As filed with the Securities and Exchange Commission on October 22, 1998
Registration No. 333-62225, 333-62225-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
FIDELITY BANCSHARES (N.C.), INC. FIDBANK CAPITAL TRUST I
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
<S> <C>
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
56-1586543 52-6936487
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
100 South Main Street 100 South Main Street
Fuquay-Varina, North Carolina 27526 Fuquay-Varina, North Carolina 27526
(919) 552-2242 (919) 552-2242
(Address, including zip code, and telephone number, (Address, including zip code, and area telephone number,
including area code, of registrant's principal executive offices) including area code, of registrant's principal
executive offices)
</TABLE>
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Billy T. Woodard
Chairman and Chief Executive Officer
Fidelity BancShares (N.C.), Inc.
100 South Main Street
Fuquay-Varina, North Carolina 27526
(919) 552-2242
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<CAPTION>
<S> <C>
William R. Lathan, Jr., Esq. Frank M. Conner, III, Esq.
F. Donald Nelms, Jr., Esq. Jonathan H. Talcott, Esq.
Ward and Smith, P.A. Alston & Bird LLP
1001 College Court 601 Pennsylvania Avenue
New Bern, North Carolina 28560 North Building, 11th Floor
(252) 633-1000 Washington, D.C. 20004
(202) 756-3300
</TABLE>
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Approximate date of commencement of the proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, check the following box: [ ]
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [ ]
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: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
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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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to securities has been filed with the Securities
and Exchange Commission. These securities may not be sold nor may offers to buy
be accepted prior to the time the registration statement becomes effective. This
prospectus shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
Subject to Completion
Dated October *, 1998
PROSPECTUS
FIDBANK Capital Trust I
$20,000,000
* % Capital Securities
(Liquidation Amount $10.00 per Capital Security)
fully and unconditionally guaranteed, as described herein, by
Fidelity BancShares
(N.C.), Inc.
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The Capital Securities offered hereby represent preferred undivided
beneficial interests in the assets of FIDBANK Capital Trust I, a statutory
business trust created under the laws of the State of Delaware (the "Issuer
Trust"). Fidelity BancShares (N.C.), Inc. ("BancShares"), initially will be the
holder of all the beneficial interests represented by common securities of the
Issuer Trust (the "Common Securities" and, collectively with the Capital
Securities, the "Trust Securities"). The Issuer Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
* % Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") to be issued by BancShares. The Junior Subordinated
Debentures will mature on * , 2028 (the "Stated Maturity"). See
"Description of the Junior Subordinated Debentures -- General." The Capital
Securities will have a preference under certain circumstances over the Common
Securities with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. See "Description of the Capital
Securities -- Subordination of Common Securities." The Capital Securities have
been approved for quotation on the American Stock Exchange, Inc. ("AMEX"),
subject to notice of issuance. (Continued on next page.)
See "Risk Factors" beginning on Page 12 of this Prospectus for a
discussion of certain risk factors that should be considered by prospective
investors in evaluating an investment in the Capital Securities.
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THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS,
ARE NOT OBLIGATIONS OF OR GUARANTEED BY A BANKING OR NONBANKING AFFILIATE OF
BANCSHARES (EXCEPT TO THE EXTENT THAT THE CAPITAL SECURITIES ARE GUARANTEED BY
BANCSHARES AS DESCRIBED HEREIN), AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public (1) Commission (2) Issuer Trust (3)(4)
<S> <C> <C> <C>
Per Capital Security ......... $ 10.00 (4) $ 10.00
Total (5) .................... $ 20,000,000 (4) $ 20,000,000
</TABLE>
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(1) Plus accumulated Distributions (as defined herein), if any, from * , 1998.
(2) BancShares and the Issuer Trust each have agreed to indemnify the
Underwriter (as defined herein) against certain liabilities, including
certain liabilities under the Securities Act. See "Underwriting."
(3) Before deducting estimated expenses of $218,500 which are payable by
BancShares.
(4) In view of the fact that the proceeds of the sale of the Capital Securities
will be invested in the Junior Subordinated Debentures issued by BancShares,
BancShares has agreed to pay the Underwriter, as compensation for its
arranging the investment therein of such proceeds, $ * per Capital Security
(or $ * in the aggregate). See "Underwriting."
(5) The Issuer Trust has granted to the Underwriter an option, exercisable
within 30 days of the date hereof, to purchase up to 300,000 additional
Capital Securities on the same terms and conditions set forth above solely
to cover over-allotments, if any. If the Underwriter exercises such option
in full, the total Price to Public, Underwriting Commission and Proceeds to
Issuer Trust, will be $23,000,000, $ * and $23,000,000, respectively. See
"Underwriting."
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The Capital Securities are offered by the Underwriter, as specified
herein, subject to receipt and acceptance by it, to prior sale and to the
Underwriter's right to reject any order in whole or in part and to withdraw,
cancel or modify the offer without notice. It is expected that delivery of the
Capital Securities will be made on or about * , 1998, against payment
therefor in immediately available funds.
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Wheat First Union
The date of this Prospectus is October *, 1998.
<PAGE>
Holders of the Capital Securities will be entitled to receive preferential
cumulative cash distributions ("Distributions") accumulating from the date of
original issuance and payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (each a "Distribution Date"),
commencing * , 1998, at an annual rate equal to * % on the stated
amount of $10.00 per Capital Security (the "Liquidation Amount"). The
distribution rate and the distribution payment dates and other payment dates
for the Capital Securities will correspond to the interest rate and interest
payment dates and other payment dates on the Junior Subordinated Debentures,
which will be the sole assets of the Issuer Trust. So long as no Event of
Default (as defined in the Junior Subordinated Indenture (as defined herein))
has occurred and is continuing with respect to the Junior Subordinated
Debentures (a "Debenture Event of Default"), BancShares has the right to defer
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures or end on a date other than a Distribution Date. No
interest shall be due and payable during any Extension Period, except at the
end thereof. Upon the termination of any such Extension Period and the payment
of all amounts then due, BancShares may elect to begin a new Extension Period
subject to the requirements described herein. If interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Capital
Securities will also be deferred and BancShares will not be permitted, subject
to certain exceptions described herein, to declare or pay any cash
distributions with respect to BancShares' capital stock or with respect to debt
securities of BancShares that rank pari passu in all respects with or junior to
the Junior Subordinated Debentures. During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Capital Securities are entitled will
accumulate) at a rate equal to * %, compounded quarterly, and holders of
Capital Securities will be required to accrue income for United States federal
income tax purposes. See "Description of the Junior Subordinated Debentures --
Option to Extend Interest Payment Period" and "Federal Income Tax Consequences
- -- Interest Income and Original Issue Discount."
BancShares will, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guarantee all
the Issuer Trust's obligations under the Capital Securities as described below.
See "Relationship Among the Capital Securities, the Junior Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." The
Guarantee of BancShares guarantees the payment of Distributions and payments on
liquidation or redemption of the Capital Securities, but only in each case to
the extent of funds held by the Issuer Trust, as described herein. See
"Description of the Guarantee." If BancShares does not make payments on the
Junior Subordinated Debentures held by the Issuer Trust, the Issuer Trust may
have insufficient funds to pay Distributions on the Capital Securities. The
Guarantee does not cover payment of Distributions when the Issuer Trust does
not have sufficient funds to pay such Distributions. In such event, a holder of
Capital Securities may institute a legal proceeding directly against BancShares
to enforce payment of such Distributions to such holder. See "Description of
the Junior Subordinated Debentures -- Enforcement of Certain Rights by Holders
of Capital Securities." The obligations of BancShares under the Guarantee and
the Capital Securities are subordinate and junior in right of payment to all
Senior Indebtedness (as defined in "Description of the Junior Subordinated
Debentures -- Subordination") of BancShares.
The Capital Securities are subject to mandatory redemption (i) in whole,
but not in part, at the Stated Maturity upon repayment of the Junior
Subordinated Debentures, (ii) in whole, but not in part, contemporaneously with
the optional redemption by BancShares of the Junior Subordinated Debentures at
any time within 90 days following the occurrence and during the continuation of
a Tax Event, Investment Company Event or Capital Treatment Event (each as
defined herein), in each case subject to possible regulatory approval and (iii)
in whole or in part at any time on or after * , 2003, contemporaneously
with the optional redemption by BancShares of the Junior Subordinated
Debentures in whole or in part, in each case at the applicable Redemption Price
(as defined herein). The Junior Subordinated Debentures are redeemable prior to
maturity at the option of BancShares (i) on or after * , 2003, in whole at
any time or in part from time to time, or (ii) in whole, but not in part, at
any time within 90 days following the occurrence and continuation of a Tax
Event, Investment Company Event or Capital Treatment Event, in each case at a
redemption price set forth herein, which includes the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed
for redemption. The ability of BancShares to exercise its rights to redeem the
Junior Subordinated Debentures or to cause the redemption of the Capital
Securities prior to the Stated Maturity may be subject to prior regulatory
approval by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), if then required under applicable Federal Reserve capital guidelines
or policies. See "Description of the Capital Securities -- Liquidation
Distribution Upon Dissolution" and "Description of the Junior Subordinated
Debentures -- Redemption."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Capital Securities will be entitled to receive a Liquidation
Amount of $10.00 per
2
<PAGE>
Capital Security plus accumulated and unpaid Distributions thereon to the date
of payment, subject to certain exceptions, which may be in the form of a
distribution of such amount in Junior Subordinated Debentures. See "Description
of the Capital Securities -- Liquidation Distribution Upon Dissolution."
The holders of the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, to cause the
Junior Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust. The
ability of the holders of the outstanding Common Securities to dissolve the
Issuer Trust may be subject to prior regulatory approval of the Federal
Reserve, if then required under applicable Federal Reserve capital guidelines
or policies. See "Description of the Capital Securities -- Liquidation
Distribution Upon Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness of BancShares. See "Description of the Junior Subordinated
Debentures -- Subordination."
The Capital Securities will be represented by global certificates
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Capital Securities will be shown on, and transfers
thereof will be effected only through, records maintained by participants in
DTC. Except as described in this Prospectus, Capital Securities in certificated
form will not be issued in exchange for the global certificates. See
"Description of the Capital Securities -- Form, Denomination, Book-Entry
Procedures and Transfer."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF
BANCSHARES AND, LIKE THE CAPITAL SECURITIES, DO NOT EVIDENCE DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER INSURER
OR GOVERNMENTAL AGENCY.
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CERTAIN PERSONS PARTICIPATING IN THE OFFERING MADE HEREBY MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CAPITAL SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
CAPITAL SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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3
<PAGE>
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the "Registration
Statement") filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), by the Issuer Trust with respect to the Capital Securities offered
hereby, and by BancShares with respect to its Junior Subordinated Debentures to
be issued to the Issuer Trust pursuant to the Junior Subordinated Indenture and
its guarantee (to the extent provided herein) of payment of the Distributions
due on the Capital Securities pursuant to the Guarantee. This Prospectus does
not contain all of the information set forth in such Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Reference is made to the Registration Statement
and the exhibits filed as a part thereof for further information with respect
to BancShares, the Issuer Trust and the securities to which this Prospectus
relates. Statements contained herein concerning the provisions of any document
filed as an exhibit to the Registration Statement are not necessarily complete
and, in each instance, reference is made to the copy of such document so filed
for a more complete description of the matter involved. Each such statement is
qualified in its entirety by such reference.
Neither BancShares nor the Issuer Trust is currently subject to the
information requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"), but each of BancShares and the Issuer Trust will become subject to such
requirements upon the effectiveness of the Registration Statement. BancShares
intends to seek an order from the Commission conditionally exempting the Issuer
Trust from the reporting requirements of the Exchange Act pursuant to Section
12(h) thereof, and, therefore, it is not expected that the Issuer Trust will be
filing separate reports under the Exchange Act. When filed, BancShares' reports
and other information can be inspected and copied at the following public
reference facilities maintained by the Commission: 450 Fifth Street, N.W.
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, upon payment of prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers who file electronically with
the Commission. The address of that site is http://www.sec.gov.
No separate financial statements of the Issuer Trust have been included
herein. BancShares and the Issuer Trust do not consider that such financial
statements would be material to holders of the Capital Securities because (i)
the Issuer Trust is a newly-formed special purpose entity, has no operating
history or independent operations and is not engaged in and does not propose to
engage in any activity other than holding as trust assets the Junior
Subordinated Debentures, issuing the Trust Securities and engaging in
incidental activities, (ii) all of the voting securities of the Issuer Trust
will be owned, directly or indirectly, by BancShares, and (iii) the obligations
of the Issuer Trust under the Capital Securities are guaranteed by BancShares
as described herein. See "FIDBANK Capital Trust I," "Description of the Capital
Securities," "Description of the Junior Subordinated Debentures," and
"Description of the Guarantee."
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of the Underwriter's
over-allotment option. Prospective investors should carefully consider the
information set forth under the heading "Risk Factors." Throughout this
Prospectus, unless the context clearly requires otherwise, references to
"BancShares" should be deemed references to the combined activities of Fidelity
BancShares (N.C.), Inc., a non-operating holding company, and its principal
operating subsidiary, The Fidelity Bank (the "Bank"). As used herein, (i) the
"Junior Subordinated Indenture" means the Junior Subordinated Indenture, to be
dated as of * , 1998, as amended and supplemented from time to time,
between BancShares and Bankers Trust Company ("Bankers Trust"), as trustee (the
"Debenture Trustee"), relating to the Junior Subordinated Debentures, (ii) the
"Trust Agreement" means the Amended and Restated Trust Agreement, to be dated
as of * , 1998, as amended and supplemented from time to time, relating to
the Issuer Trust among BancShares, as Depositor, Bankers Trust, as Property
Trustee (the "Property Trustee"), Bankers Trust (Delaware), as Delaware Trustee
(the "Delaware Trustee") (collectively, the "Issuer Trustees"), the
Administrators named by the Depositor therein (the "Administrators"), and the
holders, from time to time, of undivided beneficial interests in the assets of
the Issuer Trust, and (iii) the "Guarantee" means the Guarantee Agreement, to
be dated as of * , 1998, as amended and supplemented from time to time,
relating to the Capital Securities between BancShares and Bankers Trust, as
Guarantee Trustee (the "Guarantee Trustee").
Fidelity BancShares (N.C.), Inc.
General
BancShares is a registered bank holding company, incorporated under the
laws of Delaware, and headquartered in Fuquay-Varina, North Carolina. It was
organized during 1987 as the holding company for the Bank. BancShares operates
through the Bank which provides a variety of retail and commercial banking
products and services to individuals and small- to medium-sized businesses in
the communities it serves. At June 30, 1998, BancShares had total consolidated
assets of approximately $597.7 million, total consolidated deposits of
approximately $515.9 million, and total consolidated shareholders' equity of
approximately $62.5 million.
BancShares currently is engaged in an expansion program which involves
acquisitions of other financial institutions, or offices and/or deposits of
other institutions, and the opening of de novo branches. The Bank is a North
Carolina-chartered bank that currently maintains 41 banking offices in 28
central North Carolina communities, 12 of which were opened or acquired within
the last three fiscal years.
BancShares is focused on community-oriented banking via (i) localized
lending, (ii) core deposit funding, (iii) conservative balance sheet
management, and (iv) stable growth. BancShares' franchise includes many smaller
communities where competition is limited due to the exit of larger institutions
or to the limited product offerings of smaller institutions. By outsourcing its
core data processing requirements to an affiliated financial institution (see
"Certain Relationships and Related Transactions"), BancShares can offer a
complete array of financial services while maintaining its community banking
orientation. BancShares' focus on non-metropolitan markets and its emphasis on
customer service provide it with a stable source of core funding. At June 30,
1998, transaction accounts and non-interest bearing accounts equaled 40.13% and
15.02%, respectively, of total deposits, with the remaining 44.85% of total
deposits attributable to interest bearing savings and time deposit accounts.
BancShares' return on average assets and return on average equity were
1.32% and 13.47%, respectively, for the year ended December 31, 1997, and an
annualized 1.44% and 13.80%, respectively, for the six months ended June 30,
1998.
Members of the Holding family, including Lewis R. Holding, have been
actively involved in the management of BancShares, and, currently, various
members of the family control an aggregate of 77.31% of BancShares' common
stock. See "Beneficial Ownership of Securities" and "Certain Relationships and
Related Transactions." As a result, BancShares has been managed from a
long-term perspective with primary emphasis being placed on balance sheet
liquidity, loan quality, and earnings stability. At June 30, 1998, BancShares'
loan-to-deposit ratio was 74.67%, and over 64% of its $158.1 million investment
portfolio was invested in U.S. government obligations with an average maturity
of 11 months. Consistent with its management philosophy, BancShares has
emphasized a low-risk loan portfolio derived from its local markets. At June
30, 1998, BancShares' non-performing assets were $57,000, or 0.01% of gross
loans and other real estate. Net charge-offs for the year ended December 31,
1997 were 0.10% of average loans and, for the six-month period ended June 30,
1998, were an annualized 0.33% of average loans. The allowance for loan losses
at June 30, 1998, was 0.96% of gross loans.
5
<PAGE>
BancShares' principal executive offices are located at 100 South Main
Street, Fuquay-Varina, North Carolina 27526, and its telephone number is (919)
552-2242.
For additional information regarding BancShares and its financial
condition and results of operations, see "Available Information," "Risk Factors
- -- Risk Factors Relating to BancShares," "Fidelity BancShares (N.C.), Inc.,"
"Consolidated Ratios of Earnings to Fixed Charges," "Capitalization," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business," "Supervision and
Regulation," "Beneficial Ownership of Securities," "Directors and Executive
Officers," "Executive Compensation," "Certain Relationships and Related
Transactions," and "Fidelity BancShares (N.C.), Inc. and Subsidiary Index to
Consolidated Financial Statements."
FIDBANK Capital Trust I
The Issuer Trust is a statutory business trust created under Delaware law
on July 14, 1998, and which will be governed by the Trust Agreement. The Issuer
Trust exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures, and (iii) engaging in only those
other activities necessary, convenient or incidental thereto (such as
registering the transfer of the Trust Securities). Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Issuer Trust, and
payments under the Junior Subordinated Debentures will be the sole source of
revenue of the Issuer Trust. Upon issuance of the Capital Securities, the
purchasers thereof will own all of the Capital Securities of the Issuer Trust.
Upon issuance of the Common Securities, BancShares will own all of the Common
Securities of the Issuer Trust which will represent an aggregate Liquidation
Amount equal to at least 3% of the Issuer Trust's total capital. See "FIDBANK
Capital Trust I."
The Offering
Securities Offered.............. $20,000,000 aggregate Liquidation Amount of
* % Capital Securities (Liquidation Amount
$10.00 per Capital Security). BancShares and
the Issuer Trust have granted to the
Underwriter an option, exercisable not later
than 30 days after the date of this
Prospectus, to purchase up to an additional
$3,000,000 aggregate Liquidation Amount of
Capital Securities (300,000 Capital
Securities) at the public offering price,
less the underwriting discounts and
commissions set forth on the cover page of
this Prospectus, plus accumulated
Distributions, if any, from the date of
issuance. The Underwriter may exercise such
option only to cover over-allotments made in
connection with the sale of Capital
Securities offered hereby. If purchased, the
Underwriter will offer such additional
Capital Securities on the same terms as those
on which the $20,000,000 aggregate
Liquidation Amount of the Capital Securities
are being offered.
Offering Price.................. $10.00 per Capital Security plus
accumulated Distributions, if any, from the
date of original issuance.
Distribution Dates.............. March 31, June 30, September 30 and
December 31 of each year, commencing * ,
1998.
Extension Periods............... So long as no Debenture Event of Default
has occurred and is continuing, Distributions
on Capital Securities may be deferred for the
duration of any Extension Period selected by
BancShares with respect to the payment of
interest on the Junior Subordinated
Debentures. No Extension Period may exceed 20
consecutive quarterly periods, extend beyond
the Stated Maturity of the Junior
Subordinated Debentures, or end on a date
other than a Distribution Date. See
"Description of the Capital Securities --
Distributions," "Description of the Junior
Subordinated Debentures -- Option to Extend
Interest Payment Period" and "Federal Income
Tax Consequences -- Interest Income and
Original Issue Discount."
During an Extension Period, interest on the
Junior Subordinated Debentures will
continue to accrue (and the amount of
Distributions to
6
<PAGE>
which holders of the Capital Securities are
entitled will accumulate) at the rate of
* % per annum, compounded quarterly, to the
extent permitted by applicable law, from
the relevant payment date for such
interest, and holders of Capital Securities
will be required to accrue income (in the
form of original issue discount ("OID"))
for United States federal income tax
purposes even though the Issuer Trust is
not making cash Distributions on such
Capital Securities. There could be multiple
Extension Periods of varying lengths
throughout the term of the Junior
Subordinated Debentures.
As a consequence of the extension by
BancShares of the interest payment period,
quarterly Distributions on the Capital
Securities will be deferred (though such
distributions will continue to accumulate
and compound quarterly, since interest will
continue to accrue and compound on the
Junior Subordinated Debentures) during any
such Extension Period. During an Extension
Period, BancShares will be prohibited,
subject to certain exceptions described
herein, from declaring or paying any cash
distributions with respect to its capital
stock or debt securities that rank pari
passu with or junior to the Junior
Subordinated Debentures. Upon the
termination of any Extension Period and the
payment of all amounts then due, BancShares
may commence a new Extension Period,
subject to the foregoing requirements. See
"Description of the Capital Securities --
Distributions" and "Description of the
Junior Subordinated Debentures -- Option to
Extend Interest Payment Period." During an
Extension Period, holders of Capital
Securities will be required to include
income in the form of OID in their gross
income for federal income tax purposes in
advance of the receipt of the cash payments
attributable to such deferred interest. See
"Description of the Junior Subordinated
Debentures -- Option to Extend Interest
Payment Period" and "Federal Income Tax
Consequences -- Interest Income and
Original Issue Discount."
Ranking......................... The Capital Securities will rank pari
passu, and payments thereon will be made pro
rata, with the Common Securities except as
described under "Description of the Capital
Securities -- Subordination of Common
Securities." The Junior Subordinated
Debentures will be unsecured and subordinate
and junior in right of payment to the extent
and in the manner set forth in the Junior
Subordinated Indenture to all Senior
Indebtedness. See "Description of the Junior
Subordinated Debentures." The Guarantee will
constitute an unsecured obligation of
BancShares and will rank subordinate and
junior in right of payment to the extent and
in the manner set forth in the Guarantee to
all Senior Indebtedness. See "Description of
the Guarantee." In addition, because
BancShares is a holding company, the Junior
Subordinated Debentures and the Guarantee
will be effectively subordinated to all
existing and future liabilities of
BancShares' subsidiaries, including the
Bank's deposit liabilities. See "Description
of the Junior Subordinated Debentures --
Subordination."
Redemption...................... The Trust Securities are subject to
mandatory redemption (i) in whole, but not in
part, at the Stated Maturity upon repayment
of the Junior Subordinated Debentures, (ii)
in whole, but not in part, contemporaneously
with the optional redemption at any time by
BancShares of the Junior Subordinated
Debentures at any time within 90 days
following the occurrence and during the
continuation of a Tax Event, Investment
Company Event or Capital Treatment Event, in
each
7
<PAGE>
case subject to possible regulatory
approval, and (iii) in whole or in part at
any time on or after * , 2003,
contemporaneously with the optional
redemption by BancShares of the Junior
Subordinated Debentures in whole or in
part, in each case at the applicable
redemption price. See "Description of the
Capital Securities -- Redemption" and
"Description of the Junior Subordinated
Debentures -- Redemption."
No Ratings...................... The Capital Securities will not be rated by
any rating service, nor is any other security
issued by BancShares so rated.
Termination and Distribution.... BancShares, as holder of the Common
Securities, will have the right at any time
to terminate the Issuer Trust and cause the
Junior Subordinated Debentures to be
distributed to the holders of the Capital
Securities in liquidation of the Issuer
Trust. This right is optional and wholly
within the discretion of BancShares.
Circumstances under which BancShares may
determine to exercise such right could
include the occurrence of adverse tax
consequences to BancShares or the Issuer
Trust that are not within the definition of a
Tax Event because they do not result from an
amendment or change described in such
definition, and changes in the accounting
requirements applicable to the Capital
Securities as described under "Accounting
Treatment." See "Description of the Capital
Securities -- Liquidation Distribution Upon
Dissolution."
Guarantee....................... BancShares has, through the Guarantee, the
Junior Subordinated Indenture, the Junior
Subordinated Debentures and the Trust
Agreement, fully and unconditionally
guaranteed all the Issuer Trust's obligations
with respect to the Capital Securities,
subject to certain subordination provisions
discussed below. The payment of Distributions
on the Capital Securities is guaranteed by
BancShares under the Guarantee, but only to
the extent the Issuer Trust has funds legally
and immediately available to make such
Distributions. If BancShares does not make
principal or interest payments on the Junior
Subordinated Debentures, the Issuer Trust
will not have sufficient funds to make
Distributions on the Capital Securities. In
such event, a holder of Capital Securities
may institute a legal proceeding directly
against BancShares pursuant to the terms of
the Guarantee to enforce payment of amounts
equal to such Distributions to such holder.
See "Description of the Junior Subordinated
Debentures -- Enforcement of Certain Rights
by Holders of Capital Securities."
ERISA Considerations............ Prospective investors must carefully
consider the restrictions on purchase set
forth under "ERISA Considerations."
Absence of Market for the
Capital Securities............... The Capital Securities will be a new issue
of securities for which there currently is
no market. The Capital Securities have been
approved for quotation on AMEX, subject to
notice of issuance. However, there can be no
assurance that an active public market in
the Capital Securities will develop or, if
one does develop, that it will be
maintained. Accordingly, there can be no
assurance as to the development or liquidity
of any market for the Capital Securities.
See "Underwriting."
American Stock Exchange, Inc.... The Capital Securities have been approved
for quotation on AMEX, subject to notice of
issuance. See "Underwriting."
8
<PAGE>
For additional information regarding the Capital Securities, see "FIDBANK
Capital Trust I," "Accounting Treatment," "Use of Proceeds," "Description of
the Capital Securities," "Description of the Junior Subordinated Debentures,"
"Description of the Guarantee," "Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the Guarantee," "Federal Income Tax
Consequences," and "ERISA Considerations."
Use of Proceeds
All net proceeds to the Issuer Trust from the sale of the Capital
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. All the net proceeds to be received by BancShares from the sale of
the Junior Subordinated Debentures will be used for general corporate purposes,
although it is likely that substantially all such proceeds will be used
initially to make additional capital contributions to the Bank to fund its
operations and continued expansion and to maintain its status as a "well
capitalized" bank under bank regulatory capital guidelines. See "Supervision
and Regulation." Portions of the net proceeds from the sale of the Junior
Subordinated Debentures also may be used in the future for acquisitions by
BancShares or the Bank, extensions of credit to the Bank, or for repurchases of
outstanding common stock of BancShares.
The proceeds from the Capital Securities are expected to qualify as Tier 1
or core capital of BancShares under the risk-based capital guidelines of the
Federal Reserve. However, capital received from the proceeds of the sale of the
Capital Securities cannot constitute more than 25% of the total Tier 1 capital
of BancShares (the "25% Capital Limitation"). Amounts in excess of the 25%
Capital Limitation will constitute Tier 2 or supplementary capital of
BancShares. See "Use of Proceeds" and "Accounting Treatment."
Risk Factors
Prospective investors should carefully consider the matters set forth under
"Risk Factors" beginning on page 12.
9
<PAGE>
Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial
information for BancShares as of and for the years ended December 31, 1997,
1996, 1995, 1994 and 1993, and the six-month periods ended June 30, 1998 and
1997. The selected consolidated financial data as of and for each of the years
in the five-year period ended December 31, 1997 have been derived from
BancShares' audited consolidated financial statements. The consolidated
financial statements as of December 31, 1997 and 1996 and for each of the years
in the three-year period ended December 31, 1997, and the independent auditors'
reports thereon, are included elsewhere in this Prospectus. The information
presented as of and for the six-month periods ended June 30, 1998 and 1997 is
derived from BancShares' unaudited consolidated financial statements for these
periods. Those unaudited consolidated financial statements, which are included
elsewhere in this Prospectus, include all adjustments, consisting only of
normal recurring accruals, which management considers necessary for a fair
presentation of the financial condition and results of operations for such
interim periods. Results for the six-month period ended June 30, 1998 are not
necessarily indicative of results to be expected for the full year or any other
interim period. The following information should also be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere herein. See also "Available Information,"
"Experts," and "Fidelity BancShares (N.C.), Inc. and Subsidiary Index to
Consolidated Financial Statements."
<TABLE>
<CAPTION>
As of and for the
six months ended
June 30,
---------------------------
1998 1997
------------- -------------
(Dollars in thousands,
except share and per share
data)
(Unaudited)
<S> <C> <C>
Summary of Operations
Interest income .................................. $ 22,434 $ 21,007
Interest expense ................................. 9,686 9,323
--------- ---------
Net interest income .............................. 12,748 11,684
Provision for loan losses ........................ 180 180
--------- ---------
Net interest income after provision for loan
losses .......................................... 12,568 11,504
Noninterest income ............................... 2,639 1,908
Noninterest expense .............................. 8,411 7,595
--------- ---------
Income before income taxes ....................... 6,796 5,817
Income taxes ..................................... 2,587 2,193
--------- ---------
Net income ....................................... $ 4,209 $ 3,624
========= =========
Selected Period-End Balances
Total assets ..................................... $ 597,723 $ 559,652
Investment securities and federal funds sold ..... 158,266 156,340
Loans, gross ..................................... 385,271 354,013
Interest earning assets .......................... 543,537 510,353
Deposits ......................................... 515,937 484,718
Interest bearing liabilities ..................... 449,455 434,212
Shareholders' equity ............................. 62,542 55,039
Common shares outstanding ........................ 28,410 28,410
--------- ---------
Selected Average Balances
Total assets ..................................... $ 585,136 $ 545,705
Investment securities and federal funds sold ..... 168,045 153,087
Loans, gross ..................................... 370,463 342,042
Interest earning assets .......................... 538,508 495,129
Deposits ......................................... 505,827 479,189
Interest bearing liabilities ..................... 448,130 428,514
Shareholders' equity ............................. 61,016 52,458
Common shares outstanding ........................ 28,410 28,410
--------- ---------
Profitability Ratios
Return on average total assets (1) ............... 1.44% 1.33%
Return on average shareholders' equity (1) ....... 13.80 13.82
Dividend payout ratio (2) ........................ 10.80 12.54
--------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 73.24% 71.38%
Average shareholders' equity to average total
assets .......................................... 10.43 9.61
Tier 1 capital ratio (3) ......................... 13.04 12.59
Total capital ratio (3) .......................... 13.99 13.82
Leverage capital ratio (3) ....................... 8.82 8.10
--------- ---------
As of and for the
year ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income .................................. $ 43,249 $ 37,238 $ 30,607 $ 23,859 $ 20,991
Interest expense ................................. 19,016 16,245 12,616 8,437 7,599
--------- --------- --------- --------- ---------
Net interest income .............................. 24,233 20,993 17,991 15,422 13,392
Provision for loan losses ........................ 360 360 360 360 360
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses .......................................... 23,873 20,633 17,631 15,062 13,032
Noninterest income ............................... 3,974 3,348 2,628 2,867 2,495
Noninterest expense .............................. 15,878 14,191 10,998 9,968 9,485
--------- --------- --------- --------- ---------
Income before income taxes ....................... 11,969 9,790 9,261 7,961 6,042
Income taxes ..................................... 4,581 3,487 3,254 2,955 2,232
--------- --------- --------- --------- ---------
Net income ....................................... $ 7,388 $ 6,303 $ 6,007 $ 5,006 $ 3,810
========= ========= ========= ========= =========
Selected Period-End Balances
Total assets ..................................... $ 582,995 $ 542,138 $ 406,304 $ 334,390 $ 325,383
Investment securities and federal funds sold ..... 179,043 163,083 108,518 71,816 93,178
Loans, gross ..................................... 358,250 334,880 268,931 242,301 209,661
Interest earning assets .......................... 537,293 497,963 377,449 314,117 302,839
Deposits ......................................... 505,237 479,140 352,566 296,297 285,146
Interest bearing liabilities ..................... 448,832 429,649 313,409 264,370 256,272
Shareholders' equity ............................. 59,117 51,242 44,351 38,433 32,738
Common shares outstanding ........................ 28,410 28,410 28,582 28,582 28,682
--------- --------- --------- --------- ---------
Selected Average Balances
Total assets ..................................... $ 558,119 $ 476,559 $ 371,036 $ 331,956 $ 301,734
Investment securities and federal funds sold ..... 164,884 140,651 85,501 84,184 92,259
Loans, gross ..................................... 349,526 297,229 260,103 226,400 190,731
Interest earning assets .......................... 514,410 437,880 345,604 310,584 282,990
Deposits ......................................... 487,985 414,829 323,352 287,876 263,119
Interest bearing liabilities ..................... 433,979 370,876 286,412 258,390 236,698
Shareholders' equity ............................. 54,840 46,824 39,255 34,158 31,191
Common shares outstanding ........................ 28,410 28,570 28,582 28,640 28,686
--------- --------- --------- --------- ---------
Profitability Ratios
Return on average total assets (1) ............... 1.32% 1.32% 1.62% 1.51% 1.26%
Return on average shareholders' equity (1) ....... 13.47 13.46 15.30 14.66 12.21
Dividend payout ratio (2) ........................ 12.31 14.51 11.42 13.72 12.05
--------- --------- --------- --------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 71.63% 71.65% 80.44% 78.64% 72.49%
Average shareholders' equity to average total
assets .......................................... 9.83 9.83 10.58 10.29 10.34
Tier 1 capital ratio (3) ......................... 12.80 12.54 15.57 16.58 17.33
Total capital ratio (3) .......................... 13.93 13.79 16.82 17.83 18.58
Leverage capital ratio (3) ....................... 8.52 8.55 10.74 10.78 10.44
--------- --------- --------- --------- ---------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of and for the
six months ended
June 30,
---------------------------
1998 1997
------------- -------------
(Dollars in thousands,
except share and per share
data)
(Unaudited)
<S> <C> <C>
Per Share of Common Stock
Net income applicable to common shares (4) ......... $ 148.17 $ 127.55
Cash dividends ..................................... 16.00 16.00
Book value (5) ..................................... 2,201.41 1,937.31
---------- ----------
Asset Quality Ratios (6)
Nonperforming assets to total gross loans and
other real estate owned ........................... 0.01% 0.02%
Net charge-offs to average loans ................... 0.33 0.05
Total allowance for loan losses to total loans ..... 0.96 1.20
Total allowance for loan losses to total
nonperforming assets .............................. 6,495.89 7,411.36
As of and for the
year ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Per Share of Common Stock
Net income applicable to common shares (4) ......... $ 260.04 $ 220.63 $ 210.18 $ 174.80 $ 132.81
Cash dividends ..................................... 32.00 32.00 24.00 24.00 16.00
Book value (5) ..................................... 2,080.86 1,803.66 1,551.70 1,344.65 1,141.43
---------- ---------- ---------- ---------- ----------
Asset Quality Ratios (6)
Nonperforming assets to total gross loans and
other real estate owned ........................... 0.02% 0.02% 0.00% 0.00% 0.63%
Net charge-offs to average loans ................... 0.10 0.14 0.03 0.01 0.00
Total allowance for loan losses to total loans ..... 1.16 1.24 1.52 1.56 1.65
Total allowance for loan losses to total
nonperforming assets .............................. 7,271.93 7,261.40 N/A N/A 261.91
</TABLE>
- ---------
(1) Annualized for the six months ended June 30, 1998 and 1997.
(2) For each indicated period, total common dividends declared divided by net
income.
(3) See "Supervision and Regulation -- Capital Adequacy" for a more detailed
description of these ratios.
(4) For each indicated period, net income divided by the average number of
common shares outstanding. BancShares' adoption of Statement 128,
"Earnings per Share," had no effect on its earnings per share disclosure
since BancShares has no potentially dilutive securities.
(5) At the end of each indicated period, shareholders' equity divided by the
number of common shares outstanding.
(6) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- For the Six Months Ended June 30, 1998 and 1997
-- Financial Condition and Results of Operations -- Asset Quality and
Provision for Possible Loan Losses."
11
<PAGE>
RISK FACTORS
Prospective purchasers of the Capital Securities should carefully review
the information contained elsewhere in this Prospectus and should particularly
consider the following matters.
Risk Factors Relating to the Capital Securities
Subordinate Ranking of Obligations Under the Guarantee and the Junior
Subordinated Debentures. The obligations of BancShares under the Guarantee
issued by BancShares for the benefit of the holders of Capital Securities and
under the Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior Indebtedness. At June 30, 1998, BancShares had no Senior
Indebtedness. However, none of the Junior Subordinated Indenture, the Guarantee
or the Trust Agreement places any limitation on the amount of secured or
unsecured debt, including Senior Indebtedness, that may be incurred by
BancShares. Therefore, if BancShares were to incur such Senior Indebtedness,
required payments on such Senior Indebtedness would, under certain conditions,
need to be made before BancShares could make any payments on the Junior
Subordinated Debentures. See "Description of the Guarantee -- Status of the
Guarantee" and "Description of the Junior Subordinated Debentures --
Subordination."
The ability of the Issuer Trust to pay amounts due on the Capital
Securities is solely dependent upon BancShares' making payments on the Junior
Subordinated Debentures as and when required.
Because BancShares is a bank holding company, its right to participate in
any distribution of assets, if any, of the Bank upon its liquidation or
reorganization or otherwise (and thus the ability of holders of the Capital
Securities to benefit indirectly from such a distribution) is subject to the
prior claims of creditors of the Bank (including its depositors), except to the
extent that BancShares may itself be recognized as a creditor of the Bank. At
June 30, 1998, the Bank had total liabilities (excluding liabilities owed to
BancShares) of approximately $533.4 million, including deposits. Accordingly,
the Capital Securities effectively will be subordinated to all existing and
future liabilities of the Bank, and holders of Capital Securities should look
only to the assets of BancShares for payments on the Capital Securities.
Neither the Guarantee nor the Junior Subordinated Indenture places any
limitation on the amount of secured or unsecured debt that may be incurred by
the Bank in the future. See "Description of the Junior Subordinated Debentures"
and "Description of the Guarantee."
Option to Extend Interest Payment Period; Tax Consequences. So long as no
Debenture Event of Default has occurred and is continuing, BancShares has the
right under the Junior Subordinated Indenture to defer the payment of interest
on the Junior Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures or end on a date other
than a Distribution Date. See "Description of the Junior Subordinated
Debentures -- Option to Extend Interest Payment Period." As a consequence of
any such deferral, quarterly Distributions on the Capital Securities by the
Issuer Trust will be deferred during any such Extension Period. Distributions
to which holders of the Capital Securities are entitled will accumulate
additional Distributions thereon during any Extension Period at a rate equal to
* % per annum, compounded quarterly from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distributions" as used herein
shall include any such additional Distributions. During any such Extension
Period, BancShares may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of BancShares' capital stock or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of BancShares that rank pari passu in all respects with or junior in
interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions or other acquisitions of shares of capital stock of BancShares in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of any one or more employees, officers,
directors or consultants, in connection with a dividend reinvestment or
shareholder stock purchase plan or in connection with the issuance of capital
stock of BancShares (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered into
prior to the applicable Extension Period, (b) as a result of an exchange or
conversion of any class or series of BancShares' capital stock (or any capital
stock of a subsidiary of BancShares) for any class or series of BancShares'
capital stock or of any class or series of BancShares' indebtedness for any
class or series of BancShares' capital stock, (c) the purchase of fractional
interests in shares of BancShares' capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged, (d) any declaration of a dividend in connection with any
shareholder's rights plan, or the issuance of rights, stock or other property
under any shareholder's rights plan, or the redemption or repurchase of rights
pursuant thereto, or (e) any dividend in the form of stock, warrants, options
or other rights where the dividend stock or the stock issuable upon exercise of
such warrants, options or other rights is the same stock as that on which the
dividend
12
<PAGE>
is being paid or ranks pari passu with or junior to such stock). Prior to the
termination of any such Extension Period, BancShares may further defer the
payment of interest, provided that no Extension Period may exceed 20
consecutive quarterly periods, extend beyond the Stated Maturity of the Junior
Subordinated Debentures, or end on a date other than a Distribution Date. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at a rate equal to * % per
annum, compounded quarterly), BancShares may elect to begin a new Extension
Period subject to the above conditions. No interest shall be due and payable
during an Extension Period, except at the end thereof. BancShares must give the
Issuer Trustees notice of its election of such Extension Period at least one
Business Day prior to the earlier of (i) the date the Distributions on the
Capital Securities would have been payable but for the election to begin such
Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of BancShares'
election to begin a new Extension Period to the holders of the Capital
Securities. Subject to the foregoing, there is no limitation on the number of
times that BancShares may elect to begin an Extension Period. See "Description
of the Capital Securities -- Distributions" and "Description of the Junior
Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, a holder of Capital Securities will
accrue interest income (in the form of OID) for United States federal income
tax purposes in respect of its pro rata share of the Junior Subordinated
Debentures held by the Issuer Trust. As a result, a holder of Capital
Securities will include such OID income in gross income for United States
federal income tax purposes in advance of the receipt of cash attributable to
such income, and will not receive the cash related to such income from the
Issuer Trust if the holder disposes of the Capital Securities prior to the
record date for the payment of Distributions with respect to such Extension
Period. See "Federal Income Tax Consequences -- Interest Income and Original
Issue Discount" and " -- Sale or Redemption of Capital Securities."
BancShares has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should BancShares elect to exercise such
right in the future, the market price of the Capital Securities is likely to be
affected. A holder that disposes of its Capital Securities during an Extension
Period, therefore, might not receive the same return on its investment as a
holder that continues to hold its Capital Securities. In addition, as a result
of the existence of BancShares' right to defer interest payments, the market
price of the Capital Securities (which represent preferred undivided beneficial
interests in the assets of the Issuer Trust) may be more volatile than the
market prices of other securities on which OID accrues that are not subject to
such deferrals.
Possibility of Early Redemption. Upon the occurrence and during the
continuation of a Tax Event, Investment Company Event or Capital Treatment
Event, BancShares has the right to redeem the Junior Subordinated Debentures in
whole, but not in part, at any time within 90 days following the occurrence of
such Tax Event, Investment Company Event or Capital Treatment Event and thereby
cause a mandatory redemption of the Capital Securities and the Common
Securities. In addition, on or after * , 2003, BancShares may prepay the
Junior Subordinated Debentures, in whole or in part, for any reason and thereby
cause an optional redemption of the Capital Securities and the Common
Securities, in whole or in part. Any such redemption shall be at a price equal
to the aggregate Liquidation Amount of the Capital Securities and the Common
Securities, respectively, together with accumulated Distributions to but
excluding the date fixed for redemption. The ability of BancShares to exercise
its rights to redeem the Junior Subordinated Debentures prior to the Stated
Maturity may be subject to prior regulatory approval by the Federal Reserve, if
then required under applicable Federal Reserve capital guidelines or policies.
See "Description of the Capital Securities -- Redemption" and " -- Liquidation
Distribution Upon Dissolution," and "Description of the Junior Subordinated
Debentures -- Redemption."
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to BancShares experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or
any political subdivision or taxing authority thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or which pronouncement, action or decision is announced on
or after the date of issuance of the Capital Securities (including, without
limitation, any of the foregoing arising with respect to, or resulting from,
any proposal, proceeding or other action commencing on or before such date),
there is more than an insubstantial risk that (i) the Issuer Trust is, or will
be within 90 days of the delivery of such opinion, subject to United States
federal income tax with respect to income received or accrued on the Junior
Subordinated Debentures, (ii) interest payable by BancShares on the Junior
Subordinated Debentures is not, or within 90 days of the delivery of such
opinion will not be, deductible by BancShares, in whole or in part, for United
States federal income tax purposes or (iii) the Issuer Trust is, or will be
within 90 days of the delivery of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. According
to a petition recently filed in the United States Tax Court by a corporation
unrelated
13
<PAGE>
to BancShares and the Issuer Trust, the Internal Revenue Service has challenged
the deductibility for United States federal income tax purposes of interest
payments on certain purported debt instruments held by entities intended to be
taxable as partnerships for United States federal income tax purposes, where
those entities, in turn, issued preferred securities to investors. Although the
overall structure of the financing arrangement involved in that case is
somewhat similar to the financing structure for the Junior Subordinated
Debentures and the Issuer Trust, the relevant facts in that case appear to
differ significantly from those relating to the Junior Subordinated Debentures
and the Issuer Trust. Whether the Internal Revenue Service would attempt to
challenge the deductibility of interest on the Junior Subordinated Debentures
cannot be predicted. BancShares, based on the advice of counsel, intends to
take the position that interest payments on the Junior Subordinated Debentures
will be deductible by BancShares for United States federal income tax purposes.
See "Federal Income Tax Consequences -- Classification of the Junior
Subordinated Debentures." Adverse developments relating to the deductibility of
interest, whether arising in connection with the case currently pending in the
United States Tax Court or not, could give rise to a Tax Event.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to BancShares experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation
or application of law or regulation by any legislative body, court,
governmental agency or regulatory authority, there is more than an
insubstantial risk that the Issuer Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Capital Securities.
A "Capital Treatment Event" means the reasonable determination by
BancShares that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the Capital
Securities, there is more than an insubstantial risk that BancShares will not
be entitled to treat an amount equal to the Liquidation Amount of the Capital
Securities as "Tier 1 capital" (or the then equivalent thereof) for purposes of
the risk-based capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to BancShares.
Possible Tax Law Changes. In both 1996 and 1997, the Clinton
Administration proposed to amend the Internal Revenue Code of 1986, as amended
(the "Code"), to deny deductions of interest and OID on instruments with
features similar to those of the Junior Subordinated Debentures when issued
under arrangements similar to the Issuer Trust. That proposal was not passed
by, and is not currently pending before, Congress. There can be no assurance,
however, that future legislative proposals, future regulations or official
administrative pronouncements, or future judicial decisions will not affect the
ability of BancShares to deduct interest on the Junior Subordinated Debentures.
Such a change could give rise to a Tax Event, which may permit BancShares, upon
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve, to cause a redemption of the
Capital Securities, as described more fully under "Description of the Capital
Securities -- Redemption."
Possible Exchange of Capital Securities for Junior Subordinated
Debentures. The holders of all the outstanding Common Securities have the right
at any time to dissolve the Issuer Trust and, after satisfaction of liabilities
to creditors of the Issuer Trust as provided by applicable law, cause the
Junior Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust. The
ability of BancShares to dissolve the Issuer Trust may be subject to prior
regulatory approval of the Federal Reserve, if then required under applicable
Federal Reserve capital guidelines or policies. See "Description of the Capital
Securities -- Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Issuer Trust will be classified as a grantor
trust for United States federal income tax purposes, a distribution of the
Junior Subordinated Debentures upon a liquidation of the Issuer Trust will not
be a taxable event to holders of the Capital Securities. However, if a Tax
Event were to occur that would cause the Issuer Trust to be subject to United
States federal income tax with respect to income received or accrued on the
Junior Subordinated Debentures, a distribution of the Junior Subordinated
Debentures by the Issuer Trust would be a taxable event to the Issuer Trust and
the holders of the Capital Securities. See "Federal Income Tax Consequences --
Distribution of Junior Subordinated Debentures to Holders of Capital
Securities."
Limitation on Rights Under the Guarantee. Bankers Trust will act as the
Guarantee Trustee under the Guarantee and will hold the Guarantee for the
benefit of the holders of the Capital Securities. Bankers Trust will also act
as Debenture
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Trustee for the Junior Subordinated Debentures and as Property Trustee under
the Trust Agreement. Bankers Trust (Delaware) will act as Delaware Trustee
under the Trust Agreement. The Guarantee guarantees to the holders of the
Capital Securities the following payments, to the extent not paid by or on
behalf of the Issuer Trust: (i) any accumulated and unpaid Distributions
required to be paid on the Capital Securities, to the extent that the Issuer
Trust has funds on hand available therefor at such time; (ii) the Redemption
Price (as defined in "Description of the Capital Securities -- Redemption")
with respect to any Capital Securities called for redemption, to the extent
that the Issuer Trust has funds on hand available therefor at such time; and
(iii) upon a voluntary or involuntary dissolution of the Issuer Trust (unless
the Junior Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Issuer Trust has funds on hand available therefor at such time, and (b) the
amount of assets of the Issuer Trust remaining available for distribution to
holders of the Capital Securities on liquidation of the Issuer Trust. The
Guarantee is subordinated as described under " -- Ranking of Subordinated
Obligations Under the Guarantee and the Junior Subordinated Debentures" and
"Description of the Guarantee -- Status of the Guarantee." The holders of not
less than a majority in aggregate Liquidation Amount of the outstanding Capital
Securities have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Guarantee Trustee in respect of
the Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee under the Guarantee. Any holder of the Capital Securities may
institute a legal proceeding directly against BancShares to enforce its rights
under the Guarantee without first instituting a legal proceeding against the
Issuer Trust, the Guarantee Trustee or any other person or entity.
If BancShares were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust would lack funds for
the payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and
such event is attributable to the failure of BancShares to pay any amounts
payable in respect of the Junior Subordinated Debentures on the payment date on
which such payment is due and payable, then a holder of Capital Securities may
institute a legal proceeding directly against BancShares for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities of such holder (a "Direct
Action"). In connection with such Direct Action, BancShares will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by BancShares to such holder of Capital Securities in the Direct Action.
Except as described herein, holders of Capital Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of the Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Capital Securities"
and " -- Debenture Events of Default," and "Description of the Guarantee." The
Trust Agreement provides that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
Limited Voting Rights. Holders of Capital Securities will have limited
voting rights relating generally to the modification of the Capital Securities
and the Guarantee and the exercise of the Issuer Trust's rights as holder of
Junior Subordinated Debentures. Holders of Capital Securities will not be
entitled to appoint, remove or replace the Property Trustee or the Delaware
Trustee except upon the occurrence of certain events specified in the Trust
Agreement and described herein. The Property Trustee and the holders of all the
Common Securities may, subject to certain conditions, amend the Trust Agreement
without the consent of holders of Capital Securities to cure any ambiguity or
make other provisions not inconsistent with the Trust Agreement or to ensure
that the Issuer Trust (i) will not be taxable other than as a grantor trust for
United States federal income tax purposes, or (ii) will not be required to
register as an "investment company" under the Investment Company Act. See
"Description of the Capital Securities -- Voting Rights; Amendment of Trust
Agreement" and " -- Removal of Issuer Trustees; Appointment of Successors."
Absence of Prior Market for the Capital Securities and Certain Trading
Restrictions. There is no current public market for the Capital Securities.
Although the Capital Securities have been approved for quotation on AMEX,
subject to notice of issuance, there can be no assurance that an active public
market will develop for the Capital Securities, or if such market develops,
that it will be maintained or that the market price will equal or exceed the
public offering price set forth on the cover page of this Prospectus. The
public offering price for the Capital Securities has been determined through
negotiations between BancShares and the Underwriter. Prices for the Capital
Securities will be determined in the marketplace and may be influenced by many
factors, including prevailing interest rates, the liquidity of the market for
the Capital Securities, investor perceptions of BancShares and general industry
and economic conditions. In addition, notwithstanding the registration of the
Capital Securities, holders who are "affiliates" of BancShares or the Issuer
Trust as defined under Rule 405 of
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the Securities Act may publicly offer for sale or resell the Capital Securities
only in compliance with the provisions of Rule 144 under the Securities Act.
See "Underwriting."
Because holders of Capital Securities may receive Junior Subordinated
Debentures on termination of the Issuer Trust, prospective purchasers of
Capital Securities are also making an investment decision with regard to the
Junior Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein. See "Description
of the Junior Subordinated Debentures."
Capital Securities are Not Insured. The Capital Securities are not insured
by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") or by any other
governmental agency.
Risk Factors Relating to BancShares
Reliance on Dividend Payments by the Bank. Almost all of the operating
assets of BancShares are owned by the Bank, and BancShares relies primarily on
dividends from the Bank to meet its obligations for the payment of principal
and interest on its separate debt obligations and corporate expenses and for
payment of dividends on its outstanding common stock. Therefore, BancShares may
be unable to meet its obligations under the Junior Subordinated Indenture and
the Guarantee in the event the Bank is unable to pay dividends. The payment of
dividends by the Bank to BancShares is subject to certain legal and regulatory
limitations, is subject to ongoing review by banking regulators and, under
certain circumstances, may require prior approval by banking regulatory
authorities. At June 30, 1998, approximately $6.6 million was available for
payment of dividends to BancShares from the Bank without regulatory approval
and without affecting the Bank's current classification as a "well capitalized"
bank under federal bank regulatory capital guidelines. However, no assurance
can be given that the Bank will have funds available to pay dividends to
BancShares at any particular time in the future. At June 30, 1998, BancShares
had separate assets (consisting primarily of marketable equity securities) with
a fair value of approximately $10.8 million that could be liquidated, if
necessary, in order to pay obligations of BancShares. The Bank also is subject
to certain restrictions under federal law on extensions of credit to, and
certain other transactions with, BancShares and certain of its other
affiliates, and on investments in the stock or other securities thereof. Such
restrictions prevent BancShares and such other affiliates from borrowing from
the Bank unless the loans are secured by various types of collateral. Further,
such secured loans or other transactions and investments by the Bank are
generally limited in amount as to BancShares and as to each such other
affiliate to 10% of the Bank's capital and surplus and as to BancShares and all
such other affiliates to an aggregate of 20% of the Bank's capital and surplus.
See "Supervision and Regulation."
Fluctuations in Performance. BancShares' operating results can fluctuate
substantially from period to period as a result of a number of factors,
including the volume of loan production, interest rates, risk of credit losses
and changes in the economy, including the local economy in the markets in which
the Bank does business. In particular, BancShares' results are strongly
influenced by the level of loan production, which is influenced by the interest
rate environment and other economic factors. Accordingly, BancShares' net
income may fluctuate substantially from period to period.
Interest Rate Fluctuations. Changes in interest rates can have differing
effects on various aspects of BancShares' business, particularly on the net
interest income of BancShares, the rate of loan prepayments, and the volume of
loans originated.
Net Interest Income. The Bank's profitability is dependent to a large
extent on its net interest income, which is the difference between its income
on interest-earning assets and its expense on interest-bearing liabilities. The
Bank, like most financial institutions, is affected by changes in general
interest rate levels and by other economic factors beyond its control. Interest
rate risk arises in part from the mismatch (i.e., the interest sensitivity gap)
between the dollar amount of repricing or maturing interest earning assets and
liabilities, and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More interest earning assets than interest
bearing liabilities repricing or maturing over a given time period is
considered asset-sensitive and is reflected as a positive gap, and more
liabilities than assets repricing or maturing over a given time period is
considered liability-sensitive and is reflected as a negative gap. A
liabilities-sensitive position (i.e., a negative gap) may generally enhance net
interest income in a falling interest rate environment and reduce net interest
income in a rising interest rate environment, while an asset-sensitive position
(i.e., a positive gap) may generally enhance net interest income in a rising
interest rate environment and will reduce net interest income in a falling
interest rate environment. Fluctuations in interest rates are not predictable
or controllable. Periodically, the Bank estimates the prepayment rates of all
loans in its loan portfolios in order to determine its gap position over the
approaching twelve-month period. At December 31, 1997, based on management's
assumptions derived from its experience, the Bank calculated that it had a
positive one-year cumulative gap position representing 16.92% of total assets.
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Rate of Loan Prepayment. Changes in interest rates also affect the
average life of loans. The relatively lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities
as borrowers have refinanced their mortgages to reduce their borrowing costs.
Under these circumstances, the Bank 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 prepaid loans or securities.
Possible Inadequacy of Allowance for Loan Losses. Industry experience
indicates that a portion of BancShares' loans held in its portfolio will become
delinquent and a portion of the loans will become charge-offs. Regardless of
the underwriting criteria used by the Bank, losses may be experienced as a
result of various factors beyond the Bank's control, including, among other
things, changes in market conditions affecting the value of properties and
problems affecting the credit of the borrower. The Bank's determination of the
adequacy of its allowance for loan losses is based on various considerations,
including an analysis of the risk characteristics of various classifications of
loans, previous loan loss experience, specific loans which would have loan loss
potential, delinquency trends, estimated fair value of the underlying
collateral, current economic conditions, the views of the Bank's regulators
(who have the authority to require additional reserves), and geographic and
industry loan concentration. If delinquency levels were to increase as a result
of adverse general economic conditions, the loan loss reserve so determined by
the Bank, however, may not be adequate. The Bank believes the allowance to be
adequate, but there can be no assurance that the allowance will be adequate to
cover possible loan losses or that the Bank will not experience significant
losses in its loan portfolio which may require significant increases to the
allowance for loan losses in the future. At June 30, 1998, BancShares'
allowance for loan losses totaled $3.7 million which was 0.96% of gross loans.
No Assurance of Continued Growth or Successful Growth Management.
BancShares has grown, and may seek to grow in the future, through acquisitions
by the Bank of other financial institutions and branches of financial
institutions and the establishment of de novo branches. However, opportunities
for acquisitions and the establishment of de novo branches in BancShares'
market area are highly competitive. Moreover, any acquisitions will be subject
to regulatory approval and there can be no assurance that BancShares will
obtain such approvals. BancShares may not be successful in the future in
identifying acquisition candidates, integrating acquired institutions or
preventing deposit erosion at acquired institutions or branches. Furthermore,
BancShares' ability to grow through acquisitions will depend on its maintaining
sufficient regulatory capital levels and on economic conditions.
BancShares has experienced growth over the past five years, as total
assets have increased from $325.4 million at December 31, 1993 to approximately
$583.0 million at December 31, 1997. There can be no assurance that BancShares
will be able to manage adequately and profitably its future growth. Failure by
BancShares to manage its growth effectively or sustain historical increases in
loan origination volume could have a material adverse effect on BancShares'
business, financial condition, and results of operations.
Concentration of Control. A significant percentage of BancShares' voting
securities are beneficially owned by members of the Holding family.
Accordingly, the Holding family is able to control the election of the Board of
Directors of BancShares and thus the direction and future operations of
BancShares without any approving vote of the holders of the Capital Securities
offered hereby. See "Beneficial Ownership of Securities."
Potential Conflicts of Interest. Certain decisions concerning the
operations of, or financial dealings between, BancShares and other financial
services companies controlled by the Holding family may present conflicts of
interest between the Holding family and the holders of the Capital Securities
offered hereby. Although it is expected that the terms of any such transactions
between BancShares or the Bank and such other companies will be on terms no
less favorable than those that could be obtained from an independent third
party, BancShares cannot predict with certainty either the nature of, or the
financial terms of, any transactions which may arise in the future. See
"Fidelity BancShares (N.C.), Inc.," "Business," and "Certain Relationships and
Related Transactions."
Competition. The banking business is highly competitive. In its primary
market area, the Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms and other financial and
non-financial companies operating locally and elsewhere, which may offer
products similar to those offered by the Bank. Certain of the Bank's primary
competitors have substantially greater resources and lending limits than the
Bank and offer services the Bank does not provide at this time. Also, certain
of the competing banks in the Bank's market area are controlled by the Holding
family which also controls BancShares. See "Business" and "Certain
Relationships and Related Transactions." BancShares' profitability depends upon
the Bank's ability to continue to compete in its primary market areas. See
"Business -- Description of Business -- Competition."
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Year 2000 Issue. BancShares is heavily dependent upon complex computer
systems for all phases of its operations. The year 2000 issue common to most
corporations concerns the inability of certain software and databases to
recognize properly date sensitive information beginning January 1, 2000. This
problem could result in a disruption to BancShares' operations, if not
corrected. Financial institutions are particularly sensitive to such
disruptions. In 1997, resources were committed and implementation began to
modify the affected information systems. Implementation is currently on
schedule, but the degree of success of the project cannot be determined at this
time. BancShares uses third-party vendors for substantially all of its data
processing. See "Fidelity BancShares (N.C.), Inc. -- Relationship with
Affiliated Financial Institutions." Additionally, BancShares could be adversely
affected by year 2000 problems experienced by others, including its customers,
their vendors, correspondent banks, government agencies, and the financial
services industry in general. As a result, much of BancShares' remediation
effort relates to monitoring and communicating with those vendors. BancShares
has assessed and developed a detailed strategy to prevent or at least minimize
problems related to the year 2000 issue. However, no assurances can be given
that BancShares will not be adversely affected by year 2000 problems relating
to its own systems or those of third parties, and those problems could have a
material adverse effect on BancShares' financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Issue" for a description of BancShares'
plan to address the year 2000 issue.
Developments in Technology. The market for financial services, including
banking services, is increasingly affected by advances in technology, including
developments in telecommunications, data processing, computers, automation,
Internet-based banking, debit cards and so-called "smart" cards. BancShares'
ability to compete successfully in its markets may depend on the extent to
which it is able to exploit such technological changes. However, there can be
no assurance that the development of these or any other new technologies, or
BancShares' success or failure in anticipating or responding to such
developments, will materially affect BancShares' business, financial condition
and operating results.
Dependence on Regional and Local Economics. BancShares and the Bank are
headquartered and operate primarily in rural areas of central North Carolina.
Consistent with its banking philosophy, a majority of the Bank's depositors are
located in and doing business within its banking markets, and the Bank lends a
substantial portion of its capital and deposits to individual and commercial
borrowers in its banking markets. Accordingly, the local economies of those
areas have a direct impact on the ability of the Bank to generate deposits to
support loan growth, on the demand for loans, on the ability of residents who
are borrowers from the Bank to repay loans, on the value of collateral securing
such loans (particularly loans secured by real estate), and on the Bank's
ability to collect, liquidate and restructure problem loans. Should the economy
of any of the Bank's banking markets be adversely affected by a general
economic downturn or by other specific events or trends, the resulting economic
impact could have a direct adverse effect on the Bank and its operating
results.
Risk of Claims. In the ordinary course of its business, the Bank is or may
become subject to claims made against it by borrowers arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, errors and omissions of employees, officers
and agents of the Bank, incomplete documentation, and failures by the Bank to
comply with various laws and regulations applicable to its business. Relying as
it does on employees interacting with its customers, the Bank may encounter
circumstances where employees knowingly or unknowingly violate laws or
regulations without the knowledge of management, in which case the Bank may be
liable for these acts. BancShares believes that liability with respect to any
currently asserted claims or legal actions is not likely to be material to
BancShares' results of operations or financial condition; however, any claims
asserted may result in legal expenses or liabilities which could have a
material adverse effect on BancShares' results of operations and financial
condition.
Environmental Matters. In the course of its business, through the
foreclosure process the Bank has acquired, and may acquire in the future,
properties securing loans that are in default. Therefore, there is a risk that
the Bank could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after their acquisition and
may be held liable to a governmental entity or to third-parties for property
damage, personal injury and investigation and cleanup costs incurred by such
parties in connection with the contamination. To date, the Bank has not been
required to perform any investigation or cleanup activities of any material
nature. No assurance can be given, however, that this will remain the case in
the future.
FIDELITY BANCSHARES (N.C.), INC.
General
BancShares is a registered bank holding company, incorporated under the
laws of Delaware, and headquartered in Fuquay-Varina, North Carolina. It was
organized during 1987 as the holding company for the Bank. BancShares operates
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through the Bank which provides a variety of retail and commercial banking
products and services to individuals and small- to medium-sized businesses in
the communities it serves. At June 30, 1998, BancShares had total consolidated
assets of approximately $597.7 million, total consolidated deposits of
approximately $515.9 million, and total consolidated shareholders' equity of
approximately $62.5 million.
BancShares currently is engaged in an expansion program which involves
acquisitions of other financial institutions, or offices and/or deposits of
other institutions, and the opening of de novo branches. The Bank is a North
Carolina-chartered bank that currently maintains 41 banking offices in 28
central North Carolina communities, 12 of which were opened or acquired within
the last three fiscal years.
BancShares is focused on community-oriented banking via (i) localized
lending, (ii) core deposit funding, (iii) conservative balance sheet
management, and (iv) stable growth. BancShares' franchise includes many smaller
communities where competition is limited due to the exit of larger institutions
or to the limited product offerings of smaller institutions. By outsourcing its
core data processing requirements to an affiliated financial institution (see
"Certain Relationships and Related Transactions"), BancShares can offer a
complete array of financial services while maintaining its community banking
orientation. BancShares' focus on non-metropolitan markets and its emphasis on
customer service provide it with a stable source of core funding. At June 30,
1998, transaction accounts and non-interest bearing accounts equaled 40.13% and
15.02%, respectively, of total deposits, with the remaining 44.85% of total
deposits attributable to interest bearing savings and time deposit accounts.
BancShares' return on average assets and return on average equity were
1.32% and 13.47%, respectively, for the year ended December 31, 1997, and an
annualized 1.44% and 13.80%, respectively, for the six months ended June 30,
1998.
Members of the Holding family, including Lewis R. Holding, have been
actively involved in the management of BancShares, and, currently, various
members of the family control an aggregate of 77.31% of BancShares' common
stock. See "Beneficial Ownership of Securities" and "Certain Relationships and
Related Transactions." As a result, BancShares has been managed from a
long-term perspective with primary emphasis being placed on balance sheet
liquidity, loan quality, and earnings stability. At June 30, 1998, BancShares'
loan-to-deposit ratio was 74.67%, and over 64% of its $158.1 million investment
portfolio was invested in U.S. government obligations with an average maturity
of 11 months. Consistent with its management philosophy, BancShares has
emphasized a low-risk loan portfolio derived from its local markets. At June
30, 1998, BancShares' non-performing assets were $57,000, or 0.01% of gross
loans and other real estate. Net charge-offs for the year ended December 31,
1997 were 0.10% of average loans and, for the six-month period ended June 30,
1998, were an annualized 0.33% of average loans. The allowance for loan losses
at June 30, 1998, was 0.96% of gross loans.
BancShares' principal executive offices are located at 100 South Main
Street, Fuquay-Varina, North Carolina 27526, and its telephone number is (919)
552-2242.
For additional information regarding BancShares and its financial
condition and results of operations, see "Available Information," "Risk Factors
- -- Risk Factors Relating to BancShares," "Consolidated Ratios of Earnings to
Fixed Charges," "Capitalization," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Supervision and Regulation," "Beneficial Ownership of
Securities," "Directors and Executive Officers," "Executive Compensation,"
"Certain Relationships and Related Transactions," and "Fidelity BancShares
(N.C.), Inc. and Subsidiary Index to Consolidated Financial Statements."
Relationship with Affiliated Financial Institutions
The Bank is party to a contract with an affiliated financial institution,
First-Citizens Bank & Trust Company, Raleigh, North Carolina ("FCB"), pursuant
to which FCB provides the Bank with certain management consulting services and
with various support and data processing services relating to (i) its deposit
and loan, item processing, general ledger, statement rendering and securities
portfolio management functions which the Bank has chosen not to provide for
itself, and (ii) service as trustee for the Bank's pension plan and Section
401(k) salary deferral plan. The Bank also purchases business forms, equipment
and supplies through FCB. Amounts paid by the Bank to FCB pursuant to those
arrangements during 1997, 1996 and 1995 totaled approximately $1.9 million,
$1.6 million and $1.3 million, respectively. Management of the Bank estimates
that amounts payable during 1998 will total approximately $2.0 million. The
Bank also has agreed to purchase an aggregate of approximately $35.5 million in
assets, and to assume an aggregate of approximately $72.6 million in deposit
liabilities, associated with five branch offices of FCB; and, during January
1998, the Bank sold rights to service $51 million in mortgage loans to another
affiliated bank, Southern Bank and Trust Company. See "Certain Relationships
and Related Transactions."
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FIDBANK CAPITAL TRUST I
The Issuer Trust is a statutory business trust created under the Delaware
Business Trust Act (the "Trust Act") on July 14, 1998, pursuant to the filing
of a certificate of trust with the Delaware Secretary of State. The Issuer
Trust will be governed by the Trust Agreement among BancShares, as Depositor,
Bankers Trust (Delaware), as Delaware Trustee, Bankers Trust, as Property
Trustee, the Administrators named therein, and the holders, from time to time,
of undivided beneficial interests in the assets of the Issuer Trust. Two
individuals will be selected by the holders of the Common Securities to act as
Administrators with respect to the Issuer Trust. BancShares, while holder of
the Common Securities, intends to select two individuals who are employees or
officers of or affiliated with BancShares to serve as the Administrators. See
"Description of the Capital Securities -- Miscellaneous." The Trust Agreement
will be qualified as an indenture under the Trust Indenture Act of 1939, as
amended. The Issuer Trust exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the
Trust Securities to acquire the Junior Subordinated Debentures and (iii)
engaging in only those other activities necessary, convenient or incidental
thereto (such as registering the transfer of the Trust Securities).
Accordingly, the Junior Subordinated Debentures will be the sole assets of the
Issuer Trust, and payments under the Junior Subordinated Debentures will be the
sole source of revenue of the Issuer Trust.
All the Common Securities will initially be owned by BancShares. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Capital Securities, except that upon the occurrence and during
the continuation of a Debenture Event of Default arising as a result of any
failure by BancShares to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holders of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption
or otherwise will be subordinated to the rights of the holders of the Capital
Securities. See "Description of the Capital Securities -- Subordination of
Common Securities." BancShares will acquire Common Securities in an aggregate
Liquidation Amount equal to at least 3% of the total capital of the Issuer
Trust. The Issuer Trust has a term of 31 years, but may be dissolved or
terminated earlier as provided in the Trust Agreement. The address of the
Delaware Trustee is Bankers Trust (Delaware), E.A. Delle Donne Corporate
Center, Montgomery Building, 1011 Centre Road, Suite 200, Wilmington, Delaware
19805-1266, telephone number (302) 636-3301. The address of the Property
Trustee, the Guarantee Trustee and the Debenture Trustee is Bankers Trust
Company, Four Albany Street, 4th Floor, New York, New York 10006, telephone
number (212) 250-2500. It is anticipated that the Issuer Trust will be
conditionally exempted from the reporting requirements of the Exchange Act.
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of BancShares and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of BancShares. The
Capital Securities will be included in the consolidated balance sheets of
BancShares as long-term obligations, and appropriate disclosures about the
Capital Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to the consolidated financial statements of
BancShares. For financial reporting purposes, Distributions on the Capital
Securities will be recorded in the consolidated statements of income as
interest expense of BancShares. See also "Capitalization."
USE OF PROCEEDS
All the net proceeds to the Issuer Trust from the sale of the Capital
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. The net proceeds to BancShares from the sale of the Junior
Subordinated Debentures offered hereby are estimated to be approximately $ *
million ($ * if the Underwriter's over-allotment option is exercised in full),
after deducting the Underwriter's commission and estimated offering expenses.
All the net proceeds to be received by BancShares from the sale of the Junior
Subordinated Debentures will be used for general corporate purposes, although
it is likely that substantially all such proceeds will be used initially to
make additional capital contributions to the Bank to fund its operations and
continued expansion and to maintain its status as a "well capitalized" bank
under bank regulatory capital guidelines. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Supervision and
Regulation." Portions of the net proceeds from the sale of the Junior
Subordinated Debentures also may be used in the future for acquisitions by
BancShares or the Bank, extensions of credit to the Bank, or for repurchases of
outstanding common stock of BancShares. Pending such use, the net proceeds may
be temporarily invested. The precise amounts and timing of the application of
proceeds will depend upon the funding requirements of BancShares and its
subsidiaries and the availability of other funds. In view of anticipated
funding requirements, BancShares may from time to time engage in additional
financings of a character and in amounts to be determined.
20
<PAGE>
The proceeds from the sale of the Capital Securities are expected to
qualify as Tier 1 or core capital with respect to BancShares under the
risk-based capital guidelines established by the Federal Reserve. However,
capital received from the proceeds of the sale of the Capital Securities cannot
constitute more than 25% of the total Tier 1 capital of BancShares (the "25%
Capital Limitation"). Amounts in excess of the 25% Capital Limitation will
constitute Tier 2 or supplementary capital of BancShares.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table presents the unaudited consolidated ratios of earnings
to fixed charges of BancShares for the periods indicated. The consolidated
ratio of earnings to fixed charges has been computed by dividing the sum of
income before income taxes plus fixed charges by fixed charges. Fixed charges
represent all interest expense (ratios are presented both excluding and
including interest on deposits). Interest expense (other than on deposits)
includes interest on short-term borrowings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
For the
six months
ended June 30, For the year ended December 31,
----------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to fixed charges:
Excluding interest on deposits ....... 36.44x 40.79x 37.99x 35.07x 34.02x 28.84x 38.05x
Including interest on deposits ....... 1.70 1.62 1.63 1.60 1.73 1.94 1.80
</TABLE>
21
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization
of BancShares and its subsidiary as of June 30, 1998, and as adjusted to give
effect to the consummation of the offering of the Capital Securities and the
application of the net proceeds thereof as provided under "Use of Proceeds."
The following data is qualified in its entirety by, and should be read in
conjunction with, the detailed information contained in BancShares'
consolidated financial statements contained elsewhere herein. See "Selected
Consolidated Financial Data," and "Fidelity BancShares (N.C.), Inc. and
Subsidiary Index to Consolidated Financial Statements."
<TABLE>
<CAPTION>
As of June 30, 1998
(Unaudited)
-------------------------------------
As adjusted for Capital
Actual Securities issuance (1)
------------ ------------------------
(Dollars in thousands)
<S> <C> <C>
Short-term borrowings
TT&L and repurchase agreements ................................................ $ 11,037 $ 11,037
-------- --------
Total short-term borrowings ................................................. 11,037 11,037
-------- --------
Long-term obligations
Company-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of BancShares (2) ............. -- 20,000
-------- --------
Total long-term obligations ................................................. -- 20,000
-------- --------
Total borrowings ........................................................... 11,037 31,037
-------- --------
Shareholders' equity
Common stock: 29,200 shares authorized; 28,410 shares issued and outstanding at
June 30, 1998 ............................................................... 710 710
Surplus ....................................................................... 6,251 6,251
Retained earnings ............................................................. 50,675 50,675
Net unrealized gain on securities available-for-sale .......................... 4,906 4,906
-------- --------
Total shareholders' equity ................................................. 62,542 62,542
-------- --------
Total capitalization ...................................................... $ 73,579 $ 93,579
======== ========
Capital ratios (3)
Tier 1 capital ratio .......................................................... 13.04% 18.15%
Total capital ratio ........................................................... 13.99 19.10
Leverage capital ratio ........................................................ 8.82 12.27
</TABLE>
- ---------
(1) Does not reflect the effect of exercise of the Underwriter's over-allotment
option. See "Underwriting."
(2) See "Accounting Treatment."
(3) See "Supervision and Regulation -- Capital Adequacy."
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information for BancShares as of and for the years ended December 31, 1997,
1996, 1995, 1994 and 1993, and the six-month periods ended June 30, 1998 and
1997. The selected consolidated financial data as of and for each of the years
in the five-year period ended December 31, 1997 have been derived from
BancShares' audited consolidated financial statements. The consolidated
financial statements as of December 31, 1997 and 1996 and for each of the years
in the three-year period ended December 31, 1997, and the independent auditors'
reports thereon, are included elsewhere in this Prospectus. The information
presented as of and for the six-month periods ended June 30, 1998 and 1997 is
derived from BancShares' unaudited consolidated financial statements for these
periods. Those unaudited consolidated financial statements, which are included
elsewhere in this Prospectus, include all adjustments, consisting only of
normal recurring accruals, which management considers necessary for a fair
presentation of the financial condition and results of operations for such
interim periods. Results for the six-month period ended June 30, 1998 are not
necessarily indicative of results to be expected for the full year or any other
interim period. The following information should also be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere herein. See also "Available Information,"
"Experts," and "Fidelity BancShares (N.C.), Inc. and Subsidiary Index to
Consolidated Financial Statements."
<TABLE>
<CAPTION>
As of and for the
six months ended
June 30,
---------------------------
1998 1997
------------- -------------
(Dollars in thousands,
except share and per share
data)
(Unaudited)
<S> <C> <C>
Summary of Operations
Interest income .................................. $ 22,434 $ 21,007
Interest expense ................................. 9,686 9,323
--------- ---------
Net interest income .............................. 12,748 11,684
Provision for loan losses ........................ 180 180
--------- ---------
Net interest income after provision for loan
losses .......................................... 12,568 11,504
Noninterest income ............................... 2,639 1,908
Noninterest expense .............................. 8,411 7,595
--------- ---------
Income before income taxes ....................... 6,796 5,817
Income taxes ..................................... 2,587 2,193
--------- ---------
Net income ....................................... $ 4,209 $ 3,624
========= =========
Selected Period-End Balances
Total assets ..................................... $ 597,723 $ 559,652
Investment securities and federal funds sold ..... 158,266 156,340
Loans, gross ..................................... 385,271 354,013
Interest earning assets .......................... 543,537 510,353
Deposits ......................................... 515,937 484,718
Interest bearing liabilities ..................... 449,455 434,212
Shareholders' equity ............................. 62,542 55,039
Common shares outstanding ........................ 28,410 28,410
--------- ---------
Selected Average Balances
Total assets ..................................... $ 585,136 $ 545,705
Investment securities and federal funds sold ..... 168,045 153,087
Loans, gross ..................................... 370,463 342,042
Interest earning assets .......................... 538,508 495,129
Deposits ......................................... 505,827 479,189
Interest bearing liabilities ..................... 448,130 428,514
Shareholders' equity ............................. 61,016 52,458
Common shares outstanding ........................ 28,410 28,410
--------- ---------
Profitability Ratios
Return on average total assets (1) ............... 1.44% 1.33%
Return on average shareholders' equity (1) ....... 13.80 13.82
Dividend payout ratio (2) ........................ 10.80 12.54
--------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 73.24% 71.38%
Average shareholders' equity to average total
assets .......................................... 10.43 9.61
Tier 1 capital ratio (3) ......................... 13.04 12.59
Total capital ratio (3) .......................... 13.99 13.82
Leverage capital ratio (3) ....................... 8.82 8.10
--------- ---------
As of and for the
year ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income .................................. $ 43,249 $ 37,238 $ 30,607 $ 23,859 $ 20,991
Interest expense ................................. 19,016 16,245 12,616 8,437 7,599
--------- --------- --------- --------- ---------
Net interest income .............................. 24,233 20,993 17,991 15,422 13,392
Provision for loan losses ........................ 360 360 360 360 360
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses .......................................... 23,873 20,633 17,631 15,062 13,032
Noninterest income ............................... 3,974 3,348 2,628 2,867 2,495
Noninterest expense .............................. 15,878 14,191 10,998 9,968 9,485
--------- --------- --------- --------- ---------
Income before income taxes ....................... 11,969 9,790 9,261 7,961 6,042
Income taxes ..................................... 4,581 3,487 3,254 2,955 2,232
--------- --------- --------- --------- ---------
Net income ....................................... $ 7,388 $ 6,303 $ 6,007 $ 5,006 $ 3,810
========= ========= ========= ========= =========
Selected Period-End Balances
Total assets ..................................... $ 582,995 $ 542,138 $ 406,304 $ 334,390 $ 325,383
Investment securities and federal funds sold ..... 179,043 163,083 108,518 71,816 93,178
Loans, gross ..................................... 358,250 334,880 268,931 242,301 209,661
Interest earning assets .......................... 537,293 497,963 377,449 314,117 302,839
Deposits ......................................... 505,237 479,140 352,566 296,297 285,146
Interest bearing liabilities ..................... 448,832 429,649 313,409 264,370 256,272
Shareholders' equity ............................. 59,117 51,242 44,351 38,433 32,738
Common shares outstanding ........................ 28,410 28,410 28,582 28,582 28,682
--------- --------- --------- --------- ---------
Selected Average Balances
Total assets ..................................... $ 558,119 $ 476,559 $ 371,036 $ 331,956 $ 301,734
Investment securities and federal funds sold ..... 164,884 140,651 85,501 84,184 92,259
Loans, gross ..................................... 349,526 297,229 260,103 226,400 190,731
Interest earning assets .......................... 514,410 437,880 345,604 310,584 282,990
Deposits ......................................... 487,985 414,829 323,352 287,876 263,119
Interest bearing liabilities ..................... 433,979 370,876 286,412 258,390 236,698
Shareholders' equity ............................. 54,840 46,824 39,255 34,158 31,191
Common shares outstanding ........................ 28,410 28,570 28,582 28,640 28,686
--------- --------- --------- --------- ---------
Profitability Ratios
Return on average total assets (1) ............... 1.32% 1.32% 1.62% 1.51% 1.26%
Return on average shareholders' equity (1) ....... 13.47 13.46 15.30 14.66 12.21
Dividend payout ratio (2) ........................ 12.31 14.51 11.42 13.72 12.05
--------- --------- --------- --------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 71.63% 71.65% 80.44% 78.64% 72.49%
Average shareholders' equity to average total
assets .......................................... 9.83 9.83 10.58 10.29 10.34
Tier 1 capital ratio (3) ......................... 12.80 12.54 15.57 16.58 17.33
Total capital ratio (3) .......................... 13.93 13.79 16.82 17.83 18.58
Leverage capital ratio (3) ....................... 8.52 8.55 10.74 10.78 10.44
--------- --------- --------- --------- ---------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
As of and for the
six months ended
June 30,
---------------------------
1998 1997
------------- -------------
(Dollars in thousands,
except share and per share
data)
(Unaudited)
<S> <C> <C>
Per Share of Common Stock
Net income applicable to common shares (4) ......... $ 148.17 $ 127.55
Cash dividends ..................................... 16.00 16.00
Book value (5) ..................................... 2,201.41 1,937.31
---------- ----------
Asset Quality Ratios (6)
Nonperforming assets to total gross loans and
other real estate owned ........................... 0.01% 0.02%
Net charge-offs to average loans ................... 0.33 0.05
Total allowance for loan losses to total loans ..... 0.96 1.20
Total allowance for loan losses to total
nonperforming assets .............................. 6,495.89 7,411.36
As of and for the
year ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Per Share of Common Stock
Net income applicable to common shares (4) ......... $ 260.04 $ 220.63 $ 210.18 $ 174.80 $ 132.81
Cash dividends ..................................... 32.00 32.00 24.00 24.00 16.00
Book value (5) ..................................... 2,080.86 1,803.66 1,551.70 1,344.65 1,141.43
---------- ---------- ---------- ---------- ----------
Asset Quality Ratios (6)
Nonperforming assets to total gross loans and
other real estate owned ........................... 0.02% 0.02% 0.00% 0.00% 0.63%
Net charge-offs to average loans ................... 0.10 0.14 0.03 0.01 0.00
Total allowance for loan losses to total loans ..... 1.16 1.24 1.52 1.56 1.65
Total allowance for loan losses to total
nonperforming assets .............................. 7,271.93 7,261.40 N/A N/A 261.91
</TABLE>
- ---------
(1) Annualized for the six months ended June 30, 1998 and 1997.
(2) For each indicated period, total common dividends declared divided by net
income.
(3) See "Supervision and Regulation -- Capital Adequacy" for a more detailed
description of these ratios.
(4) For each indicated period, net income, divided by the average number of
common shares outstanding. BancShares' adoption of Statement 128,
"Earnings per Share," had no effect on its earnings per share disclosure
since BancShares has no potentially dilutive securities.
(5) At the end of each indicated period, shareholders' equity divided by the
number of common shares outstanding.
(6) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- For the Six Months Ended June 30, 1998 and 1997
-- Financial Condition and Results of Operations -- Asset Quality and
Provision for Possible Loan Losses."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Years Ended December 31, 1997, 1996 and 1995
Introduction.
This discussion provides information concerning changes in the
consolidated financial condition and results of operations of BancShares for
the three years ended December 31, 1997, 1996, and 1995. The comments are
intended to supplement and should be reviewed in conjunction with the
consolidated financial statements, related notes and selected financial data
presented elsewhere herein.
Acquisitions.
1996 Acquisitions. In May 1996, BancShares acquired the deposits of the
Biscoe, Troy, Rockingham, and Hamlet, North Carolina offices of a North
Carolina commercial bank. These acquisitions were accounted for as purchases,
and therefore, the results of operations prior to the purchase are not included
in the consolidated financial statements. In September 1996, BancShares
acquired Perpetual State Bank, Lexington, North Carolina. This acquisition was
accounted for as a purchase, and therefore, the results of operations of
Perpetual State Bank prior to the purchase are not included in the consolidated
financial statements. These acquisitions were as follows:
<TABLE>
<CAPTION>
Transaction Loans Deposits
Date Acquired Acquired
----------------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Biscoe, NC Branch .................. May 1996 -- $ 7,574
Troy, NC Branch .................... May 1996 -- 21,647
Rockingham, NC Branch .............. May 1996 -- 12,134
Hamlet, NC Branch .................. May 1996 -- 13,949
Perpetual State Bank ............... September 1996 $40,000 35,000
------- -------
1996 Acquisition Totals ......... $40,000 $90,304
======= =======
</TABLE>
24
<PAGE>
1995 Acquisitions. In May 1995, BancShares acquired the Buies Creek,
Moncure, and Roxboro, North Carolina offices of a North Carolina commercial
bank. These acquisitions were accounted for as purchases, and therefore, the
results of operations prior to the purchase are not included in the
consolidated financial statements. Additionaly, in June 1995, BancShares
acquired the deposits of the Candor, North Carolina office of a North Carolina
savings bank. This acquisition was accounted for as a purchase, and therefore,
the results of operations prior to the purchase are not included in the
consolidated financial statements. These acquisitions were as follows:
<TABLE>
<CAPTION>
Transaction Loans Deposits
Date Acquired Acquired
------------- ---------- ---------
(Dollars in
thousands)
<S> <C> <C> <C>
Buies Creek, NC Branch ........... May 1995 $ 3,167 $ 6,108
Moncure, NC Branch ............... May 1995 2,407 4,961
Roxboro, NC Branch ............... May 1995 10,001 10,142
Candor, NC Branch ................ June 1995 -- 2,954
------- -------
1995 Acquisition Totals ......... $15,575 $24,165
======= =======
</TABLE>
BancShares made no acquisitions in 1997.
1998 Expansion Activities. Currently, BancShares has definitive plans to
purchase five branch offices of an affiliated bank. In connection with that
transaction, BancShares expects to acquire approximately $35.5 million in
assets (including premises and loans), and to assume an aggregate of
approximately $72.6 million in deposit liabilities (for which it expects to pay
an aggregate deposit premium of approximately $5.0 million). See "Certain
Relationships and Related Transactions." Additionally, BancShares plans to
establish one additional de novo branch office during the remainder of 1998
(having previously established five de novo branches during 1998). While these
expansion activities will reduce BancShares' capital ratios and short-term
earnings, management believes this course of action to be in BancShares' best
interest over the long term. Management has extensive experience in managing
acquisitions and de novo offices. The planned expansions will allow BancShares
to spread fixed costs over a larger customer base and to increase the
geographic diversification of its loan portfolio throughout the Piedmont Region
of North Carolina.
Results of Operations.
Net Income. For 1997, net income of $7.4 million represented a 17.21%
increase from 1996 net income of $6.3 million. Net income for 1995 was $6.0
million. The increase in 1997 net income was principally the result of an
increase in net interest income resulting from the full year impact of new
locations acquired or established in 1996. This increase was partially offset
by increased operating expenses associated with both de novo branches and
acquired branches established in 1996.
The increase in 1996 net income was principally the result of increased
net interest income resulting from the 1996 full year impact in 1996 of the
1995 acquisitions and the partial year impact of the 1996 acquisitions. This
increase was partially offset by the additional expenses of the de novo offices
established in 1996. Net income per share increased to $260.04 in 1997, from
$220.63 in 1996 due to increased earnings and a decrease in the average shares
outstanding for 1997. Net income per share increased to $220.63 in 1996, from
$210.18 in 1995 due to increased earnings.
Net Interest Income. The greatest portion of BancShares' earnings is from
net interest income, which is the difference between interest income on earning
assets and interest paid on deposits and other interest bearing liabilities.
The primary factors affecting net interest income are changes in the volume and
yields/rates on earning assets and interest bearing liabilities, and the
ability to respond to changes in interest rates through asset/liability
management. In 1997 net interest income was $24.2 million as compared to $21.0
million in 1996, an increase of $3.2 million or 15.43%. In 1996 net interest
income was $21.0 million as compared to $18.0 million in 1995, an increase of
$3.0 million or 16.69%. The 1997 increase was primarily attributable to
increased interest income from a 17.60% increase in average loan balances
outstanding from $297.2 million in 1996 to $349.5 million in 1997.
Approximately $13.3 million of this increase was attributable to loans acquired
in 1996 branch acquisitions. The yields received on average loans for 1997
decreased to 9.76% from 9.78% in 1996. The rates paid on interest bearing
liabilities were unchanged during 1997, and the average interest bearing
deposits increased 17.14% between 1996 and 1997 resulting in a 17.06% increase
in total interest expense. Approximately $48.5 million of this increase was
attributable to deposits acquired in 1996 branch acquisitions.
The 1996 increase was primarily attributable to increased interest income
from a 14.26% increase in average loan balances outstanding from $260.1 million
in 1995 to $297.2 million in 1996. The yields received on average loans for
1996
25
<PAGE>
decreased to 9.78% from 9.79% in 1995. The rates paid on interest bearing
liabilities decreased 2 basis points during 1996 while the average interest
bearing deposits increased 29.63% between 1995 and 1996 resulting in a 28.77%
increase in total interest expense.
Loans produced the largest component of interest income, amounting to
$34.1 million in 1997, $29.1 million in 1996, and $25.5 million in 1995. This
represented an increase in 1997 of 17.40%. For the year ended December 31,
1996, interest income on loans increased 14.10%. During 1997 average loans
outstanding increased $52.3 million or 17.59%. This average increase was
primarily due to loan growth in the existing branch network. The increase in
interest income for 1996 was primarily due to loan growth in the existing
branch network and the impact of the 1996 acquisitions discussed above. In
1997, the average yield on loans decreased to 9.76% from 9.78% in 1996. This
decrease resulted from the overall lower market interest rates during most of
1997. The 1995 average yield was 9.79%.
Earnings from investments and federal funds sold provided the balance of
interest income, contributing $9.1 million in 1997, $8.2 million in 1996, and,
$5.1 million in 1995. In 1997, BancShares realized lower yields on investment
securities and federal funds sold and maintained higher average balances for
each period. In 1996, BancShares realized lower yields on investment securities
and federal funds sold and larger average balances. Average investment
securities and federal funds sold was $164.9 million in 1997, an increase from
$140.7 million in 1996. The 1997 average increase was principally the result of
deposit growth in the existing branch network and deposits acquired.
Total 1997 interest expense for BancShares was $19.0 million, an increase
of 17.06% over total 1996 interest expense of $16.2 million, a 28.77% increase
over total 1995 interest expense of $12.6 million. The principal component of
BancShares' interest expense, interest paid on deposits, totaled $18.7 million
in 1997, $16.0 million in 1996, and $12.3 million in 1995. BancShares' deposit
base increased 5.45% in 1997, primarily as a result of growth in the existing
branch network. The cost of interest bearing deposits also increased in 1997 as
a result of deposit growth. The cost of interest bearing deposits increased in
1996 as a result of deposit growth within the branch network and the 1996
acquisitions. The average effective rates paid on interest bearing liabilities
were 4.38%, 4.38%, and 4.40% in 1997, 1996, and 1995 respectively.
BancShares' interest rate spread was 4.03%, 4.12%, and 4.46% on a tax
equivalent basis in 1997, 1996, and 1995 respectively. BancShares' ability to
maintain a favorable spread between interest income and interest expense is a
major factor in generating earnings. Therefore, it is necessary for BancShares
to effectively manage earning assets and interest bearing liabilities.
Noninterest Income. Noninterest income which consists primarily of service
charges, commissions and fees increased $626,000 in 1997. Total noninterest
income was $4.0 million in 1997, as compared to $3.3 million in 1996 and $2.6
million in 1995. Noninterest income did not include any securities gains in
1997, 1996 or 1995. Service charges on deposit accounts increased $311,000, or
15.55% in 1997 to $2.3 million from $2.0 million in 1996. This increase was
primarily attributable to the full year impact of the accounts subject to
service charges acquired in 1996 and deposit growth in the existing branch
network. Service charges on deposit accounts increased $429,000 or 27.32% in
1996, from $1.6 million in 1995 to $2.0 million in 1996. This increase was
primarily attributable to the full year impact of accounts subject to service
charges acquired in 1995, the acquisitions in 1996, de novo branch openings in
1996, and deposit growth in the existing branch network.
BancShares had increases in other service charges and fees of $319,000 and
$287,000, respectively in 1997 and 1996.
Noninterest expense. Noninterest expense includes personnel, occupancy,
furniture and equipment, data processing, FDIC assessments, printing, supplies,
legal and professional fees, postage, intangible amortization, and other
miscellaneous operating expenses. Noninterest expense was $15.9 million in 1997
compared to $14.2 million in 1996 and $11.0 million in 1995. Control of
noninterest expense is an important aspect in managing net income. The 1995 and
1996 acquisitions should enhance the future operating results of BancShares.
However, for the following fifteen years, earnings will be reduced as
BancShares amortizes intangibles resulting from the assets acquired.
The most significant element of BancShares' noninterest expense is
personnel costs. In 1997 salaries and benefits represented $8.2 million, or
51.85%, of total noninterest expense. The 1997 personnel costs include the
impact of a full year of the costs related to the acquisitions made in 1996 and
de novo offices established in 1996. In 1996, salaries and benefits represented
$7.0 million, or 49.65%, of total noninterest expense. The personnel costs of
1996 include the impact of a full year of the costs related to acquisitions
made in 1995 and a partial year of costs for the acquisitions made and de novo
offices established in 1996. In 1995, salaries and benefits represented $5.6
million, or 50.86%, of total noninterest expense. The personnel costs of 1995
included the impact of the partial year costs of the acquisitions made in 1995.
In addition, certain deferred compensation contracts were amended during 1996,
which resulted in an additional $101,000 and $98,000 of salaries and employee
benefits expense in 1997 and 1996, respectively.
26
<PAGE>
Occupancy and equipment expenses increased from $1.9 million in 1995 to
$2.5 million in 1996 and to $3.2 million in 1997. The 1996 increase of 31.64%
principally relates to new locations added as a result of acquisition activity
and establishment of de novo branches. The four offices acquired in 1995 all
represented new branch office locations. 1996 costs included the full year
impact of these additional offices. Of the five locations acquired in 1996, two
of those represented the Bank's expansion into new markets, while the three
other offices were consolidated into Bank offices within existing markets. The
partial year costs of these two new locations, as well as the four de novo
offices established in 1996 were principally responsible for the increased
costs. The 1997 increase of 28.92% was principally the result of the full year
impact of the six new offices established in 1996 as well as the partial year
impact of the depreciation cost associated with the replacement of all computer
hardware in the branches and the conversion to new branch platform software in
the branch network (collectively, the "Branch 2000 Project"). The total cost of
this equipment was $850,000.
Data processing costs represent charges by vendors that perform data
processing services for the Bank. The Bank has contracts with three such
companies. Data processing fees are primarily based upon per item or per
account charges. Data processing costs in 1997 were $1.2 million, unchanged
from the 1996 data processing expenses of $1.2 million. The data processing
costs of $1.2 million in 1996 were an increase of 21.15% over 1995 data
processing expenses of $1.0 million. The 1995 and 1996 amounts included one
time costs associated with the acquisitions in those years.
Intangibles amortization in 1997 was $589,000, a 63.16% increase over the
1996 intangibles amortization. Intangibles amortization in 1996 was $361,000, a
107.47% increase over the 1995 amortization of $174,000. The 1997 amortization
included a full year's amortization for the 1996 acquisitions. The 1996
amortization included a full year's amortization for the 1995 acquisitions and
a partial year amortization for acquisitions made in 1996. The 1995
amortization included a partial year amortization for the acquisitions made in
1995.
The Bank has deposits insured under both of the FDIC's insurance funds,
the BIF and the SAIF. In July 1995, the FDIC and other regulatory agencies
proposed a plan to recapitalize the SAIF, and Congress mandated a one-time
assessment for all SAIF insured deposits on September 30, 1996. Congress
required that 80% of the Bank's SAIF insured deposits as reported on the Bank's
March 31, 1995 call report and 100% of SAIF insured deposits purchased by the
Bank after March 31, 1995 be assessed at 0.66%. In 1996 the Bank recorded a
charge to earnings as a one-time FDIC SAIF insurance expense. The decrease in
1997 and increase in 1996 FDIC assessment expenses of $408,000 and $75,000,
respectively, for FDIC premiums, resulted primarily from the 1996 one-time
assessment discussed above.
BancShares expects that, under current FDIC assessment guidelines, it will
not incur any FDIC deposit insurance assessments for 1998. However, beginning
in 1997 the FDIC began collecting from all banks an assessment for Financing
Corporation ("FICO") funding requirements. Accordingly, BancShares expects a
1998 FDIC FICO assessment expense of approximately $100,000, based on the FDIC
FICO assessment rates in effect for the first quarter of 1998.
Other miscellaneous operating expenses were $2.6 million, $2.6 million,
and $2.0 million for 1997, 1996, and 1995, respectively.
Income Taxes. In 1997, 1996 and 1995, BancShares had taxable income for
book purposes that resulted in income tax expense of $4.6 million, $3.5 million
and $3.3 million, respectively. The resulting effective income tax rates for
the years ended December 31, 1997, 1996 and 1995 were 38.28%, 35.62% and
35.13%, respectively. The increase in the effective income tax rate for the
year ended December 31, 1997, as compared to the years ended December 31, 1996
and 1995, is primarily attributable to an increase in state taxes paid.
Financial Condition.
Earning and Nonearning Assets. Earning assets consist of loans, investment
securities, and short-term investments that earn interest. Average earning
assets during 1997 were $514.4 million, an increase of 17.47% from the 1996
average of $437.9 million. This increase was primarily due to the full year
impact of the 1996 acquisitions and de novo branch openings, and to a lesser
extent, growth within the existing branch network. The cash received from the
acquisitions was ultimately invested primarily in loans and short-term
investments.
Average earning assets during 1996 were $437.9 million, an increase of
26.70% from the 1995 average of $345.6 million. This increase was due primarily
to the 1996 full year average impact of the 1995 acquisitions and the partial
year impact of the 1996 acquisitions and denovo branch openings, and to a
lesser extent, growth within the existing branch network. The cash received in
the acquisitions was ultimately invested primarily in loans and short-term
investments including federal funds.
Average non-interest earning assets during 1997 were $43.7 million, an
increase of 13.00% from the 1996 average of $38.7 million. Average non-interest
earning assets during 1996 were $38.7 million, an increase of 52.09% from the
1995
27
<PAGE>
average of $25.4 million. The increase was primarily due to increases in fixed
assets and intangible assets resulting from the 1995 and 1996 acquisitions and
the 1996 de novo branch openings. The principal non-interest earning asset for
BancShares is cash and due from banks. Cash and due from banks averaged $15.8
million in 1997, $14.0 million in 1996 and $11.5 million in 1995.
Return on total average assets was 1.32% in 1997 as compared to 1.32% in
1996 and 1.62% in 1995. The decline is principally the result of the
establishment of four de novo offices in 1996 as well as costs to establish a
new telephone banking center for customers of the Bank to be able to
bank-by-phone.
Interest Bearing and Noninterest Bearing Liabilities. Interest bearing
liabilities consist of deposits and short term borrowed funds. Average interest
bearing liabilities during 1997 were $434.0 million, an increase of 17.01% from
the 1996 average of $370.9 million. This increase was due primarily to the 1997
full year impact of the 1996 acquisitions of $90.3 million in deposits, growth
in the four de novo offices established in 1996, and to a lesser extent,
deposit growth within the existing branch network. The principal interest
bearing liabilities of BancShares are interest bearing deposits. Average
noninterest bearing liabilities during 1997 were $69.3 million, an increase of
17.74% from the 1996 average of $58.9 million. Noninterest bearing demand
deposits are the principal noninterest bearing liability. The cost of total
interest bearing liabilities was 4.38% in both 1997 and 1996.
Average interest bearing liabilities during 1996 were $370.9 million, an
increase of 29.49% from the 1995 average of $286.4 million. This increase was
due primarily to the 1996 full year impact of the 1995 acquisitions of $24.2
million in deposits, the 1996 partial year impact of the 1996 acquisitions of
$90.3 million in deposits and deposit growth in the existing branch network.
Average noninterest bearing liabilities during 1996 were $58.9 million, an
increase of 29.73% from the 1995 average of $45.4 million. Noninterest bearing
demand deposits are the principal noninterest bearing liability. This increase
was also due primarily to the 1996 full year impact of the 1995 acquisitions
and the 1996 partial year impact of the 1996 acquisitions and de novo branch
openings. The cost of total interest bearing liabilities was 4.38% in 1996 as
compared to 4.40% in 1995.
Loans. As of December 31, 1997, loans, net of the allowance for loan
losses, totaled $354.1 million compared to $330.7 million at year-end 1996. The
increase was attributable to normal loan growth, particularly in the real
estate mortgage and commercial loan portfolios, which grew $10.2 million and
$5.5 million, respectively. The Bank ran an equity line of credit promotion
during 1997, which contributed to a $8.9 million increase in this category of
the real estate mortgage loans. There were no significant changes made to
underwriting standards to stimulate this growth.
Rate sensitivity and liquidity in the loan portfolio are achieved by
making loans with adjustable interest rates and shorter maturities. This allows
the Bank to adjust its pricing structure with changes in interest rates. At the
end of 1997, 62.74% of the loan portfolio was due to mature or be available for
repricing of interest rates in 1998.
Investments. Management's asset/liability strategies include maintaining
an investment securities portfolio with appropriate maturities to preclude the
necessity of selling investment securities for purposes of liquidity.
Traditionally, BancShares has maintained a larger investment portfolio than its
peers.
BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities," which
requires that investments in debt and equity securities be classified in three
categories and accounted for as follows: debt securities that BancShares has
the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; debt and equity securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; and debt and equity
securities not classified as either held-to-maturity securities or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity. Securities available-for-sale
consist of certain debt and marketable equity securities not classified as
trading securities or as held-to-maturity, and consist of securities which may
be sold in response to changes in interest rates, prepayment risk, regulatory
capital requirements and liquidity needs.
At December 31, 1997 the fair value of available-for-sale securities
exceeded the carrying value by $8.7 million, deferred taxes related to these
available-for-sale securities were $3.5 million and shareholders' equity
included $5.2 million for the net unrealized gain related to these
available-for-sale securities. At December 31, 1996 the fair value of
available-for-sale securities exceeded the carrying value by $5.8 million,
deferred taxes related to these available-for-sale securities were $2.0 million
and shareholders' equity included $3.8 million for the net unrealized gain
related to these available-for-sale securities. BancShares does not maintain a
trading account.
28
<PAGE>
Asset Quality.
Provision and Allowance for Possible Loan Losses. Because the loan
portfolio represents BancShares' largest earning asset, BancShares continually
monitors the quality of its loan portfolio. The Bank operates in a diversified
economic environment, and, in the opinion of management, is not unduly exposed
to any one particular industry. In 1997, BancShares charged-off loans net of
recoveries of $354,000. This represents a decrease of $62,000 from 1996
charge-offs of $416,000. This decrease is primarily the result of increased
recoveries in 1997. The percentage of charge-offs (net of recoveries) to
average outstanding loans was 0.10% in 1997, 0.14% in 1996, and 0.03% in 1995.
The ratio of total non-performing assets to total loans plus other real
estate remained unchanged at a level of 0.02% at both December 31, 1997 and
December 31, 1996. At both December 31, 1997 and December 31, 1996 BancShares
had $57,000 of assets classified as other real estate.
Accrual of interest is discontinued on a loan when management believes the
borrower's financial condition is such that collection of principal or interest
is doubtful. Loans are returned to the accrual status when the factors
indicating doubtful collectibility cease to exist.
Management considers a loan to be impaired when based on current
information or events, it is probable that a borrower will be unable to pay all
amounts due according to contractual terms of the loan agreement. Impaired
loans are valued using either the discounted expected cash flow method or the
value of the collateral. When the ultimate collectibility of the impaired
loan's principal is doubtful, all cash receipts are applied to principal. Once
the recorded principal balance has been reduced to zero, future cash receipts
are applied to interest income, to the extent that any interest income has been
foregone. Future cash receipts are recorded as recoveries of any amounts
previously charged-off.
At December 31, 1997 and 1996, the Bank did not have any nonaccrual loans,
nor did the Bank have any restructured or impaired loans. At December 31, 1997
the Bank did not have any accruing loans past due 90 days or more. At December
31, 1996, the total accruing loans past due 90 days or more were $85,000.
The allowance for loan losses represented 1.16% and 1.24% of loans
outstanding at year end 1997 and 1996, respectively. The Bank's provision for
loan losses charged against earnings was $360,000 in each of the years 1997,
1996 and 1995.
Management considers the December 31, 1997 allowance for loan losses
adequate to cover the losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of
any underlying collateral, current economic conditions, analysis of peer bank
trends, and other risk factors. Management believes it has established the
allowance in accordance with generally accepted accounting principles and in
consideration of the current economic environment. While management uses the
best information available to make evaluations, future adjustments may be
necessary if economic or other conditions differ substantially from the
assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and losses on other real estate owned. Such agencies may require the Bank to
recognize additions to the allowances based on the examiner's judgments about
information available to them at the time of their examinations.
Liquidity, Market Risk and Interest Sensitivity
Liquidity. Liquidity refers to the ability of BancShares to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. One of BancShares' objectives is to maintain a high level of
liquidity, and this goal continues to be met. Maintaining liquidity ensures
that funds will be available for reserve requirements, customer demand for
loans, withdrawal of deposit balances and maturities of other deposits and
liabilities. These events may take place daily or at other intervals in the
normal operation of the business. Past experience helps management anticipate
cyclical demands and amounts of cash required. These obligations can be met by
existing cash reserves or funds from maturing loans and investments, but in the
normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including:
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include all investment securities, federal
funds sold, and cash and due from banks. These assets represented 38.47% of
deposits at December 31, 1997, an increase from 37.14% at December 31, 1996.
29
<PAGE>
The Bank's liquidity ratio, which is defined as cash plus short term and
marketable securities divided by deposits and short term liabilities, was
34.74% at December 31, 1997, compared to 17.04% and 30.25% at year-end 1996 and
1995, respectively. In addition, the Bank has a $40 million line of credit with
the Federal Home Loan Bank to meet liquidity needs.
BancShares has traditionally maintained a high level of liquidity,
characteristic of the high ratio of investment securities to total assets that
BancShares maintains. Although loans have increased in each of the recent
fiscal periods, BancShares' ability to manage its liquidity is enhanced by the
mortgage loan department. With this department, BancShares has the ability to
sell mortgage loans originated for liquidity or other asset/liability
management requirements.
Any maturing investments whose funds are not immediately necessary to
sustain BancShares' liquidity, are invested in similar instruments or used to
fund any increased loan demand. Investments scheduled to mature within the one
year time frame, without consideration of marketable equity securities,
represented 88.64%, 26.04% and 82.01% of the total investment securities
portfolio at December 31, 1997, 1996 and 1995, respectively.
In addition, BancShares holds marketable equity securities with fair
values of $11.8 million, $8.9 million and $5.5 million in 1997, 1996 and 1995,
respectively. Although these investments do not "mature" in the next twelve
months, they are classified as available-for-sale and could be sold at
management's discretion.
The consolidated statements of cash flows disclose the principal sources
and uses of cash from operating, investing, and financing activities for 1997,
1996, and 1995. In 1997, operating activities of BancShares provided cash flows
of $10.0 million. Net income of $7.4 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Investing
activities, including lending, utilized $30.0 million of BancShares' cash flow.
Loans originated, net of principal collected, used $23.7 million. BancShares
utilized $3.8 million in cash in connection with expenditures for premises and
equipment.
In 1997, operating activities of BancShares provided cash flows of $10.0
million. Net income of $7.4 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Investing
activities, including lending, utilized $30.0 million of BancShares' cash flow.
Loans originated, net of principal collected, used $23.7 million. Securities
purchases, net of maturities, utilized $3.3 million, and expenditures for
premises and equipment utilized $3.8 million, largely for de novo branching
during 1997. Net additional cash inflows of $30.3 million resulted from
financing activities, principally from deposit inflows of $26.1 million and
short-term borrowings of $5.1 million. BancShares had cash outflows for 1997 of
$909,000.
In 1996, operating activities of BancShares provided cash flows of $7.8
million. Net income of $6.3 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Investing
activities, including lending, utilized $47.2 million of BancShares' cash flow.
Loans originated, net of principal collected, used $26.7 million. BancShares
received $42.0 million in cash in connection with the branches purchased from
other financial institutions in 1996. Securities purchases, net of maturities,
utilized $56.6 million and expenditures for premises and equipment utilized
$6.6 million, largely for de novo branching activities. Net additional cash
inflows of $35.9 million resulted from financing activities. Net deposit
inflows of $36.6 million were improved by an increase in short term borrowed
funds of $483,000 and reduced by payments for cash dividends and retirements of
stock totaling $1.2 million.
In 1995, operating activities of BancShares provided cash flows of $7.6
million. Net income of $6.0 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Investing
activities, including lending, utilized $12.4 million of BancShares' cash flow.
Loans originated, net of principal collected, used $10.1 million. BancShares
received $5.3 million in cash in connection with the branches purchased from
other financial institutions in 1995. In 1995, net additional cash inflows of
$30.5 million resulted from financing activities. Net deposit inflows of $33.1
million were reduced by the $2.0 million repayment of short term obligations
and payments for cash dividends on stock totaling $686,000.
The Bank has no brokered funds. Jumbo certificates of deposit ("CD's") are
considered to include all CD's of $100,000 or more. The Bank does not and has
never aggressively bid on these deposits, and it does not seek nor does it
accept deposits from outside of its general trade area. Almost all of the
Bank's jumbo CD customers have other relationships with the Bank, including
savings, demand and other time deposits, and in some cases, loans. At December
31, 1997 and 1996, jumbo CD's represented 9.9% of total deposits.
In the opinion of management, BancShares has the ability to generate
sufficient amounts of cash to cover normal funding requirements and any
additional needs which may arise, within realistic limitations, during the next
twelve months, and management is not aware of any known demands, commitments or
uncertainties that will affect liquidity in a material way.
30
<PAGE>
Market Risk. Market risk reflects the risk of economic loss resulting from
adverse changes in market price and interest rates. This risk of loss can be
reflected in either diminished current market values or reduced potential net
interest income in future periods.
BancShares' market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. Management seeks to manage this
risk through the use of shorter term maturities. The composition and size of
the investment portfolio is managed so as to reduce the interest rate risk in
the deposit and loan portfolios while at the same time maximizing the yield
generated by the portfolio.
The table below presents in tabular form the contractual balances and the
estimated fair value of financial instruments at their expected maturity dates
as of December 31, 1997. The expected maturity categories take into
consideration historical prepayment experience as well as management's
expectations based on the interest rate environment as of December 31, 1997.
For core deposits without contractual maturity (i.e., interest bearing
checking, savings and money market accounts), the table presents principal cash
flows as maturing in 1998 since they are subject to immediate repricing.
<TABLE>
<CAPTION>
Maturing in years ended December 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
------------ ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans
Fixed Rate ................... $ 72,961 $ 33,144 $ 35,370 $ 7,950 $ 4,582 $ 20,924
Average rate (%) ............. 10.23% 9.28% 9.20% 9.25% 8.97% 8.53%
Variable rate ................ $156,801 $ 15,975 $ 11,091 $ 2,168 $ 2,284 --
Average rate (%) ............. 9.30% 9.38% 9.38% 9.37% 9.35% --
Investment securities
Fixed rate ................... $117,117 $ 14,996 -- -- -- $ 18
Average rate (%) ............. 5.75% 5.96% -- -- -- 10.81%
Variable rate ................ $ 3,101 -- -- -- -- --
Average rate (%) ............. 3.22% -- -- -- -- --
Liabilities
Savings and interest bearing
checking
Fixed rate ................... $172,873 -- -- -- -- --
Average rate (%) ............. 2.71% -- -- -- -- --
Certificates of deposit
Fixed rate ................... $215,169 $ 28,836 $ 20,140 $ 762 -- --
Average rate (%) ............. 5.26% 5.64% 5.37% 5.96% -- --
Short-term obligations
Variable rate ................ $ 11,051 -- -- -- -- --
Average rate (%) ............. 4.47% -- -- -- -- --
Total Fair Value
------------- -----------
<S> <C> <C>
Assets
Loans
Fixed Rate ................... $ 174,931 $174,387
Average rate (%) ............. 9.43%
Variable rate ................ $ 183,319 $183,319
Average rate (%) ............. 9.22%
Investment securities
Fixed rate ................... $ 132,131 $132,289
Average rate (%) ............. 6.40%
Variable rate ................ $ 3,101 $ 11,809
Average rate (%) ............. 3.22%
Liabilities
Savings and interest bearing
checking
Fixed rate ................... $ 172,873 $172,873
Average rate (%) ............. 2.71%
Certificates of deposit
Fixed rate ................... $ 264,907 $263,518
Average rate (%) ............. 5.43%
Short-term obligations
Variable rate ................ $ 11,051 $ 11,051
Average rate (%) ............. 4.47%
</TABLE>
Interest Sensitivity. Deregulation of interest rates and short-term,
interest bearing deposits which are more volatile, has created a need for
shorter maturities of interest earning assets. As a result, an increasing
percentage of commercial, installment, and mortgage loans are being made with
variable rates or shorter maturities to increase liquidity and interest rate
sensitivity.
The difference between interest sensitive asset and interest sensitive
liability repricing within time periods is referred to as the interest rate
sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets).
As of December 31, 1997, BancShares had a positive one year cumulative gap
position of 16.92%. BancShares has interest earning assets of $375.2 million
maturing or repricing within one year and interest bearing liabilities of
$284.3 million repricing or maturing within one year. This is primarily the
result of developing loan products and purchasing investment securities that
are either short-term in nature or subject to repricing in the near term in
order to protect BancShares from volatile interest rates. A positive gap
position implies that interest earning assets (loans and investments) will
reprice at a faster rate than interest bearing liabilities (deposits). In a
falling rate environment, this position will generally have a negative effect
on earnings, while in a rising rate environment this position will generally
have a positive effect on earnings.
31
<PAGE>
Inflation. The effect of inflation on financial institutions differs from
the impact on other types of businesses. Since assets and liabilities of banks
are primarily monetary in nature, they are more effected by changes in interest
rates than by the rate of inflation.
Inflation generates increased credit demands and fluctuations in interest
rates. Although credit demand and interest rates are not directly tied to
inflation, each can significantly impact net interest income. As in any
business or industry, expenses such as salaries, equipment, occupancy, and
other operating expenses are also subject to upward pressures created by
inflation.
Since the rate of inflation has been relatively stable during the last
several years, the impact of inflation on the earnings presented in this report
is insignificant.
Capital Resources.
Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank,
have established risk based capital ("RBC") adequacy guidelines.
As of December 31, 1997, BancShares' Leverage Capital Ratio (as defined
herein) was 8.52%, as compared to 8.55% and 10.74%, respectively, at year end
1996 and 1995. For regulatory purposes, a 5.00% Leverage Capital Ratio
represents a well capitalized financial institution.
Within the RBC calculations, BancShares' assets, including commitments to
lend and other off-balance sheet items, are weighted according to Federal
regulatory guidelines for the risk considered inherent in the assets.
BancShares' Tier 1 Capital Ratio (as defined herein) as of December 31, 1997
was 12.80% which is, along with the ratios of 12.54% and 15.57% for 1996 and
1995, respectively, representative of a well capitalized institution (one whose
ratio exceeds 6.00%). The calculation of Total Capital Ratio (as defined
herein) allows, in BancShares' circumstances, the inclusion of BancShares'
allowance for loan losses in capital, but only to a maximum of 1.25% of risk
weighted assets. As of December 31, 1997 BancShares' Total Capital Ratio was
13.93%, which is representative of a well capitalized institution (one whose
ratio exceeds 10.00%). The Total Capital Ratios for 1996 and 1995 were 13.79%
and 16.82%, respectively. See "Supervision and Regulation -- Capital Adequacy."
The reason for the decline in ratios between 1995 and 1997 is the significant
balance sheet growth due to acquisitions creating intangible assets, de novo
branch openings, and normal growth in the existing branch network.
These ratios will only improve if BancShares' capital increases at a rate
proportionately faster than liabilities. Management is aware that growth must
be controlled. BancShares' 1998 expansion plans may appear to be contrary to
this policy but management is also aware that the process of expanding market
share by normal business processes can be very difficult and expensive.
Management believes that improvement in its overall market share within an
existing trade area is valuable in the long run and should be pursued by
BancShares, when it can be done prudently.
BancShares' primary source of new capital is earnings. In 1997, equity
capital increased through retention of earnings by $6.5 million, by $5.4
million in 1996 and by $5.3 million in 1995. BancShares' internal capital
generation rate was 11.81% in 1997, 11.51% in 1996, and 13.55% in 1995. At
December 31, 1997, shareholders' equity totaled $59.1 million compared to $51.2
million in 1996. The shareholders' equity for 1997 and 1996 included, as
discussed above, $5.2 million and $3.8 million, respectively, of net unrealized
securities gains on available-for-sale securities.
The ratio of average shareholders' equity to average total assets was
9.83% in both 1997 and 1996.
Retention of sufficient earnings to maintain an adequate capital position
that provides BancShares with expansion capabilities is an important factor in
determining dividends. During 1997, BancShares paid $909,000 in dividends,
versus $914,000 in 1996 and $686,000 in 1995. As a percentage of net income,
dividends were 12.31% in 1997, 14.51% in 1996 and 11.42% in 1995. The decrease
in dividends paid in 1997 compared to 1996 is attributable to a decrease in the
number of shares outstanding between these two periods.
Accounting and Other Matters.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("Statement 130"). This statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose
32
<PAGE>
financial statements. It does not address issues in recognition or measurement
for comprehensive income and its components. The provisions of Statement 130
are effective for fiscal years beginning after December 31, 1997. BancShares
adopted this statement in the first quarter of 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("Statement 131"). This statement
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The provisions of Statement 131 are
effective for fiscal years beginning after December 31, 1997. Adoption of this
pronouncement is not expected to have a material effect on BancShares'
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pension and Other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact BancShares. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all 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 depends on the
intended use of the derivative and the resulting designation. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier application of all provisions of this statement is encouraged.
The Company plans to adopt this Statement on January 1, 2000 and does not
anticipate any material effect on its consolidated financial statements.
Management is not aware of any other known trends, events, uncertainties,
or current recommendations by regulatory authorities that will have or are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources, or other operations.
33
<PAGE>
Statistical Information.
The following tables contain certain additional statistical information
regarding BancShares' business operations.
Table I.
Average Balance Sheet Items and Net Interest Differential
Average Balances and Average Rates Earned and Paid
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- --------- ----------- ---------- ---------
(Dollars in thousands, taxable-equivalent)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans (1)(2) ...................... $349,526 $34,116 9.76% $297,229 $29,060 9.78%
Taxable investment
securities ...................... 144,218 8,438 5.85 119,042 7,248 6.09
Non taxable investment
securities (3) .................. 88 5 5.68 158 11 6.96
Federal funds sold ................ 8,519 461 5.41 13,442 704 5.24
Other ............................. 12,059 229 1.89 8,009 218 2.72
-------- ------- ---- -------- ------- ----
Total interest earning assets ...... 514,410 43,249 8.41% 437,880 37,241 8.50%
-------- ------- ---- -------- ------- ----
Noninterest earning assets:
Cash and due from banks ........... 15,811 14,043
Premises and equipment ............ 19,974 17,519
Other ............................. 7,924 7,117
-------- --------
Total assets ....................... $558,119 $476,559
======== ========
Liabilities & Equity
Interest bearing liabilities:
Demand deposits ................... $118,582 3,321 2.80% $ 99,928 2,684 2.69%
Savings deposits .................. 46,008 1,142 2.48 42,954 1,073 2.50
Time deposits ..................... 262,000 14,230 5.43 221,304 12,201 5.51
Short-term borrowings (6) ......... 7,389 324 4.38 6,690 287 4.29
-------- ------- ---- -------- ------- ----
Total interest bearing
liabilities ....................... 433,979 19,017 4.38% 370,876 16,245 4.38%
-------- ------- ---- -------- ------- ----
Noninterest bearing liabilities:
Demand deposits ................... 61,395 50,643
Other ............................. 7,905 8,216
Shareholders' equity ............... 54,840 46,824
-------- --------
Total liabilities and equity ....... $558,119 $476,559
======== ========
Interest rate spread (4) ........... 4.03% 4.12%
==== ====
Net interest income and net
interest margin (5) ............... $24,232 4.71% $20,996 4.79%
======= ==== ======= ====
December 31, 1995
---------------------------------
Average Average
Balance Interest Rate
----------- ---------- ----------
(Dollars in thousands,
taxable-equivalent)
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans (1)(2) ...................... $260,103 $25,468 9.79%
Taxable investment
securities ...................... 70,013 4,312 6.16
Non taxable investment
securities (3) .................. 786 55 7.00
Federal funds sold ................ 11,584 658 5.68
Other ............................. 3,118 133 4.27
-------- ------- ----
Total interest earning assets ...... 345,604 30,626 8.86%
-------- ------- ----
Noninterest earning assets:
Cash and due from banks ........... 11,452
Premises and equipment ............ 12,599
Other ............................. 1,381
--------
Total assets ....................... $371,036
========
Liabilities & Equity
Interest bearing liabilities:
Demand deposits ................... $ 83,066 2,401 2.89%
Savings deposits .................. 38,018 1,039 2.73
Time deposits ..................... 159,865 8,896 5.56
Short-term borrowings (6) ......... 5,463 280 5.13
-------- ------- ----
Total interest bearing
liabilities ....................... 286,412 12,616 4.40%
-------- ------- ----
Noninterest bearing liabilities:
Demand deposits ................... 42,403
Other ............................. 2,966
Shareholders' equity ............... 39,255
--------
Total liabilities and equity ....... $371,036
========
Interest rate spread (4) ........... 4.46%
====
Net interest income and net
interest margin (5) ............... $18,010 5.21%
======= ====
</TABLE>
- ---------
(1) Average balances include non-accrual loans.
(2) Interest income includes related loan fee amounts which were immaterial.
(3) The average rate on nontaxable investment securities has been adjusted to a
tax equivalent yield using a 34% tax rate.
(4) Interest rate spread is the difference between earning asset yield and
interest bearing liability rate.
(5) Net interest margin is net interest income divided by average earning
assets.
(6) See Table XI.
34
<PAGE>
Table II.
Average Balance Sheet Items and Net Interest Differential
Analysis of Changes in Interest Differential
<TABLE>
<CAPTION>
December 31, 1997 Increase (Decrease)
-------------------------------------------------------
Amount Amount Amount
Total Attributable Attributable Attributable
Change to Change to Change to Change in
1996-1997 in Volume in Rate Rate/Volume
----------- -------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans ..................................... $5,056 $5,115 $ (59) $ --
Taxable investment securities ............. 1,190 1,533 (286) (57)
Non taxable investment securities ......... (6) (5) (2) 1
Federal funds sold ........................ (243) (258) 23 (8)
Other ..................................... 11 110 (66) (33)
------- ------- ------- ------
Total interest income ...................... 6,008 6,495 (390) (97)
------- ------- ------- ------
Liabilities & Equity
Interest bearing liabilities:
Demand deposits ........................... 637 502 110 25
Savings deposits .......................... 69 76 (9) 2
Time deposits ............................. 2,029 2,242 (177) (36)
Short-term borrowings ..................... 37 30 6 1
------- ------- ------- ------
Total interest expense ..................... 2,772 2,850 (70) (8)
------- ------- ------- ------
Net interest income ........................ $3,236 $3,645 $ (320) $(89)
======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 Increase (Decrease)
-------------------------------------------------------
Amount Amount Amount
Total Attributable Attributable Attributable
Change to Change to Change to Change in
1995-1996 in Volume in Rate Rate/Volume
----------- -------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans, net ................................ $3,592 $3,635 $ (26) $ (17)
Taxable investment securities ............. 2,936 3,020 (49) (35)
Non taxable investment securities ......... (44) (44) -- --
Federal funds sold ........................ 46 106 (51) (9)
Other ..................................... 85 209 (48) (76)
------ ------ ------ ------
Total interest income ...................... 6,615 6,926 (174) (137)
------ ------ ------ ------
Liabilities & Equity
Interest bearing liabilities:
Demand deposits ........................... 283 487 (166) (38)
Savings deposits .......................... 34 135 (87) (14)
Time deposits ............................. 3,305 3,416 (80) (31)
Short-term borrowings ..................... 7 63 (46) (10)
------ ------ ------ ------
Total interest expense ..................... 3,629 4,101 (379) (93)
------ ------ ------ ------
Net interest income ........................ $2,986 $2,825 $ 205 $ (44)
====== ====== ====== ======
</TABLE>
Average loan balances include nonaccrual loans. BancShares earns
tax-exempt interest on certain loans and investment securities due to the
borrower or issuer being either a governmental agency or a quasi-governmental
agency. Yields related to loans and securities exempt from both federal and
state income taxes, federal income taxes only, or state income taxes only, are
stated on a taxable-equivalent basis assuming a statutory federal income tax
rate of 34% for all periods. The taxable equivalent adjustment was immaterial
for the years 1997, 1996 and 1995, respectively.
35
<PAGE>
Table III. Investment Portfolio
The following table sets forth the carrying amount of investment
securities:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies ......... $130,131 $128,592 $71,028
States and political subdivisions .................. 2,000 219 1,000
Marketable equity securities ....................... 11,809 8,918 5,512
-------- -------- -------
Total ............................................. $143,940 $137,729 $77,540
======== ======== =======
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted average yields of such securities. (Note
that nontaxable investment securities have not been adjusted to a tax
equivalent basis and unrealized gain (loss) on available for sale is not
included.)
<TABLE>
<CAPTION>
Maturing After One
Within One Year But Within Five Years After Ten Years
---------------------- --------------------- --------------------
Amount Yield Amount Yield Amount Yield
----------- ---------- ---------- ---------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies (1) ..... $115,117 5.75% $14,996 6.27% $18 10.81%
States and political subdivisions ........................ 2,000 5.73 -- -- -- --
Other (2) ................................................ 11,809 3.22 -- -- -- --
-------- ---- ------- ---- --- -----
$128,926 5.52% $14,996 6.27% $18 10.81%
======== ==== ======= ==== === =====
</TABLE>
- ---------
(1) Mortgage-backed securities are included in the obligations of U.S.
Government agencies and spread within the columns according to their
anticipated repayment schedules.
(2) The "Within One Year" column of the "Other" category includes marketable
equity securities held by BancShares. Accordingly, the yield on these
securities represents anticipated dividend income rather than interest
income.
Table IV. Loan Portfolio
Analysis of Loans by Type and Maturity
The table below classifies loans by major category:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Construction and land development .......... $ 33,851 $ 28,787 $ 24,728 $ 24,369 $ 15,215
Mortgage:
One to four family residential .......... 141,301 144,331 99,228 94,743 88,902
Commercial .............................. 57,222 51,629 48,736 42,733 34,777
Equity lines of credit .................. 44,915 35,971 29,011 22,973 20,087
Other ................................... 4,579 5,839 4,757 6,933 7,434
Commercial and industrial ................... 41,851 36,330 30,080 24,129 18,092
Consumer .................................... 28,630 26,934 24,870 20,956 18,153
Agricultural ................................ 3,335 2,669 2,368 1,982 1,742
Other ....................................... 2,566 2,390 5,153 3,483 5,259
-------- -------- -------- -------- --------
Total ................................... 358,250 334,880 268,931 242,301 209,661
Less allowance for possible loan losses ..... 4,145 4,139 4,078 3,786 3,452
-------- -------- -------- -------- --------
Net loans ............................... $354,105 $330,741 $264,853 $238,515 $206,209
======== ======== ======== ======== ========
</TABLE>
36
<PAGE>
The following table identifies the maturities of all loans as of December
31, 1997 and addresses the sensitivity of these loans to changes in interest
rates:
Loan Sensitivity
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Within One To Five After
One Year Years FiveYears Total
---------- ------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate -- construction and land development $ 33,851 $ -- $ -- $ 33,851
Commercial and industrial ....................... 30,258 11,258 335 41,851
Other ........................................... 160,653 101,306 20,589 282,548
-------- -------- ------- --------
Total ....................................... $224,762 $112,564 $20,924 $358,250
======== ======== ======= ========
Loans maturing after one year with:
Fixed interest rates ........................... $ 81,046 $20,924 $101,970
Floating or adjustable rates ................... 31,518 -- 31,518
-------- ------- --------
Total ....................................... $112,564 $20,924 $133,488
======== ======= ========
</TABLE>
Nonperforming Assets
The following analysis identifies other real estate owned and loans that
were either non-accruing, past-due or restructured:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ............................ $ -- $ -- $ -- $ -- $ --
Restructured loans .......................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total nonperforming loans .................. -- -- -- -- --
Other real estate ........................... 57 57 -- -- 1,318
--------- --------- --------- --------- ---------
Total nonperforming assets ................. $ 57 $ 57 $ -- $ -- $ 1,318
========= ========= ========= ========= =========
Accruing loans 90 days or more past due ..... $ -- $ 85 $ 10 $ 109 $ --
Loans at December 31 ........................ $ 358,250 $ 334,880 $ 268,931 $ 242,301 $ 209,661
Ratio of nonperforming assets to total loans
plus other real estate ..................... 0.02% 0.02% 0.00% 0.00% 0.63%
Interest income that would have been
earned on nonperforming loans had they
been performing ............................ $ -- $ -- $ -- $ -- $ --
Interest income earned on nonperforming
loans ...................................... $ -- $ -- $ -- $ -- $ --
</TABLE>
Loans are placed on a non-accrual basis when they become 90 days past due
and the ability of the borrower to comply with the present terms is doubtful.
37
<PAGE>
Table V. Summary of Loan Loss Experience
Analysis of the Allowance for Possible Loan Losses
The table presented below summarizes activity in the allowance for
possible loan losses for each of the five years ended December 31, 1997:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses -- beginning of year .. $ 4,139 $ 4,078 $ 3,786 $ 3,452 $ 3,096
Charge-offs:
Commercial, financial, and agricultural ................. 196 32 -- -- 2
Real estate:
Construction .......................................... -- -- -- -- --
Mortgage:
One to four family residential ...................... 273 283 -- -- 10
Commercial .......................................... -- -- -- -- --
Equity lines of credit .............................. -- 19 -- -- --
Other ............................................... -- -- -- -- --
Consumer ................................................ 379 262 153 85 54
--------- --------- --------- --------- ---------
Total charge-offs ........................................ 848 596 153 85 66
--------- --------- --------- --------- ---------
Recoveries:
Commercial, financial, and agricultural ................. 63 3 9 -- 2
Real estate:
Construction .......................................... -- -- -- -- --
Mortgage:
One to four family residential ...................... 308 90 -- 8 4
Commercial .......................................... -- -- -- -- --
Equity lines of credit .............................. -- 19 -- -- --
Other ............................................... -- -- -- -- --
Consumer ................................................ 123 68 76 51 56
--------- --------- --------- --------- ---------
Total recoveries ......................................... 494 180 85 59 62
--------- --------- --------- --------- ---------
Net charge-offs .......................................... 354 416 68 26 4
Provision for loan losses ................................ 360 360 360 360 360
Addition from acquisition of Perpetual Savings Bank ...... -- 117 -- -- --
--------- --------- --------- --------- ---------
Allowance for possible loan losses -- end of year ........ $ 4,145 $ 4,139 $ 4,078 $ 3,786 $ 3,452
========= ========= ========= ========= =========
Average loans outstanding during the year ................ $ 349,526 $ 297,229 $ 260,103 $ 226,400 $ 190,731
========= ========= ========= ========= =========
Ratio of net charge-offs (recoveries) to average loans
outstanding ............................................. 0.10% 0.14% 0.03% 0.01% 0.00%
========= ========= ========= ========= =========
</TABLE>
38
<PAGE>
Allocation of the Allowance for Possible Loan Losses
The composition of the allowance by loan category shown in the table below
is based upon management's evaluation of the loan portfolio, past history, and
prevailing economic conditions:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
% of loans % of loans % of loans
in each in each in each
category to category to category to
Amount total loans Amount total loans Amount total loans
-------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and land
development ............ $ 254 10% $ 216 9% $ 185 9%
Mortgage:
One to four family
residential ........... 777 39 794 43 546 37
Commercial ............. 458 16 413 15 390 18
Equity lines of
credit ................ 269 13 216 11 174 11
Commercial, industrial
and agricultural ......... 678 12 585 11 487 11
Consumer .................. 1,575 8 1,616 8 1,492 9
Other ..................... 27 2 155 3 631 5
Unallocated ............... 107 -- 144 -- 173 --
------ -- ------ -- ------ --
Total .................. $4,145 100% $4,139 100% $4,078 100%
====== === ====== === ====== ===
December 31,
--------------------------------------------
1994 1993
---------------------- ---------------------
% of loans % of loans
in each in each
category to category to
Amount total loans Amount total loans
-------- ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction and land
development ............ $ 183 10% $ 114 7%
Mortgage:
One to four family
residential ........... 521 39 489 42
Commercial ............. 342 18 278 17
Equity lines of
credit ................ 138 9 121 10
Commercial, industrial
and agricultural ......... 392 10 298 9
Consumer .................. 1,257 9 1,089 9
Other ..................... 771 5 841 6
Unallocated ............... 182 -- 222 --
------ -- ------ --
Total .................. $3,786 100% $3,452 100%
====== === ====== ===
</TABLE>
Table VI. Deposits
The average monthly volume of deposits, which is considered representative
of BancShares' operations, and the average rates paid on such deposits are
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ---------------------
Average Average Average Average Average Average
Balances Rates Balances Rates Balances Rates
---------- --------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand ......... $ 61,395 -- $ 50,643 -- $ 42,403 --
Interest bearing demand ............. 118,582 2.80% 99,928 2.69% 83,066 2.89%
Savings ............................. 46,008 2.48 42,954 2.50 38,018 2.73
Time deposits ....................... 262,000 5.43 221,304 5.51 159,865 5.56
-------- -------- --------
Total deposits ..................... $487,985 $414,829 $323,352
======== ======== ========
</TABLE>
Maturities of $100,000 or more time certificates of deposit at December
31, 1997 are summarized as follows (dollars in thousands):
Maturity category:
Three months or less ...................... $16,297
Over three through six months ............. 12,382
Over six months through twelve months ..... 12,475
Over one year through five years .......... 8,749
Over five years ........................... --
-------
$49,903
=======
39
<PAGE>
Table VII. Return on Equity and Assets
The following table presents certain ratios of BancShares:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) ............ 1.32% 1.32% 1.62%
Return on equity (net income divided by average total equity) ............ 13.47 13.46 15.30
Dividend payout ratio (dividends paid divided by net income) ............. 12.31 14.51 11.42
Equity to assets ratio (average equity divided by average total assets) .. 9.83 9.83 10.58
</TABLE>
Table VIII. Capital Adequacy
The following table presents certain calculations of BancShares' capital
and related ratios:
December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
Total shareholders' equity ......... $ 59,117 $ 51,242 $ 44,351
Leverage capital ................... 46,977 40,113 39,577
Tier 1 capital ..................... 46,977 40,113 39,577
Total capital ...................... 51,122 44,112 42,754
Leverage capital ratio (1) ......... 8.52% 8.55% 10.74%
Tier 1 capital ratio ............... 12.80 12.54 15.57
Total capital ratio (2) ............ 13.93 13.79 16.82
- ---------
(1) Bank holding companies operating at the 3% minimum are expected to have
well diversified risk profiles, including no undue interest rate risk,
excellent asset quality, high liquidity and strong earnings. Bank holding
companies not meeting these requirements are expected to maintain a
leverage ratio somewhat higher than the 3% minimum applicable to the
highest rated companies.
(2) The minimum ratio of qualifying total capital to risk weighted assets is
8%, of which 4% must be Tier 1 capital, which is common equity, retained
earnings, and a limited amount of perpetual preferred stock, less certain
intangibles.
Table IX. Rate of Internal Capital Generation
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Return on average assets (based on net income) ................. 1.32% 1.32% 1.62%
Average equity as a percentage of total average assets ......... 9.83 9.83 10.58
Return on average equity ....................................... 13.47 13.46 15.30
Dividend payout ratio .......................................... 12.31 14.51 11.42
(dividends paid divided by net income)
Earnings retention ............................................. 87.69 85.49 88.58
(net income less dividends divided by net income)
Rate of internal capital generation ............................ 11.81 11.51 13.55
(return on average equity ratio times earnings retention ratio)
</TABLE>
40
<PAGE>
Table X. Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------
1-30 31-90 91-180
Days Days Days
Sensitive Sensitive Sensitive
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Loans .................................... $ 163,534 $ 18,170 $ 14,353
Investment securities .................... -- 88,213 2,000
Federal funds sold ....................... 33,300 -- --
--------- --------- ---------
Total interest earning
assets ................................ $ 196,834 $ 106,383 $ 16,353
========= ========= =========
Liabilities
Savings and checking with interest ....... $ -- $ -- $ --
Money market savings accounts ............ 58,061 -- --
Time deposits ............................ 25,523 52,076 68,613
Short-term borrowings .................... 11,051 -- --
--------- --------- ---------
Total interest bearing
liabilities ........................... $ 94,635 $ 52,076 $ 68,613
========= ========= =========
Interest sensitivity gap ................. $ 102,199 $ 54,307 $ (52,260)
========= ========= =========
Cumulative interest sensitivity gap ...... $ 102,199 $ 156,506 $ 104,246
Cumulative interest sensitivity gap to
total interest earning assets ........... 19.02% 29.13% 19.40%
December 31, 1997
--------------------------------------------------------
181-365 Total
Days One-Year Total
Sensitive Sensitive Nonsensitive Total
------------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Loans .................................... $ 28,705 $ 224,762 $133,488 $ 358,250
Investment securities .................... 26,904 117,117 28,626 145,743
Federal funds sold ....................... -- 33,300 -- 33,300
--------- --------- -------- ---------
Total interest earning
assets ................................ $ 55,609 $ 375,179 $162,114 $ 537,293
========= ========= ======== =========
Liabilities
Savings and checking with interest ....... $ -- $ -- $114,813 $ 114,813
Money market savings accounts ............ -- 58,061 -- 58,061
Time deposits ............................ 68,957 215,169 49,738 264,907
Short-term borrowings .................... -- 11,051 -- 11,051
--------- --------- -------- ---------
Total interest bearing
liabilities ........................... $ 68,957 $ 284,281 $164,551 $ 448,832
========= ========= ======== =========
Interest sensitivity gap ................. $ (13,348) $ 90,898 $ (2,437) $ 88,461
========= ========= ======== =========
Cumulative interest sensitivity gap ...... $ 90,898 $ 90,898 $ 88,461 $ 88,461
Cumulative interest sensitivity gap to
total interest earning assets ........... 16.92% 16.92% 16.46% 16.46%
</TABLE>
Assets and liabilities with maturities of one year or less and those that
may be adjusted within this period are considered interest-sensitive. The
interest-sensitivity position has meaning only as of the date for which it was
prepared.
Table XI. Short-Term Borrowings
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Amount Rate Amount Rate Amount Rate
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased:
At December 31 ............................. $ -- -- $ -- -- $ -- --
Average during year ........................ 896 5.53% 1,359 5.37% 743 5.67%
Maximum month end balance during year ...... 4,800 7,100 4,950
Repurchase agreements:
At December 31 ............................. $7,632 4.12% $3,995 4.38% 4,322 4.43%
Average during year ........................ 4,741 3.86% 3,827 3.53% 3,278 4.20%
Maximum month-end balance during year ...... 7,632 4,111 4,414
U.S. Treasury tax and loan accounts:
At December 31 ............................. $3,419 5.25% $1,980 5.15% 1,170 5.15%
Average during year ........................ 1,752 5.20% 1,504 5.26% 1,442 5.63%
Maximum month-end balance during year ...... 3,594 3,441 3,718
</TABLE>
41
<PAGE>
Table XII. Selected Quarterly Data -- Unaudited (1)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Fourth Third Second First
------------- ------------- ------------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ................. $ 11,240 $ 11,002 $ 10,719 $ 10,288
Interest expense ................ 4,875 4,819 4,708 4,614
---------- ---------- ---------- ----------
Net interest income ............. 6,365 6,183 6,011 5,674
Provision for loan losses ....... 90 90 90 90
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ...... 6,275 6,093 5,921 5,584
Noninterest income .............. 992 1,065 997 920
Noninterest expense ............. 4,358 3,922 3,835 3,762
---------- ---------- ---------- ----------
Income before income taxes ...... 2,909 3,236 3,083 2,742
Income taxes .................... 1,154 1,232 1,189 1,007
---------- ---------- ---------- ----------
Net income ...................... $ 1,755 $ 2,004 $ 1,894 $ 1,735
========== ========== ========== ==========
PER SHARE OF STOCK
Net income per common share ..... $ 61.77 $ 71.04 $ 66.67 $ 61.07
Cash dividends -- common ........ 8.00 8.00 8.00 8.00
Common sales price
High ........................... 1,500.00 1,500.00 1,500.00 1,500.00
Low ............................ 1,500.00 1,500.00 1,500.00 1,500.00
1996
----------------------------------------------------
Fourth Third Second First
------------- ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ................. $ 10,379 $ 9,720 $ 9,024 $ 8,115
Interest expense ................ 4,660 4,255 3,948 3,382
---------- ---------- ---------- ----------
Net interest income ............. 5,719 5,465 5,076 4,733
Provision for loan losses ....... 90 90 90 90
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ...... 5,629 5,375 4,986 4,643
Noninterest income .............. 837 966 848 697
Noninterest expense ............. 4,107 3,956 3,284 2,844
---------- ---------- ---------- ----------
Income before income taxes ...... 2,359 2,385 2,550 2,496
Income taxes .................... 519 994 907 1,067
---------- ---------- ---------- ----------
Net income ...................... $ 1,840 $ 1,391 $ 1,643 $ 1,429
========== ========== ========== ==========
PER SHARE OF STOCK
Net income per common share ..... $ 64.40 $ 48.67 $ 57.51 $ 50.02
Cash dividends -- common ........ 8.00 8.00 8.00 8.00
Common sales price
High ........................... 1,500.00 1,300.00 1,300.00 1,100.00
Low ............................ 1,500.00 1,300.00 1,300.00 1,100.00
</TABLE>
- ---------
(1) The selected quarterly data included in the tables for the quarterly
periods in 1997 and 1996 are unaudited, and limited quarterly review
procedures have not been performed by an independent certified public
accountant.
For the Six Months Ended June 30, 1998 and 1997
Financial Condition and Results of Operations.
Net Income. In the first six months of 1998, BancShares' net income
increased $586,000 from $3.6 million in the first six months of 1997 to $4.2
million in the first six months of 1998, an increase of 16.28%. Growth in net
income was limited due to the opening of three de novo branches in the first
six months of 1998 and initial expenses related to three other de novo branches
scheduled to open in the third quarter of 1998.
Net income per share for the first six months of 1998 was $148.17 per
share, an increase of $20.62, or 16.17%, from $127.55 per share in 1997. The
return on average equity decreased to 13.80%, for the period ended June 30,
1998, from 13.82% for the period ended June 30, 1997 and the return on assets
increased to 1.44% for the period ended June 30, 1998, from 1.33% for the
period ended June 30, 1997. At June 30, 1998, BancShares' assets totaled $597.7
million, an increase of $14.7 million, or 2.52%, from the $583.0 million at
December 31, 1997. During this six month period, gross loans increased $27.0
million or 7.54% from $358.3 million to $385.3 million. During the six months
ended June 30, 1998 investment securities decreased $31.0 million or 21.60%
from $143.9 million at December 31, 1997 to $112.9 million at June 30, 1998.
Total deposits increased $10.7 million, or 2.12% from $505.2 million at
December 31, 1997 to $515.9 million at June 30, 1998. The above increases
resulted from internal growth as there were no branch acquisitions in the six
months ended June 30, 1998.
Interest Income. Interest and fees on loans increased $1.4 million or
8.53%, from $16.5 million for the six months ended June 30, 1997 to $18.0
million for the six months ended June 30, 1998. This increase was due to
increased loan volume. Average loans for the six months ended June 30, 1998
were $370.5 million, an increase of 8.31% from $342.0 million for the prior
year six month period. The yield on the loan portfolio was 9.71% in the six
months ended June 30, 1998 and 9.69% in the six months ended June 30, 1997.
Interest income from investments securities, including US Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $903,000 or 21.30%, from $4.2 million for the six months
ended June 30, 1997 to $3.3 million for the six months ended June 30, 1998.
This decrease was due to a large percentage of US Treasuries maturing in the
six months ended June 30, 1998. For the six months ended June 30, 1998 and
1997, average securities totaled $126.0 million and $144.8 million,
respectively. The yield on investment securities was 5.29% and 5.42% for the
six months ended June 30, 1998 and 1997, respectively.
Interest income on federal funds sold increased $918,000 or 441.35% from
$208,000 for the six months ended June 30, 1997 to $1.1 million for the six
months ended June 30, 1998. This increase in income resulted primarily from the
increase in the average federal funds sold to $41.9 million for the six months
ended June 30, 1998 from $8.3 million for the six
42
<PAGE>
months ended June 30, 1997. Average federal funds sold yields were 5.37% for
the six months ended June 30, 1998, an increase from 5.03% for the six months
ended June 30, 1997.
Total interest income increased $1.4 million or 6.67%, from $21.0 million
for the six months ended June 30, 1997 to $22.4 million for the six months
ended June 30, 1998. This increase was the result of volume increases. Average
earning asset interest yields for the six months ended June 30, 1998 and June
30, 1997 were 8.33% and 8.49%, respectively. Average earning assets increased
from $495.1 million in the six months ended June 30, 1997 to $538.5 million in
the period ended June 30, 1998. This $43.4 million increase in the average
earning assets resulted from internal growth and the opening of three de novo
branches in the six months ended June 30, 1998.
Interest Expense. Total interest expense increased $364,000 or 3.90% from
$9.3 million for the six months ended June 30, 1997 to $9.7 million for the six
months ended June 30, 1998. The principal reason for the change was the
increase in average interest bearing liabilities from $428.5 million for the
six months ended June 30, 1997 to $448.1 million for the six months ended June
30, 1998. This increase was mitigated by a decrease in BancShares' total cost
of funds from 4.35% for the six months ended June 30, 1997 to 4.32% for the six
months ended June 30, 1998.
Net Interest Income. Net interest income was up $1.0 million, or 9.10%
from $11.7 million for the six months ended June 30, 1997 to $12.7 million for
the six months ended June 30, 1998. This increase was primarily due to the
increase in loan volume through the Bank's internal growth. The net interest
margin at June 30, 1998 was 4.73%, an increase of 1 basis point from the 4.72%
net interest margin at June 30, 1997.
Asset Quality and Provision for Possible Loan Losses. For the six months
ended June 30, 1998 and 1997, management added $180,000 as volume related
additions to the provision for loan losses. During the six months of 1998
management charged-off loans totaling $898,000 and received recoveries of
$282,000 resulting in net charge-offs of $616,000. During the same period in
1997, $341,000 in loans were charged-off and recoveries of $261,000 were
received resulting in net charge-offs of $80,000. The increase in net
charge-offs in 1998 was primarily due to management following its policy of
charging loans off early and conservatively. In management's opinion, the
charge-offs in the first six months of 1998 are not necessarily indicative of
deterioration in the quality of the loan portfolio. The following table
presents BancShares' comparative asset quality ratios:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Ratio of annualized net loans charged off to average loans ............ .33% .10%
Allowance for loan losses to loans .................................... .96 1.16
Non-performing assets to total gross loans and other real estate owned .01 .02
Non-performing assets to total assets ................................. -- --
Allowance for loan losses to non-performing assets .................... 6,495.89% 7,271.93%
</TABLE>
The ratio of net charge-off to average loans outstanding increased to
0.33% (annualized) at June 30, 1998 from 0.10% for the year ended December 31,
1997 primarily due to loans charged off in June 1998. The allowance for loan
losses represented 0.96% of loans at June 30, 1998, a decrease of 20 basis
points from the December 31, 1997 ratio of 1.16%. Loans increased $27.0
million, or 7.54% from December 31, 1997 to June 30, 1998.
Management considers the June 30, 1998 allowance for loan losses adequate
to cover the losses and risks inherent in the loan portfolio at June 30, 1998
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares had no impaired loans at June 30, 1998. At
June 30, 1998, BancShares had no loans classified for regulatory purposes as
loss or doubtful and less than $1.0 million of loans classified as substandard.
Management actively maintains a current loan watch list and knows of no other
loans which are material and (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 is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Noninterest Income. Noninterest income increased $731,000 for the period
ended June 30, 1998 compared to the prior period ended June 30, 1997. Total
noninterest income was $2.6 million at June 30, 1998 compared to $1.9 million
at June 30, 1997. Noninterest income does not include any securities gains for
either six month period. During the six months ended June 30, 1998, noninterest
income was positively impacted by a gain of $507,000 on the sale of mortgage
servicing rights. Service charges on deposit accounts increased by $124,000 or
11.40% from $1.1 million at June 30, 1997 to $1.2 million at June 30, 1998.
This increase was primarily attributable to internal growth of the existing
branch network. Additionally, other service charges, commissions and fees
increased $100,000 or 12.21% from $819,000 for the six months ended June 30,
1997, to $919,000 for the six months ended June 30, 1998, due to increased ATM,
mortgage and other miscellaneous fees.
43
<PAGE>
Noninterest Expense. Noninterest expense which includes personnel,
occupancy, furniture and equipment, data processing, legal and professional
fees, postage, intangible amortization, FDIC insurance and state assessments,
printing and supplies and other expenses, increased $815,000 or 10.73% from
$7.6 million for the six months ended June 30, 1997 to $8.4 million for the six
months ended June 30, 1998.
This increase was primarily due to an increase in personnel expense of
$388,000 or 9.63%, from $4.0 million at June 30, 1997 to $4.4 million at June
30, 1998 and an increase in occupancy, furniture and equipment expense and
other volume related expenses resulting from three new de novo branch openings
in the six months ended June 30, 1998 and the expenses related to three more de
novo branches being planned to open in the third quarter of 1998.
Income taxes. In the six months ended June 30, 1998, BancShares had income
tax expense of $2.6 million, an increase of $393,000, or 17.92%, from $2.2
million in the prior year period. This increase was due to increased
profitability resulting from internal growth. The resulting effective income
tax rates based on the accruals for the six months ended June 30, 1998 and 1997
were 38.06% and 37.70%, respectively.
Capital Resources.
Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank,
have established minimum capital guidelines for the institutions they
supervise.
Regulatory guidelines define minimum requirements for BancShares' leverage
capital ratio. Leverage capital equals total equity less goodwill and certain
other intangibles and is measured relative to total adjusted assets as defined
by regulatory guidelines. According to these guidelines, BancShares' leverage
ratio at June 30, 1998 was 8.82%. At December 31, 1997, BancShares' leverage
capital ratio was 8.52%.
BancShares is also required to meet minimum requirements for RBC.
BancShares' assets, including loan commitments and other off-balance sheet
items, are weighted according to federal guidelines for the risk considered
inherent in each asset. At June 30, 1998, the Total Capital Ratio was 13.99%.
At December 31, 1997 the Total Capital Ratio was 13.93%.
The net unrealized gains on securities available-for-sale at June 30, 1998
of $4.9 million and at December 31, 1997 of $5.2 million, although a part of
shareholders' equity, are not included in the calculation of either the Total
Capital or Leverage Capital Ratios pursuant to regulatory definitions of these
capital requirements. The following table presents capital adequacy
calculations and ratios of BancShares:
June 30, 1998 December 31, 1997
--------------- ------------------
(Dollars in thousands)
Tier 1 capital ................. $ 51,029 $ 46,977
Total capital .................. 54,738 51,122
Tier 1 capital ratio ........... 13.04%(1) 12.80%(1)
Total capital ratio ............ 13.99 (1) 13.93 (1)
Leverage capital ratio ......... 8.82 (1) 8.52 (1)
- ---------
(1) These ratios exceed the minimum required regulatory capital ratios. See
"Supervision and Regulation -- Capital Adequacy."
At June 30, 1998 and December 31, 1997, the Bank also was in compliance
with its regulatory capital requirements, and all of its regulatory capital
ratios exceed the minimum ratios required for it to be classified as "well
capitalized." See "Supervision and Regulation -- Capital Adequacy."
Liquidity, Market Risk and Interest Sensitivity.
Liquidity. Liquidity refers to the ability of the bank to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for
reserve requirements, customer demand for loans, withdrawal of deposit balances
and maturities of other deposits and liabilities. Past experiences help
management anticipate cyclical demands and amounts of cash required. These
obligations can be met by existing cash reserves or funds from maturing loans
and investments, but in the normal course of business are met by deposit
growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentration, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investments securities available-for-sale. The liquidity ratio,
which is defined as net cash plus short-term and marketable securities divided
by net deposits and short term liabilities, was 33.91% at June 30, 1998 and
34.74% at December 31, 1997.
44
<PAGE>
The consolidated statement of cash flows discloses the principal sources
and uses of cash from operating, investing and financing activities for the six
months ended June 30, 1998 and 1997, respectively. BancShares has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$100,000 or more. BancShares has never aggressively bid on these deposits.
Almost all jumbo deposit customers have other relationships with the Bank,
including savings, demand and other time deposits, and in some cases, loans. At
June 30, 1998 and at December 31, 1997 jumbo time deposits represented 9.52%
and 9.88%, respectively, of total deposits.
Management believes that BancShares has the ability to generate sufficient
amounts of cash to cover normal requirements and any additional needs which
arise, within realistic limitations, and management is not aware of any known
demands, commitments or uncertainties that will affect liquidity in a material
way.
Market Risk and Interest Sensitivity. Management is of the opinion that
there have been no material changes in BancShares' market risk and interest
sensitivity since December 31, 1997.
Accounting and Other Matters.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("Statement 130"). Statement 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. It does not address issues in recognition
or measurement for comprehensive income and its components. The provisions of
Statement 130 are effective for fiscal years beginning after December 31, 1997.
BancShares adopted this statement in the first quarter of 1998. During the six
months ended June 30, 1998 and 1997, comprehensive income, which consisted of
net income and changes in net unrealized gains and losses, net of applicable
tax effects, amounted to $3.9 million and $4.3 million, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("Statement 131"). Statement 131
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The provisions of Statement 131 are
effective for fiscal years beginning after December 31, 1997. Adoption of this
pronouncement is not expected to have a material effect on BancShares'
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pension and Other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact BancShares. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all 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 depends on the
intended use of the derivative and the resulting designation. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier application of all provisions of this statement is encouraged.
The Company plans to adopt this Statement on January 1, 2000 and does not
anticipate any material effect on its consolidated financial statements.
The Bank has opened six de novo branches subsequent to December 31, 1997.
In addition, BancShares has entered into definitive agreements to acquire five
additional branches in 1998.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
Year 2000 Issue
Introduction.
The year 2000 ("Y2K") issue confronting BancShares and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs
and systems originally were programmed with six digit dates that provided only
two digits to identify the calendar year in the date field. With the impending
new millennium, these programs and computers will recognize "00" as the year
1900 rather than the year 2000. These problems may also arise from other
sources as well, such as the use of special codes and conventions in software
that make use of the date field.
45
<PAGE>
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, suppliers and borrowers. These statements also
require each federally regulated financial institution to survey its exposure,
measure its risk and prepare a plan to address the Y2K issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any Y2K problems. The federal banking agencies have asserted that
Y2K testing and certification is a key safety and soundness issue in
conjunction with regulatory exams and, thus, that an institution's failure to
address appropriately the Y2K issue could result in supervisory action,
including the reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions or the imposition of civil
money penalties.
Risks.
Like most financial service providers, BancShares and its operations may
be significantly affected by the Y2K issue due to its dependence on information
technology and date-sensitive data. Computer hardware and software and other
equipment, both within and outside BancShares' direct control, and third
parties with whom BancShares electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and
BancShares could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of BancShares' suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on BancShares' operations
and, in turn, its financial condition and results of operations.
State of Readiness.
During October 1997, BancShares developed its plan to address the Y2K
issue. A substantial portion of BancShares' data processing functions are
performed by FCB on its mainframe systems and/or on systems supported by FCB,
which also provides similar services to several other financial institutions.
See "Certain Relationships and Related Transactions." Therefore, BancShares'
plan for addressing the Y2K issue divides information technology systems ("IT
Systems") into groups which include (i) FCB's mainframe systems used for
processing BancShares' data ("Group A Systems"), (ii) BancShares' non-mainframe
systems which are supported by FCB ("Group B Systems"), and (iii) BancShares'
separate non-mainframe systems ("Group C Systems"). BancShares' Y2K plan also
addresses non-information technology systems ("Non-IT Systems"). As to Group A
Systems and Group B Systems, BancShares' Y2K plan necessarily is designed to be
implemented jointly with FCB. FCB has retained an outside consultant to plan
and direct its Y2K compliance efforts, and BancShares participates in a
committee made up of representatives of the consultant, FCB and each of the
financial institutions for which FCB provides data processing services that
meets periodically to monitor the status of FCB's compliance efforts. Periodic
progress reports are made to Bancshares' Board of Directors.
Separate from its Y2K plan, BancShares installed a new, on-line branch
automation system during 1997. This installation had previously been planned
and was not made in response to the Y2K issue. However, the timing was such
that the new system, when acquired, was Y2K-ready, which eliminated the need to
include many issues relating to that system in BancShares' Y2K plan.
The following paragraphs summarize the phases of BancShares' Y2K plan:
Assessment Phase. During the assessment phase, a Y2K corporate inventory
and business risk assessment was made (jointly with FCB in the case of Group A
Systems and Group B Systems, and separately in the case of Group C Systems and
Non-IT Systems) to quantify the extent of BancShares' Y2K exposure and identify
systems that required remediation. IT Systems identified as being affected by
the Y2K issue were designated as (i) "Priority 1" or "mission critical" (where
core operations could be sustained for up to three days in the event of a
failure), (ii) "Priority 2" (where core operations could be sustained for up to
seven days in the event of a failure), and (iii) "Priority 3" (where core
operations could be sustained for more than seven days in the event of a
failure). A general plan for dealing with each system was developed and
responsibilities for each system were assigned. This phase has been completed.
46
<PAGE>
Remediation and Testing. With respect to IT Systems, this phase
contemplates the implementation of modifications, upgrades or system
replacements determined to be necessary to achieve Y2K compliance and the
testing of modified or upgraded systems to determine their functionality and
operating capability. As to Group A Systems and Group B Systems, FCB's outside
consultant is responsible for coordinating necessary modifications, upgrades or
replacements. This phase has been completed as to all Group A Systems and is
scheduled to be completed by December 31, 1998 as to Priority 1 Group B
Systems, and during the first and second quarters of 1999 as to Priority 2 and
Priority 3 Group B Systems. As to Group C Systems, BancShares' staff is
coordinating remediation (which, in most cases, entails the installation of
upgrades provided by outside vendors) and testing, and this phase has been
completed as to substantially all systems (with completion of this phase as to
remaining systems scheduled for the fourth quarter of 1998).
Validation. The validation phase contemplates intensive testing, in an
isolated environment, of the ability of new and modified systems, which have
been determined to be functional, to accurately process date sensitive data
beginning January 1, 2000. Validation testing as to Group A Systems and Group B
Systems is being conducted by FCB's outside consultant and is expected to be
completed by December 31, 1998 as to all Group A Systems and Priority 1 Group B
Systems, and during the first and second quarters of 1999 as to Priority 2 and
Priority 3 Group B Systems. As to Group C Systems, BancShares' staff is
conducting validation testing which is expected to be completed by December 31,
1998 in the case of most systems and during the first quarter of 1999 in the
case of certain systems.
Implementation. Under BancShares' plan, once new and modified systems have
been tested for functionality, they are being put into production before
validation testing is actually completed. BancShares' target is to have
substantially completed the implementation and validation phase with respect to
substantially all Priority 1 systems by December 31, 1998.
Non-IT Systems, Loan Customers and Third Party Service Providers.
Activities under BancShares' plan with respect to Non-IT Systems (including
security systems, office equipment, etc.), substantially all of which have been
categorized as Priority 3, primarily involve identifying potential Y2K problems
and insuring that outside vendors provide necessary upgrades or replacements.
Each system has been assigned to an officer of BancShares whose responsibility
it is to communicate with the vendor of that system and coordinate remediation.
Validation testing for Non-IT Systems is planned for the first quarter of 1999.
During early 1998, BancShares identified those borrowing customers whose
existing aggregate borrowings from BancShares exceeded $500,000 and whose
businesses were of a nature that they could be adversely affected by the Y2K
issue. A meeting was held individually with each such borrowing customer to
assess the customer's plan for and progress toward addressing the Y2K issue.
Individual follow-up meetings are being held with each such customer during the
fourth quarter of 1998. With respect to new and renewed loans, an assessment of
Y2K risk and steps being taken by the customer to address the Y2K issue is made
as part of the credit approval process.
Costs.
BancShares is expensing all costs associated with required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. Because a substantial portion of BancShares' data processing
functions are performed by FCB on its mainframe systems and/or on systems
supported by FCB, FCB is bearing a substantial portion of the expenses related
to the remediation and testing of systems that affect BancShares. BancShares
has budgeted $412,000 for its separate Y2K project expenses. Expenses actually
incurred through June 30, 1998 were not material. BancShares does not expect
significant increases in future data processing costs relating to Y2K
compliance.
Contingency Plans.
During the assessment phase, BancShares began to identify a back-up or
contingency plan for each of its Priority 1 systems. Virtually all of
BancShares' Priority 1 systems are dependent upon third party vendors or
service providers, therefore, contingency plans include selecting a new vendor
or service provider and converting to their system. In the event a current
vendor's system fails during the validation phase and it is determined that the
vendor is unable or unwilling to correct the failure, BancShares will convert
to a new system from a pre-selected list of prospective vendors. In each case,
realistic trigger dates have been established to allow for orderly and
successful conversions. Contingency plans with respect to a Priority 1 system
failure on or after January 1, 2000 are still being developed.
47
<PAGE>
BUSINESS
General
BancShares is a registered bank holding company, incorporated under the
laws of Delaware, and headquartered in Fuquay-Varina, North Carolina. It was
organized during 1987 as the holding company for the Bank. BancShares operates
through the Bank which provides a variety of retail and commercial banking
products and services to individuals and small- to medium-sized businesses in
the communities it serves. At June 30, 1998, BancShares had total consolidated
assets of approximately $597.7 million, total consolidated deposits of
approximately $515.9 million, and total consolidated shareholders' equity of
approximately $62.5 million.
BancShares currently is engaged in an expansion program which involves
acquisitions of other financial institutions, or offices and/or deposits of
other institutions, and the opening of de novo branches. The Bank is a North
Carolina-chartered bank that currently maintains 41 banking offices in 28
central North Carolina communities, 12 of which were opened or acquired within
the last three fiscal years.
BancShares is focused on community-oriented banking via (i) localized
lending, (ii) core deposit funding, (iii) conservative balance sheet
management, and (iv) stable growth. BancShares' franchise includes many smaller
communities where competition is limited due to the exit of larger institutions
or to the limited product offerings of smaller institutions. By outsourcing its
core data processing requirements to an affiliated financial institution (see
"Certain Relationships and Related Transactions"), BancShares can offer a
complete array of financial services while maintaining its community banking
orientation. BancShares' focus on non-metropolitan markets and its emphasis on
customer service provide it with a stable source of core funding. At June 30,
1998, transaction accounts and non-interest bearing accounts equaled 40.13% and
15.02%, respectively, of total deposits, with the remaining 44.85% of total
deposits attributable to interest bearing savings and time deposit accounts.
BancShares' return on average assets and return on average equity were
1.32% and 13.47%, respectively, for the year ended December 31, 1997, and an
annualized 1.44% and 13.80%, respectively, for the six months ended June 30,
1998.
Members of the Holding family, including Lewis R. Holding, have been
actively involved in the management of BancShares, and, currently, various
members of the family control an aggregate of 77.31% of BancShares' common
stock. See "Beneficial Ownership of Securities" and "Certain Relationships and
Related Transactions." As a result, BancShares has been managed from a
long-term perspective with primary emphasis being placed on balance sheet
liquidity, loan quality, and earnings stability. At June 30, 1998, BancShares'
loan-to-deposit ratio was 74.67% and over 64% of its $158.1 million investment
portfolio was invested in U.S. government obligations with an average maturity
of 11 months. Consistent with its management philosophy, BancShares has
emphasized a low-risk loan portfolio derived from its local markets. At June
30, 1998, BancShares' non-performing assets were $57,000, or 0.01% of gross
loans and other real estate. Net charge-offs for the year ended December 31,
1997 were 0.10% of average loans and, for the six-month period ended June 30,
1998, were an annualized 0.33% of average loans. The allowance for loan losses
at June 30, 1998, was 0.96% of gross loans.
BancShares' principal executive offices are located at 100 South Main
Street, Fuquay-Varina, North Carolina 27526, and its telephone number is (919)
552-2242.
For additional information regarding BancShares and its financial
condition and results of operations, see "Available Information," "Risk Factors
- -- Risk Factors Relating to BancShares," "Consolidated Ratios of Earnings to
Fixed Charges," "Capitalization," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Supervision and Regulation," "Beneficial Ownership of
Securities," "Directors and Executive Officers," "Executive Compensation,"
"Certain Relationships and Related Transactions," and "Fidelity BancShares
(N.C.), Inc. and Subsidiary Index to Consolidated Financial Statements."
Description of Business
General. The Bank is a community-oriented bank which is engaged in a
general commercial and consumer banking business. Its operations are primarily
retail oriented and directed toward individuals, small- to medium-sized
businesses and local governmental units in its market area. While the Bank
provides most traditional commercial and consumer banking services, its
principal activities are the taking of demand and time deposits and the making
of secured and unsecured loans. The Bank's deposits are insured by the FDIC to
the maximum amount permitted by law.
The Bank's primary source of revenue is interest income from its lending
activities. Since it commenced business, the Bank has pursued a strategy of
growth through internal expansion by establishing branch offices in communities
in its geographic market and by acquiring smaller institutions or offices of
other institutions in its existing markets or in new markets.
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Lending Activities. The Bank's loans are concentrated in three major
areas: (i) real estate loans; (ii) commercial and agricultural loans; and (iii)
consumer loans.
At June 30, 1998, approximately 78% of the Bank's loan portfolio consisted
of real estate loans. All real estate loans are secured by liens on real
property. However, in addition to real estate purpose loans (which generally
are made up of loans made to individuals and businesses for the purchase and
improvement of or investment in real estate, including construction loans to
individuals and builders), the Bank's real estate loans include loans secured
by first or junior liens on real estate but which were made for various other
commercial, agricultural and consumer purposes. The high percentage of the
Bank's loans which are secured by real estate generally is reflective of
efforts by management to minimize credit risk by taking real estate as primary
or additional collateral on loans made for purposes not directly related to the
real estate itself. Real estate loans may be made at fixed or variable interest
rates and for terms, or which provide for payments based on an amortization
schedule, of up to 30 years. However, loans having terms of more than five
years, or which are based on an amortization schedule of more than that many
years, generally will contain contractual provisions which allow the Bank to
call the loan in full, or provide for a "balloon" payment in full, at any time
after the fifth year.
In addition to the real estate loans described above which are carried in
the Bank's loan portfolio, the Bank makes conventional, long-term mortgage
loans which are underwritten to FHLMC guidelines, closed in the Bank's name,
and then sold in the secondary market. The servicing rights on these loans are
sold by the Bank to an affiliated financial institution. See "Certain
Relationships and Related Transactions." With the exception of these
conventional mortgage loans, none of the Bank's real estate loans are
underwritten to conform to FNMA or FHLMC guidelines.
The Bank's commercial and agricultural loans include loans to individuals
and small- to medium-sized businesses in its market area for working capital,
equipment purchases and various other business and agricultural purposes (other
than any such loan secured by real estate) and loans made to finance the
production of crops or livestock operations. A majority of the Bank's
commercial and agricultural loans are secured by inventory, equipment or
similar assets, but these loans also may be made on an unsecured basis.
Commercial and agricultural loans may be made at variable or fixed rates of
interest; however, it currently is the Bank's policy that those loans which
have terms or amortization schedules of longer than five years normally will
carry interest rates which vary with the prime lending rate and may be called
in full at any time after the fifth year.
The Bank's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes (other than any such loan secured by
real estate), but also includes the outstanding balances on consumer revolving
credit accounts, including credit card accounts. The majority of the Bank's
installment loans are secured by liens on various personal assets of the
borrowers, but these loans may also be made on an unsecured basis. Consumer
loans are made at fixed and variable interest rates and for terms which
generally do not exceed five years. However, the Bank will make consumer loans
for terms of up to seven years.
With the exception of conventional mortgage loans underwritten to FHLMC
guidelines as described above, none of the Bank's loans are made or
underwritten for sale in any secondary market, and there is no established
secondary market into which any of the loans carried in the Bank's loan
portfolio could be sold. However, while the Bank has not previously sold, or
attempted to sell, any of its portfolio loans, management of the Bank believes
that, should the need arise (for purposes of liquidity or otherwise), portions
of its loan portfolio could be sold to other banks or financial institutions on
a privately negotiated basis. Because it believes the Bank has adequate other
sources of liquidity, and because the Bank's loans generally are made at
variable interest rates and/or provide for a call option or a balloon payment
after not more than five years (in order to minimize interest rate risk),
management currently does not foresee a need to sell any of the Bank's
portfolio loans.
A discussion of and certain statistical information regarding the Bank's
loan portfolio, reserve for loan losses and its nonaccrual, past due and
restructured loans is contained in this Prospectus under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Loan Administration and Underwriting. As described above, the Bank's loan
portfolio consists primarily of loans made for a variety of commercial,
agricultural and consumer purposes. Because these types of loans are made
based, to a great extent, on the Bank's assessment of borrowers' income, cash
flows, character and abilities to repay (as compared to long-term residential
mortgage loans in which greater emphasis is placed on collateral), such loans
generally are viewed as involving a higher degree of credit risk than is the
case with long-term residential mortgage loans. To manage this risk, the Bank's
loan portfolio is managed under a defined credit review process which includes
guidelines for loan underwriting standards and risk assessment, procedures for
ongoing identification and management of credit deterioration and regular
portfolio reviews to assess loss exposure and to ascertain compliance with the
Bank's credit policies and procedures. This
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process includes a centralized credit review and analysis prior to funding of
all credit decisions in excess of $500,000, a review of all loans over $20,000
within 30 days after funding, and an annual review of all loans over $500,000.
The Bank's loan approval policies generally provide for various levels of
lending authority for lending personnel. All loans over $200,000 require the
approval of senior management, and all loans over $500,000 require the approval
of the Supervisory Loan Committee which consists of senior management officials
of the Bank.
During periodic reviews, loans are assigned a grade which indicates the
level of management attention to be given to that loan to protect the Bank's
position and to reduce loss exposure. Loans are placed in a nonaccrual status
whenever, in the opinion of management, collection becomes doubtful, and they
are charged off when the collection of principal and interest is doubtful and
the loans can no longer be considered sound collectible assets. Management
meets regularly to review asset quality trends and to discuss loan policy
issues. Potential losses are identified during these reviews and reserves are
established accordingly.
Deposit Activities. The Bank's deposit services include business and
individual checking accounts, savings accounts, NOW accounts, certificates of
deposit and market rate checking accounts. It is the Bank's policy to monitor
its competition in order to keep the rates paid on its deposits at a
competitive level. Time deposits of $100,000 and over made up approximately
9.52% of the Bank's total deposits at June 30, 1998. The vast majority of the
Bank's deposits are generated from within its market area. The Bank does not
accept brokered deposits but does actively solicit public funds deposits in its
market area.
A discussion of and certain statistical information regarding the Bank's
deposit accounts is contained in this Prospectus under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Other Services. The Bank provides most other traditional commercial and
consumer banking services. Nondeposit investment products and services are
offered by the Bank through a subsidiary corporation, while discount brokerage
services are offered through an unaffiliated broker. Trust services are
provided through a correspondent bank.
Investment Portfolio. At June 30, 1998, the Bank's investment portfolio
consisted almost entirely of U.S. government securities and obligations of
states and political subdivisions, 88.64% of which mature within one year and
11.35% of which mature after one through five years.
A discussion of and certain statistical information regarding the Bank's
investment portfolio is contained in this Prospectus under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Subsidiaries. The Bank has a wholly-owned subsidiary, TFB Financial
Services, Inc., which provides non-deposit investment products, including
mutual funds and annuities, to the Bank's customers. A second subsidiary
corporation currently is inactive.
Competition. Commercial banking in North Carolina is highly competitive.
In its market areas, the Bank competes directly with a number of local,
regional and superregional banking organizations. Competition among financial
institutions for loans and deposits is based, to a large extent, on interest
rates charged or paid. Fees and charges for other services, office location,
the quality of customer services, community reputation and continuity of
personnel, and, in the case of loans to large commercial borrowers, relative
lending limits, also are important competitive factors. Many of the Bank's
competitors have greater resources, broader geographic markets and higher
lending limits and offer more services than the Bank, and they can better
afford and make more effective use of media advertising, support services and
electronic technology than can the Bank. The Bank depends on its reputation in
its local community, direct customer contact, its ability to make credit and
other business decisions locally, and personalized service to counter these
competitive disadvantages.
In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions must conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina financial institutions,
but also with out-of-state financial institutions which may acquire North
Carolina institutions and are able to provide certain financial services across
state lines, thereby adding to the competitive atmosphere of the industry in
general.
Employees. At June 30, 1998, the Bank employed 226 full-time employees and
27 part-time employees. It is not a party to any collective bargaining
agreements and considers relations with its employees to be good. BancShares
does not have any separate employees.
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Property. BancShares does not own or lease any real property. Except for
four tracts of land that are leased and upon which are constructed leasehold
improvements for the conduct of its banking business, the Bank owns all of the
real property utilized in its operations. At June 30, 1998, the Bank's
investment in premises and equipment, net of depreciation, was approximately
$22.8 million.
Legal Proceedings. The Bank is a party to various legal proceedings in the
ordinary course of its business. However, based on information presently
available, and after consultation with legal counsel, BancShares' management
believes that the ultimate outcome in such proceedings, in the aggregate, will
not have any material adverse effect on BancShares' financial condition.
Statistical Information. Certain statistical information with respect to
BancShares' business is contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which appears elsewhere in this
Prospectus.
Change in Accountants
During April 1997, BancShares appointed KPMG Peat Marwick LLP to serve as
its independent certified public accountants. KPMG Peat Marwick LLP replaced
Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) which had previously
been retained by BancShares. This change in accountants was approved by
BancShares' audit committee.
During BancShares' two fiscal years preceding the change (1996 and 1995),
and through the date of the change in April 1997, there were no disagreements
with Coopers & Lybrand L.L.P. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to such firm's satisfaction, would have caused it to make
reference to the subject matter of such disagreement in its reports on
BancShares' consolidated financial statements; and, during that period, Coopers
& Lybrand L.L.P.'s reports on BancShares' consolidated financial statements did
not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
KPMG Peat Marwick LLP audited BancShares' consolidated financial statements for
1997.
SUPERVISION AND REGULATION
The following information is not intended to be an exhaustive description
of the statutes and regulations applicable to BancShares or the Bank. The
discussion is qualified in its entirety by reference to all particular
statutory or regulatory provisions.
The business and operations of BancShares and the Bank are subject to
extensive federal and state governmental regulation and supervision.
Regulation of BancShares
BancShares is a bank holding company registered with the Federal Reserve
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is
subject to supervision and examination by, and the regulations and reporting
requirements of, the Federal Reserve. Under the BHCA, the activities of
BancShares are limited to banking, managing or controlling banks or engaging in
any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The BHCA prohibits BancShares from acquiring direct or indirect control of
more than 5.0% of the outstanding voting stock or substantially all of the
assets of any financial institution, or merging or consolidating with another
bank holding company or savings bank holding company, without prior approval of
the Federal Reserve. Additionally, the BHCA prohibits BancShares from engaging
in, or acquiring ownership or control of more than 5.0% of the outstanding
voting stock of any company engaged in, a nonbanking activity unless such
activity is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto. In approving an application by
BancShares to engage in a nonbanking activity, the Federal Reserve must
consider whether that activity can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
There are a number of obligations and restrictions imposed by law on a
bank holding company and its insured depository institution subsidiaries that
are designed to minimize potential loss to depositors and the FDIC insurance
funds. For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the
terms of any capital restoration plan filed with its appropriate federal
banking agency. Also, a bank holding company is required to serve as a
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source of financial strength to its depository institution subsidiaries and to
commit resources to support such institutions in circumstances where it
otherwise might not do so, absent such policy. Under the BHCA, the Federal
Reserve has the authority to require a bank holding company to terminate any
activity or to relinquish control of a nonbank subsidiary upon the Federal
Reserve's determination that such activity or control constitutes a serious
risk to the financial soundness and stability of a depository institution
subsidiary of the bank holding company.
Regulation of the Bank
The Bank is a North Carolina-chartered commercial bank, and its deposits
are insured by the FDIC. It is subject to supervision and examination by, and
the regulations and reporting requirements of, the North Carolina Commissioner
of Banks (the "Commissioner") and the FDIC. As a result of its ownership of the
Bank, BancShares also is registered with and subject to regulation by the
Commissioner under the state's bank holding company laws.
As an insured institution, the Bank is prohibited from engaging as a
principal in activities that are not permitted for national banks unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund and (ii) the Bank is, and continues to be,
in compliance with all applicable capital standards. Insured institutions also
are prohibited from directly acquiring or retaining any equity investment of a
type or in an amount not permitted for national banks.
The Federal Reserve, the FDIC and the Commissioner all have broad powers
to enforce laws and regulations applicable to BancShares and the Bank and to
require corrective action of conditions affecting the safety and soundness of
the Bank. Among others, these powers include cease and desist orders, the
imposition of civil penalties and the removal of officers and directors.
Payment of Dividends
BancShares is a legal entity separate and distinct from the Bank. The
principal sources of cash flow of BancShares, including cash flow to pay
dividends to its shareholders, are dividends it receives from the Bank. There
are statutory and regulatory limitations on the payment of dividends by the
Bank to BancShares, as well as by BancShares to its shareholders. As an insured
depository institution, the Bank also is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, it would become "undercapitalized" (as such term is defined in
the Federal Deposit Insurance Act). See "Fidelity BancShares (N.C.), Inc. and
Subsidiary Notes to Consolidated Financial Statements -- Note 10. Regulatory
Restrictions."
If, in the opinion of the FDIC, a depository institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), the FDIC may require,
after notice and hearing, that such institution cease and desist from such
practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under current federal law, a
depository institution may not pay any dividend if payment would cause it to
become undercapitalized or if it already is undercapitalized. See " -- Prompt
Corrective Action." Moreover, the federal agencies have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
At June 30, 1998, approximately $6.6 million was available for payment of
dividends to BancShares from the Bank without affecting the Bank's
classification as a "well capitalized" bank under federal bank regulatory
capital guidelines and without regulatory approval.
The payment of dividends by BancShares and the Bank may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. See "Risk Factors -- Risk Factors Relating
to BancShares -- Reliance on Dividend Payments by Bank."
Capital Adequacy
BancShares and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve in the case of BancShares and the
FDIC in the case of the Bank. There are two basic measures of capital adequacy
that have been promulgated by the Federal Reserve and each of the federal bank
regulatory agencies: a risk-based measure and a leverage measure. All
applicable capital standards must be satisfied for a bank holding company or an
insured depository institution to be considered in compliance.
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Under the Federal Reserve's standards, the minimum guideline for the ratio
("Total Capital Ratio") of total capital ("Total Capital") to risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) is 8.0%. At least half of Total Capital must be composed of common
equity, undivided profits, minority interests in the equity accounts of
consolidated subsidiaries, qualifying noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist
of certain subordinated debt, certain hybrid capital instruments and other
qualifying preferred stock, and a limited amount of loan loss reserves ("Tier 2
Capital"). At June 30, 1998, BancShares' consolidated Total Capital Ratio and
its ratio of Tier 1 Capital to risk-weighted assets ("Tier 1 Capital Ratio")
were 13.99% and 13.04%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Capital Ratio") of Tier 1 Capital to average assets, less
goodwill and certain other intangible assets, of 3.0% for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies generally are required to
maintain an additional cushion of 100 to 200 basis points above the stated
minimums. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve has
indicated that it will consider a "Tangible Leverage Ratio" (deducting all
intangibles) and other indicia of capital strength in evaluating proposals for
expansion or new activities. BancShares' Leverage Capital Ratio at June 30,
1998 was 8.82%.
The Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC which are substantially similar to those adopted by the
Federal Reserve for bank holding companies. At June 30, 1998, the Bank's
consolidated Total Capital, Tier I Capital and Leverage Capital Ratios were
12.51%, 11.61% and 8.46%, respectively. Neither BancShares nor the Bank has
been advised by any federal banking agency of any additional, specific minimum
capital ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
" -- Prompt Corrective Action."
The Federal Reserve and the FDIC also consider interest rate risk (when
the interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. The bank regulatory agencies'
methodology for evaluating interest rate risk requires banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.
Prompt Corrective Action
Current federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under this system, which
became effective in December 1992, the federal banking regulators are required
to establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories. The severity of such actions taken will
depend upon the capital category in which the institution is placed. Generally,
subject to a narrow exception, current federal law requires the banking
regulators to appoint a receiver or conservator for an institution that is
critically undercapitalized.
Under the final agency rules implementing the prompt corrective action
provisions, an institution that (i) has a Total Capital Ratio of 10% or
greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of
5.0% or greater, and (ii) is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the
appropriate federal banking agency, is deemed to be well capitalized. An
institution with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital
Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is
considered to be adequately capitalized. A depository institution that has a
Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than
4.0%, or a Leverage Ratio of less than 4.0%, is considered to be
undercapitalized. A depository institution that has a Total Capital Ratio of
less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio
of less than 3.0%, is considered to be significantly undercapitalized, and an
institution that has a tangible equity capital to assets ratio equal to or less
than 2.0% is deemed to be critically undercapitalized. For purposes of the
regulation, the term "tangible equity" includes core capital elements counted
as Tier 1 Capital for purposes of the risk-based capital standards, plus the
amount of outstanding cumulative
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perpetual preferred stock (including related surplus), minus all intangible
assets with certain exceptions. A depository institution may be deemed to be in
a capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
obligation of a controlling bank holding company to fund a capital restoration
plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described above if it determines "that those actions are
necessary to carry out the purpose" of the law.
At June 30, 1998, the Bank had the requisite capital levels to qualify as
well capitalized.
Reserve Requirements
Pursuant to regulations of the Federal Reserve, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.7 million of transaction accounts, but reserves equal to 3% must be
maintained on the aggregate balances of such accounts between $4.7 million and
$47.8 million, and reserves equal to 10% must be maintained on aggregate
balances in excess of $47.8 million. These percentages are subject to
adjustment by the Federal Reserve. Because required reserves must be maintained
in the form of vault cash or in a non-interest-bearing account at a Federal
Reserve Bank, the effect of the reserve requirement is to reduce the amount of
the institution's interest-earning assets. As of June 30, 1998, the Bank met
its reserve requirements.
FDIC Insurance Assessments
The FDIC currently uses a risk-based assessment system that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities for purposes of calculating deposit insurance
assessments to be paid by insured depository institutions. The risk-based
assessment system, which went into effect on January 1, 1994, assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the final risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
In 1996, the FDIC imposed a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's assessable deposits
insured by the SAIF held as of March 31, 1995 (or approximately 52.6 basis
points on SAIF deposits acquired by banks in certain qualifying transactions),
and adopted revisions to the assessment rate schedules that would generally
eliminate the disparity between assessment rates applicable to the deposits
insured by the BIF and the SAIF. BancShares anticipates that the net effect of
the decrease in the premium assessment rate on SAIF deposits will result in a
reduction in the Bank's total deposit insurance premium assessments through
1999 as compared to years prior to 1997, assuming no further changes in
announced premium assessment rates. BancShares recorded a charge against
earnings for the special assessment in 1996 in the pre-tax amount of
approximately $353,000.
Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC.
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Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, an insured institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of an insured institution, to assess the institution's
record of meeting the credit needs of its community, using the ratings of
"outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance," and to take that record into account in its evaluation of
certain applications by the institution. All institutions are required to make
public disclosure of their CRA performance rating. The Bank received a
"satisfactory" rating in its last CRA examination by the FDIC as of March 2,
1998.
On May 4, 1995, the bank regulatory agencies, including the FDIC, adopted
new uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations will be
assessed and enforced. The regulations establish three tests applicable to the
Bank: (i) a lending test to evaluate direct lending in low-income areas and
indirect lending to groups that specialize in community lending; (ii) a service
test to evaluate its delivery of services to such areas, and (iii) an
investment test to evaluate its investment in programs beneficial to such
areas. The new CRA regulations became effective on July 1, 1995, but reporting
requirements were not effective until January 1, 1997. Evaluation under the
regulations was not mandatory until July 1, 1997. The Bank believes its current
operations and policies substantially comply with the regulations and therefore
no material changes to operations or policies are expected.
Transactions With Affiliates
The Bank is subject to restrictions imposed by federal law on extensions
of credit to, and certain other transactions with, BancShares and other
affiliates and on investments in the stock or other securities thereof. These
restrictions prevent BancShares and other affiliates from borrowing from the
Bank unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Further, such secured loans and other transactions and
investments by the Bank are generally limited in amount as to BancShares and as
to any other affiliate to 10.0% of the Bank's capital and surplus and as to
BancShares and all other affiliates to an aggregate of 20.0% of the Bank's
capital and surplus. These regulations and restrictions may limit BancShares'
ability to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses. The
Bank's ability to extend credit to its and BancShares' directors, executive
officers, and 10.0% stockholders, as well as to entities controlled by such
persons, is governed by the requirements of Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve thereunder.
Interstate Banking and Branching
The BHCA, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Law"), permits adequately capitalized and managed bank
holding companies to acquire control of the assets of banks in any state.
Acquisitions are subject to antitrust provisions that cap at 10.0% the portion
of the total deposits of insured depository institutions in the United States
that a single bank holding company may control and generally cap at 30.0% the
portion of the total deposits of insured depository institutions in a state
that a single bank holding company may control. Under certain circumstances,
states have the authority to increase or decrease the 30.0% cap, and states may
set minimum age requirements of up to five years on target banks within their
borders.
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permitted interstate branching by allowing a bank to merge
with a bank located in a different state. A state was allowed to accelerate the
effective date for interstate mergers by adopting a law authorizing such
transactions prior to June 1, 1997, or it could "opt out" and thereby prohibit
interstate branching by enacting legislation to that effect prior to that date.
The Interstate Banking Law also permits banks to establish branches in other
states by opening new branches or acquiring existing branches of other banks,
provided the laws of those other states specifically permit that form of
interstate branching. North Carolina has adopted statutes which, subject to
conditions contained therein, specifically authorize out-of-state bank holding
companies and banks to acquire or merge with North Carolina banks and to
establish or acquire branches in North Carolina.
55
<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
Principal Shareholders
As of the close of business on September 30, 1998, the following persons
were known to management to own beneficially or of record more than 5% of
BancShares' voting securities:
<TABLE>
<CAPTION>
Title Name and address Amount and nature of Percentage
of class of beneficial owner beneficial ownership (1) of class
- ---------- --------------------------------- -------------------------- -----------
<S> <C> <C> <C>
Common George H. Broadrick 8,032(2) 28.27%
Stock Post Office Box 31727
Charlotte, North Carolina 28231
Frank B. Holding 11,155(3) 39.26
Post Office Box 1377
Smithfield, North Carolina 27577
Lewis R. Holding 3,123(3) 10.99
Post Office Box 151
Raleigh, North Carolina 27602
</TABLE>
- ---------
(1) Except as otherwise indicated below and to the best knowledge of management
of BancShares, the individuals named above exercise sole voting and
investment power with respect to shares shown as beneficially owned.
(2) All shares are held by Mr. Broadrick as sole trustee or co-trustee of
various trusts. He exercises shared voting and investment power with
respect to 345 shares held as a co-trustee.
(3) Named individuals disclaim beneficial ownership with respect to the
following numbers of shares held of record by members of their immediate
families which are included in the shares listed for them above and as to
which they may be deemed to exercise shared voting and investment power;
Mr. F. Holding -- 3,968 shares; Mr. L. Holding -- 396 shares.
Management
As of the close of business on September 30, 1998, the beneficial
ownership of BancShares' voting securities by the directors of BancShares,
individually and as a group, was as follows:
<TABLE>
<CAPTION>
Amount and
Title Name and address nature of beneficial Percentage
of class of beneficial owner ownership(1) of class
- ---------- ----------------------------------------- ---------------------- -----------
<S> <C> <C> <C>
Common F. Ray Allen 102(2) .36%
Stock Biscoe, N.C.
Wiley H. Cozart, M.D. 6 .02
Fuquay-Varina, N.C.
Haywood A. Lane, Jr. 140 .49
Cary, N.C.
Wallace H. Mitchell 100 .35
Fuquay-Varina, N.C.
Sam C. Riddle, Jr. 87(2) .31
Carthage, N.C.
Billy T. Woodard 731(2) 2.57
Fuquay-Varina, N.C.
All directors and executive officers as 1,166 4.10
a group (6 persons)
</TABLE>
- ---------
(1) Except as otherwise indicated below and to the best knowledge of management
of BancShares, the individuals named and included in the group exercise
sole voting and investment power with respect to all shares shown as
beneficially owned.
(2) Individuals named or included in the group exercise shared voting and
investment power with respect to the following numbers of shares: Mr.
Allen -- 80 shares held jointly with his spouse (40 shares) and a
corporation which he controls (40 shares); Mr. Riddle -- 22 shares held by
his spouse; Mr. Woodard -- 318 shares held by his spouse and adult
children.
56
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Directors
BancShares' Bylaws, provide for not less than five nor more than twelve
directors, with the actual number being set and changed from time to time by
the Board of Directors. Each director serves for a term of one year or until
his successor has been duly elected and qualified. The following table contains
the name and certain information about BancShares' current directors.
<TABLE>
<CAPTION>
Position(s) Year
with BancShares first Principal occupation and
Name and age and Bank elected business experience for past five years
- ----------------------- ------------------------ --------- ------------------------------------------
<S> <C> <C> <C>
F. Ray Allen Director 1993 President, Uwharrie Lumber Company,
39 Troy, N.C. (hardwood lumber manufacturer)
Wiley H. Cozart, M.D. Director 1963 Physician; Medical Consultant,
76 State of North Carolina, Raleigh, N.C.
Haywood A. Lane, Jr. President and Director 1979 Formerly Executive Vice President of
61 the Bank and BancShares
Wallace H. Mitchell Director 1968 Retired; Partner, Mitchell Farms; former
70 Secretary-Treasurer and General Manager,
Mitchell Chevrolet Company, Fuquay-
Varina, N.C. (automobile dealership)
Sam C. Riddle, Jr. Director 1979 Owner and former President,
71 Riddle Equipment Company, Inc.,
Carthage, N.C. (farm equipment dealer)
Billy T. Woodard Chairman and Chief 1970 Formerly President of the Bank and
67 Executive Officer BancShares
</TABLE>
Executive Officers
Information regarding BancShares' and the Bank's executive officers is set
forth in the following table. All executive officers serve at the pleasure of
the Board of Directors.
Name and age Positions with BancShares and the Bank
- ---------------------- ---------------------------------------
Billy T. Woodard Chairman and Chief Executive Officer
67
Haywood A. Lane, Jr. President
61
57
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers
Cash Compensation. The following table shows, for 1997, 1996, and 1995,
the cash and certain other compensation paid to or received or deferred by the
Chief Executive Officer and the President of BancShares and the Bank,
respectively, in all capacities in which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------------
Name and Other annual All other
principal Salary Bonus compensation compensation
position Year ($)(1) ($) ($)(2) ($)(3)
- ---------------------- ------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Billy T. Woodard 1997 $159,304 $44,000 $1,600 $7,260
Chairman and Chief 1996 148,883 39,000 1,600 7,240
Executive Officer 1995 139,143 24,000 1,600 7,066
Haywood A. Lane, Jr. 1997 $125,000 $30,000 $1,600 $6,921
President 1996 110,476 5,000 1,600 6,096
1995 103,249 14,000 1,600 5,276
</TABLE>
- ---------
(1) Includes all amounts of salary deferred at the election of each named
executive officer pursuant to the Bank's Section 401(k) salary deferral
plan.
(2) Consists entirely of directors' fees received by each named executive
officer.
(3) Consists entirely of the Bank's contributions on behalf of each named
executive officer to the Bank's Section 401(k) salary deferral plan.
Pension Plan. The following table shows the extimated annual benefits
payable to a covered participant at normal retirement age under the Bank's
qualified defined benefit pension plan based on various specified numbers of
years of service with the Bank and various levels of compensation covered under
the plan.
<TABLE>
<CAPTION>
Years of service
Final -------------------------------------------------
average
compensation 10 years 20 years 30 years 40 years
- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 50,000 $ 7,345 $14,690 $22,036 $ 28,708
75,000 11,970 23,940 35,911 46,396
100,000 16,595 33,190 49,786 64,083
125,000 21,220 42,440 63,661 81,771
150,000 25,845 51,690 77,536 99,458
175,000 30,470 60,940 91,411 117,146
</TABLE>
Benefits shown in the table are computed as straight life annuities
beginning at age 65 and are not subject to a deduction for Social Security
benefits or any other offset amounts. A participant's compensation covered by
the pension plan includes base salary, bonuses, overtime pay, and earnings
deferred by the participant's own contribution pursuant to the Bank's Section
401(k) salary deferral plan (but excluding any special bonuses, any directors'
fees, the Bank's matching contributions to the Section 401(k) salary deferral
plan, or any other incidental compensation), and benefits are calculated based
on each participant's "final average compensation," which is defined as the
participant's average earnings during the five highest consecutive earning
years of the last ten complete calendar years as a participant.
The estimated years of service and the estimated final average
compensation as of December 31, 1997, for each of the named executive officers
in the Summary Compensation Table above are as follows: Billy T. Woodard - 41
years and $170,469; and Haywood A. Lane, Jr. - 35 years and $125,935.
58
<PAGE>
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements. During 1986, the Bank entered into Post-Retirement Noncompetition
and Consultation Agreements with Billy T. Woodard and Hayward A. Lane, Jr.,
both of which Agreements were amended on January 29, 1996. Each Agreement, as
amended, provides that, upon the officer's retirement from full time employment
with the Bank, he will serve as a consultant to the Bank and will receive
monthly payments ($5,583 for Mr. Woodard and $4,143 for Mr. Lane) for a period
of ten years. In the event of the officer's death prior to the expiration of
the ten-year period, any remaining monthly payments will be paid to the
officer's designated beneficiary or estate. If the officer dies prior to
retirement, his designated beneficiary or estate will receive those payments
for a period of ten years following his death.
Director Compensation
Each director of BancShares and the Bank (including directors who also are
employees) receives a fee of $400 for attendance at each meeting of BancShares'
or the Bank's Board of Directors. However, only one fee is paid for joint
meetings of the Boards and any committee meetings held on the same day.
Members of the Executive Committee of the Board of Directors receive a fee
of $300 for each Executive Committee meeting attended, except that Billy T.
Woodard and Haywood A. Lane, Jr. receive no compensation for attendance at
Executive Committee meetings. No fees are paid to any directors for attendance
at any other committee meetings. Directors are reimbused for expenses of travel
to and from all meetings.
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 several of the directors, executive
officers, and principal shareholders of BancShares and the Bank and their
associates. Loans included in those transactions were made on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others, and did not involve more than the normal
risk of collectibility or present other unfavorable features. Each such
transaction has been approved by the Board of Directors of the Bank.
The Bank is party to a contract with FCB, an affiliated financial
institution located in Raleigh, North Carolina, pursuant to which FCB provides
the Bank with certain management consulting services and with various support
and data processing services relating to (i) its deposit and loan, item
processing, general ledger, statement rendering and securities portfolio
management functions which the Bank has chosen not to provide for itself, and
(ii) service as trustee for the Bank's pension plan and Section 401(k) salary
deferral plan. The Bank also purchases business forms, equipment and supplies
through FCB. Fees paid by the Bank to FCB for such services during 1997, 1996
and 1995 totaled approximately $1.9 million, $1.6 million and $1.3 million,
respectively. Management of the Bank estimates that fees payable during 1998
will total approximately $2.0 million.
FCB is the wholly-owned bank subsidiary of FCBancShares. Frank B. Holding,
who is a principal shareholder of BancShares, and Lewis R. Holding, also a
principal shareholder of BancShares, are directors and executive officers of
FCBancShares and FCB and are principal shareholders of FCBancShares; and, the
Holding family, whose control of BancShares' outstanding capital stock is
described under "Benficial Ownership of Securities," also controls 43.0% of the
Class A, and 68.8% of the Class B, common stock of FCBancShares. The Bank's
contract with FCB was negotiated at arms-length and was approved by BancShares'
Board of Directors. Based on its comparison of the terms of the contract in
previous years with terms available to it from other providers of the services
being obtained from FCB, management of the Bank believes the terms of its
contract with FCB, including prices, are no less favorable to the Bank than
could be obtained from an unrelated provider.
The Bank also has agreed to purchase assets (including premises and loans)
totaling approximately $35.5 million, and to assume an aggregate of
approximately $72.6 million in deposit liabilities, of five branch offices of
FCB located in Gastonia (three branches), Salisbury and Siler City, North
Carolina. In connection with those transactions (which are expected to be
consummated during October 1998), the Bank expects to pay an aggregate deposit
premium of approximately $5.0 million.
During January 1998, the Bank sold rights to service $51 million in
mortgage loans to Southern Bank and Trust Company ("SBT"), Mount Olive, North
Carolina, for $522,000. The Holding family controls an aggregate of 51.55% of
the outstanding common stock of SBT's parent holding company, Southern
BancShares (N.C.), Inc. ("Southern"). Lewis R. Holding and Frank B. Holding,
who are principal shareholders of BancShares, also are principal shareholders
of Southern, and Frank B. Holding serves as a director of Southern and Chairman
of its executive committee.
59
<PAGE>
DESCRIPTION OF THE CAPITAL SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trustees on behalf of the Issuer Trust will issue the Capital Securities
and the Common Securities. The Capital Securities will represent preferred
undivided beneficial interests in the assets of the Issuer Trust and the
holders thereof will be entitled to a preference in certain circumstances with
respect to Distributions and amounts payable on redemption or liquidation over
the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain provisions of the Capital Securities and the
Trust Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms. Wherever
particular defined terms of the Trust Agreement are referred to herein, such
defined terms are incorporated herein by reference. A copy of the form of the
Trust Agreement is available upon request from the Issuer Trust by contacting
the Issuer Trustees.
General
The Capital Securities will be limited to $20,000,000 aggregate
Liquidation Amount outstanding (unless the Underwriter's over allotment option
is exercised, in which case they will be limited to $23,000,000 aggregate
Liquidation Amount). The Capital Securities will rank pari passu, and payments
will be made thereon pro rata, with the Common Securities except as described
under " -- Subordination of Common Securities." The Junior Subordinated
Debentures will be registered in the name of the Issuer Trust and held by
Bankers Trust, as Property Trustee, in trust for the benefit of the holders of
the Capital Securities and the Common Securities. The Guarantee will be a
guarantee on a subordinated basis with respect to the Capital Securities but
will not guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Capital Securities when the Issuer Trust does not have
funds on hand available to make such payments. See "Description of the
Guarantee."
Distributions
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and Distributions on each Capital Security
will be payable at an annual rate equal to * % on the stated Liquidation
Amount of $10.00, payable quarterly in arrears on March 31, June 30, September
30 and December 31 of each year (each a "Distribution Date"), to the holders of
the Capital Securities at the close of business on the fifteenth day (whether
or not a Business Day (as defined below)) next preceding the relevant
Distribution Date. Distributions on the Capital Securities will be cumulative.
Distributions will accumulate from the date of original issuance. The first
Distribution Date for the Capital Securities will be * , 1998. The amount
of Distributions payable for any period less than a full Distribution period
will be computed on the basis of a 360-day year of twelve 30-day months and the
actual days elapsed in a partial month in such period. Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by four. If any date on which Distributions are payable on the Capital
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day
(without any additional Distributions or other payment in respect of any such
delay), with the same force and effect as if made on the date such payment was
originally payable.
So long as no Debenture Event of Default has occurred and is continuing,
BancShares has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures or end on a
date other than a Distribution Date. As a consequence of any such deferral,
quarterly distributions on the Capital Securities by the Issuer Trust will be
deferred during any such Extension Period. Distributions to which holders of
the Capital Securities are entitled will accumulate additional Distributions
thereon at a rate equal to * % per annum, compounded quarterly from the
relevant payment date for such Distributions, computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. Additional Distributions payable for each full
Distribution period will be computed by dividing the rate per annum by four.
The term "Distributions" as used herein shall include any such additional
Distributions. During any such Extension Period, BancShares may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire or make
a liquidation payment with respect to, any of BancShares' capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of BancShares that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of BancShares in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or shareholder stock purchase plan or in connection with
60
<PAGE>
the issuance of capital stock of BancShares (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of BancShares'
capital stock (or any capital stock of a subsidiary of BancShares) for any
class or series of BancShares' capital stock or of any class or series of
BancShares' indebtedness for any class or series of BancShares' capital stock,
(c) the purchase of fractional interests in shares of BancShares' capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (d) any declaration of a dividend in
connection with any shareholder's rights plan, or the issuance of rights, stock
or other property under any shareholder's rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of
stock, warrants, options or other rights where the dividend stock or the stock
issuable upon exercise of such warrants, options or other rights is the same
stock as that on which the dividend is being paid or ranks pari passu with or
junior to such stock). Prior to the termination of any such Extension Period,
BancShares may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods, extend beyond the
Stated Maturity of the Junior Subordinated Debentures, or end on a date other
than a Distribution Date. Upon the termination of any such Extension Period and
the payment of all amounts then due, BancShares may elect to begin a new
Extension Period. No interest shall be due and payable during an Extension
Period, except at the end thereof. BancShares must give the Issuer Trustees
notice of its election of such Extension Period at least one Business Day prior
to the earlier of (i) the date the Distributions on the Capital Securities
would have been payable but for the election to begin such Extension Period and
(ii) the date the Property Trustee is required to give notice to holders of the
Capital Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Property Trustee will give notice of BancShares' election to begin a
new Extension Period to the holders of the Capital Securities. Subject to the
foregoing, there is no limitation on the number of times that BancShares may
elect to begin an Extension Period. See "Description of the Junior Subordinated
Debentures -- Option To Extend Interest Payment Period" and "Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
BancShares has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of
the Capital Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Capital Securities. See "Description of the Junior
Subordinated Debentures." If BancShares does not make payments on the Junior
Subordinated Debentures, the Issuer Trust will not have funds available to pay
Distributions or other amounts payable on the Capital Securities. The payment
of Distributions and other amounts payable on the Capital Securities (if and to
the extent the Issuer Trust has funds legally available for and cash sufficient
to make such payments) is guaranteed by BancShares on a limited basis as set
forth herein under "Description of the Guarantee."
Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined herein) of the Trust Securities, upon not less than 30 nor more
than 60 days notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Capital Securities plus accumulated
but unpaid Distributions thereon to but excluding the date of redemption (the
"Redemption Date"). See "Description of the Junior Subordinated Debentures --
Redemption." If less than all the Junior Subordinated Debentures are to be
repaid or redeemed on a Redemption Date, then the proceeds from such repayment
or redemption shall be allocated to the redemption pro rata of the Capital
Securities and the Common Securities.
BancShares has the right to redeem the Junior Subordinated Debentures (i)
on or after * , 2003, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event, Investment Company Event
or Capital Treatment Event, in each case subject to possible regulatory
approval. See " -- Liquidation Distribution Upon Dissolution." A redemption of
the Junior Subordinated Debentures would cause a mandatory redemption of a Like
Amount of the Capital Securities and Common Securities at the Redemption Price.
The Redemption Price, in the case of a redemption under (i) or (ii) above,
shall equal the Liquidation Amount, together with accumulated Distributions to
but excluding the date fixed for redemption.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day
on which banking institutions in the City of New York, New York, or the City of
Raleigh, North Carolina are authorized or required by law or executive order to
61
<PAGE>
remain closed, or (c) a day on which the Property Trustee's Corporate Trust
Office or the Corporate Trust Office of the Debenture Trustee is closed for
business.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Junior Subordinated Debentures to be contemporaneously
redeemed in accordance with the Junior Subordinated Indenture, allocated to the
Common Securities and to the Capital Securities pro rata based upon the
relative Liquidation Amounts of such classes and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities
in connection with a dissolution or liquidation of the Issuer Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $10.00 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to BancShares experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement, action or decision is announced on or after
the date of issuance of the Capital Securities (including, without limitation,
any of the foregoing arising with respect to, or resulting from, any proposal,
proceeding or other action commencing on or before such date), there is more
than an insubstantial risk that (i) the Issuer Trust is, or will be within 90
days of the delivery of such opinion, subject to United States federal income
tax with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by BancShares on the Junior Subordinated
Debentures is not, or within 90 days of the delivery of such opinion, will not
be, deductible by BancShares, in whole or in part, for United States federal
income tax purposes or (iii) the Issuer Trust is, or will be within 90 days of
the delivery of such opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to BancShares experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation
or application of law or regulation by any legislative body, court,
governmental agency or regulatory authority, there is more than an
insubstantial risk that the Issuer Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change or prospective change becomes effective or would
become effective, as the case may be, on or after the date of the issuance of
the Capital Securities.
"Capital Treatment Event" means, in respect of the Issuer Trust, the
reasonable determination by BancShares that, as a result of the occurrence of
any amendment to, or change (including any announced prospective change) in,
the laws (or any rules or regulations thereunder) of the United States or any
political subdivision thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement, action or decision is announced on or after the date of
issuance of the Capital Securities, there is more than an insubstantial risk
that BancShares will not be entitled to treat an amount equal to the
Liquidation Amount of the Capital Securities as Tier 1 Capital (or the then
equivalent thereof) for purposes of the risk-based capital adequacy guidelines
of the Federal Reserve, as then in effect and applicable to BancShares.
Payment of Additional Sums. If a Tax Event described in clause (i) or
(iii) of the definition of Tax Event above has occurred and is continuing and
the Issuer Trust is the holder of all the Junior Subordinated Debentures,
BancShares will pay Additional Sums (as defined herein), if any, on the Junior
Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Issuer Trust
on the outstanding Capital Securities and Common Securities of the Issuer Trust
will not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result
of a Tax Event.
62
<PAGE>
Redemption Procedures
Capital Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Capital
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer Trust has funds on hand
available for the payment of such Redemption Price. See also " -- Subordination
of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of any Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are available, in the case of Capital Securities held in
book-entry form, the Property Trustee will deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price and will give DTC irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Capital Securities. With respect to Capital Securities not held in book-entry
form, the Property Trustee, to the extent funds are available, will irrevocably
deposit with the paying agent for the Capital Securities funds sufficient to
pay the applicable Redemption Price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing the Capital Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for any Capital Securities called for redemption shall be
payable to the holders of the Capital Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit all
rights of the holders of such Capital Securities so called for redemption will
cease, except the right of the holders of such Capital Securities to receive
the Redemption Price and any Distribution payable in respect of the Capital
Securities, but without interest on such Redemption Price, and such Capital
Securities will cease to be outstanding. If any date fixed for redemption of
Capital Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day which is a
Business Day (without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day. In the event
that payment of the Redemption Price in respect of Capital Securities called
for redemption is improperly withheld or refused and not paid either by the
Issuer Trust or by BancShares pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such Capital Securities will
continue to accumulate at the then applicable rate, from the Redemption Date
originally established by the Issuer Trust for such Capital Securities to the
date such Redemption Price is actually paid, in which case the actual payment
date will be the date fixed for redemption for purposes of calculating the
Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), BancShares or its affiliates may at any time and from
time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Capital Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Capital Securities and Common Securities to be redeemed shall be allocated pro
rata to the Capital Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Capital Securities
to be redeemed shall be selected on a pro rata basis not more than 60 days
prior to the Redemption Date by the Property Trustee from the outstanding
Capital Securities not previously called for redemption. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Capital Securities selected for redemption and, in the case of
any Capital Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Capital Securities shall relate, in the case of any Capital Securities redeemed
or to be redeemed only in part, to the portion of the aggregate Liquidation
Amount of Capital Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Capital
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless BancShares defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Capital Securities is withheld or refused and not paid either by
the Issuer Trust or BancShares pursuant to the Guarantee, Distributions will
cease to accumulate on the Capital Securities or portions thereof) called for
redemption.
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Subordination of Common Securities
Payment of Distributions (including "Additional Amounts", as defined in
the Trust Agreement, if applicable) on, the Liquidation Distribution in respect
of, and the Redemption Price of, the Capital Securities and Common Securities,
as applicable, shall be made pro rata based on the Liquidation Amount of such
Capital Securities and Common Securities. However, if on any Distribution Date
or Redemption Date a Debenture Event of Default has occurred and is continuing
as a result of any failure by BancShares to pay any amounts in respect of the
Junior Subordinated Debentures when due, no payment of any Distribution
(including Additional Amounts) on, or Liquidation Distribution in respect of,
or Redemption Price of, any of the Common Securities, and no other payment on
account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions (including Additional Amounts) on all the outstanding
Capital Securities for all Distribution periods terminating on or prior
thereto, or in the case of payment of the Redemption Price, the full amount of
such Redemption Price on all the outstanding Capital Securities then called for
redemption, or in the case of payment of the Liquidation Distribution, the full
amount of such Liquidation Distribution on all outstanding Capital Securities,
shall have been made or provided for, and all funds immediately available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions (including any Additional Amounts) on, or the Redemption
Price of, or Liquidation Distribution in respect of, the Capital Securities
then due and payable. The existence of an Event of Default does not entitle the
Holders of Capital Securities to accelerate the maturity thereof.
In the case of any Event of Default resulting from a Debenture Event of
Default, the holders of the Common Securities will be deemed to have waived any
right to act with respect to any such Event of Default under the Trust
Agreement until the effects of all such Events of Default with respect to such
Capital Securities have been cured, waived or otherwise eliminated. See " --
Events of Default; Notice" and "Description of the Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Capital Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Capital Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Capital
Securities will have the right to direct the Property Trustee to act on their
behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the Capital Securities in the event of any
liquidation of the Issuer Trust is $10.00 per Capital Security plus accumulated
and unpaid Distributions to the date of payment, subject to certain exceptions,
which may be in the form of a distribution of a Like Amount of Junior
Subordinated Debentures bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust.
The Federal Reserve's risk-based capital guidelines currently provide that
redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption
should consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a
like amount of a similar or higher quality capital instrument and the Federal
Reserve considers the organization's capital position to be fully adequate
after the redemption).
In the event BancShares, while a holder of Common Securities, dissolves
the Issuer Trust prior to the Stated Maturity of the Capital Securities and the
dissolution of the Issuer Trust is deemed to constitute the redemption of
capital instruments by the Federal Reserve under its risk-based capital
guidelines or policies, the dissolution of the Issuer Trust by BancShares may
be subject to the prior approval of the Federal Reserve. Moreover, any changes
in applicable law or changes in the Federal Reserve's risk-based capital
guidelines or policies could impose a requirement on BancShares that it obtain
the prior approval of the Federal Reserve to dissolve the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of
BancShares or the holder of the Common Securities, (ii) if the holders of
Common Securities have given written direction to the Property Trustee to
dissolve the Issuer Trust (which direction, subject to the foregoing
restrictions, is optional and wholly within the discretion of the holders of
Common Securities), (iii) the repayment of all the Capital Securities in
connection with the redemption of
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all the Trust Securities as described under " -- Redemption" and (iv) the entry
of an order for the dissolution of the Issuer Trust by a court of competent
jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii)
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by
distributing, after satisfaction of liabilities to creditors of the Issuer
Trust as provided by applicable law, to the holders of such Trust Securities a
Like Amount of the Junior Subordinated Debentures, unless such distribution is
not practical, in which event such holders will be entitled to receive out of
the assets of the Issuer Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Issuer Trust as provided by
applicable law, an amount equal to, in the case of holders of Capital
Securities, the aggregate of the Liquidation Amount plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Issuer Trust has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Issuer Trust on its Capital Securities shall be paid on a pro rata
basis. The holders of the Common Securities will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Capital Securities, except that if a Debenture Event of Default has occurred
and is continuing as a result of any failure by BancShares to pay any amounts
in respect of the Junior Subordinated Debentures when due, the Capital
Securities shall have a priority over the Common Securities. See " --
Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Capital Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Capital
Securities represented by Global Capital Securities (as herein described) shall
receive a registered global certificate or certificates representing the Junior
Subordinated Debentures to be delivered upon such distribution with respect to
such Global Capital Securities, and (iii) each certificate representing the
Capital Securities other than Global Capital Securities will be deemed to
represent the Junior Subordinated Debentures having a principal amount equal to
the stated Liquidation Amount of the Capital Securities and bearing accrued and
unpaid interest in an amount equal to the accumulated and unpaid Distributions
on the Capital Securities until such certificates are presented to the security
registrar for the Trust Securities for transfer or reissuance.
If BancShares does not redeem the Junior Subordinated Debentures prior to
the Stated Maturity and the Issuer Trust is not liquidated and the Junior
Subordinated Debentures are not distributed to holders of the Capital
Securities, the Capital Securities will remain outstanding until the repayment
of the Junior Subordinated Debentures and the distribution of the Liquidation
Distribution to the holders of the Capital Securities.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Capital Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive
on dissolution and liquidation of the Issuer Trust, may trade at a discount to
the price that the investor paid to purchase the Capital Securities offered
hereby.
Events of Default; Notice
Any one of the following events constitutes an event of default under the
Trust Agreement (an "Event of Default") with respect to the Capital Securities
(whatever the reason for such Event of Default and whether it is voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
the Junior Subordinated Debentures -- Debenture Events of Default");
(ii) default by the Issuer Trust in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period
of 30 days;
(iii) default by the Issuer Trust in the payment of any Redemption Price
of any Trust Security when it becomes due and payable;
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust Agreement
(other than a covenant or warranty a default in the performance of which or
the breach of which is dealt with in clause (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Issuer Trustees and
BancShares by the holders of at least
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25% in aggregate Liquidation Amount of the outstanding Capital Securities,
a written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" under the
Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has not
been appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived.
BancShares, as Depositor, and the Administrators are required to file annually
with the Property Trustee a certificate as to whether or not they are in
compliance with all the conditions and covenants applicable to them under the
Trust Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by BancShares to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Capital Securities will have a preference
over the Common Securities with respect to payments of any amounts in respect
of the Capital Securities as described above. See " -- Subordination of Common
Securities," " -- Liquidation Distribution Upon Dissolution" and "Description
of the Junior Subordinated Debentures -- Debenture Events of Default."
Removal of Issuer Trustees; Appointment of Successors
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Capital Securities may remove an Issuer Trustee for cause or, if a
Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Capital Securities, the successor may be appointed by the holders of at least
25% in Liquidation Amount of Capital Securities then outstanding. If an Issuer
Trustee resigns, such Issuer Trustee will appoint its successor. If an Issuer
Trustee fails to appoint a successor, the holders of at least 25% in
Liquidation Amount of the outstanding Capital Securities may appoint a
successor. If a successor has not been appointed by the holders, any holder of
Capital Securities or Common Securities or the other Issuer Trustee may
petition a court in the State of Delaware to appoint a successor. Any Delaware
Trustee must meet the applicable requirements of Delaware law. Any Property
Trustee must be a national or state-chartered bank and, at the time of
appointment, have securities rated in one of the three highest rating
categories by a nationally recognized statistical rating organization and have
a combined capital and surplus of at least $50,000,000. No resignation or
removal of an Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all of the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Issuer Trust
The Issuer Trust may not merge with or into, consolidate, amalgamate, or
be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the
request of the holders of the Common Securities and with the consent of the
holders of at least a majority in aggregate Liquidation Amount of the
outstanding Capital Securities, merge with or into, consolidate, amalgamate, or
be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to a trust organized as such under the laws of any
State, so long as (i) such successor entity either (a) expressly assumes all
the obligations of the Issuer Trust with respect to the Capital Securities or
(b) substitutes for the Capital Securities other securities having
substantially the same terms as the Capital Securities (the "Successor
Securities") so long as the Successor Securities have the same priority as the
Capital Securities with respect to distributions and payments upon liquidation,
redemption and otherwise, (ii) a trustee of such successor entity, possessing
the same powers and duties as the Property Trustee, is appointed to hold the
Junior Subordinated Debentures, (iii) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not cause the Capital
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (iv) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does
not adversely affect the rights, preferences and privileges of the holders of
the
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Capital Securities (including any Successor Securities) in any material
respect, (v) such successor entity has a purpose substantially identical to
that of the Issuer Trust, (vi) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Issuer Trust has
received an opinion from independent counsel experienced in such matters to the
effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Capital Securities (including any
Successor Securities) in any material respect and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease,
neither the Issuer Trust nor such successor entity will be required to register
as an investment company under the Investment Company Act, and (vii) BancShares
or any permitted successor or assignee owns all the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, the Issuer Trust may not, except with the
consent of holders of 100% in aggregate Liquidation Amount of the Capital
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause
the Issuer Trust or the successor entity to be taxable other than as a grantor
trust for United States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided below and under " -- Removal of Issuer Trustees;
Appointment of Successors" and "Description of the Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Capital Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority in Liquidation Amount of the Common Securities and the Property
Trustee, without the consent of the holders of the Capital Securities, (i) to
cure any ambiguity, correct or supplement any provisions in the Trust Agreement
that may be inconsistent with any other provision, or to make any other
provisions with respect to matters or questions arising under the Trust
Agreement, provided that any such amendment does not adversely affect in any
material respect the interests of any holder of Trust Securities, or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as may be necessary to ensure that the Issuer Trust will not be taxable
other than as a grantor trust for United States federal income tax purposes at
any time that any Trust Securities are outstanding or to ensure that the Issuer
Trust will not be required to register as an "investment company" under the
Investment Company Act, and any such amendments of the Trust Agreement will
become effective when notice of such amendment is given to the holders of Trust
Securities. The Trust Agreement may be amended by the holders of a majority of
the Common Securities and the Property Trustee with (i) the consent of holders
representing not less than a majority in aggregate Liquidation Amount of the
outstanding Capital Securities and (ii) receipt by the Issuer Trustees of an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Issuer Trustees in accordance with such amendment will not
affect the Issuer Trust's being taxable as a grantor trust for United States
federal income tax purposes or the Issuer Trust's exemption from status as an
"investment company" under the Investment Company Act, except that, without the
consent of each holder of Trust Securities affected thereby, the Trust
Agreement may not be amended to (x) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount
of any Distribution required to be made in respect of the Trust Securities as
of a specified date or (y) restrict the right of a holder of Trust Securities
to institute suit for the enforcement of any such payment on or after such
date.
So long as any Junior Subordinated Debentures are held by the Issuer
Trust, the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is
waivable under Section 5.13 of the Junior Subordinated Indenture, (iii)
exercise any right to rescind or annul a declaration that the Junior
Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Junior Subordinated Indenture or
the Junior Subordinated Debentures, where such consent shall be required,
without, in each case, obtaining the prior approval of the holders of at least
a majority in aggregate Liquidation Amount of the Capital Securities, except
that, if a consent under the Junior Subordinated Indenture would require the
consent of each holder of Junior Subordinated Debentures affected thereby, no
such consent will be given by the Property Trustee without the prior written
consent of each holder of the Capital Securities. The Property Trustee may not
revoke any action previously authorized or approved by a vote of the holders of
the Capital Securities except by subsequent vote of the holders of the Capital
Securities. The Property Trustee will notify each holder of Capital Securities
of any notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of the holders of the
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Capital Securities, before taking any of the foregoing actions, the Property
Trustee will obtain an opinion of counsel experienced in such matters to the
effect that the Issuer Trust will not be taxable other than as a grantor trust
for United States federal income tax purposes on account of such action.
Any required approval of holders of Capital Securities may be given at a
meeting of holders of Capital Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Capital Securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be given to
each registered holder of Capital Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Capital Securities will be required
to redeem and cancel Capital Securities in accordance with the Trust Agreement.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned by BancShares, the Issuer Trustees or any affiliate
of BancShares or any Issuer Trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
Form, Denomination, Book-Entry Procedures and Transfer
The Capital Securities to be issued in the offering may be transferred or
exchanged in the manner and at the offices described below.
The Capital Securities to be issued in the offering initially will be
represented by one or more Capital Securities in registered, global form
(collectively, the "Global Capital Securities"). The Global Capital Securities
will be deposited upon issuance with the Property Trustee as custodian for DTC,
in New York, New York, and registered in the name of Cede & Co. as nominee for
DTC or another nominee designated by DTC, in each case for credit to an account
of a direct or indirect participant in DTC, as described below.
Except as set forth below, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Capital
Securities may not be exchanged for Capital Securities evidenced by separate
certificates ("Certificated Capital Securities") except in the limited
circumstances described under " -- Exchange of Book-Entry Capital Securities
for Certificated Capital Securities" below. In addition, transfer of beneficial
interests in the Global Capital Securities will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants, which may
change from time to time.
Depositary Procedures
DTC has advised the Issuer Trust and BancShares that DTC is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and the Indirect Participants.
DTC has also advised the Issuer Trust and BancShares that, pursuant to
procedures established by it, (i) upon deposit of the Global Capital
Securities, DTC will credit the accounts of Participants on behalf of
purchasers of the Capital Securities with portions of the Liquidation Amount of
the Global Capital Securities and (ii) ownership of such interests in the
Global Capital Securities will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Capital
Securities).
Investors in the Global Capital Securities may hold their interests
therein directly through DTC if they are Participants in such system, or
indirectly through organizations which are Participants in such system. All
interests in a Global Capital Security may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in certificated form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Capital
Security to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
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interests in a Global Capital Security to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests. For certain other restrictions on the
transferability of the Capital Securities, see " -- Exchange of Book-Entry
Capital Securities for Certificated Capital Securities."
Except as described below, owners of interests in the Global Capital
Securities will not have Capital Securities registered in their name, will not
receive physical delivery of Certificated Capital Securities and will not be
considered the registered owners or holders thereof under the Trust Agreement
for any purpose.
Payments in respect of the Global Capital Securities registered in the
name of DTC or its nominee will be payable by the Property Trustee to DTC in
its capacity as the registered holder under the Trust Agreement. Under the
terms of the Trust Agreement, the Property Trustee will treat the persons in
whose names the Capital Securities, including the Global Capital Securities,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Property Trustee nor any agent thereof has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Capital Securities, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Capital Securities or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Issuer Trust and BancShares that its current practice, upon receipt
of any payment in respect of securities such as the Capital Securities, is to
credit the account of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in Liquidation
Amount of beneficial interests in the relevant security as shown on the records
of DTC unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Capital Securities will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Property Trustee, the Issuer Trust or BancShares. Neither the Issuer
Trust nor BancShares or the Property Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Capital Securities, and the Issuer Trust or BancShares and the Property Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee for all purposes.
DTC has advised the Issuer Trust and BancShares that it will take any
action permitted to be taken by a holder of Capital Securities only at the
direction of one or more Participants to whose account with DTC interests in
the Global Capital Securities are credited and only in respect of such portion
of the Liquidation Amount of the Capital Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Trust Agreement, DTC reserves the right to
exchange the Global Capital Securities for Certificated Capital Securities and
to distribute such Certificated Capital Securities to its Participants.
The information in this section concerning DTC and book-entry systems has
been obtained from sources that the Issuer Trust and BancShares believe to be
reliable, but neither the Issuer Trust nor BancShares takes responsibility for
the accuracy thereof.
Exchange of Book-Entry Capital Securities for Certificated Capital Securities
A Global Capital Security is exchangeable for Certificated Capital
Securities if (i) DTC (x) notifies BancShares and the Property Trustee in
writing that it is unwilling or unable to properly discharge its
responsibilities as depositary for the Global Capital Security and BancShares
is unable to locate a qualified successor, or (y) has ceased to be a clearing
agency registered under the Exchange Act and BancShares is unable to locate a
qualified successor, (ii) the Issuer Trust at its option advises DTC in writing
that it elects to terminate the book-entry system through DTC, or (iii) there
shall have occurred and be continuing an Event of Default or any event which
after notice or lapse of time or both would be an Event of Default under the
Trust Agreement. In addition, beneficial interests in a Global Capital Security
may be exchanged for Certificated Capital Securities upon request but only upon
at least 20 days prior written notice given to the Property Trustee by or on
behalf of DTC in accordance with customary procedures. In all cases,
Certificated Capital Securities delivered in exchange for any Global Capital
Security or beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of DTC (in
accordance with its customary procedures).
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Expenses and Taxes
In the Trust Agreement, BancShares has agreed to pay all debts and other
obligations (other than with respect to the Capital Securities) and all costs
and expenses of the Issuer Trust (including costs and expenses relating to the
organization of the Issuer Trust, the fees and expenses of the Issuer Trustees
and the costs and expenses relating to the operation of the Issuer Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than withholding taxes) to which the Issuer Trust might become subject. The
foregoing obligations of BancShares under the Trust Agreement are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of BancShares directly against BancShares, and BancShares has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Issuer Trust or any other person before proceeding
against BancShares. BancShares has also agreed in the Trust Agreement to
execute such additional agreements as may be necessary or desirable to give
full effect to the foregoing.
Payment and Paying Agency
Payments in respect of the Capital Securities will be made by check mailed
to the address of the holder entitled thereto as such address appears on the
securities register for the Trust Securities. The paying agent (the "Paying
Agent") initially will be the Property Trustee and any co-paying agent chosen
by the Property Trustee and acceptable to the Administrators. The Paying Agent
will be permitted to resign as Paying Agent upon 30 days' written notice to the
Property Trustee and the Administrators. If the Property Trustee is no longer
the Paying Agent, the Property Trustee will appoint a successor (which must be
a bank or trust company reasonably acceptable to the Administrators) to act as
Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of Capital Securities will be effected without
charge by or on behalf of the Issuer Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Issuer Trust will not be required to register or cause to be
registered the transfer of the Capital Securities after the Capital Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise
or use in the conduct of his or her own affairs. Subject to this provision, the
Property Trustee is under no obligation to exercise any of the powers vested in
it by the Trust Agreement at the request of any holder of Capital Securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
For information concerning the relationships between the Property Trustee
and BancShares, see "Description of the Junior Subordinated Debentures --
Information Concerning the Debenture Trustee."
Miscellaneous
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable other than as a grantor
trust for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of BancShares for
United States federal income tax purposes. In this connection, the Property
Trustee and the holders of Common Securities are authorized to take any action,
not inconsistent with applicable law, the certificate of trust of the Issuer
Trust or the Trust Agreement, that the Property Trustee and the holders of
Common Securities determine in their discretion to be necessary or desirable
for such purposes, as long as such action does not materially adversely affect
the interests of the holders of the Capital Securities.
Holders of the Capital Securities have no preemptive or similar rights.
The Issuer Trust may not borrow money or issue debt or mortgage or pledge
any of its assets.
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Governing Law
The Trust Agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust is acting as Debenture
Trustee. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Junior Subordinated Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Junior Subordinated Indenture, including the
definitions therein of certain terms. Whenever particular defined terms of the
Junior Subordinated Indenture (as amended or supplemented from time to time)
are referred to herein, such defined terms are incorporated herein by
reference. A copy of the form of Junior Subordinated Indenture is available
from the Debenture Trustee upon request.
General
Concurrently with the issuance of the Capital Securities, the Issuer Trust
will invest the proceeds thereof, together with the consideration paid by
BancShares for the Common Securities, in the Junior Subordinated Debentures
issued by BancShares. The Junior Subordinated Debentures will bear interest,
accruing from the date of original issuance, at a rate equal to * % per annum
on the principal amount thereof, payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year (each, an "Interest Payment
Date"), commencing * , 1998, to the person in whose name each Junior
Subordinated Debenture is registered at the close of business on the fifteenth
day (whether or not a Business Day) next preceding such Interest Payment Date.
It is anticipated that, until the liquidation, if any, of the Issuer Trust,
each Junior Subordinated Debenture will be registered in the name of the Issuer
Trust and held by the Property Trustee in trust for the benefit of the holders
of the Trust Securities. The amount of interest payable for any period less
than a full interest period will be computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of interest payable for any full interest period will be
computed by dividing the rate per annum by four. If any date on which interest
is payable on the Junior Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (without any interest or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable. Accrued interest that is not paid on
the applicable Interest Payment Date will bear additional interest ("Additional
Interest") on the amount thereof (to the extent permitted by law) at a rate
equal to * % per annum, compounded quarterly and computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. The amount of Additional Interest payable for any full
interest period will be computed by dividing the rate per annum by four. The
term "interest" as used herein includes quarterly interest payments, Additional
Interest and Additional Sums (as defined under "Description of the Capital
Securities -- Redemption"), as applicable.
The Junior Subordinated Debentures will mature on * , 2028.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of
BancShares. The Junior Subordinated Debentures will not be subject to a sinking
fund and will not be eligible as collateral for any loan made by BancShares.
The Junior Subordinated Indenture does not limit the incurrence or issuance of
other secured or unsecured debt by BancShares, including Senior Indebtedness,
whether under the Junior Subordinated Indenture or any existing or other
indenture or agreement that BancShares may enter into in the future or
otherwise. See " -- Subordination."
Option to Extend Interest Payment Period
So long as no Debenture Event of Default has occurred and is continuing,
BancShares has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time
for a period not exceeding 20 consecutive quarterly periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures or end on a date other
than an Interest Payment Date. At the end of such Extension Period, BancShares
must pay all interest then accrued and unpaid (together with interest thereon
at a rate equal to * % per annum, compounded quarterly and computed on the
basis of a 360-day year of twelve 30-day months and the actual days elapsed in
a partial month in such period, to the extent permitted by applicable law). The
amount of additional interest payable for any full interest period will be
computed by dividing the rate
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per annum by four. During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures (or holders of Capital Securities
while outstanding) will be required to accrue interest income (in the form of
OID) for United States federal income tax purposes. See "Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, BancShares may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of BancShares' capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of BancShares that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of BancShares in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or shareholder stock purchase plan or in connection with the
issuance of capital stock of BancShares (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of BancShares'
capital stock (or any capital stock of a subsidiary of BancShares) for any
class or series of BancShares' capital stock or of any class or series of
BancShares' indebtedness for any class or series of BancShares' capital stock,
(c) the purchase of fractional interests in shares of BancShares' capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (d) any declaration of a dividend in
connection with any shareholder's rights plan, or the issuance of rights, stock
or other property under any shareholders rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of
stock, warrants, options or other rights where the dividend stock or the stock
issuable upon exercise of such warrants, options or other rights is the same
stock as that on which the dividend is being paid or ranks pari passu with or
junior to such stock). Prior to the termination of any such Extension Period,
BancShares may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Junior Subordinated Debentures or end on a date
other than an Interest Payment Date. Upon the termination of any such Extension
Period and the payment of all amounts then due, BancShares may elect to begin a
new Extension Period subject to the above conditions. No interest shall be due
and payable during an Extension Period, except at the end thereof. BancShares
must give the Issuer Trustees notice of its election of such Extension Period
at least one Business Day prior to the earlier of (i) the date the
Distributions on the Capital Securities would have been payable but for the
election to begin such Extension Period and (ii) the date the Property Trustee
is required to give notice to holders of the Capital Securities of the record
date or the date such Distributions are payable, but in any event not less than
one Business Day prior to such record date. The Property Trustee will give
notice of BancShares' election to begin a new Extension Period to the holders
of the Capital Securities. There is no limitation on the number of times that
BancShares may elect to begin an Extension Period.
Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of BancShares (i) on or after * , 2003, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within
90 days following the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined under
"Description of the Capital Securities -- Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Issuer Trust to redeem the Capital Securities.
The Federal Reserve's risk-based capital guidelines, which are subject to
change, currently provide that redemptions of permanent equity or other capital
instruments before stated maturity could have a significant impact on a bank
holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debentures by BancShares prior
to their Stated Maturity would constitute the redemption of capital instruments
under the Federal Reserve's current risk-based capital guidelines and may be
subject to the prior approval of the Federal Reserve.
The redemption price for Junior Subordinated Debentures in the case of a
redemption under (i) or (ii) above shall equal their principal amount, together
with accrued interest to but excluding the date fixed for redemption.
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Additional Sums
BancShares has covenanted in the Junior Subordinated Indenture that, if
and for so long as (i) the Issuer Trust is the holder of all Junior
Subordinated Debentures and (ii) the Issuer Trust is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, BancShares will pay as Additional Sums on the Junior Subordinated
Debentures such amounts as may be required so that the Distributions payable by
the Issuer Trust will not be reduced as a result of any such additional taxes,
duties or other governmental charges. See "Description of the Capital
Securities -- Redemption."
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Issuer Trust. If the Junior Subordinated Debentures are distributed
to holders of Capital Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Capital Securities. See "Description of
the Capital Securities -- Form, Denomination, Book-Entry Procedures and
Transfer."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in
definitive form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description
of the Capital Securities -- Form, Denomination, Book-Entry Procedures and
Transfer." If Junior Subordinated Debentures are issued in certificated form,
principal and interest will be payable, the transfer of the Junior Subordinated
Debentures will be registrable, and Junior Subordinated Debentures will be
exchangeable for Junior Subordinated Debentures of other authorized
denominations of a like aggregate principal amount, at the corporate trust
office of the Debenture Trustee in New York, New York or at the offices of any
Paying Agent or transfer agent appointed by the Company, provided that payment
of interest may be made at the option of the Company by check mailed to the
address of the persons entitled thereto. However, a holder of $1 million or
more in aggregate principal amount of Junior Subordinated Debentures may
receive payments of interest (other than interest payable at the Stated
Maturity) by wire transfer of immediately available funds upon written request
to the Debenture Trustee not later than 15 calendar days prior to the date on
which the interest is payable.
The Junior Subordinated Debentures will be issuable only in registered
form without coupons in integral multiples of $10.00. Junior Subordinated
Debentures will be exchangeable for other Junior Subordinated Debentures of
like tenor, of any authorized denominations, and of a like aggregate principal
amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Indenture or at the office of any transfer agent designated
by BancShares for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. BancShares will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. BancShares may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither BancShares nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) to register the
transfer or exchange of any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any Paying Agent, or
then held by BancShares in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of BancShares, be repaid to
BancShares and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to BancShares for
payment thereof.
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Restrictions on Certain Payments; Certain Covenants of BancShares
BancShares has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of BancShares' capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of BancShares that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of BancShares in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or shareholder stock purchase plan or in connection with the
issuance of capital stock of BancShares (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period or other
event referred to below, (b) as a result of an exchange or conversion of any
class or series of BancShares' capital stock (or any capital stock of a
subsidiary of BancShares) for any class or series of BancShares' capital stock
or of any class or series of BancShares' indebtedness for any class or series
of BancShares' capital stock, (c) the purchase of fractional interests in
shares of BancShares' capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any shareholder's rights
plan, or the issuance of rights, stock or other property under any
shareholder's rights plan, or the redemption or repurchase of rights pursuant
thereto, or (e) any dividend in the form of stock, warrants, options or other
rights where the dividend stock or the stock issuable upon exercise of such
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks pari passu with or junior to such stock), if at
such time (x) there has occurred any event (1) of which BancShares has actual
knowledge that with the giving of notice or the lapse of time, or both, would
constitute a Debenture Event of Default and (2) that BancShares has not taken
reasonable steps to cure, (y) if the Junior Subordinated Debentures are held by
the Issuer Trust, BancShares is in default with respect to its payment of any
obligations under the Guarantee or (z) BancShares has given notice of its
election of an Extension Period as provided in the Junior Subordinated
Indenture and has not rescinded such notice, or such Extension Period, or any
extension thereof, is continuing.
BancShares has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to BancShares' ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, wind up or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Capital Securities in liquidation of the Issuer Trust or (b) in connection with
certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms
and provisions of the Trust Agreement, to cause the Issuer Trust to continue to
be taxable as a grantor trust for United States federal income tax purposes.
Modification of Junior Subordinated Indenture
From time to time, BancShares and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated
Debentures, amend, waive or supplement the provisions of the Junior
Subordinated Indenture to: (i) evidence succession of another corporation or
association to BancShares and the assumption by such person of the obligations
of BancShares under the Junior Subordinated Indenture and the Junior
Subordinated Debentures; (ii) add further covenants for the benefit of holders
of the Junior Subordinated Debentures, or surrender any right or power
conferred upon BancShares by the Junior Subordinated Indenture; (iii) cure
ambiguities or correct or supplement any provision in the Junior Subordinated
Debentures in the case of defects or inconsistencies in the provisions thereof,
so long as any such cure or correction does not adversely affect the interest
of the holders of the Junior Subordinated Debentures or the Capital Securities
in any material respect; (iv) change the terms of the Junior Subordinated
Indenture to facilitate the issuance of the Junior Subordinated Debentures in
certificated or other definitive form; (v) evidence or provide for the
acceptance of appointment under the Junior Subordinated Indenture of a
successor Debenture Trustee; (vi) comply with the requirements of the
Commission to qualify, or maintain the qualification of, the Junior
Subordinated Indenture under the Trust Indenture Act; (vii) convey, transfer,
assign, mortgage or pledge any property to or with the Debenture Trustee or to
surrender any right or power conferred on BancShares in the Junior Subordinated
Indenture; (viii) establish the form or terms of any series of the Junior
Subordinated Debentures as permitted by the Junior Subordinated Indenture; (ix)
change or eliminate any provision of the Junior Subordinated Indenture, so long
as at the time of such change there are no outstanding Junior Subordinated
Debentures entitled to the benefit of such provision or such change does not
apply to then outstanding Junior Subordinated Debentures; or (x) add any
additional Debenture Events of Default for the holders of the Junior
Subordinated Debentures. The Junior Subordinated Indenture contains provisions
permitting BancShares and the Debenture Trustee, with the consent of the
holders of not less than a majority in principal amount of the Junior
Subordinated Debentures, to modify the Junior
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Subordinated Indenture in a manner affecting the rights of the holders of the
Junior Subordinated Debentures, except that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the principal of, or any
installment of interest on, the Junior Subordinated Debentures, or reduce the
principal amount thereof, the rate of interest thereon or any premium payable
upon the redemption thereof, or change the place of payment where, or the
currency in which, any such amount is payable or impair the right to institute
suit for the enforcement of any Junior Subordinated Debenture or (ii) reduce
the percentage of principal amount of Junior Subordinated Debentures, the
holders of which are required to consent to any such modification of, or to
waive certain matters provided for in, the Junior Subordinated Indenture.
Furthermore, so long as any of the Capital Securities remain outstanding, no
such modification may be made that adversely affects the holders of such
Capital Securities in any material respect, and no termination of the Junior
Subordinated Indenture may occur, and no waiver of any Debenture Event of
Default or compliance with any covenant under the Junior Subordinated Indenture
may be effective, without the prior consent of the holders of at least a
majority of the aggregate Liquidation Amount of the outstanding Capital
Securities unless and until the principal of (and premium, if any, on) the
Junior Subordinated Debentures and all accrued and unpaid interest thereon have
been paid in full and certain other conditions are satisfied.
Debenture Events of Default
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated Debentures
when due and payable, and continuance of such default for a period of 30
days (subject to the deferral of any due date in the case of an Extension
Period);
(ii) failure to pay any principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration of acceleration or otherwise;
(iii) failure to duly observe or perform in any material respect certain
other covenants contained in the Junior Subordinated Indenture for 90 days
after written notice to BancShares from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of the
outstanding Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of
BancShares.
For purposes of the Trust Agreement and this Prospectus, each such Event
of Default under the Junior Subordinated Debenture is referred to as a
"Debenture Event of Default." As described in "Description of the Capital
Securities -- Events of Default; Notice," the occurrence of a Debenture Event
of Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable upon a Debenture Event of Default which
is continuing, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Capital Securities shall
have such right. The holders of a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures may annul such declaration and waive
the default if all defaults (other than the non-payment of the principal of
Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured or waived and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Capital Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby, and the holders of
a majority in aggregate Liquidation Amount of the Capital Securities issued by
the Issuer Trust, may, on behalf of the holders of all the Junior Subordinated
Debentures, waive any past default, except a default in the payment of
principal (or premium, if any) or interest (unless such default has been cured
and a sum sufficient to pay all matured installments of interest and principal
due otherwise than by acceleration has been deposited with the Debenture
Trustee) or a default in respect of a covenant or provision which under the
Junior Subordinated Indenture cannot be modified or amended without the consent
of the holder of each outstanding Junior Subordinated Debenture affected
thereby. See " -- Modification of Junior Subordinated Indenture." BancShares is
required to file annually with the Debenture Trustee a
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certificate as to whether or not BancShares is in compliance with all the
conditions and covenants applicable to it under the Junior Subordinated
Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to the Junior Subordinated Debentures.
Enforcement of Certain Rights by Holders of Capital Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of BancShares to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Capital Securities may institute a
legal proceeding directly against BancShares for enforcement of payment to such
holder of an amount equal to the amount payable in respect of Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities held by such holder (a "Direct
Action"). BancShares may not amend the Junior Subordinated Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all the Capital Securities. BancShares will have the right
under the Junior Subordinated Indenture to set-off any payment made to such
holder of Capital Securities by BancShares in connection with a Direct Action.
With certain exceptions, the holders of the Capital Securities would not
be able to exercise directly any remedies available to the holders of the
Junior Subordinated Debentures except under the circumstances described in the
preceding paragraph. See "Description of the Capital Securities -- Events of
Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Junior Subordinated Indenture provides that BancShares may not
consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets substantially as an entirety to any Person, and no
Person may consolidate with or merge into BancShares or convey, transfer or
lease its properties and assets substantially as an entirety to BancShares,
unless (i) if BancShares consolidates with or merges into another Person or
conveys, or transfers or leases its properties and assets substantially as an
entirety to any Person, the successor Person is organized under the laws of the
United States or any state thereof or the District of Columbia, and such
successor Person expressly assumes BancShares' obligations in respect of the
Junior Subordinated Debentures; (ii) immediately after giving effect thereto,
no Debenture Event of Default, and no event which, after notice or lapse of
time or both, would constitute a Debenture Event of Default, has occurred and
is continuing; and (iii) certain other conditions as prescribed in the Junior
Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford holders
of the Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving BancShares that may adversely affect
holders of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i)(a) have become due and payable or (b) will become
due and payable at the Stated Maturity within one year, or (c) are to be called
for redemption within one year under arrangements satisfactory to the Debenture
Trustee, and (ii) BancShares deposits or causes to be deposited with the
Debenture Trustee funds, in trust, for the purpose and in an amount sufficient
to pay and discharge the entire indebtedness on the Junior Subordinated
Debentures not previously delivered to the Debenture Trustee for cancellation,
for the principal (and premium, if any) and interest (including any Additional
Interest) to the date of the deposit or to the Stated Maturity, as the case may
be, then the Junior Subordinated Indenture will, upon BancShares' request, be
satisfied and discharged and cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange, certain obligations
of BancShares to the Debenture Trustree and the obligations of the Debenture
Trustee to apply money deposited by BancShares in payment of the Junior
Subordinated Debentures).
Subordination
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to
all Senior Indebtedness (as defined below) of BancShares. If BancShares
defaults in the payment of any principal, premium, if any, or interest, if any,
on any Senior Indebtedness when the same becomes due and
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payable, whether at maturity or at a date fixed for redemption or by
declaration of acceleration or otherwise, then, unless and until such default
has been cured or waived or has ceased to exist or all Senior Indebtedness has
been paid, no direct or indirect payment (in cash, property, securities, by
setoff or otherwise) may be made or agreed to be made on the Junior
Subordinated Debentures, or in respect of any redemption, repayment,
retirement, purchase or other acquisition of any of the Junior Subordinated
Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all or
a portion of the assets of BancShares and whether or not contingent, (i) every
obligation of BancShares for money borrowed; (ii) every obligation of
BancShares evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of BancShares with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of BancShares; (iv) every obligation of BancShares issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of BancShares; (vi) every
obligation of BancShares for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person the payment of which BancShares has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise. "Senior Indebtedness" shall not include (i) any obligations which,
by their terms, are expressly stated to rank pari passu in right of payment
with, or to not be superior in right of payment to, the Junior Subordinated
Debentures, (ii) any indebtedness of BancShares which when incurred and without
respect to any election under Section 1111(b) of the United States Bankruptcy
Code of 1978, as amended, was without recourse to BancShares, (iii) any
indebtedness of BancShares to any of its subsidiaries, (iv) indebtedness to any
executive officer or director of BancShares, or (v) any indebtedness in respect
of debt securities issued to any trust, or a trustee of such trust, partnership
or other entity affiliated with BancShares that is a financing entity of
BancShares in connection with the issuance of such financing entity of
securities that are similar to the Capital Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of BancShares, (ii) any proceeding for the liquidation, dissolution
or other winding up of BancShares, voluntary or involuntary, whether or not
involving insolvency or bankruptcy proceedings, (iii) any assignment by
BancShares for the benefit of creditors or (iv) any other marshalling of the
assets of BancShares, all Senior Indebtedness (including any interest thereon
accruing after the commencement of any such proceedings) shall first be paid in
full before any payment or distribution, whether in cash, securities or other
property, shall be made on account of the Junior Subordinated Debentures. In
such event, any payment or distribution on account of the Junior Subordinated
Debentures, whether in cash, securities or other property, that would otherwise
(but for the subordination provisions) be payable or deliverable in respect of
the Junior Subordinated Debentures will be paid or delivered directly to the
holders of Senior Indebtedness in accordance with the priorities then existing
among such holders until all Senior Indebtedness (including any interest
thereon accruing after the commencement of any such proceedings) has been paid
in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of BancShares ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be
paid from the remaining assets of BancShares the amounts at the time due and
owing on the Junior Subordinated Debentures and such other obligations before
any payment or other distribution, whether in cash, property or otherwise, will
be made on account of any capital stock or obligations of BancShares ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention
of any of the terms hereof and before all the Senior Indebtedness has been paid
in full, such payment or distribution or security will be received in trust for
the benefit of, and must be paid over or delivered and transferred to, the
holders of the Senior Indebtedness at the time outstanding in accordance with
the priorities then existing among such holders for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
such Senior Indebtedness in full. By reason of such subordination, in the event
of the insolvency of BancShares, holders of Senior Indebtedness may receive
more, ratably, and holders of the Junior Subordinated Debentures may receive
less, ratably, than the other creditors of BancShares. Such subordination will
not prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
At June 30, 1998, BancShares had no Senior Indebtedness. However, the
Junior Subordinated Indenture places no limitation on the amount of additional
Senior Indebtedness that may be incurred by BancShares. BancShares expects from
time to time to incur indebtedness that will constitute Senior Indebtedness.
See "Risk Factors -- Risk Factors Relating to the
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Capital Securities -- Ranking of Subordinated Obligations under the Guarantee
and the Junior Subordinated Debentures" and " -- Risk Factors Relating to
BancShares -- Status of BancShares as a Bank Holding Company."
Information Concerning the Debenture Trustee
The Debenture Trustee, other than during the occurrence and continuance of
a Debenture Event of Default, undertakes to perform only such duties as are
specifically set forth in the Junior Subordinated Indenture, is under no
obligation to exercise any of the powers vested in it by the Junior
Subordinated Indenture, and, after such Debenture Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise
in the conduct of his or her own affairs. The Debenture Trustee is not required
to expend or risk its own funds or otherwise incur personal financial liability
in the performance of its duties if the Debenture Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
The Debenture Trustee may serve from time to time as trustee under other
indentures or trust agreements with BancShares or its subsidiaries relating to
other issues of their securities. In addition, BancShares and certain of its
affiliates may have other banking relationships with the Debenture Trustee and
its affiliates.
Governing Law
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by BancShares concurrently
with the issuance of Capital Securities by the Issuer Trust for the benefit of
the holders from time to time of the Capital Securities. Bankers Trust will act
as Guarantee Trustee under the Guarantee. This summary of certain provisions of
the Guarantee does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all the provisions of the Guarantee, including
the definitions therein of certain terms. A copy of the form of Guarantee is
available upon request from the Guarantee Trustee. The Guarantee Trustee will
hold the Guarantee for the benefit of the holders of the Capital Securities.
General
BancShares will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to
the holders of the Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Issuer Trust may have or
assert other than the defense of payment. The following payments with respect
to the Capital Securities, to the extent not paid by or on behalf of the Issuer
Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on such Capital
Securities, to the extent that the Issuer Trust has funds on hand available
therefor at such time; (ii) the Redemption Price with respect to any Capital
Securities called for redemption, to the extent that the Issuer Trust has funds
on hand available therefor at such time; and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Issuer Trust (unless
the Junior Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Issuer Trust has funds on hand available therefor at such time, and (b) the
amount of assets of the Issuer Trust remaining available for distribution to
holders of the Capital Securities on liquidation of the Issuer Trust.
BancShares' obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by BancShares to the holders of the Capital
Securities or by causing the Issuer Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Issuer Trust's obligations under the Capital Securities, but will apply
only to the extent that the Issuer Trust has funds sufficient to make such
payments, and is not a guarantee of collection.
If BancShares does not make payments on the Junior Subordinated Debentures
held by the Issuer Trust, the Issuer Trust will not be able to pay any amounts
payable in respect of the Capital Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior Indebtedness of BancShares. See " -- Status of the
Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of BancShares, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that BancShares
may enter into in the future or otherwise.
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BancShares has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Capital Securities. See
"Relationship Among the Capital Securities, the Junior Subordinated Debentures
and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of BancShares and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of BancShares in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Capital Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Capital Securities of the Junior
Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Capital Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of the Capital Securities. The manner of obtaining any such approval will be as
set forth under "Description of the Capital Securities -- Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of BancShares and shall inure to the benefit of the holders of
the Capital Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
BancShares to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the Capital Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee.
Any registered holder of Capital Securities may institute a legal
proceeding directly against BancShares to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer
Trust, the Guarantee Trustee or any other person or entity.
BancShares, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not BancShares is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a default by BancShares in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by
the Guarantee at the request of any holder of the Capital Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
For information concerning the relationship between the Guarantee Trustee
and BancShares, see "Description of the Junior Subordinated Debentures --
Information Concerning the Debenture Trustee."
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Capital Securities, upon full
payment of the amounts payable with respect to the Capital Securities, upon
liquidation of the
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Issuer Trust or upon distribution of Junior Subordinated Debentures to the
holders of the Capital Securities. The Guarantee will continue to be effective
or will be reinstated, as the case may be, if at any time any holder of the
Capital Securities must restore payment of any sums paid under the Capital
Securities or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Issuer Trust has funds available for such payment) are
irrevocably guaranteed by BancShares as and to the extent set forth under
"Description of the Guarantee." Taken together, BancShares' obligations under
the Junior Subordinated Debentures, the Junior Subordinated Indenture, the
Trust Agreement and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Capital Securities. If and to the
extent that BancShares does not make payments on the Junior Subordinated
Debentures, the Issuer Trust will not have sufficient funds to pay
Distributions or other amounts due on the Capital Securities. The Guarantee
does not cover payment of amounts payable with respect to the Capital
Securities when the Issuer Trust does not have sufficient funds to pay such
amounts. In such event, the remedy of a holder of the Capital Securities is to
institute a legal proceeding directly against BancShares for enforcement of
payment of BancShares' obligations under Junior Subordinated Debentures having
a principal amount equal to the Liquidation Amount of the Capital Securities
held by such holder.
The obligations of BancShares under the Junior Subordinated Debentures and
the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Capital Securities, primarily because: (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Capital Securities
and the Common Securities; (ii) the interest rate and interest and other
payment dates on the Junior Subordinated Debentures will match the Distribution
rate, Distribution Dates and other payment dates for the Capital Securities;
(iii) BancShares will pay for all and any costs, expenses and liabilities of
the Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited
purposes of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, BancShares has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent BancShares has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may institute a legal proceeding directly
against BancShares to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Issuer Trust
or any other person or entity. See "Description of the Guarantee."
A default or event of default under any Senior Indebtedness of BancShares
would not constitute a default or Event of Default in respect of the Capital
Securities. However, in the event of payment defaults under, or acceleration
of, Senior Indebtedness of BancShares, the subordination provisions of the
Junior Subordinated Indenture provide that no payments may be made in respect
of the Junior Subordinated Debentures until such Senior Indebtedness has been
paid in full or any payment default thereunder has been cured or waived. See
"Description of the Junior Subordinated Debentures -- Subordination."
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Limited Purpose of Issuer Trust
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and the Issuer Trust exists for the sole
purpose of issuing its Capital Securities and Common Securities and investing
the proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Capital Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from BancShares payments on Junior Subordinated Debentures
held, while a holder of Capital Securities is entitled to receive Distributions
or other amounts distributable with respect to the Capital Securities from the
Issuer Trust (or from BancShares under the Guarantee) only if and to the extent
the Issuer Trust has funds available for the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Capital Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of the Capital Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation
or bankruptcy of BancShares, the Issuer Trust, as registered holder of the
Junior Subordinated Debentures, would be a subordinated creditor of BancShares,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any shareholders of BancShares receive payments or distributions. Since
BancShares is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture to pay for all costs, expenses and liabilities of the
Issuer Trust (other than the Issuer Trust's obligations to the holders of the
Trust Securities), the positions of a holder of the Capital Securities and a
holder of such Junior Subordinated Debentures relative to other creditors and
to shareholders of BancShares in the event of liquidation or bankruptcy of
BancShares are expected to be substantially the same.
FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Capital
Securities. The statements of law and legal conclusions set forth in this
summary regarding the tax consequences to the beneficial owners of Capital
Securities (the "Securityholders") represent the opinion of Hunton & Williams,
Richmond, Virginia, special tax counsel to BancShares. This summary does not
address all tax consequences that may be applicable to a Securityholder, nor
does it address the tax consequences to (i) persons that may be subject to
special treatment under United States federal income tax law, such as banks,
insurance companies, thrift institutions, regulated investment companies, real
estate investment trusts, tax-exempt organizations and dealers in securities or
currencies, (ii) persons that will hold Capital Securities as part of a
position in a "straddle" or as part of a "hedging", "conversion" or other
integrated investment transaction for federal income tax purposes, (iii) except
with respect to the discussion under the caption "United States Alien
Securityholders", persons whose functional currency is not the United States
dollar or (iv) persons that do not hold Capital Securities as capital assets.
This summary is based upon the Code, Treasury Regulations, Internal
Revenue Service (the "IRS") rulings and pronouncements and judicial decisions
now in effect, all of which are subject to change at any time. Such changes may
be applied retroactively in a manner that could cause the tax consequences to
vary substantially from the consequences described below, possibly adversely
affecting a beneficial owner of Capital Securities. In addition, the
authorities on which this summary is based (including authorities
distinguishing debt from equity) are subject to various interpretations, and it
is therefore possible that the federal income tax treatment of the Capital
Securities may differ from the treatment described below. No ruling has been
received from the IRS regarding the tax consequences of the Capital Securities.
Counsel's opinion regarding such tax consequences represents only counsel's
best legal judgment based on current authorities and is not binding on the IRS
or the courts.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS
IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES,
AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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Classification of the Junior Subordinated Debentures
The Junior Subordinated Debentures are intended to be, in the opinion of
Hunton & Williams should be, and BancShares intends to take the position that
the Junior Subordinated Debentures will be, classified for United States
federal income tax purposes as indebtedness under current law. No assurance can
be given, however, that the IRS will not challenge that position. According to
a petition recently filed in the United States Tax Court by a corporation
unrelated to BancShares and the Issuer Trust, the IRS has challenged the status
as indebtedness, for United States federal income tax purposes, of certain
purported debt instruments held by entities intended to be taxable as
partnerships for United States federal income tax purposes, where those
entities, in turn, issued preferred securities to investors. Although the
overall structure of the financing arrangement involved in that case is
somewhat similar to the financing structure for the Junior Subordinated
Debentures and the Issuer Trust, the relevant facts involved in that case
appear to differ significantly from those relating to the Junior Subordinated
Debentures and the Issuer Trust. The remainder of this summary assumes that the
Junior Subordinated Debentures will be classified as indebtedness for United
States federal income tax purposes.
Classification of the Issuer Trust
In the opinion of Hunton & Williams, under current law and assuming
compliance with the terms of the Trust Agreement, the Issuer Trust will be
classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes. As a result, each
Securityholder will be treated as owning an undivided beneficial interest in
the Junior Subordinated Debentures. Accordingly, each Securityholder will be
required to include in its gross income its pro rata share of the interest,
including any OID, and any other income received or accrued with respect to the
Junior Subordinated Debentures whether or not cash is actually distributed to
the Securityholders. See " -- Interest Income and Original Issue Discount." No
amount included in income with respect to the Capital Securities will be
eligible for the dividends received deduction.
Interest Income and Original Issue Discount
Under Treasury Regulations applicable to debt instruments issued after
August 12, 1996 (the "Regulations"), a "remote" contingency that stated
interest will not be timely paid will be ignored in determining whether a debt
instrument is issued with OID. BancShares believes that the likelihood of its
exercising its option to defer payments of interest on the Junior Subordinated
Debentures is remote. Based on the foregoing, in the opinion of Hunton &
Williams, the Junior Subordinated Debentures will not be considered to be
issued with OID at the time of their original issuance and, accordingly, a
Securityholder should include in gross income such Securityholder's allocable
share of interest on the Junior Subordinated Debentures (other than any portion
of the first interest payment attributable to pre-issuance accrued interest,
which a Securityholder may treat as a reduction of the issue price of the
Junior Subordinated Debentures rather than as gross income) in accordance with
such Securityholder's method of tax accounting.
Under the Regulations, if BancShares should actually exercise its option
to defer any payment of interest, the Junior Subordinated Debentures would at
that time be treated as issued with OID, and all stated interest on the Junior
Subordinated Debentures would thereafter be treated as OID so long as the
Junior Subordinated Debentures remained outstanding. In such event, all of a
Securityholder's taxable interest income with respect to the Junior
Subordinated Debentures would be accounted for as OID on an economic accrual
basis regardless of such Securityholder's method of tax accounting, and actual
payments of stated interest would not be reported as taxable income.
Consequently, a Securityholder would be required to include in gross income OID
even though BancShares would not make any cash payments during an Extension
Period.
The Regulations have not been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation herein.
Market Discount and Amortizable Premium
A secondary market purchaser of Capital Securities at a discount from the
principal amount (or, if the Junior Subordinated Debentures are deemed to be
issued with OID, the issue price plus accrued but unpaid OID) of the pro rata
share of Junior Subordinated Debentures represented by the Capital Securities
acquires such Capital Securities with "market discount" if the discount is not
less than the product of (i) 0.25% of the principal amount (or, if the Junior
Subordinated Debentures are deemed to be issued with OID, the issue price plus
accrued but unpaid OID) multiplied by (ii) the number of complete years to
maturity of the Junior Subordinated Debentures after the date of purchase. A
purchaser of Capital Securities with market discount generally will be required
to treat any gain on the sale, redemption or other disposition of all or part
of such Capital Securities as ordinary income to the extent of accrued (but not
previously taxable) market discount. Market discount generally will accrue
ratably during the period from the date of purchase to the maturity date,
unless
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<PAGE>
the Securityholder elects to accrue such market discount on the basis of a
constant interest rate. A Securityholder who acquires Capital Securities at a
market discount may be required to defer some interest deductions attributable
to any indebtedness incurred or continued to purchase or carry the Capital
Securities.
A secondary market purchaser of Capital Securities at a premium over the
stated principal amount of the pro rata share of Junior Subordinated Debentures
(plus accrued interest) generally may elect to amortize such premium ("Section
171 premium"), under a constant yield method, as an offset to interest income
on the Junior Subordinated Debentures. If the Junior Subordinated Debentures
are deemed to be issued with OID and Capital Securities are acquired at a
premium, the premium will not be Section 171 premium but will be amortized as a
reduction in the amount of OID includable in the Securityholder's income.
Distribution of Junior Subordinated Debentures to Holders of Capital Securities
Except as noted below, under current law a distribution by the Issuer
Trust of the Junior Subordinated Debentures as described under the caption
"Description of Capital Securities -- Liquidation Distribution Upon
Dissolution," would not be a taxable event to Securityholders for United States
federal income tax purposes; such a distribution would result in a
Securityholder receiving directly its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Issuer Trust, with a holding
period and aggregate tax basis equal to the holding period and aggregate tax
basis such Securityholder had in its Capital Securities before such
distribution; and a Securityholder would account for interest, market discount
and amortizable premium in respect of Junior Subordinated Debentures received
from the Issuer Trust in the manner described above under " -- Interest Income
and Original Issue Discount" and " -- Market Discount and Amortizable Premium."
If, however, the Junior Subordinated Debentures were distributed in connection
with a Tax Event that would cause the Issuer Trust to be subject to United
States federal income tax with respect to income received or accrued on the
Junior Subordinated Debentures, the distribution likely would be a taxable
event to Securityholders. In that case, Securityholders would recognize gain or
loss equal to the difference between their adjusted bases in their Capital
Securities and the fair market value of the Junior Subordinated Debentures
distributed to the Securityholders, and they would obtain new holding periods
and fair market value bases for such Junior Subordinated Debentures.
Sale or Redemption of Capital Securities
Upon a sale (including redemption) of Capital Securities, a Securityholder
will recognize gain or loss equal to the difference between its adjusted tax
basis in the Capital Securities and the amount realized on the sale of such
Capital Securities (excluding any amount attributable to any accrued interest
with respect to such Securityholder's pro rata share of the Junior Subordinated
Debentures not previously included in income, which will be taxable as ordinary
income). Provided that BancShares does not exercise its option to defer payment
of interest on the Junior Subordinated Debentures and the Capital Securities
are not considered to be issued with OID, a Securityholder's adjusted tax basis
in the Capital Securities generally will be its initial purchase price,
increased by any market discount included in income and reduced by any
amortized Section 171 premium for such Capital Securities. If the Junior
Subordinated Debentures are deemed to be issued with OID as a result of
BancShares' deferral of any interest payment, a Securityholder's tax basis in
the Capital Securities generally will be increased by OID previously includable
in such Securityholder's gross income to the date of disposition and decreased
by distributions or other payments received on the Capital Securities since and
including the commencement date of the first Extension Period. Such gain or
loss, except to the extent of any accrued market discount, generally will be a
capital gain or loss and generally will be a long-term capital gain or loss if
the Capital Securities have been held for more than one year.
Should BancShares exercise its option to defer any payment of interest on
the Junior Subordinated Debentures, the Capital Securities may trade at a price
that does not accurately reflect the value of accrued but unpaid interest with
respect to the underlying Junior Subordinated Debentures. As a result, and
because a Securityholder will be required to include in income accrued but
unpaid interest on Junior Subordinated Debentures and to add such amount to its
adjusted tax basis, such Securityholder may recognize a capital loss on a sale
of Capital Securities during an Extension Period. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
Backup Withholding Tax and Information Reporting
The amount of interest paid and any OID accrued with respect to the
Capital Securities to Securityholders (other than corporations and other exempt
Securityholders) will be reported to the IRS. It is expected that such income
on the Capital Securities will be reported to Securityholders on Form 1099 and
mailed to Securityholders by January 31 following each
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calendar year. "Backup" withholding at a rate of 31% will apply to payments of
interest and payments of disposition (including redemption) proceeds to a
non-exempt Securityholder unless the Securityholder furnishes to the payor its
taxpayer identification number, certifies that such number is correct, and
meets certain other conditions. Any amounts withheld from a Securityholder
under the backup withholding rules will be allowable as a refund or a credit
against such Securityholder's United States federal income tax liability.
United States Alien Securityholders
For purposes of this discussion, a United States Alien Securityholder is
any corporation, individual, partnership, estate or trust that for United
States federal income tax purposes is a foreign corporation, non-resident alien
individual, foreign partnership, foreign estate or foreign trust. This
discussion assumes that income with respect to the Capital Securities is not
effectively connected with a trade or business in the United States in which
the United States Alien Securityholder is engaged.
Under current United States federal income tax law:
(i) payments by the Issuer Trust or any of its paying agents to any
holder of Capital Securities that is a United States Alien Securityholder
generally will not be subject to withholding or other Untied States federal
income tax, provided that, in the case of payments with respect to interest
(including OID), (a) the beneficial owner of the Capital Securities does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of BancShares entitled to vote, (b) the
beneficial owner of the Capital Securities is not a controlled foreign
corporation that is related to BancShares through stock ownership, and (c)
either (A) the beneficial owner of the Capital Securities certifies to the
Issuer Trust or its agent, under penalties of perjury, that it is a United
States Alien Securityholder and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
(a "Financial Institution") and holds the Capital Securities in such
capacity certifies to the Issuer Trust or its agent under penalties of
perjury that such statement has been received from the beneficial owner by
it or by a Financial Institution between it and the beneficial owner and
furnishes the Issuer Trust or its agent with a copy thereof; and
(ii) a United States Alien Securityholder of Capital Securities generally
will not be subject to withholding or other United States federal income
tax on any gain realized upon the sale or other disposition of Capital
Securities.
Possible Tax Law Changes
In both 1996 and 1997, the Clinton Administration proposed to amend the
Code to deny deductions of interest and OID on instruments with features
similar to those of the Junior Subordinated Debentures when issued under
arrangements similar to the Issuer Trust. That proposal was not passed by, and
is not currently pending before, Congress. There can be no assurance, however,
that future legislative proposals, future regulations or official
administrative pronouncements, or future judicial decisions will not affect the
ability of BancShares to deduct interest on the Junior Subordinated Debentures.
Such a change could give rise to a Tax Event, which may permit BancShares, upon
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve, to cause a redemption of the
Capital Securities, as described more fully under "Description of the Capital
Securities -- Redemption."
ERISA CONSIDERATIONS
Before authorizing an investment in the Capital Securities, fiduciaries of
pension, profit sharing or other employee benefit plans subject to the Employee
Retirement Income Security Act of 1974 ("ERISA") ("Plans") should consider,
among other matters, (a) ERISA's fiduciary standards (including its prudence
and diversification requirements), (b) whether such fiduciaries have authority
to make such investment in the Capital Securities under the applicable Plan
investment policies and governing instruments, and (c) rules under ERISA and
the Code that prohibit Plan fiduciaries from causing a Plan to engage in a
"prohibited transaction."
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of
the Code (also "Plans"), from, among other things, engaging in certain
transactions involving "plan assets" with persons who are "parties in interest"
under ERISA or "disqualified persons" under the Code ("Parties in Interest")
with respect to such Plan. A violation of these "prohibited transaction" rules
may result in an excise tax or other liabilities under ERISA and/or Section
4975 of the Code for such persons, unless exemptive relief is available under
an applicable statutory or administrative exemption. Employee benefit plans
that are governmental plans (as defined
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in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33)
of ERISA) and foreign plans (as described in Section 4(b)(4) of ERISA) are not
subject to the requirements of ERISA or Section 4975 of the Code.
The Department of Labor (the "DOL") has issued a regulation (29 C.F.R. ss.
2510.3-101) (the "Plan Assets Regulation") concerning the definition of what
constitutes the assets of a Plan. The Plan Assets Regulation provides that, as
a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed, for purposes of ERISA, to be assets of the
investing Plan unless certain exceptions apply.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Issuer Trust would not be deemed to be "plan assets" of investing
Plans if, immediately after the most recent acquisition of any equity interest
in the Issuer Trust, less than 25% of the value of each class of equity
interests in the Issuer Trust were held by Plans, other employee benefit plans
not subject to ERISA or Section 4975 of the Code (such as governmental, church
and foreign plans), and entities holding assets deemed to be "plan assets" of
any Plan (collectively, "Benefit Plan Investors"). No assurance can be given
that the value of the Capital Securities held by Benefit Plan Investors will be
less than 25% of the total value of such Capital Securities at the completion
of the initial offering or thereafter, and no monitoring or other measures will
be taken with respect to the satisfaction of the conditions to this exception.
All the Common Securities will be purchased and held directly by BancShares.
Under another exception contained in the Plan Assets Regulation, if the
Capital Securities qualify as "publicly offered securities" under the Plan
Assets Regulation, the assets of the Issuer Trust would not be deemed to be
"plan assets" by reason of a Plan's acquisition or holding of such securities.
The Capital Securities would qualify as "publicly offered securities" if, among
other things, they are offered pursuant to an effective registration statement,
are owned by 100 or more investors independent of the issuer and each other at
the time of the offering, and are subsequently registered under the Exchange
Act. It is expected that the 100 investor requirement will not be satisfied and
that the New Capital Securities will not be registered under the Exchange Act.
However, the Capital Securities are being offered pursuant to an effective
Registration Statement.
There can be no assurance that any of the exceptions set forth in the Plan
Assets Regulation will apply to the purchase of Capital Securities offered
hereby and, as a result, an investing Plan's assets could be considered to
include an undivided interest in the Junior Subordinated Debentures held by the
Issuer Trust. In the event that assets of the Issuer Trust are considered
assets of an investing Plan, the Trustees, BancShares and/or other persons, in
providing services with respect to the Junior Subordinated Debentures, could be
considered fiduciaries to such Plan and subject to the fiduciary responsibility
provisions of Title I of ERISA. In addition, certain transactions involving the
Issuer Trust and/or the Capital Securities could be deemed to constitute direct
or indirect prohibited transactions under ERISA and Section 4975 of the Code
with respect to a Plan. For example, if BancShares is a Party in Interest with
respect to an investing Plan (either directly or by reason of its ownership of
the Bank or other subsidiaries), extensions of credit between BancShares and
the Issuer Trust (as represented by the Junior Subordinated Debentures and the
Guarantee) would likely be prohibited by Section 406(a)(1)(B) of ERISA and
Section 4975(c)(1)(B) of the Code.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief for direct or indirect prohibited
transactions resulting from the purchase or holding of the Capital Securities,
assuming that assets of the Issuer Trust were deemed to be "plan assets" of
Plans investing in the Trust (see above). Those class exemptions are PTCE 96-23
(for certain transactions determined by in-house asset managers), PTCE 91-38
(for certain transactions involving bank collective investment funds), PTCE
95-60 (for certain transactions involving insurance company general accounts),
PTCE 90-1 (for certain transactions involving insurance company pooled separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified asset managers).
Because of ERISA's prohibitions and those of Section 4975 of the Code, the
Capital Securities may not be purchased or held by any Plan, any entity whose
underlying assets include "plan assets" by reason of any Plan's investment in
the entity (a "Plan Asset Entity") or any other person investing "plan assets"
of any Plan, unless such purchase or holding is covered by the exemptive relief
provided by PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable
exemption. If a purchaser or holder of the Capital Securities that is a Plan or
a Plan Asset Entity elects to rely on an exemption other than PTCE 96-23,
95-60, 91-38, 90-1 or 84-14, BancShares and the Issuer Trust may require a
satisfactory opinion of counsel or other evidence with respect to the
availability of such exemption for such purchase and holding. Any purchaser or
holder of the Capital Securities that is a Plan or a Plan Asset Entity or is
purchasing such securities on behalf of or with "plan assets" will be deemed to
have represented by its purchase and holding thereof that (a) the purchase and
holding of the Capital Securities is covered by the exemptive relief provided
by PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another
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applicable exemption, (b) BancShares and the Administrators are not
"fiduciaries," within the meaning of Section 3(21) of ERISA and the regulations
thereunder, with respect to such person's interest in the Capital Securities or
the Junior Subordinated Debentures, and (c) in purchasing the Capital
Securities, such person approves the purchase of the Junior Subordinated
Debentures and the appointment of the Issuer Trustees.
Insurance companies considering an investment in the Capital Securities
should note that the Small Business Job Protection Act of 1996 added new
Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the Department of Labor issued proposed regulations (the
"Proposed General Accounting Regulations") in December 1997 with respect to
insurance policies that are supported by an insurer's general account. The
Proposed General Accounting Regulations are intended to provide guidance on
which assets held by the insurer constitute "plan assets" of an ERISA Plan for
purposes of the fiduciary responsibility provisions of ERISA and Section 4975
of the Code.
Any plans or other entities whose assets include Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire Capital Securities
should consult with their own counsel.
Governmental Plans and certain church plans are not subject to ERISA, and
are also not subject to the prohibited transaction provisions of Section 4975
of the Code. However, state laws or regulations governing the investment and
management of the assets of such plans may contain fiduciary and prohibited
transaction provisions similar to those under ERISA and the Code discussed
above. Accordingly, fiduciaries of governmental and church plans, in
consultation with the advisers, should consider the impact of their respective
state laws on investments in the Capital Securities and the considerations
discussed above to the extent applicable.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, BancShares and the Issuer Trust have agreed that the Issuer Trust
will sell 2,000,000 Capital Securities to Wheat First Union, a division of
Wheat First Securities, Inc. (the "Underwriter"), and the Underwriter has
agreed to purchase that number of Capital Securities from the Issuer Trust.
Under the terms and conditions set forth in the Underwriting Agreement,
the Underwriter is committed to take and pay for all such Capital Securities
offered hereby, if any are taken.
The Underwriter proposes to offer the Capital Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $ * per Capital Security. The Underwriter may allow, and
such dealers may reallow, a concession not to exceed $ * per Capital
Security to certain brokers and dealers. After the Capital Securities are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the Underwriter.
BancShares and the Issuer Trust have granted to the Underwriter an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to an additional $3,000,000 aggregate Liquidation Amount of Capital
Securities (300,000 Capital Securities) at the public offering price, less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus, plus accumulated Distributions, if any, from the date of issuance.
To the extent that the Underwriter exercises such option, the Issuer Trust will
be obligated, pursuant to the option, to sell such additional Capital
Securities to the Underwriter. The Underwriter may exercise such option only to
cover over-allotments made in connection with the sale of Capital Securities
offered hereby. If purchased, the Underwriter will offer such additional
Capital Securities on the same terms as those on which the $20,000,000
aggregate Liquidation Amount of the Capital Securities are being offered.
In connection with the offering of the Capital Securities, the Underwriter
and any selling group members and their respective affiliates may engage in
transactions effected in accordance with Rule 104 of the Commission's
Regulation M that are intended to stabilize, maintain or otherwise affect the
market price of the Capital Securities. Such transactions may include
over-allotment transactions in which the Underwriter creates a short position
for their own account by selling more Capital Securities than they are
committed to purchase from the Issuer Trust. In such a case, to cover all or
part of the short position, the Underwriter may exercise the over-allotment
option described above or may purchase Capital Securities in the open market
following completion of the initial offering of Capital Securities. The
Underwriter also may engage in stabilizing transactions in which it bids for,
and purchases, Capital Securities at a level above that which might otherwise
prevail in the open market for the purpose of preventing or retarding a decline
in the market price of the Capital Securities. The Underwriter also may reclaim
any selling concessions allowed to a dealer if the Underwriter repurchases
shares distributed by that dealer. Any of the foregoing transactions may result
in the maintenance of a price for the Capital Securities at a level
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<PAGE>
above that which might otherwise prevail in the open market. Neither BancShares
nor the Underwriter makes any representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on
the price of the Capital Securities. The Underwriter is not required to engage
in any of the foregoing transactions and, if commenced, such transactions may
be discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued
by BancShares, the Underwriting Agreement provides that BancShares will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $ * per Capital Security for the account of the
Underwriter.
BancShares and the Issuer Trust have agreed that, during the period
beginning from the date of the Underwriting Agreement and continuing to and
including the earlier of 180 days following the Closing Date, they will not
offer, sell, contract to sell or otherwise dispose of any additional securities
of the Issuer Trust or BancShares substantially similar to the Capital
Securities or any securities convertible into or exchangeable for or that
represent the right to receive any such similar securities, without the consent
of the Underwriter.
Prior to this offering, there has been no public market for the Capital
Securities. The Capital Securities have been approved for listing on AMEX,
subject to notice of issuance. However, no assurance can be given as to the
liquidity of any trading market for the Capital Securities.
BancShares and the Issuer Trust have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
The Underwriter or its affiliates have provided from time to time, and
expect to provide in the future, investment or commercial banking services to
BancShares and its affiliates, for which the Underwriter or its affiliates have
received or will receive customary fees and commissions.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Trust Agreement and the creation of the
Issuer Trust will be passed upon by Richards, Layton & Finger, P.A., special
Delaware counsel to BancShares and the Issuer Trust. Certain tax matters
relating to the Capital Securities and the Issuer Trust will be passed upon for
BancShares by Hunton & Williams, Richmond, Virginia, special tax counsel to
BancShares. The validity of the Guarantee and the Junior Subordinated
Debentures will be passed upon for BancShares by Ward and Smith, P.A., Raleigh,
North Carolina, General Counsel to BancShares, and for the Underwriter by
Alston & Bird LLP, Washington, D.C., special counsel to the Underwriter. Ward
and Smith, P.A. and Alston & Bird LLP, will rely as to certain matters of
Delaware law on the opinion of Richards, Layton & Finger, P.A., and as to
certain matters of New York law on the opinion of White & Case LLP. A member
of Ward and Smith, P.A. beneficially owns 153 shares of BancShares' common
stock.
EXPERTS
The consolidated balance sheet of Fidelity BancShares (N.C.), Inc. and
subsidiary as of December 31, 1997, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the year then ended,
have been included herein and in the Registration Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated balance sheet of Fidelity BancShares (N.C.), Inc. and
subsidiary as of December 31, 1996, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the years in
the two-year period ended December 31, 1996, have been included herein and in
the Registration Statement in reliance upon the report of
PricewaterhouseCoopers LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
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FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Independent Auditors' Report ............................................................. F-3
Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of December 31, 1997 F-5
and 1996
Consolidated Statements of Income for the six months ended June 30, 1998 and 1997
(unaudited), and for each of
the years in the three-year period ended December 31, 1997 .............................. F-6
Consolidated Statements of Changes in Shareholders' Equity for each of the years in the
three-year period ended
December 31, 1997 and for the six months ended June 30, 1998 (unaudited) ................ F-7
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997
(unaudited), and for
each of the years in the three-year period ended December 31, 1997 ...................... F-8
Notes to Consolidated Financial Statements ............................................... F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fidelity BancShares (N.C.), Inc.:
We have audited the accompanying consolidated balance sheet of Fidelity
BancShares (N.C.), Inc. and subsidiary (the "Company") as of December 31, 1997,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Fidelity BancShares (N.C.), Inc. and subsidiary as of December 31, 1997, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
February 6, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fidelity BancShares (N.C.), Inc. and Subsidiary
Fuquay-Varina, North Carolina
We have audited the accompanying consolidated balance sheet of Fidelity
BancShares (N.C.), Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Fidelity BancShares (N.C.), Inc. and subsidiary as of December 31, 1996, and
the consolidated results of their operations and their cash flows for each of
the years in the two year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
By: /s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 28, 1997
F-3
<PAGE>
(This Page Intentionally Left Blank)
F-4
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks .................................................. $ 23,766,730 $ 17,125,430 $ 16,516,187
Federal funds sold ....................................................... 43,400,000 33,300,000 23,700,000
------------ ------------ ------------
Total cash and cash equivalents ....................................... 67,166,730 50,425,430 40,216,187
------------ ------------ ------------
Investment securities (note 3):
Held to maturity (estimated fair value of $102,125,862, $132,289,335
and $129,044,000, respectively) ....................................... 102,052,076 132,131,039 128,811,330
Available-for-sale (cost of $2,644,600, $3,100,600 and $3,100,600,
respectively) ......................................................... 10,804,252 11,809,125 8,917,876
------------ ------------ ------------
Total investment securities ........................................... 112,856,328 143,940,164 137,729,206
------------ ------------ ------------
Loans (note 4) ........................................................... 385,270,983 358,250,205 334,880,101
Allowance for possible loan losses (note 4) .............................. (3,708,958) (4,144,752) (4,138,816)
------------ ------------ ------------
Loans, net ............................................................ 381,562,025 354,105,453 330,741,285
Federal Home Loan Bank of Atlanta stock, at cost (note 1) ................ 1,862,400 1,803,300 1,653,900
Premises and equipment, net (note 5) ..................................... 22,816,231 20,906,093 19,843,077
Accrued interest receivable .............................................. 3,629,714 4,069,044 3,747,816
Intangible assets ........................................................ 6,628,320 6,903,955 7,289,642
Other assets ............................................................. 1,201,342 841,139 916,871
------------ ------------ ------------
Total assets .......................................................... $597,723,090 $582,994,578 $542,137,984
============ ============ ============
Liabilities and Shareholders' Equity
Deposits (note 6):
Noninterest-bearing demand deposits .................................... $ 77,518,550 $ 67,456,795 $ 55,465,256
Savings and interest-bearing demand deposits ........................... 175,027,491 172,873,085 165,519,791
Time deposits .......................................................... 263,390,987 264,907,190 258,154,974
------------ ------------ ------------
Total deposits ........................................................ 515,937,028 505,237,070 479,140,021
Short-term borrowings (note 7) ........................................... 11,037,014 11,051,315 5,974,642
Accrued interest payable ................................................. 3,894,955 3,303,447 3,136,280
Other liabilities ........................................................ 4,312,111 4,285,643 2,645,048
------------ ------------ ------------
Total liabilities ..................................................... 535,181,108 523,877,475 490,895,991
------------ ------------ ------------
Commitments and contingencies (note 11)
Shareholders' equity (note 10):
Common stock ($25 par value; 29,200 shares authorized; 28,410
shares issued and outstanding) ........................................ 710,250 710,250 710,250
Surplus ................................................................ 6,251,174 6,251,174 6,251,174
Net unrealized gain on securities available-for-sale ................... 4,905,955 5,235,996 3,839,402
Retained earnings ...................................................... 50,674,603 46,919,683 40,441,167
------------ ------------ ------------
Total shareholders' equity ............................................ 62,541,982 59,117,103 51,241,993
------------ ------------ ------------
$597,723,090 $582,994,578 $542,137,984
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------
1998 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
Interest income:
Interest and fees on loans ..................... $ 17,970,223 $ 16,557,710
Interest and dividends on investment
securities:
Non taxable interest income .................. 22,699 1,010
Taxable interest and dividend income ......... 3,315,355 4,240,482
Interest on federal funds sold ................. 1,126,085 207,950
------------ ------------
Total interest income ....................... 22,434,362 21,007,152
------------ ------------
Interest expense:
Deposits (note 6) .............................. 9,494,947 9,176,481
Short-term borrowings .......................... 191,747 146,186
------------ ------------
Total interest expense ...................... 9,686,694 9,322,667
------------ ------------
Net interest income ......................... 12,747,668 11,684,485
Provision for possible loan losses (note 4) ..... 179,819 180,008
------------ ------------
Net interest income after provision for
possible loan losses ....................... 12,567,849 11,504,477
------------ ------------
Noninterest income:
Service charges on deposit accounts ............ 1,212,880 1,088,713
Other service charges, commissions and
fees ......................................... 918,688 819,352
Gain on sale of assets acquired in
settlement of loans .......................... -- --
Gain on sale of mortgage servicing rights
(note 15) .................................... 507,456 --
------------ ------------
Total noninterest income .................... 2,639,024 1,908,065
------------ ------------
Noninterest expenses:
Salaries and employee benefits ................. 4,419,429 4,031,082
Occupancy and equipment ........................ 1,563,510 1,482,155
Data processing ................................ 657,768 602,835
Other .......................................... 1,770,202 1,479,720
------------ ------------
Total noninterest expense ................... 8,410,909 7,595,792
------------ ------------
Net income before income taxes .............. 6,795,964 5,816,750
Income tax expense (note 8) ..................... 2,586,484 2,193,134
------------ ------------
Net income .................................. $ 4,209,480 $ 3,623,616
============ ============
Per share information:
Net income ..................................... $ 148.17 $ 127.55
Cash dividends declared ........................ $ 16.00 $ 16.00
Weighted average shares outstanding ............ 28,410 28,410
Year ended December 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans ..................... $ 34,116,250 $ 29,060,388 $ 25,467,719
Interest and dividends on investment
securities:
Non taxable interest income .................. 3,150 7,387 36,227
Taxable interest and dividend income ......... 8,668,343 7,466,128 4,445,352
Interest on federal funds sold ................. 461,434 703,633 657,582
------------ ------------ ------------
Total interest income ....................... 43,249,177 37,237,536 30,606,880
------------ ------------ ------------
Interest expense:
Deposits (note 6) .............................. 18,692,963 15,957,942 12,335,539
Short-term borrowings .......................... 323,548 287,329 280,473
------------ ------------ ------------
Total interest expense ...................... 19,016,511 16,245,271 12,616,012
------------ ------------ ------------
Net interest income ......................... 24,232,666 20,992,265 17,990,868
Provision for possible loan losses (note 4) ..... 360,000 360,000 360,000
------------ ------------ ------------
Net interest income after provision for
possible loan losses ....................... 23,872,666 20,632,265 17,630,868
------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts ............ 2,310,203 1,999,341 1,570,107
Other service charges, commissions and
fees ......................................... 1,664,193 1,345,255 1,058,301
Gain on sale of assets acquired in
settlement of loans .......................... -- 3,391 --
Gain on sale of mortgage servicing rights
(note 15) .................................... -- -- --
------------ ------------ ------------
Total noninterest income .................... 3,974,396 3,347,987 2,628,408
------------ ------------ ------------
Noninterest expenses:
Salaries and employee benefits ................. 8,232,811 7,045,092 5,594,048
Occupancy and equipment ........................ 3,164,555 2,454,998 1,864,910
Data processing ................................ 1,213,034 1,225,585 1,012,214
Other .......................................... 3,267,203 3,464,266 2,526,873
------------ ------------ ------------
Total noninterest expense ................... 15,877,603 14,189,941 10,998,045
------------ ------------ ------------
Net income before income taxes .............. 11,969,459 9,790,311 9,261,231
Income tax expense (note 8) ..................... 4,581,823 3,486,933 3,253,778
------------ ------------ ------------
Net income .................................. $ 7,387,636 $ 6,303,378 $ 6,007,453
============ ============ ============
Per share information:
Net income ..................................... $ 260.04 $ 220.63 $ 210.18
Cash dividends declared ........................ $ 32.00 $ 32.00 $ 24.00
Weighted average shares outstanding ............ 28,410 28,570 28,582
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
unrealized
gain
Common Stock on securities Total
---------------------- available-for- Retained shareholders'
Shares Amount Surplus sale earnings equity
---------- ----------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ............... 28,582 $714,550 $6,289,020 $1,485,000 $29,944,094 $38,432,664
Net income .............................. -- -- -- -- 6,007,453 6,007,453
Cash dividends ($24.00 per share) ....... -- -- -- -- (685,968) (685,968)
Change in net unrealized gain, net of
deferred taxes of $566,000 ............ -- -- -- 596,500 -- 596,500
------ -------- ---------- ---------- ----------- -----------
Balance, December 31, 1995 ............... 28,582 714,550 6,289,020 2,081,500 35,265,579 44,350,649
Net income .............................. -- -- -- -- 6,303,378 6,303,378
Cash dividends ($32.00 per share) ....... -- -- -- -- (914,336) (914,336)
Purchase and retirement
of common stock ....................... (172) (4,300) (37,846) -- (213,454) (255,600)
Change in net unrealized gain, net of
deferred taxes of $646,874 ............ -- -- -- 1,757,902 -- 1,757,902
------ -------- ---------- ---------- ----------- -----------
Balance, December 31, 1996 ............... 28,410 710,250 6,251,174 3,839,402 40,441,167 51,241,993
Net income .............................. -- -- -- -- 7,387,636 7,387,636
Cash dividends ($32.00 per share) ....... -- -- -- -- (909,120) (909,120)
Change in net unrealized gain, net of
deferred taxes of $1,152,886 .......... -- -- -- 1,396,594 -- 1,396,594
------ -------- ---------- ---------- ----------- -----------
Balance, December 31, 1997 ............... 28,410 710,250 6,251,174 5,235,996 46,919,683 59,117,103
Net income (Unaudited)................... -- -- -- -- 4,209,480 4,209,480
Cash dividends ($16.00 per
share) (Unaudited) .................... -- -- -- -- (454,560) (454,560)
Change in net unrealized gain, net of
deferred taxes of $
(218,832) (Unaudited) ................. -- -- -- (330,041) -- (330,041)
------ -------- ---------- ---------- ----------- -----------
Balance, June 30, 1998 (Unaudited)........ 28,410 $710,250 $6,251,174 $4,905,955 $50,674,603 $62,541,982
====== ======== ========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------
1998 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 4,209,480 $ 3,623,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 831,808 768,150
Amortization (accretion) on investment securities ...... (12,647) (2,460)
Gain on sale of assets acquired in settlement of
loans ................................................. -- --
Loss (gain) on sales of premises and equipment ......... (10,000) (50)
Provision for possible loan losses ..................... 179,819 180,008
Origination of loans held for sale ..................... (9,560,050) (2,728,425)
Proceeds from sales of loans held for sale ............. 9,592,734 2,744,037
Gain on sale of mortgage servicing rights .............. (507,456) --
Gain on sales of loans held for sale ................... (32,684) (15,612)
Deferred income taxes .................................. 490,488 (316,952)
Decrease (increase) in accrued interest receivable ..... 439,330 (370,103)
Decrease (increase) in other assets .................... (84,568) (16,547)
Increase (decrease) in other liabilities ............... 210,812 478,634
Increase in accrued interest payable ................... 591,508 532,462
-------------- --------------
Net cash provided by operating activities ............. 6,338,574 4,876,758
-------------- --------------
Cash flows from investing activities:
Purchase of securities available-for-sale ................ -- --
Purchase of securities held to maturity .................. (60,111,328) (24,957,731)
Proceeds from maturities and issuer calls of
securities held to maturity ............................ 90,202,938 7,300,522
Purchase of FHLB of Atlanta stock ........................ (59,100) (149,400)
Proceeds from the redemption of FHLB of Atlanta
stock .................................................. -- --
Net increase in loans .................................... (27,636,391) (19,213,638)
Expenditures for premises and equipment .................. (2,741,946) (489,676)
Proceeds from sales of premises and equipment ............ 10,000 50
Proceeds from sales of assets acquired in settlement
of loans ............................................... -- --
Proceeds from sale of mortgage servicing rights .......... 507,456 --
Net cash received on purchases of bank and branches -- --
-------------- --------------
Net cash used in investing activities ................. 171,629 (37,509,873)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits ................................. 10,699,958 5,577,496
Net increase (decrease) in short-term borrowings ......... (14,301) 7,122,584
Cash dividends paid ...................................... (454,560) (454,560)
Purchase and retirement of common stock .................. -- --
-------------- --------------
Net cash provided by financing activities ............. 10,231,097 12,245,520
-------------- --------------
Net increase (decrease) in cash and cash
equivalents .......................................... 16,741,300 (20,387,595)
Cash and cash equivalents at beginning of period .......... 50,425,430 40,216,187
-------------- --------------
Cash and cash equivalents at end of period ................ $ 67,166,730 $ 19,828,592
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ................. $ 9,095,186 $ 8,790,205
============== ==============
Cash paid during the period for income taxes ............. $ 2,314,126 $ 1,877,546
============== ==============
Supplemental disclosure of noncash financing and
investing activities:
Unrealized gains (losses) on available-for-sale
securities, net of deferred tax effects of
$(218,832), $1,152,886, $646,874 and $566,000,
respectively ........................................... $ (330,041) $ 628,631
============== ==============
Year ended December 31,
---------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 7,387,636 $ 6,303,378 $ 6,007,453
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 2,192,046 1,659,572 1,176,643
Amortization (accretion) on investment securities ...... (16,999) 68,723 (36,615)
Gain on sale of assets acquired in settlement of
loans ................................................. -- (3,391) --
Loss (gain) on sales of premises and equipment ......... (4,569) (6,900) 4,112
Provision for possible loan losses ..................... 360,000 360,000 360,000
Origination of loans held for sale ..................... (6,811,425) (16,006,555) (17,191,218)
Proceeds from sales of loans held for sale ............. 6,845,794 16,056,305 17,249,987
Gain on sale of mortgage servicing rights .............. -- -- --
Gain on sales of loans held for sale ................... (34,369) (49,750) (58,769)
Deferred income taxes .................................. (163,177) (125,411) (367,800)
Decrease (increase) in accrued interest receivable ..... (321,228) (1,197,301) (375,292)
Decrease (increase) in other assets .................... 258,732 (340,251) (675,801)
Increase (decrease) in other liabilities ............... 126,118 548,851 369,884
Increase in accrued interest payable ................... 167,167 568,451 1,111,768
-------------- --------------- --------------
Net cash provided by operating activities ............. 9,985,726 7,835,721 7,574,352
-------------- --------------- --------------
Cash flows from investing activities:
Purchase of securities available-for-sale ................ -- (1,000,600) --
Purchase of securities held to maturity .................. (46,854,606) (115,082,700) (21,024,924)
Proceeds from maturities and issuer calls of
securities held to maturity ............................ 43,551,896 59,500,000 16,500,000
Purchase of FHLB of Atlanta stock ........................ (149,400) (105,200) (1,177,200)
Proceeds from the redemption of FHLB of Atlanta
stock .................................................. -- 48,900 --
Net increase in loans .................................... (23,724,169) (26,665,184) (10,087,866)
Expenditures for premises and equipment .................. (3,840,387) (6,587,279) (2,055,138)
Proceeds from sales of premises and equipment ............ 975,581 554,309 75,089
Proceeds from sales of assets acquired in settlement
of loans ............................................... -- 67,832 --
Proceeds from sale of mortgage servicing rights .......... -- -- --
Net cash received on purchases of bank and branches -- 42,028,648 5,334,523
-------------- --------------- --------------
Net cash used in investing activities ................. (30,041,085) (47,241,274) (12,435,516)
-------------- --------------- --------------
Cash flows from financing activities:
Net increase in deposits ................................. 26,097,049 36,577,301 33,102,501
Net increase (decrease) in short-term borrowings ......... 5,076,673 482,553 (1,951,807)
Cash dividends paid ...................................... (909,120) (914,336) (685,968)
Purchase and retirement of common stock .................. -- (255,600) --
-------------- --------------- --------------
Net cash provided by financing activities ............. 30,264,602 35,889,918 30,464,726
-------------- --------------- --------------
Net increase (decrease) in cash and cash
equivalents .......................................... 10,209,243 (3,515,635) 25,603,562
Cash and cash equivalents at beginning of period .......... 40,216,187 43,731,822 18,128,260
-------------- --------------- --------------
Cash and cash equivalents at end of period ................ $ 50,425,430 $ 40,216,187 $ 43,731,822
============== =============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ................. $ 18,849,344 $ 15,466,820 $ 11,504,244
============== =============== ==============
Cash paid during the period for income taxes ............. $ 4,437,300 $ 3,599,540 $ 3,585,973
============== =============== ==============
Supplemental disclosure of noncash financing and
investing activities:
Unrealized gains (losses) on available-for-sale
securities, net of deferred tax effects of
$(218,832), $1,152,886, $646,874 and $566,000,
respectively ........................................... $ 1,396,594 $ 1,757,902 $ 596,500
============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
June 30, 1998 and 1997 (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) Nature of Operations
Fidelity BancShares (N.C.), Inc. (the "Company") is a bank holding company
incorporated under the General Corporation Law of the State of Delaware. The
principal activity of the Company is ownership of The Fidelity Bank (the
"Bank"), which operates thirty-five offices in eastern and central North
Carolina. The Bank's primary source of revenue is derived from loans to
customers and from its investment securities portfolio. The loan portfolio is
comprised mainly of real estate, commercial, consumer, and equity line of
credit loans. These loans are primarily collateralized by residential and
commercial properties, commercial equipment, and personal property.
(b) Consolidation
The accompanying consolidated financial statements of the Company include
the accounts the Bank, its wholly-owned subsidiary. The Bank also has two
wholly-owned subsidiaries, Fidelity Properties, Inc. and TFB Financial
Services. Fidelity Properties, Inc. was incorporated on November 2, 1995 under
the laws of the State of North Carolina. There have been no transactions by
Fidelity Properties, Inc. other than the initial capitalization of 100,000
shares of no par value common stock. TFB Financial Services, Inc., formerly
Servco Service Corporation, was acquired in the purchase of Perpetual State
Bank in 1996 (see note 2). TFB Financial Services, Inc., provides depositors
alternative non-deposit investment products. All significant intercompany
transactions have been eliminated in consolidation, and all adjustments
considered necessary for a fair presentation of the results for the interim
periods presented, which are unaudited, have been included (such adjustments
are normal and recurring in nature). Operating results for the six-month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
(c) Basis of Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the reporting date and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
and federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
(e) Investment Securities
The Company accounts for investment securities under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. These
investments are to be classified into three categories and accounted for as
follows: (1) debt securities that the entity has the positive intent and the
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings; and (3) debt and equity securities not classified as
either securities held to maturity or trading securities are classified as
available-for-sale and consist of securities which may be sold in response to
changes in interest rates, prepayment risk, regulatory capital requirements and
liquidity needs. Such securities are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity. The classification of securities is determined by
management at the date of purchase.
Amortization of premiums and accretion of discounts are recognized as
adjustments to interest income using the interest method. Gains and losses on
sales of securities, computed based on specific identification of adjusted cost
of each security, are included in other income at the time of the sale.
F-9
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)
(f) Loans
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest on loans is recorded as earned on an
accrual basis.
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are current or past due less than 90 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt. Loans may be returned to accrual status when all
principal and interest amounts contractually due (including arrearages) are
reasonably assured of repayment within an acceptable period of time, and there
is a sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms.
While a loan (including an impaired loan) is classified as nonaccrual and
the future collectibility of the recorded loan balance is doubtful, collections
of interest and principal are generally applied as a reduction to the principal
outstanding. When the future collectibility of the recorded loan balance is not
in doubt, interest income may be recognized on a cash basis. In the case where
a nonaccrual loan had been partially charged-off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Receipts in excess of that
amount are recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
(g) Allowance and Provision for Possible Loan Losses
The Company provides for loan losses on the allowance method. Additions to
the allowance for possible loan losses are provided by charges to operations
based on various factors which, in management's judgment, deserve current
recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the
allowance is adjusted accordingly. 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, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for possible
loan losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination.
Allowances for possible loan losses related to loans that are identified
as impaired are based on discounted cash flows using the loans' initial
interest rates or the fair value of the collateral if the loan is collateral
dependent. Larger groups of smaller balance homogeneous loans that are
collectively evaluated for impairment (such as credit card, residential
mortgage and consumer installment loans) are excluded from this impairment
evaluation and their allowance for possible loan losses is calculated in
accordance with the allowance for possible loan losses policy discussed above.
(h) Assets Acquired in Settlement of Loans
Assets acquired in settlement of loans consists of property acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure
and loans classified as in-substance foreclosure. In accordance with SFAS No.
114, a loan is classified as in-substance foreclosure when the Company has
taken possession of the collateral regardless of whether formal foreclosure
proceedings have taken place. Assets acquired in settlement of loans are
recorded initially at the lower of the loan balance plus unpaid accrued
interest or estimated fair value of the property less estimated selling costs
at the date of foreclosure. The initial recorded value may be subsequently
reduced by additional allowances, which are charged to earnings, if the
estimated fair value of the property declines below the initial recorded value.
Costs related to the improvement of the property are capitalized, whereas those
related to holding the property are expensed.
F-10
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)
(i) Membership/Investment in Federal Home Loan Bank of Atlanta Stock
The Company is a member of the Federal Home Loan Bank of Atlanta ("FHLB").
Membership provides the Company with the ability to draw $40 million of
advances from the FHLB, subject to a signed blanket collateral agreement. No
advances were drawn by the Company in 1997 or 1996.
As a requirement for membership, the Company invests in stock of the FHLB
in the amount of 1% of its outstanding residential loans or 5% of its
outstanding advances from the FHLB, whichever is greater. Such stock is pledged
as collateral for any FHLB advances drawn by the Company. At December 31, 1997
and 1996, the Company owned 18,033 and 16,539 shares of the FHLB's $100 par
value capital stock, respectively. No ready market exists for such stock, which
is carried at cost.
(j) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method based on the estimated
useful lives of assets. Useful lives range from 10 to 31.5 years for premises
and from 5 to 10 years for equipment and fixtures. Expenditures for repairs and
maintenance are charged to expense as incurred. Upon retirement or other
disposition of the assets, the cost and the related accumulated depreciation
are removed from the accounts and any gains or losses are included in income.
(k) Intangible Assets
Intangible assets are composed primarily of goodwill and core deposit
premiums. Amortization of goodwill and core deposit premiums is computed using
the straight-line method based on the estimated useful lives of the assets
(current useful lives range from 10 - 15 years). The lives of the assets are
estimated by management at the time the assets are acquired using information
available at that time and are subject to re-evaluation as new information
becomes available.
(l) Income Taxes
Income tax expense is based on consolidated net income and generally
differs from income taxes paid due to deferred income taxes and benefits
arising from income and expenses being recognized in different periods for
financial and income tax reporting. The Company uses the asset and liability
method to account for deferred income taxes. The objective of the asset and
liability method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the income tax
basis of the Company's assets and liabilities at enacted rates expected to be
in effect when such amounts are recovered or settled. The Bank and its
subsidiaries are included in the consolidated federal return filed by the
Company. Each subsidiary pays its allocation of federal income taxes or
receives a payment to the extent that tax benefits are realized. The Company
and its subsidiaries each file separate state income tax returns.
(m) Net Income Per Share
Net income per share is computed based on the weighted average number of
common shares outstanding during the year. The Company adopted SFAS No. 128,
"Earnings Per Share," in 1997, which requires net income per share to be
calculated on both a basic and diluted basis. Because the Company has no
potentially dilutive securities, the adoption of SFAS No. 128, had no impact on
the Company's consolidated financial statements and restatement of prior years'
net income per share amounts was not necessary.
(n) New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. It does not address
issues of recognition or measurement for comprehensive income and its
components. The provisions of SFAS No. 130 are effective for fiscal years
beginning after December 15, 1997. The Company adopted this statement in the
first quarter of fiscal 1998. During the six months ended June 30, 1998 and
1997, comprehensive income, which consisted of net income and changes in net
unrealized gains and losses, net of applicable tax effects, amounted to
$3,879,439 (unaudited) and $4,252,247 (unaudited), respectively.
F-11
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)
(o) Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements of
the Company have been reclassified to conform with the 1997 presentation, with
no effect on previously reported stockholders' equity or net income.
(2) ACQUISITIONS
On September 1, 1996, the Company acquired Perpetual State Bank
("Perpetual"). The Company paid $17.85 per share for the 600,000 shares and
23,280 shares of Perpetual's common and restricted stock, respectively. The
acquisition was accounted for as a purchase and accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on estimated
fair values at the date of the acquisition. Goodwill of approximately $971,000
was recorded, representing the excess of the purchase price over the fair value
of the net assets acquired. Loans and deposits acquired in the acquisition were
$40 million and $35 million, respectively. The results of operations of
Perpetual have been included in the consolidated financial statements from the
date of acquisition.
Pro-forma net interest income and net income for 1996 and 1995 would have
been approximately $22,350,000 and $19,638,000 and $6,550,000 and $6,203,000,
respectively, assuming the acquisition of Perpetual occurred at the beginning
of the respective periods.
On April 16, 1996 the Company purchased four branches from a North
Carolina commercial bank for which $4,026,000 was paid by the Company. Assets
and deposits acquired were $928,000 and $55,304,000, respectively.
There were no acquisitions by the Company during 1997 or 1998.
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Available-for-sale:
Marketable equity securities ......... $ 3,100,600 $8,708,525 $ -- $ 11,809,125
============= ========== ========= ============
Held to maturity:
U.S. agency obligations .............. $ 217,718 $ 2,867 $ -- $ 220,585
U.S. Treasury ........................ 129,913,321 180,789 (25,360) 130,068,750
State and political subdivisions ..... 2,000,000 -- -- 2,000,000
------------- ---------- --------- ------------
$ 132,131,039 $ 183,656 $ (25,360) $132,289,335
============= ========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Available-for-sale:
Marketable equity securities .... $ 3,100,600 $5,817,276 $ -- $ 8,917,876
============= ========== ========== ============
Held to maturity:
U.S. Treasury ................... $ 128,591,717 $ 378,695 $ (149,412) $128,821,000
State and political subdivisions 219,613 3,387 -- 223,000
------------- ---------- ---------- ------------
$ 128,811,330 $ 382,082 $ (149,412) $129,044,000
============= ========== ========== ============
</TABLE>
F-12
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) INVESTMENT SECURITIES -- (Continued)
The amortized cost and estimated fair value of debt securities at December
31, 1997 by contractual maturities are as follows:
Estimated
Amortized fair
cost value
---------------- ---------------
Due in one year or less:
U.S. Treasury ............................ $ 114,916,857 $114,965,625
U.S. agency obligations .................. 200,000 200,178
State and political subdivisions ......... 2,000,000 2,000,000
Due after one year through five years:
U.S. Treasury ............................ 14,996,464 15,103,125
Due after ten years:
U.S. agency obligations .................. 17,718 20,407
------------- ------------
$132,131,039 $132,289,335
============ ============
There were no sales of investment securities during 1997, 1996 and 1995.
Investment securities with an amortized cost of approximately $27,343,000
were pledged to secure public deposits at December 31, 1997.
(4) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Major classifications of loans as of December 31, 1997 and 1996 are
summarized as follows:
1997 1996
----------------- ----------------
Loans secured by real estate:
Construction ........................... $ 33,850,960 $ 28,786,688
Single-family residential .............. 186,216,002 180,301,590
Commercial ............................. 57,221,618 51,628,480
Other .................................. 4,579,022 5,839,090
Commercial ............................. 41,850,966 36,330,439
Consumer ............................... 28,630,156 26,934,399
Agricultural ........................... 3,335,116 2,669,149
Other .................................. 2,566,365 2,390,266
------------- ------------
358,250,205 334,880,101
Allowance for possible loan losses ..... (4,144,752) (4,138,816)
------------- ------------
$ 354,105,453 $330,741,285
============= ============
There were no loans designated as held for sale at December 31, 1997 and
1996.
The Company offers loans to its officers, directors, and employees for the
financing of their personal residences and for other personal purposes. These
loans are made in the ordinary course of business and are made on substantially
the same terms prevailing at the time as comparable transactions with other
persons. Management does not believe these loans involve more than the normal
risk of collectibility or present other unfavorable features.
F-13
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES -- (Continued)
The following is a reconciliation of aggregate loans outstanding to
executive officers, directors, and their immediate families for the year ended
December 31, 1997:
Balance at beginning of year ..... $ 1,641,214
New loans ........................ 800,000
Principal repayments ............. (294,183)
-----------
Balance at end of year ........... $ 2,147,031
===========
A summary of the allowance for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
-------------- ------------- -------------
Balance at beginning of year ...... $ 4,138,816 $4,077,691 $3,785,930
Allowance acquired in acquisition . -- 116,765 --
Provision for possible loan losses 360,000 360,000 360,000
Charge-offs ....................... (848,275) (595,288) (152,513)
Recoveries ........................ 494,211 179,648 84,274
----------- ---------- ----------
Balance at end of year ............ $ 4,144,752 $4,138,816 $4,077,691
=========== ========== ==========
At December 31, 1997 and 1996, the Company had no nonaccrual loans. In
addition, at and during the years ended December 31, 1997 and 1996, the Company
had no impaired loans as defined by SFAS No. 114. Accruing loans ninety or more
days past due totaled $-0- and $85,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996 the Company was servicing loans for others
amounting to $47,936,000 and $46,257,000, respectively. Servicing loans for
others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes service fees
from investors and certain charges collected from borrowers, such as late fees
(see note 15).
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS No. 125"). Among other provisions, SFAS No. 125 provides
accounting standards for contractually specified servicing fees. Servicing
rights were previously accounted for under the provisions of SFAS No. 122,
"Accounting for Mortgage Servicing Rights". There were no capitalized servicing
rights material to the consolidated financial statements at either December 31,
1997 or 1996.
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are as follows:
1997 1996
--------------- ---------------
Land .............................. $ 6,069,565 $ 5,114,063
Building and improvements ......... 16,746,236 16,023,395
Furniture and equipment ........... 5,704,251 6,064,833
------------ ------------
28,520,052 27,202,291
Less accumulated depreciation ..... (7,613,959) (7,359,214)
------------ ------------
Premises and equipment, net ....... $ 20,906,093 $ 19,843,077
============ ============
(6) DEPOSITS
At December 31, 1997 and 1996, time deposits of $100,000 or more amounted
to approximately $49,903,000 and $47,353,000, respectively. For the years ended
December 31, 1997, 1996 and 1995 interest expense on time deposits of $100,000
or more amounted to approximately $2,596,000, $2,304,000 and $1,444,000,
respectively.
F-14
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(6) DEPOSITS -- (Continued)
Time deposit accounts as of December 31, 1997, mature in the following
years and approximate amounts: 1998 - $215,169,000; 1999 - $28,836,000; 2000 -
$20,140,000; and thereafter - $762,000.
(7) SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1997 and 1996 consist of the
following:
1997 1996
-------------- -------------
Securities sold under agreements to repurchase ..... $ 7,632,000 $3,995,000
Treasury tax and loan deposits -- note option ...... 3,419,315 1,979,642
------------ ----------
$11,051,315 $5,974,642
=========== ==========
Information concerning securities sold under agreements to repurchase is
summarized as follows:
Average rate during year .................. 3.86% 3.53%
Average balance during year ............... $ 4,741,000 $3,827,000
Maximum month-end balance during year ..... $ 7,632,000 $4,111,000
These borrowings have maturities of less than 90 days. Securities sold
under agreements to repurchase represent transactions whereby the Company sells
investment securities to certain of its commercial customers on an overnight
basis and repurchases such securities the next day.
(8) INCOME TAXES
The components of income taxes for the years ended December 31, 1997, 1996
and 1995 are as follows:
1997 1996 1995
-------------- ------------- -------------
Current:
Federal ......... $ 4,399,708 $3,374,644 $3,201,216
State ........... 345,292 237,700 420,362
----------- ---------- ----------
4,745,000 3,612,344 3,621,578
----------- ---------- ----------
Deferred:
Federal ......... (139,382) (197,950) (367,800)
State ........... (23,795) 72,539 --
----------- ---------- ----------
(163,177) (125,411) (367,800)
----------- ---------- ----------
$ 4,581,823 $3,486,933 $3,253,778
=========== ========== ==========
The reconciliation of expected income tax expense at the statutory federal
rate with income tax expense for the years ended December 31, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Expected income tax expense at statutory rate (35%) ..... $ 4,189,311 $3,426,609 $3,241,431
Increase (decrease) in income tax expense resulting from:
State taxes, net ....................................... 208,973 (48,560) 273,235
Tax exempt income ...................................... (25,389) (23,482) (14,328)
Other, net ............................................. 208,928 132,366 (246,560)
----------- ---------- ----------
Income tax expense ..................................... $ 4,581,823 $3,486,933 $3,253,778
=========== ========== ==========
</TABLE>
F-15
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(8) INCOME TAXES -- (Continued)
The deferred tax components at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ........................... $ 1,312,939 $1,259,625
Amortization of intangibles ......................... 102,750 94,305
Deferred compensation ............................... 163,777 121,189
Depreciation ........................................ 54,474 15,522
Other ............................................... 155,525 155,115
----------- ----------
Total gross deferred tax assets ....................... 1,789,465 1,645,756
----------- ----------
Less: Valuation allowance .................... -- --
----------- ----------
Net deferred tax asset ................................ 1,789,465 1,645,756
Deferred tax liabilities:
Premises and equipment .............................. 193,426 194,022
Bond accretion ...................................... 70,309 64,811
Pension costs ....................................... 58,824 83,194
Unrealized gains on available-for-sale securities ... 3,472,529 1,977,874
----------- ----------
Total gross deferred tax liabilities .................. 3,795,088 2,319,901
----------- ----------
Net deferred tax liability ............................ $ 2,005,623 $ 674,145
=========== ==========
</TABLE>
No valuation allowance for deferred tax assets was required at December
31, 1997 or 1996 as management has determined that it is more likely than not
that the net deferred tax asset can be realized. During 1997, the net deferred
tax liability related to unrealized gains on available-for-sale securities
increased approximately $1,152,886 due to 1997 fair value adjustments required
under SFAS 115 for securities available-for-sale and further increased due to
other adjustments totaling $341,769.
(9) EMPLOYEE BENEFIT PLANS
Capital Accumulation Plan
The Company has a profit sharing 401(k) plan (the "Plan") for all full
time employees with at least one year of service, which covers substantially
all employees. Under the Plan, employees may contribute up to an annual maximum
as determined under the Internal Revenue Code, not to exceed 16% of the
participant's compensation. The Company matches 100% of such contributions for
the first three percent of the participant's contributions and 50% of the next
three percent. Further, the Company may make additional contributions on a
discretionary basis. The Plan provides that employees' contributions are 100%
vested at all times and the Company's contributions are 100% vested after five
years of service. The Company incurred $227,427, $196,491 and $166,242 of
expense related to the Plan for the years ended December 31, 1997, 1996 and
1995, respectively.
Pension Plan
The Company has a noncontributory, defined benefit pension plan which
covers substantially all full-time employees. The Company's funding policy is
based on actuarially calculated amounts to fund normal pension cost and any
unfunded accrued liability. The Plan utilizes the projected unit credit
actuarial cost method.
F-16
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) EMPLOYEE BENEFIT PLANS -- (Continued)
Net pension expense for the years ended December 31, 1997, 1996 and 1995
includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- ---------------
<S> <C> <C> <C>
Service cost -- benefits earned during the year ........... $ 167,609 $ 131,738 $ 130,738
Interest cost on projected benefit obligation ............. 343,859 310,667 295,047
Return on assets .......................................... (1,244,808) (496,602) (1,279,949)
Net deferral of actuarial gain ............................ 840,787 123,257 912,783
Net amortization of unrecognized net transition asset ..... (45,613) (55,173) (55,173)
------------ ---------- ------------
Net pension expense .................................... $ 61,834 $ 13,887 $ 3,446
============ ========== ============
</TABLE>
The funded status of the Plan as of December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation:
Vested benefits ........................................ $ 4,225,782 $ 3,715,927
Nonvested benefits ..................................... 125,663 58,409
------------ ------------
Total accumulated benefit obligation .................. 4,351,445 3,774,336
Effect of anticipated salary increases ................. 986,675 812,726
------------ ------------
Projected benefit obligation .............................. 5,338,120 4,587,062
Plan assets, at fair value ................................ (7,296,169) (6,178,798)
------------ ------------
Plan assets in excess of projected benefit obligation ..... 1,958,049 1,591,736
Unrecognized prior service costs .......................... 76,588 86,148
Unrecognized net gain ..................................... (1,457,873) (984,113)
Unrecognized net asset from transition date ............... (257,491) (312,664)
------------ ------------
Prepaid pension expense ............................... $ 319,273 $ 381,107
============ ============
</TABLE>
Actuarial assumptions used to determine the Plan's funded status were as
follows:
1997 1996
---------- ----------
Discount rate .............................. 7.25% 7.25%
Rate of increase in compensation levels .... 4.25% 4.25%
Expected long-term rate of return on assets 8.25% 8.25%
The Plan's investment portfolio consists of approximately 50% equity
securities, 49% fixed income investments, and 1% cash equivalents at December
31, 1997.
Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreements
The Company has in place Employee Death Benefit and Post-Retirement
Non-Competition and Consultation Agreements (the "Agreements") covering two of
its executive officers. The Agreements provide for certain benefits to be paid
to the executive officers upon either their retirement (as defined in the
Agreements) or their death. The Company's accrual for these future benefits was
$420,000 and $310,000 at December 31, 1997 and 1996, respectively.
(10) REGULATORY RESTRICTIONS
The Company is regulated by the Board of Governors of the Federal Reserve
System ("FRB"). The Bank is regulated by the Federal Deposit Insurance
Corporation ("FDIC") and the State of North Carolina Office of the Commissioner
of Banks.
Subject to applicable law, the Boards of Directors of the Company and the
Bank may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Company may depend upon dividend payments by the Bank
F-17
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) REGULATORY RESTRICTIONS -- (Continued)
to the Company. The Bank, as a North Carolina banking corporation, may pay
dividends only out of undivided profits as determined pursuant to North
Carolina General Statutes Section 53-87. However, 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 the financial
soundness of the bank.
Under regulations of the Federal Reserve, banking affiliates are required
to maintain certain average reserve balances which include both cash on hand
and deposits with the Federal Reserve. These deposits are included in cash and
cash equivalents in the accompanying balance sheets. At December 31, 1997 and
1996 the Bank was required to maintain such balances at $5,782,000 and
$4,375,000, respectively.
The Company and the Bank are 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 Company's consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios, as set
forth in the table below. Management believes, as of December 31, 1997, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum amounts and ratios, as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the Bank's category.
The actual capital amounts and ratios for the Company and the Bank are
presented in the table below (dollars in thousands):
<TABLE>
<CAPTION>
Actual To be well
----------------------------------------------- For capitalized
Company Bank capital under prompt
----------------------- ----------------------- adequacy corrective
Amount Ratio Amount Ratio purposes action provisions
----------- ----------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ...... $ 51,122 13.93% $ 48,345 13.55% >=8.00% >=10.00%
Tier 1 Capital (to Risk Weighted Assets) ..... 46,977 12.80 44,200 12.39 >=4.00 >= 6.00
Tier 1 Capital (to Average Adjusted Assets) .. 46,977 8.52 44,200 7.87 >=4.00 >= 5.00
</TABLE>
<TABLE>
<CAPTION>
Actual To be well
----------------------------------------------- For capitalized
Company Bank capital under prompt
----------------------- ----------------------- adequacy corrective
Amount Ratio Amount Ratio purposes action provisions
----------- ----------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) ...... $44,112 13.79% $42,111 13.80% >=8.00% >=10.00%
Tier 1 Capital (to Risk Weighted Assets) ..... 40,113 12.54 37,972 12.44 >=4.00 >= 6.00
Tier 1 Capital (to Average Adjusted Assets) .. 40,113 8.55 37,972 8.21 >=4.00 >= 5.00
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
The Company 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,
lines of credit and standby letters of credit. These instruments involve
elements of credit risk in excess of amounts recognized in the accompanying
consolidated financial statements.
The Company's risk of loss in the event of nonperformance by the other
party to the commitment to extend credit, line of credit or standby letter of
credit is represented by the contractual amount of these instruments. The
Company uses the
F-18
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) COMMITMENTS AND CONTINGENCIES -- (Continued)
same credit policies on the borrower in making commitments under such
instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
As of December 31, 1997 and 1996, outstanding financial instruments whose
contract amounts represent credit risk were as follows:
1997 1996
-------------- --------------
Outstanding commitments to lend, unfunded loans
and lines of credit ............................ $113,927,044 $92,233,410
============ ===========
Standby and commercial letters of credit $ 5,806,858 $ 877,918
============ ===========
The Company's lending is concentrated primarily in eastern and central
North Carolina and the surrounding communities in which it operates. Credit has
been extended to certain of the Company's customers through multiple lending
transactions; however, there is no concentration to any single customer or
industry.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS No. 107), requires the disclosure of
estimated fair values for financial instruments. Quoted market prices, if
available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of
the Company's financial instruments, the fair value of such instruments has
been derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only indicative of
individual financial instruments' values and should not be considered an
indication of the fair value of the Company taken as a whole. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Cash and Due from Banks and Federal Funds Sold
The carrying amounts of cash and due from banks from federal funds sold are
equal to the fair value due to the liquid nature of these financial
instruments.
Investment Securities
Fair values of investment securities are based on quoted market prices. If
a quoted market price is not available, fair value is estimated using
quoted market prices for similar investment securities.
Loans Receivable
Fair values have been estimated by type of loan: residential real estate
loans, consumer loans, and commercial and other loans. For variable-rate
loans that reprice frequently and with no significant credit risk, fair
values are based on carrying values. The fair values of fixed rate loans
are estimated by discounting the future cash flows using the current rates
at which loans with similar terms would be made to borrowers with similar
credit ratings and for the same remaining maturities. The Company has
assigned no fair value to off-balance sheet financial instruments since
they are either short term in nature or subject to immediate repricing.
Deposits
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at year end. Fair value of
certificates of deposit is estimated by discounting the future cash flows
using the current rate offered for similar deposits with the same
maturities.
F-19
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
Short-Term Borrowings
The carrying amounts of short-term borrowings approximate fair values due
to the fact these borrowings mature within 90 days.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest approximates market.
The following table presents information for financial assets and
liabilities as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ................. $ 17,125 $ 17,125 $ 16,516 $ 16,516
Federal funds sold ...................... 33,300 33,300 23,700 23,700
Investment securities available-for-sale 11,809 11,809 8,918 8,918
Investment securities held to maturity .. 132,131 132,289 128,811 129,044
Federal Home Loan Bank of Atlanta stock . 1,803 1,803 1,654 1,654
Accrued interest receivable ............. 4,069 4,069 3,748 3,748
Loans, net .............................. 354,105 353,561 330,741 332,062
--------- -------- -------- --------
Total financial assets ............... $ 554,342 $553,956 $514,088 $515,642
========= ======== ======== ========
Financial liabilities:
Deposits ................................ 505,237 503,848 479,140 477,025
Short-term borrowings ................... 11,051 11,051 5,975 5,975
Accrued interest payable ................ 3,303 3,303 3,136 3,136
--------- -------- -------- --------
Total financial liabilities .......... $ 519,591 $518,202 $488,251 $486,136
========= ======== ======== ========
</TABLE>
(13) PARENT COMPANY FINANCIAL DATA
The Company's principal asset is its investment in The Fidelity Bank.
Condensed financial statements for the parent company as of December 31, 1997
and 1996 and for the three years then ended are as follows (in thousands):
Condensed Balance Sheets
1997 1996
----------- ----------
Cash ................................. $ 141 $ 34
Investments .......................... 11,809 7,900
Investment in wholly-owned subsidiary 50,604 45,273
Other assets ......................... 36 8
-------- -------
Total assets .............................. $ 62,590 $53,215
======== =======
Deferred tax liability ............... 3,473 1,973
Shareholders' equity ................. 59,117 51,242
-------- -------
Total liabilities and stockholders' equity $ 62,590 $53,215
======== =======
F-20
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(13) PARENT COMPANY FINANCIAL DATA -- (Continued)
Condensed Statements of Income
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Dividends from wholly-owned subsdiairy ..................... $ 1,971 $ 965 $ 768
Other dividends ............................................ 100 90 81
Miscellaneous expenses ..................................... (26) (40) (47)
------- ------ ------
Income before equity in undistributed earnings of
wholly-owned subsidiary .............................. 2,045 1,015 802
Equity in undistributed earnings of wholly-owned subsidiary 5,343 5,288 5,205
------- ------ ------
Net income ............................................. $ 7,388 $6,303 $6,007
======= ====== ======
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income ........................................................ $ 7,388 $ 6,303 $ 6,007
Equity in undistributed earnings of wholly-owned subsidiary ....... (5,343) (5,288) (5,205)
Dividend of investment securities from wholly-owned subsidiary .... (1,001) -- --
(Increase) decrease in other assets ............................... (28) 1 37
-------- -------- --------
Net cash provided by operating activities ...................... 1,016 1,016 839
-------- -------- --------
Cash flows from financing activities:
Dividends paid .................................................... (909) (914) (686)
Redemption of common stock ........................................ -- (255) --
-------- -------- --------
Net cash used in financial activities .......................... (909) (1,169) (686)
Net increase (decrease) in cash and cash equivalents ........... 107 (153) 153
Cash and cash equivalents at beginning of year ..................... 34 187 34
-------- -------- --------
Cash and cash equivalents at end of year ........................... $ 141 $ 34 $ 187
======== ======== ========
</TABLE>
(14) RELATED PARTIES
The Company has entered into various service contracts with another bank
holding company and its subsidiary (the "Corporation"). The Corporation has two
significant shareholders, which are also significant shareholders of the
Company. At December 31, 1997, the first significant shareholder beneficially
owned 11,155 shares, or 39.26 percent, of the Company's outstanding common
stock. At the same date, the second significant shareholder beneficially owned
3,123 shares, or 10.99 percent, of the Company's outstanding common stock.
These two significant shareholders are directors and executive officers of
the Corporation and at December 31, 1997, beneficially owned 2,548,519 shares,
or 26.46 percent, and 1,157,052 shares, or 12.01 percent, respectively, of the
Corporation's outstanding Class A common stock, and 632,146 shares, or 36.04
percent, and 190,191 shares, or 10.84 percent, respectively, of the
Corporation's outstanding Class B common stock. The above totals include
258,136 Class A common shares, or 2.68 percent, and 41,825 Class B Common
shares, or 2.38 percent, that are considered to be beneficially owned by both
of the shareholders and, therefore, are included in each of their totals. A
subsidiary of the Corporation is First-Citizens Bank & Trust Company ("FCB").
Data and item processing expenses, including courier services, proof and
encoding, microfilming, check storage, statement rendering and item processing
forms, paid by the Company to the Corporation totaled approximately $1,213,000,
$1,226,000 and $1,012,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Other expenses paid by the Company to the Corporation totaled
approximately $639,000, $392,000 and $329,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The Company also has a correspondent
relationship with the Corporation. Correspondent
F-21
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(14) RELATED PARTIES -- (Continued)
account balances with the Corporation included in cash, due from banks and
federal funds sold totaled $41,253,338 and $30,905,906 at December 31, 1997 and
1996, respectively.
(15) SUBSEQUENT COMPANY EVENTS (UNAUDITED)
During January 1998, the Company sold rights to service $51 million in
mortgage loans to Southern Bank and Trust Company ("SBT"), Mount Olive, North
Carolina, for $522,000 (including accrued interest), resulting in a gain of
$507,456. The two significant shareholders of the Company also are significant
shareholders of Southern BancShares (N.C.), Inc., the parent holding company
for SBT.
The Company has entered into an agreement, subject to regulatory approval,
to buy five branches from FCB. The effect on the Company will be an increase of
approximately $72.6 million in deposits and $35.5 million in assets (including
premises and loans). This transaction is scheduled to be completed October
1998.
The Company has opened six de novo branches subsequent to December 31,
1997.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by BancShares, the Issuer Trust or by the Underwriter. Neither
the delivery of this Prospectus nor any sale made hereunder and thereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of BancShares or the Issuer Trust since the date hereof.
This Prospectus does not constitute an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such offer or solicitation.
Until * , 1998 all dealers effecting transactions in the Capital
Securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus when acting as Underwriters and
with respect to their unsold allotments or subscriptions.
--------------------------------
TABLE OF CONTENTS
Page
---------
Available Information ...................................... 4
Prospectus Summary ......................................... 5
Risk Factors ............................................... 12
Fidelity BancShares (N.C.), Inc. ........................... 18
FIDBANK Capital Trust I .................................... 20
Accounting Treatment ....................................... 20
Use of Proceeds ............................................ 20
Consolidated Ratios of Earnings to Fixed Charges ........... 21
Capitalization ............................................. 22
Selected Consolidated Financial Data ....................... 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 24
Business ................................................... 48
Supervision and Regulation ................................. 51
Beneficial Ownership of Securities ......................... 56
Directors and Executive Officers ........................... 57
Executive Compensation ..................................... 58
Certain Relationships and Related Transactions ............. 59
Description of the Capital Securities ...................... 60
Description of the Junior Subordinated Debentures .......... 71
Description of the Guarantee ............................... 78
Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee ............... 80
Federal Income Tax Consequences ............................ 81
ERISA Considerations ....................................... 84
Underwriting ............................................... 86
Legal Matters .............................................. 87
Experts .................................................... 87
Fidelity BancShares (N.C.), Inc. and Subsidiary
Index to Consolidated Financial Statements .............. F-1
$20,000,000
FIDBANK Capital Trust I
* % Capital Securities
fully and unconditionally guaranteed,
as described herein, by
Fidelity BancShares
(N.C.), Inc.
--------------------------
PROSPECTUS
--------------------------
Wheat First Union
October * , 1998
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the issuance and distribution of
the Securities covered by this Registration Statement, other than underwriting
discounts and commissions, are as follows:
Printing fees and expenses ........... $ 40,000
Legal fees and expenses .............. 75,000
Accounting fees and expenses ......... 75,000
Blue Sky fees and expenses ........... 1,000
Trustees' fees and expenses .......... 7,500
Other (1) ............................ 20,000
--------
Total .............................. $218,500
========
- ---------
(1) Includes Securities and Exchange Commission registration fee of $6,785.
Item 14. Indemnification of Directors and Officers.
Permissible Indemnification. Under the General Corporation Law of the
State of Delaware, Registrant generally may indemnify any person who was or is
a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right
of Registrant), whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director or officer of Registrant,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Registrant
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful.
In the case of an action or suit by or in the right of Registrant to
procure a judgment in its favor, Registrant generally may indemnify any person
who was or is a party, or is threatened to be made a party, to any such
threatened, pending or completed action or suit by reason of the fact that he
is or was a director or officer of Registrant, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
Registrant and, if he shall have been adjudged to be liable to Registrant, only
to the extent the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Mandatory Indemnification. To the extent that a director or officer of
Registrant is successful on the merits or otherwise in defense of any action,
suit or proceeding, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Advance for Expenses. Expenses incurred by a director or officer of
Registrant in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by Registrant in advance of the final
disposition of the action, suit or proceeding upon receipt of an undertaking by
or on behalf of such person to repay amounts advanced if it ultimately is
determined that such person is not entitled to be indemnified by Registrant
against such expenses.
Indemnification by Registrant. Registrant's Bylaws provide for
indemnification of its directors and officers to the fullest extent permitted
by Delaware law and require its Board of Directors to take all actions
necessary and appropriate to authorize such indemnification.
Under Delaware law, Registrant may purchase insurance on behalf of any
person who is or was a director or officer against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not Registrant would have the power to indemnify him
against such liability. Registrant maintains a liability insurance policy
covering its directors and officers.
Item 15. Recent Sales of Unregistered Securities
Registrant has not sold any securities within the past three years.
II-1
<PAGE>
Item 16. Exhibits.
An index of exhibits appears at page II-5 and is incorporated herein by
reference.
Item 17. Undertakings.
Each of the undersigned Registrants hereby undertakes that:
1. The Registrants will provide to the Underwriter at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
2. For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
3. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth in Item 15 hereof, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (the "Commission") such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Fidelity
BancShares (N.C.), Inc., certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-1 and has duly
caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fuquay-Varina, North
Carolina, on October 21, 1998.
FIDELITY BANCSHARES (N.C.), INC.
By: /s/ BILLY T. WOODARD
---------------------------------
Billy T. Woodard
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------- ------------------------------ --------------------
<S> <C> <C>
/s/ BILLY T. WOODARD Chairman, Chief Executive October 21, 1998
- --------------------------------- Officer and Director
Billy T. Woodard (principal executive officer)
/s/ HAYWOOD A. LANE President and Director October 21, 1998
- ---------------------------------
Haywood A. Lane
/s/ F. RAY ALLEN Director October 21, 1998
- ---------------------------------
F. Ray Allen
/s/ WILEY H. COZART, M.D. Director October 21, 1998
- ---------------------------------
Wiley H. Cozart, M.D.
/s/ WALLACE H. MITCHELL Director October 21, 1998
- ---------------------------------
Wallace H. Mitchell
/s/ SAM C. RIDDLE Director October 21, 1998
- ---------------------------------
Sam C. Riddle, Jr.
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, FIDBANK
Capital Trust I certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and has duly caused this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Fuquay-Varina, North Carolina, on
October 21, 1998.
FIDBANK CAPITAL TRUST I
By: FIDELITY BANCSHARES (N.C.), INC.
By: /s/ BILLY T. WOODARD
---------------------------------
Billy T. Woodard
Chairman and Chief Executive Officer
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ------------- ---------------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1 *Form of Underwriting Agreement for Capital Securities
3.1 *BancShares' Certificate of Incorporation
3.2 *BancShares' By-laws
4.1 *Initial Trust Agreement of FIDBANK Capital Trust I, as amended
4.2 *Certificate of Trust of FIDBANK Capital Trust I
4.3 *Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust I
4.4 *Form of Capital Security Certificate for FIDBANK Capital Trust I (included as an Exhibit to
Exhibit 4.3 hereto)
4.5 *Form of Guarantee Agreement
4.6 *Form of Junior Subordinated Indenture between BancShares and Bankers Trust Company, as
Debenture Trustee
4.7 *Form of Junior Subordinated Debenture (included in Section 2.2 of Exhibit 4.6 hereto)
5.1 Opinion of Ward and Smith, P.A., relating to the legality of the Junior Subordinated Debentures and
the Guarantee (filed herewith)
5.2 Opinion of Richards, Layton & Finger, P.A., as to the legality of the Capital Securities (filed
herewith)
8.1 Opinion of Hunton & Williams as to certain federal income tax matters (filed herewith)
10.1 *Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between
Billy T. Woodard and The Fidelity Bank
10.2 *First Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation
Agreement between Billy T. Woodard and The Fidelity Bank
10.3 *Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between
Haywood A. Lane, Jr., and The Fidelity Bank
10.4 *First Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation
Agreement between Haywood A. Lane, Jr., and The Fidelity Bank
10.5 Agreement for Banking Support Services
12.1 *Statement re: computation of ratio of earnings to fixed charges
16.1 *Letter regarding change in certifying accountant
21.1 *List of subsidiaries
23.1 Consent of KPMG Peat Marwick LLP (filed herewith)
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith)
23.3 Consent of Ward and Smith, P.A. (included in Exhibit 5.1 hereto)
23.4 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2 hereto)
23.5 Consent of Hunton & Williams (included in Exhibit 8.1 hereto)
23.6 Consent of White & Case LLP (included as Exhibit A to Exhibit 5.1 hereto)
25.1 *Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of Bankers Trust
Company, as Trustee under the Junior Subordinated Indenture, as Property Trustee under the
Amended and Restated Trust Agreement of FIDBANK Capital Trust I, and as Guarantee Trustee
under the Guarantee for the benefit of holders of Capital Securities of FIDBANK Capital Trust I
27.1 *Financial data schedule
27.2 *Financial data schedule
</TABLE>
- ---------
* Previously filed.
II-4
EXHIBIT 5.1
[Letterhead of Ward and Smith, P.A.]
October 21, 1998
Fidelity BancShares (N.C.), Inc.
100 South Main Street
Fuquay-Varina, North Carolina 27526
RE: Our File 88-1308(O)
Ladies and Gentlemen:
We have acted as counsel to Fidelity BancShares (N.C.), Inc. ("BancShares") in
connection with the preparation of a Registration Statement on Form S-1, as
amended by Amendment No. 1, including the form of Prospectus contained therein
(the "Registration Statement"), which has been filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
for purposes of registering under the Act (i) BancShares' issuance and sale to
FIDBANK Capital Trust I (the "Issuer Trust") of up to $23,000,000 in ___% Junior
Subordinated Debentures (the "Junior Subordinated Debentures") pursuant to the
terms of a certain Junior Subordinated Indenture proposed to be entered into by
and between BancShares and Bankers Trust Company, as Trustee thereunder, in the
form filed as Exhibit 4.6 to the Registration Statement (the "Junior
Subordinated Indenture"), (ii) the issuance and sale by the Issuer Trust of up
to $23,000,000 aggregate liquidation amount of ___% Capital Securities (the
"Capital Securities"), and (iii) the issuance by BancShares of its guarantee of
the Capital Securities pursuant to and to the extent provided in a certain
Guarantee Agreement proposed to be entered into by and between BancShares and
Bankers Trust Company, as Guarantee Trustee thereunder, in the form filed as
Exhibit 4.5 to the Registration Statement (the "Guarantee Agreement").
In connection with rendering the opinions set forth in this letter, we have
examined or relied upon copies of the following documents:
1. the Registration Statement and the Prospectus contained therein;
2. the form of Junior Subordinated Indenture filed as Exhibit 4.6 to
the Registration Statement;
3. the form of Junior Subordinated Debentures contained as an exhibit
to the Junior Subordinated Indenture; and
4. the form of Guarantee Agreement filed as Exhibit 4.5 to the
Registration Statement.
In rendering the opinions set forth in this letter, we have also examined the
minutes of proceedings of BancShares' Board of Directors and such certificates
of public officials, records and other certificates and instruments as we have
deemed necessary for the purposes of the opinions expressed herein.
In delivering this letter, we have assumed (i) the authenticity of all documents
submitted to us as originals and the conformity to the original or certified
copies of all documents submitted to us as conformed or reproduction copies,
(ii) that the minutes of proceedings of BancShares Board of Directors are
accurate and complete and contain minutes of all actions pertaining to the
Junior Subordinated Indenture, the Junior Subordinated Debentures, the Guarantee
Agreement, and the transactions described therein, (iii) that the final,
executed versions of all relevant documents, including the Junior Subordinated
Indenture, the Junior Subordinated Debentures and the Guarantee Agreement, will
be identical in all material respects to the versions reviewed by us, and (iv)
that the Junior Subordinated Debentures will be issued and sold on the terms
described in the Junior Subordinated Indenture and the Registration Statement.
Based upon and subject to the foregoing, as well as the qualifications set forth
in subsequent portions of this letter, we are of the opinion as of this date
that, (i) when the Registration Statement has become effective, and upon
compliance with the pertinent provisions of the Act and the Trust Indenture Act
of 1939, as amended, and compliance with the securities or "blue sky" laws of
various jurisdictions in which the Capital Securities will be offered or sold,
(ii) when the Junior Subordinated Indenture and the Guarantee Agreement have
been properly executed and delivered by BancShares and by the Trustee and the
Guarantee Trustee, respectively, and (iii) when the Junior Subordinated
Debentures have been executed, authenticated and delivered in accordance with
the terms of the Junior Subordinated Indenture, then the Junior Subordinated
Debentures and the Guarantee Agreement will be valid, binding and legal
obligations of BancShares.
In rendering the opinions set forth above, we have assumed, without
independent verification, that
1. The parties to the Junior Subordinated Indenture, the Guarantee Agreement
and the Junior Subordinated Debentures have the corporate power and
authority to execute, deliver and perform their respective obligations
thereunder;
2. No event will take place subsequent to the date hereof that would cause
any action taken in connection with the Junior Subordinated Indenture, the
Junior Subordinated Debentures, the Guarantee Agreement, or the
transactions described therein to fail to comply with any law, rule,
regulation, order, judgment, decree or duty, or that would permit any
party to cancel, rescind, or otherwise avoid any act;
3. All certificates of public officials have been properly given and are
accurate and complete;
4. There has been no mutual mistake of fact, fraud, duress or undue influence
in connection with the Junior Subordinated Indenture, the Junior
Subordinated Debentures, the Guarantee Agreement, or the transactions
described therein, and the conduct of the parties to such documents has
complied with any requirement of good faith, fair dealing and
conscionability;
5. There are no agreements or understandings, or any usage of trade or course
of dealing, among the parties that, in any case, would define, supplement
or qualify the terms of the Junior Subordinated Indenture, the Junior
Subordinated Debentures, the Guarantee Agreement, or the transactions
described therein.
In addition, all opinions and statements set forth in this letter are expressly
limited and qualified as follows:
(1) The opinions expressed herein are limited to matters of North Carolina
law, New York law and the federal laws of the United States of America. We
point out that the Junior Subordinated Indenture, the Junior Subordinated
Debentures and the Guarantee Agreement are governed by New York law. As to
matters of New York law, we have relied exclusively on the opinion of
White & Case LLP addressed to us and attached hereto as Exhibit A.
(2) Our opinions are limited to the matters expressly stated herein, and no
opinion may be inferred or implied beyond the matters expressly stated.
(3) The enforceability of all or various provisions of the Junior Subordinated
Indenture, the Junior Subordinated Debentures and the Guarantee Agreement
may be limited by (i) the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect
relating to or limiting the enforcement of creditors' rights generally,
(ii) general principles of equity and applicable laws or court decisions
limiting the availability of specific performance, injunctive relief and
other equitable remedies, and (iii) federal and/or state bank holding
company, commercial bank, savings bank, thrift institution and deposit
insurance laws and regulations, and the application of principles of
public policy underlying such laws and regulations.
(4) We express no opinion herein as to the enforceability of any choice of law
or indemnification provisions contained in the Junior Subordinated
Indenture, the Junior Subordinated Debentures or the Guarantee
Agreement.
(5) Except as otherwise expressly specified herein, the opinions herein are
limited to matters in existence as of the date hereof, and we undertake no
responsibility to revise or supplement this letter or the opinions herein
to reflect any change in the law or facts.
We consent to the filing of this opinion as an exhibit to the Registration
Statement. We also consent to the reference to Ward and Smith, P.A. under the
caption "Legal Matters" in the Registration Statement.
Yours truly,
/s/ WARD AND SMITH, P.A.
<PAGE>
EXHIBIT A
[Letterhead of White & Case LLP]
October 21, 1998
Ward and Smith, P.A.
Suite 2400
Two Hanover Square
Fayetteville Street Mall
Raleigh, NC 27602
Re: FIDBANK Capital Trust I
- ----------------------------
Ladies and Gentlemen:
We have acted as special counsel to Bankers Trust Company, a New York
banking corporation (the "Trust Company") in connection with (i) the Junior
Subordinated Indenture, (the "Indenture"), to be entered into between Fidelity
Bancshares (N.C.), Inc. (the "Company") and the Trust Company, not in its
individual capacity, but solely as trustee (the "Indenture Trustee"), and (ii)
the Guarantee Agreement, (the "Guarantee Agreement"), to be entered into between
the Company and the Trust Company, not in its individual capacity, but solely as
trustee (the "Guarantee Trustee").
In this connection, we have examined the form of the Guarantee Agreement
and the form of the Indenture, each filed as an Exhibit to the Registration
Statement described hereinafter. We have also examined such certificates of
public officials, such certificates of officers of the Trust Company, and copies
certified to our satisfaction of such corporate documents and records of the
Trust Company, and of such other papers, as we have deemed relevant and
necessary for our opinion hereinafter set forth. We have relied upon such
certificates of public officials and of officers of the Trust Company with
respect to the accuracy of material factual matters contained therein which were
not independently established. In rendering the opinion expressed below, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all documents submitted to us as certified, conformed or photostatic copies.
<PAGE>
WHITE & CASE LLP
Page 2
Based upon the foregoing and subject to the assumptions, exceptions and
qualifications set forth below, it is our opinion that:
When the Indenture and the Guarantee Agreement have been properly
authorized, executed and delivered by the Company and by the Indenture Trustee
and the Guarantee Trustee, respectively, and when the Junior Subordinated
Debentures have been executed, authenticated and delivered in accordance with
the terms of the Indenture and the Company shall have received valid
consideration therefor, then the Junior Subordinated Debentures and the
Guarantee Agreement will be valid, binding and legal obligations of the Company
under the laws of the State of New York.
The foregoing opinions are subject to the following assumptions, exceptions
and qualifications:
A. We do not express or purport to express any opinion with respect to
laws other than the laws of the State of New York, and the Federal laws of the
United States (except that we express no opinion with respect to (i) state
securities or blue sky laws and (ii) federal securities laws, including without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the Trust Indenture Act of 1939, as amended, and the
Investment Company Act of 1940, as amended) and we have not considered and
express no opinion on the laws, rules or regulations of any other jurisdiction.
B. We have assumed that the Company has the power and authority to
execute, deliver and perform each such document.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. We also
consent to the reference to White & Case LLP under the caption "Legal Matters"
in the Registration Statement.
Very truly yours,
/s/ White & Case LLP
EXHIBIT 5.2
[Letterhead of Richards, Layton & Finger, P.A.]
October 21, 1998
FIDBANK Capital Trust I
c/o Fidelity BancShares (N.C.), Inc.
100 South Main Street
Fuquay-Varina, North Carolina 27526
Re: FIDBANK Capital Trust I
Ladies and Gentlemen:
We have acted as special Delaware counsel for Fidelity BancShares
(N.C.), Inc., a Delaware corporation (the "Company"), and FIDBANK Capital Trust
I, a Delaware business trust (the "Trust"), in connection with the matters set
forth herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust, dated July 14, 1998 (the
"Certificate"), as filed in the office of the Secretary of State of the State of
Delaware (the "Secretary of State") on July 14, 1998;
(b) The Trust Agreement of the Trust, dated as of July 14, 1998 (the
"Original Trust Agreement"), by and between the Company, as depositor, and the
trustee of the Trust named therein;
(c) Amendment No. 1 to the Original Trust Agreement, dated as of
July 21, 1998, by and between the Company, as depositor, and the trustee of the
Trust named therein;
(d) A form of Amended and Restated Trust Agreement of the Trust
(including Exhibits A, C and D thereto) (the "Trust Agreement"), to be entered
into among the Company, as depositor, the trustees of the Trust named therein,
the administrators named therein and the holders, from time to time, of
undivided beneficial interests in the assets of the Trust, attached as an
exhibit to the Registration Statement;
(e) Amendment No. 1 to the Registration Statement on Form S-1 (the
"Registration Statement"), including a preliminary prospectus (the
"Prospectus"), relating to the ___% Capital Securities of the Trust representing
undivided beneficial interests in the assets of the Trust (each, a "Capital
Security" and collectively, the "Capital Securities"), as proposed to be filed
by the Company and the Trust with the Securities and Exchange Commission on or
about October 21, 1998; and
(f) A Certificate of Good Standing for the Trust, dated October 21,
1998, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined
are used as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents
other than the documents listed in paragraphs (a) through (f) above. In
particular, we have not reviewed any document (other than the documents listed
in paragraphs (a) through (f) above) that is referred to in or incorporated by
reference into the documents reviewed by us. We have assumed that there exists
no provision in any document that we have not reviewed that is inconsistent with
the opinions stated herein. We have conducted no independent factual
investigation of our own but rather have relied solely upon the foregoing
documents, the statements and information set forth therein and the additional
matters recited or assumed herein, all of which we have assumed to be true,
complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i)
the authenticity of all documents submitted to us as authentic originals, (ii)
the conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust
Agreement constitutes the entire agreement among the parties thereto with
respect to the subject matter thereof, including with respect to the creation,
operation and termination of the Trust, and that the Trust Agreement and the
Certificate are in full force and effect and have not been amended, (ii) except
to the extent provided in paragraph 1 below, the due creation or due
organization or due formation, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, organization or formation, (iii) the legal
capacity of natural persons who are parties to the documents examined by us,
(iv) that each of the parties to the documents examined by us has the power and
authority to execute and deliver, and to perform its obligations under, such
documents, (v) the due authorization, execution and delivery by all parties
thereto of all documents examined by us, (vi) the receipt by each Person to whom
a Capital Security is to be issued by the Trust (collectively, the "Capital
Security Holders") of a Capital Securities Certificate, in accordance with the
Trust Agreement, and as described in the Registration Statement, and (vii) that
the Capital Securities are issued to the Capital Security Holders in accordance
with the Trust Agreement, and as described in the Registration Statement. We
have not participated in the preparation of the Registration Statement and
assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware
(excluding the securities laws of the State of Delaware), and we have not
considered and express no opinion on the laws of any other jurisdiction,
including federal laws and rules and regulations relating thereto. Our opinions
are rendered only with respect to Delaware laws and rules, regulations and
orders thereunder that are currently in effect.
Based upon the foregoing, and upon our examination of such questions
of law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act.
2. The Capital Securities will represent valid and, subject to the
qualifications set forth in paragraph 3 below, fully paid and nonassessable
undivided beneficial interests in the assets of the Trust.
3. The Capital Security Holders, as beneficial owners of the Trust,
will be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Capital Security
Holders may be obligated to make payments as set forth in the Trust Agreement.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Richards, Layton & Finger, P.A.
[Letterhead of Hunton & Williams]
October 20, 1998
Fidelity BancShares (N.C.), Inc.
100 South Main Street
Fuquay-Varina, North Carolina 27526
FIDBANK CAPITAL TRUST I
FEDERAL INCOME TAX MATTERS
--------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Fidelity
BancShares (N.C.), Inc. (the "Company") in connection with the preparation of a
Registration Statement on Form S-1 (the "Registration Statement"), which has
been filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), for the registration under the Act of (1) up to
$23 million aggregate principal amount of Junior Subordinated Deferrable
Interest Debentures (the "Junior Subordinated Debentures") to be issued by the
Company to FIDBANK Capital Trust I, (2) up to 2,300,000 Capital Securities
(liquidation amount $10 per Capital Security) to be issued by FIDBANK Capital
Trust I, and (3) the Company's Guarantee of Capital Securities. The Junior
Subordinated Debentures will be issued pursuant to an indenture between the
Company and the trustee named therein, and the Capital Securities will be issued
pursuant to an amended and restated trust agreement between the Company and the
trustees named therein.
We have reviewed copies of (1) the Registration
Statement and the prospectus included therein (the "Prospectus") and (2) such
other documents as we have deemed necessary or appropriate as a basis for the
opinion set forth below. We have also relied upon, and assumed the accuracy of,
certain written representations made to us by the Company. We have further
assumed (i) that all documents submitted to us as originals are authentic, (ii)
with respect to all documents supplied to us as drafts, that the final, executed
versions of such documents are identical in all material respects to the
versions most recently supplied to us, (iii) that each such final version (when
executed) is valid and enforceable in accordance with its terms, and (iv) that
the Capital Securities will be sold at the offering price stated on the cover of
the Prospectus.
<PAGE>
Fidelity BancShares (N.C.), Inc.
October 20, 1998
Page 2
Based on the foregoing, we confirm that the statements
of law and legal conclusions contained in the Prospectus under the caption
"Federal Income Tax Consequences" constitute our opinion, subject to the
assumptions, conditions, and limitations described therein, and that the
discussion thereunder does not omit any material provision with respect to the
matters covered.
Our representation of the Company in connection with the
Capital Securities is limited solely to that of special tax counsel and, except
for our opinion as to certain federal income tax matters as set forth in the
preceding paragraph, we express no opinion on any tax or other legal matter. We
do not undertake to advise you of any changes in our opinion expressed herein
(or under the heading "Federal Income Tax Consequences" in the Prospectus)
resulting from matters that might hereafter arise or be brought to our
attention.
We consent to the filing of this opinion as an exhibit
to the Registration Statement. We also consent to the reference to Hunton &
Williams under the captions "Federal Income Tax Consequences" and "Legal
Matters" in the Prospectus. In giving this consent, we do not admit that we are
in the category of persons whose consent is required by Section 7 of the Act or
the rules and regulations promulgated thereunder by the Securities and Exchange
Commission.
Very truly yours,
/s/ HUNTON & WILLIAMS
AGREEMENT FOR BANKING SUPPORT SERVICES
This Agreement for Banking Support Services is made and entered into as of the
1st day of January, 1994, by and between First-Citizens Bank & Trust Company, a
North Carolina banking corporation ("FCB"), and The Fidelity Bank, a banking
corporation incorporated under the laws of North Carolina (the "Client").
In support of its own banking operations, FCB has developed the staff,
resources, organization, and technology required to deliver a broad variety of
banking products and services to FCB's customers. The organization created by
FCB now has the expertise, technology, and excess capacity to provide banking
and support services and other related banking products and services to other
financial institutions. The processes, programs, products and services to be
provided under this Agreement are referred to collectively as the "services."
The Client, recognizing the benefits it can derive by subscribing to various
services offered by FCB, desires to utilize and avail itself of the expertise,
technology, and excess capacity of FCB. For and in consideration of the terms
and conditions contained in this Agreement, and for other good and valuable
consideration, FCB and the Client agree as follows:
1. The parties intend for this Agreement to be a "master" agreement. This
Agreement identifies the overall framework within which FCB will offer
various services from time to time to the Client. This Agreement is not
exclusive, however, and the parties may enter into various other
agreements outside the scope of this Agreement. The nature, scope and cost
of specific services to which the Client may subscribe pursuant to this
Agreement will be identified on one or more forms entitled "Specific
Services Schedule", an example of which is attached to this Agreement and
incorporated herein by reference. The nature and scope of the services to
be provided by FCB, and the terms and conditions under which the services
will be provided, may therefore be modified from time to time by the
parties by the execution of new or amended Specific Services Schedules
executed by FCB and the Client. The purpose of this arrangement is to
insure flexibility for the delivery of specific services under the
"umbrella" of this master agreement. Each Specific Services Schedule duly
executed by both parties shall become a part of this Agreement.
2. By way of example, but not by way of limitation, FCB may offer the Client
some or all of the following bank-related services: accounting, internal
auditing, administrative, personnel administration (including payroll
services and benefits administration), check processing, courier, data
processing, loan servicing, shared research and development for products
and services, marketing, and education and training. FCB may also license
or sell the Client the right to use certain other products and services
offered by FCB to its customers which fall outside the scope of this
Agreement. The foregoing list is not intended to be a comprehensive list
of all of the various services which may be offered from time to time by
FCB on a subscription basis.
3. The Client agrees to pay FCB for all services rendered by FCB under this
Agreement. Invoices shall be due and payable upon presentation. The
initial fees, rates and charges for the services to be provided by FCB
(collectively, the "fees"), shall be as set forth on the Specific Services
Schedule applicable to such services. The fees (including those "standard
rates" adopted by FCB) may be increased or decreased by FCB from time to
time, provided:
<PAGE>
A. FCB may not increase fees more frequently than annually;
B. No annual fee increase shall be greater than five percent
(compounded annually), but the Client agrees to negotiate in good
faith with respect to fee increases in excess of five percent
requested by FCB necessary to cover the costs of providing the
service or services in question; and
C. FCB may pass on to the Client any increased "pass-through" charges
or fees.
In addition to the fees charged by FCB, FCB shall be entitled to recover
its reasonable out-of-pocket expenses. Any increase in fees shall become
effective only after FCB gives the Client at least 45 days prior written
notice of the increase. All such fees shall be determined in an "arms
length" manner. In determining its pricing structure, FCB will
periodically conduct surveys of the marketplace to insure that the fees
are reasonable in light of the nature, extent, and quality of the services
to be delivered according to this Agreement and competitive in the
marketplace. The Client acknowledges that it is not a "captive" customer.
When goods and services are offered by FCB, the Client shall conduct its
own market survey to determine whether the nature, extent, quality and
price of the services offered by FCB are satisfactory to the Client.
4. In order to deliver the services contemplated by this Agreement, FCB may
require from the Client access to or delivery of various information,
data, records, materials, commercial banking items, and policies and
procedures (collectively referred to in this Agreement as the "input
data"). The Client will prepare and process input data with reasonable
care in a manner acceptable to FCB and in a manner commercially reasonable
given the range of services to be provided by FCB. The Client will deliver
input data to the place designated by FCB for processing in a timely
manner according to the timetable prescribed from time to time by FCB. In
addition, the Client will furnish all necessary records and materials
reasonably required by FCB to provide the services contemplated by this
Agreement, even though such records and materials are not specifically
identified in this Agreement.
5. All deliveries and pick ups from FCB shall be the responsibility of the
Client and shall be accomplished at the Client's expense. If the receipt
of input data from the Client by FCB is delayed, FCB will use its best
efforts to reschedule and process the work and perform its services as
promptly as it reasonably can, but both parties understand and acknowledge
that completion time may be delayed. If the Client's input data is not
received in a timely manner or in a form reasonably acceptable to FCB,
additional costs may be incurred by FCB to provide the services
contemplated by this Agreement within commercially acceptable time limits.
The Client will be responsible for the payment of any such additional
costs. All deliveries to FCB will be made at the time, place, and in the
form prescribed by FCB.
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<PAGE>
6. FCB may impose additional charges for any changes in the input data,
output data or any computational procedures which may be requested by the
Client after FCB has begun performing the services contemplated by this
Agreement. Such charges shall be based on FCB's then prevailing standard
rates for personnel and/or machine time occasioned by such changes. If
additional personnel or machine time is required as a result of these
changes, FCB reserves the right to extend delivery dates. FCB will use its
best efforts to reschedule and process the work and perform its services
as promptly as it reasonably can.
7. FCB is authorized to make minor corrections or minor adjustments to input
data when an original source document may be in error or incomplete.
Unless in the judgment of FCB the volume of minor corrections and
adjustments becomes burdensome, FCB will make no charge for minor
corrections or adjustments. If the volume becomes burdensome, FCB may
notify the Client of its intention to impose charges for such additional
work at the then prevailing standard rate charged by FCB for personnel
and/or machine time.
8. In the delivery of the services contemplated by this Agreement, FCB will
use the personnel, facilities, equipment and machines selected by it. FCB
will make reasonable efforts to deliver the services with the same care
and in substantially the same manner as used by it in connection with the
delivery of its own banking services. FCB assumes no liability or
responsibility for any errors or omissions in the delivery of the services
contemplated by this Agreement except those which may arise out of FCB's
gross negligence or bad faith. FCB's liability to the Client arising out
of this Agreement shall not exceed the damages or losses directly
sustained by the Client as a consequence of FCB's gross negligence or bad
faith. FCB shall not be liable for indirect, punitive, special or
consequential damages, nor shall FCB be liable to the Client or any other
person because of failure to perform or delay in performance of the
services provided by FCB pursuant to this Agreement when such failure or
delay is caused by: (a) an event or circumstance within the control of the
Client, or (b) an event or circumstance beyond the control of FCB,
including, but not limited to, any of the following events: fire; flood;
explosion; other catastrophe; legal acts of public authorities; strikes;
riots; war; civil insurrection; acts of terrorism; or the failure of
communications, power supply, or mechanical difficulties with any
equipment which could not be reasonably anticipated and prevented. In the
event of any emergency, the internal operational needs of FCB will take
priority over the Client's needs. FCB agrees to maintain adequate backup
procedures in the event of a computer system failure.
9. Significant delays beyond the control of either party may occur in the
delivery of the services contemplated by this agreement. When delays
occur, it may be necessary to prioritize the Client's work based upon the
Client's needs. When possible, FCB will consult with the Client to
prioritize the delivery of the services. If the parties cannot consult
regarding the prioritization of the Client's needs, FCB may rely upon any
written
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<PAGE>
prioritization supplied to FCB by the Client or, in the absence of a
written prioritization, its own best judgment.
10. The parties anticipate that the services which will be provided to the
Client by FCB will include a variety of data processing services. The
nature and extent of those services will be as set forth in the Specific
Services Schedules approved by the parties. The purpose of this Section 10
is to address a variety of general issues relating specifically to data
processing services. All data processing services provided by FCB shall be
subject to the terms and provisions of this Section 10 in addition to the
other sections of this Agreement and to the Specific Services Schedules
executed by the parties. If a conflict arises between the terms of this
Agreement and the language of a Specific Services Schedule, the terms and
provisions of the Specific Services Schedule shall control.
A. Applications to be processed will be as set forth in the Specific
Services Schedules. In providing data processing services, FCB will
apply daily accrual calculations. Data will be processed and reports
generated on a daily basis, excluding weekends and holidays. The
Client will provide FCB with a list of its banking holidays. FCB
will generate for the Client the same types of reports that FCB
generates for its own use when it processes its own data. FCB will
provide to the Client any special forms which FCB may require from
time to time in connection with data processing services. FCB may
charge Client for any forms supplied to Client in bulk at the then
prevailing standard rate charged by FCB.
B. Other provisions of this Agreement and the Specific Services
Schedules address the payment of fees, rates and charges for
services to be provided by FCB. In addition to the fees charged by
FCB, FCB shall be entitled to recover its reasonable out-of- pocket
expenses. Any costs of conversion and the time frame for conversion
shall be as specified in the Specific Services Schedule or as
otherwise may be agreed between the parties. Costs for satisfying
special management requests, audit needs, regulatory requirements
and mergers and acquisitions shall be negotiated on a case by case
basis and shall be billed at the then prevailing standard rate
changed by FCB. FCB shall own any special software developed for
Client to process its applications, and FCB may use such special
software for the benefit of its other clients, and may license
and/or sell such software as it deems appropriate.
C. Unless otherwise provided in the Specific Services Schedule, the
operating hours for online communications networks to Client's
branches shall be from 8:00 a.m. until 7:00 p.m. on a daily basis,
weekends and holidays excluded. The operating hours for online
communication networks for the ATM system, however, shall be 7 days
per week, 24 hours per day. While the ATM system is encrypted, other
communications networks are not presently encrypted. In order to
provide security to the system, FCB utilizes "RACF" user sign-on,
with various password levels authorized to individual users. This
method assures that an individual cannot obtain access to certain
information within the data processing system without
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<PAGE>
having been properly authorized and without utilizing his or her
unique password to access the information.
D. FCB shall, at all times during the term of this Agreement, make
available to the Client data processing emergency kits as well as
FCB's backup data processing site in Raleigh, North Carolina.
E. If so designated in a Specific Services Schedule, FCB will be
responsible for capturing and processing Client's FED (or "cash")
letter.
F. The Internal Audit Department of FCB will not be responsible for
conducting servicer audits with FCB staff. FCB will, however,
annually contract for and provide copies to the Client of a third
party CPA review of the data processing services provided. The cost
of this review shall be passed on to the data processing clients of
FCB on a pro-rata basis based upon asset size. FCB shall use its
best efforts in good faith to minimize the cost of this review.
G. FCB maintains an effective disaster recovery/contingency plan, a
copy of which shall be delivered to Client upon Client's request. In
connection with its disaster recovery/contingency plan, FCB has
established and shall maintain adequate backup arrangements for all
data processing functions to which the Client subscribes. The
details of all backup arrangements shall be made available to Client
upon Client's request.
H. FCB shall not be responsible for, nor liable for, any source
documents while in transit to or from FCB's service center. FCB
maintains and shall continue to maintain reasonable and adequate
insurance for fidelity, fire, liability and data losses from error
and omissions. Details of FCB's insurance protection shall be
provided to Client at Client's request.
I. Upon termination of any data processing services, computer programs
and related documentation shall remain the property of FCB. FCB
shall provide to the Client, however, at the Client's expense the
Client's master and transaction data files in machine-readable
format within adequate time to convert in an orderly and timely
manner. The fees for providing the master and transaction data files
in machine- readable format shall be in accordance with FCB's then
prevailing standard rates, plus out-of-pocket expenses. In the event
of the termination of any specific data processing services, the
parties agree to provide for the orderly and timely conversion from
FCB to the Client or another servicer selected by the Client.
J. FCB will provide notification to Client of all systems changes that
may affect Client's procedures, reports, and operations. Whenever
possible, this notification shall be given at least 45 days prior to
the time the change will become effective.
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K. Customer will give FCB prompt notice of any program changes required
by federal or state regulations or required to consummate planned
mergers and acquisitions. FCB will make every reasonable effort to
effect program changes in a timely manner to insure regulatory
compliance and to accommodate Client's anticipated acquisitions and
mergers.
L. Unless a Specific Services Schedule provides to the contrary, FCB
will provide any training and documentation required by Client's
personnel prior to the time of data services conversion without
additional charge (other than out-of-pocket expenses). After
conversion, subsequent training shall be performed at Client's
request at the then prevailing standard rates charged by FCB for
such training, plus out-of-pocket expenses. Training may be
addressed in a specific services schedule.
M. FCB shall establish a "user's group." If Client subscribes to data
processing services with FCB, Client will be invited to participate,
at its expense, in the user's group.
N. Nothing in this Agreement limits the ability of any regulator to
arrange for an orderly and reasonable conversion of data to another
vendor, or to a receiver in the event of a receivership. FCB shall
be entitled, however, to compensation for the conversion work
performed at its then prevailing standard rate, plus out-of-pocket
expenses.
11. In the performance of its obligations under this Agreement, FCB will hold
in strict confidence all information to which it may become privy
regarding the accounts and affairs of the Client and its customers, except
to the extent disclosure to federal or state regulatory agencies is
permitted or required by applicable law or regulation, and except as
otherwise required by applicable law or regulation. Similarly, in the
receipt of services and the performance of its obligations under this
Agreement, the Client will hold in strict confidence all information to
which it may become privy regarding the accounts, systems, technology,
services, processes, products and affairs of FCB and its customers, except
to the extent disclosure to federal or state regulatory agencies is
permitted or required by applicable law or regulation, and except as
otherwise required by applicable law or regulation.
12. The parties recognize that the performance of the services contemplated by
this Agreement may be subject to regulation, audit, and examination by
various regulatory authorities to the same extent as if the services were
being performed by the Client itself on its own premises. The Client
authorizes FCB to furnish, when requested, any information requested by
the Federal Deposit Insurance Corporation or any other regulatory
authority, agency, or commission having jurisdiction over the FCB or the
Client (including the state Banking Commission). Any additional work
performed by FCB or information provided by FCB shall be paid for by the
Client at FCB's then prevailing standard rates.
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13. Services provided under this Agreement may be audited by the internal
audit staff of FCB and by the certified public accounting firm regularly
employed by FCB to perform its annual audits. The Client may annually
audit FCB with respect to the services provided under this Agreement.
14. FCB will provide the Client with FCB's annual financial statement and such
other financial information as may be required by any regulatory agency
having jurisdiction over the Client or FCB.
15. In the delivery of the services contemplated by this Agreement, FCB is an
independent contractor and not the agent of the Client. The Client agrees
to indemnify FCB and hold it harmless from any loss, cost or damage
(including attorneys fees and court costs, if any) which FCB may suffer or
be liable for by virtue of this Agreement unless the loss, cost or damage
arises from FCB's bad faith or gross negligence without contributory
negligence on the part of the Client or any other person, firm, or
corporation, whether or not acting as an agent or employee of the Client.
This Agreement to indemnify and hold FCB harmless shall include, but not
be limited to, all risk of loss of any information or documents during
transit between the Client and FCB. This indemnity provision shall survive
the termination of this Agreement.
16. FCB owns extensive computer hardware and uses a broad array of computer
software which may be used in the delivery of the various services
contemplated by this Agreement. From time to time FCB may significantly
change its hardware configuration, the software used in the delivery of
services, and the procedures and documentation which may be required for
the delivery of the services. FCB will use diligence in promptly notifying
the Client of any prospective system changes so the Client will have an
opportunity to analyze and approve any applicable test results. Whenever
possible, the Client will be notified at least 45 days prior to the
effective date of any change. All computer hardware, software, programs,
written procedures, and similar items, including master and transaction
data files, shall be and remain the property of FCB unless otherwise
specified in writing by FCB.
17. The Client will pay any taxes or governmental assessments arising out of
this Agreement or any of the services rendered according to this
Agreement, other than FCB's income taxes.
18. The Client and FCB recognize that the cost of the delivery of services to
the Client and the fees paid by the Client may be reduced to the extent
FCB can avoid "customizing" the services to the peculiar or unique needs
of the Client. To this extent, the parties acknowledge that it may be to
the mutual benefit of both parties for the Client to adapt aspects of its
internal operations, policies and procedures to match those of FCB. For
that purpose, employees of the Client may be asked to participate in
workshops, study sessions, user groups, and other similar activities
conducted by FCB for the benefit of its own operations.
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<PAGE>
19. The parties acknowledge that they are competing financial institutions and
that they are subject to various laws and regulations relating to
anti-trust and unfair competition. It is the intent of FCB and the Client
to adhere strictly to such applicable laws and regulations, and the
parties agree that they will each make every effort to insure there is no
violation of any such law or regulation. The parties further acknowledge
that discussions about or the exchange of information concerning the
retail pricing of products and services may be unlawful, and the parties
agree that each shall be excluded during any discussion or determination
of the other's retail pricing. Each party shall determine its own retail
pricing structure independently of the other, totally without collusion.
20. This Agreement contemplates that the parties may jointly undertake the
research, development, testing and delivery of various services which may
thereafter be offered by FCB and the Client to their respective customers,
but serviced operationally by FCB. The Client agrees, at its own expense,
that it will cooperate and participate fully in the research, development,
testing, evaluation, implementation and delivery of such services as may
be reasonably requested by FCB. Any such service shall be and remain the
property of FCB. Neither this Agreement nor the Client's participation in
the research, development, testing, evaluation, implementation or delivery
of a service shall vest any ownership interest therein in the Client.
Except for the fees agreed upon between the parties, each party shall bear
its own costs and expenses in the research, development, testing,
evaluation, implementation and delivery of a service undertaken pursuant
to this Agreement, and, except as to the fees agreed upon, neither party
shall be entitled to any reimbursement or refund from the other, even if,
for any reason, a service is rejected or abandoned.
21. Unless otherwise agreed in writing with respect to a particular service,
either party may terminate this Agreement (either in full or as to one or
more services) by giving at least 60 days prior written notice to the
other. Any pending increases in the fees shall not become effective prior
to the stated termination date. Notwithstanding this time limitation, upon
default in the performance in any of the obligations by one party to this
Agreement, the non-defaulting party may terminate this Agreement upon 30
days prior written notice to the party in default. Neither the Client nor
FCB shall be construed to be in default permitting termination of this
Agreement if either is unable to comply with the provisions of this
Agreement due to causes beyond its control, including, but not limited to,
those events and circumstances enumerated in paragraph 8 of this
Agreement. Provided the Client is not in default under the terms of this
Agreement, the Client may postpone the stated termination date of any data
processing services for a period of up to 360 days, and any other services
for a period of up to 180 days, in order to permit the Client adequate
time to effect a smooth transition and conversion from FCB to another
service provider (including the Client, if the services will thereafter be
provided by the Client "in-house").
22. Any other agreements previously entered into between the parties relating
to the delivery of services to the Client by FCB are superseded by this
Agreement. Any prior or subsequent agreements between the parties relating
to services provided by Frank B.
8
<PAGE>
Holding, however, are outside the scope of this Agreement and shall not be
affected by this Agreement.
23. This Agreement shall be binding upon and inure to the benefit of the
parties to this Agreement, their successors and assigns. Notwithstanding
the foregoing, neither party shall have the right to assign its rights
under this Agreement without the written consent of the other. This
restriction on assignment shall not apply in the event of a merger or
acquisition.
24. This Agreement constitutes the entire agreement between the parties
concerning the delivery of the services contemplated hereunder. All
services contemplated by this Agreement shall be provided and delivered by
FCB to Client in the State of North Carolina, and this Agreement shall be
governed by the laws of the State of North Carolina. No representations,
except when made in writing by a duly authorized officer of FCB, shall be
deemed to be a part of this Agreement, nor shall this Agreement be deemed
or construed to be modified or amended in whole or in part except by a
written agreement duly executed by the parties (including each Specific
Services Schedule signed by the parties).
When signed by both parties, this Agreement shall be effective as of the 1st day
of January, 1994. This Agreement is executed under seal on behalf of FCB and the
Client by their duly authorized officers. This Agreement and all Specific
Services Schedules executed pursuant to this Agreement are subject to
ratification by the FCB Board of Directors.
FIRST-CITIZENS BANK & THE FIDELITY BANK
TRUST COMPANY Client
By: /s/ W. R. White, Jr. By: /s/ Billy T. Woodard
---------------------- ---------------------
Senior Vice President President
(Corporate Seal) (Corporate Seal)
Attest: Attest:
/s/ J. E. Creekman /s/ Nancy R. Pore
---------------------- ---------------------
Assistant Secretary Secretary
9
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #1
PURCHASING SERVICES:
1. The services to be provided:
Purchasing services, which include requisition processing and procurement
of forms, equipment and supplies.
2. The initial fees, rates and charges for such services are as follows:
FULL Purchasing services, per $100 million of Assets
(as of the previous year end rounded to the nearest
$100 million). $330.00
LIMITED Purchasing services, per $100 million of Assets $250.00
(SERVICES TO BE RENDERED UNDER 'LIMITED' SERVICES MUST BE NEGOTIATED
BETWEEN THE CLIENT AND THE MANAGER OF THE PURCHASING DEPT.)
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #2
FACILITIES CONSULTING SERVICES:
1. SERVICES TO BE PROVIDED:
CONSULTATION SERVICES INVOLVING BANK FACILITIES.
2. THE INITIAL FEES, RATES AND CHARGES FOR SUCH SERVICES ARE AS FOLLOWS:
PERSONNEL: FCB'S FACILITIES MANAGEMENT STAFF $75.00/HOUR
FIRST CITIZENS BANK IS ALSO ENTITLED TO RECOVER ALL DIRECT OUT-OF-POCKET
EXPENSES, INCLUDING THE CHARGES OF THIRD PARTY VENDORS AND TRAVEL, MEALS AND
LODGING.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #3
EDUCATIONAL SERVICES:
LEASED CBE COURSE
Client Bank uses Course as is, with no
customization No Charge
INTERNALLY DEVELOPED CBE COURSE
Master CBE course $500.00 (1 time charge)
FCB customization for Client Bank $ 50.00 per hour
Changes Made to Course by Client Bank No Charge
Changes/customization by Outside vendor Pass through at Cost
ON-LINE MANUAL
MASTER ON-LINE MANUAL $500.00 (1 time charge)
FCB Customization for Client Bank $ 50.00 per hour
Changes made to Course by Client Bank No Charge
Changes/customization by Outside Vendor pass through at Cost
SELF-REGISTRATION CAPABILITY No Charge
STUDENT USAGE OF CBE COURSES No Charge
ASSOCIATE EDUCATION RECORD REPORT $100.00 per month
Includes: printed report monthly
manual payroll changes
manual course history updates
CLASSROOM COURSES
Master classroom course which includes: $500.00 (1 time charge)
-paper & electronic file copy of all
materials (FCB standard)
-one-time/one person audit of class
FCB customization for Client Bank $ 50.00 per hour
Changes made to Course by Client Bank No Charge
CLASSROOM PARTICIPATION
Per student per day $ 50.00
COURSES PURCHASED FROM OUTSIDE VENDOR Pass through at Cost
FACILITATOR TRAINING
Leader Training for Client Bank Trainer $1,500.00 per day
Consulting $ 50.00 per hour
ANY SPECIAL REQUESTS WILL BE HANDLED ON A PER QUOTE BASIS, THROUGH THE CORPORATE
EDUCATION DEPARTMENT. ALL OUT OF POCKET EXPENSES INCURRED BY FCB (AS A RESULT OF
A REQUEST MADE BY THE CLIENT BANK) WILL BE PASSED THROUGH TO THE CLIENT BANK.
PLEASE CONTACT EDUCATION SERVICES, 919-716-2787, FOR INFORMATION OR ASSISTANCE
ON ANY OF THE ABOVE.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #4
CASH MANAGEMENT SERVICES:
1. THE SERVICES TO BE PROVIDED:
DataNet services including balance and deposit reporting.
2. THE INITIAL FEES, RATES, AND CHARGES FOR SUCH SERVICES ARE AS FOLLOWS:
Balance Reporting - Audio Response per account $32.00/month
Balance Reporting - PC/Terminals
Maintenance $20.00/month
Minimum $32.00/month
Per login .40
Per minute .21
Per detail item loaded .008
Per detail item reported .032
Outbound Data Exchange per account $35.00/month
Deposit Reporting
Maintenance $20.00/month
Minimum $32.00/month
Per login .40
Per minute .21
Per entry .064
Per management report 1.20
Installation per location $ 8.00
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #5
EASYTRIEVE REPORTING:
1.) FCB REPORT CREATION FOR THE CLIENT BANK:
If an FCB associate writes an Easytrieve (Ad Hoc) Report for the Client
Bank, the cost associated with the man hours spent to write the report as
well as the systems usage will be charged back to the Client Bank as
follows:
a) $75.00 per man hour, with a minimum charge of $75.00, plus
b) $25.00 per Easytrieve Report produced (for system resources
and support)
2.) CLIENT BANK REPORT CREATION:
a) Easytrieve and/or TSO Training for Client Bank Associates will be
arranged for as a special request, and will be provided on a per
quote basis.
b) All Easytrieve reports must be written and run by an FCB certified
Client Bank associate, that has been given TSO access and completed
all FCB required training.
c) Each Client Bank that chooses to have the ability to write
Easytrieve Reports in-house will be charged the following flat
monthly fee:
$500.00 per month
d) Additional ongoing Support or Special Requests for access to back
dated files, or other requests not covered in this document, will be
billable using the Standard Fees listed in Schedule A.
PLEASE NOTE: ANY EASYTRIEVE REPORTS THAT ARE REQUESTED TO
BE PLACED INTO PRODUCTION MUST BE WRITTEN BY FCB
FOR THE CLIENT BANK AND THEN PLACED INTO
PRODUCTION. THE FCB REPORT CREATION DEVELOPMENT
COSTS WOULD THEREFORE APPLY.
e) FCB reserves the right to restrict the hours of system usage for the
production of Easytrieve Reports, by Client Bank associates, if it
should become necessary in the future. FCB also reserves the right
to revoke the Easytrieve and/or TSO access of any User without prior
consent.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #6
LOAN OPERATION SUPPORT SERVICES
SERVICES COVERED BY THIS SCHEDULE:
1. COMMERCIAL AND CONSUMER LOAN OPERATIONS/LOAN SERVICING
2. BUSINESS LOAN UNDERWRITING
3. RETAIL CENTRAL UNDERWRITING
4. RETAIL RISK MANAGEMENT
5. CREDIT POLICY
PRICING:
1. ONE TIME FEES FOR NEW LOAN SET UP (PER LOAN BOOKED):
o Loans set up on AFS system $ 159.81
o New modifications set up on AFS system 113.83
o Equity line set up 141.76
o CheckLine Reserve set up 32.94
o CheckLine Reserve Plus or Capital Line set up 80.84
o Loans set up on IL System 135.47
2. MONTHLY MAINTENANCE/SERVICING FEE (PER LOAN ON FILE):
O Loans on the AFS system 2.58
O Loans on the IL system .82
O Equity Lines on the Hogan system .64
O CheckLines on the Hogan system .48
O CheckLine Plus on the Hogan system .46
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #7
PAYROLL PROCESSING SERVICES
First Citizens Bank of North Carolina will offer to its client banks an array of
payroll service offerings, allowing the client banks to select only those
offerings it wishes to purchase. The specific functions that FCB/NC will perform
within each service offering are detailed in this document.
SPECIFIC SERVICES TO BE PROVIDED:
1. PAYROLL PROCESSING, TIME AND ATTENDANCE, POSITION CONTROL AND CUSTOMER
SERVICE
o Maintain records of hours worked, days worked, vacation, sick leave,
personal leave.
o Pay employees by Check or direct deposit (Pay periods are determined by
the client bank)
o Calculate all deductions for tax purposes, 401 K, spending accounts,
charities, insurance
o Create W2's
o Create all General Ledger entries for payment of payroll and deductions
o Create a file by Employee of Job number, Grade, Job Description, Salary
evaluation, email address, mail code, telephone number and provide this
information to Motivator, the email system, telephone book.
o Provide personnel customer service representatives that can be called to
answer payroll related questions
2. TAX ACCOUNTING
o Biweekly/Monthly distribution of funds to the federal and state
governments
o Quarterly filing to the federal and state governments
o Distribution to 401K plan investment vehicles
o Distribution to Insurance companies
o Distribution to selected charities
o Balancing distributions to the General Ledger
3. BENEFITS
o Update hours each payroll for pension related benefits
o Update pension earnings
o Annually determine new participants for pension
o Create a participant tape for the pension actuary
o Create benefit statements that include pension information, health plan,
vacation time, sick leave
o Determine 401K eligibility
o Maintain welfare plan elections and report to vendor
o Produce annual re-enrollment election forms and update files
<PAGE>
4. SPENDING ACCOUNT ADMINISTRATION
5. PERSONNEL
o Create and maintain a file of employee information that is not payroll or
benefits related such as sex, home address and phone number, corporate
title, salary history, position history, birthdate, marital status,
employment date, acquisition date, race, hourly rate, monthly hours, group
number, and numerous other fields.
FCB/NC will not:
o Perform pension distribution calculations
o Administer any 401K plans (investment, loans, distributions)
INITIAL FEES, RATES AND CHARGES FOR SUCH SERVICES ARE AS FOLLOWS:
ONE TIME CHARGES:
MONTHLY CHARGES (PER EMPLOYEE):
1. PAYROLL PROCESSING, TIME AND ATTENDANCE, POSITION CONTROL
AND CUSTOMER SERVICE $ 6.27
2. TAX ACCOUNTING $ 3.07
3. BENEFITS $ 3.07
4. SPENDING ACCOUNT ADMINISTRATION $ .57
5. PERSONNEL $ 1.37
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #8
COMMERCIAL LEASING & PUBLIC FINANCE SERVICES:
1. THE SERVICES TO BE PROVIDED ARE IDENTIFIED AS FOLLOWS:
a. Computer and Operations services to provide finance accounting for
the Client's commercial leasing and public finance portfolio.
b. A comprehensive public finance service for both real and personal
property types of financing with municipalities.
c. Product/Sales training, and consulting services to develop a
commercial leasing portfolio. Fees for these services are negotiable
and are not included below.
2. THE DESCRIPTION AND THE SCOPE OF SERVICES TO BE PROVIDED ARE AS FOLLOWS:
A. OPERATIONS/COMPUTER: Input of data to book leases and public finance
contracts, billing of customers, payment processing, documentation
follow-up and general ledger interface, property tax and sales tax
reporting to State/Local authorities.
B. PUBLIC FINANCE: Complete service support from bidding to closing for
every transaction. This includes completion of all documents,
collecting fees and disbursing proceeds on behalf of the client.
C. COMMERCIAL LEASING: Assistance in developing new documents, training
personnel, assisting with sales calls and providing consultation for
a one year period. These services are optional and fees are
negotiable.
3. THE INITIAL FEES, RATES AND CHARGES FOR SUCH SERVICES ARE AS FOLLOWS:
OPERATIONS:
Initiation fee (one time charge) $500.00*
Monthly maintenance fee (based on total groups serviced)
1 - 10 groups $100.00
11 - 20 groups $200.00
21 - 30 groups $300.00
31 - 40 groups $400.00
41 - over $500.00
Monthly processing fee (per lease) $ 6.00
* The Initiation fee is only assessed one time covering both Commercial
Leasing and Business Banking.
COMMERCIAL LEASING;
Per Proposal charge $250.00
Transaction fee will be charged and a percentage based on the amount
of the lease:
<PAGE>
(page 2 of 2)
$10,000 - $200,000 $200,001 - $1,000,000 OVER $1,000,000
$250.00 + .10% $500.00 + .05% 1,000.00 + .025%
(THIS INCLUDES STRUCTURING, COMPLETION OF DOCUMENTS, PURCHASING FROM
DEALER OR VENDOR, AND TITLE/INSURANCE FOLLOW-UP.)
CONSULTATION:
Charges are $50.00 per hour with a minimum of $50.00
PUBLIC FINANCE:
Per Proposal Charge $250.00
At closing, a transaction fee $250.00 base fee, plus
additional fee based on the amount financed:
$1 - $100,000 $100,000 - $250,000 $250,000 - & over
.25% .15% .10%
TRAINING - Charges are negotiable
BUSINESS BANKING LEASING:
OPERATIONS
Initiation fee (one time charge) $500.00*
Monthly maintenance fee (based on total groups serviced)
1 - 10 groups $100.00
11 - 20 groups $200.00
21 - 30 groups $300.00
31 - 40 groups $400.00
41 - over $500.00
Monthly processing fee (per lease) $ 6.00
* The Initiation fee is only assessed one time covering both Commercial
Leasing and Business Banking.
LEASE DOC PREP: Per Lease $100.00
CONSULTATION:
Charges are $50.00 per hour with a minimum of $50.00
Clarification of Credit and Collections Responsibilities:
First Citizens Bank will not provide credit analysis or make credit decisions.
Client will be totally responsible for the credit risk of the portfolio and for
all collection efforts.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #9
INVESTMENT SERVICES:
1. SERVICES TO BE PROVIDED:
- Investment and brokerage services.
- Buying and selling of Federal Funds
- Securities sales and purchase invoicing, appraisal, and related services
to Customer upon the terms and conditions herein set forth:
DAILY TRANSACTIONS
1 - Security Invoicing - Sales and Purchases
2 - Coupon Credit Schedules
3 - Pledge Additions and releases
MONTHLY TRANSACTIONS
1 - Portfolio Accounting Report
2 - Detailed Interest Accounting, Detailed Discount accounting
& Detailed Premium Accounting
3 - U.S. Treasury and Government Agency Appraisals
4 - Pledged Securities Report
5 - Maturity Schedule for Call Statement Information
PERIODICALLY AS REQUESTED
1 - Information for Examiners
2. THE INITIAL FEES RATES AND CHARGES FOR SUCH SERVICES ARE AS FOLLOWS:
A. SECURITY TRANSACTION FEES (PURCHASES & SALES):
<TABLE>
<CAPTION>
<S> <C>
1. For Client's Account --
- Securities with par value $55,000 and above $275.00 per transaction
- Securities with par value below $55,000 $ 5.00 per $1000 par value
2. For the accounts of Client's Customers --
a. Municipal Securities
1) Par value less than $50,000 $ 5.00 per thousand
2) Par value $50,000 and more $ 2.50 per thousand
b. U.S. Government and Government
Agency Securities
1) Treasury Bills $ 50.00 per trade
2) Treasury Notes, Bonds & Government
Agency Securities $ 50.00 per trade
3) One time initial Safekeeping Fee $ 25.00 per account
<PAGE>
(page 2 of 2)
B. MONTHLY STATEMENT CHARGE --
Per line item on month-end securities
inventory listing. $ 4.75
(Minimum Charge) $150.00
C. FEDERAL FUNDS TRANSACTIONS --
(Based on FCB Daily Weighted Average Federal Funds Rate):
- Federal Funds Sold (-) 10bp
- Federal Funds Purchased (+) 10bp
</TABLE>
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #10
TRUST DEPARTMENT SERVICES:
REFERRALS: The client agrees to identify qualified Trust Prospects and to assist
in the solicitation of their business for Trust Services to be rendered by
First-Citizens Bank and Trust Company (FCB).
FCB will for the life of the account, pay the Client Bank 25% of the fees
actually collected by FCB on Trust Business referred or solicited by the Client
Bank and accepted by FCB.
FCB will assign the Client Bank a new business officer to familiarize the
client's personnel with the Trust services offered by FCB and to help identify
trust prospects.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #11
ON-LINE COLLECTIONS SYSTEM
ONE TIME CHARGES:
Write Interfaces (FCB Systems Management) $ 7,500.00
Set up CACS System parameters (FCB Collections Dept.) $ 2,000.00
4 Days Client Bank on site training (FCB Collections Dept.)* $ 2,000.00
-----------
* Plus out of pocket expenses (Travel & lodging)
TOTAL ONE TIME CHARGES: $11,500.00
MONTHLY CHARGES:
OPTION A:
---------
Per Loan Processed on the CACS Collections System
includes all required systems administration support. $ 0.29
Per letter generated and mailed * $ 0.05
*plus postage
OPTION B:
---------
Per Loan Processed on the CACS Collections System
does not include any systems administration support. $ 0.07
Ongoing Systems administration support (per hour) $ 50.00
Per letter generated and mailed * $ 0.05
*plus postage
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #12
DEALER FLOORPLAN PROCESSING SERVICES
First Citizens Bank of North Carolina will offer to its client banks the ability
to offer Dealer Floor Plans to its commercial customers. These accounts will be
set up for each bank in a totally separate Bank file but will be serviced by
First Citizens Bank of North Carolina.
SPECIFIC SERVICES TO BE PROVIDED:
o Set up of all new Dealer Floor Plan Accounts
o Adding and deleting inventory as required
o Posting Payments to the Dealer Floor Plan System
o Filing Trust Receipts
o Returning Trust Receipts when all units are paid off
INITIAL FEES, RATES AND CHARGES FOR SUCH SERVICES ARE AS FOLLOWS:
ONE TIME CHARGES:
O SYSTEM SETUP $ 4,000.00
REOCCURRING CHARGES
O TO SET UP A DEALER FLOOR PLAN (PER 15 UNITS IN THE PLAN) $ 6.30
MONTHLY CHARGES (PER DEALER FLOOR PLAN): $ 20.68
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
ADDENDUM #13
<TABLE>
<CAPTION>
INTERNATIONAL BANKING SERVICES:
COMMERCIAL SERVICES FEE
<S> <C>
WIRE TRANSFERS
Incoming: For deposit into an account at First Citizens Bank Free
Outgoing: In U.S. Dollars $30.00
In foreign currency $20.00
Recalls/amendments/tracers $20.00
DRAFTS
In U.S. Dollars or foreign currencies $15.00
Stop-payments $20.00
CHECKS FOR DEPOSIT
In U.S. or Canadian dollars drawn on a Canadian bank float only (commercial)
$1.50 (individual)
In other foreign currencies drawn on the respective countries same as above
Returned items $10.00
In U.S. dollars drawn on a foreign bank (other than Canadian) see separate schedule
COLLECTIONS
Clean (checks):
Processing/paying $25.00
Tracers expenses only
Documentary:
Import: Processing/paying 1/10% of draft amount,
Minimum $50.00, max $75.00
Export: Processing/paying:
Direct (sent by exporter) 1/10% of draft amount,
minimum $40.00, max $65.00
Indirect (sent by FCB) 1/10% of draft amount,
minimum $50.00, max $75.00
Tracers expenses only
Amendments expenses only
LETTERS OF CREDIT
Import:
Issuance $50.00, plus expenses
Amendment $35.00, plus expenses
Negotiation $1/4% of drawing amount,
minimum $60.00
<PAGE>
(page 2 of 2)
Discrepancy $50.00
Non-Utilization $50.00
Banker's acceptance/deferred payment $1 1/2% per annum,
minimum $60.00 per draft
Export:
Pre-advisement $35.00
Advisement $50.00
Confirmation by arrangement, minimum 1/10%
per quarter, minimum $100.00
Negotiation 1/8% of drawing amount,
minimum $50.00
Reimbursement claim $25.00
Discount charge on banker's acceptance by arrangement
Miscellaneous:
Transfer 1/4% of transferred amount,
minimum $200.00
Assignment of proceeds 1/4 of assigned amount,
minimum $150.00
Cargo release $50.00, plus $25.00/month
maintenance
Telex expense $5.00/minute
RETAIL SERVICES FEE
Foreign Currency (bought & sold) No Fees
Foreign Currency Travelers Checks - Supplied 1% of U.S. $
Equivalent or
minimum $5.00
</TABLE>
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
Schedule 'A'
EFFECTIVE JANUARY 1998 THROUGH DECEMBER 1998
INITIAL SYSTEM APPLICATION SET UP CHARGES (NEW BANK, ONE TIME FEES)
-DEMAND DEPOSIT SYSTEM 7,500.00
-TIME DEPOSIT SYSTEM 5,000.00
-LOC 5,000.00
-COMMERCIAL LOANS 7,500.00
-CONSUMER LOANS 5,000.00
-GENERAL LEDGER 5,000.00
ACCOUNT PROCESSING
Includes Contingency planning / Disaster Recovery.
Enterprise Wide Electronic Mail (EMAIL) system access.
Year End Processing.
PRICING BASED ON ACTIVE ACCOUNTS ONLY.
MONTHLY MONTHLY
DESCRIPTION FEE MINIMUM
*DDA - (per account) 0.420 2,500.00
*SAVINGS - (per account) 0.420
*TIME DEPOSITS -
-TDA/PRENEED/CLUB (per account) 0.420 1,000.00
*IRA - (per account) 0.500
*MASTER NOTES - (per account) 0.470
*PACKAGED ACCOUNTS - (per account) 0.250
*LOC ACCOUNTS (per account) 500.00
- Checkline Reserve 0.420
- Checkline Plus 0.420
- Equityline 0.440
*COMMERCIAL LOANS - (per account) 0.750 500.00
*CONSUMER LOANS (ILD) - (per account) 0.750 500.00
*GENERAL LEDGER - (per branch) 124.000 750.00
*BR-BANKER & BA-TELLER (per branch) 91.630
ATM - CARD ISSUE (per card) 1.750
ATM - (per ATM) 75.000
AIH PORT - (per port)
- Periphonics 274.000
- Aspect 30.000
AIH USAGE (per phone call)
- Periphonics .030
- Aspect .043
AIH-TELEPHONE SERVICE REPRESENTATIVES- (per call) 5.130
- See Service Description #1
AIH-TELEPHONE BANKERS - (per call) 18.350
- See Service Desctription #1
*ACH - (per transaction) 0.055
* Bold indicates change from previous year. Page 1
<PAGE>
MONTHLY MONTHLY
DESCRIPTION FEE MINIMUM
SAFE BOX ACCOUNTS - (per account) 0.070 200.00
-maintenance & balancing services (optional,
per account) 0.030
CRA EXTRACT - (per record) .050
SPECIAL REQUESTS QUOTE
*MOTIVATOR - (per employee) 7.520
CENTRAL BANK OPERATIONS
RETURNS - (per item) 0.4458
FAX LARGE ITEM RETURNS - (per item) 2.0000
BA TELLER ARCHIVE - (per teller workstation)
- With Teller Balancing 11.2500
- Without Teller Balancing 4.5300
- See Service Description # 2
FOREIGN ITEMS FOR COLLECTION - (per item) 1.2000
- Also, a float adjustment will be made to
the Client Bank Due to/Due from account for
the # of days in collection.
*STATEMENT RENDERING - (per statement rendered)
-ZERO ENCLOSURE STATEMENTS 0.0780
-ENCLOSURE STATEMENTS 0.2300
*PROOF - (per item) 0.0254 500.00
PROOF - (per preencoded items) .0000
*SORTER - (per item) 0.0152 750.00
ENCODED - IN STATE - (per item) 0.0027
ENCODED - OUT OF STATE - (per item) 0.0436
ACCOUNT RECONCILIATION PROCESSING (ARP):
-PARTIAL/RANGE
-Minimum Monthly Charge/ per account 20.0000
-Per Item 0.0300
-FULL RECON
-Minimum Monthly Charge/ per account 30.0000
-Per Item 0.0400
-DEPOSIT RECON
-Minimum Monthly Charge/ per account 30.0000
-Per Item 0.0400
CHECK SERIAL SORT
- (minimum monthly charge) 20.0000
- (per item) 0.0200
FOOD COUPONS - (per coupon) 0.0056
SALES DRAFTS - (per item) 0.0716
MC & VISA PAYMENTS - (per item) 0.1217
CD ROM - (per item captured) 0.0400
- (per CD produced) 16.0000
- Initial Software (Pass Through)
T TAX - (per T TAX account) 0.3000
- See Service Description #3
T T & L PAYMENT PROCESSING - (per payment) .0050
BUSINESS EXPRESS
-Per Account added or changed (one time) 1.0000
-Download to ADP & Support (per account) .4500
LCR ANALYSIS - (per CTR) 1.2900
* Bold indicates change from previous year. Page 2
<PAGE>
MONTHLY MONTHLY
DESCRIPTION FEE MINIMUM
- See Service Description #10
MC & VISA RESEARCH RETRIEVAL - (per item) 1.5000
MC & VISA CONVENIENCE CHECK PROCESSING:
-CD-ROM Imaging Charges - (per item) 0.0400
-Exception Handling & Processing - (per item) 0.1950
DATA ENTRY SERVICES **:
-Visa, MC, Merchant, ARC, Maintenance,
New Accounts, etc. - (per customer input) 0.2700
** This only applies to companies for which FCBNC does not provide Account
processing services.
RESEARCH (Per Photo Copy) 0.9500
ADJUSTMENTS (Per Adjustment Completed) 7.1800
OTHER
LOCK BOX SERVICES:
-Maintenance - (per box ) 32.0000
-Box Rental - (per box) 1.0000
-Processing - (per item) .2200
-Photo Copy - (per item) .0500
-Deposit Preparation - (per day) 1.0000
-Optional Services:
-Deposit Reporting - (per month) 20.0000
-Toll Call Deposit Reporting - (per month) 32.0000
-FAX Services
-Per month 20.0000
-Per Page .2000
-Research - (per request) .8000
-Mag Tape - (per month) 40.0000
-Postage = Pass through + (per item
handling fee) .0400
-Other QUOTE
ENVELOPE OPENING - (per envelop) .0200
REMOTE ACCESS (DIAL ACCESS)
- Secure Net Key Deposit - (per key/one
time charge) 65.0000
- Secure Net Key Support - (per key) 10.0000
- See Service Description #4
MERGERS & ACQUISITIONS
-Charges are calculated using "Standard Fees" below.
-Consultant Charges/Out of Pocket Actual Cost
CRA ANALYSIS AND REPORTING - (per CRA record) 1.5800
- See Service Description #5
SECURITY MONITORING - (per branch) 27.5000
MCIF MONTHLY EXTRACT - (per record) 0.0039
MCIF ANALYSIS AND REPORTING - (per record) 0.0100
TSO ACCESS - (per user) 50.0000
NCOA PROCESSING - (per record extracted) 0.0030
OFAC DAILY PROCESSING - (per record extracted) 0.0500
OFAC FULL FILE PROCESSING - (per record extracted) 0.0015
OFAC FACS SW COPIES - (per software license/per year) 600.0000
EARLY WARNING FRAUD DETECTION & OFAC PROCESS'G .0500
INTERNAL CONTROLS - (per branch) 74.7300
DESKTOP SUPPORT- (per associate) 29.7200
* Bold indicates change from previous year. Page 3
<PAGE>
MONTHLY MONTHLY
DESCRIPTION FEE MINIMUM
OPTICAL PROCESSING
-Per Page 0.0007
-Per Disk 95.0300
FILE TRANSMISSIONS USING XCOMM - (per byte) 0.0000347
OTHER FILE TRANSMISSION MODES TBD
PC HOME BANKING
-Per Customer Set Up 14.6000
-Full Support - (per customer) 1.2500
-Technical Support Only - (per customer) .2500
- See Service Description #6
CREDIT CARD COLLECTION - (per credit card delinquent) 3.6000
- See Service Description #11
LOAN COLLECTION
- One Time Charge 9,500.0000
- CACS System Support and Maintenance - (per loan) .2900
- All Collection Efforts - (per loan) 2.4300
- Per Letter Generated and Mailed (Not
Including Postage) .0500
- See Service Description #7
LOAN DOC PREP
-One Time Charge 2,400.0000
- Per Branch 99.0000
- Vendor Software License Fee QUOTE
- See Service Description #8
APPRO MP100 - CBI FAXBACK - (per loan processed) 1.0300
Plus Fax Phone Live Charges (Pass Through)
- See Service Description #9
FCB MANUALS
-Initial Set of Manuals 350.000
-Annual Update Fee 100.000
STANDARD FEES (Charged in 1/4 Increments)
-First Citizens Bank Personnel
Management/Technical/Professional & Consulting
(Per Hour) 60.000
Clerical/Administrative (Per Hour) 25.000
-Computer Time (Per Hour) 250.000
-Supplies and Out of Pocket Expense ACTUAL COST
TRANSPORTATION SERVICES:
-Pass Through from Vendor plus 10% Administrative Fee
PURCHASING SERVICES See Attached Pricing Addendum 1
FACILITIES CONSULTING SERVICES See Attached Pricing Addendum 2
EDUCATIONAL FEES See Attached Pricing Addendum 3
CASH MANAGEMENT (Datanet) See Attached Pricing Addendum 4
EASYTRIEVE REPORTING See Attached Pricing Addendum 5
LOAN SUPPORT SERVICES See Attached Pricing Addendum 6
PAYROLL PROCESSING SERVICES See Attached Pricing Addendum 7
COMM. LEASING & PUBLIC FINANCE SVCS. See Attached Pricing Addendum 8
INVESTMENTS See Attached Pricing Addendum 9
TRUST See Attached Pricing Addendum 10
ON-LINE COLLECTION SYSTEM See Attached Pricing Addendum 11
DEALER FLOOR PLAN PROCESSING SERVICES See Attached Pricing Addendum 12
INTERNATIONAL BANKING SERVICES See Attached Pricing Addendum 13
MANAGING CHECK VENDORS & TRAVELERS
CHECK VENDORS See Attached Pricing Addendum 14
* Bold indicates change from previous year. Page 4
<PAGE>
MANAGEMENT FEES See Attached Pricing Addendum 15
NETWORK MANAGEMENT:**
- - See Schedule C
** The fees for Network Management will remain in effect until the earlier date
of : (1) the expiration of the pricing agreement, or (2) the Network
Configuration changes with the installation of a Wide Area Network.
PASSTHROUGH CHARGES:
MONTHLY MONTHLY
DESCRIPTION FEE MINIMUM
------- -------
MAGNUM/CBI
-Initial Set Up Fee (one-time) 1,260.0000
-Monthly Processing Support 200.0000
-Per CBI Transaction Charge 0.1000 each
-Transaction Processing/Software Maintenance
(pass through from vendor) Actual Cost
POSTAGE AND PRESORT FEES
TRANSPORTATION
EARLY WARNING/WJM TECHNOLOGIES
SERIES E BONDS
MICROFICHE
MICROFILM / MICROFICHE OFFSITE STORAGE
ADP FINANCIAL SERVICES
ADVANTIS
BUSINESS RECOVERY (SC ONLY)
CD ROM INITIAL SOFTWARE
PURCHASING
PC MAINTENANCE
RENTAL FEES AND MAINTENANCE OF LOCK BOX
APPRO FAXBACK CREDIT BUREAU CHARGES AND FAX PHONE LINE CHARGES
CASH TAX
OTHER
* Bold indicates change from previous year. Page 5
<PAGE>
NON CBO DISCOUNTS:
A VOLUME DISCOUNT CREDIT WILL BE APPLIED TO THE TOTAL AMOUNT OF NON CBO
MONTHLY CHARGES FROM THE ITEMS HAVING AN ASTERISK (*) ABOVE, ACCORDING TO
THE FOLLOWING SCHEDULE:
MONTHLY TOTAL DISCOUNT
------------- --------
$ 00,000 -- $ 24,999 NONE
25,000 -- 37,499 2.5%
37,500 -- 49,999 5.0%
50,000 -- 62,499 7.5%
62,500 -- 74,999 10.0%
75,000 -- 87,499 12.5%
87,500 -- 99,999 15.0%
100,000 -- 112,499 17.5%
112,500 -- 124,999 20.0%
125,000 -- 137,499 22.5%
137,500 -- 149,999 25.0%
150,000 -- 162,499 27.5%
162,500 -- 174,999 30.0%
175,000 -- 199,999 32.5%
200,000 -- ABOVE 35.0%
CBO DISCOUNTS:
A VOLUME DISCOUNT CREDIT WILL BE APPLIED TO THE TOTAL AMOUNT OF CBO
MONTHLY CHARGES FROM THE CBO ITEMS HAVING AN ASTERISK (*) ABOVE, ACCORDING
TO THE FOLLOWING SCHEDULE:
MONTHLY TOTAL DISCOUNT
------------- --------
$150,000 - GREATER 5%
COMPENSATING BALANCE:
Client Bank monthly invoice will be adjusted based upon the compensating average
collected balances of all accounts maintained at First Citizens Bank. Average
positive collected balance will be paid an earnings credit based upon the
average Federal Funds Rate for the month (-10bp).
Average negative collected balances will be charged at the average Federal Funds
Rate for the month (+10 bp).
ACCEPTED AND APPROVED:
FIRST-CITIZENS BANK
& TRUST COMPANY THE FIDELITY BANK
Name: /s/ Billy T. Woodard
--------------------
By: /s/ Timothy D. Seamon By:
---------------------- -------------------------
Title: Vice President Title: Chairman
---------------------- -------------------------
Date: 12/8/97 Date: 12/8/97
---------------------- -------------------------
* Bold indicates change from previous year. Page 6
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SCHEDULE C
THE FIDELITY BANK
NETWORK MANAGEMENT FEE
Monthly Network Management Fee
o FCB Network Management Fee (per line drop) $144.75
o Communication lines and equipment (per line drop) $255.51
o Adds, changes, deletes to existing network QUOTE
o Pass through installation charges QUOTE
**The fees for Network Management will remain in effect until the earlier date
of: (1) the expiration of the pricing agreement, or (2) the Network
Configuration changes with the installation of a Wide Area Network.
FIRST CITIZENS BANK
& TRUST COMPANY THE FIDELITY BANK
BY: /S/ TIMOTHY D. SEAMON BY: /S/ BILLY T. WOODARD
--------------------- ---------------------
TITLE: VICE PRESIDENT TITLE: CHAIRMAN
--------------------- ---------------------
DATE: 12/8/97 DATE: 2/3/98
--------------------- ---------------------
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #1
TELEPHONE BANKING SERVICES
1. THE SERVICES TO BE PROVIDED ARE IDENTIFIED AS FOLLOWS:
o Use of the FCB/NC automated telephone banking Voice Response Unit for
Credit Card Balance Inquiries only
o Provide "live customer support" to customers who select that option
o Provide customers with the ability to open new deposit and loan accounts
2. THE DESCRIPTION AND THE SCOPE OF SERVICES TO BE PROVIDED ARE AS FOLLOWS:
o Any credit card customers may use the FCB/NC Automated Voice Response Unit
to inquire about the balance of their checking account. If they are a
customer of FCB/NC, they may also use this automated voice response unit to
make a credit card payment from their FCB/NC account.
o A customer using the VRU of FCB/NC or of the client bank, may select the
option to speak with a telephone service representative. In that case, the
call will be directed to one of FCB/NC's TSR's for resolution of their
problem. If the TSR is not able to help the customer, the call will be
directed back to the client bank own bank.
o A customer may select the option to open a new account or apply for a loan.
In that case, the customer will be directed to the FCB/NC Telephone Banking
Center where a Telephone Banking Representative will follow normal FCB/NC
procedure to open the account or close the loan for the client bank.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #2
BRANCHTELLER ARCHIVING & RETRIEVAL SERVICES:
SERVICES:
1) BRANCHTELLER SYSTEM TRANSACTION ARCHIVING
FCB will perform all of the functions for the Client Bank
related to Centralized Daily archiving of all BranchTeller
transactions. This will be done centrally in Raleigh, NC for
all of the Client's Tellers.
The Client will contact FCB via email/eform to request any
necessary Teller Archive data to be printed and forwarded to
the Client Bank as necessary.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #3
T-TAX PROCESSING SERVICES
1 . THE SERVICE TO BE PROVIDED:
First Citizens Bank of NC has entered into an agreement with an outside vendor
("Cash Tax") to provide FCBNC and our Client Banks, the ability to sell a
service to be used by Business customers, to pay Federal Taxes via ACH Debit to
the customers DDA account. The payment is then forwarded to the IRS on an
automated basis.
Once the Client Bank has verified the customer's enrollment form for
completeness and accuracy, it will be forwarded to FCBNC for final review and
submission to Cash Tax.
2. PASS THROUGH CHARGES:
All outside vendor charges related to the processing of T-Tax transactions will
be passed through to the Client Bank.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #4
REMOTE ACCESS:
1) SECURE NET KEY $65.00 One Time Charge
(FCB retains the right to recall the key
and refund the Client Bank at anytime)
2) TELECOMMUNICATIONS:
Option A: Establish a unique 1-800 for the Client Banks use.
The Client Bank pays all costs associated with the 1-800
line and usage.
(Estimated at $20/month plus $0.17 per minute of usage)
Option B: Establish direct dial, local or long distance access.
The Client Bank pays all costs associated with the line
(s) and usage.
(Estimated at $0.24 to $0.29 per minute for Long Distance).
3) COMMUNICATIONS SOFTWARE:
Each Institution is responsible for the purchase and installation
of their own Communications software. FCB recommends and Supports
"Procomm".
4) FCB SUPPORT: $10.00 per month per SecureNet Key Issued.
5) FCB reserves the right to limit the number of users to be provided with
Dial Access. Currently the maximum number of SecureNet Keys to be issued
is as follows:
Client Bank with Assets of $1 Billion or Greater = 8 SecureNet Keys
Client Bank with Assets of less than $1 Billion = 4 SecureNet Keys
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #5
CRA ANALYSIS AND REPORTING
First Citizens Bank will, as outlined below, perform certain functions and
provide certain information in such a manner as to aid with CRA compliance. Only
those functions described below will be performed automatically by First
Citizens Bank. However, First Citizens Bank, in no way, accepts responsibility
for each individual bank's compliance with CRA.
SPECIFIC SERVICES TO BE PROVIDED:
1. MONTHLY
o Extract the applicable loan information from loans that fall under the CRA
regulation, import this information into the Centrax software, and GEO code
the loans.
o Provide to each bank an Error Reject Report of all loans for which a valid
GEO code was unobtainable.
o Provide to each bank the Annual Revenue Reject Report for all loans for
which there was no income stated on the loan record
o Force GEO code the Business Farm and Business loans, if requested by the
client to do so.
2. QUARTERLY
o Provide the CRA Business Farm and Consumer Performance Report
o Provide the Community Development Loan Report
3. ANNUALLY
o Provide the Year End Assessment Maps (no loans will be plotted on these
maps)
o Provide the Year End Loan Performance Report
o Provide the Remittance File Submission Disk and Form for the bank to sign
and remit.
4. SPECIAL REQUEST
o Any request for a report/map/information not specifically stated in this
schedule should be submitted in writing and FCB/NC will reply with a time
and price estimate.
FCB/NC will not:
o Accept responsibility for each bank's compliance with CRA.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #6
PC HOME BANKING SERVICES
PROCESSING:
PC Banking On-Line Processing and interface with CheckFree Systems.
SUPPORT:
OPTION A: FULL SUPPORT
CUSTOMER SET UP: Includes the one time set up of the Customers on
one application on the Check Free System and on
the FCB system. Includes set up of any Bill Payees
associated with the application over the life of
the relationship. Includes "fulfillment" (mailing
of the introductory package of Software, manual,
disclosures and letter). Fulfillment does not
include the cost of postage or the materials.
FULL TELEPHONE SUPPORT: This support will be available during the same
days and hours as is available to First Citizens
Bank of NC PC Home Banking Customers.
Technical Support: Includes telephone support for Technical questions
from Client Bank Customers related to the
installation and running of the PC Home Banking
Software.
Non Technical Support: Includes telephone support for all non technical
questions from Client Bank Customers related to
the PC Home Banking Product, PC Bill Payment
Services.
OPTION B: TECHNICAL SUPPORT ONLY
TECHNICAL SUPPORT: Includes telephone support for Technical questions
fromClient Bank Customers related to the
installation and running of the PC Home Banking
Software. This support will be available during
the same days and hours as is available to First
Citizens Bank of NC PC Home Banking Customers.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #7
COLLECTION OF INSTALLMENT AND LOC LOANS
1. THE SERVICES TO BE PROVIDED ARE IDENTIFIED AS FOLLOWS:
o Extraction of delinquent Installment Loans and Lines of Credit
o Automatic input of these loans into the CACS On-Line Collection
System
o Printing and mailing of Collection Letters
o Phone Calls to delinquent customers
o Repossession of Collateral where necessary
o Filing of any legal documents necessary
2. THE DESCRIPTION AND THE SCOPE OF SERVICES TO BE PROVIDED ARE AS FOLLOWS:
o Procedures to collect delinquent accounts will be the same as those
now in effect to collect delinquent loans for FCB/NC except in the
case where state regulations may cause a change in procedure.
o Collectors will use the ACS on-line collection system now in place to
collect these loans. However, FCB/NC reserves the right to use any
collection system that it deems appropriate for itself.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #8
LOAN DOCUMENT PREPARATION SOFTWARE SUPPORT
1. THE SERVICES TO BE PROVIDED TO "AFFILIATE BANKS" ARE IDENTIFIED AS FOLLOWS:
o Use of CFI Laser Pro Software at the Branch and/or Centralized
Location
o Software Maintenance Fees (CFI and FCB)
o Implementation of all future vendor supplied SW releases and updates
o All future new product set up, by FCB analysts
o Host interfaces from CFI Laser Pro to the FCB Consumer Loans, CIS and
LOC systems
o Use of the "Loan Remote" Software System for Printing from a central
location*
* Please note that upon conversion from "Loan Remote" to another
Software system, additional SW Licencing fees may apply, which
will be passed through to the Client Bank from the Software
Vendor.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #9
APPRO MP-100 CBI FAX BACK/LOAN SCORING PROCESS
1. SERVICE:
The Client Bank will submit a formatted CICS transaction in the format of
the required Online Loan Application to the host computer. This data will
be forwarded to the FCBNC Appro MP-100 system. The Appro MP-100 System
will FAX back to the designated location, a complete CBI along with a
Credit Score. This data will serve as part of the tools used by the Client
Bank Credit Officer in decisioning the loan.
2. PASS THROUGH CHARGES:
All outside vendor charges will be passed through to the Client Bank.
These may include Credit Bureau charges for the per CBI charge, as well as
phone line charges for FAX back, etc.
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #10
LARGE CURRENCY TRANSACTION REPORTING:
SPECIFIC SERVICES INCLUDED:
CONVERSION: - Set up Bank Information
- Set up Branch Information
- Set up Branch Access/Limits to System
- Enter Repeat Customer Information on Data Base
- Enter Exemption Information on Customer File
- Assign Report Distribution
ON-GOING: - Use of on-line Large Currency Reporting System
- Hot line for On-Line CTR questions
- Verification of All POD versus On-Line entries
- Maintaining / Updating Customer Data Base
- Magnetic Reporting of CTR Information
- Rendering Mag Tape to IRS
- Correcting/Acknowledgment of IRS Acceptance
- Furnish 60 Day History For Exemption Review/Request
- 5 year Retention of CRTs and Exemption Listings
- Continued Training related to any on-line changes
FIRST CITIZENS BANK
<PAGE>
FIRST CITIZENS BANK
CLIENT BANK PRICING
SERVICE DESCRIPTION #11
COLLECTION OF PERSONAL CREDIT CARD ACCOUNTS
1. THE SERVICES TO BE PROVIDED ARE IDENTIFIED AS FOLLOWS:
o Using the FDR on-line system, identification of delinquent accounts
o Printing and mailing of Collection Letters
o Phone Calls to delinquent customers
2. THE DESCRIPTION AND THE SCOPE OF SERVICES TO BE PROVIDED ARE AS FOLLOWS:
o Procedures to collect on delinquent accounts will be the same as
those now in effect to collect delinquent loans for FCB/NC except in
the case where state regulations may cause a change in procedure.
o Collectors will use the FDR on-line system now in place to collect
these loans. However, FCB/NC reserves the right to use any collection
system that it deems appropriate for itself.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Fidelity BancShares (N.C.), Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
October 21, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this registration statement of Fidelity
BancShares (N.C.), Inc. and FIDBANK Capital Trust I on Form S-1 of our report
dated February 28, 1997 on our audits of the consolidated financial statements
of Fidelity BancShares (N.C.), Inc. as of December 31, 1996, and for each of the
years in the two year period ended December 31, 1996. We also consent to the
reference to our firm under the captions "Experts" and "Change in Accountants".
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
October 20, 1998
