SCHEDULE 14-A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Citizens South Banking Corporation
----------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
.......................................................................
2) Aggregate number of securities to which transaction applies:
.......................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
.......................................................................
4) Proposed maximum aggregate value of transaction:
.......................................................................
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<page>
[Letterhead of Citizens South Banking Corporation]
April 10, 2007
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Citizens South Banking Corporation. The Annual Meeting will be held at the
Gaston County Public Library at 1555 East Garrison Boulevard, Gastonia, North
Carolina, at 10:30 a.m. (local time) on May 14, 2007.
The enclosed Notice of Annual Meeting and proxy statement describe the formal
business to be transacted.
The Annual Meeting is being held so that stockholders will be given an
opportunity to elect two directors and to ratify the appointment of Cherry,
Bekaert & Holland, L.L.P. as independent registered public accounting firm for
Citizens South Banking Corporation's 2007 fiscal year.
The Board of Directors of Citizens South Banking Corporation has determined that
the matters to be considered at the Annual Meeting are in the best interest of
Citizens South Banking Corporation and its stockholders. For the reasons set
forth in the proxy statement, the Board of Directors unanimously recommends a
vote "FOR" the election of directors and "FOR" the ratification the of the
appointment of Cherry, Bekaert & Holland, L.L.P. as independent registered
public accounting firm for the year ending December 31, 2007.
On behalf of the Board of Directors, we urge you to sign, date and return the
enclosed proxy card as soon as possible even if you currently plan to attend the
Annual Meeting. Your vote is important, regardless of the number of shares that
you own. Voting by proxy will not prevent you from voting in person, but will
assure that your vote is counted if you are unable to attend the meeting.
Sincerely,
\s\ Kim S. Price
Kim S. Price
President and Chief Executive Officer
<page>
Citizens South Banking Corporation
519 South New Hope Road
Gastonia, North Carolina 28054-4040
(704) 868-5200
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 14, 2007
Notice is hereby given that the Annual Meeting of Stockholders of
Citizens South Banking Corporation will be held at the Gaston County Public
Library at 1555 East Garrison Boulevard, Gastonia, North Carolina 28054-5156, on
May 14, 2007 at 10:30 a.m., local time.
A proxy statement and proxy card for the annual meeting are enclosed.
The annual meeting is for the purpose of considering and acting upon:
1. The election of two directors of Citizens South Banking
Corporation;
2. The ratification of the appointment of Cherry, Bekaert &
Holland, L.L.P. as independent registered public accounting
firm for Citizens South Banking Corporation for the fiscal
year ending December 31, 2007; and
such other matters as may properly come before the annual meeting, or any
adjournments thereof. The Board of Directors is not aware of any other business
to come before the annual meeting.
Any action may be taken on the foregoing proposals at the annual
meeting on the date specified above, or on any date or dates to which by
original or later adjournment the annual meeting may be adjourned. Stockholders
of record at the close of business on March 15, 2007 are the stockholders
entitled to vote at the annual meeting, and any adjournments thereof. A list of
stockholders entitled to vote at the annual meeting will be available at 519
South New Hope Road, Gastonia, North Carolina, for a period of 10 days prior to
the annual meeting and will also be available for inspection at the annual
meeting.
EACH STOCKHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY THE STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING
WITH THE SECRETARY OF CITIZENS SOUTH BANKING CORPORATION A WRITTEN REVOCATION OR
A DULY EXECUTED PROXY BEARING A LATER DATE. ANY STOCKHOLDER PRESENT AT THE
ANNUAL MEETING MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER
BROUGHT BEFORE THE ANNUAL MEETING. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE
SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL
DOCUMENTATION FROM YOUR RECORD HOLDER IN ORDER TO VOTE PERSONALLY AT THE ANNUAL
MEETING.
By Order of the Board of Directors
\s\ Paul L. Teem, Jr.
Paul L. Teem, Jr.
Secretary
Gastonia, North Carolina
April 10, 2007
- --------------------------------------------------------------------------------
IMPORTANT: A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO
POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
- --------------------------------------------------------------------------------
<page>
PROXY STATEMENT
of
CITIZENS SOUTH BANKING CORPORATION
519 South New Hope Road
Gastonia, North Carolina 28054-4040
(704) 868-5200
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS
MAY 14, 2007
- --------------------------------------------------------------------------------
This proxy statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of Citizens South Banking
Corporation to be used at the Annual Meeting of Stockholders of Citizens South
Banking Corporation, which will be held at the Gaston County Public Library at
1555 East Garrison Boulevard, Gastonia, North Carolina 28054-5156, on May 14,
2007 at 10:30 a.m., local time, and all adjournments thereof. The accompanying
Notice of Annual Meeting of Stockholders and this proxy statement are first
being mailed to stockholders on or about April 20, 2007.
- --------------------------------------------------------------------------------
REVOCATION OF PROXIES
- --------------------------------------------------------------------------------
Stockholders who execute proxies in the form solicited hereby retain
the right to revoke them in the manner described below. Unless so revoked, the
shares represented by such proxies will be voted at the annual meeting and all
adjournments thereof. Proxies solicited on behalf of the Board of Directors of
Citizens South Banking Corporation will be voted in accordance with the
directions given thereon. Please sign and return your proxy to our corporate
secretary at Citizens South Banking Corporation in order for your vote to be
counted. Where no instructions are indicated, signed proxies will be voted "FOR"
the proposals set forth in this proxy statement for consideration at the annual
meeting.
Proxies may be revoked by sending written notice of revocation to the
Secretary of Citizens South Banking Corporation, Paul L. Teem, Jr., at the
address of Citizens South Banking Corporation shown above, by filing a duly
executed proxy bearing a later date or by voting in person at the annual
meeting. The presence at the annual meeting of any stockholder who had given a
proxy shall not revoke such proxy unless the stockholder delivers his or her
ballot in person at the annual meeting or delivers a written revocation to the
Secretary of Citizens South Banking Corporation prior to the voting of such
proxy.
- --------------------------------------------------------------------------------
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
- --------------------------------------------------------------------------------
Holders of record of Citizens South Banking Corporation common stock at
the close of business on March 15, 2007 are entitled to one vote for each share
held. As of March 15, 2007, there were 8,015,947 shares of common stock issued
and outstanding. The presence in person or by proxy of at least a majority of
the issued and outstanding shares of common stock entitled to vote is necessary
to constitute a quorum at the annual meeting.
In accordance with the provisions of our Certificate of Incorporation,
record holders of common stock who beneficially own in excess of 10% of the
outstanding shares of common stock (the "Limit") are not entitled to any vote
with respect to the shares held in excess of the Limit. Our Certificate of
Incorporation authorizes the Board of Directors (i) to make all determinations
necessary to implement and apply the Limit, including determining whether
persons or entities are acting in concert, and (ii) to demand that any person
who is reasonably believed to beneficially own stock in excess of the Limit
supply information to us to enable the Board of Directors to implement and apply
the Limit.
<page>
Persons and groups who beneficially own in excess of five percent of
Citizens South Banking Corporation's common stock are required to file certain
reports with the Securities and Exchange Commission regarding such ownership
pursuant to the Securities Exchange Act of 1934. The following table sets forth
beneficial ownership of Citizens South Banking Corporation's outstanding common
stock, as of March 15, 2007, by those persons who held more than five percent of
Citizens South Banking Corporation's outstanding shares and by directors and
executive officers of Citizens South Banking Corporation, individually and as a
group.
<table>
<caption>
Amount of Shares Owned and Percent of Shares of
Name and Address of Beneficial Owner (1) Nature of Beneficial Ownership (2) Common Stock Outstanding
- ----------------------------------------------------- ----------------------------------- ------------------------
<s> <c> <c>
Mendon Capital Advisors Corp. (3) 814,284 10.16%
150 Allens Creek Road
Rochester, New York 14618
Citizens South Bank Employee Stock Ownership Plan (4) 424,865 5.30%
519 South New Hope Road
Gastonia, North Carolina 28054-4040
Senator David W. Hoyle 204,429 2.55%
Ben R. Rudisill, II 137,741 1.72%
Kim S. Price 271,131 3.38%
James J. Fuller 56,481 *
Charles D. Massey 112,967 1.40%
Eugene R. Matthews, II 106,595 1.33%
David C. McGuirt 10,030 *
Gary F. Hoskins 123,637 1.54%
Paul L. Teem, Jr. 195,357 2.44%
Michael R. Maguire 53,821 *
Vance B. Brinson, Jr. 54,822 *
Daniel M. Boyd, IV 38,697 *
J. Stephen Huffstetler 65,866 *
Kimberly G. Cooke 10,792 *
All directors and executive officers 1,442,366 17.99%
as a group (14 persons)
</table>
- --------------------------
(1) The address for each listed individual is 519 South New Hope Road,
Gastonia, North Carolina 28054-4040.
(2) For information regarding the nature of beneficial ownership for each
listed individual.
(3) Based exclusively on a Schedule 13G filed by Mendon Capital Advisors Corp.
with the Securities and Exchange Commission February 13, 2007.
(4) All shares are held on behalf of the plan by a third-party trustee.
* Less than 1%.
- --------------------------------------------------------------------------------
VOTING PROCEDURES AND METHOD OF COUNTING VOTES
- --------------------------------------------------------------------------------
As to the election of directors, the proxy card provided by the Board
of Directors enables a stockholder to vote "FOR" the election of the two
nominees proposed by the Board of Directors or to "WITHHOLD AUTHORITY" to vote
for the nominees being proposed. Under Delaware law and our Certificate of
Incorporation and Bylaws, directors are elected by a plurality of the shares
voted at the annual meeting without regard to either broker non-votes or proxies
as to which the authority to vote for the nominee is withheld.
As to the ratification of Cherry, Bekaert & Holland, L.L.P. as
independent registered public accounting firm of Citizens South Banking
Corporation, by checking the appropriate box a stockholder may vote "FOR" the
item, vote "AGAINST" the item or "ABSTAIN" from voting on the item. The
ratification of the independent registered public accounting firm must be
approved by a majority of the shares voted at the annual meeting without regard
to broker non-votes or proxies marked abstain.
In the event at the time of the annual meeting there are not sufficient
votes for a quorum or to approve or ratify any matter being presented, the
annual meeting may be adjourned in order to permit the further solicitation of
proxies.
2
<page>
Proxies solicited hereby will be returned to Citizens South Banking
Corporation and will be tabulated by Kelly Woodward Byrd, CPA, Vice President
and Controller of Citizens South Bank, the inspector of election designated by
the Board of Directors of Citizens South Banking Corporation.
- --------------------------------------------------------------------------------
PROPOSAL I--ELECTION OF DIRECTORS
- --------------------------------------------------------------------------------
Citizens South Banking Corporation's Board of Directors is currently
composed of seven persons, and is divided into three classes with one class of
directors elected each year. Directors are generally elected to serve for a
three-year period and until their respective successors shall have been elected
and shall qualify. Two directors will be elected at the annual meeting. The
Board of Directors has nominated Kim S. Price and Eugene R. Matthews, II for
three-year terms, each of whom has agreed to serve if elected.
The table below sets forth certain information, as of the record date,
regarding the Board of Directors. Historical information includes service as a
director with Citizens South Bank and its predecessors. It is intended that the
proxies solicited on behalf of the Board of Directors (other than proxies in
which the vote is withheld as to one or more nominees) will be voted at the
annual meeting for the election of the nominees identified below. If any nominee
is unable to serve, the shares represented by all such proxies will be voted for
the election of such substitute as the Board of Directors may recommend. At this
time, the Board of Directors knows of no reason why any of the nominees might be
unable to serve, if elected. There are no arrangements or understandings between
any nominee and any other person pursuant to which such nominee was selected.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE
NOMINEES LISTED IN THIS PROXY STATEMENT.
<table>
<caption>
Shares of
Current Common Stock
Director Term Beneficially Percent
Name Age Positions Held Since Expires Owned(1) of Class
- ------------------------- ------ ------------------------------- -------- ----------- ------------ -------------
<s> <c> <c> <c> <c> <c>
NOMINEES
Kim S. Price 51 President, Chief Executive 1997 2007 271,131(2) 3.10%
Officer and Director
Eugene R. Matthews, II 50 Director 1998 2007 106,595(3) 1.22%
DIRECTORS
James J. Fuller 63 Director 1972 2008 56,481(4) *
Charles D. Massey 69 Director 1971 2008 112,967(4) 1.29%
David C. McGuirt 65 Executive Vice President 2005 2008 10,030 *
and Director
Senator David W. Hoyle 68 Chairman 1975 2009 204,429(5) 2.34%
Ben R. Rudisill, II 63 Vice Chairman 1977 2009 137,741(6) 1.58%
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Gary F. Hoskins 44 Executive Vice President, 123,637(7) 1.42%
Treasurer and Chief
Financial Officer
Paul L. Teem, Jr. 59 Executive Vice President, 195,357(8) 2.24%
Secretary and Chief
Administrative Officer
Michael R. Maguire 49 Senior Vice President and 53,821(9) *
Chief Credit Officer
Vance B. Brinson, Jr. 60 Executive Vice President 54,822(10) *
Daniel M. Boyd, IV 45 Executive Vice President 38,697(11) *
J. Stephen Huffstetler 51 Senior Vice President 65,866(12) *
Kimberly G. Cooke 38 Senior Vice President 10,792(13) *
All directors and executive officers 1,442,366(14)(15) 16.51%
as a group (14 persons)
(footnotes begin on following page)
</table>
3
<page>
(footnotes from previous page)
(1) Unless otherwise indicated, each person effectively exercises sole (or
shared with spouse) voting and dispositive power as to the shares
reported. The percent of class is calculated against a total of 8,734,918,
which includes 8,015,947 common shares issued and outstanding plus 718,971
shares of potential stock in the form of presently exercisable stock
options on March 15, 2007.
(2) Includes 154,307 shares that may be acquired pursuant to presently
exercisable stock options.
(3) Includes 27,665 shares that may be acquired pursuant to presently
exercisable stock options, plus 18,000 shares owned by a charitable
foundation of which Mr. Matthews serves as President and as a trustee.
(4) Includes 22,670 shares that may be acquired pursuant to presently
exercisable stock options.
(5) Includes 30,731 shares that may be acquired pursuant to presently
exercisable stock options.
(6) Includes 30,754 shares that may be acquired pursuant to presently
exercisable stock options.
(7) Includes 50,561 shares that may be acquired pursuant to presently
exercisable stock options.
(8) Includes 74,059 shares that may be acquired pursuant to presently
exercisable stock options.
(9) Includes 33,908 shares that may be acquired pursuant to presently
exercisable stock options.
(10) Includes 37,126 shares that may be acquired pursuant to presently
exercisable stock options.
(11) Includes 20,000 shares that may be acquired pursuant to presently
exercisable stock options.
(12) Includes 35,476 shares that may be acquired pursuant to presently
exercisable stock options.
(13) Includes 7,852 shares that may be acquired pursuant to presently
exercisable stock options.
(14) Includes 145,458 shares held indirectly by executive officers in
Bank-sponsored qualified retirement plans, which consists of 68,931 shares
allocated to the accounts of executive officers under the 401(k) Plan and
excludes the remaining 179,431 shares owned by the 401(k) Plan for the
benefit of employees, and 76,527 shares allocated to the accounts of
executive officers under the ESOP and excludes the remaining 348,338
shares owned by the ESOP for the benefit of employees. Under the terms of
the 401(k) Plan and the ESOP, shares of common stock allocated to the
accounts of employees are voted in accordance with the instructions of the
respective employees. Unallocated shares in the ESOP are voted by the ESOP
trustee in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated shares, unless
its fiduciary duty requires otherwise.
(15) Includes 547,779 shares that may be acquired pursuant to presently
exercisable stock options.
* Less than 1%
The business experience for the past five years for each of Citizens
South Banking Corporation's directors and executive officers is as follows:
Directors
Senator David W. Hoyle is a North Carolina State Senator and has served
in that position since 1993. Prior to that, Senator Hoyle was a self-employed
real estate developer and investor. Senator Hoyle has served as Chairman of the
Board since January 1998. Senator Hoyle also serves as a director of The Shaw
Group, a publicly traded company.
Ben R. Rudisill, II is the President of Rudisill Enterprises, Inc., a
wholesale beverage distributor, and has served in that position since 1976. Mr.
Rudisill has served as Vice Chairman of the Board since January 1998.
Kim S. Price is the President and Chief Executive Officer of Citizens
South Banking Corporation and Citizens South Bank, and has served in these
positions since August 1997.
James J. Fuller is the President of Mount Holly Furniture Company,
Inc., and has served in that position since 1972. This corporation currently is
primarily engaged in real estate.
Charles D. Massey is a private investor and retired in 2003 as the
Managing Partner of Massey Properties, a real estate investment firm, a position
he had served in since 1975. From 1957 to 2000, Mr. Massey also served in
various positions with The Massey Company, Inc., a wholesale industrial
distributor, from which he retired in December 2000 as Director of Information
Services.
Eugene R. Matthews, II is the Vice President and Regional Director of
Stores of Belk, Inc., a department store chain, and has served in that position
since 1998. From 1980 to 1998, Mr. Matthews served as Senior Vice President and
a director of Matthews-Belk Co., Inc., a department store chain.
David C. McGuirt is an Executive Vice President of Citizens South
Banking Corporation and Citizens South Bank, and has served in these positions
and as a Director since November 1, 2005. Prior to that, he served as Chief
Executive Officer and Corporate Secretary of Trinity Bank, Monroe, North
Carolina, from its organization in 1998 until it was acquired by Citizens South
Banking Corporation and merged into Citizens South Bank on October 31, 2005. He
previously served as Executive Vice President of the Bank of Union from 1984
until it was merged
4
<page>
into First Charter National Bank in 1998 and, prior to that, he was employed by
United Carolina Bank and its predecessor banks for 20 years.
Executive Officers Who are Not Directors
Gary F. Hoskins has served as Executive Vice President, Treasurer and
Chief Financial Officer of Citizens South Banking Corporation and Citizens South
Bank since August 1997.
Paul L. Teem, Jr. has served as Executive Vice President and Secretary
of Citizens South Banking Corporation and Citizens South Bank since 1983, and
Chief Administrative Officer since November 2000.
Michael R. Maguire has served as Senior Vice President and Chief Credit
Officer of Citizens South Bank since May 1999. Prior to that Mr. Maguire served
as a Vice President and in various executive capacities in the commercial
banking functions of First Union National Bank of North Carolina from 1984 to
May 1999.
Vance Burton ("Burt") Brinson, Jr. has served as Executive Vice
President of Citizens South Bank since March 2002. Prior to that Mr. Brinson
served as a Senior Vice President and in various executive capacities in the
commercial banking functions of Wachovia Bank, N.A., from 1977 to March 2002.
Daniel M. Boyd, IV has served as Executive Vice President of Citizens
South Bank since September 2002. Prior to that Mr. Boyd served as Executive Vice
President - Commercial Lending at First Gaston Bank of North Carolina from 1995
to September 2002. Prior to that Mr. Boyd served as Vice President - Commercial
Banking and in various executive capacities in the commercial banking functions
of Wachovia Bank, N.A., from 1984 to July 1995.
John Stephen ("Steve") Huffstetler has served as Senior Vice President
of Citizens South Bank since March 1997.
Kimberly ("Kim") Goins Cooke has served as a Senior Vice President of
Citizens South Bank since October 17, 2005. Mrs. Cooke joined Citizens South
Bank as Vice President in August 2003 and serves as Chief Information Officer,
having charge of Loan Administration, Deposit Operations, and Information
Technology. From 2002 to 2003, she served as Assistant Vice President of Bank
Operations at Carolina Trust Bank, Lincolnton, North Carolina. From 1995 to
2002, she served as Senior Vice President of Bank Operations at First Gaston
Bank, and, prior to that, she was employed as a Loan Officer by Lincoln Bank of
North Carolina for six years.
Board Independence
The Board of Directors has determined that, except as to Messrs. Price
and McGuirt, each member of the Board is an "independent director" within the
meaning of the Nasdaq corporate governance listing standards. Messrs. Price and
McGuirt are not considered independent because they are executive officers of
Citizens South Banking Corporation.
In determining the independence of the directors listed above, the
Board of Directors reviewed the following transactions, which are not required
to be reported under "--Transactions With Certain Related Persons," below.
Senator David W. Hoyle has two residential mortgage loans and a home equity line
of credit with Citizens South Bank. Director Eugene R. Matthews, II, has a
mortgage loan with Citizens South Bank. Director Ben R. Rudisill, II has a home
equity line of credit with Citizens South Bank, is a guarantor of a commercial
line of credit with Citizens South Bank to a company of which Mr. Rudisill is a
50% partner, and is the sole owner of another company that has a commercial line
of credit with Citizens South Bank.
References to our Website Address
References to our website address throughout this proxy statement and
the accompanying materials are for informational purposes only, or to fulfill
specific disclosure requirements of the Securities and Exchange Commission's
rules or the listing standards of the Nasdaq Stock Market. These references are
not intended to, and do not, incorporate the contents of our website by
reference into this proxy statement or the accompanying materials.
5
<page>
Meetings and Committees of the Board of Directors
General. The business of Citizens South Banking Corporation is
conducted at regular and special meetings of the full Board and its standing
committees. The standing committees include the Executive, Audit, Nominating and
Corporate Governance and Compensation Committees. During the year ended December
31, 2006, the Board of Directors of Citizens South Banking Corporation held four
regular meetings. No member of the Board or any committee thereof attended fewer
than 75% of the aggregate of: (i) the total number of meetings of the board of
directors (held during the period for which he or she has been a director); and
(ii) the total number of meetings held by all committees of the board on which
he or she served (during the periods that he or she served). Executive sessions
of the independent directors are held on a regularly scheduled basis. While
Citizens South Banking Corporation has no formal policy on director attendance
at annual meetings of stockholders, directors are encouraged to attend. All
then-current directors attended the last Annual Meeting of Stockholders held on
May 8, 2006.
Executive Committee. The Executive Committee consists of Directors
Hoyle (Chairman), Rudisill, Matthews and Price. The Executive Committee meets as
necessary when the Board is not in session to exercise general control and
supervision in all matters pertaining to the interests of Citizens South Banking
Corporation, subject at all times to the direction of the Board of Directors.
The Executive Committee met 12 times during the year ended December 31, 2006.
Compensation Committee. The Compensation Committee consists of
Directors Rudisill (Chairman), Fuller and Matthews. The Compensation Committee
reviews and administers compensation, including stock options and stock awards,
benefits and other matters of personnel policy and practice. The Committee met
three times during the year ended December 31, 2006. Each member of the
Compensation Committee is considered "independent" as defined in the Nasdaq
corporate governance listing standards. Citizens South Banking Corporation's
Board of Directors has adopted a written charter for the Committee, which is
available at Citizens South Banking Corporation's website at
www.citizenssouth.com. The report of the Compensation Committee is included
elsewhere in this proxy statement.
The Compensation Committee makes all compensation decisions for the
President and Chief Executive Officer and approves recommendations from the
President and Chief Executive Officer regarding compensation for all other
senior executives, including the other named executives. The President and Chief
Executive Officer annually reviews the performance of each senior executive
(other than the President and Chief Executive Officer whose performance is
reviewed by the Compensation Committee). The conclusions reached and
recommendations based on these reviews, including with respect to salary
adjustments and annual award amounts, are presented to the Compensation
Committee. The Compensation Committee can exercise its discretion in modifying
any recommended adjustments or awards to executives. For a discussion of the
role of compensation consultants in assisting the Compensation Committee, see
"Compensation Discussion and Analysis--Setting Executive Compensation Using
Benchmarking and Survey Data."
Nominating and Corporate Governance Committee. The Nominating and
Corporate Governance Committee consists of Directors Fuller (Chairman), Hoyle,
Massey, Rudisill and Matthews. Each member of the Nominating and Corporate
Governance Committee is considered "independent" as defined in the Nasdaq
corporate governance listing standards. Citizens South Banking Corporation's
Board of Directors has adopted a written charter for the Committee, which is
available at Citizens South Banking Corporation's website at
www.citizenssouth.com. The Committee met once during the year ended December 31,
2006.
The functions of the Nominating and Corporate Governance Committee
include the following:
o to lead the search for individuals qualified to become members of
the Board and to select director nominees to be presented for
stockholder approval;
o to review and monitor compliance with the requirements for board
independence;
6
<page>
o to review the committee structure and make recommendations to the
Board regarding committee membership;
o to develop and recommend to the Board for its approval a set of
corporate governance guidelines; and
o to develop and recommend to the Board for its approval a
self-evaluation process for the Board and its committees.
The Nominating and Corporate Governance Committee identifies nominees
by first evaluating the current members of the Board of Directors willing to
continue in service. Current members of the Board with skills and experience
that are relevant to Citizens South Banking Corporation's business and who are
willing to continue in service are first considered for re-nomination, balancing
the value of continuity of service by existing members of the Board with that of
obtaining a new perspective. If any member of the Board does not wish to
continue in service, or if the Committee or the Board decides not to re-nominate
a member for re-election, or if the size of the Board is increased, the
Committee would solicit suggestions for director candidates from all Board
members. In addition, the Committee is authorized by its charter to engage a
third party to assist in the identification of director nominees. The Nominating
and Corporate Governance Committee would seek to identify a candidate who at a
minimum satisfies the following criteria:
o has the highest personal and professional ethics and integrity and
whose values are compatible with Citizens South Banking
Corporation's;
o has had experiences and achievements that have given him or her the
ability to exercise and develop good business judgment;
o is willing to devote the necessary time to the work of the Board and
its committees, which includes being available for Board and
committee meetings;
o is familiar with the communities in which Citizens South Banking
Corporation operates and/or is actively engaged in community
activities;
o is involved in other activities or interests that do not create a
conflict with his or her responsibilities to Citizens South Banking
Corporation and its stockholders; and
o has the capacity and desire to represent the balanced, best
interests of the stockholders of Citizens South Banking Corporation
as a group, and not primarily a special interest group or
constituency.
In addition, the Nominating and Corporate Governance Committee will
determine whether a candidate satisfies the qualifications requirements of our
Bylaws, which require any person appointed or elected to the Board of Directors
to own at least 100 shares of our common stock and to reside or work in a county
in which Citizens South Bank maintains an office (at the time of appointment or
election) or in a county contiguous to a county in which Citizens South Bank
maintains an office.
Finally, the Nominating and Corporate Governance Committee will take
into account whether a candidate satisfies the criteria for "independence" under
the Nasdaq corporate governance listing standards, and if a nominee is sought
for service on the audit committee, the financial and accounting expertise of a
candidate, including whether the individual qualifies as an audit committee
financial expert.
Procedures for the Recommendation of Director Nominees by Stockholders.
The Nominating and Corporate Governance Committee has adopted procedures for the
submission of recommendations for director nominees by stockholders. There have
been no material changes to these procedures since they were previously
disclosed in the proxy statement for our 2006 annual meeting of stockholders. If
a determination is made that an additional candidate is needed for the Board,
the Nominating and Corporate Governance Committee will consider candidates
submitted by Citizens South Banking Corporation's stockholders. Stockholders can
submit qualified names of candidates for director by writing to our Corporate
Secretary, at 519 South New Hope Road, Gastonia,
7
<page>
North Carolina 28054-4040. The Corporate Secretary must receive a submission not
less than ninety (90) days prior to the anniversary date of Citizens South
Banking Corporation's proxy materials for the preceding year's annual meeting
for a candidate to be considered for next year's annual meeting of stockholders.
The submission must include the following information:
o a statement that the writer is a stockholder and is proposing a
candidate for consideration by the Nominating and Corporate
Governance Committee;
o the qualifications of the candidate and why the candidate is being
proposed;
o the name and address of the stockholder as they appear on Citizens
South Banking Corporation's books, and number of shares of Citizens
South Banking Corporation's common stock that are owned beneficially
by such stockholder (if the stockholder is not a holder of record,
appropriate evidence of the stockholder's ownership will be
required);
o the name, address and contact information for the candidate, and the
number of shares of common stock of Citizens South Banking
Corporation that are owned by the candidate (if the candidate is not
a holder of record, appropriate evidence of the stockholder's
ownership will be required);
o a statement of the candidate's business and educational experience;
o such other information regarding the candidate as would be required
to be included in the proxy statement pursuant to Securities and
Exchange Commission Rule 14A;
o a statement detailing any relationship between the candidate and
Citizens South Banking Corporation;
o a statement detailing any relationship between the candidate and any
customer, supplier or competitor of Citizens South Banking
Corporation;
o detailed information about any relationship or understanding between
the proposing stockholder and the candidate; and
o a statement that the candidate is willing to be considered and
willing to serve as a director if nominated and elected.
Submissions that are received and that meet the criteria outlined above
are forwarded to the Chairman of the Nominating and Corporate Governance
Committee for further review and consideration. A nomination submitted by a
stockholder for presentation by the stockholder at an annual meeting of
stockholders must comply with the procedural and informational requirements
described in this proxy statement under the heading "Stockholder Proposals and
Nominations." No submission for Board nominees were received by Citizens South
Banking Corporation for the annual meeting.
Stockholder Communications with the Board. A stockholder of Citizens
South Banking Corporation who wishes to communicate with the Board or with any
individual director may write to the Corporate Secretary of Citizens South
Banking Corporation, 519 South New Hope Road, Gastonia, North Carolina
28054-4040, Attention: Board Administration. The letter should indicate that the
author is a stockholder and if shares are not held of record, should include
appropriate evidence of stock ownership. Depending on the subject matter,
management will:
o forward the communication to the director or directors to whom it is
addressed;
o attempt to handle the inquiry directly, for example where it is a
request for information about Citizens South Banking Corporation or
a stock-related matter; or
8
<page>
o not forward the communication if it is primarily commercial in
nature, relates to an improper or irrelevant topic, or is unduly
hostile, threatening, illegal or otherwise inappropriate.
At each Board meeting, management will present a summary of all
communications received since the last meeting that were not forwarded and make
those communications available to the directors.
The Audit Committee. The Audit Committee consists of Directors Massey
(Chairman), Rudisill and Matthews. Each member of the Audit Committee is
considered "independent" as defined in the Nasdaq corporate governance listing
standards and under Securities and Exchange Commission Rule 10A-3. The duties
and responsibilities of the Audit Committee include, among other things:
o retaining, overseeing and evaluating an independent registered
public accounting firm to audit Citizens South Banking Corporation's
annual financial statements;
o in consultation with the independent registered public accounting
firm and the internal auditor, reviewing the integrity of Citizens
South Banking Corporation's financial reporting processes, both
internal and external;
o approving the scope of the audit in advance;
o reviewing the financial statements and the audit report with
management and the independent registered public accounting firm;
o considering whether the provision by the external independent
registered public accounting firm of services not related to the
annual audit and quarterly reviews is consistent with maintaining
the independent registered public accounting firm's independence;
o reviewing earnings and financial releases and quarterly reports
filed with the Securities and Exchange Commission;
o consulting with the internal audit staff and reviewing management's
administration of the system of internal accounting controls;
o approving all engagements for audit and non-audit services by the
independent registered public accounting firm; and
o reviewing the adequacy of the audit committee charter.
The Audit Committee met four times during the year ended December 31,
2006. The Audit Committee reports to the Board on its activities and findings.
The Board of Directors has determined that Ben R. Rudisill, II qualifies as an
"audit committee financial expert" as that term is defined by the rules and
regulations of the Securities and Exchange Commission. Information with respect
to Mr. Rudisill's experience is included in "--Directors."
Audit Committee Report
The Audit Committee operates under a written charter adopted by the
Board of Directors which is available on Citizens South Banking Corporation's
website at www.citizenssouth.com.
Management has the primary responsibility for Citizens South Banking
Corporation's internal controls and financial reporting processes. The
independent registered public accounting firm is responsible for performing an
independent audit of Citizens South Banking Corporation's consolidated financial
statements in accordance with auditing standards generally accepted in the
United States and issuing a report thereon. The Audit Committee's responsibility
is to monitor and oversee these processes.
9
<page>
The Audit Committee has issued a report that states as follows:
o We have reviewed and discussed with management, and the independent
registered public accounting firm, our audited consolidated
financial statements for the year ended December 31, 2006 and
management's assessment of the effectiveness of internal controls
over financial reporting as of December 31, 2006;
o We have discussed with the independent registered public accounting
firm the matters required to be discussed by Statement on Auditing
Standards No. 61, Communications with Audit Committees, as amended;
and
o We have received the written disclosures and the letter from the
independent registered public accounting firm required by
Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees, and have discussed with the
independent registered public accounting firm their independence.
Based on the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in our Annual Report on Form 10-K for the year
ended December 31, 2006 and be filed with the Securities and Exchange
Commission. In addition, the Audit Committee engaged Cherry, Bekaert & Holland,
L.L.P. as our independent registered public accounting firm for the year ending
December 31, 2007, subject to the ratification of this appointment by our
stockholders.
This report shall not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, except to the extent that Citizens South Banking
Corporation specifically incorporates this information by reference, and shall
not otherwise be deemed filed under such Acts.
The Audit Committee
Charles D. Massey (Chairman)
Eugene R. Matthews, II
Ben R. Rudisill, II
Code of Ethics
Citizens South Banking Corporation has adopted a Code of Ethics that is
applicable to the officers, directors and employees of Citizens South Banking
Corporation, including its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. The Code of Ethics is available on Citizens South Banking
Corporation's website at www.citizenssouth.com. Amendments to and waivers from
the Code of Ethics will also be disclosed on Citizens South Banking
Corporation's website. There were no such amendments or waivers in 2006.
Compensation Committee Interlocks and Insider Participation
Our Compensation Committee determines the salaries to be paid each year
to the Chief Executive Officer and those executive officers who report directly
to the Chief Executive Officer. The Compensation Committee consists of Directors
Rudisill (Chairman), Fuller and Matthews. None of these individuals was an
officer or employee of Citizens South Banking Corporation during the year ended
December 31, 2006, or is a former officer of Citizens South Banking Corporation.
In addition, none of these individuals had any relationship requiring disclosure
under "--Transactions with Certain Related Person." During the year ended
December 31, 2006, (i) no executive officer of Citizens South Banking
Corporation served as a member of the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served on the Compensation Committee of Citizens South
Banking Corporation; (ii) no executive officer of Citizens South Banking
Corporation served as a director of another entity, one of whose executive
officers served on the Compensation Committee of Citizens South Banking
10
<page>
Corporation; and (iii) no executive officer of Citizens South Banking
Corporation served as a member of the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of Citizens South Banking Corporation.
Compensation Committee Report
The Compensation Committee has issued a report that states that it has
reviewed and discussed the section entitled "Compensation Discussion and
Analysis" with management. Based on this review and discussion, the Compensation
Committee recommended to the Board of Directors that the "Compensation
Discussion and Analysis" be included in our Proxy Statement.
This report has been provided by the Compensation Committee, which
consists of Directors Rudisill (Chairman), Fuller and Matthews.
Compensation Discussion and Analysis
Private Securities Litigation Reform Act Safe Harbor Statement
This Compensation Discussion and Analysis contains certain "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 which may be identified by the use of such words as "may,"
"believe," "expect," "anticipate," "consider" "should," "plan," "estimate,"
"predict," "continue," "probable," and "potential" or the negative of these
terms or other comparable terminology. Examples of forward-looking statements
include, but are not limited to, estimates with respect to the financial
condition, results of operations and business of Citizens South Banking
Corporation. These factors include, but are not limited to:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among the financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins
or affect the value of our investments;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause
our financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all of the areas in which we do business, or conditions in the
securities markets or the banking industry may be less favorable
than we currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o applicable technological changes may be more difficult or expensive
than we anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate;
o litigation or matters before regulatory agencies, whether currently
existing or commencing in the future, may delay the occurrence or
non-occurrence of events longer than we anticipate;
o the risks associated with continued diversification of assets and
adverse changes to credit quality;
11
<page>
o difficulties associated with achieving expected future financial
results;
o the risk of an economic slowdown that would adversely affect credit
quality and loan originations; and
o changes in prevailing compensation practices.
Our ability to predict results or the actual effects of our plans or
strategies is inherently uncertain. As such, forward-looking statements can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be guaranteed.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this filing. We do not intend to
update any of the forward-looking statements after the date of the Proxy
Statement that includes this Compensation Discussion and Analysis or to conform
these statements to actual events.
Introduction
Set forth below is (1) a description of our decision- and policy-making
process for executive compensation, (2) a discussion of the background and
objectives of our compensation programs for executive officers and (3) a
description of the material elements of the compensation. The following table
sets forth for the year ended December 31, 2006, certain information as to the
total remuneration paid by us to Mr. Price, who serves as President and Chief
Executive Officer, to Mr. Hoskins, who serves as Chief Financial Officer, and to
the three most highly compensated executive officers of Citizens South Banking
Corporation or Citizens South Bank, other than Messrs. Price and Hoskins, to
whom we refer here collectively as our "Named Executive Officers."
Name Titles
--------------------- ----------------------------------------
Kim S. Price President, Chief Executive Officer,
and Director
Gary F. Hoskins Executive Vice President, Treasurer,
and Chief Financial Officer
Daniel M. Boyd, IV Executive Vice President (Commercial)
David C. McGuirt Executive Vice President and Director
Vance B. Brinson, Jr. Executive Vice President (Retail)
Descriptions of compensation plans, programs and individual
arrangements referred to in the Compensation Discussion and Analysis (other than
broad-based plans that are open to substantially all salaried employees
including the named executives) that are governed by written documents are
merely summaries of the documents themselves and are qualified in their entirety
by reference to the full text of their governing documents.
Overview of Compensation Program
The Compensation Committee (for purposes of this analysis, the
"Committee") of the Board has responsibility for establishing, implementing and
continually monitoring adherence to our compensation philosophy. The Committee
ensures that the total compensation paid to our management and executives is
fair, reasonable and competitive. Generally, the types of compensation and
benefits provided to our management, including the Named Executive Officers, are
similar to those provided to other executive officers.
Compensation Philosophy and Objectives
The Committee believes that the most effective executive compensation
program is one that is designed to reward the achievement of specific annual,
long-term and strategic goals, and which aligns executives' interests with those
of the stockholders by rewarding performance above established goals, with the
ultimate objective of improving stockholder value. The Committee evaluates both
performance and compensation to ensure that we
12
<page>
maintain our ability to attract and retain superior employees in key positions
and that compensation provided to key employees remains competitive relative to
the compensation paid to similarly situated executives of our peer companies. To
that end, the Committee believes executive compensation packages provided to our
executives, including the Named Executive Officers, should include both cash and
stock-based compensation that reward performance as measured against established
goals.
Role of Executive Officers in Compensation Decisions
The Committee makes all compensation decisions for the President and
Chief Executive Officer and approves recommendations from the President and
Chief Executive Officer regarding compensation for all other senior executives,
including the other named executives. The President and Chief Executive Officer
annually reviews the performance of each senior executive (other than the
President and Chief Executive Officer whose performance is reviewed by the
Committee). The conclusions reached and recommendations based on these reviews,
including with respect to salary adjustments and annual award amounts, are
presented to the Committee. The Committee can exercise its discretion in
modifying any recommended adjustments or awards to executives.
Setting Executive Compensation Using Benchmarking and Survey Data
Based on the foregoing compensation philosophy and objectives, the
Committee has structured our annual and long-term incentive-based cash and
non-cash executive compensation to motivate executives to achieve the business
goals set for Citizens South Banking Corporation and Citizens South Bank and
reward the executives for achieving such goals. In furtherance of these goals,
in November, 2006, the Committee engaged Benmark East, an Atlanta, Georgia,
human resources, benefits, and insurance consulting subsidiary of CBIZ, a
national leader in providing executive compensation solutions, notably in the
financial services industry, to conduct peer group studies on compensation and
benefits and industry-standard comparisons for the Committee's annual review of
its total compensation program for the President and Chief Executive Officer as
well as for other senior executives and directors. Benmark East provided the
Committee with relevant market data and alternatives to consider when making
compensation decisions for the Named Executive Officers.
In making compensation decisions, the Committee compares each element
of total compensation against a peer group of ten publicly-traded financial
institutions that have assets that are relatively comparable to Citizens South
Bank and that are located in North Carolina and Virginia (collectively, the
"Peer Banks"). The Peer Banks, which are periodically reviewed and updated by
the Committee, consists of companies against which the Committee believes we
compete for talent and for stockholder investment. The Compensation Committee
requests and reviews survey data for information relating to compensation
practices at other financial institutions of similar asset and business mix as
well as general compensation trends in the private sector. In addition to
comparative information gathered from the proxy statements of the Peer Banks,
corroborative information has been identified from a compensation survey
conducted by America's Community Banks. The consultants have ensured that the
findings are reasonably consistent with information in the Benmark East database
of compensation and benefits information for executives and directors among
financial institutions in the Mid-Atlantic region of the United States. For
2006, the Compensation Committee considered survey data for the following
companies selected, in consultation with its compensation consultant, based on
their asset size, market capitalization, headcount, and business focus: The
companies comprising the Peer Banks, their headquarters locations, and ticker
symbols are:
o Lexington State Bank, Lexington, North Carolina, LXBK;
o First South Bank, Washington, North Carolina, FSBK;
o Bank of North Carolina, Thomasville, North Carolina, BNCN;
o Cooperative Bank, Wilmington, North Carolina, COOP;
o Peoples Bank, Newton, North Carolina, PEBK;
o The East Carolina Bank, Engelhard, North Carolina, ECBE;
o Four Oaks Bank and Trust Company, Four Oaks, North Carolina,
FOFN.OB;
o American National Bank and Trust Company, Danville, Virginia, AMNB;
o Citizens and Farmers Bank, West Point, Virginia, CFFI; and
o Highlands Union Bank, Abingdon, Virginia, HBKA.OB.
13
<page>
Objectives
The creation of long-term value for our stockholders is highly
dependent on the development and effective execution of business strategy by our
executive officers. Our executive officer compensation program seeks to:
o attract and retain executive officers with the skills, experience,
and vision to create and execute a strategy for the prudent and
efficient deployment of invested capital and retained earnings in a
manner that will create superior long-term, cumulative returns to
our stockholders through dividends and stock price appreciation;
o motivate behavior in furtherance of these goals; and
o reward favorable results.
The factors that influence the design of our executive compensation
program include, but are not limited to, the following:
o We operate in a highly regulated industry. We value
industry-specific management experience and a track record of
effective interaction with our primary regulators.
o The success of our product offerings depends on the behavior of
customers in the local communities that we serve, as well as on
local, regional, and national interest rates, employment levels and
real estate markets, and on other economic factors that influence
the performance of our loan and investment portfolios. We value
executives with sufficient tenure in our markets to have experienced
the behavior of our customers, products, and investments in various
phases of the business cycle.
o We are a community-based institution focused primarily on organic
expansion of our core business. We value commitment to shared
objectives and individual contribution to their achievement.
o Strategic initiatives that enhance long-term stockholder value may
not always improve short-term operating results or stockholder
returns. We value decision-making that focuses on long-term results
with sensitivity to short-term effects.
o We operate in interest rate and credit markets that are in a state
of flux. We value flexible decision-making that respects our
business plan but adapts quickly to change.
o External recruitment of executives can have substantial monetary
costs, unpredictable outcomes, and a disruptive effect on corporate
culture. We value the retention of performing incumbent executives
and the internal development of their successors where possible,
turning to external recruitment where retention and management
development programs do not meet our needs.
o Our principal operating subsidiary, Citizens South Bank, is a
federally chartered savings bank, and compensation paid for service
as an executive officer of the savings bank must take into account
certain specific considerations enumerated in regulations issued by
the Office of Thrift Supervision of the United States Treasury
Department.
The executive compensation program includes several components
designed, in combination, to address these factors. Our executive officer
compensation program was in a state of transition during 2006 as we adapted it
to our new organizational structure and business plan resulting from our
acquisition of Trinity Bank, completed in October 2005. We expect that the
components of our executive compensation program and their relative significance
may change further from year to year as we grow and circumstances change.
14
<page>
Key Elements of the Compensation Package
In General. Our 2006 compensation program for our Named Executive
Officers consisted of three key elements: base salary, which is designed to
provide a reasonable level of predictable income commensurate with market
standards of the position held; annual cash incentives, which are designed to
motivate our executives to meet or exceed annual performance objectives that are
derived from our business plan; and long-term incentives in the form of stock
options and restricted stock, which are designed to retain talented employees
and provide an incentive to maximize stockholder return in the longer term. We
also provide certain fringe benefits and perquisites, retirement, and other
termination benefits. We have designed our executive compensation program such
that, as a general matter, a significant portion of each Named Executive
Officer's total annual compensation opportunities will be comprised of
performance-based compensation opportunities and a majority of the
performance-based compensation opportunities will be comprised of long-term
incentives with value derived exclusively from stock price appreciation.
Base Salary. Base salaries are reviewed annually. They do not vary
substantially and directly with annual performance but, instead, reflect market
factors, experience, and tenure in office, job content and sustained performance
over an extended period, and general cost of living factors. Base salaries of
our Named Executive Officers have been positioned below the median of the
indicated range of salaries derived from the competitive salary review prepared
for our Compensation Committee by its independent consultant, reflecting a
combination of sustained individual performance by the Named Executive Officers,
experience, and tenure in office.
In 2006, base salary increases for our Named Executive Officers were as
follows:
Resulting annual
Name % Increase $ Increase base salary rate
- ----------------------- ---------- ---------- ----------------
Kim S. Price 9.53 20,016 $230,016
Gary F. Hoskins 10.01 10,008 110,016
Daniel M. Boyd, IV 13.42 15,084 127,512
David C. McGuirt -- -- 151,608
Vance B. Brinson, Jr. 13.42 15,084 127,512
Percentage and dollar increases vary based on the increase necessary to
achieve the desired salary positioning for each named executive, based on the
survey results. Mr. McGuirt's base salary was not adjusted in 2006 or 2007 as he
joined the bank on October 31, 2005, in connection with the acquisition of
Trinity Bank, where he had served as Chief Executive Officer. Mr. Price's base
salary was further increased effective January 1, 2007, to $250,000.
Cash Incentives. We employ performance-based annual incentives under
our Executive Annual Incentive Plan to motivate Named Executive Officers to
execute specific financial and non-financial elements of our business plan and
to reward individual conduct that supports shared corporate goals. Annual
incentives are formulaic and earned principally on the basis of the level of
attainment of pre-determined earnings targets, together with individual
performance objectives for each Named Executive Officer. Actual incentive
payments are based in part on a subjective evaluation of performance and in part
on the achievement of shared corporate financial goals.
Our business plan contemplates an expansion of our franchise primarily
through de novo branch openings in selected markets, leveraging our balance
sheet through wholesale borrowings to fund loans, dividend payments and stock
repurchases, all as consistent with prevailing business conditions and
opportunities, expense discipline and the preservation of or growth in annual
net income. For 2006, each of our Named Executive Officers (other than Mr.
McGuirt) had the opportunity to earn an incentive payment once our earnings per
share equaled or exceeded a threshold level of $0.63 per fully diluted share,
further based on a subjective, retrospective review of corporate and individual
performance indicators. A subjective assessment of performance relative to
individual performance objectives determined the ultimate payment. This approach
enabled us to control the portion of our net income before taxes and
extraordinary items that will be expended for cash incentives. It focused
management on the income effects of increases in overhead expense associated
with expansion of the branch network, balance sheet growth, and other strategic
and operating decisions. It also afforded management flexibility to adapt to
business conditions as they emerged during the year and afforded the
Compensation Committee the ability to reward or
15
<page>
discipline management for its actions based on a retrospective review of the
business context in which action was taken.
Individual performance factors for Mr. Price consisted of an assessment
of the effectiveness of capital deployment initiatives during the year, expense
discipline reflected in our efficiency ratio, effective execution of the
acquisition of Trinity Bank, development of a compelling vision and long-term
corporate strategy, and personal involvement in the development of a strong
investor relations program. Individual performance factors for Mr. Hoskins
included effective operational management as reflected in the achievement of
individual objectives by his direct reports, effective integration of Trinity
Bank, progress on development of key managers and a management succession plan,
successful use of wholesale funding sources to achieve balance sheet and revenue
growth, progress in re-balancing the components of our securities portfolio, and
effective integration of the Trinity Bank investment and loan portfolios into
Citizens South Banking Corporation's systems and portfolios, as well as
contributions to investor relations and long-term strategic planning
initiatives. Individual performance factors for Mr. Boyd and Mr. Brinson
consisted of success in expanding our Central Piedmont Carolinas franchise in
commercial and retail banking through additional de novo branch openings and
success in building brand recognition through effective advertising, superior
customer service, and community involvement.
Final award decisions reflected our actual earnings per share, the
Compensation Committee's subjective assessment of the individual performance
factors described above, and, in the case of executives other than the Chief
Executive Officer, the Chief Executive Officer's subjective assessment of their
individual performance. The Compensation Committee also took into account the
adverse interest rate environment that continued and the slowdown in residential
real estate markets that emerged during the year and the quality of management's
response to these and other competitive factors.
For the fiscal year ended December 31, 2006, the Named Executive
Officers' incentive payments received in February 2007, maximum award
opportunities, and actual incentives awarded as a percentage of maximum, were:
2006 Bonus amount paid Maximum award Actual award as a
Name ($) opportunity percent of maximum
- -------------------- ---------------------- ------------- ------------------
Kim S. Price 34,500 $ 39,700 87%
Gary F. Hoskins 14,302 14,900 96
Daniel M. Boyd, IV 16,577 17,270 96
David C. McGuirt -- -- --
Vance B. Brinson, Jr. 12,751 16,560 77
The payment of annual incentives to each of the named executives in
amounts less than the maximum incentive opportunity is attributable to the level
of annual income per share and extraordinary items for 2006 and the weight
accorded to the Compensation Committee's assessment of individual performance
relative to individual goals in each case. No specific factors were dispositive
in any individual case. Mr. McGuirt was not included in the awards for 2006 as
he joined the bank on October 31, 2005, in the Trinity Bank acquisition. Awards
made to Named Executive Officers for performance in 2006 are also reflected in
the "Non-equity incentive plan compensation" column of the Summary Compensation
Table.
Equity Compensation. Our practice is to consider stock option and
restricted stock grants, both at the time of hire or promotion for newly hired
or promoted executive officers and annually in connection with our annual
executive officer compensation review for incumbent executive officers. We use
equity awards as a retention tool and as an incentive for executive officers to
make strategic and operating decisions that, over time, are reflected in stock
price appreciation. Awards vest ratably over a vesting period, contingent only
on continued service through the vesting date or the occurrence of certain
acceleration events such as death, disability, retirement, and change in
control. Awards are valued based on the grant-date fair market value of our
common stock (in the case of restricted stock awards) and the grant-date value
of stock options based on a recognized option valuation methodology. We
amortized the grant-date value over the award's vesting period and included each
year's amortization amount as part of that year's compensation package in
evaluating the overall compensation package. It has not been our practice to
reduce compensation or retirement benefits in subsequent years based on stock
price performance that causes previously granted equity awards to increase in
value, or to grant additional compensation or retirement benefits
16
<page>
where stock price performance has impaired the value of previous awards, because
such practices could weaken the intended linkage between equity compensation and
mid- to long-term stockholder return.
In 1999, Citizens South Bank implemented, and Citizens South Banking
Corporation's stockholders approved, the 1999 Stock Option Plan. In 2003,
Citizens South Banking Corporation adopted, and its stockholders approved, the
2003 Stock Option Plan. There were no options granted to the Named Executive
Officers or to Citizens South Banking Corporation's directors during 2006.
Pursuant to these plans, options to purchase common stock of Citizens
South Banking Corporation were granted to directors and certain executive
officers and employees of Citizens South Banking Corporation as determined by
the Compensation Committee that administers the plans. The Committee has never
granted options with an exercise price that is less than the closing price of
our shares of common stock on the grant date. The committee determines the
period over which such awards will vest and become exercisable. The 1999 plan
provides for awards in the form of stock options, reload options, and dividend
equivalent rights. The 2003 plan provides for awards in the form of stock
options and reload options. Limited stock appreciation rights were eliminated
from both plans by action of the Board of Directors in December 2005. Stock
option awards' value is based on and directly tied to stock price appreciation.
The stock options granted to our Named Executive Officers have vested.
Pursuant to the 2003 Citizens South Banking Corporation Recognition and
Retention Plan, restricted stock granted on November 3, 2003, to directors and
certain executive officers vest over a seven-year period, commencing on November
3, 2003, at the rate of 30% on November 3, 2003, 10% on January 2, 2004, 10% on
November 3, 2005, and 10% per year on November 3 of each year thereafter in
order to strengthen the retention aspect of restricted stock grants. Vesting
accelerates in the event of a change of control.
Stock options and recognition and retention stock granted in 2003 have
been structured to reward holders for stock price appreciation that is achieved
without compromising fundamental elements of our business plan. Our business
plan contemplates deposit and loan growth achieved through favorable product
pricing, made possible by operating efficiency. Our current policy is to
consider stock option grants and/or recognition and retention stock grants to
executive officers, with consideration given to episodic grants at the time of
promotion or hire to promoted or newly hired executives, and, in general, to
price stock option grants shortly after the release of quarterly or annual
financial results or at other times when we would permit our directors and
executives to purchase and sell our common stock on the open market under our
securities trading policy. Stock options and recognition and retention stock
have been granted to all Named Executive Officers except Mr. McGuirt.
Other Elements of the Executive Compensation Package
Our 2006 compensation program for our Named Executive Officers included
the following additional elements:
Retirement Benefits. In addition to base salary, annual cash
incentives, and long-term equity incentives, our Named Executive Officers are
eligible to participate in the same broad-based, tax-qualified retirement and
savings plans as other employees with similar dates of hire. They are also
eligible to participate in certain non-qualified supplemental executive
retirement plans because applicable tax rules do not permit them to receive
benefits under our broad-based, tax-qualified plans at the same percentage of
salary as other employees. The supplemental executive retirement plans generally
provide benefits that, when added to the benefits available under our qualified
plans, approach being equivalent, as a percentage of salary, to the benefits
provided to other employees. We provide these benefits in lieu of additional
current cash or equity compensation to assure that our Named Executive Officers
have a source of retirement income that is consistent and available at the time
of retirement without regard to the performance of their personal savings and
investment portfolios and because these programs enjoy more favorable corporate
and/or personal income tax treatment under the federal tax laws than current
compensation. Although we also use the supplemental plans to provide additional
pension benefits to executives who are recruited from other employers in
mid-career, we do not currently grant additional years of service credits for
periods of employment with a prior employer as part of the employment
negotiation. Our broad-based and executive-level retirement programs have
benefit formulas that are tied to base salary. Cash incentives, restricted
stock, option-related compensation and other items of compensation do not
increase or reduce benefit levels.
17
<page>
Perquisites and Other Benefits. We provide Named Executive Officers
with perquisites and other personal benefits that we and the Committee believe
are reasonable and consistent with its overall compensation program to better
enable us to attract and retain superior employees for key positions. The
Committee periodically reviews the levels of perquisites and other personal
benefits provided to Named Executive Officers.
We provide the following perquisites and benefits to our Named
Executive Officers: the use of a company automobile for Messrs. Price and
McGuirt, automobile allowances for Messrs. Boyd and Brinson; membership dues in
private country clubs for Messrs. Price, McGuirt, Boyd, and Brinson; and travel
and entertainment expenses, from time to time, for the wives of Named Executive
Officers to accompany them on certain business travel. We provide them as a
convenience to our executives and because we believe our business benefits from
the travel and entertainment activities that they facilitate. We provide these
benefits in kind, but the Compensation Committee takes the cost of these items
into account in setting other elements of compensation.
Financial planning assistance is made available to the Named Executive
Officers, but no Named Executive Officers were provided financial planning
assistance during the year ended December 31, 2006. Named Executive Officers are
also provided participation in the plans and programs described above and the
use of administrative assistant services for personal matters. In addition, upon
relocation, key executive officers may receive, at the discretion of the
Compensation Committee, a relocation allowance.
Except as to Mr. McGuirt, the named beneficiary of each Named Executive
Officer and certain other members of senior management designated by the
Compensation Committee are entitled to receive a salary continuation benefit
upon such executive's death through the 2003 Citizens South Bank Salary
Continuation Plan that was available to bank officers of Vice President rank or
higher serving in May, 2003. In the event of the executive's death prior to the
executive's retirement, his or her designated beneficiaries would be entitled to
receive the executive's then-current annual salary for a period of twelve
months, paid in semi-monthly installments, after withholding federal and state
taxes payable by the beneficiary. In the event of the executive's death after
actual retirement no benefit would be payable. The executive forfeits all
benefits under the Senior Executive Death Benefit Program if he or she
voluntarily terminates his or her employment with Citizens South Banking
Corporation or if we terminate the executive's employment for cause. However,
benefits under the program may be paid to an eligible executive whose employment
is terminated as a result of a disability or for any other reason, other than
termination for cause, prior to such executive attaining age 65.
Attributed costs of the personal benefits described above for Messrs.
Boyd and Brinson for the fiscal year ended December 31, 2006, are included in
the "All other compensation" column of the Summary Compensation Table.
Attributed costs of the personal benefits described above for Messrs. Price,
Hoskins and McGuirt were less than $10,000 for the year ended December 31, 2006,
and are therefore not included in the Summary Compensation Table.
Employment Agreements and Change in Control Agreements. To promote
stability and continuity of senior management and consistent with the practices
of other financial institutions of similar size and asset and business mix, we
have entered into employment or change of control severance agreements with each
of our Named Executive Officers. We have found it necessary to offer these
arrangements as part of the recruitment packages for newly hired executives. We
have offered them to incumbent executives so that they perceive our package of
employment and change in control protections to be comparable to those available
at other financial institutions. If we did not follow market practice in this
regard, we believe we would have to offer increased annual compensation
packages, at increased recurring annual cost, in order to attract and retain the
executive talent we require.
The employment agreements with Messrs. Price, Hoskins, McGuirt, Boyd,
and Brinson help us protect our franchise by restricting their ability to work
for competitors in our markets for a specified period following a voluntary
resignation without good reason or a discharge with cause and prohibiting
solicitation of or disturbance of our relations with customers and employees for
a specified period following termination for any reason. We choose to secure
these restrictions through employment agreements rather than attaching them to
equity compensation grants or other items of compensation so that they remain in
effect indefinitely and are not tied to a decision to continue or discontinue,
or to the value of, a particular item of compensation. These agreements are
designed to provide a termination benefit equal in value to three years'
compensation and benefits (excluding stock options,
18
<page>
restricted stock or other equity compensation) in the event of discharge without
cause or resignation following certain triggering events, including a diminution
in title, position, duties or authority, failure to pay or a reduction in
compensation, involuntary relocation or other material breach of contract in the
case of Mr. Price and for eighteen months in the case of Messrs. Hoskins,
McGuirt, Boyd, and Brinson. In addition, for a limited period of time following
a change in control, Messrs. Price, Hoskins, McGuirt, Boyd, and Brinson may each
choose to resign for any reason or no reason and collect the same termination
benefits that would be available if their resignation had followed a specified
triggering event. We provide these benefits as a retention incentive for these
named executives to remain in their positions through the conclusion of a change
in control transaction that will be in place regardless of the existence or
value, from time to time, of other items of compensation with retention
features. We have provided for the resignation window following a change in
control for these individuals to reduce the extent to which personal issues
would serve to distract them from corporate matters during the negotiation and
execution of a change in control transaction.
The change in control agreements in effect with our other Named
Executive Officers restrict their right to solicit or disturb our relations with
our customers or employees following termination of employment for any reason
following a change in control. We choose to secure these restrictions through
change in control agreements rather than attaching them to equity compensation
grants or other items of compensation so that they remain in effect indefinitely
and are not tied to a decision to continue or discontinue, or to the value of, a
particular item of compensation. These agreements are designed to provide a
termination benefit equal in value to eighteen months' compensation and benefits
(excluding stock options, restricted stock or other equity compensation) in the
event of discharge without cause or resignation following certain triggering
events, including a diminution in title, position, duties or authority, failure
to pay or a reduction in compensation, involuntary relocation or other material
breach of contract. We provide these benefits as a retention incentive for these
named executives to remain in their positions through the conclusion of a change
in control transaction that will be in place regardless of the existence or
value, from time to time, of other items of compensation with retention
features. Information regarding applicable payments under such agreements for
the Named Executive Officers is provided under the heading "Potential Payments
to Named Executive Officers."
Material Policies and Procedures
The Compensation Committee does not seek to set compensation levels at
prescribed percentile rankings within a peer group. It does use survey data to
determine on a historical basis the degree of correlation between the base
salary, annual incentive and equity compensation provided by us (expressed as a
percentile ranking relative to our peers) and our percentile ranking among the
same peer group for performance measures that include, but are not limited to,
return on average assets, return on average equity, asset growth, total
stockholder return, efficiency ratio and net income growth.
Impact of Accounting and Tax Treatment
Section 162(m). Section 162(m) of the Internal Revenue Code imposes a
$1 million annual limit, per executive officer, on our federal tax deduction for
certain types of compensation paid to the Named Executive Officers. It has been
the Compensation Committee's practice to structure the compensation and benefit
programs offered to the Named Executive Officers with a view to maximizing the
tax deductibility for us of amounts paid. However, in structuring compensation
programs and making compensation decisions, the Compensation Committee considers
a variety of factors, including the materiality of the payments and tax
deductions involved, the need for flexibility to address unforeseen
circumstances, and the need to attract and retain qualified management. After
considering these factors, the Compensation Committee may decide to authorize
payments all or part of which would be nondeductible for federal tax purposes.
It is anticipated that certain payments, including restricted stock awards, may
be non-deductible, in whole or in part, in certain circumstances, as a result of
section 162(m).
Sections 4999 and 280G. Section 4999 of the Internal Revenue Code
imposes a 20% excise tax on certain "excess parachute payments" made to
"disqualified individuals." Under section 280G of the Internal Revenue Code,
such excess parachute payments are also nondeductible to Citizens South Banking
Corporation. If payments that are contingent on a change of control to a
disqualified individual exceed three times the individual's "base amount," they
constitute "excess parachute payments" to the extent they exceed one times the
individual's base amount.
19
<page>
We have entered into employment agreements with Mr. Price, pursuant to
which we will make an indemnification payment to the executive officer so that,
after payment of the initial excise tax and all additional income and excise
taxes imposed on the indemnification payment, the executive officer would retain
approximately the same net after-tax amounts under the employment agreement that
he would have retained if there was no excise tax. We have done this so that, in
general, whether or not we have experienced a change in control will not affect
the net after-tax value to Mr. Price of termination benefits under his
employment agreements. Messrs. Hoskins, McGuirt, Boyd, and Brinson are not
entitled to such payments under their change of control agreements; since their
change in control agreements provide for termination benefits only in the event
of a change in control, their circumstances do not present the concerns that
caused us to provide for indemnification payments in Mr. Price's employment
agreement. Neither Citizens South Banking Corporation Savings, nor Citizens
South Bank, is permitted to claim a federal income tax deduction for the portion
of the change of control payment that constitutes an "excess parachute payment,"
or the indemnification payment.
Nonqualified Deferred Compensation. On October 22, 2004, the American
Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable
to nonqualified deferred compensation arrangements. Although we have not yet
analyzed the final regulations that were published on April 10, 2007, we believe
we are operating in good faith compliance with the statutory provisions
currently in effect. A more detailed discussion of our nonqualified deferred
compensation arrangements is discussed under the table captioned "Nonqualified
Deferred Compensation."
Accounting for Stock-Based Compensation. All then-outstanding unvested
stock options granted prior to December 31, 2003, were declared vested by the
Board on October 17, 2005. Beginning on January 1, 2006, we began accounting for
stock-based payments in accordance with the requirements of FASB Statement
123(R).
Accounting Considerations. The Compensation Committee is informed of
the financial statement implications of the elements of the executive officer
compensation program. However, a compensation element's probable contribution to
the objectives of our executive officer compensation program and its projected
economic cost, which may or may not be reflected on our financial statements,
are the primary drivers of executive officer compensation decisions.
Personal Income Tax Considerations. Federal and state income tax laws
do not apply uniformly to all items of compensation, with the result that
certain items of compensation are more valuable, on a net after-tax basis, to
our named executives, or less costly, on a net after-tax basis, to us. We take
the federal and state personal income tax treatment of various items of
compensation into account to the extent consistent with the corporate goals and
objectives of our executive compensation program.
Stock Ownership Policy
Other than the requirement contained in our Bylaws for a director's
ownership of stock, we do not have a formal policy governing stock ownership.
Nevertheless, we encourage stock ownership for our directors and officers. The
purpose of this practice is to promote director and officer stock ownership that
will cause our directors and officers to share, with other stockholders, a
financial interest in the performance of our stock. The Nominating and
Governance Committee is authorized to adopt stock ownership guidelines for our
officers and directors as it deems necessary or appropriate.
This report shall not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, except to the extent that Citizens South Banking
Corporation specifically incorporates this information by reference, and shall
not otherwise be deemed filed under such Acts.
The Compensation Committee
Ben R. Rudisill, II (Chairman)
James J. Fuller
Eugene R. Matthews, II
20
<page>
Executive Compensation
The following table sets forth for the year ended December 31, 2006
certain information as to the total remuneration paid by us to Mr. Price, who
serves as President and Chief Executive Officer, Mr. Hoskins, who serves as
Chief Financial Officer, and the three most highly compensated executive
officers of Citizens South Banking Corporation or Citizens South Bank other than
Messrs. Price and Hoskins ("Named Executive Officers").
<table>
<caption>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Change in
pension value
and
nonqualified
Non-equity deferred
incentive plan compensation All other
Name and principal Stock awards Option compensation earnings Compensation
position Year Salary ($) Bonus ($) ($)(1) awards ($) ($)(2) ($)(3) ($)(4)(5) Total ($)
- ------------------------ ----- ---------- --------- ----------- ---------- ------------ ------------ ------------ ---------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Kim S. Price 2006 230,016 -- 63,920 -- 34,500 34,457 52,290 415,183
President, Chief
Executive Officer and
Director
Gary F. Hoskins 2006 110,016 -- 30,080 -- 14,302 4,442 30,687 189,527
Executive Vice
President, Treasurer and
Chief Financial Officer
Daniel M. Boyd, IV, 2006 127,512 -- 15,040 -- 16,577 4,512 41,410 205,051
Executive Vice President
David C. McGuirt, 2006 151,608 -- -- -- -- 30,618 8,419 190,645
Executive Vice President
and Director
Vance B. Brinson, Jr., 2006 127,512 -- 15,040 -- 12,751 43,050 51,004 249,357
Executive Vice President
</table>
(footnotes begin on following page)
21
<page>
(footnotes from previous page)
(1) Reflects the value of all stock awards that vested during the year ended
December 31, 2006 that were granted on November 3, 2003 under the 2003
Citizens South Banking Corporation Recognition and Retention Plan, approved
by stockholders on October 23, 2006. The value is the amount recognized for
financial statement reporting purposes with respect to the year ended
December 31, 2006 in accordance with Statement of Financial Accounting
Standards ("SFAS") 123(R). The assumptions used in the valuation of these
awards are included in Notes 1 and 14 to our audited financial statements
for the year ended December 31, 2006 included in our Annual Report on Form
10-K for the year ended December 31, 2006 as filed with the Securities and
Exchange Commission.
(2) See "Compensation Discussion and Analysis--Key Elements of the Compensation
Package--Cash Incentives" for information related to payments listed in
this column.
(3) For Messrs. Price, Hoskins, Boyd and Brinson, amounts in this column are
attributed solely to increases in pension values. For Mr. McGuirt, includes
$6,631 of an increase in pension values and $23,987 of earnings on
nonqualified deferred compensation.
(4) The compensation represented by the amounts for 2006 set forth in the All
Other Compensation column for the Named Executive Officers is detailed in
the following table. See footnote (5) for a discussion of perquisites
listed in the following table.
<table>
<caption>
Cash
Employee Dividends
stock on
ownership Life unvested Total all
Tax 401(k) plan plan insurance restricted other
Name Perquisites reimbursements contributions contributions premiums stock compensation
- -------------- ----------- --------------- ------------- ------------- ---------- ----------- ------------
<s> <c> <c> <c> <c> <c> <c> <c>
Kim S. -- $13,128 $6,900 $24,219 $1,774 $6,269 $52,290
Price
Gary F. -- $6,178 $3,308 $17,932 $319 $2,950 $30,687
Hoskins
Daniel M. $13,080 $3,089 $3,825 $18,749 $1,192 $1,475 $41,410
Boyd, IV
David C. -- -- $4,548 -- $3,871 -- $8,419
McGuirt
Vance B. $17,895 $3,089 $3,825 $20,543 $4,177 $1,475 $51,004
Brinson, Jr.
</table>
(5) Total perquisites for Messrs. Price, Hoskins and McGuirt were less than
$10,000 for the year ended December 31, 2006. For the year ended December
31, 2006, perquisites provided to Mr. Boyd consisted of $4,080 for country
club fees and $9,000 for automobile expenses, and perquisites provided to
Mr. Brinson consisted of $4,200 for country club fees and $13,695 for
automobile expenses.
Employment Agreements. Citizens South Banking Corporation and Citizens
South Bank (collectively, "Citizens South") have entered into an employment
agreement with their President and Chief Executive Officer, Kim S. Price. The
agreement provides for a term of 36 months. On each anniversary date, the
agreement may be extended for an additional 12 months, so that the remaining
term shall be 36 months. If the agreement is not renewed, the agreement will
expire 36 months following the anniversary date. At January 1, 2007, the base
salary for Mr. Price was $250,000. The base salary may be increased but not
decreased. In addition to the base salary, the agreement provides for, among
other things, participation in stock benefit plans and other employee and fringe
benefits applicable to executive personnel. The agreement provides for
termination by Citizens South Bank for cause at any time. In the event Citizens
South Bank terminates the executive's employment for reasons other than for
cause, or in the event of the executive's resignation from Citizens South Bank
upon the occurrence of certain events that would amount to a constructive
termination, the executive would be entitled to receive his base salary for the
remaining unexpired term of the employment agreement, plus an amount of cash
equal to the value of unvested stock options held by the executive payable in a
lump sum within 90 days of termination of employment, plus an amount of cash
equal to the value of unvested employer contributions to the Citizens South
401(k) Plan as of the
22
<page>
date of termination of employment. Citizens South would also continue the
executive's life, health, dental and disability coverage for the unexpired term
of the agreement.
In the event of the executive's disability, the executive will receive
his base salary for the remaining term of the agreement or one year, whichever
is longer, reduced by any benefits paid to the executive pursuant to any
disability insurance policy maintained by Citizens South Bank. Citizens South
would also continue the executive's life, health, dental and disability coverage
for the unexpired term of the agreement. In the event of the executive's death,
Citizens South Bank will pay his base salary to his named beneficiaries for one
year following his death, and will also continue medical, dental, and other
benefits to his family for one year.
In the event of a change in control followed by the executive's
involuntary termination, or voluntary resignation under circumstances that would
amount to a constructive termination, within 12 months after such change in
control, the executive will receive a lump sum cash payment equal to three times
the executive's annual compensation, including his base salary at the time of
the change of control or the time of his termination of employment, whichever is
greater, plus the average cash bonuses and cash incentive compensation earned by
the executive for the three years immediately preceding the change in control,
but excluding the value of any stock-based compensation. The executive will also
become fully vested in any qualified and non-qualified plans maintained by
Citizens South that do not otherwise address the effect of a change in control,
and Citizens South will contribute employer contributions to the Citizens South
401(k) plan on the executive's behalf as if the executive had remained employed
for the entire plan year. Citizens South would also continue the executive's
life, health, dental and disability coverage for the unexpired term of the
agreement. The agreement also provides for additional cash payments to
compensate the executive in the event the executive incurs an excise tax under
Sections 280G or 4999 of the Internal Revenue Code as a result of excess
parachute payments received by the executive in connection with a change in
control.
Citizens South Banking Corporation has entered into a two-year
employment agreement with Executive Vice President and Director David C.
McGuirt, beginning October 31, 2005. The agreement provides Mr. McGuirt an
annual salary of $151,608 and participation in Citizens South Bank's benefit and
insurance plans. In the event Citizens South Banking Corporation or Citizens
South Bank terminates Mr. McGuirt's employment for reasons other than for cause,
or in the event of his resignation from Citizens South Banking Corporation or
Citizens South Bank upon the occurrence of certain events that would amount to a
constructive termination, Mr. McGuirt would be entitled to receive his base
salary for the remaining unexpired term of the employment agreement.
In the event of a change in control followed by Mr. McGuirt's
involuntary termination, or his voluntary resignation under circumstances that
would amount to a constructive termination, within 12 months after such change
in control, Mr. McGuirt will receive a lump sum cash payment equal to his base
salary for the remaining unexpired term of the employment agreement. Mr. McGuirt
will also become fully vested in any non-qualified plans or arrangements
maintained by Citizens South Bank in which he participated that do not otherwise
address the effect of a change in control, and Citizens South Bank will
contribute employer contributions to the Citizens South 401(k) plan on Mr.
McGuirt's behalf as if he had remained employed for the entire plan year.
Citizens South Bank would also continue Mr. McGuirt's life, health, dental and
disability coverage for the unexpired term of the agreement.
Consulting and Non-Compete Agreement. Citizens South Bank and Mr.
McGuirt have entered into a two-year Consulting and Non-Compete Agreement,
effective November 1, 2007 (the first day of the month following the second
anniversary of the acquisition of Trinity Bank). Under the agreement, Mr.
McGuirt will receive a fee of $11,750 for each month of service, or a total of
$282,000 if he completes the entire two-year term.
Severance Agreements. Citizens South Banking Corporation has entered
into a severance agreement with each of Gary F. Hoskins, its Executive Vice
President and Chief Financial Officer, Daniel M. Boyd, IV, its Executive Vice
President, and Vance B. Brinson, Jr., its Executive Vice President, pursuant to
which each executive will be paid as severance a sum equal to one and one-half
times his annual compensation, including base salary on the date of the change
in control or on the date of the executive's termination of employment,
whichever is greater, plus cash bonuses and incentive compensation earned for
the calendar year before the change in control, or immediately before the year
of termination, whichever is greater. The executives will also become fully
vested in
23
<page>
any qualified and non-qualified plans in which they participate, if the plan
does not address the effect of a change in control, and will be entitled to have
contributions made on their behalf to a 401(k), retirement, or profit sharing
plan as if the executive's employment had not terminated before the end of the
plan year. In addition, the executive would be entitled to continued life,
medical and dental coverage for 18 months following termination of employment.
The term of the agreement continues during the term of his employment and for 12
months following a change in control of Citizens South Bank or Citizens South
Banking Corporation. The severance agreements supersede and replace the
merger/acquisition protection agreements previously entered into by Citizens
South and each of the executives.
Employee Stock Ownership Plan and Trust. Citizens South Bank
implemented an employee stock ownership plan in connection with its initial
mutual holding company reorganization. The employee stock ownership plan was
established effective January 1, 1998, and purchased 169,068 shares of common
stock in the initial public offering that was completed on April 9, 1998, and
105,198 shares in the offering that was completed on September 30, 2002.
Employees with at least one year of employment in which they work 1,000 hours or
more with Citizens South Bank and who have attained age 21 are eligible to
participate in the employee stock ownership plan. The employee stock ownership
plan borrowed funds from Citizens South Banking Corporation and used those funds
to purchase the shares of the common stock of Citizens South Banking
Corporation. The collateral for the loan is the common stock purchased by the
employee stock ownership plan. The loan is being repaid principally from
Citizens South Bank's contributions to the employee stock ownership plan over a
period of 15 years. The interest rate on the loan adjusts at the prime rate,
which is the base rate charged on corporate loans at large U.S. money center
commercial banks. Shares purchased by the employee stock ownership plan are held
in a suspense account for allocation among participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares released
from the suspense account in an amount proportional to the repayment of the
employee stock ownership plan loan are allocated among employee stock ownership
plan participants on the basis of compensation in the year of allocation. For
the plan year ended December 31, 2006, 32,340 shares were released from the
suspense account and allocated to employees. Benefits will not vest at all
during the first two years of service and will become 100% vested upon the
completion of three years of service. Employees who were employed by Gaston
Federal Savings and Loan Association, Citizens South Bank's mutual predecessor,
generally received credit for up to five years of service with the mutual
institution. A participant also becomes 100% vested upon early or normal
retirement, disability or death of the participant or a change in control (as
defined in the employee stock ownership plan). A participant who terminates
employment for reasons other than death, retirement or disability prior to three
years of credited service will forfeit his entire benefit under the employee
stock ownership plan. Benefits will be payable in the form of common stock and
cash upon death, retirement, early retirement, disability or separation from
service. Citizens South Bank's contributions to the employee stock ownership
plan are discretionary, and subject to the loan terms and tax law limits and,
therefore, benefits payable under the employee stock ownership plan cannot be
estimated. Citizens South Bank is required to record compensation expense in an
amount equal to the fair market value of the shares released from the suspense
account.
Citizens South Bank's Board of Directors administers the employee stock
ownership plan. Citizens South Bank has appointed an independent financial
institution to serve as trustee of the employee stock ownership plan. The
employee stock ownership plan committee may instruct the trustee regarding
investment of funds contributed to the employee stock ownership plan. The
employee stock ownership plan trustee, subject to its fiduciary duty, must vote
all allocated shares held in the employee stock ownership plan in accordance
with the instructions of participating employees. Under the employee stock
ownership plan, nondirected shares and shares held in the suspense account will
be voted in a manner calculated to most accurately reflect the instructions the
trustee has received from participants regarding the allocated stock so long as
such vote is in accordance with the provisions of ERISA.
24
<page>
Plan-Based Awards. The following table sets forth for the year ended
December 31, 2006 certain information as to grants of plan-based awards for the
Named Executive Officers.
<table>
<caption>
GRANTS OF PLAN-BASED AWARDS FOR THE YEAR ENDED DECEMBER 31, 2006
- -----------------------------------------------------------------------------------------------------------
Estimated future payouts under Non-equity incentive plan awards
Grant ----------------------------------------------------------------------
Name date Threshold ($) Target ($) Maximum ($)
- -------------------- -------- -------------- -------------- -------------
<s> <c> <c> <c> <c>
Kim S. Price 1/23/06 -- 39,700 39,700
Gary F. Hoskins 1/23/06 -- 14,900 14,900
Daniel M. Boyd, IV 1/23/06 -- 17,270 17,270
David C. McGuirt 1/23/06 -- -- --
Vance B. Brinson, Jr. 1/23/06 -- 16,560 16,560
</table>
25
<page>
Outstanding Equity Awards at Year End. The following table sets forth
information with respect to outstanding equity awards as of December 31, 2006
for the Named Executive Officers.
<table>
<caption>
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
- ----------------------------------------------------------------------------------------------------
Option awards
------------------------------------------------------------------------------
Equity
incentive plan
awards:
Number of Number of number of
securities securities securities
underlying underlying underlying
unexercised unexercised unexercised Option
options (#) options (#) unearned exercise Option expiration
Name exercisable unexercisable options (#) price ($) date
- ------------------- ------------ ------------- ------------- ---------- -----------------
<s> <c> <c> <c> <c> <c>
Kim S. Price 45,002 -- -- 5.605 04/19/2009
9,305 -- -- 15.06 04/19/2009
100,000 -- -- 15.04 11/03/2013
-- -- -- -- --
Gary F. Hoskins 10,561 -- -- 12.98 04/19/2009
40,000 -- -- 15.04 11/03/2013
-- -- -- -- --
Daniel M. Boyd, IV 20,000 -- -- 15.04 11/03/2013
-- -- -- -- --
David C. McGuirt -- -- -- -- --
Vance B. Brinson, Jr. 17,126 -- -- 7.264 03/25/2012
20,000 -- -- 15.04 11/03/2013
<caption>
------------------------------------------------------------------------------
Stock awards
------------------------------------------------------------------------------
Equity
incentive plan
awards:
Equity incentive market or
plan awards: payout value
Number of number of of unearned
shares or units Market value of unearned shares, shares, units
of stock that shares or units of units or other or other rights
have not stock that have not rights that have that have not
Name vested (#) vested ($) not vested (#) vested ($)
- ------------------- ------------ ------------------ ----------------- -----------------
<s> <c> <c> <c> <c>
Kim S. Price -- -- -- --
-- -- -- --
-- -- -- --
17,000(1) 219,980 -- --
Gary F. Hoskins -- -- -- --
-- -- -- --
8,000(1) 103,520 -- --
Daniel M. Boyd, IV -- -- -- --
4,000(1) 51,760 -- --
David C. McGuirt -- -- -- --
Vance B. Brinson, Jr. -- -- -- --
4,000(1) 51,760 -- --
</table>
- ---------------------------------
(1) Shares vest in equal installments on November 3, 2007, 2008, 2009 and 2010.
26
<page>
Stock Option Plans. In 1999 Citizens South Bank adopted, and Citizens
South Banking Corporation's stockholders approved, the 1999 Stock Option Plan.
In 2003, Citizens South Banking Corporation adopted, and its stockholders
approved, the 2003 Stock Option Plan.
There were no options granted to the Named Executive Officers or to
Citizens South Banking Corporation's directors during 2006.
Pursuant to these plans, options to purchase common stock of Citizens
South Banking Corporation were granted to directors and certain executive
officers and employees of Citizens South Banking Corporation as determined by
the Compensation Committee that administers the plans. The committee also
determines the period over which such awards will vest and become exercisable.
The 1999 plan provides for awards in the form of stock options, reload options,
and dividend equivalent rights. The 2003 plan provides for awards in the form of
stock options and reload options. Limited stock appreciation rights were
eliminated from both plans by action of the Board of Directors in December 2005.
Restricted Stock Plans. In 1999, Citizens South Bank adopted, and
Citizens South Banking Corporation's stockholders approved, the 1999 Recognition
and Retention Plan. In 2003, Citizens South Banking Corporation adopted and its
stockholders approved the 2003 Recognition and Retention Plan. Under these
plans, Citizens South Banking Corporation has issued common stock to key
employees and directors. Awards vest for plan participants in accordance with
schedules determined by the Compensation Committee of the Board of Directors. If
a recipient ceases continuous service with Citizens South Banking Corporation
due to normal retirement, death or disability, or following a change in control
of Citizens South Banking Corporation, shares subject to restriction will
immediately vest; in the event of cessation of continuous service for any other
reason, unvested shares are forfeited and returned to Citizens South Banking
Corporation. Recipients have the right to vote non-vested shares that have been
awarded and will receive dividends declared on such shares.
Option Exercises and Stock Vested. The following table sets forth
information with respect to option exercises and stock that vested during the
year ended December 31, 2006 for the Named Executive Officers. Information for
the "Value realized on vesting" column is based on the $15.04 per share trading
price of our common stock on November 3, 2006.
<table>
<caption>
OPTION EXERCISES AND STOCK VESTED FOR THE YEAR ENDED
DECEMBER 31, 2006
- ---------------------------------------------------------------------------------------------------------
Option awards Stock awards
----------------------------------------- ----------------------------------------
Number of shares Number of shares
acquired on exercise Value realized on acquired on vesting Value realized on
Name (#) exercise ($) (#) vesting ($)
- ------------------- --------------------- ----------------- ------------------- ------------------
<s> <c> <c> <c> <c>
Kim S. Price -- -- 4,250 63,920
Gary F. Hoskins -- -- 2,000 30,080
Daniel M. Boyd, IV -- -- 1,000 15,040
David C. McGuirt -- -- -- --
Vance B. Brinson, Jr. -- -- 1,000 15,040
</table>
27
<page>
Pension Benefits. The following table sets forth information with
respect to pension benefits at and for the year ended December 31, 2006 for the
Named Executive Officers.
<table>
<caption>
PENSION BENEFITS AT AND FOR THE YEAR ENDED DECEMBER 31, 2006
- -------------------------------------------------------------------------------------------------------------------
Number of years Present value of
credited service accumulated benefit Payments during last
Name Plan name (#) ($) fiscal year ($)
- ------------------- ------------------------------ ---------------- -------------------- --------------------
<s> <c> <c> <c> <c>
Kim S. Price Salary Continuation Agreement 9 236,504 --
Gary F. Hoskins Salary Continuation Agreement 9 31,102 --
Daniel M. Boyd, IV Salary Continuation Agreement 3 11,645 --
David C. McGuirt Supplemental Retirement Plan 1 113,470 --
Vance B. Brinson, Jr. Salary Continuation Agreement 4 111,103 --
</table>
Nonqualified Deferred Compensation Plans. The following table sets
forth information with respect to defined contribution and other nonqualified
deferred compensation plans at and for the year ended December 31, 2006 for the
Named Executive Officers. Information with respect to contributions to and the
aggregate balance of Mr. McGuirt is described below under "Supplemental
Agreement."
<table>
<caption>
NONQUALIFIED DEFERRED COMPENSATION AT AND FOR THE YEAR ENDED DECEMBER 31, 2006
- ---------------------------------------------------------------------------------------------------------------------------
Executive Registrant Aggregate
contributions in contributions in Aggregate balance at last
last fiscal year last fiscal year Aggregate earnings withdrawals/ fiscal year end
Name ($) ($) in last fiscal year ($) distributions ($) ($)
- ----------------------- ---------------- ---------------- ----------------------- ----------------- ---------------
<s>
Kim S. Price -- -- -- -- --
Gary F. Hoskins -- -- -- -- --
Daniel M. Boyd, IV -- -- -- -- --
David C. McGuirt -- -- 23,987(1) -- 412,935(2)
Vance B. Brinson, Jr. -- -- -- -- --
</table>
- --------------------
(1) Contributions included in the "Aggregate earnings in last fiscal year"
column were included as compensation of Mr. McGuirt in the Summary
Compensation Table.
(2) Amounts included in the "Aggregate balance at last fiscal year end" column
were not previously reported as compensation to Mr. McGuirt, as Mr. McGuirt
joined Citizens South Banking Corporation and Citizens South Bank on
October 31, 2005, and was not previously a Named Executive Officer of
Citizens South Banking Corporation.
Supplemental Agreement. On May 25, 2005, Citizens South Bank and Mr.
McGuirt entered into a Supplemental Agreement that (i) provides that the prior
employment agreement between Trinity Bank and Mr. McGuirt would terminate on the
effective date of the acquisition of Trinity Bank (October 31, 2005), (ii)
rescinds the section of the prior employment agreement between Trinity Bank and
Mr. McGuirt providing for payments in the event of a change in control, or
$387,102, which is the lump sum equivalent of 2.99 times Mr. McGuirt's average
taxable income for the five years immediately preceding the year of the change
in control; and (iii) provides for payments of the $387,102, plus interest at
the long-term applicable federal rate, to be annuitized and paid to Mr. McGuirt
by Citizens South Bank in ten equal annual installments beginning in January
2010 and ending in January 2019.
Salary Continuation Agreements. In 2004, Citizens South Bank entered
into Salary Continuation Agreements with certain executives, including Messrs.
Price, Hoskins, Brinson and Boyd. The Salary Continuation Agreements amend and
restate in their entirety, the prior Executive Supplemental Retirement Plan for
the benefit of the executives (other than Messrs. Boyd and Brinson who were not
covered by the Executive Supplemental Retirement Plan). The Salary Continuation
Agreements constitute a non-qualified, unfunded deferred compensation plan
evidenced by separate agreements for each executive. The amount of an
executive's benefit is determined under the individual agreement with the
executive, and is, assuming retirement at the normal retirement age of 65,
28
<page>
an annual benefit of $148,500 in the case of Mr. Price, and $45,000 in the case
of each of Messrs. Hoskins, Boyd and Brinson. The annual benefit is payable in
monthly installments for the executive's lifetime. In the event of termination
of employment prior to normal retirement age for reasons other than death,
disability, termination for cause or following a change in control, the
executive will receive a reduced benefit, payable at normal retirement age,
assuming the executive is at least partially vested in a benefit at the time of
termination of employment. In the case of Mr. Price, the reduced benefit is
presently fully vested. In all other cases, an executive will be 75% vested in a
reduced benefit at age 60, will increase in vesting at the rate of 5% per year
from age 61 to 65, and prior to age 60, will vest ratably in accordance with the
terms of the executive's Salary Continuation Agreement until the executive
attains age 60. As of January 1, 2007, Mr. Hoskins is 50% vested, and Messrs.
Boyd and Brinson are 20% vested. In the event Messrs. Price, Hoskins, Brinson or
Boyd becomes disabled prior to termination of employment at normal retirement
age and the executive's employment is terminated because of such disability, the
executive will be entitled to receive a disability benefit upon attainment of
normal retirement age. The early termination benefit and the disability benefit
are calculated as an annual payment stream of the accrual balance (or vested
accrual balance in the case of an early termination benefit other than due to
disability) that exists at the end of the year immediately prior to the year in
which the early termination or disability occurs, using a standard discount rate
of 8.5%, and increasing the benefit amount annually by 2% to offset inflation,
beginning in the year after payment of the benefit commences. In the event of
their termination of employment prior to normal retirement age due to
disability, Messrs. Price, Hoskins, Brinson and Boyd would receive an annual
benefit of $75,126, $18,516, $16,701 and $5,978, respectively, commencing upon
their normal retirement age. Upon their early retirement, Messrs. Price,
Hoskins, Brinson and Boyd would receive an annual benefit of $75,126, $9,258,
$3,340 and $1,196, respectively, commencing upon their normal retirement age.
The benefits are forfeitable by the executive if the executive's service is
terminated for cause.
In the event that an executive dies during active service or following
termination of employment while receiving benefits, Citizens South Bank will pay
to the executive's beneficiary, the accrual balance (or vested accrual balance
in the case of an early termination benefit) remaining at the time of the
executive's death. In addition, the executive's beneficiary will be entitled to
the following split dollar death benefits discussed immediately below.
In the event of a change in control of Citizens South Banking
Corporation followed by the executive's involuntary termination of employment
within 12 months or voluntary termination of employment within 12 months due to
good reason (as defined in the plan), each of Messrs. Price and Hoskins will be
entitled to their normal retirement age accrual benefit, discounted to present
value and payable within three days after termination of employment. The present
value of the payments that Messrs. Price and Hoskins would receive assuming that
a change in control occurred on December 31, 2006, is $467,492 and $75,585,
respectively. Under the same circumstances, each of Messrs. Boyd and Brinson
would be entitled to his then-existing accrual benefit, or $11,645 and $111,103,
respectively, without regard to his vesting percentage, payable within three
days after termination of employment. In addition, Mr. Price's Salary
Continuation Agreement provides a gross-up payment to him in the event the
change in control benefit payable under the Salary Continuation Agreement causes
an excess parachute payment under Section 280G of the Internal Revenue Code. The
Salary Continuation Agreements indemnify each executive for legal fees incurred
in pursuing the executive's rights to payment of the executive's benefit in the
event of a change in control. Such indemnification for legal fees is up to
$500,000 in the case of Mr. Price, $100,000 in the case of Mr. Hoskins, and
$25,000 in the case of each of Messrs. Boyd and Brinson. At December 31, 2006,
Messrs. Price, Hoskins, Brinson and Boyd had an accrual balance of $236,504;
$31,102; $111,103; and $11,645, respectively.
Split Dollar Death Benefits. In conjunction with the adoption of the
Salary Continuation Agreements, Citizens South Bank terminated each of the then
existing Endorsement Split Dollar Agreements and entered into new Endorsement
Split Dollar Agreements with the six executives covered by the Salary
Continuation Agreements. Under the new Endorsement Split Dollar Agreements, if
at the time of termination of the executive's employment, the executive is
entitled to benefits under the Salary Continuation Agreement, or if the
executive dies while employed by Citizens South Bank, the executive's
beneficiaries will be paid a death benefit equal to the product of 100% of the
net death proceeds (in excess of the cash surrender value of the policy)
multiplied by the executive's vested percentage under the Salary Continuation
Agreement (which will be deemed to be 100% in the event of the executive's
death, disability or termination due to a change in control). The executives'
vested percentages are described above in "--Salary Continuation Agreements." In
the event of their deaths as of December 31, 2006, the
29
<page>
beneficiaries of Messrs. Price, Hoskins, Boyd and Brinson would receive a split
dollar death benefit of $751,977, $238,352, $133,187 and $249,410, respectively.
Supplemental Retirement Plan for David McGuirt. On October 25, 2005,
Trinity Bank and Mr. McGuirt executed the Supplemental Retirement Plan for David
McGuirt. The plan freezes the 2003 Supplemental Retirement Plan Trinity Bank had
adopted for Mr. McGuirt's benefit and that had an accrued benefit of $107,000.
The plan provides that the accrued benefit of $107,000, plus interest at the
long-term applicable federal rate, will be annuitized and paid to Mr. McGuirt in
ten equal annual installments beginning in January 2010 and ending in January
2019. As the successor to Trinity Bank, Citizens South Bank has inherited the
payment obligations under the plan.
30
<page>
Potential Payments to Named Executive Officers
The following tables show potential payments that would be made to the
Named Executive Officers upon specified events, assuming such events occurred on
December 31, 2006, pursuant to Messrs. Price's and McGuirt's employment
agreements, Messrs. Hoskins', Boyd's, and Brinson's severance agreements, and
pursuant to shares of restricted stock that have been granted under our
recognition and retention plans. These tables do not reflect payments that would
be received by Mr. McGuirt under his Consulting and Non-Compete agreement and
under his Supplemental Retirement Plan, which are described above. These tables
also do not reflect payments that would be received by Messrs. Price, Hoskins,
Boyd or Brinson under their Salary Continuation Agreements, or their split
dollar agreements, which are also described above.
<table>
<caption>
Involuntary
Termination
or Termination Termination
for Good Upon or
Reason Following
Type of Before Change Change in Voluntary Termination Normal
Name Benefit in Control Control Termination for Cause Death Disability Retirement
- ----------------- ----------------------------- -------------- ------------ ----------- ---------- -------- ----------- ----------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Kim S. Price Severance pay under employment $517,536 $690,048 -- -- $230,016 $517,536 --
agreement
Bonus payment -- $59,500 -- -- -- -- --
Health care and other benefits $19,818 $19,818 -- -- -- $19,818 --
continuation
Acceleration of shares of -- $219,980 -- -- $219,980 $219,980 $219,980
unvested restricted stock
Tax gross-up -- $441,691 -- -- -- -- --
Gary F. Hoskins Severance pay under severance -- $165,024 -- -- -- -- --
agreement
Bonus payment -- $18,750 -- -- -- -- --
Health care and other benefits -- $7,860 -- -- -- -- --
continuation
Acceleration of shares of -- $103,520 -- -- $103,520 $103,520 $103,520
unvested restricted stock
Daniel M. Boyd, IV Severance pay under severance -- $191,268 -- -- -- -- --
agreement
Bonus payment -- $18,750 -- -- -- -- --
Health care and other benefits -- $7,980 -- -- -- -- --
continuation
Acceleration of shares of -- $51,760 -- -- $51,760 $51,760 $51,760
unvested restricted stock
</table>
31
<page>
<table>
<caption>
Involuntary
Termination
or Termination Termination
for Good Upon or
Reason Following
Type of Before Change Change in Voluntary Termination Normal
Name Benefit in Control Control Termination for Cause Death Disability Retirement
- ----------------- ----------------------------- -------------- ------------ ----------- ---------- -------- ----------- ----------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
David C. McGuirt Severance pay under employment $126,340 $126,340 -- -- $151,608 $151,608 --
agreement
Health care and other benefits $4,545 $4,545 -- -- -- $4,445 --
continuation
Vance B. Brinson, Severance pay under severance -- $191,268 -- -- -- -- --
Jr. agreement
Bonus payment -- $18,750 -- -- -- -- --
Health care and other benefits -- $8,018 -- -- -- -- --
continuation
Acceleration of shares of -- $51,760 -- -- $51,760 $51,760 $51,760
unvested restricted stock
</table>
32
<page>
Directors' Compensation
The following table sets forth for the year ended December 31, 2006
certain information as to the total remuneration we paid to our directors other
than Messrs. Price and McGuirt, who do not receive separate compensation for
their services as Directors.
<table>
<caption>
DIRECTOR COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2006
- ----------------------------------------------------------------------------------------------------------------------------------
Change in
pension value
and
Non-equity nonqualified
incentive plan deferred All other
Fees earned or Stock awards Option awards compensation compensation compensation
Name paid in cash ($) ($)(1) ($) ($) earnings ($)(2) ($)(3) Total ($)
- ---------------------- ----------------- ------------ ------------- -------------- --------------- ------------ -----------
<s> <c> <c> <c> <c> <c> <c> <c>
Senator David W. Hoyle 33,600 15,807(4) -- -- 40,164 1,550 81,121
Ben R. Rudisill, II 29,000 15,807(5) -- -- 36,858 1,550 83,215
James J. Fuller 23,000 15,807(6) -- -- 33,310 1,550 73,667
Charles D. Massey 24,700 15,807(7) -- -- 40,915 1,550 82,972
Eugene R. Matthews, II 29,900 15,807(8) -- -- 1,125 1,550 48,382
</table>
- ------------------
(1) Reflects the value of all stock awards that vested during the year ended
December 31, 2006 that were granted on November 3, 2003 under the 2003
Citizens South Banking Corporation Recognition and Retention Plan approved
by stockholders on October 23, 2006. The value is the amount recognized for
financial statement reporting purposes with respect to the year ended
December 31, 2006 in accordance with Statement of Financial Accounting
Standards ("SFAS") 123(R). The assumptions used in the valuation of these
awards are included in Notes 1 and 14 to our audited financial statements
for the year ended December 31, 2006 included in our Annual Report on Form
10-K for the year ended December 31, 2006 as filed with the Securities and
Exchange Commission. On November 3, 2003, each outside director was granted
10,510 shares of restricted stock with a grant-date fair value of $158,070.
Shares vest at the rate of 30% on November 3, 2003, 10% on January 2, 2004
and 10% on November 3, 2005, 2006, 2007, 2008, 2009 and 2010.
(2) Includes an increase in pension value of $9,140, $3,725, $3,251, $5,574 and
$1,125 for Senator Hoyle and Messrs. Rudisill, Fuller, Massey and Matthews,
respectively, and nonqualified deferred compensation earnings of $31,024,
$33,133, $30,059 and $35,341 for Senator Hoyle and Messrs. Rudisill, Fuller
and Massey, respectively.
(3) Reflects cash dividends on unvested shares of restricted stock granted
under the 2003 Citizens South Banking Corporation Recognition and Retention
Plan.
(4) At December 31, 2006, Senator Hoyle had 4,204 unvested shares of restricted
stock and held 8,061 stock options with an exercise price of $10.42 per
share and 22,670 stock options with an exercise price of $15.04 per share.
(5) At December 31, 2006, Mr. Rudisill had 4,204 unvested shares of restricted
stock and held 8,064 stock options with an exercise price of $10.39 per
share and 22,670 stock options with an exercise price of $15.04 per share.
(6) At December 31, 2006, Mr. Fuller had 4,204 unvested shares of restricted
stock and held 22,670 stock options with an exercise price of $15.04 per
share.
(7) At December 31, 2006, Mr. Massey had 4,204 unvested shares of restricted
stock and held 22,670 stock options with an exercise price of $15.04 per
share.
(8) At December 31, 2006, Mr. Matthews had 4,204 unvested shares of restricted
stock and held 4,995 stock options with an exercise price of $5.605 per
share and 22,670 stock options with an exercise price of $15.04 per share.
33
<page>
Compensation of Directors
Fees. Each non-employee director of Citizens South Banking Corporation
(other than the Chairman of the Board) receives a monthly retainer of $1,083.
The Chairman of the Board of Citizens South Banking Corporation receives a
monthly retainer of $1,667. In addition, each non-employee director of Citizens
South Banking Corporation receives a fee of $1,000 for each Board meeting
attended and $300 for each Committee meeting attended. Non-employee members of
Citizens South Banking Corporation's Executive Committee receive $400 for each
meeting attended, and the Chairman of the Audit Committee receives $400 for each
meeting attended.
All of our directors currently serve on the Board of Directors of
Citizens South Bank, Citizens South Banking Corporation's subsidiary. Each
non-employee director receives a fee of $350 for each Bank Board meeting
attended and $300 for each Bank Committee meeting attended (except for the
Executive Committee of Citizens South Bank, for which the directors receive $400
for each meeting attended). Directors are permitted one paid absence from
Company Board meetings and two paid absences from Bank Board meetings.
Deferred Compensation and Income Continuation Agreement. In May 1986,
Citizens South Bank entered into nonqualified deferred compensation agreements
("DCAs") for the benefit of certain directors at that time, including Directors
Fuller, Hoyle, Massey and Rudisill. The DCAs provided each director with a
one-time opportunity to defer up to $20,000 of then-annual compensation into the
DCA. Amounts credited to a director's account under the DCA will be paid in 120
equal monthly payments (i) to the director upon his retirement from service on
or after attaining age 70, (ii) to the director immediately upon termination of
his service due to disability, or (iii) to the director's beneficiaries upon his
death. If the director voluntarily terminates his service before age 70, his
retirement benefit will be paid at age 70 and will be based on the accrued
retirement liability balance existing on the date service terminates. If a
director's service terminates within one year after a change in control of
Citizens South Banking Corporation, the DCA provides for a lump sum cash payment
of the retirement benefit projected to be accrued at the point when the director
would have attained age 70. Benefits under the DCAs are forfeited if the
director's service is terminated for cause. The DCA is an unfunded plan for tax
purposes and for purposes of the Employment Retirement Income Security Act
("ERISA"). All obligations arising under the DCA are payable from the general
assets of Citizens South Bank.
Supplemental Retirement Plan. In February 1992, Citizens South Bank
entered into nonqualified supplemental retirement agreements ("SRAs") for
certain directors at that time, including Directors Fuller, Hoyle, Massey and
Rudisill. These SRAs were amended and restated in March 2004. Citizens South
Bank entered into an SRA for Director Matthews in October 2000. The SRAs provide
for an annual benefit that ranges from $8,000 to $15,600, payable in monthly
installments beginning at age 70 for a period of 15 years. In the event of a
director's pre-retirement death or death before all payments under the SRA have
been made to the director, monthly benefits are provided for the director's
designated beneficiary or beneficiaries. If a director dies without a valid
beneficiary designation, the surviving spouse will be his beneficiary, or if
none, then the benefits will be paid to the director's personal representative.
Benefits under the SRAs are forfeited if the director's service is terminated
for cause. The SRA is considered an unfunded plan for tax and ERISA purposes.
All obligations arising under the SRAs are payable from the general assets of
Citizens South Bank.
Stock Benefit Plans. Directors are eligible to receive awards of stock
options and restricted stock. On November 3, 2003, each non-employee director of
Citizens South Banking Corporation was granted non-qualified options to purchase
22,670 shares of common stock of Citizens South Banking Corporation and 10,510
restricted stock awards. All stock options vest in 20% increments over a
five-year period from the date of the director's first election to the Board of
Directors. Restricted stock awards vest over a seven-year period, commencing on
the date of the award, at the rate of 30% immediately, 10% on January 2, 2004,
10% on November 3, 2005, and 10% per year on November 3 of each year thereafter,
or upon the director's disability, normal retirement, death, or following a
change in control of Citizens South Banking Corporation.
34
<page>
Additional Equity Compensation Plan Disclosure
Set forth below is information as of December 31, 2006 regarding
compensation plans under which equity securities of Citizens South Banking
Corporation are authorized for issuance.
<table>
<caption>
================================================================================================================
Number of Securities to be
Issued upon Exercise of Number of Securities
Outstanding Options and Weighted Average Remaining Available for
Plan Rights Exercise Price Issuance under Plan
- ----------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Equity compensation plans
approved by stockholders 740,871 $ 12.22 33,125(1)
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by stockholders -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total 740,871 $ 12.22 33,125(1)
================================================================================================================
</table>
(1) There are no shares available for future issuance pursuant to the 1999
Recognition and Retention Plan and 1,612 shares underlying options
available for future issuance pursuant to the 1999 Stock Option Plan. There
are 15,038 shares available for future issuance pursuant to the 2003
Recognition and Retention Plan and 16,475 shares underlying options
available for future issuance pursuant to the 2003 Stock Option Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
The common stock of Citizens South Banking Corporation is registered
with the Securities and Exchange Commission pursuant to Section 12(g) of the
Securities Exchange Act of 1934. The officers and directors of Citizens South
Banking Corporation and beneficial owners of greater than 10% of Citizens South
Banking Corporation's common stock ("10% beneficial owners") are required to
file reports on Forms 3, 4, and 5 with the Securities and Exchange Commission
disclosing beneficial ownership and changes in beneficial ownership of the
common stock. Securities and Exchange Commission rules require disclosure in
Citizens South Banking Corporation's Proxy Statement or Annual Report on Form
10-K of the failure of an officer, director, or 10% beneficial owner of Citizens
South Banking Corporation's common stock to file a Form 3, 4, or 5 on a timely
basis. Based on Citizens South Banking Corporation's review of ownership
reports, none of Citizens South Banking Corporation's officers or directors
failed to file these reports on a timely basis for 2006.
Transactions with Certain Related Persons
Federal law and regulation generally requires that all loans or
extensions of credit to executive officers and directors must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the general public and
must not involve more than the normal risk of repayment or present other
unfavorable features. However, pursuant to federal regulations permitting
executive officers and directors to receive the same terms through benefit or
compensation plans that are widely available to other employees as long as the
director or executive officer is not given preferential treatment compared to
the other participating employees, Citizens South Bank extended loans to bank
officer Huffstetler (summarized in the table below). Citizens South Bank no
longer provides loans to executive officers and directors on preferential terms
when compared to persons who are not affiliated with Citizens South Bank.
35
<page>
Set forth below is certain information as to loans made by Citizens
South Bank to certain of its directors and executive officers, or their
affiliates, whose aggregate indebtedness to Citizens South Bank exceeded
$120,000 at any time since January 1, 2006. Other than these loans, all loans to
our executive officers and directors that exceeded $120,000 at any time since
January 1, 2006 were made in the ordinary course of business on substantially
the same terms, including interest rate and collateral, as those prevailing at
the time for comparable loans with persons not related to Citizens South Bank.
Management believes that the loans set forth below, and all other loans to our
executive officers and directors, neither involve more than the normal risk of
collectibility nor present other unfavorable features
<table>
<caption>
Highest Balance Principal Interest
Original Balance on Paid Interest Rate on
Name of Date Loan During December During Paid During December 31,
Individual Loan Type Originated Amount 2006 31, 2006 2006 2006 2006
- ------------ ------------ ---------- --------- --------- -------- ---------- ---------- ------------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
J. Stephen Residential 7/97 $ 170,000 $ 146,096 $ 0 $ 146,096 $ 948 5.75%
Huffstetler Home 2/00 $ 50,800 $ 32,285 $ 0 $ 32,285 $ 70 Prime
equity line
of credit
</table>
Section 402 of the Sarbanes-Oxley Act of 2002 generally prohibits an
issuer from: (1) extending or maintaining credit; (2) arranging for the
extension of credit; or (3) renewing an extension of credit in the form of a
personal loan for an officer or director. There are several exceptions to this
general prohibition, one of which is applicable to Citizens South Banking
Corporation. Sarbanes-Oxley does not apply to loans made by a depository
institution that is insured by the FDIC and is subject to the insider lending
restrictions of the Federal Reserve Act. All loans to our directors and officers
are made in conformity with the Federal Reserve Act and the Federal Reserve
Board Regulation O.
In accordance with the listing standards of the Nasdaq Stock Market,
any new transactions that would be required to be reported under this section of
this proxy statement must be approved by our audit committee or another
independent body of the board of directors.
- --------------------------------------------------------------------------------
PROPOSAL II--RATIFICATION OF APPOINTMENT OF THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
Citizens South Banking Corporation's independent registered public
accounting firm for the year ended December 31, 2006 were Cherry, Bekaert &
Holland, L.L.P. The Audit Committee has engaged Cherry, Bekaert & Holland,
L.L.P. to be Citizens South Banking Corporation's independent registered public
accounting firm for the year ending December 31, 2007, subject to the
ratification of the engagement by Citizens South Banking Corporation's
stockholders. At the annual meeting, stockholders will consider and vote on the
ratification of the engagement of Cherry, Bekaert & Holland, L.L.P. for the year
ending December 31, 2007. A representative of Cherry, Bekaert & Holland, L.L.P.
is expected to attend the annual meeting to respond to appropriate questions and
to make a statement if he so desires.
Stockholder ratification of the selection of Cherry, Bekaert & Holland,
L.L.P. is not required by Citizens South Banking Corporation's bylaws or
otherwise. However, the Board of Directors is submitting the selection of the
independent registered public accounting firm to the stockholders for
ratification as a matter of good corporate practice. If the stockholders fail to
ratify the selection of Cherry, Bekaert & Holland, L.L.P., the Audit Committee
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee in its discretion may direct the appointment of a
different independent registered public accounting firm at any time during the
year if it determines that such change is in the best interests of Citizens
South Banking Corporation and its stockholders.
Fees Paid to Cherry, Bekaert & Holland, L.L.P.
Set forth below is certain information concerning aggregate fees billed
for professional services rendered by Cherry, Bekaert & Holland, L.L.P. to
Citizens South Banking Corporation during 2006 and 2005:
36
<page>
Audit Fees. The aggregate fees billed to Citizens South Banking
Corporation by Cherry, Bekaert & Holland, L.L.P. for professional services
rendered by Cherry, Bekaert & Holland, L.L.P. for the audit of Citizens South
Banking Corporation's annual financial statements, audit of management's
assessment of the effectiveness of internal control over financial reporting,
review of the financial statements included in Citizens South Banking
Corporation's Quarterly Reports on Form 10-Q and services that are normally
provided by Cherry, Bekaert & Holland, L.L.P. in connection with statutory and
regulatory filings and engagements were $84,500 and $112,800 during the years
ended December 31, 2006 and 2005, respectively.
Audit-Related Fees. There were no fees billed to Citizens South Banking
Corporation by Cherry, Bekaert & Holland, L.L.P. for assurance and related
services rendered by Cherry, Bekaert & Holland, L.L.P. that were reasonably
related to the performance of the audit of and review of the financial
statements and that are not already reported in "--Audit Fees," above during the
years ended December 31, 2006 and 2005.
Tax Fees. There were no fees billed to Citizens South Banking
Corporation by Cherry, Bekaert & Holland, L.L.P. for professional services
rendered by Cherry, Bekaert & Holland, L.L.P. for tax compliance, tax advice and
tax planning during the years ended December 31, 2006 and 2005.
All Other Fees. There were no fees billed Citizens South Banking
Corporation by Cherry, Bekaert & Holland, L.L.P. that are not described above
during the years ended December 31, 2006 and 2005.
The Audit Committee has considered whether the provision of non-audit
services, which related in 2006 primarily to tax services, research, and
consultation, is compatible with maintaining Cherry, Bekaert & Holland, L.L.P.'s
independence. The Audit Committee concluded that performing such services does
not affect Cherry, Bekaert & Holland, L.L.P.'s independence in performing its
function as independent registered public accounting firm of Citizens South
Banking Corporation.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of
Independent Registered Public accounting firm
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the independent registered public accounting firm. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to particular service or category of services and is
generally subject to a specific budget. The Audit Committee has delegated
pre-approval authority to its Chairman when expedition of services is necessary.
The independent registered public accounting firm and management are required to
periodically report to the full Audit Committee regarding the extent of services
provided by the independent registered public accounting firm in accordance with
this pre-approval, and the fees for the services performed to date.
In 2006 and 2005, there were no fees paid to Cherry, Bekaert & Holland,
L.L.P. that were not pre-approved by the Audit Committee.
Required Vote and Recommendation of the Board of Directors
In order to ratify the selection of Cherry, Bekaert & Holland, L.L.P.
as the independent registered public accounting firm for the year ending
December 31, 2007, the proposal must receive at least a majority of the votes
cast, either in person or by proxy, in favor of such ratification.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
CHERRY, BEKAERT & HOLLAND, L.L.P. AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM FOR THE YEAR ENDING DECEMBER 31, 2007.
- --------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS AND NOMINATIONS
- --------------------------------------------------------------------------------
In order to be eligible for inclusion in Citizens South Banking
Corporation's proxy materials for next year's Annual Meeting of Stockholders,
any stockholder proposal to take action at such meeting must be received at
37
<page>
Citizens South Banking Corporation's executive office, 519 South New Hope Road,
Gastonia, North Carolina 28054-4040, no later than December 11, 2007. Nothing in
this paragraph shall be deemed to require Citizens South Banking Corporation to
include in its proxy statement and proxy relating to an annual meeting any
stockholder proposal that does not meet all of the requirements for inclusion
established by the Securities and Exchange Commission.
The Bylaws of Citizens South Banking Corporation provide an advance
notice procedure for certain business, or nominations to the Board of Directors,
to be brought before an annual meeting. In order for a stockholder to properly
bring business before an annual meeting, or to propose a nominee to the Board,
the stockholder must give written notice to the Secretary of Citizens South
Banking Corporation not less than ninety (90) days before the date fixed for
such meeting; provided, however, that in the event that less than one hundred
(100) days notice or prior public disclosure of the date of the meeting is given
or made, notice by the stockholder to be timely must be received no later than
the close of business on the tenth day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure was made.
The notice must include the stockholder's name, record address, and number of
shares owned by the stockholder, describe briefly the proposed business, the
reasons for bringing the business before the annual meeting, and any material
interest of the stockholder in the proposed business. In the case of nominations
to the Board, certain information regarding the nominee must be provided.
Nothing in the paragraph shall be deemed to require Citizens South Banking
Corporation to include in its proxy statement and proxy relating to an annual
meeting any stockholder proposal which does not meet all of the requirements or
inclusion established by the Securities and Exchange Commission in effect at the
time such proposal is received.
The date on which the next Annual Meeting of Stockholders of Citizens
South Banking Corporation is expected to be held is May 12, 2008. Accordingly,
advance written notice of business or nominations to the Board of Directors to
be brought before next year's Annual Meeting of Stockholders must be given to
Citizens South Banking Corporation no later than February 12, 2008. If notice is
received after February 12, 2008, it will be considered untimely, and Citizens
South Banking Corporation will not be required to present the matter at the
meeting.
- --------------------------------------------------------------------------------
MISCELLANEOUS
- --------------------------------------------------------------------------------
The Board of Directors is not aware of any business to come before the
annual meeting other than the matters described above in this proxy statement.
However, if any matters should properly come before the annual meeting, it is
intended that holders of the proxies will act as directed by a majority of the
Board of Directors, except for matters related to the conduct of the annual
meeting, as to which they shall act in accordance with their best judgment.
The cost of solicitation of proxies will be borne by Citizens South
Banking Corporation. Citizens South Banking Corporation will reimburse brokerage
firms and other custodians, nominees and fiduciaries for reasonable expenses
incurred by them in sending proxy materials to the beneficial owners of common
stock. In addition to solicitations by mail, directors, officers and regular
employees of Citizens South Bank may solicit proxies personally or by telephone
without additional compensation.
A copy of the Citizens South Banking Corporation's Annual Report on
Form 10-K for the year ended December 31, 2006 will be furnished without charge
to stockholders as of the record date upon written request to the Secretary,
Citizens South Banking Corporation, 519 South New Hope Road, Gastonia, North
Carolina 28054-4040.
BY ORDER OF THE BOARD OF DIRECTORS
\s\ Paul L. Teem, Jr.
Paul L. Teem, Jr.
Gastonia, North Carolina Secretary
April 10, 2007
38
<page>
REVOCABLE PROXY
CITIZENS SOUTH BANKING CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
May 14, 2007
The undersigned hereby appoints the full Board of Directors, with full
powers of substitution to act as attorneys and proxies for the undersigned to
vote all shares of common stock of Citizens South Banking Corporation which the
undersigned is entitled to vote at the Annual Meeting of Stockholders to be held
at the Gaston County Public Library at 1555 East Garrison Boulevard, Gastonia,
North Carolina, at 10:30 a.m. (local time) on May 14, 2007. The official proxy
committee is authorized to cast all votes to which the undersigned is entitled
as follows:
VOTE
FOR WITHHELD
--- --------
1. The election as Directors of all nominees listed [_] [_]
below each to serve for a three-year term
Kim S. Price
Eugene R. Matthews, II
INSTRUCTION: To withhold your vote for one or more nominees, write the
name of the nominee(s) on the line(s) below.
- -----------------------
- -----------------------
FOR AGAINST ABSTAIN
--- ------- -------
2. The ratification of the appointment of [_] [_] [_]
Cherry, Bekaert & Holland, L.L.P. as
independent registered public accounting
firm for the fiscal year ending December 31,
2007.
The Board of Directors recommends a vote "FOR" each of the listed proposals.
- --------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS STATED ABOVE. IF ANY OTHER
BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THE
ABOVE-NAMED PROXIES AT THE DIRECTION OF A MAJORITY OF THE BOARD OF DIRECTORS. AT
THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE MEETING.
- --------------------------------------------------------------------------------
<page>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the annual
meeting or at any adjournment thereof and after notification to the Secretary of
Citizens South Banking Corporation at the annual meeting of the stockholder's
decision to terminate this proxy, then the power of said attorneys and proxies
shall be deemed terminated and of no further force and effect. This proxy may
also be revoked by sending written notice to the Secretary of Citizens South
Banking Corporation at the address set forth on the Notice of Annual Meeting of
Stockholders, or by the filing of a later proxy statement prior to a vote being
taken on a particular proposal at the annual meeting.
The undersigned acknowledges receipt from Citizens South Banking
Corporation prior to the execution of this proxy of a Notice of the annual
meeting, audited financial statements and a proxy statement dated April 10,
2007.
Dated: , 2007 [_] Check Box if You Plan
----------------- to Attend Meeting
- ------------------------------- -----------------------------------
PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER
- ------------------------------- -----------------------------------
SIGNATURE OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
Please sign exactly as your name appears on this card. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
shares are held jointly, each holder should sign.
- --------------------------------------------------------------------------------
Please complete and date this proxy and return it promptly
in the enclosed postage-prepaid envelope.
- --------------------------------------------------------------------------------