BANCSHARES LOGO]
Selected Consolidated Financial and Other Data
Management's Discussion and Analysis of AMERICAN COMMUNITY
Financial Condition and Results of Operations BANCSHARES, INC.
Business
Management
Certain Relationships and Related Transactions COMMON STOCK
Supervision and Regulation
Description of Capital Stock
Method of Subscription/Plan of Distribution
Legal Opinions PROSPECTUS
Experts
Index to Financial Statements
_____________, 2000
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes permit a
corporation to indemnify its directors, officers, employees or agents under
either or both a statutory or nonstatutory scheme of indemnification. Under the
statutory scheme, a corporation may, with certain exceptions, indemnify a
director, officer, employee or agent of the corporation who was, is, or is
threatened to be made, a party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (a) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (b) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification described above
under the statutory scheme, Section 55-8-57 of the North Carolina General
Statutes permits a corporation to indemnify or agree to indemnify any of its
directors, officers, employees or agents against liability and expenses
(including attorney's fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interests of the corporation. The
Bylaws of Bancshares provide for indemnification to the fullest extent permitted
under North Carolina law for persons who serve as directors or officers of
Bancshares, or at the request of Bancshares serve as an officer, director,
agent, partner, trustee, administrator or employee for any other foreign or
domestic entity, except to the extent such activities were at the time taken
known or believed by the potential indemnities to be clearly in conflict with
the best interests of Bancshares. Accordingly, Bancshares may indemnify its
directors, officers or employees in accordance with either the statutory or non-
statutory standards.
II-1
<PAGE>
Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes require a
corporation, unless its articles of incorporation provide otherwise, to
indemnify a director or officer who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
[Finally, Section 55-8-57 of the North Carolina General Statutes provides that a
corporation may purchase and maintain insurance on behalf of an individual who
is or was a director, officer, employee or agent of the corporation against
certain liabilities incurred by such persons, whether or not the corporation is
otherwise authorized by the NCBCA to indemnify such party. Bancshares has
purchased a standard directors' and officers liability policy which will,
subject to certain limitations, indemnify Bancshares and its officers and
directors for damages they become legally obligated to pay as a result of any
negligent act, error, or omission committed by directors or officers while
acting in their capacity as such. Bancshares may also purchase such a policy.]
As permitted by North Carolina law, Article 5 of Bancshares' Articles of
Incorporation limits the personal liability of directors for monetary damages
for breaches of duty as a director arising out of any legal action whether by or
in the right of Bancshares or otherwise, provided that such limitation will not
apply to (i) acts or omissions that the director at the time of such breach knew
or believed were clearly in conflict with the best interests of Bancshares, (ii)
any liability under Section 55-8-33 of the General Statutes of North Carolina,
or (iii) any transaction from which the director derived an improper personal
benefit (which does not include a director's reasonable compensation or other
reasonable incidental benefit for or on account of his service as a director,
officer, employee, independent contractor, attorney, or consultant of
Bancshares).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration Fee $ 2,244*
Sales Agent Commission 300,000**
NASD Fee 1,162*
Listing Fee 10,000*
Printing and Engraving Expenses 20,000*
Legal Fees and Expenses 45,000*
Accounting Fees and Expenses 15,000*
Blue Sky Fees and Expenses 5,000*
Miscellaneous 2,500*
--------
Total $400,906
* Estimated
** Estimated sale of 500,000 shares
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Bancshares has sold no unregistered securities since it was chartered on
February 16, 2000.
II-2
<PAGE>
ITEM 27. INDEX TO EXHIBITS.
The following exhibits are filed with this Registration Statement:
Exhibit
Number Description
------ -----------
1.1 Sales Agency Agreement (to be filed by amendment)
1.2 Selected Dealer Agreement (to be filed by amendment)
3.1 Articles of Incorporation of American Community Bancshares, Inc. *
3.2 Bylaws of American Community Bancshares, Inc. *
4 Specimen Common Stock Certificate *
5 Opinion of Gaeta & Glesener, P.A. regarding the legality of the
securities being registered
10.1 1999 Incentive Stock Option Plan *
10.2 1999 Nonstatutory Stock Option Plan *
10.3 Employment Agreement of Randy P. Helton dated April 15, 1998 *
10.4 401(k) Savings Plan of American Community Bank *
21 Subsidiaries of American Community Bancshares, Inc.
23.1 Consent of Dixon Odom PLLC
23.2 Consent of Gaeta & Glesener, P.A. (contained in
Exhibit 5 hereto)
24 Power of Attorney
27 Financial Data Schedule
* Incorporated by reference to the Registration Statement of American Community
Bancshares, Inc. on Form S-4, Registration No. 333-31148 as filed with the
Securities and Exchange Commission on February 25, 2000.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Monroe, State of North
Carolina, on July 28, 2000.
AMERICAN COMMUNITY BANCSHARES, INC.
By: /s/ Randy P. Helton
-------------------
Randy P. Helton
President and Chief Executive Officer
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below on July 28, 2000 by the following persons in the
capacities indicated.
/s/ Randy P. Helton
-------------------
Randy P. Helton
President and Chief Executive Officer
/s/ Dan R. Ellis, Jr.
---------------------
Dan R. Ellis, Jr.
Chief Financial Officer and Secretary
/s/ Thomas J. Hall*
-------------------
Thomas J. Hall
Director
/s/ Larry S. Helms*
-------------------
Larry S. Helms
Director
/s/ Kenneth W. Long*
--------------------
Kenneth W. Long
Director
/s/ L. Steven Phillips*
-----------------------
L. Steven Phillips
Director
/s/ David D. Whitley*
---------------------
David D. Whitley
Director
/s/ Gregory N. Wylie*
---------------------
Gregory N. Wylie
Director
* /s/ Randy P. Helton
-------------------
By Randy P. Helton
Attorney-in-Fact
II-5
