As filed with the Securities and Exchange Commission on October 12, 2001
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
MOUNTAINBANK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 6711 56-2237240
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
201 Wren Drive
Hendersonville, North Carolina 28792
(828) 693-7376
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
________________
Gregory L. Gibson
Chief Financial Officer
MountainBank Financial Corporation
201 Wren Drive
Hendersonville, North Carolina 28792
(828) 697-0030
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
________________
Copy to:
William R. Lathan, Jr., Esq.
Ward and Smith, P.A.
1001 College Court
New Bern, North Carolina 28560
(252) 672-5400
________________
Approximate date of commencement of the proposed sale to the public:
The date of mailing of the enclosed Proxy Statement/ Prospectus to the
shareholders of First Western Bank.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
________________
CALCULATION OF REGISTRATION FEE
=========================================================================================================
Title of each class Proposed maximum Proposed maximum Amount of
of securities to Amount to offering price per aggregate registration
be registered be registered (1) share/unit (2) offering price (2) fee (2)
=========================================================================================================
Common Stock, $4.00 par value 687,841 $22.00 $15,132,502 $3,783.13
=========================================================================================================
(1) This Registration Statement covers the maximum number of shares of
Registrant's common stock expected to be issued in connection with the
merger.
(2) Estimated solely for purposes of calculating the registration fee and
based, pursuant to Rule 457(f) under the Securities Act of 1933, as
amended, on the average of the high and low sales prices of shares of First
Western Bank's common stock on the Nasdaq SmallCap Market on October 9,
2001.
________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[LOGO
FIRST WESTERN BANK]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
FIRST WESTERN BANK
A special meeting of shareholders (the "Special Meeting") of First Western
Bank will be held at 2:00 p.m. on ________, December ____, 2001, at The
Pinebridge Inn located at 101 Pinebridge Avenue in Spruce Pine, North Carolina.
The purposes of the meeting are:
1. Proposal to Approve the Merger Agreement and Merger. To consider and vote
on a proposal to approve the Agreement and Plan of Reorganization and
Merger, dated as of September 17, 2001 (the "Merger Agreement"), between
First Western Bank, MountainBank Financial Corporation ("MFC") and
MountainBank (a copy of which is attached as Appendix A to the Proxy
Statement/Prospectus which accompanies this Notice), and to approve the
transactions described in the Merger Agreement, including, without
limitation, the merger of First Western Bank into MountainBank (the
"Merger"), with the result that each outstanding share of First Western
Bank's common stock will be converted into the right to receive 0.50 shares
of MFC's common stock, all as more fully described in the Proxy
Statement/Prospectus; and
2. Other Business. To transact any other business properly presented for
action at the Special Meeting.
First Western's Board of Directors recommends that you vote "FOR" the
Merger Agreement and the transactions described in it.
If the Merger is approved and completed, you will have the right to dissent
and demand payment of the fair value of your shares. Your right to dissent is
conditioned on your strict compliance with the requirements of Article 13 of
Chapter 55 of the North Carolina General Statutes. The full text of that
statute is attached as Appendix B to the Proxy Statement/Prospectus which
accompanies this Notice.
You are invited to attend the Special Meeting in person. However, even if
you plan to attend, we ask that you complete, sign and date the enclosed
appointment of proxy and return it to us as soon as you can in the accompanying
envelope. Doing that will help us ensure that a quorum is present at the
meeting. Even if you sign an appointment of proxy, you may still revoke it
later or attend the meeting and vote in person.
By Order of the Board of Directors
Ronnie E. Deyton
President and Chief Executive Officer
November _____, 2001
[LOGO] MOUNTAINBANK
FIRST WESTERN BANK Taking Care of Our Own
Proxy Statement for
Special Meeting of Shareholders MOUNTAINBANK FINANCIAL CORPORATION
Prospectus
The Boards of Directors of First Western Bank and MountainBank Financial
Corporation have agreed to a transaction that will result in First Western Bank
being acquired by MountainBank Financial Corporation and merged into its
subsidiary, MountainBank. Some important facts about the merger are listed
below.
. First Western Bank will merge into MountainBank.
. In the merger, you will receive 0.50 shares of MountainBank Financial
Corporation's common stock for each share of First Western Bank common
stock you own.
. Your Board of Directors recommends the merger.
. After the merger, First Western Bank's shareholders will own about 26.9% of
the combined company, and MountainBank Financial Corporation's shareholders
will own about 73.1% of the combined company.
. The merger will be tax free to you, other than with respect to cash you
receive for a fractional share or as a "dissenting" shareholder.
. In connection with the merger, you have "dissenters rights" under North
Carolina law.
. First Western Bank plans to hold a special meeting of its shareholders on
December ____, 2001, to vote on the merger.
This Document. This document is a combined Proxy Statement and Prospectus
that is being distributed to the shareholders of First Western Bank in
connection with First Western Bank's special shareholders' meeting and
MountainBank Financial Corporation's offer to exchange its stock for your First
Western Bank stock in the merger. It contains important information about the
merger and you should read it carefully. In this Proxy Statement/Prospectus,
"First Western" refers to First Western Bank, and "MFC" refers to MountainBank
Financial Corporation.
Merger Consideration. The number of MFC shares that First Western's
shareholders will receive in the merger is fixed. The dollar value of the
consideration will change depending on changes in the market price of MFC shares
and will not be known at the time of the special meeting of First Western's
shareholders. First Western's common stock is traded on the Nasdaq SmallCap
Market under the symbol "FWBN," and MFC's common stock is traded on the OTC
Bulletin Board under the symbol "MBFC." On the day before the merger was
announced, the value of consideration to be received by First Western's
shareholders for each share of First Western stock would have been $13.98. On
November _____, 2001, the value would have been $______.
Voting. Even if you plan to attend First Western's special meeting of
shareholders, please vote as soon as possible by completing and returning the
enclosed appointment of proxy. Not voting at all will have the same effect as
voting against the merger.
Some factors you should consider before you decide how to vote on the
merger are described in this document under the heading "Risk Factors" which
begins on page _____.
Neither the Securities and Exchange Commission, the FDIC, the North
Carolina Commissioner of Banks, nor any state securities commission has approved
of the MFC stock to be issued in the merger or determined if this document is
accurate or complete. It is illegal to tell you otherwise.
This Proxy Statement/Prospectus is dated November ____, 2001, and it is
being mailed to First Western's shareholders on or about November ____, 2001.
___________________
TABLE OF CONTENTS
Page
----
SUMMARY................................................................
RISK FACTORS...........................................................
A WARNING ABOUT FORWARD-LOOKING
STATEMENTS AND OTHER MATTERSG.........................................
THE SPECIAL MEETING OF SHAREHOLDERS....................................
THE MERGER.............................................................
General...............................................................
The Merger............................................................
Conversion of First Western Stock.....................................
Surrender and Exchange of Certificates................................
Treatment of Fractional Shares........................................
Recommendation........................................................
Background of and Reasons for the Merger..............................
Opinion of First Western Financial Advisor............................
Required Shareholder Approvals........................................
Required Regulatory Approvals.........................................
Conduct of Business Pending the Merger................................
Dividends.............................................................
Prohibition on Solicitation...........................................
Accounting Treatment..................................................
Certain Income Tax Consequences.......................................
Conditions to the Merger..............................................
Waiver; Amendment of Merger Agreement.................................
Termination of the Merger Agreement...................................
Closing Date and Effective Time.......................................
Interests of Certain Persons With Respect to the Merger...............
Expenses..............................................................
RIGHTS OF DISSENTING SHAREHOLDERS MARKET AND DIVIDEND INFORMATION......
MFC's Capital Stock...................................................
First Western's Capital Stock.........................................
CAPITALIZATION SELECTED FINANCIAL INFORMATION..........................
MountainBank Financial Corporation....................................
First Western Bank....................................................
Pro forma Combined....................................................
Comparative Per Share Data............................................
MOUNTAINBANK FINANCIAL CORPORATION.....................................
General...............................................................
MFC Financial Statements; Available Information.......................
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................
Beneficial Ownership of Securities....................................
Board of Directors....................................................
Directors' Compensation...............................................
Executive Officers....................................................
Management Compensation...............................................
Transactions with Related Parties.....................................
FIRST WESTERN BANK.....................................................
General...............................................................
First Western Financial Statements;
Available Information................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................
Beneficial Ownership of Securities....................................
Board of Directors....................................................
Directors' Compensation...............................................
Executive Officers....................................................
Management Compensation...............................................
Transactions with Related Parties.....................................
Change in Accountants.................................................
SUPERVISION AND REGULATION.............................................
CAPITAL STOCK OF MFC AND
FIRST WESTERN.........................................................
Capital Stock of MFC..................................................
Differences in Capital Stock..........................................
INDEMNIFICATION........................................................
VALIDITY OF SECURITIES.................................................
EXPERTS................................................................
PROPOSALS FOR
ANNUAL MEETING OF SHAREHOLDERS........................................
CONSOLIDATED FINANCIAL STATEMENTS OF
MOUNTAINBANK FINANCIAL CORPORATION.................................... F-1
FINANCIAL STATEMENTS OF
FIRST WESTERN BANK.................................................... F-31
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS..................................... F-59
APPENDIX A - Agreement and Plan of
Reorganization and Merger............................................. A-1
APPENDIX B - Article 13 of Chapter 55 of the
North Carolina General Statutes Relating to
the Rights of Dissenting Shareholders................................. B-1
APPENDIX C - Fairness Opinion of
The Carson Medlin Company............................................. C-1
2
SUMMARY
The following is a brief summary of the information in this document. The
summary is not intended to be complete, and it may not contain all the
information that is important to you. To better understand the merger that will
be voted on by First Western's shareholders at the special meeting, we urge you
to read this entire document carefully. Each item in this summary includes a
page reference directing you to a more complete discussion of the information in
that item.
The Special Meeting of Shareholders
The Special Meeting First Western plans to hold its special meeting on
December ___, 2001, at 2:00 p.m. at The Pinebridge Inn
which is located at 101 Pinebridge Avenue in Spruce
Pine, North Carolina. At the meeting (the "Special
Meeting"), First Western's shareholders will vote on a
proposal to approve a merger agreement and plan of
merger between First Western, MFC and MountainBank that
provides for First Western to be merged into
MountainBank. (See "The Special Meeting of First
Western's Shareholders" on page _____.)
You can vote at First Western's special meeting if you
owned First Western common stock at the close of
business on November 9, 2001. On that date, there were
1,375,682 outstanding shares of First Western's common
stock. You may cast one vote for each share of First
Western common stock that you owned of record on that
date.
The Merger
Parties to the Merger First Western is a North Carolina banking corporation.
The mailing address of its principal office is 601 West
Bypass, Burnsville, North Carolina 28714, and its
telephone number at that address is (828) 682-1115.
(See "First Western Bank" on page _____.)
MountainBank also is a North Carolina banking
corporation and is a subsidiary of MFC. The mailing
address of its principal office is 201 Wren Drive,
Hendersonville, North Carolina 28792, and its telephone
number at that address is (828) 693-7376. (See
"MountainBank Financial Corporation" on page _____.)
MFC is a North Carolina business corporation that is
registered with the Federal Reserve Board as a bank
holding company and is the parent company of
MountainBank. The mailing address of its principal
office is 201 Wren Drive, Hendersonville, North
Carolina 28792, and its telephone number at that
address is (828) 693-7376. (See "MountainBank Financial
Corporation" on page _____.)
The Merger Agreement The terms and conditions of the merger are provided for
in the merger agreement (the "Merger Agreement")
entered into on September 17, 2001, between First
Western, MFC and MountainBank. A copy of the Merger
Agreement is attached as Appendix A to this Proxy
Statement/Prospectus.
3
Effect of the Merger When the merger becomes effective (the "Effective
Time"):
. First Western will be merged into MountainBank
(the "Merger"), and
. each outstanding share of First Western's common
stock ("First Western Stock") held by its
shareholders (other than shareholders who
"dissent") will be converted into the right to
receive 0.50 shares of MFC's common stock ("MFC
Stock"). MountainBank will be the surviving
corporation in the Merger. (See "The Merger" on
page _____ and "Rights of Dissenting Shareholders"
on page _____.)
Conversion of
First Western Stock At the Effective Time, each share of First Western
Stock you hold (unless you "dissent")
automatically will be converted into 0.50 shares
of MFC Stock. (See "The Merger -- Conversion of
First Western Stock" on page _____.)
MFC will Pay Cash for
Fractional Shares If the conversion of your First Western Stock
results in a fraction of a share of MFC Stock, MFC
will pay you cash rather than issuing the
fractional share. (See "The Merger -- Treatment of
Fractional Shares" on page _____.)
First Western's Board of
Directors Recommends
that you vote "FOR" the
the Merger Agreement First Western's Board of Directors has approved
the Merger Agreement and believes the Merger is in
the best interests of First Western and its
shareholders. First Western's Board of Directors
recommends that you vote "FOR" approval of the
Merger Agreement. (See "The Merger --
Recommendation" and "-- Background of and Reasons
for the Merger" on page _____.)
Opinion of First Western's
Financial Advisor First Western's Board of Directors retained The
Carson Medlin Company ("Carson Medlin") as its
financial advisor in connection with its
consideration of the Merger. Carson Medlin has
provided First Western's Board of Directors with
its written opinion which states that it believes
the consideration to be received by First
Western's shareholders in connection with the
Merger as provided in the Merger Agreement is fair
from a financial point of view. A copy of the
opinion is attached as Appendix C to this Proxy
Statement/Prospectus. (See "The Merger -- Opinion
of First Western's Financial Advisor" on page
_____.)
First Western's Shareholders
must Approve the Merger In order to complete the Merger, the holders of at
least two-thirds of the total outstanding shares
of First Western Stock must vote to approve the
Merger Agreement at the Special Meeting. (See "The
Merger -- Required Shareholder Approvals" on page
_____.) First Western's directors and executive
officers beneficially own and have a right to vote
an aggregate of 170,460 shares of First Western
Stock which amounts to approximately 12.4% of the
total outstanding shares.
4
Banking Regulators also
must Approve the Merger The Merger also is subject to approval by the North
Carolina Commissioner of Banks, the FDIC, and the
North Carolina Banking Commission. An application
for each of those regulatory approvals has been
filed. (See "The Merger -- Required Regulatory
Approvals" on page _____.)
There are Certain other
Conditions to the Merger In addition to required shareholder and regulatory
approvals, various other conditions described in the
Merger Agreement must be satisfied in order for the
Merger to be completed. (See "The Merger --
Conditions to the Merger" on page _____.)
Termination of the
Merger Agreement Before the Merger is completed, the Merger Agreement
may be terminated by the mutual agreement of First
Western, MFC and MountainBank and, under certain
conditions described in the Merger Agreement, it
also may be terminated by either First Western or
MFC alone. (See "The Merger -- Termination of the
Merger Agreement" on page _____.)
Effective Time If all required regulatory approvals are received
and First Western's shareholders approve the Merger
Agreement, First Western and MFC expect that the
Merger will become effective during the later part
of the fourth quarter of 2001 or the early part of
the first quarter of 2002. (See "The Merger --
Closing Date and Effective Time" on page _____.)
Directors If they remain directors of First Western at the
Effective Time, then four of First Western's current
directors will be appointed to serve as directors of
MountainBank, and two of those directors will be
appointed to serve as directors of MFC. (See "The
Merger -- Interests of Certain Persons with Respect
to the Merger" on page _____.)
Interests of
Certain Persons Certain of First Western's executive officers and
directors have interests in the Merger and will
receive certain benefits that are in addition to
their interests as shareholders of First Western
generally. (See "The Merger -- Interests of Certain
Persons with Respect to the Merger" on page _____.)
Accounting Treatment The Merger will be treated as a "purchase" for
accounting purposes. (See "The Merger -- Accounting
Treatment" on page ____.)
Income Tax Consequences First Western and MFC expect that the Merger will be
treated as a "tax-free reorganization" for federal
income tax purposes. First Western and MFC have
received a written opinion from legal counsel to
that effect. (See "The Merger -- Certain Income Tax
Consequences" on page _____.)
5
Rights of
Dissenting Shareholders If the Merger is completed, North Carolina law gives
you the right to dissent and to receive the "fair
value" of your shares of First Western Stock in
cash. If you wish to dissent, you must, among other
things:
. give to First Western, before the vote on the Merger
Agreement is taken at the Special Meeting, timely
written notice of your intent to dissent and demand
payment for your shares if the Merger is completed;
. not vote your shares in favor of the Merger
Agreement;
. demand payment and deposit your share certificates
by the date set forth in and in accordance with the
terms and conditions of a "dissenters' notice" that
will be sent to you by First Western; and,
. otherwise satisfy the requirements of the North
Carolina statutes which are attached as Appendix B
to this Proxy Statement/Prospectus.
In order to dissent, you must follow carefully the
requirements of the North Carolina statutes
(including giving the required written notice before
the vote on the Merger is taken at the Special
Meeting). Those steps are summarized under the
caption "Rights of Dissenting Shareholders" on page
_____, and a copy of the North Carolina statutes is
attached as Appendix B to this Proxy
Statement/Prospectus.
There are Differences
Between MFC Stock and
First Western Stock When you receive MFC Stock for your First Western
Stock, you will become a shareholder of MFC. There
are certain differences under North Carolina law
that you should be aware of between the rights of
holders of First Western Stock and the rights of
shareholders of MFC. (See "Capital Stock of MFC and
First Western -- Differences in Capital Stock" on
page _____.)
Recent Developments MFC's Board of Directors has approved an amendment
to MFC's Articles of Incorporation. The amendment
(which must be approved by MFC's shareholders) would
authorize MFC to issue up to 2,000,000 shares of
preferred stock and would authorize the MFC's Board
to issue shares of the new preferred stock from time
to time in the future, in one or more series, and to
fix and determine the relative rights and
preferences of those shares, or of each series of
shares, at the time of issuance and without the
approval of MFC's shareholders. MFC has called a
special meeting of its shareholders for the purpose
of voting on the proposed amendment. If the proposed
amendment is approved by MFC's shareholders, MFC may
sell shares of preferred stock in the future as one
method of increasing its capital. ("Capital Stock of
MFC and First Western -- Capital Stock of MFC" on
page ____.)
Risk Factors There are some risk factors that you should consider
before you decide how to vote on the Merger. (See
"Risk Factors" on page _____.)
6
Selected Historical Financial Information
MountainBank Financial Corporation
The following table contains certain selected historical consolidated
financial information for MFC on the dates and for the periods indicated. This
selected financial information has been derived from, and you should read it in
conjunction with, MFC's audited consolidated financial statements and unaudited
interim consolidated financial statements, together with related financial
statement footnotes, which are included in this Proxy Statement/Prospectus.
(See "Consolidated Financial Statements of MountainBank Financial Corporation"
on page F-1.)
The information as of and for the six months ended June 30, 2001 and 2000,
has not been audited but, in the opinion of MFC's management, contains all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of MFC's financial condition and results of operations for
those periods. The results of operations for the six- month period ended June
30, 2001, are not necessarily indicative of the results to be expected for the
remainder of the year or any other period.
As of and for the six months As of and for the year ended
ended June 30, December 31,
------------------------------ ----------------------------------------
2001 2000 2000 1999 1998 1997 (1)
--------- --------- -------- -------- ------- --------
(Dollars in thousands, except per share amounts)
Selected balance sheet data:
Gross loans.............................. $ 320,139 $ 133,186 $200,380 $ 89,745 $48,360 $ 18,079
Securities............................... 43,435 29,435 35,416 18,588 6,171 503
Total assets............................. 405,698 182,192 259,109 127,211 58,634 23,754
Deposits................................. 345,732 157,604 233,338 113,886 50,360 16,779
Stockholders' equity..................... 19,062 15,478 18,210 10,222 6,177 5,975
Selected results of operations:
Net interest income...................... $ 5,409 $ 2,814 $ 6,805 $ 3,190 $ 1,714 $ 428
Provision for loan losses................ 1,492 785 1,905 827 471 281
Non-interest income...................... 870 642 1,318 782 469 103
Non-interest expense..................... 3,570 1,935 4,579 2,820 1,583 579
Income taxes............................. 420 221 583 - - -
Net income............................... 797 515 1,056 326 130 (329)
Per share:
Net income:
Basic................................. $ 0.43 $ 0.34 $ 0.62 $ 0.26 $ 0.12 $ (0.30)
Diluted............................... 0.39 0.31 0.57 0.23 0.11 (0.30)
Book value.............................. 10.17 9.29 9.73 7.09 6.75 5.49
Selected ratios:
Return on average assets................. 0.52% (2) 0.67% (2) 0.57% 0.37% 0.30% (3.68)%
Return on average stockholders' equity... 8.43% (2) 8.52% (2) 7.14% 3.93% 2.13% (10.60)%
Average stockholders' equity to
average total assets................... 6.21% 7.92% 7.99% 9.33% 13.91% 25.16 %
_______________________________
(1) MountainBank was incorporated and began banking operations during June
1997.
(2) Annualized.
7
First Western Bank
The following table sets forth certain selected historical financial
information for First Western on the dates and for the periods indicated. This
selected financial information has been derived from, and you should read it in
conjunction with, First Western's audited financial statements and unaudited
interim financial statements, together with the related financial statement
footnotes, which are included in this Proxy Statement/Prospectus. (See
"Financial Statements of First Western Bank" on page F-31.)
The information as of and for the six months ended June 30, 2001 and 2000,
has not been audited but, in the opinion of First Western's management, contains
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of First Western's financial condition and results of
operations for those periods. The results of operations for the six- month
period ended June 30, 2001, are not necessarily indicative of the results to be
expected for the remainder of the year or any other period.
As of and for the six months As of and for the year ended
ended June 30, December 31,
---------------------------- --------------------------------------------
2001 2000 2000 1999 1998 1997 (1)
--------- --------- -------- ------- -------- ---------
(Dollars in thousands, except per share amounts)
Selected balance sheet data:
Gross loans............................. $ 60,840 $ 46,626 $52,029 $39,642 $ 36,065 $ 29
Securities.............................. 9,667 12,070 12,413 8,936 3,808 -
Total assets............................ 77,534 70,117 71,839 63,089 55,075 8,076
Deposits................................ 60,704 55,990 56,918 48,180 39,789 547
Stockholders' equity.................... 13,406 13,714 13,472 13,831 13,735 7,529
Selected results of operations:
Net interest income..................... $ 1,550 $ 1,289 $ 2,726 $ 2,274 $ 696 $ 30
Provision for loan losses............... 114 173 199 66 132 -
Non-interest income..................... 367 271 612 327 102 -
Non-interest expense.................... 1,675 1,440 3,049 2,299 1,527 165
Income taxes............................ 64 (392) (349) - - -
Net income.............................. 65 338 439 236 (861) (135)
Per share:
Net income (loss) (basic and diluted)... $ 0.05 $ 0.23 $ 0.30 $ 0.16 $ (1.18) $ (0.19)
Book value.............................. 9.76 9.36 9.66 9.17 9.11 10.40
Selected ratios:
Return on average assets................ 0.17% (2) 1.04% (2) 0.65% 0.39% (4.63)% (1.67)%
Return on average stockholders' equity.. 0.97% (2) 4.90% (2) 3.20% 1.72% (11.93)% (1.80)%
Average stockholders' equity to
average total assets................... 17.99% 21.33% 20.25% 21.97% 38.77% 93.23%
_______________________________
(1) First Western was incorporated and began banking operations during December
1997.
(2) Annualized.
8
Selected Unaudited Pro Forma Combined Financial Information
The following table sets forth certain selected historical combined
financial information for MFC on a pro forma basis on the dates and for the
periods indicated. The pro forma information has been prepared assuming that
the Merger had been completed on June 30, 2001, for balance sheet data, and on
January 1, 2000, for results of operations data, using the "purchase" method of
accounting. This information has been prepared based on estimates of the fair
values of First Western's tangible and identifiable intangible assets and
liabilities. The final purchase accounting adjustments may be materially
different from those used in preparing the pro forma data presented below. Any
decrease in the net fair value of the assets and liabilities of First Western as
compared to the information shown below will have the effect of increasing the
amount of the purchase price allocable to goodwill. (See "The Merger --
Accounting Treatment" on page _____.) The pro forma information is not
necessarily indicative of the operating results or financial condition of the
combined company that would have occurred had the Merger occurred at the
beginning of the periods presented, nor is it necessarily indicative of the
future operating results or financial position of the combined company. You
should read the information below in conjunction with MFC's and First Western's
audited financial statements and unaudited interim financial statements,
together with the related financial statement footnotes, and the Unaudited Pro
Forma Condensed Combined Financial Statements and related notes and assumptions,
which are included in this Proxy Statement/ Prospectus. (See "Consolidated
Financial Statements of MountainBank Financial Corporation" on page F-1,
"Financial Statements of First Western Bank" on page F-31, and "Unaudited Pro
Forma Condensed Combined Financial Statements" on page F-59.)
As of and for the
six months ended For the year ended
June 30, 2001 December 31, 2000
----------------- ------------------
(Dollars in thousands, except per share amounts)
Selected balance sheet data:
Gross loans............................................ $ 380,979
Securities............................................. 53,102
Total assets........................................... 485,059
Deposits............................................... 406,435
Stockholders' equity................................... 32,795
Selected results of operations:
Net interest income.................................... $ 6,959 $ 9,531
Provision for loan losses.............................. 1,606 2,104
Non-interest income.................................... 1,237 1,930
Non-interest expense................................... 5,276 7,693
Income taxes........................................... 484 614
Net income............................................. 830 1,050
Per share:
Net income (basic)..................................... $ 0.32 $ 0.43
Book value............................................. 12.81 12.43
Selected ratios:
Return on average assets............................... 0.44% (1) 0.42%
Return on average stockholders' equity................. 5.14% (1) 3.69%
Average stockholders' equity to average total assets... 8.53% 11.27%
_______________________________
(1) Annualized.
9
Comparative Per Share Data
The following table includes data relating to MFC Stock and First Western
Stock, including book values, cash dividends declared and net income per share,
on the dates and for the periods presented:
. for MFC and First Western on a historical basis;
. for MFC on a pro forma combined basis; and,
. on an equivalent per share of First Western Stock basis.
The pro forma combined and equivalent per share information combines the
MFC information together with the proposed Merger with First Western as though
the Merger had occurred on June 30, 2001 and December 31, 2000 in the case of
book value per share and on January 1, 2000, in the case of net income. The pro
forma data in the table assumes that the Merger is accounted for using the
"purchase" method of accounting. (See "The Merger -- Accounting Treatment" on
page ____.) The pro forma data is not indicative of the results of future
operations or the actual results that would have occurred had the Merger been
consummated at the beginning of the periods presented. You should read the
information below in conjunction with MFC's and First Western's audited
financial statements and unaudited interim financial statements, together with
the related footnotes, which are included in this Proxy Statement/Prospectus.
(See "Consolidated Financial Statements of MountainBank Financial Corporation"
on page F-1, and "Financial Statements of First Western Bank" on page F-31.) You
also should read the notes and assumptions used to prepare the "Unaudited Pro
Forma Condensed Combined Financial Statements" that appear in this Proxy
Statement/Prospectus beginning on page F-59.
As of and for the As of and for the
six months ended year ended
June 30 , 2001 December 31, 2000
----------------- -----------------
Book value per share:
MFC.................................................... $10.17 $ 9.73
First Western.......................................... 9.76 9.66
Pro forma combined.................................... 12.81 12.43
Pro forma equivalent per share for First Western (1).. 6.41 6.22
Cash dividends per share: (2)............................ - -
Net income per share:
MFC................................................... $ 0.43 $ 0.62
First Western......................................... 0.05 0.30
Pro forma combined.................................... 0.32 0.43
Pro forma equivalent per share for First Western (1).. 0.16 0.22
__________________________
(1) Pro forma equivalent per share amounts have been calculated by multiplying
the "Pro forma combined" amounts by the exchange rate of 0.50 shares of MFC
Stock for each share of First Western Stock.
(2) In the case of "Cash dividends per share," no historical, "Pro forma
combined" or "Pro forma equivalent per share for First Western" amounts are
shown since neither MFC nor First Western has paid any cash dividends.
The following table lists the market values of MFC Stock and First Western
Stock on August 27, 2001 (the day preceding the first public announcement of the
Merger), and the equivalent per share market value of First Western Stock based
on the terms of the Merger.
Equivalent per share
MFC Stock First Western Stock of First Western Stock
--------- ------------------- ----------------------
Market value........ $27.95 $9.00 $13.98
10
RISK FACTORS
In deciding how to vote on the Merger, you will be making an investment
decision to take MFC Stock in exchange for your First Western Stock. In
addition to normal investment risks, there are certain factors that you should
be aware of in making your decision. In addition to the other information in
this document, you should carefully consider the risk factors described below.
In addition to the risks described below, MFC and First Western may be
affected by the events of September 11, 2001, in New York, Washington, D.C. and
Pennsylvania, as well as actions taken by the United States in response. At
this time, it is not known how these events will affect the banking and
financial services industries or the economic conditions in the United States
generally or in MFC's and First Western's primary markets in particular. Their
results of operations and financial condition could be adversely impacted if
those events and other related events cause either a decline in the United
States economy generally or in the economies of their primary markets in
particular. There can be no assurance that positive trends, developments or
projections discussed in this Proxy Statement/Prospectus will continue or be
realized or that negative trends or developments will not have significant
downward effects on MFC's or First Western's results of operations or financial
condition.
Because the market price of MFC Stock may fluctuate, you cannot be sure of the
market value of the MFC Stock that you will receive in the Merger.
Upon completion of the Merger, each share of First Western Stock will be
converted into 0.50 shares of MFC Stock. The exchange ratio is fixed and will
not be adjusted for changes in the market price of either First Western Stock or
MFC Stock. So, changes in the price of MFC Stock prior to the Merger will
affect the market value that First Western's shareholders will receive on the
date of the Merger, just as those changes will affect the market value of the
MFC Stock that MFC's shareholders now hold and will continue to hold after the
Merger is completed. Stock price changes may result from a variety of factors,
including general market and economic conditions, changes in MFC's business,
operations and prospects, and regulatory considerations. Many of these factors
are beyond MFC's control. Neither First Western nor MFC is permitted to
terminate the Merger Agreement as a result of changes in the market price of
either company's common stock.
The prices of First Western Stock and MFC Stock at the closing of the
Merger may vary from their prices on the date the Merger Agreement was signed,
on the date of this Proxy Statement /Prospectus, and on the date of the Special
Meeting. As a result, the value represented by the exchange ratio also may be
different on each of those dates. Because the date the Merger is completed will
be after the date of the Special Meeting, at the time you vote on the Merger
Agreement you will not know the market value of the MFC Stock that you will hold
upon completion of the Merger. (See "Market and Dividend Information" on page
_____.)
MFC currently does not pay cash dividends on MFC Stock.
Neither MFC nor First Western have paid any cash dividends. Following the
Merger, you will not receive any cash dividends on the MFC Stock you receive
until MFC begins to pay cash dividends. MFC cannot predict when or if it will
begin to pay dividends. (See "Market and Dividend Information" on page _____.)
Combining First Western and MountainBank may be more difficult, costly or time-
consuming than we expect.
Until completion of the Merger, First Western and MountainBank will operate
independently. When MFC and First Western begin to integrate their operations,
it is possible that there will be disruptions in each company's ongoing
operations. MFC and First Western use the same provider for
11
their data processing services, which will make the consolidation of First
Western's account records into MFC's system easier. However, inconsistencies in
the two companies' business procedures, controls, account terms, product
descriptions, and personnel policies could create problems that affect MFC's
relationships with its and First Western's customers, that cause MFC and First
Western to lose key employees, or that affect their ability to realize all
anticipated benefits of the Merger. MFC and MountainBank do not have previous
experience completing a merger or integrating another bank's operations into
their own.
First Western's directors and officers may have interests in the Merger that
differ from the interests of First Western's other shareholders.
First Western's directors and executive officers have interests in the
Merger other than their interests as First Western shareholders. These
interests may cause them to view the Merger proposal differently that you may
view it. (See "The Merger -- Interests of Certain Persons with Respect to the
Merger" on page _____.)
We may record additional allowance for loan losses in connection with the
Merger.
The determination of the appropriate level of any bank's allowance for loan
losses is a subjective process that involves both quantitative and qualitative
factors. MFC's and First Western's preliminary analysis performed during due
diligence has revealed that there are certain differences in the methodologies
employed by First Western and MFC in determining the levels of their respective
allowances for loan losses. MFC has selected its methodology for the combined
company. In connection with preparations for combining First Western and
MountainBank, MFC will complete its analysis of their allowances for loan losses
and further analyze the attributes of the combined loan portfolio. Based on its
preliminary analysis, MFC expects that First Western will record an additional
provision for loan losses in its results of operations prior to completion of
the Merger. The actual addition to the allowance will be determined and
recorded immediately prior to the Merger and will be based on a comprehensive
analysis of the loan portfolio taking into account credit conditions existing at
that time. MFC and First Western currently do not believe that the increase in
First Western's allowance for loan losses will exceed $350,000.
Future results of the combined companies may materially differ from the
unaudited pro forma condensed combined financial statements presented in this
document.
Future results of the combined companies may be materially differ from
those shown in the unaudited pro forma condensed combined financial statements
included in this document. Those unaudited pro forma condensed combined
financial statements only show a combination of MFC's and First Western's
historical results. MFC estimates that the combined company will record
approximately $1,700,000 in restructuring charges, Merger-related charges and
purchase accounting adjustments. The charges may be higher or lower than
estimated, depending upon how costly or difficult it is to integrate the two
companies. These charges may decrease the capital of the combined company that
could be used for profitable, income-earning investments in the future.
MFC Needs Additional Capital.
Rapid growth in MountainBank's assets resulting from its internal expansion
and de novo branch offices has reduced its capital ratios, and continued growth
will further reduce its capital ratios. On June 30, 2001, while MountainBank's
capital ratios were above the minimum levels required by federal banking
guidelines, one of its ratios had declined to a level that results in its being
classified as "adequately capitalized" rather than "well capitalized" under
those guidelines and, on a consolidated basis, one of MFC's capital ratios was
below the minimum level required by the federal banking guidelines. As a result,
MFC needs additional capital. It already has had to begin to control
MountainBank's growth by restricting its lending activities and selling loans to
control its asset size in order to prevent MountainBank from becoming
"undercapitalized" and to minimize further declines in MFC's capital ratios. The
Merger will have a positive effect on MFC's capital ratios as a result of First
Western's excess capital. However, the Merger alone will not provide all the
additional capital
12
needed by MFC. If MFC is not able to further increase its capital, it will have
to continue restricting MountainBank's growth, and MFC may be
required by its regulators to adopt a plan to achieve an adequate level of
capital. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page _____, "Supervision and Regulation--Capital
Adequacy" on page _____and "--Prompt Corrective Action" on page _____.)
Even if it is able to increase its capital, there is no assurance that MFC
will not be required to raise even more capital in the future in order to fund
additional growth or to satisfy regulatory requirements. If it is required to
raise additional capital in the future, that additional capital may not be
available to it, or it may not be able to raise additional capital on terms
favorable to it. If MFC sells additional shares of MFC Stock or preferred stock
in the future to raise capital, those sales could dilute the interests of
holders of MFC Stock. MFC cannot predict the effect on its shareholders of any
future sales of MFC Stock or other forms of capital stock. See "Capital Stock
of MFC and First Western--Capital Stock of MFC" on page _____.)
MountainBank's classification at a level below "well capitalized" will
cause its FDIC deposit insurance assessment rate to increase in the future until
it restores and maintains its capital at a "well capitalized" level. A higher
assessment rate will result in an increase in the assessments MountainBank pays
the FDIC for deposit insurance, which will have an adverse effect on MFC's
operating results.
MFC's Increased Loan Volume resulting from Recent Growth makes Loan Quality more
Difficult to Control.
MFC has grown rapidly. While growth in earning assets is desirable in a
bank, it can have adverse consequences if it is not well managed. For example,
rapid increases in loans could result in future loan losses if a bank is not
able to properly underwrite increasing volumes of loans as they are made and to
adequately monitor a larger loan portfolio to detect and deal with loan problems
as they occur. MFC's loan portfolio has increased substantially within a
relatively short period of time. Collection problems with some loans often do
not arise until those loans have been in existence for a period of time, so MFC
cannot assure you that it will not have collection problems in the future
relating to loans included in the large amount of its loans that currently are
performing according to their terms but which have been on its books for only a
short period of time. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations " on page _____.
If it Incurs Credit Losses, there is no Assurance that MFC's Loan Loss Allowance
will be Adequate.
MFC uses underwriting procedures and criteria designed to minimize its loan
delinquencies and losses, but the nature of lending is such that there is no
assurance that all MFC's borrowers will repay their loans, and banks routinely
incur losses in their loan portfolios. Regardless of the underwriting criteria
MFC uses, it will experience loan losses from time to time in the ordinary
course of its business as a result of various factors beyond its control. These
factors include, among other things, changes in market, economic, business or
personal conditions, or other events (including changes in market interest
rates), that affect the abilities of its borrowers to repay their loans and the
value of properties that collateralize loans.
MFC maintains an allowance for loan losses based on its current judgments
about the credit quality of its loan portfolio. In determining the amount of
the allowance, MFC's management and Board of Directors consider relevant
internal and external factors that affect loan collectibility. However, if
delinquency levels increase or MFC incurs future loan losses as a result of
adverse general economic conditions or other factors, there is no assurance that
its allowance for loan losses will be adequate to cover resulting losses. Even
if the allowance is adequate, charging future loan losses against the allowance
will mean that MFC will have to increase its provision to the allowance which
will reduce its net income. So, without regard to the adequacy of MFC's
allowance, loan losses will have an adverse
13
affect on its operating results and, depending on the size of those losses, the
effect on its operating results could be material. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page _____.)
A Significant Portion of MFC's Loan Portfolio is Secured by Real Estate.
A significant percentage of MFC's loan portfolio consists of loans secured
by first or junior liens on real estate, and it has a significant amount of
construction and development loans. So future events or circumstances that
adversely affect real estate values or the real estate market in MFC's banking
market would adversely affect its loan portfolio and the value of the collateral
securing its real estate loans. A reduction in the value of MFC's collateral
for a loan could impair its ability to fully collect that loan if the borrower
could not repay the loan and MFC had to foreclose on the collateral.
MFC's Reliance on Time Deposits could affect its Liquidity and Operating
Results.
Among other sources of funds, MFC relies heavily on deposits to provide
funds with which to make loans and provide for its other liquidity needs.
Because MFC's loan demand has exceeded the rate at which it has been able to
build core deposits, it has relied heavily on time deposits, including
certificates of deposit it obtained on the Internet, as a source of funds.
Those deposits (particularly the deposits obtained on the Internet) may not be
viewed as being as stable as other types of deposits, and, in the future, those
depositors may not renew their time deposits when they mature, or MFC may have
to pay a higher rate of interest in order to keep those deposits or to replace
them with other deposits or with funds from other sources. Not being able to
keep or replace those deposits as they mature would adversely affect MFC's
liquidity. Paying higher deposit rates to keep or replace those deposits would
have a negative effect on MFC's interest margin and its operating results. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page _____.)
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
AND OTHER MATTERS
This Proxy Statement/Prospectus includes forward-looking statements. These
statements usually will contain words such as "may," "will," "expect," "likely,"
"estimate," or similar terms. First Western and MFC have based these forward-
looking statements on current expectations and projections about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions, including, among other things, the factors discussed in "Risk
Factors" above. Therefore, the events described in any forward-looking
statements in this document might not occur, or they might occur in a different
way than they are described in the statements.
In deciding how to vote on the Merger, you should rely only on the
information contained in this document. The information contained in this
document regarding First Western has been furnished by it, and the information
contained regarding MFC and MountainBank has been furnished by MFC. Neither
First Western nor MFC has authorized any person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. You should not assume that the information in this
document is accurate as any date other than the date on the front cover. MFC is
not offering MFC Stock to any person in any state where the offer or sale of the
stock is not permitted.
14
THE SPECIAL MEETING OF FIRST WESTERN'S SHAREHOLDERS
General
This Proxy Statement/Prospectus is being furnished to First Western's
shareholders in connection with the solicitation by First Western's Board of
Directors of appointments of proxy for use at the Special Meeting and at any
adjournments of the meeting. The Special Meeting will be held on ___________,
December ____, 2001, at 2:00 p.m. at The Pinebridge Inn located at 101
Pinebridge Avenue in Spruce Pine, North Carolina. This Proxy
Statement/Prospectus is being mailed to First Western's shareholders on or about
November ___, 2001.
Purposes of First Western Special Meeting
The purposes of the Special Meeting are:
. to consider and vote on a proposal to approve the Merger Agreement and the
transactions described in it, including the Merger; and
. to transact any other business that may properly be presented for action at
the Special Meeting. (See "The Merger" on page _____.)
A copy of the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference.
Solicitation and Voting of Proxies
A form of appointment of proxy is included with this Proxy
Statement/Prospectus which names Charles L. Ownbey and Martin J. Shuford (the
"Proxies") to act as proxies and represent First Western's shareholders at the
Special Meeting. First Western's Board of Directors requests that you sign and
date an appointment of proxy and return it to First Western in the enclosed
envelope.
If you correctly execute an appointment of proxy and return it to First
Western before the Special Meeting, then the shares of First Western Stock you
hold of record will be voted by the Proxies according to your directions in the
appointment of proxy. If you sign and return an appointment of proxy but do not
give any voting directions, then your shares will be voted by the Proxies "FOR"
approval of the Merger Agreement and Merger. Under North Carolina law
generally, no business may be brought before the Special Meeting unless it is
described in the notice of meeting that accompanies this Proxy
Statement/Prospectus, and First Western's Board of Directors is not aware of any
other business that will be brought before the First Western Special Meeting
other than the proposal to approve the Merger Agreement and the Merger. But, if
any other matter is properly presented for action by shareholders, the Proxies
will be authorized to vote shares represented by your appointment of proxy
according to their best judgment.
The costs of this solicitation of appointments of proxy for the Special
Meeting, including costs of preparing and mailing this Proxy
Statement/Prospectus, will be shared equally by First Western and MFC. In
addition to solicitation by mail, appointments of proxy may be solicited
personally or by telephone by officers, employees and directors of First
Western, without additional compensation.
Revocation of Appointments of Proxy
If you execute an appointment of proxy, you can revoke it at any time
before the voting takes place at the Special Meeting by filing with First
Western's Secretary either a written instrument revoking
15
it or an executed appointment of proxy dated as of a later date, or by attending
the Special Meeting and announcing an intention to vote in person.
Record Date
The close of business on November 9, 2001, is the record date (the
"Record Date") for determining which First Western shareholders are entitled to
receive notice of and to vote at the Special Meeting. You must have been a
record holder of First Western Stock on the Record Date in order to be eligible
to vote at the Special Meeting.
Voting Securities
First Western's voting securities are the outstanding shares of First
Western Stock. There were 1,375,682 outstanding shares of First Western Stock
on the Record Date. At the Special Meeting, you may cast one vote for each
share you held of record on the Record Date on each matter to be voted on by
shareholders.
On the Record Date, the directors and executive officers of First Western
and their affiliates beneficially owned and were entitled to vote an aggregate
of 170,460 shares, or approximately 12.4%, of the outstanding shares of First
Western Stock. The directors and executive officers of First Western are
expected to vote their shares for approval of the Merger Agreement and the
Merger. Additional information regarding the beneficial ownership of First
Western Stock by First Western's directors, executive officers and principal
shareholders is included in this Proxy Statement/Prospectus under the caption
"First Western Bank -- Beneficial Ownership of Securities" on page _____.
Votes Required for Approval
Under North Carolina law, the affirmative vote of the holders of at
least two-thirds of the total outstanding shares of First Western Stock is
required to approve the Merger Agreement and the Merger. Broker non-votes and
abstentions will have the same effect as votes against the Merger Agreement and
the Merger.
16
THE MERGER
The following is a summary of information about the Merger and certain of
the important terms and conditions of the Merger Agreement. This summary is not
intended to be a complete description of all facts regarding the Merger. You
should carefully read the Merger Agreement and all the other documents attached
to this Proxy Statement/Prospectus for more information.
General
At the Special Meeting, a proposal will be introduced for First Western's
shareholders to approve the Merger Agreement and the Merger. The Merger
Agreement provides for First Western to be merged into MountainBank.
The Merger
When the transactions described in the Merger Agreement become effective
(the "Effective Time"), (i) First Western will be merged into and its existence
will be combined with that of MountainBank (the "Merger"), (ii) First Western
will cease to exist as a separate company, and (iii) as further described below,
each outstanding share of First Western Stock held by First Western's
shareholders (other than shareholders who "dissent" as further described below)
will be converted into the right to receive 0.50 shares of MFC Stock.
MountainBank will be the surviving corporation in the Merger and will continue
to exist as a subsidiary of MFC. It will carry on its and First Western's
business at their existing offices, all under the supervision and regulation of
the North Carolina Commissioner of Banks (the "Commissioner") and the Federal
Deposit Insurance Corporation (the "FDIC"). (See "-- Conversion of First
Western Stock" below, and "Rights of Dissenting Shareholders" on page _____.)
First Western's deposit accounts will become deposit accounts of MountainBank
and will continue to be insured by the FDIC to the maximum amount permitted by
law. (See "MountainBank Financial Corporation" on page _____.)
Conversion of First Western Stock
At the Effective Time, each outstanding share of First Western Stock you
hold of record (unless you "dissent") automatically will be converted into the
right to receive 0.50 shares of MFC Stock. (See "Rights of Dissenting
Shareholders" on page _____.)
Changes in the market value of MFC Stock or First Western Stock prior to
the Effective Time will not result in a change in the rate at which First
Western Stock is converted into MFC Stock. However, if there is a change in the
number of outstanding shares of First Western Stock or MFC Stock prior to the
Effective Time as a result of a stock dividend, stock split, reclassification or
other subdivision or combination of outstanding shares, then an appropriate and
proportionate adjustment will be made in the number of shares of MFC Stock into
which each of your shares of First Western Stock will be converted. First
Western and MFC currently are not aware of any change (completed or proposed) in
the outstanding shares of First Western Stock or MFC Stock which would result in
an adjustment.
Surrender and Exchange of Certificates
Following the Effective Time, the certificates that previously evidenced
your shares of First Western Stock ("Old Certificates") will represent only your
right to receive certificates ("New Certificates") evidencing the shares of MFC
Stock into which your shares of First Western Stock have been converted. At the
Effective Time, First Western's stock transfer books will be closed and no
further transfer of First Western Stock or of your Old Certificates will be
recognized or registered. As soon as possible following the Effective Time, you
will be sent transmittal forms with instructions for forwarding your Old
Certificates for surrender to MFC, or to an agent designated by MFC to act as
its exchange
17
agent. Upon your proper surrender to MFC or its agent of your Old Certificates
(together with properly completed transmittal forms), you will receive the New
Certificates evidencing the MFC Stock into which your First Western Stock has
been converted, together with a check for any fractional share to which you
otherwise would be entitled. If you properly exercise your dissenters' rights,
the process for submitting your Old Certificates and receiving cash for the
"fair value" of your shares is described in this Proxy Statement/Prospectus
under the caption "Rights of Dissenting Shareholders" on page _____.
Until your Old Certificates are surrendered to MFC or its exchange agent as
described above, they will be considered for all purposes to represent only your
right to receive the New Certificates evidencing the MFC Stock into which your
First Western Stock has been converted. However, after the Effective Time, and
regardless of whether you have surrendered your Old Certificates, you will be
entitled to vote and to receive any distributions (for which the record date is
after the Effective Time) on the number of whole shares of MFC Stock into which
your First Western Stock has been converted, but no distributions actually will
be paid to you unless and until your Old Certificates are physically surrendered
to MFC or its exchange agent. Upon surrender and exchange of your Old
Certificates, MFC will pay the amount, without interest, of any distributions
which became payable on the shares of MFC Stock represented by those Old
Certificates after the Effective Time but which had not been paid to you. (See
"Market and Dividend Information -- MFC's Capital Stock" on page _____.)
If your Old Certificates have been lost, stolen or destroyed, you will be
required to furnish to MFC evidence satisfactory to it of your ownership of your
First Western Stock and of the loss, theft or destruction of your certificates.
You also will be required to furnish appropriate and customary indemnification
(which may include an indemnity bond issued by a surety) in order to receive the
New Certificates to which you are entitled.
You should not forward your Old Certificates to MFC or its exchange agent
until you receive instructions to do so.
Treatment of Fractional Shares
No fraction of a share of MFC Stock, or any scrip or certificate
representing any fractional share, will be issued to you in connection with the
Merger, and no right to vote or to receive any distribution will attach to any
fractional share. If you otherwise would be entitled to receive a fraction of a
share, then, following the Effective Time, and upon the surrender and exchange
of your Old Certificates, you will receive cash (without interest) from MFC in
the place of that fractional share in an amount equal to that fraction
multiplied by the average of the closing prices of MFC Stock on the OTC Bulletin
Board on the ten trading days immediately preceding the Effective Time.
Recommendation of First Western's Board of Directors
First Western's Board of Directors has approved the Merger Agreement and
believes the Merger is in the best interests of First Western and First
Western's shareholders. The Board of Directors recommends that First Western's
shareholders vote to approve the Merger Agreement and the Merger.
Background of and Reasons for the Merger
Background. First Western opened for business in 1997, completed the
acquisition of Mitchell Savings Bank in 1998, and recently has expanded its
market with a de novo office. From time to time First Western's management and
Board of Directors have received informal inquiries from other financial
institutions as to their interest in a possible affiliation transaction.
Following a number of those inquiries during the first and second quarters of
2001, First Western's management contacted The Carson Medlin Company ("Carson
Medlin") in May 2001. Management and Carson Medlin discussed a number of issues
facing First Western, including the costs of developing a broader product line,
substantial
18
investment in new technology, and other expenditures potentially necessary to
remain competitive. As a result of its discussions with Carson Medlin, First
Western's management determined the need for a review of First Western's
strategic options available for its future operations, and in May 2001 First
Western engaged Carson Medlin to prepare an analysis, evaluation and financial
comparison of those options (the "Strategic Evaluation").
In June 2001, Carson Medlin delivered the Strategic Evaluation to First
Western's management and met with the Board of Directors to discuss its
conclusions contained in the Strategic Evaluation. Based on certain assumptions,
including First Western's future performance and institutions with which First
Western might affiliate, the Strategic Evaluation concluded that an affiliation
transaction could result in a higher financial value for the investments of
First Western's shareholders than remaining unaffiliated. As a result of
several follow-up discussions among First Western's management and Board and
Carson Medlin, the Board decided that it would be desirable for First Western to
conduct preliminary merger-related discussions with a limited number of
potential affiliates, including MFC, that had previously expressed an interest
in a merger in order to determine their interest in an actual transaction.
On July 3, 2001, First Western engaged Carson Medlin to assist in preparing
a confidential informational document on First Western (the "Confidential
Memorandum") and to contact and initiate discussions with three financial
institutions that had recently expressed an interest in an affiliation with
First Western (the "Prospects").
In mid-July, First Western and Carson Medlin completed the Confidential
Memorandum and, after obtaining confidentiality agreements from the Prospects,
delivered the Confidential Memorandum to each of them. In late July, First
Western's management and Carson Medlin met with each of the Prospects to discuss
their respective operations, plans for the future and a potential merger with
First Western. During the first week of August 2001, First Western received
written indications of interest (the "Initial Offers"), including proposed basic
financial terms, from each of the Prospects. On August 7, 2001, First Western's
Board met with Carson Medlin to review and discuss Carson Medlin's analysis and
evaluation of the Initial Offers. Upon determining that the Initial Offer from
MFC, though superior to those of the other two Prospects, was inadequate, the
Board directed management and Carson Medlin to continue discussions with MFC
with the objective of negotiating a higher offer. Those discussions continued
among the managements and certain directors of First Western and MFC and Carson
Medlin. On August 23, 2001, Carson Medlin delivered its analysis of MFC's
revised offer, which included the exchange ratio and its opinion, delivered
verbally, that the exchange ratio was fair, from a financial point of view, to
First Western's shareholders. On August 28, 2001, First Western and MFC
announced publicly their agreement in principal to merge. On September 17,
2001, MFC, MountainBank and First Western executed the Merger Agreement.
First Western's Reasons for the Merger. First Western's Board of
Directors, with the assistance of its outside financial and legal advisors,
evaluated certain financial, legal and market considerations relevant to the
decision to approve and recommend the Merger Agreement. The terms of the Merger
Agreement, including the exchange ratio, are the result of arm's-length
negotiations between representatives of First Western and MFC. In reaching its
conclusion that the Merger Agreement and the Merger are in the best interests of
First Western and its shareholders, First Western's Board of Directors carefully
considered various factors, including:
. the exchange ratio, including the fact that First Western shareholders will
not recognize any gain or loss for federal income tax purposes on the
receipt of MFC Stock in the Merger;
. a comparison of the terms of the Merger Agreement with comparable
transactions, both in the southeastern United States and elsewhere;
. information concerning the business, financial condition, results of
operations and prospects of
19
First Western, MFC and MountainBank;
. competitive factors and trends toward consolidation in the banking
industry;
. the enhanced potential for increased access to the public capital markets
and stock liquidity to First Western's shareholders as a result of the
Merger;
. the review by First Western's Board of Directors with its legal and
financial advisors of the provisions of the Merger Agreement;
. Carson Medlin's opinion that the exchange ratio is fair, from a financial
point of view;
. alternatives to the Merger, including continuing to operate First Western
on a stand-alone basis, in view of First Western's existing product line,
economic conditions and the prospects for community banking and competition
in the financial services industry; and
. the value to be received by First Western's shareholders in the Merger in
relation to the historical per share trading prices, book value, and
earnings of First Western Stock.
First Western's Board of Directors concluded that, by affiliating with a
larger financial institution with greater resources, First Western will be
better able to serve its customers and communities and remain competitive. A
larger organization also will provide more diverse career opportunities for
First Western's employees. The Board of Directors also considered the separate
arrangements with certain of First Western's officers and concluded that the
terms of those arrangements are reasonable. (See "The Merger -- Interests of
Certain Persons with Respect to the Merger" on page ____.)
While each member of First Western's Board of Directors individually
considered the foregoing and other factors, the Board did not collectively
assign specific or relative weights to the factors considered and did not make
any specific determination with respect to any individual factor. First
Western's Board collectively made its determination with respect to the Merger
based on the conclusion reached by its members, in light of the factors that
each of them considered appropriate, that the Merger is in the best interests of
First Western's shareholders.
MFC's Reasons for the Merger. MountainBank originally was organized as a
commercial bank and first began operating on June 26, 1997, with one banking
office in Hendersonville, North Carolina. Since then it has grown at a faster
rate (through internal growth as well as through the expansion of its banking
markets through the opening of eight de novo branch offices) than its organizers
originally projected. Despite the sale of additional shares of MountainBank's
common stock on two occasions since its initial subscription offering in
connection with its organization, continued rapid growth has reduced
MountainBank's capital ratios to a level at which it must again supplement its
capital in order to continue to grow and to satisfy regulatory capital
requirements.
MFC's management views the acquisition of First Western as benefitting MFC
and its shareholders in two ways. First, because First Western has excess
capital, the Merger helps MFC in its overall plan to increase and maintain an
adequate level of capital to fund its growth. At the same time, the Merger
provides MFC with the opportunity to establish an additional branch office in
Buncombe County, and to logically extend MFC's banking markets into Yancey and
Mitchell Counties, without incurring the start-up costs normally associated with
de novo branch offices.
Opinion of First Western's Financial Advisor
General. First Western engaged Carson Medlin to serve as its financial
adviser and to render its opinion as to the fairness, from a financial point of
view, of the exchange ratio received by First Western's shareholders in the
Merger. First Western selected Carson Medlin as its financial adviser on
20
the basis of Carson Medlin's historical relationship with First Western and
Carson Medlin's experience and expertise in advising community banks in similar
transactions. Carson Medlin is an investment banking firm which specializes in
the securities of financial institutions located in the southeastern and western
United States. As part of its investment banking activities, Carson Medlin is
regularly engaged in the valuation of financial institutions and transactions
relating to their securities, including mergers and acquisitions.
Representatives of Carson Medlin provided an analysis to First Western's
Board of Directors at a meeting held on September 12, 2001, during which the
terms of the Merger Agreement were discussed and approved. Carson Medlin has
delivered its written opinion as of that date that the exchange ratio provided
for in the Merger Agreement is fair, from a financial point of view, to First
Western's shareholders. Carson Medlin subsequently confirmed its opinion by
delivering its opinion dated as of November ___, 2001, which is included in this
Proxy Statement/Prospectus.
You should consider the following when reading the discussion of the Carson
Medlin opinion in this document:
. The summary of Carson Medlin's opinion set forth below is qualified in its
entirety by reference to the full text of the opinion that is attached as
Appendix C to this Proxy Statement/Prospectus. You should read the opinion
in its entirety for a full discussion of the procedures followed,
assumptions made, matters considered and qualification and limitation on
the review undertaken by Carson Medlin in connection with its opinion.
. Carson Medlin's opinion does not address the merits of the acquisition
relative to other business strategies, whether or not considered by First
Western's Board, nor does it address the decision by First Western's Board
to proceed with the Merger.
. Carson Medlin's opinion to First Western's Board is not a recommendation to
any First Western shareholder as to how he or she should vote at the First
Western Special Meeting.
No limitations were imposed by First Western's Board of Directors or its
management upon Carson Medlin with respect to the investigations made or the
procedures followed by Carson Medlin in rendering its opinion.
The preparation of a financial fairness opinion involves various
determinations as to the most appropriate methods of financial analysis and the
application of those methods to the particular circumstances. It is, therefore,
not readily susceptible to partial analysis or summary description. In
connection with rendering its opinion, Carson Medlin performed a variety of
financial analyses. Carson Medlin believes that its analyses must be considered
together as a whole and that selecting portions of its analyses and the facts
considered in its analyses, without considering all other factors and analyses,
could create an incomplete or inaccurate view of the analyses and the process
underlying the rendering of Carson Medlin's opinion.
In performing its analyses, Carson Medlin made numerous assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which are beyond the control of First Western and MFC and may
not be realized. Any estimates contained in Carson Medlin's analyses are not
necessarily predictive of future results or values, which may be significantly
more or less favorable than the estimates. Estimates of values of companies do
not purport to be appraisals or necessarily reflect the prices at which the
companies or their securities may actually be sold. Except as described below,
none of the analyses performed by Carson Medlin was assigned a greater
significance by Carson Medlin than any other. The relative importance or weight
given to these analyses by Carson Medlin is not necessarily reflected by the
order of presentation of the analyses herein (and the corresponding results).
The summaries of financial analyses include information presented in tabular
21
format. The tables should be read together with the text of those summaries.
Carson Medlin has relied, without independent verification, upon the
accuracy and completeness of the information it reviewed for the purpose of
rendering its opinion. Carson Medlin did not undertake any independent
evaluation or appraisal of the assets and liabilities of First Western or MFC,
nor was it furnished with any appraisals.
Carson Medlin is not an expert in the evaluation of loan portfolios,
including under-performing or non-performing assets, charge-offs or the
allowance for loan losses; it has not reviewed any individual credit files of
First Western or MFC; and it has assumed that the allowances of First Western
and MFC are in the aggregate adequate to cover potential losses. Carson
Medlin's opinion is necessarily based on economic, market and other conditions
existing on the date of its opinion, and on information as of various earlier
dates made available to it which is not necessarily indicative of current market
conditions.
In rendering its opinion, Carson Medlin made the following assumptions:
. that the Merger will be accounted for as a purchase in accordance with
generally accepted accounting principles;
. that all material governmental, regulatory and other consents and approvals
necessary for the consummation of the Merger would be obtained without any
adverse effect on First Western, MFC or on the anticipated benefits of the
Merger;
. that First Western had provided it with all of the information prepared by
First Western or its other representatives that might be material to Carson
Medlin in its review; and
. that the financial projections it reviewed were reasonably prepared on a
basis reflecting the best currently available estimates and judgement of
the management of First Western as to the future operating and financial
performance of First Western.
In connection with its opinion dated September 12, 2001, Carson Medlin
reviewed:
. the Merger Agreement;
. MFC's audited consolidated financial statements for the three years ended
December 31, 2000;
. First Western's audited financial statements for the three years ended
December 31, 2000;
. MFC's unaudited consolidated financial statements for the six months ended
June 30, 2001;
. First Western's unaudited financial statements for the six months ended
June 30, 2001; and
. financial and operating information with respect to the business,
operations and prospects of MFC and First Western.
In addition, Carson Medlin:
. held discussions with members of management of MFC and First Western
regarding the historical and current business operations, financial
condition and future prospects of their respective companies;
. reviewed the historical market prices and trading activity for the common
stocks of MFC and First Western;
22
. compared the results of operations of MFC and First Western with those of
certain financial institutions which it deemed to be relevant;
. compared the financial terms of the Merger with the financial terms, to the
extent publicly available, of certain other recent business combinations of
financial institutions; and,
. conducted such other studies, analyses, inquiries and examinations as
Carson Medlin deemed appropriate.
The following is a summary of all material analyses performed by Carson
Medlin in connection with its opinion provided to First Western's Board of
Directors as of September 12, 2001. The summary does not purport to be a
complete description of the analyses performed by Carson Medlin.
Summary of Merger and Analysis. Carson Medlin reviewed the terms of the
proposed Merger, including the form of consideration, the price per share of MFC
Stock and the price paid to First Western shareholders pursuant to the proposed
Merger. Under the terms of the Merger Agreement, First Western shareholders
will receive 0.50 shares of MFC Stock for each outstanding First Western Share.
Based on MFC's 30-day average stock price of $27.10 as of August 27, 2001 (the
date preceding the announcement of an agreement in principal), First Western
shareholders will receive $13.55 per share for each outstanding share of First
Western Stock.
Carson Medlin calculated that the indicated consideration paid to First
Western shareholders represented:
. a 50.5% premium to First Western's market value one month prior to
announcement and a 23.2% premium to First Western's initial public
offering;
. 151% of First Western's tangible book value at June 30, 2001;
. 113.1 times First Western's estimated earnings for 2001;
. 30.6% of First Western's total deposits at June 30, 2001;
. a 10.9% premium on First Western's core deposits at June 30, 2001; and
. 24.0% of First Western's total assets of First Western at June 30, 2001.
Industry Comparative Analysis. In connection with rendering its opinion,
Carson Medlin compared selected operating results of both First Western and MFC
to those of 33 traded community commercial banks in Florida, Georgia, Louisiana,
North Carolina, South Carolina, Virginia and West Virginia, established in the
past five years which are listed in the Eastern De Novo Bank Review, a
proprietary research publication prepared by Carson Medlin quarterly since 1998.
The banks reviewed by Carson Medlin range in asset size from $40 million to $409
million and in shareholders' equity from approximately $4 million to $41
million. Carson Medlin considers this group of de novo financial institutions
more comparable to First Western and MFC than larger, more widely traded
community and regional financial institutions. Carson Medlin compared, among
other factors, profitability, capitalization, and leverage (loans to deposits)
of First Western and MFC to these financial institutions. Carson Medlin noted
the following performance based on results at or for the three months ended
March 31, 2001 (most recent available).
23
MFC First Western Average for Peer Group
------- -------------- -----------------------
Return on average assets, pretax............ 1.04% 0.31% 0.61%
Interest spread............................. 3.69% 3.20% 3.32%
Equity to assets............................ 6.00% 18.00% 10.00%
Loans to deposits........................... 97.00% 91.00% 80.00%
Price to book value at June 30, 2001........ 2.53 X 0.88 X 1.24 X
This comparison indicated that First Western's financial performance was
above the peer group for capitalization and loans to deposits and below the peer
group for profitability. Carson Medlin noted that MFC's financial performance
was above the peer group for each factor analyzed, with the exception of
capitalization. MFC Stock traded at a significant premium to book value and to
the peer group average at June 30, 2001, while First Western Stock traded at a
discount to book value and the peer group average. Carson Medlin noted that the
market value multiples for both companies had not materially changed as of
September 12, 2001.
Comparable Transaction Analysis. Carson Medlin reviewed certain
information related to the following selected merger transactions involving
commercial banks in the southeast United States announced since January 1, 2000
with assets less than $100 million:
Seller State Buyer State
--------------------------------- -------------- ---------------------------------- --------------
Village Banc of Naples Florida Harris Bankcorp, Inc. Illinois
Commerce Bancshares, Inc. Tennessee Private Investor Tennessee
Heritage Bancorp, Inc. Virginia Cardinal Financial Corp Virginia
Perry County Bank Alabama West Alabama Capital Corp. Alabama
Stockmans Bank of Harman West Virginia Highlands Bankshares, Inc. West Virginia
Citizens Southern Bank, Inc. WestVirginia First Community Bancshares Virginia
Ridgeway Bancshares, Inc. South Carolina RHBT Financial Corp. South Carolina
Bank of Gibson Georgia Private Investor Georgia
Friendship Community Bank Florida PAB Bankshares, Inc. Georgia
Walton Bank & Trust Co. Georgia First Sterling Banks, Inc. Georgia
First Bank Holding Co. Florida SouthTrust Corporation Alabama
First Security Bank Florida United Financial Holdings Florida
Freedom Bancshares, Inc. West Virginia WesBanco, Inc. West Virginia
Tri-County Bank Florida ABC Bancorp Georgia
Farmers Bank Georgia Persons Banking Co., Inc. Georgia
Citrus Financial Services, Inc. Florida CIB Marine Bancshares, Inc. Wisconsin
Pine Level Bank North Carolina Heritage Bancshares, Inc. North Carolina
Belfast Holding Company Tennessee First Pulaski National Corporation Tennessee
BOC Financial Corp. North Carolina Bank of Davie North Carolina
24
In evaluating these factors, Carson Medlin considered, among other factors,
the earnings, capital level, asset size and quality of assets of the acquired
financial institutions. Carson Medlin compared the transaction prices at the
time of announcement to the book value, earnings, total and core deposits and
total assets of the acquired institutions.
Purchase Price as a Percentage of Tangible Book Value Low High Average
------------------------------------------------------- ------- ------- --------
Comparable Transactions....................................... 114% 311% 174%
Range of Values (based on FWBN tangible
book value of $8.95 per share at June 30, 2001)............ $10.20 $27.83 $15.57
Based on MFC's 30-day average price of $27.10 prior to announcement of the
Merger and a 0.50 exchange ratio, First Western's shareholders would receive
$13.55 per share of First Western Stock, or 151% of tangible book value. This
consideration is below the average for the range of the comparable
transactions.
Purchase Price as a Multiple of Earnings Low High Average
---------------------------------------------------- ----- ------- -------
Comparable Transactions....................................... 7.6 31.7 18.7
Range of values (based on First Western
earnings per share of $0.12 estimated for 2001)............ $0.91 $3.80 $2.24
Based on the terms of the transaction at announcement, First Western's
shareholders would receive $13.55 per share of First Western Stock, or 113.1
times estimated 2001 earnings, which is well above the average for the
comparable transactions. Carson Medlin noted that First Western had only been
in operation for slightly more than three years and had not yet established
significant profitability which rendered any price to earnings multiples
essentially meaningless. As such, Carson Medlin did not place any weight on
this measure in its analysis.
Comparable Transactions
------------------------------
First Western
Other Pricing Multiples Indicator Low High Average
----------------------------------------- -------------- ------- ------ ---------
Purchase Price % of Total Deposits........... 30.6% 12.3% 34.9% 21.1%
Core Deposit Premium (on stated equity) 10.9% 3.0% 21.8% 9.4%
Purchase Price % of Total Assets............. 24.0% 10.1% 26.9% 18.1%
The purchase price as a percentage of total deposits implied by the Merger
is 30.6%, which is above the average of the range for the comparable
transactions. The core deposit premium, which is the aggregate transaction
value minus stated book value divided by core deposits, is 10.9% which is above
the average of the range for the comparable transactions. The purchase price as
a percentage of total assets implied by the Merger is 24.0%, which is also above
the average of the range for the comparable transactions.
No company or transaction used in Carson Medlin's analyses is identical to
First Western or the proposed Merger. Accordingly, the results of these
analyses necessarily involve complex considerations and judgments concerning
differences in financial and operating characteristics of First Western and
other factors that could affect the value of the companies to which they have
been compared.
Contribution Analysis. Carson Medlin reviewed the relative contributions
in terms of various balance sheet and income statement components to be made by
MFC and First Western to the combined institution based on (i) balance sheet
data at June 30, 2001, and (ii) 2000 pre-tax and 2001 estimated net income. The
income statement and balance sheet components analyzed included total assets,
total deposits, shareholders' equity, and pre-tax and net income. The following
table compares the pro forma
25
ownership of MFC and First Western shareholders in the combined company based
upon the exchange ratio with each company's respective contribution to each
element of this analysis.
MFC First Western
---- --------------
Implied pro forma ownership........... 73% 27%
Contribution to combined company:
Total assets....................... 84% 16%
Total deposits..................... 81% 19%
Shareholders equity................ 58% 42%
2000 pre-tax income................ 95% 5%
2001 estimated net income.......... 93% 7%
Shareholder Claims Analysis. Carson Medlin compared the ownership of one
share of First Western Stock to the ownership of the number of shares of MFC
Stock to be received in the Merger from the perspective of claims on various
balance sheet and income statement variables. Carson Medlin found that First
Western's shareholders would have a claim to $1.23 per share of First Western
Stock of estimated combined pro forma 2001 core earnings compared to $0.33 per
share of First Western Stock on a stand alone basis. Based on the exchange
ratio of 0.50, First Western's shareholders would have had a claim to $129.5
million of June 30, 2001 total assets compared to $77.5 million stand alone
before the Merger. First Western's shareholders would have a claim to $6.30 per
share of First Western Stock of June 30, 2001 pro forma book value, compared to
$9.76 before the Merger.
Present Value Analysis. Carson Medlin calculated the present value of
First Western assuming that First Western remained an independent bank. For
purposes of this analysis, Carson Medlin utilized certain projections of First
Western's future growth of assets, earnings and dividends and assumed a terminal
price to book value multiple from 1.80 to 2.20 times. These values were then
discounted to present value utilizing discount rates of 14% to 16%. These rates
were selected because, in Carson Medlin's experience, they represent the rates
that investors in securities such as First Western Stock would demand in light
of the potential appreciation and risks.
Discount rate Present Value Analysis (in dollars per share)
--------------- ---------------------------------------------
1.80 1.90 2.00 2.10 2.20
------ ------ ------ ------ ------
14%........ $11.19 $11.76 $12.33 $12.90 $13.47
15%........ $10.73 $11.28 $11.82 $12.37 $12.91
16%........ $10.30 $10.82 $11.34 $11.86 $12.38
On the basis of these assumptions, Carson Medlin calculated that the
present value of First Western as an independent bank ranged from $10.30 per
share to $13.47 per share. The consideration to be paid to First Western
shareholders at announcement was $13.55 per share which is above the high end of
the range indicated under the present value analysis.
Carson Medlin noted that it included present value analysis because it is a
widely used valuation methodology, but also noted that the results of this
methodology are highly dependent upon the numerous assumptions that must be
made, including assets and earnings growth rates, dividend payout rates,
terminal values and discount rates.
Historical Stock Performance Analysis. Carson Medlin reviewed and analyzed
the historical trading prices and volumes of First Western Stock and MFC Stock
over recent periods. MFC Stock trades on the OTC Bulletin Board and was trading
around $27.00 per share immediately prior to
26
announcement of the Merger. First Western Stock trades on the NASDAQ SmallCap
Market and was trading around $9.00 per share just prior to the Merger
announcement. Both First Western Stock and MFC Stock trading volume has been
modest over the period analyzed, averaging less than 1,000 shares per day.
The opinion expressed by Carson Medlin was based upon market, economic and
other relevant considerations as they existed and could be evaluated as of the
date of the opinion. Events occurring after the date of issuance of the
opinion, including but not limited to, changes affecting the securities markets,
the results of operations or material changes in the assets or liabilities of
First Western or MFC, could materially affect the assumptions used in preparing
the opinion.
In connection with its opinion, Carson Medlin confirmed the appropriateness
of its reliance on the analyses used to render its September 12, 2001, opinion
by performing procedures to update certain of such analyses and reviewing the
assumptions on which its analyses were based and the factors considered in
connection therewith.
Effect of Merger on Outstanding Shares of MFC Stock
The shares of MFC Stock that are held by its shareholders at the Effective
Time will remain outstanding and not be changed by the Merger. The Merger will
not affect any rights of MFC's current shareholders. However, because MFC is
expected to issue a total of approximately 687,841 new shares of MFC Stock to
First Western's shareholders, the Merger will dilute the relative percent
interests of MFC's current shareholders. It is expected that, following the
Merger, MFC's current shareholders will hold approximately 73.1%, and First
Western's former shareholders will hold approximately 26.9%, of MFC's
outstanding shares.
Required Shareholder Approval
Under North Carolina banking law, the Merger Agreement and the Merger must
be approved by the holders of at least two-thirds of the total outstanding
shares of First Western Stock in order for the Merger to be completed.
Required Regulatory Approvals
The Merger is subject to approval by the North Carolina Commissioner of
Banks, the North Carolina Banking Commission and the FDIC. The Merger Agreement
provides that First Western's and MFC's respective obligations to complete the
Merger are conditioned on receipt of all required regulatory approvals of the
transactions described in the Merger Agreement. An application for each
required regulatory approval has been filed and is pending. Management of First
Western and MFC currently are not aware of any reason, condition or circumstance
that might lead to a denial of any of their applications.
Conduct of Business Pending the Merger
The Merger Agreement provides that, during the period from the date of the
Merger Agreement to the Effective Time, and except as otherwise permitted by the
Merger Agreement or consented to by MFC and MountainBank, First Western will,
among various other things:
. conduct its business in the usual manner, preserve its organization intact,
keep available the services of its present officers, employees and agents,
and preserve relationships with its customers and others it does business
with;
. maintain its properties and assets in customary repair, order and
condition;
27
. maintain its books and records in the usual, regular and ordinary manner;
. comply with laws, ordinances, regulations and standards that apply to its
business;
. periodically provide MFC with various information regarding its business
and operations, and promptly advise MFC of any material change in its
financial condition, business or affairs;
. prior to the Effective Time, make accruals or accounting entries or create
reserves on its books, or make additional provisions to its allowance for
loan losses, that MFC considers necessary, appropriate or desirable in
anticipation of the Merger, and charge-off loans that MFC considers to be
losses or believes should be charged-off under generally accepted
accounting principles, banking regulations or MFC's loan administration
policies and procedures; and,
. prior to the Effective Time, review its credit files, correct any
documentation and compliance deficiencies, and implement MFC's credit file
policies and procedures for all new loans, and conform its existing credit
files for loans in excess of $25,000 to those policies and procedures.
Additionally, the Merger Agreement provides that, between the date of the
Merger Agreement and the Effective Time, First Western may not, among various
other things (and with certain exceptions):
. amend its Articles of Incorporation or Bylaws, make any changes in its
capital stock, issue any additional capital stock or other securities,
grant options to purchase its capital stock or other securities, or
purchase or redeem any of its outstanding shares;
. make any changes in its accounting methods, practices or procedures, or in
the nature of its business or the manner in which it does business;
. acquire or merge with, or acquire substantially all the assets of, any
other company;
. agree to buy or sell any real property or, above certain amounts, any
personal property, or mortgage, pledge or otherwise subject to a lien any
of its tangible assets, or, except in the ordinary course of business,
incur any indebtedness;
. waive or compromise any rights in its favor of any substantial value,
except for money or money's worth, or waive or compromise any rights in its
favor with respect to its officers, directors, shareholders or members of
their families;
. except in accordance with its customary salary administration and review
procedures, increase the compensation of, or pay any bonuses or additional
compensation to, its officers, directors, employees or consultants;
. enter into certain types of contracts described in the Merger Agreement,
including without limitation employment or consulting contracts not
immediately terminable without cost or other liability on no more than 30
days' notice, compensation or employee benefit plans or agreements, single
contracts calling for expenditures in excess of $5,000, or any other
contracts other than in the ordinary course of business; or
. make, renew, extend or modify the terms of a loan or extension of credit,
or commit itself to take any of those actions, involving a borrower with
which it has a $25,000 or greater credit exposure without the prior
approval of MountainBank's lending personnel.
Dividends
The Merger Agreement provides that, prior to the Effective Time, First
Western may not declare or pay any cash dividend or make any other distributions
to its shareholders.
28
Prohibition on Solicitation
The Merger Agreement provides that, except under certain circumstances,
First Western may not:
. encourage, solicit or attempt to initiate discussions, negotiations or
offers with or from any other person relating to a merger or other
acquisition of First Western or the purchase or acquisition of any First
Western Stock or all or any significant part of First Western's assets, or
provide assistance to any person in connection with such an offer;
. except to the extent required by law, disclose to any person or entity any
information not customarily disclosed to the public concerning First
Western or its business, or give any other person access to First Western's
properties, facilities, books or records; or
. enter into or become bound by any contract, agreement, commitment or letter
of intent relating to, or otherwise take or agree to take any action in
furtherance of, any such transaction.
Accounting Treatment
The Merger will be treated as a "purchase" under generally accepted
accounting principles. Under the purchase method of accounting, at the Effective
Time First Western's assets and liabilities will be recorded at their respective
fair values and added to those of MFC. The excess of the cost over the fair
value of the assets acquired will be recorded as goodwill on MFC's books. MFC's
financial statements after the Effective Time will reflect the assets and
liabilities of First Western, but MFC's financial statements will not be
restated retroactively to reflect First Western's historical financial position
or results of operations.
All unaudited pro forma condensed combined financial information contained
in this Proxy Statement/Prospectus has been prepared using the purchase method
to account for the Merger. The final allocation of the purchase price will be
determined after the Merger is completed and after completion of an analysis to
determine the fair values of First Western's tangible and identifiable
intangible assets and liabilities. In addition, estimates related to
restructuring and Merger-related charges are subject to final decisions related
to combining First Western and MFC. Accordingly, the final purchase accounting
adjustments, restructuring and Merger-related charges may be materially
different from the unaudited pro forma adjustments presented in this document.
Any decrease in the net fair value of the assets and liabilities of First
Western as compared to the information shown in this document will have the
effect of increasing the amount of the purchase price allocable to goodwill.
Certain Income Tax Consequences
Consummation of the Merger is conditioned on receipt by MFC and First
Western of a written opinion (the "Tax Opinion") of MFC's legal counsel, Ward
and Smith, P.A., to the effect that the Merger will constitute a tax-free
reorganization under Section 368 of the Internal Revenue Code (the "Code"). The
following discussion summarizes MFC's and First Western's current understanding
of the material federal income tax consequences of the Merger as described in
the Tax Opinion that generally will apply to holders of First Western Stock.
The Tax Opinion and this summary do not cover all aspects of federal
income taxation that may apply to First Western's shareholders, and they do not
cover the tax consequences of the Merger under state, local or other tax laws,
or special tax consequences to First Western shareholders who may be affected by
special individual circumstances. Further, the Tax Opinion and this summary do
not address the tax consequences of the Merger in the case of the holders of
outstanding options to purchase First Western Stock. Your individual
circumstances may affect the tax consequences of the Merger to you, and you
should consult your own tax advisor in order to make an individual evaluation
29
of the federal, state or local tax consequences of the Merger in your particular
circumstances and, among other things, the tax return reporting requirements,
application and effect of federal, foreign, state, local and other tax laws on
you, and the implications of any proposed changes in the tax laws.
You should be aware that the Tax Opinion is not binding on the Internal
Revenue Service (the "IRS"), and there is no assurance that in the future the
IRS will not disagree with or take a position contrary to that set forth in the
Tax Opinion on any particular aspect of the tax consequences of the Merger. If
the IRS were to take a position contrary to that set forth in the Tax Opinion,
that could result in adverse tax consequences to you.
The Tax Opinion and this summary are based on currently existing provisions
of the Code, existing and proposed Treasury Regulations under the Code, and
current administrative rulings and court decisions, all of which are subject to
change. Any such change could be retroactive and cause the tax consequences of
the Merger to MFC, First Western, MountainBank or First Western's shareholders
to be different from those described in the Tax Opinion.
Subject to the limitations and qualifications referred to above and in the
Tax Opinion, the Tax Opinion states, among other things, that:
. The Merger of First Western with and into MountainBank, and the issuance of
MFC Stock in exchange for First Western Stock in connection with the Merger
as described in the Merger Agreement, will constitute a tax-free
reorganization under Section 368(a) of the Code;
. First Western's shareholders who receive MFC Stock in exchange for their
First Western Stock in the Merger and do not exercise dissenters' rights
will not recognize any gain or loss on the receipt of MFC Stock (except to
the extent that they receive cash in lieu of fractional shares);
. The basis of the MFC Stock received by First Western's shareholders in the
Merger will be the same as the basis of the shares of their First Western
Stock surrendered in exchange for the MFC Stock (excluding fractional
shares for which cash is received);
. The holding period of the MFC Stock received by First Western's
shareholders in the Merger will include the period for which the First
Western Stock surrendered in exchange for the MFC Stock was considered to
have been held, provided that the First Western Stock is held as a capital
asset at the Effective Time; and,
. Neither MFC nor MountainBank will recognize a gain solely as a result of
the Merger, except that gain or loss may be recognized on the recapture of
tax attributes, including but not limited to the recapture of bad debt
reserves.
In general, cash received by First Western's shareholders who exercise
dissenters' rights under North Carolina law, or in exchange for fractional
shares of MFC Stock, will be treated as amounts distributed in redemption of
their shares, the federal income tax consequences of which will be governed by
Section 302 of the Code. However, it is possible that Section 302 of the Code
will not apply, in which case such a distribution could be treated as a dividend
pursuant to Section 301 of the Code. The tax consequences of the distribution,
whether it is treated as a dividend or as received in exchange for stock, will
vary depending upon the circumstances of the individual shareholder.
You are urged to consult your own tax advisor regarding the specific tax
consequences to you of the Merger and the exchange of your First Western Stock
for MFC Stock.
30
Conditions to the Merger
Completion of the Merger is subject to various conditions described in the
Merger Agreement, including:
. approval of the Merger Agreement by First Western's shareholders;
. receipt of all required regulatory approvals, and MFC's approval of any
conditions or requirements imposed on it or MountainBank by any regulatory
agency as a condition to its approval of the Merger;
. receipt of the Tax Opinion;
. receipt by First Western of the First Western Fairness Opinion, and receipt
by MFC of a similar opinion from its financial advisor to the effect that
the terms of the Merger Agreement are fair to MFC shareholders from a
financial point of view (the "MFC Fairness Opinion"), and, prior to
consummation of the Merger, receipt of confirmations that the First Western
Fairness Opinion and the MFC Fairness Opinion remain in effect; and,
. approval by First Western's and MFC's respective legal counsel of the form
and substance of all legal matters related to the Merger.
Additionally, under the Merger Agreement, First Western's and MFC's
separate obligations to complete the Merger are subject to various other
conditions, including:
. performance by the other party of its various covenants, agreements and
conditions under the Merger Agreement;
. absence of any breach of any of the other party's representations or
warranties contained in the Merger Agreement;
. compliance by the other party with all laws and regulations that apply to
the transactions described in the Merger Agreement;
. receipt of agreements from persons who are "affiliates" of First Western
and certain of their related parties regarding restrictions on the MFC
Stock they receive for their First Western Stock; and,
. receipt of a written opinion of the other party's legal counsel as to
various matters.
Waiver; Amendment of Merger Agreement
Any term or condition of the Merger Agreement (except as to matters of
shareholder and regulatory approvals and other approvals required by law) may be
waived in writing, either in whole or in part, by First Western, MountainBank or
MFC if its Board of Directors determines that the waiver would not adversely
affect its interests or the interests of its shareholders. The Merger Agreement
may be amended, modified or supplemented at any time or from time to time prior
to the Effective Time, and either before or after its approval by First
Western's shareholders, by an agreement in writing approved by a majority of the
Boards of Directors of First Western, MFC and MountainBank. Approval of the
Merger Agreement by First Western's shareholders will authorize First Western's
Board of Directors to grant any waiver, or to agree to any amendment,
modification or supplement, as described above. However, following approval of
the Merger Agreement by First Western's shareholders, no change may be made in
the number of shares of MFC Stock into which each share of First Western Stock
will be converted at the Effective Time unless that change also is approved by
First Western's shareholders.
31
Termination of the Merger Agreement
Prior to the Effective Time, the Merger Agreement may be terminated by the
mutual agreement of First Western and MFC. The Merger Agreement also may be
terminated by either First Western or MFC alone, by action of its Board of
Directors, if among other things:
. any of the conditions to its obligations have not been satisfied in all
material respects or effectively waived by it in writing by February 28,
2002;
. the other party has violated or failed to fully perform any of its
obligations, covenants or agreements under in the Merger Agreement in any
material respect;
. any of the other party's representations or warranties were false or
misleading in any material respect when made, or there occurs any event or
development or there exists any condition or circumstance which has caused
or, with the lapse of time or otherwise, might cause any of the other
party's representations or warranties to become false or misleading in any
material respect;
. First Western's shareholders do not approve the Merger Agreement and Merger
at the Special Meeting; or
. the Merger does not become effective on or before February 28, 2002, or by
a later date agreed upon in writing by First Western and MFC.
Additionally, MFC can terminate the Merger Agreement if the Special Meeting
is not held by December 28, 2001.
Closing Date and Effective Time
After all conditions described in the Merger Agreement have been satisfied,
the closing of the Merger will be held on a date (the "Closing Date") agreed
upon by First Western and MFC after the expiration of the waiting periods
required by federal regulatory authorities following receipt of their approvals.
The Effective Time of the Merger will be the date and time specified in Articles
of Merger filed by MountainBank with the North Carolina Secretary of State (or,
if a time is not specified, then at the time the Articles of Merger are filed).
Although there is no assurance as to whether or when the Merger will occur, it
currently is expected that it will become effective during the later part of the
fourth quarter of 2001 or the early part of the first quarter of 2002.
Interests of Certain Persons With Respect to the Merger
As further described below, members of First Western's management and Board
of Directors have certain interests in the Merger that are in addition to their
interests as shareholders of First Western generally.
Election of First Western's Directors as Directors of MFC and MountainBank.
MountainBank and MFC have agreed that, if they remain directors of First Western
at the Effective Time, William A. Banks, Jerry Duncan, David R. McIntosh and Van
F. Phillips, current directors of First Western, will be appointed to serve as
directors of MountainBank, and Mr. Banks and Mr. Phillips will be appointed to
serve as directors of MFC. Mr. Phillips also will be appointed to serve as Vice
Chairman of MFC. Those individuals will be compensated for their services as
directors of MFC and MountainBank on the same basis as MFC's and MountainBank's
other directors. For their services as directors, MountainBank's directors
currently receive a monthly retainer of $100 and fees of $650 for attendance at
each Board meeting and $100 for attendance at each meeting of a committee on
which they serve. Directors currently do not receive any additional compensation
for their services as members of MFC's Board of Directors. First Western
currently pays each of its directors $400 per regular Board
32
meeting (regardless of whether or not they attend), and $65 for attendance at
each meeting of a Board committee. (See "MountainBank Financial Corporation --
Directors' Compensation" on page _____, and "First Western Bank -- Directors'
Compensation" on page _____.) After their initial appointment, the continued
service of First Western's directors as directors of MFC and MountainBank will
be subject to MFC's and MountainBank's normal director nomination and election
processes.
Change in Control Payments. Ronnie E. Deyton (First Western's President
and Chief Executive Officer), Charles L. Ownbey (First Western's Senior Vice
President) and Martin J. Shuford (First Western's Senior Vice President) each
currently is employed by First Western under an employment agreement which
provides for a term that is extended by one additional year on each anniversary
of the execution of the agreement, unless proper written notice is received.
The salaries for 2001 for Mr. Deyton, Mr. Ownbey and Mr. Shuford are $100,000,
$88,482 and $77,490, under their respective employment agreements. Upon
termination of their employment, or the occurrence of a "termination event," in
connection with, or within twenty-four months after, a "change in control" of
First Western, each agreement provides that the officer will be entitled to
receive 299% of his then "base amount" as defined in Section 280G(b)(3) of the
Code. As defined in the employment agreements, a "termination event" will occur
if the officer is assigned any duties or responsibilities that are inconsistent
with or constitute a demotion or reduction in his position, duties,
responsibilities, status or compensation at the time of the change in control or
if there is a change in his reporting responsibilities or titles with First
Western in effect at the time of the change in control.
Mr. Deyton will become an employee of MountainBank upon completion of the
Merger, but he has agreed to accept a reduction in his position, duties and
compensation. Mr. Ownbey's and Mr. Shuford's employment will cease upon
completion of the Merger. Immediately prior to completion of the Merger, First
Western will make change in control payments to Mr. Deyton, Mr. Ownbey and Mr.
Shuford under their respective employment agreements. It is currently estimated
that those payments will amount to $234,479, $221,961 and $172,976,
respectively.
Employment of First Western's President. In order to assure itself of his
assistance and continued services following the Effective Time, MountainBank has
agreed that it will enter into a new employment agreement with Mr. Deyton in the
place of his existing agreement with First Western. The proposed new agreement
would provide for Mr. Deyton to be employed by MountainBank on a part-time basis
as a Senior Vice President for a two-year term of employment and at a base
salary of $30,000 per year. The employment agreement provides that Mr. Deyton
may not "compete" (as defined in the agreement) against MountainBank in
Henderson County, Yancey County, Mitchell County or Buncombe County, North
Carolina, during the term of employment and for a period of five years following
its termination and, in return, for MountainBank to make additional payments to
Mr. Deyton in the amount of $103,396 per year during the five-year restriction
period following termination of the term of employment.
Other Employees. Provided they remain employed by First Western at the
Effective Time, MountainBank will attempt in good faith to locate suitable
positions with MountainBank for which employment may be offered to all other
employees of First Western. However, MountainBank will have no obligation to
employ or provide employment to any employee of First Western, and any
employment offered to an employee of First Western will be in a position, at a
location within MountainBank's branch system, and for a rate of compensation, as
MountainBank will determine in its sole discretion. The employment of each
First Western employee (other than Mr. Deyton) by MountainBank will be on an
"at-will" basis.
Outstanding First Western Stock Options. First Western previously has
granted options to certain of its officers and directors to purchase shares of
First Western Stock. The Merger Agreement provides that, at the Effective Time,
outstanding options held by First Western's directors, and options held by
officers and employees who become officers or employees of MountainBank at the
Effective
33
Time, will be assumed by MFC and converted into options to purchase MFC Stock.
The conversion will be made such that, following the Effective Time, each option
will provide for the purchase of 0.50 shares of MFC Stock for each share of
First Western Stock previously covered by the option, and the exercise price of
the option will be appropriately adjusted. First Western has agreed to obtain
from each holder of an option to be assumed by MFC, and will deliver to MFC, a
written agreement in a form specified by MFC confirming and agreeing to the
conversion of that person's option as described above. Options held by officers
and employees that are not assumed by MFC will become vested and may be
exercised in full pursuant to their terms immediately prior to the Effective
Time.
Employee Benefits. First Western's employees who become employees of
MountainBank at the Effective Time (including Mr. Deyton) will be entitled to
receive all employee benefits and to participate in all benefit plans provided
by MountainBank on the same basis and subject to the same eligibility and
vesting requirements, and to the same conditions, restrictions and limitations,
as generally are in effect and applicable to other newly hired employees of
MountainBank. In addition, First Western's employees will be given credit for
their years of service with First Western for all purposes under MountainBank's
employee benefit plans.
Directors' and Officers' Liability Insurance. First Western and
MountainBank have agreed that, to the extent it can be purchased at a cost to
which they both agree, then immediately prior to the Effective Time First
Western will purchase "tail" coverage, effective at the Effective Time, under
and in the same amount of coverage as is provided by its then current directors'
and officers' liability insurance policy.
Expenses
The Merger Agreement provides that First Western, MountainBank and MFC each
will pay its own legal, accounting and financial advisory fees and all its other
costs and expenses (including all filing fees, printing and mailing costs and
travel expenses) incurred or to be incurred in connection with the performance
of its obligations under the Merger Agreement or otherwise in connection with
the Merger. The costs of preparing, printing and distributing this Proxy
Statement/Prospectus will be divided equally between First Western and MFC.
RIGHTS OF DISSENTING SHAREHOLDERS
Under Article 13 of the North Carolina Business Corporation Act ("Article
13"), if you object to the Merger Agreement and Merger, you may "dissent" and
become entitled to be paid the fair value of your shares of First Western Stock
if the Merger is completed. The following is only a summary of the rights of a
dissenting shareholder. If you intend to exercise your right to dissent (your
"Diss[Bters' Rights"), you should carefully review the following summary and
comply with all requirements of Article 13. A copy of Article 13 is attached as
Appendix B to this document and is incorporated into this discussion by
reference. You also should consult with your attorney. NO FURTHER NOTICE OF
THE EVENTS GIVING RISE TO DISSENTERS' RIGHTS WILL BE FURNISHED BY FIRST WESTERN
TO YOU.
If you intend to exercise Dissenters' Rights, you should be aware that cash
paid to you likely will result in your receipt of taxable income. (See "The
Merger - Certain Income Tax Consequences" on page ____.)
Article 13 provides in detail the procedure which you must follow if you
wish to exercise Dissenters' Rights. In summary, to exercise Dissenters'
Rights:
34
. you must give to First Western, and First Western must actually receive,
before the vote on the Merger is taken at the First Western Special
Meeting, written notice of your intent to demand payment for your shares if
the Merger is completed (a "Notice of Intent"); and
. you must not vote your shares in favor of the Merger at the First Western
Special Meeting.
In other words, you do not have to vote against the Merger, or even vote at
all, in order to exercise Dissenters' Right, but you may not vote in favor of
the Merger, and in all cases you must give the required written notice. Your
failure to satisfy these requirements will result in your not being entitled to
exercise Dissenters' Rights and receive payment for your shares under Article
13. Even if you vote against the Merger (either in person or by appointment of
proxy), you still have to send the required Notice of Intent in order to
exercise Dissenters' Rights. You should remember that (as described under the
caption "The Special Meeting of First Western's Shareholders - Solicitation and
Voting of Proxies" on page _____) if you return a signed appointment of proxy
but fail to provide instructions as to the manner in which your shares are to be
voted, you will be considered to have voted in favor of the Merger and you will
not be able to assert Dissenters' Rights. If you do not return a proxy card or
otherwise vote at all at the Special Meeting, you will not be treated as waiving
your Dissenters' Rights.
If you intend to dissent, your Notice of Intent should be mailed or
delivered to First Western's President, Ronnie E. Deyton, at First Western's
corporate office at 600 West By-Pass (Post Office Box 187) in Burnsville, North
Carolina 28714, or it may be hand delivered to the President of First Western
at the First Western Special Meeting (before the voting begins). In order for a
Notice of Intent sent by mail to be effective, it must actually be received by
First Western at its address prior to the First Western Special Meeting. A
Notice of Intent which is hand delivered must be received prior to the vote on
the Merger at the First Western Special Meeting.
If you deliver a Notice of Intent and the Merger is approved by First
Western's shareholders at the First Western Special Meeting (or at any
adjournment of the meeting), then, within ten days following that approval,
First Western will send you a written notice (a "Dissenters' Notice"), by
registered or certified mail, return receipt requested, so long as you have
satisfied the requirements to exercise Dissenters' Rights. The Dissenters'
Notice will:
. state where your payment demand must be sent, and where and when your share
certificates must be deposited;
. supply a form you can use for demanding payment, and be accompanied by a
copy of Article 13; and,
. specify a date by which First Western must receive your payment demand
(which may not be fewer than 30 nor more than 60 days after the date the
Dissenters' Notice is mailed).
After receipt of the Dissenters' Notice, you must deliver to First Western
a written demand for payment (a "Payment Demand") and deposit your share
certificates with First Western by the date set forth in and in accordance with
the terms and conditions of the Dissenters' Notice. Otherwise, you will not be
entitled to payment for your shares under Article 13. If you deliver a Payment
Demand and deposit your share certificates as required by the Dissenters'
Notice, you will retain all other rights as a shareholder until those rights are
canceled or modified by completion of the Merger.
As soon as the Merger is completed, or within 30 days after receipt of your
Payment Demand (whichever is later), MFC will pay you (provided that you have
satisfied all requirements to exercise Dissenters' Rights) the amount MFC
estimates to be the fair value of your shares, plus interest accrued to the date
of payment. MFC's payment will be accompanied by:
. certain of MFC's most recent available financial statements;
35
. an explanation of how MFC estimated the fair value of your shares and how
the interest was calculated;
. a statement of your rights if you are dissatisfied with MFC's payment; and,
. a copy of Article 13.
If the Merger is not completed within 60 days after the date set for you to
demand payment and deposit your share certificates, First Western must return
your deposited certificates, and if the Merger is completed later, First Western
must send you a new Dissenters' Notice and repeat the Payment Demand procedures
described above.
If you believe that the amount paid by MFC as described above is less than
the fair value of your shares of First Western Stock or that the interest due is
incorrectly calculated, or if MFC fails to make payment to you within 30 days
after receipt of your Payment Demand, or if First Western fails to complete the
Merger and does not return your deposited certificates within 60 days after the
date set for demanding payment, then you may notify MFC, or First Western if the
Merger has not been completed, in writing of your own estimate of the fair value
of your shares of First Western Stock and the amount of interest due and may
demand payment of your estimate (a "Further Payment Demand"). In any such
event, if you fail to take any such action within the 30 days after MFC makes
payment for your shares or fails to perform timely, you will be deemed to have
waived your rights under Article 13 and to have withdrawn your dissent and
demand for payment.
If you have taken all required actions and your demand for payment remains
unsettled, you may file a lawsuit within 60 days after the earlier of the date
of MFC's payment or the date of your Further Payment Demand (where the
shareholder is dissatisfied with MFC's payment or MFC has failed to make payment
or First Western has failed to return your stock certificates). If you take no
action within that 60-day period, you will be deemed to have withdrawn your
dissent and demand for payment. In the court proceeding described above, the
court may appoint one or more persons as appraisers to receive evidence and
recommend a decision on the question of fair value, and it has discretion to
make all dissenters whose demands remain unsettled parties to the proceeding.
Each dissenter made a party to the proceeding must be served with a copy of the
complaint and will be entitled to judgment for the amount, if any, by which the
court finds the fair value of his shares, plus interest, to exceed the amount
paid by MFC. Court costs, appraisal, and counsel fees may be assessed by the
court as it deems equitable.
Article 13 contains certain additional provisions and requirements that
apply in the case of dissents by nominees who hold shares for others, and by
beneficial owners whose shares are held in the names of other persons.
36
MARKET AND DIVIDEND INFORMATION
First Western's Capital Stock
First Western first issued First Western Stock during 1997 in connection
with its initial incorporation and the commencement of its banking operations.
First Western Stock was listed on the Nasdaq SmallCap Market (under the trading
symbol "FWBN") during the first quarter of 1999. However, there is not an active
public trading market for First Western Stock. Prior to its listing on the
Nasdaq SmallCap Market, First Western Stock was listed on the OTC Bulletin Board
under the symbol "FWBN." On September 30, 2001, there were approximately
_________ holders of record of First Western Stock.
The following table lists high and low published prices of First Western
Stock (as reported on the Nasdaq SmallCap Market).
Price
---------------
Year Quarterly period High Low
-------- ----------------------------- ------- ------
1999 First quarter.............................. $10.50 $8.00
Second quarter............................. 9.50 6.50
Third quarter.............................. 9.13 7.00
Fourth quarter............................. 9.00 6.38
2000 First quarter.............................. 8.75 4.75
Second quarter............................. 9.88 5.75
Third quarter.............................. 10.25 7.50
Fourth quarter............................. 9.50 8.00
2001 First quarter.............................. 8.75 8.38
Second quarter............................. 8.95 8.50
Third...................................... 12.25 8.25
Fourth (through ______, 2001)..............
First Western has not paid any cash dividends to date. Management of First
Western expects that, for the foreseeable future, any profits resulting from
First Western's operations will be retained as additional capital to support its
operations and growth and that it will not pay any cash dividends.
If the Merger is not completed, any declaration and payment of cash
dividends by First Western in the future will be subject to First Western's
Board of Directors' evaluation of First Western's operating results, financial
condition, future growth plans, general business and economic conditions, and
tax and other relevant considerations. Also, the payment of cash dividends by
First Western in the future will be subject to certain other legal and
regulatory limitations (including the requirement that First Western's capital
be maintained at certain minimum levels) and will be subject to ongoing review
by banking regulators. See "Supervision and Regulation - Payment of Dividends"
on page _____, and "Description of Capital Stock - Differences in Capital Stock"
on page _____.)
MFC's Capital Stock
MFC first issued MFC Stock during March 2001 in exchange for the
outstanding shares of MountainBank's common stock in connection with MFC's
initial incorporation as MountainBank's parent holding company. MFC Stock is
listed on the OTC Bulletin Board (under the trading symbol "MBFC"). However,
there is not an active public trading market for MFC Stock. Prior to the
organization of MFC, MountainBank's common stock was listed on the OTC Bulletin
Board, but neither was there an active public trading market for that stock. On
September 30, 2001, there were approximately _____ holders of record of MFC
Stock.
37
The following table lists high and low published prices of MFC Stock for
each calendar quarter since April 1, 2001, and, prior to that, the high and low
published prices for MountainBank's common stock for each calendar quarter since
December 31, 1998. All prices are as reported on the OTC Bulletin Board. They
represent reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Price
----------------
Year Quarterly period High Low
-------- ----------------------------- ------- -------
1999 First quarter................................. $12.66 $10.00
Second quarter................................ 13.34 11.66
Third quarter................................. 14.66 13.00
Fourth quarter................................ 14.66 13.04
2000 First quarter................................. 17.60 11.60
Second quarter................................ 15.51 12.00
Third quarter................................. 17.11 15.20
Fourth quarter................................ 20.50 15.20
2001 First quarter................................. 24.80 16.80
Second quarter................................ 31.50 21.00
Third.........................................
Fourth (through ______, 2001).................
MFC has not yet paid any cash dividends on MFC Stock. MFC is a holding
company, and its only source of revenue is dividends it receives from
MountainBank. Therefore, MFC's ability to pay dividends to its shareholders is
subject to MountainBank's ability to pay dividends to it. MountainBank's ability
to pay dividends to MFC will continue to depend on its earnings and financial
condition, capital requirements, general economic conditions, compliance with
regulatory requirements that apply to North Carolina banks, and other factors.
Also, dividends by MountainBank are subject to various laws and regulatory
restrictions, including the requirement that its capital be maintained at
certain minimum levels and that it only pay dividends from its retained
earnings. MFC expects that, for the foreseeable future, profits resulting from
MountainBank's operations will be retained by it as additional capital to
support its operations and growth and that any dividends paid by MountainBank to
MFC will be limited to amounts needed to pay any separate expenses of MFC or to
make required payments on MFC's debt obligations.
In the future, MFC's ability to pay dividends also will be subject to its
Board of Directors' evaluation of its own separate factors, including MFC's
earnings and financial condition, capital requirements, debt service
requirements, and regulatory restrictions applicable to bank holding companies.
Additionally, if MFC borrows additional money in the future, covenants contained
in a loan agreement between it and its lender could restrict or condition its
payment of cash dividends based on various financial considerations or factors.
Therefore, there is no assurance that, for the foreseeable future, MFC will have
funds available to pay cash dividends, or, even if funds are available, that it
will pay dividends in any particular amount or at any particular time, or that
it will pay dividends at all. See "Supervision and Regulation - Payment of
Dividends" on page ____, and "Description of Capital Stock - Differences in
Capital Stock" on page ____.
38
CAPITALIZATION
The following table sets forth:
. MFC's unaudited historical consolidated capitalization on June 30, 2001,
. First Western's unaudited historical capitalization on June 30, 2001, and
. MFC's unaudited pro forma consolidated capitalization as of June 30, 2001,
assuming the Merger had been completed on that date (with no shareholder of
First Western exercising Dissenters' Rights).
This unaudited financial information is based on and should be read in
conjunction with MFC's and First Western's audited financial statements and
unaudited interim financial statements, together with the related financial
statement footnotes, and the Unaudited Pro Forma Condensed Combined Financial
Statements, and related notes and assumptions, which are included in this Proxy
Statement/Prospectus under the captions "Consolidated Financial Statements of
MountainBank Financial Corporation" on page F-1, "Financial Statements of First
Western Bank" on page F-31, and "Unaudited Pro Forma Condensed Combined
Financial Statements" on page F-59.
At June 30, 2001 (Unaudited)
---------------------------------------
MFC First Western Pro forma
(actual) (actual) combined (2)
--------- -------------- ------------
Shareholders' equity:
Preferred stock (1)................. $ -0- $ -0- $ -0-
Common stock........................ 7,494 6,866 10,241
Surplus............................. 9,404 6,803 20,390
Retained earnings................... 1,979 (419) 1,979
Accumulated other
comprehensive income.............. 185 156 185
------- ------- -------
Total shareholders' equity..... $19,062 $13,406 $32,795
======= ======= =======
_______________________________
(1) First Western's current Articles of Incorporation provide for the issuance
of both common and preferred stock. MFC's Articles of Incorporation
currently provide for the issuance of common stock only. However, MFC's
Board of Directors has approved a proposed amendment to MFC's Articles of
Incorporation which would authorize MFC to issue up to 2,000,000 shares of
preferred stock. The amendment would authorize the Board to issue shares
of the new preferred stock from time to time in the future, in one or more
series, and to fix and determine the relative rights and preferences of
those shares, or of each series of shares, at the time of issuance and
without the approval of MFC's shareholders. (See "Capital Stock of MFC and
First Western -- Capital Stock of MFC" on page _____.) The amendment is
subject to the approval of MFC's shareholders.
(2) Numbers in the column headed "Pro forma combined" have been calculated
assuming that the Merger became effective on June 30, 2001.
MOUNTAINBANK FINANCIAL CORPORATION
General
Business. MFC is a bank holding company that was organized under North
Carolina law during January 2001. It is the parent company of MountainBank, and
its primary business activity is its investment in and managing the business of
MountainBank. MountainBank is a North Carolina-
39
chartered bank which first began banking operations during June 1997. Its
deposits are insured by the FDIC. MFC and MountainBank each is headquartered in
Hendersonville, North Carolina, and they are engaged in a general, community-
oriented commercial and consumer banking business. On June 30, 2001, MFC had
total consolidated assets of approximately $405.7 million, total consolidated
loans of approximately $320.1 million, total consolidated deposits of
approximately $345.7 million, and total consolidated shareholders' equity of
approximately $19.1 million. MFC's and MountainBank's headquarters are located
at 201 Wren Drive, Hendersonville, North Carolina 28792, and their telephone
number at that address is (828) 693-7376.
The Reorganization. MFC was organized by the directors of MountainBank for
the sole purpose of becoming MountainBank's parent holding company. On March
30, 2001, MFC and MountainBank completed a share exchange in which each
outstanding share of MountainBank's common stock was exchanged for one share of
MFC Stock, and MountainBank became MFC's wholly-owned subsidiary. MountainBank's
shareholders had approved that reorganization on February 20, 2001.
Banking Offices. MountainBank has nine full-service banking offices
located in the towns of Hendersonville (two offices) and Fletcher (Henderson
County), Columbus (Polk county), Forest City and Lake Lure (Rutherford County),
Asheville (Buncombe County), Waynesville (Haywood County) and Marion (McDowell
County), North Carolina.
Services. MountainBank's operations are primarily retail oriented and
directed toward individuals and small- and medium-sized businesses located in
its banking markets. The majority of its customers are residents of or do
business in its banking markets, but it also makes loans to and has deposit
relationships with individuals and business customers in areas outside its
immediate banking market (including northwestern South Carolina). MountainBank
also solicits deposits on the Internet through Express Data Corporation's Quick-
Rate CD Clearinghouse. It provides most traditional commercial and consumer
banking services, but its principal activities are the taking of demand and time
deposits and the making of consumer and commercial loans. Its primary source of
revenue is interest income derived from its lending activities.
Banking Market. MountainBank's current banking market consists of
Henderson, Rutherford, McDowell, Haywood, Polk and Buncombe Counties, which are
situated in the southwestern mountains and foothills of North Carolina.
Competition. MountainBank competes for deposits in its banking market with
other commercial banks, savings banks and other thrift institutions, credit
unions, agencies issuing United States government securities and all other
organizations and institutions engaged in money market transactions. In its
lending activities, MountainBank competes with all other financial institutions
and with consumer finance companies, mortgage companies and other lenders.
Commercial banking in MountainBank's banking market and in North Carolina as a
whole is extremely competitive. North Carolina is the home of two of the
largest commercial banks in the United States, each of which has branches
located in MountainBank's banking market, and numerous other commercial banks,
thrift institutions and credit unions also have offices in its banking market.
Interest rates, both on loans and deposits, and prices of fee-based
services are significant competitive factors among financial institutions
generally. Other important competitive factors include office location, office
hours, the quality of customer service, community reputation, continuity of
personnel and services, and, in the case of larger commercial customers,
relative lending limits and the ability to offer sophisticated cash management
and other commercial banking services. Many of MountainBank's competitors have
greater resources, broader geographic markets, more extensive branch networks,
and higher lending limits, than it does. They also can offer more products and
services and can better afford and make more effective use of media advertising,
support services and electronic technology than MountainBank can. In terms of
assets, MountainBank is larger than First Western, but it is not one of the
larger commercial banks in North Carolina, and there is no assurance that it
will be or
40
continue to be an effective competitor in its banking market. However,
management believes that community banks can compete successfully by providing
personalized service and making timely, local decisions, and that further
consolidation in the banking industry is likely to create additional
opportunities for community banks to capture deposits from affected customers
who may become dissatisfied as their financial institutions grow larger. Also,
it believes that the continued growth of MountainBank's banking market affords
an opportunity to capture new deposits from new residents.
In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial
institutions, but also with out-of-state financial institutions which may
acquire North Carolina institutions, establish or acquire branch offices in
North Carolina, or otherwise offer financial services across state lines,
thereby adding to the competitive atmosphere of the industry in general.
To counter MountainBank's competitive disadvantages, it tries to
differentiate itself from its larger competitors with its focus on relationship
banking, personalized service, direct customer contact, and its ability to make
credit and other business decisions locally. It also depends on its reputation
as a community bank in its banking market and its involvement in the communities
it serves, the experience of its senior management team, and the quality of its
associates. Management believes that these factors aid in MountainBank's growth
and are a major factor in furthering its ability to respond more efficiently to
its customers' needs.
Employees. On June 30, 2001, MountainBank employed 103 full-time employees
(including its executive officers) and five part-time employees. It is not a
party to any collective bargaining agreement with its employees, and it
considers its relations with its employees to be good.
Legal Proceedings. From time to time MFC and MountainBank may become
involved in legal proceedings occurring in the ordinary course of their
businesses. However, subject to the uncertainties inherent in any litigation,
MFC believes there currently are no pending or threatened proceedings that are
likely to result in a material adverse change in its consolidated financial
condition or operations.
Properties. MFC and MountainBank own no real property. MountainBank
leases the facilities housing its and MFC's headquarters, each of its banking
offices, and its administration/operations facility. On June 30, 2001, MFC's
consolidated investment in premises and banking equipment (cost less accumulated
depreciation) was approximately $2.8 million.
Information and Reports
MFC's audited consolidated financial statements as of and for the years
ended December 31, 2000 and 1999, and its unaudited consolidated interim
statements of condition, statements of income, and statements of cash flows, as
of and for the six-month periods ended June 30, 2001 and 2000, are included in
this Proxy Statement/Prospectus under the caption "Consolidated Financial
Statements of MountainBank Financial Corporation" on page F-1.
MFC is subject to the informational requirements of Sections 13 and 15(d)
of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and it
files reports and other information, including annual reports, quarterly reports
and proxy statements, with the Securities and Exchange Commission under the 1934
Act. You may read and copy any reports, proxy statements and other information
filed by MFC with the SEC under the 1934 Act at the public reference facilities
the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549. MFC's SEC
file number is 000-32547. Its filings with the SEC also are available to the
public from the SEC's website at http://www.sec.gov. You may call the SEC at 1-
800-SEC-0330 for further information.
41
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis is provided to assist you in
understanding and evaluating MFC's financial condition and its results of
operations. The following discussion should be read in conjunction with MFC's
financial statements and related notes which also are included in this proxy
statement/prospectus.
Table 1. Net Interest Income and Average Balances (dollars in thousands).
Year Ended Year Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------------------- ---------------------------- ----------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Inc/Exp Cost Balance Inc/Exp Cost Balance Inc/Exp Cost
-------- ---------- ------- ------- ---------- ------- ------- ---------- -------
Interest earning assets:
Interest bearing deposits
with other depositories $ 8,144 $ 505 6.20% $ 4,778 $ 258 5.39% $ - $ - -%
Investment Securities 27,436 1,865 6.80% 9,178 513 5.59% 2,527 138 5.46%
Federal funds sold 3,944 241 6.11% 6,473 331 5.11% 5,993 327 5.46%
Loans 136,846 13,210 9.65% 63,396 5,650 8.91% 32,635 3,014 9.24%
-------- ------- ------- ------ ---- ------- ------- ----
Total interest-earning
assets 176,370 15,821 83,825 6,752 41,155 3,479
-------- ------- ------- ------ ------- -------
Yield on average interest-
earning assets 8.97% 8.05% 8.45%
==== ==== ====
Noninterest-earning assets:
Cash and due from banks 5,024 2,993 1,253
Property and equipment 1,886 1,336 1,205
Interest receivable and other 1,839 729 302
-------- ------- -------
Total noninterest-earning
assets 8,749 5,058 2,760
-------- ------- -------
Total assets $185,119 $88,883 $43,915
======== ======= =======
Interest-bearing liabilities:
Demand deposits $ 11,174 152 1.36% $ 6,324 111 1.76% $ 2,824 52 1.84%
Savings deposits 38,241 1,750 4.58% 27,927 1,274 4.56% 10,677 494 4.63%
Time deposits 104,427 6,894 6.60% 36,822 2,059 5.59% 19,437 1,128 5.80%
Obligation under capital lease 776 68 8.76% 794 62 7.81% 812 62 7.64%
Fed funds purchased/
Repurchase agreements 2,586 152 5.88% 1,444 55 3.81% 690 29 4.20%
-------- ------- ---- ------- ------ ---- ------- ------- ----
Total interest-bearing
liabilities 157,204 9,016 73,311 3,561 34,440 1,765
-------- ------- ------- ------ ------- -------
Cost on average interest-
bearing liabilities 5.74% 4.86% 5.12%
==== ==== ====
Noninterest bearing liabilities:
Demand deposits 11,079 5,629 3,020
Interest payable and other 2,036 1,654 345
-------- ------- -------
Total noninterest-bearing
liabilities 13,115 7,283 3,365
-------- ------- -------
Total liabilities 170,319 80,594 37,805
Stockholders' equity 14,800 8,289 6,110
-------- ------- -------
Total liabilities and
stockholders' equity $185,119 $88,883 $43,915
======== ======= =======
Net interest income $ 6,805 $3,191 $ 1,714
======= ====== =======
Net yield on interest-
earning assets 3.86% 3.81% 4.16%
==== ==== ====
42
Table 2. Rate/Volume Variance Analysis (dollars in thousands).
2000 Compared to 1999 1999 Compared to 1998
------------------------------ ------------------------
Interest Interest Interest Interest
Income/ Variance Income/ Variance
Expense Attributed to Expense Attributed to
Variance Rate Volume Variance Rate Volume
--------- ------- ---------- -------- ------ ------
Interest-earning assets:
Interest bearing deposits in other
Depositories $ 247 $ 66 $ 181 $ 258 $ - $ 258
Investments securities 1,352 332 1,020 375 5 370
Federal funds sold (90) 39 (129) 4 (23) 27
Loans 7,560 1,013 6,547 2,636 (136) 2,772
------ ------ -------- ------ ----- ------
Total $9,069 1,450 7,619 3,273 (154) 3,427
------ ------ -------- ------ ----- ------
Interest-bearing liabilities:
Demand deposits 41 (45) 86 59 (6) 65
Savings deposits 476 8 468 780 (20) 800
Time deposits 4,835 1,055 3,780 931 (77) 1,008
Obligation under capital lease 6 7 (1) - - -
Federal funds purchased/Repurchase
agreements 97 54 43 26 (6) 32
------ ------ -------- ------ ----- ------
Total 5,455 1,079 4,376 1,796 (109) 1,905
------ ------ -------- ------ ----- ------
Net interest income $3,614 $ 371 $ 3,243 $1,477 $ (45) $1,522
====== ====== ======== ====== ===== ======
Analysis of Financial Condition. Average earning assets have increased
110.4% from 1999 to 2000. Average earning assets represented 95.3% of total
average assets at December 31, 2000 compared to 94.3% at the end of 1999. With
the exception of Federal funds sold, all categories of average assets increased
during 2000. The most significant of these increases was recorded in MFC's loan
account. Average loans increased $73.5 million or 115.9% over 1999. The
following table illustrates the growth of various balance sheet components.
Table 3. Average Asset Mix (dollars in thousands)
Average Average
Balance % Balance %
-------- ------- ------- -------
Earning assets:
Loans, net $136,846 73.92% $63,396 71.33%
Investment securities 27,436 14.82% 9,178 10.32%
Federal funds sold 3,944 2.13% 6,473 7.28%
Interest bearing deposits with depositories 8,144 4.40% 4,778 5.38%
-------- ------ ------- ------
Total earning assets 176,370 95.27% 83,825 94.31%
-------- ------ ------- ------
Non-earning assets:
Cash and due from banks 5,024 2.72% 2,993 3.37%
Property and equipment 1,886 1.02% 1,336 1.50%
Other assets 1,839 0.99% 729 0.82%
-------- ------ ------- ------
Total non-earning assets 8,749 4.73% 5,058 5.69%
-------- ------ ------- ------
Total assets $185,119 100.00% $88,883 100.00%
======== ====== ======= ======
43
During 2000, average net loans represented 73.92% of total average assets
compared to 71.33% at the end of 1999. As a result of the continued high growth
rate of MFC's loan portfolio, these assets comprised a larger percentage of the
total asset base. It is management's intent to pull the growth of MFC's balance
sheet forward through growth of the loan portfolio rather than growing its
liability base and then investing in lower yielding assets such as securities
and overnight investments. Management believes that this is the most prudent
strategy for profitable growth and foresees continued rapid growth for both the
loan portfolio and the balance sheet as a whole over the next several quarters.
As MFC expands its geographic market presence, access to high quality loans is
expected to continue to drive overall growth. During the next fiscal year,
management intends to begin complementing deposit growth with wholesale funding
to supply adequate liquidity for anticipated growth of the loan portfolio.
Net Interest Income. As with most community banks, MFC's primary source of
income is net interest income, which is defined as the difference between income
generated by MFC's earning assets less expense incurred on its interest bearing
liabilities. Table 1 above summarizes the major components of net interest
income for the years ended December 31, 2000, 1999 and 1998. Compared with
1999, MFC's net interest income increased substantially during 2000. Overall
growth of MFC's balance sheet was the principal contributing factor for the
113.3% increase in net interest income. During 2000, both net interest income
and yields on interest-earning assets increased substantially. Net interest
income increased $3.61 million while yields on interest earning assets increased
92 basis points. These increases resulted primarily from an increased
percentage of loans carried on the balance sheet and an increase in the yield on
MFC's loan portfolio. During 2000, 73.9% of MFC's average assets were invested
in its loan portfolio as compared with 71.3% on average during 1999. The second
principal factor was an increase in overall loan yields. This resulted from the
ability to acquire higher yielding loan assets as MFC expanded it geographic
market base and more aggressively accessed fees relating to originating and
servicing loans. To fund loan demand, MFC relied primarily on certificates of
deposit. As a result, MFC's cost of funds increased 88 basis points to 5.74%
from 4.86% during 1999. Through the end of 2000, management had not used
wholesale funding such as borrowings from the Federal Home Loan Bank. It is the
intention of management to begin incorporating wholesale funding during 2001 as
a tool to aid in managing MFC's cost of funding and maintaining or improving its
net interest rate margin.
Provision for Credit Losses and Credit Losses. As a result of the
continued rapid growth of MFC's loan portfolio, its provision for loan losses
represents one of its largest expenses. During 2000, MFC provided $1.9 million
for possible loan losses. This compares to $826,500 in 1999 and $471,100 in
1998. Provisions are made to MFC's allowance for credit losses, which is
maintained to provide for possible future losses. Loan losses and recoveries
are charged directly to this allowance, which is evaluated on at least a
quarterly basis by management to determine its adequacy to meet any known or
anticipated future losses. Factors considered in determining the adequacy of the
allowance include the estimated collectability of past due loans, the volume of
new loans, composition of the loan portfolio, industry standards and current as
well as projected economic conditions. Specific reserves for individual loans
are established in addition to the basic reserve as deemed necessary based on
evaluation of individual credits. At three and one half years old, MFC's loan
portfolio is beginning to establish a limited historical trend, however, with
continued growth and expansion into new markets, estimates of future portfolio
performance remain quite subjective. Therefore, while it is the opinion of
management and the Board of Directors that MFC's allowance for loan losses is
adequate to absorb any anticipated loan losses as of the report date, no
assurances can be made that any future losses may not be significant and may
require additional provisions. At December 31, 2000, 1999 and 1998, MFC's
allowance for loan losses totaled $3.00 million, $1.25 million, and $752,000,
respectively, representing 1.50%, 1.39% and 1.55% of gross loans.
During 2000, MFC experienced limited loan losses, the net total of which
amounted to $145,000 for the year. The most significant charge off experienced
during the year was a $40,000 write down of a commercial lending relationship.
At December 31, 2000, no credit relationships were identified as having
significant risk for material loss. While MFC has experienced limited credit
losses to date, the rapid growth of its loan portfolio, unknown future economic
conditions and industry standards indicate future credit losses are to be
expected in the normal course of business. It is management's intent to control
and limit such losses through adherence to current policies and procedures which
have been created with an intent to maintain a high level of credit quality.
44
Other Income. In addition to net interest income, MFC derives revenues
from a variety of financial products and services offered to its customer base.
The majority of noninterest income results from origination fees and released
service rights on sold mortgage loans, from service charges on deposit accounts
including charges for insufficient funds, sale of checks, and fees charged for
nondeposit services and from premiums generated through the sale of insurance
products. Additionally, during the first quarter of fiscal 2000, MFC recorded
income of $151,000 from the sale of a government guaranteed loan. This income
is considered to be non-recurring in nature. During 2000, MFC entered into an
arrangement with Salomon Smith Barney to offer investment products to customers.
As this service was available for only a portion of the year, income generated
from this arrangement was nominal. Table 4 describes non-interest income for
the years ended December 31, 2000, 1999 and 1998.
Table 4. Sources of Noninterest Income (dollars in thousands).
For the periods ended December 31,
----------------------------------
2000 1999 1998
------ ------ ------
Service charges on deposit accounts $ 461 $ 231 $ 100
Fees on mortgage loans sold 499 493 321
Other service charges and fees 60 35 22
Other income 298 23 26
------ ----- -----
$1,318 $ 782 $ 469
====== ===== =====
Non-interest Expense. The major components of non-interest expense for the
years ended December 31, 2000, 1999 and 1998 are listed in Table 5.
Table 5. Sources of Noninterest Expense (dollars in thousands).
For the periods ended December 31,
----------------------------------
2000 1999 1998
------ ------ ------
Salary and benefits $2,417 $1,397 $ 807
Occupancy expenses 316 210 174
Furniture/equipment expenses 349 196 72
Professional service fees 148 145 132
Data and credit card processing fees 298 206 107
Advertising and business promotion 222 117 55
Printing and related supplies 108 95 51
Other expenses 721 454 184
------ ------ ------
$4,579 $2,820 $1,582
====== ====== ======
Management calculates MFC's overhead efficiency ratio as noninterest
expense divided by adjusted total revenue (net interest income before provision
for loan losses plus noninterest income). This ratio is used to determine the
efficiency of MFC's overall operation. During 2000 this ratio declined to 56.4%
from 71.0% in 1999 and from 72.5% in 1998. The continued positive trend in this
ratio was impacted by the continued progress of MFC toward full leverage of its
equity base and continued attention to managing noninterest expense. Now that
full leverage of the balance sheet has been effectively achieved, improvements
in efficiency measurements are expected to slow as compared to prior year
improvements.
45
Loans. Average net loans totaled $136.8 million during the year ended
December 31, 2000, representing an increase of 115.9% as compared with 1999.
Management intends to continue to let loan growth dictate the pace of MFC's
overall growth rate. With continued expansion of MFC's geographic market area,
aggressive marketing efforts and the strong acceptance of MFC within the
communities it serves, management expects MFC's loan growth, and consequently,
its overall growth to continue at a relatively rapid rate, albeit slower on a
percentage basis than previous years.
The majority of growth in MFC's loan portfolio has been centered in real
estate and commercial loans. These loans comprised nearly 90% of the total loan
portfolio at December 31, 2000. The amount of loans outstanding by type at
December 31, 2000 and December 31, 1999 and the maturity distribution for
variable and fixed rate loans as of December 31, 2000 are presented in Tables 6
and 7, respectively.
Table 6. Loan Portfolio Summary (dollars in thousands).
December 31, 2000 December 31, 1999
------------------ ------------------
Amount % Amount %
--------- ------- -------- --------
Construction and development $ 32,602 16.27% $13,480 15.02%
1-4 family residential 36,963 18.45% 20,480 22.82%
Farmland 385 0.19% 565 0.63%
Nonfarm, nonresidential 78,489 39.17% 27,799 30.98%
Multifamily residential 596 0.30% 455 0.51%
-------- ----- ------- ------
Total real estate 149,035 74.38% 62,779 69.96%
Loans to finance agricultural production 996 0.50% 218 0.24%
Commercial and industrial 29,381 14.66% 17,471 19.47%
Consumer 20,968 10.46% 9,277 10.33%
Other - -% - -%
-------- ----- ------- ------
Total $200,380 100.0% $89,745 100.00%
======== ===== ======= ======
Table 7. Maturity and Repricing Schedule of Loans (dollars in thousands).
Commercial Residential Total
Financial and Real ----------------
Agricultural Estate Others Amount %
------------- ----------- ------- -------- ------
Fixed rate loans:
Three months or less $ 6,934 $ 590 $ 1,426 $ 8,950 4.47%
Over three months to
twelve months 9,620 698 1,536 11,854 5.92%
Over one year to five
years 66,907 15,859 10,436 93,202 46.51%
Over five years 15,146 2,012 2,343 19,501 9.73%
------- ------- ------- -------- -----
Total fixed rate loans $98,607 $19,159 $15,741 $133,507 66.63%
------- ------- ------- -------- -----
46
Commercial Residential Total
Financial and Real -----------------
Agricultural Estate Others Amount %
------------- ----------- ------- -------- -------
Variable rate loans:
Three months or less $ 42,441 $12,179 $ 2,843 $ 57,463 28.67%
Over three months to
twelve months 805 1,707 1,831 4,343 2.17%
Over one year to
five years - 4,514 553 5,067 2.53%
Over five years - - - - -
-------- ------- ------- -------- ------
Total variable rate loans $ 43,246 $18,400 $ 5,227 $ 66,873 33.37%
-------- ------- ------- -------- ------
Total loans:
Three months or less $ 49,375 $12,769 $ 4,269 $ 66,413 33.14%
Over three months to
twelve months 10,425 2,405 3,367 16,197 8.09%
Over one year to
five years 66,907 20,373 10,989 98,269 49.04%
Over five years 15,146 2,012 2,343 19,501 9.73%
-------- ------- ------- -------- ------
Total loans $141,853 $37,559 $20,968 $200,380 100.00%
======== ======= ======= ======== ======
Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
MFC's loan portfolio yielded 9.65% during 2000 as compared to an average yield
of 8.91% during 1999.
Investment Securities. MFC uses its investment portfolio as a tool to
provide liquidity, manage interest rate risk and provide supplemental earnings.
During 2000, market demand continued to require management to fix rates on a
sizeable portion (approximately two-thirds) of MFC's loan portfolio for terms up
to five years. As a result, floating rate securities continued to comprise the
majority of assets in MFC's investment portfolio. Also, management continues to
accept credit risk only in MFC's loan portfolio, therefore, only U.S. Treasury
and U.S. Government Agency debt instruments have been purchased to date.
With MFC's rapid growth since its inception and with continuing growth
expected by management, the need to manage liquidity through the investment
portfolio has been acknowledged by classifying all of its investment securities
as available for sale. Accordingly, these securities may be sold from time to
time to increase liquidity or re-balance the interest rate sensitivity profile
of MFC's balance sheet as deemed necessary. Table 8 presents the investment
portfolio at December 31, 2000 by major type of investments and maturity ranges.
At December 31, 2000, the market value of the investment portfolio was
$35.9 million, representing a $211,000 or 0.59% appreciation as compared to book
value. At December 31, 1999 the market value of the investment portfolio was
$18.6 million or $59,000 below book value.
47
Table 8. Investment Securities (dollars in thousands).
December 31, 2000, Available for Sale
One Year After Five
In One Year Through Five Through After Ten Market
or Less Years Ten Years Years Total Value
------------ ------------- ----------- ---------- -------- -------
Investment securities:
U.S. Government agencies $ - $ $ $ 9,385 $ 9,385 $ 9,344
U.S. Government agency
pools (MBS) - - - 25,006 25,006 25,260
Municipals - 814 - - 814 812
Restricted equity securities - - - 453 453 453
----------- ------------ ---------- ------- ------- -------
Total $ - $ 814 $ - $34,844 $35,658 $35,869
=========== ============ ========== ======= ======= =======
Weighted average yields:
U.S. Government agencies -% % % 6.86% 6.86%
U.S. Government agencies
pools (MBS) -% -% -% 6.64% 6.64%
Municipals (tax equivalent) -% 7.32% -% -% 7.32%
Restricted equity securities -% -% -% 5.57% 5.57%
----------- ------------ ---------- ------- -------
Consolidated -% 7.32% -% 6.69% 6.70%
=========== ============ ========== ======= =======
December 31, 1999, Available for Sale
One Year After Five
In One Year Through Five Through After Ten Market
or Less Years Ten Years Years Total Value
----------- ------------ ---------- --------- ------- -------
Investment securities:
U.S. Government agencies $ $ 2,000 $ 1,983 $ 7,392 $11,375 $11,303
U.S. Government agencies
pools (MBS) - - - 7,272 7,272 7,285
Restricted equity securities - - - 167 167 167
----------- ------------ ---------- ------- ------- -------
Total $ $ 2,000 $ 1,983 $14,831 $18,814 $18,755
=========== ============ ========== ======= ======= =======
Weighted average yields:
U.S. Treasury Note -% 7.17% 5.86% 5.95% 6.27%
U.S. Government agencies -% -% -% 5.19% 5.19%
U.S. Government agencies
pools (MBS) -% -% -% 7.25% 7.25%
----------- ------------ ---------- ------- -------
Consolidated % 7.17% 5.86% 5.68% 5.95%
=========== ============ ========== ======= =======
Average overnight investments totaled $12.1 million or 6.53% of average
assets for the year ended December 31, 2000. At December 31, 1999, overnight
investments totaled $11.3 million. Federal funds sold and interest bearing
deposits with banks represent the most liquid portion of MFC's invested funds
and generally the lowest yielding portion of earning assets. Management expects
to begin using wholesale funding to supplement deposit growth during the
upcoming year, and accordingly, expects to further reduce its level of overnight
and other short term investments.
48
Deposits. Since the inception of MFC, deposits acquired in its local
market areas have been its principal source of funding lending and investing
activities. Management considers acquisition of core deposits as one of the most
fundamental sources of increased franchise value. While management strives to
drive overall balance sheet growth through the loan origination of high quality
loan assets, MFC's primary advertising and mass media marketing efforts are
geared toward attracting deposits. It continues to be management's opinion that
generation of quality loan assets can be materially impacted by the level of
service provided to the customer. However, a significant portion of depositors
are viewed as more rate sensitive than service oriented. MFC's strategy remains
providing these customers with both competitive rates and exceptional service.
This strategy is considered the primary causal factor for the rapid deposit
growth experienced by MFC over the past three years.
Due to the popularity of MFC's primary market area as a favored retirement
destination, a higher percentage of its certificates of deposit are concentrated
in CDs over $100,000 as compared to peer institutions. Due to the market
demographics within MFC's primary area of operations, management generally
differentiates little between jumbo CDs and smaller denomination certificates in
projecting retention rates for certificates. During 2000, certificates of
deposit comprised 63.2% of MFC's average deposit base as compared with 51.0%
during 1999.
Average deposits for the year ended December 31, 2000 totaled $164.9
million as compared with $76.7 million for the same period in 1999. MFC's
percentage of interest bearing deposits decreased slightly to 93.3% in 2000 as
compared with 92.7% in 1999. Management desires to decrease this ratio further
as additional emphasis is placed on the cross-selling of demand deposit accounts
and increasing MFC's account per customer ratio. Demand deposits are generally
considered the most difficult deposit account to acquire, however, management
remains intent on emphasizing acquisition of demand deposits as one of MFC's
primary goals. Therefore, it is anticipated that the percentage of interest
bearing deposits will continue to trend downward slowly. Average deposits for
the periods ended December 31, 2000 and December 31, 1999 are summarized in
Table 9 below.
Table 9. Deposit Mix (dollars in thousands).
December 31, 2000 December 31, 1999
------------------ ------------------
Average Average
Balance % Balance %
--------- ------- -------- --------
Interest-bearing deposits:
NOW Accounts $ 11,174 6.78% $ 6,324 8.25%
Money Market 36,221 21.96% 26,816 34.96%
Savings 2,020 1.22% 1,111 1.45%
Certificates of deposit 104,427 63.32% 36,822 48.00%
-------- ------ ------- ------
Total interest-bearing deposits 153,842 93.28% 71,073 92.66%
Noninterest-bearing deposits 11,079 6.72% 5,629 7.34%
-------- ------ ------- ------
Total deposits $164,921 100.00% $76,702 100.00%
======== ====== ======= ======
At December 31, 2000, certificates of deposit denominated in amounts of
$100,000 or more totaled $66.4 million as compared with $25.9 million at
December 31, 1999. This represents an increase of nearly $40.5 million. The
percentage of total deposits represented by these certificates increased to
28.5% at December 31, 2000 as compared with 22.8% at December 31, 1999. Table
10 provides maturity information relating to Certificates of Deposit of $100,000
or more at December 31, 2000.
49
The following table analyzes time deposits of $100,000 or more at December
31, 2000 and 1999
Table 10. Large time deposit maturities (dollars in thousands).
2000 1999
------- -------
Remaining maturity of three months or less $23,220 $ 7,413
Remaining maturity over three through twelve months 38,379 15,944
Remaining maturity over twelve months 4,788 2,580
------- -------
Total time deposits of $100,000 or more $66,387 $25,937
======= =======
Capital Adequacy. As a result of the retention of earnings and a
successful equity offering of approximately $7.5 million completed during 2000,
stockholders' equity increased to $18.2 million at December 31, 2000 as compared
to $10.2 million at December 31, 1999, an increase of $8.0 million or 78.4 %.
Stockholders' equity as a percentage of total assets amounted to 7.03% at
December 31, 2000.
Regulatory guidelines relating to capital adequacy provide minimum risk-
based ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier 1) capital (common stockholders' equity) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted
assets of 8.0%. As of December 31, 2000 MFC had a ratio of Tier 1 capital to
risk-weighted assets of 8.64% and a ratio of total capital to risk-weighted
assets of 9.89%. All capital ratio levels indicate that, at December 31, 2000,
MFC was well capitalized. At December 31, 2000 MFC had 1,497,615 shares of
common stock outstanding that were held by approximately 1,650 stockholders.
Nonperforming and Problem Assets. Certain credit risks are inherent in
making loans, particularly commercial and consumer loans. Management's intent
with regard to maintaining a high level of credit quality is to identify,
quantify and assess these risks and to manage them effectively. MFC's internal
credit underwriting policies and procedures are designed to provide a high level
of credit quality while allowing the lending function to be responsive to the
needs of its customers. These policies and procedures include officer and
customer limits, periodic loan documentation review, on-going credit review and
follow up on exceptions to credit policies.
Nonperforming assets at December 31, 2000 and 1999 are analyzed in Table
11.
Table 11. Nonperforming Assets (dollars in thousands).
December 31,
------------
2000 1999
----- -----
Nonaccrual loans $ 266 $270
Loans past due 90 days or more and still accruing interest - -
Other real estate owned - -
----- -----
$ 266 $ 270
===== =====
Nonaccrual loans comprised .13% and .30% of outstanding gross loans at
December 31, 2000 and 1999, respectively.
50
Liquidity and Interest Rate Sensitivity. MFC's asset and liability
management goals are principally the maintenance of adequate liquidity, the
management of interest rate risk and the maximization of net interest income via
competitive pricing of both assets and liabilities. Liquidity is the ability to
convert assets to cash or generate alternative liabilities in order to fund
deposit withdrawals or net increases in loans without significant adverse impact
on MFC's income statement. Interest rate risk management aims to manage the
pricing and duration of assets and liabilities so that the effects of interest
rate changes do not result in wide fluctuations of either MFC's net interest
income or the market values of assets and liabilities.
Liquidity is provided by cash flows from maturing investments, loan
payments and maturities, federal funds sold, and unpledged investment
securities. On the liability side of the balance sheet, liquidity sources
include core deposits, the ability to increase large denomination certificates
from both retail and wholesale sources, federal fund lines from correspondent
banks, borrowings from the Federal Home Loan Bank as well as the Federal Reserve
Bank and also the ability to generate funds through the issuance of long-term
debt and equity.
MFC's liquidity ratio (the level of current liquid assets less reserve
requirements divided by total deposits plus short-term liabilities) was 26.67%
at December 31, 2000, compared to 30.06% at December 31, 1999. The ratios are
considered to be adequate by management.
Next to credit risk, interest rate risk is considered one of the more
significant risks requiring on-going monitoring and management. Interest rate
risk is defined as the effect that changes in interest rates would have on net
interest income as interest-sensitive assets and liabilities either reprice or
mature. Management attempts to correlate the repricing of MFC's portfolios of
earning assets and interest-bearing liabilities so as to afford protection from
significant erosion of net interest margin resulting from changes in interest
rates. Table 12 below shows the sensitivity of MFC's balance sheet at December
31, 2000 and is not necessarily indicative of the position on other dates. On
that date, MFC appeared to be cumulatively asset-sensitive (earning assets
subject to interest rate changes exceeding interest-bearing liabilities subject
to changes in interest rates).
Matching sensitive positions alone does not ensure MFC has no interest rate
risk. The repricing characteristics of assets are different from the repricing
characteristics of funding sources. Thus, net interest income can be impacted
by changes in interest rates even if the repricing opportunities of assets and
liabilities are perfectly matched.
51
Table 12. Interest Rate Sensitivity (dollars in thousands).
December 31, 2000 Maturities
----------------------------------------------------
1 - 3 4 - 12 13 - 60 Over 60
Months Months Months Months Total
------- -------- -------- --------- --------
Earning assets:
Loans $66,413 $ 16,196 $ 98,269 $ 19,502 $200,380
Investments 9,797 8,518 17,554 - 35,869
Interest bearing deposits
with banks 3,668 - - - 3,668
Federal Funds Sold 9,220 - - - 9,220
------- -------- -------- --------- --------
Total $89,098 $ 24,714 $115,823 $ 19,502 $249,137
======= ======== ======== ========= ========
Interest-bearing deposits:
NOW accounts $13,706 $ - $ - $ - $ 13,706
Money market 32,179 - - - 32,179
Savings 2,593 - - - 2,593
Certificates of Deposit 38,119 115,124 15,481 605 169,329
Repurchase agreements/Fed
funds purchased 3,145 - - - 3,145
Other - - - 760 760
------- -------- -------- --------- --------
Total $89,742 $115,124 $ 15,481 $ 1,365 $221,712
======= ======== ======== ========= ========
Interest sensitivity gap $ (644) $(90,410) $100,342 $ 18,137 $ 27,425
Cumulative interest
sensitivity gap $ (644) $(91,054) $ 9,288 $ 27,425 $ 27,425
Ratio of sensitive assets to
sensitive liabilities 99.28% 21.48% 748.16% 1,428.72% 112.37%
Cumulative ratio of
sensitive assets to
sensitive liabilities 99.28% 55.55% 104.22% 112.37% 112.37%
52
Table 13. Key Financial Ratios.
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
Return on average assets 0.57% 0.37% 0.30%
Return on average equity 7.14% 3.93% 2.13%
Equity to assets 7.03% 8.04% 10.53%
Changes in Financial Condition at June 30, 2001 Compared with December 31,
2000. MFC continued to experience very rapid growth during the first six months
of 2001. During that period, total assets increased $147.1 million, or 56.80%,
while earning assets increased $148.1 million, or 59.44%, over the same six
month period. Loans, MFC's largest earning asset, increased $119.8 million, or
59.77%, during the period, primarily as a result of the continuing penetration
of its current geographic markets and the opening of new offices. Short-term
interest bearing accounts increased substantially at June 30, 2001 principally
as a result of a certificate of deposit campaign conducted via MFC's Internet
banking site. This liquidity was acquired to fund lending efforts over the next
several months. These deposits, totaling approximately $51 million, were
acquired at costs lower than those of CDs generated through MFC's retail
distribution channel at the time of the campaign and represent an initial step
in broadening MFC's wholesale funding sources. While management does not
anticipate significant ongoing Internet campaigns, deposit acquisition via the
Internet has been incorporated into MFC's funding and liquidity plans and is
expected to be utilized periodically. MFC's securities portfolio increased $4.1
million or 11.39% during the period as some additional funding was used to
acquire pledgeable assets. During the second quarter, MFC invested in
guaranteed insurance contracts bearing interest rates above those available in
the government guaranteed bond market. These contracts are variable rate in
nature.
Deposits increased $112.9 million, or 48.38%, from December 31, 2000 to
June 30, 2001, with non-interest bearing demand deposits increasing $10.3
million, or 66.36%, over the same six month period. Interest bearing deposits,
primarily certificates of deposit, increased $102.6 million, or 47.09%. A
sizeable portion of this increase resulted from the Internet CD campaign
described above which was conducted during the second quarter. At June 30,
2001, MFC's loan to deposit ratio was 92.47% as compared to 85.88% at December
31, 2000.
During the first six months of the year, new liabilities were added to
MFC's balance sheet. A $25 million advance from the Federal Home Loan Bank of
Atlanta was entered into during the second quarter. This ten year wholesale
funding arrangement bears a fixed cost of 4.53% but may be repriced to a
floating rate of LIBOR flat if three month LIBOR exceeds 7% at any quarter end
following the first anniversary of the inception of this advance. Management
believes that the diversification of funding sources is crucial in managing
funding costs as deposits become more commoditized. It is anticipated that
wholesale funding strategies, such as FHLB borrowings and the use of the
Internet, will continue to play a role in MFC's funding plan by supplementing
funding acquired via tradition retail channels. The note payable of $5.0
million reported on the June 30, 2001 balance sheet represents a mezzanine
borrowing from a correspondent bank. This borrowing was used primarily by the
parent company to purchase additional stock from MountainBank thereby enhancing
the bank's capital ratios. It is expected that this borrowing will be
liquidated in the second half of 2001 through the acquisition of additional
common stock and Trust Preferred debt. During the first six months of 2001,
common stock outstanding increased 1,523 shares, or .10% as a result of stock
option exercises.
Liquidity, Interest Rate Sensitivity, Capital Adequacy and Market Risks.
The objectives of MFC's liquidity management policy include providing adequate
funds to meet the needs of depositors and borrowers at all times, as well as
providing funds to meet the basic needs for on-going operations of MFC and
regulatory requirements. Management's goal is to maintain sufficient liquidity
for these purposes while limiting the market volatility of MFC's available for
sale securities portfolio and returning a positive spread to the Federal funds
rate over time. At June 30, 2001, management considered MFC's liquidity
position to be adequate to meet expected liquidity demands.
53
Management and the Board of Directors view the monitoring and managing of
MFC's asset/liability position to be of strategic importance. MFC's aggressive
plans for growth necessitate relatively aggressive pricing policies for both
assets and liabilities. Thus, managing interest rate risk, interest margins and
the overall leverage of MFC's balance sheet becomes increasingly important as
growth and expansion into other markets continues. Management considers MFC's
deposit base to be generally stable and not overly vulnerable to volatility
experienced in national financial markets in recent years; however, MFC does
realize the importance of minimizing such volatility while at the same time
balancing growth and earnings capacity as well as maximizing shareholder value.
During the first half of 2001, the velocity of MFC's loan production accelerated
thus requiring modifications to MFC's liquidity plan. As discussed above, new
sources of funding have been added which are expected to both provide
supplemental funding to support ongoing loan production and assist in the
overall management of funding costs. It is management's opinion that the
addition of these funding sources has strengthened MFC's liquidity management
process.
MFC uses several modeling techniques to measure interest rate risk. Its
primary method is the simulation of net interest income under varying interest
rate scenarios. Management believes this methodology is preferable in that it
takes into account the pricing strategies management would undertake in response
to rate changes, whereas other methods such as interest rate shock analysis do
not take these into consideration.
Periodically, MFC also utilizes traditional gap analysis to measure
interest rate sensitivity. Gap analysis measures the difference or gap between
the volume of interest-earning assets and interest-bearing liabilities repricing
over a specific time period. This method, however, addresses only the magnitude
of funding mismatches and does not address the magnitude or relative timing of
rate changes and is not considered as precise as MFC's simulation model. MFC's
balance sheet is asset-sensitive over the short term (approximately one year),
and then shifts to liability-sensitive in future periods. The result of this is
that, in the near term, more assets than liabilities are subject to immediate
repricing as market rates change. Because most of MFC's securities portfolio,
all overnight investments and approximately one-third of its loan portfolio,
bear variable rates, they reprice more rapidly than rate sensitive interest-
bearing deposits. During periods of rising rates, this results in increased net
interest income. However, in periods of sustained rising rates, the fixed rate
component of MFC's loan portfolio would begin to negatively impact net interest
income after the first year of such conditions and would result in lower net
interest income than in a flat rate scenario. The opposite would be expected
during periods of declining rates.
While MFC's balance sheet has grown substantially over the first six months
of 2001, the mix of its rate-sensitive assets and liabilities has not changed
sufficiently to result in a material change in its interest rate sensitivity
since reported at December 31, 2000.
At June 30, 2001, MFC's equity to assets ratio stood at 6.18%. As a result
of the rapid growth experienced during the first six months of 2001, MFC's
capital ratios have declined. In response, management and the Board of
Directors have adopted a capital plan which, when executed during the second
half of 2001, is expected to generate additional Tier I capital of between $19
million to $22 million, effectively doubling MFC's core capital. Management
expects this capital to be sufficient to support anticipated near-term growth.
Results of Operations for the Three and Six Month Periods Ended June 30,
2001 Compared with the Same Periods in 2000. During the three month period
ended June 30, 2001, net interest income increased $1.4 million, or 86.44%, from
the same period last year. The increase is primarily attributable to the overall
growth and increased volume of MFC's balance sheet and the continuing strong
loan demand experienced in MFC's primary lending markets. During the period,
average gross loans increased $155.8 million, or 127.90%, resulting in an
increase of $3.5 million or 122.39% in interest earned on loans.
Interest on securities and overnight investments increased $172,000, or
39.19%, due to higher average volumes invested during the quarter. Average
securities and overnight investments were $51.783 million compared to $39.411
million during 2000, an increase of $12.372 million or 31.39%. Interest expense
increased $2.3 million, or 117.15%, primarily due to the overall increase in
volume of deposits. Interest-bearing deposits averaged $260.3 million compared
to $137.7 million last year, an increase of $122.6 million, or 89.05%.
During the first six months of 2001, net interest income increased
substantially to $5.4 million from $2.8 million, representing a change of $2.6
million or 92.18%. Again, this increase resulted primarily from continued
growth, particularly with regard to MFC's loan portfolio which averaged $249.5
million compared to $111.0 million last year, an increase of $138.5 million, or
124.83%. Interest on securities and overnight investments increased $471,000, or
60.38%, due to significantly higher average volumes invested during the period.
Average securities and overnight investments were $47.8 million compared to
$36.4 million last year, an increase of $11.4, or 31.27%.
54
Interest expense increased $4.2 million or 123.45%, again, primarily due to
growth in MFC's balance sheet. Additionally, during the first six months of the
year, MFC has experienced some migration of deposits from money market accounts
to certificates of deposits and the difference in rate between these two
products has become more pronounced. Interest-bearing deposits averaged $244.0
million compared to $127.2 million last year, an increase of $117.6 million, or
92.44%.
Management determines the allowance for loan losses based on a number of
factors including reviewing and evaluating MFC's loan portfolio in order to
identify potential problem loans, credit concentrations and other risk factors
connected to the loan portfolio as well as current and projected economic
conditions locally and nationally. Upon loan origination, management evaluates
the relative quality of each loan and assigns a corresponding loan grade. All
loans are periodically reviewed to determine both the initial and ongoing
accuracy of these loan grades. The loan grading system assists management in
determining the overall risk in the loan portfolio.
Management realizes that general economic trends greatly affect loan losses
and no assurances can be made that further charges to the loan loss allowance
may not be significant in relation to the amount provided during a particular
period or that further evaluation of the loan portfolio based on conditions then
prevailing may not require sizable additions to the allowance, thus
necessitating similarly sizable charges to operations. During the three and six
month periods ended June 30, 2001, management determined a charge to operations
of $865,000 and $1.5 million, respectively, was sufficient to bring the loan
loss reserve to a balance considered to be adequate to absorb estimated
potential losses in the portfolio. At June 30, 2001 the loan loss reserve was
1.38% of loans outstanding. Excluding government guaranteed, sold and cash
collateralized loans, the allowance for loan losses was 1.42%.
At June 30, 2001 and 2000, MFC had $348,500 and $87,300, respectively, in
loans that were considered to be impaired under SFAS No. 114. All of these
credits were on a non-accruing basis.
For the quarter ended June 30, 2001, noninterest income totaled $503,100,
up $229,000, or 83.95%, from $273,500 earned in the same period of 2000. Fees
on deposit accounts increased $89,900 or 79.72% during the second quarter as
compared with the second quarter of 2000. Origination fees generated from the
origination and sale of mortgage loans increased $86,500. Fees from other
services increased $53,200 or 92.14% in the second quarter of 2001 in comparison
to the same period in 2000. This increase resulted primarily from increased
sales of commissioned insurance products.
Second quarter 2001 noninterest expenses totaled $2.1 million, up $1.0
million or 97.11%, from $1.1 million in the same quarter of 2000. Personnel
costs increased $530,100 or 93.4% resulting from staffing increases required as
MFC has opened new offices and grown its infrastructure to support its retail
banking network. Other non-interest expenses totaled $684,700 during the second
quarter of 2001, up $340,100, or 98.69%, from $344,600 in the same quarter a
year ago. Of the $340,100 increase, $74,300 was attributed to increases in data
processing and data telecom fees. Additionally, printing and supplies expense
recorded a $79,700 increase during the period.
For the six months ended June 30, 2001, noninterest income totaled
$870,200, up $228,300, or 35.57%, from $641,800 earned in the first six months
of 2000. During the period, service charges on deposit accounts increased
$142,400, or 68.08% while fees on mortgage originations increased from $196,700
to $320,300, an increase of $123,600, or 62.82%.
Total noninterest expenses were $3.6 million during the first six months of
2001, representing an increase of $1.6 million, or 84.42%, from $1.9 million in
the same period of 2000. As was the case for the second quarter, year-to-date
increases in the various overhead captions were principally impacted by the
continuing growth of MFC and the building of infrastructure to support ongoing
expansion. For the period, personnel expense totaled $1.9 million, up $824,700,
or 79.62%, from $1.0 million in the same period of 2000. Year-to-date occupancy
expense increased $250,300, or 83.39%. Other non-interest expense totaled $1.2
million for the six months ended June 30, 2001, up $559,100, or 93.22%, from
$599,800 in the same period of 2000. Of the $559,100 increase in other non-
interest expenses, $160,800 related to increases in data processing and data
telecom fees and $73,200 related to printing and supplies.
55
Accounting and Regulatory Matters. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 was amended by SFAS No. 138, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Effective January 1, 2001, the Bank adopted
the Standard. The adoption of the Standard had no effect on the Bank's
financial statements and current disclosures.
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140
replaces SFAS No. 125 "Accounting for Transfer and Servicing of Financial Assets
and Extinguishment of Liabilities." SFAS No. 140 revises the standards for
accounting for securitizations and other transfer of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125 without reconsideration. The statement became
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001. The adoption of the Standard had no
effect on the Bank's financial statements and current disclosures.
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by
FASB. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and write-
downs may be necessary. The statement became effective on July 1, 2001. The
adoption of the standard had no effect on the Bank's financial statements and
current disclosures.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting of goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill
recorded in business combinations, which occurred prior to June 30, 2001 will
cease effective January 1, 2002. The statement further requires that the fair
value of goodwill and other intangible assets with indefinite lives be tested
for impairment upon adoption of this statement, annually and upon the occurrence
of certain events. The Bank's management estimates that the adoption of SFAS
No. 142 will result in the elimination of annual amortization expense related to
any goodwill which might result from the proposed MFC and First Western merger,
however, the impact of related impairment, if any, on the Bank's financial
position or results of operations has not been determined.
From time to time, the FASB issues exposure drafts for proposed statements
of financial accounting standards. Such exposure drafts are subject to comment
from the public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the financial statements of the Bank and monitors
the status of changes to and proposed effective dates of exposure drafts.
56
Beneficial Ownership of Common Stock
The following table described the beneficial ownership of MFC Stock as of
October ___, 2001, by MFC's current directors and certain executive officers,
individually, and by all its current directors and executive officers as a
group.
Percent of class (2)
------------------------
Name of Amount and nature of As adjusted
beneficial owner beneficial ownership (1) Current for the Merger
------------------------------------- ------------------------ -------- --------------
William H. Burton.................... 44,325 2.35% 1.72%
J. W. Davis.......................... 58,300 3.06% 2.25%
Kenneth C. Feagin.................... 33,411 1.77% 1.30%
Danny L. Ford........................ 33,867 1.80% 1.32%
Boyd L. Hyder........................ 89,914 4.75% 3.48%
J. Edward Jones...................... 15,180 .81% .59%
Ronald R. Lamb....................... 21,452 1.14% .83%
H. Steve McManus..................... 74,497 3.97% 2.91%
Vincent K. Rees...................... 16,620 .88% .64%
Catherine H. Schroader............... 63,653 3.36% 2.47%
Maurice A. Scott..................... 32,796 1.74% 1.27%
William B. Taylor.................... 23,752 1.26% .92%
All current directors and executive
officers as a group (13 people).... 516,832 25.25% 18.90%
(1) Except as otherwise noted, the individuals named and included in the group
exercise sole voting and investment power with respect to all shares shown
as beneficially owned. Individuals named and included in the group have
shared voting and investment power with respect to certain of the listed
shares as follows: Mr. Burton - 6,305; Mr. Ford - 15,600; Mr. Hyder - 312;
Mr. Lamb - 4,225; Mr. McManus - 10,125; Mr. Rees - 720; Ms. Schroader -
21,960; Mr. Scott - 250; and all persons included in the group - 59,497.
The listed shares also include the following numbers of shares that could
be acquired by individuals named and included in the group pursuant to
currently exercisable stock options and with respect to which shares they
may be deemed to have sole investment power only: Mr. Burton -15,835; Mr.
Davis - 31,300; Mr. Feagin - 15,981; Mr. Ford - 8,367; Mr. Hyder - 19,070;
Mr. Jones - 9,295; Mr. Lamb - 8,817; Mr. McManus - 1,797; Mr. Rees -
15,900; Ms. Schroader - 18,533; Mr. Scott - 14,296; Mr. Taylor - 8,671; and
all persons included in the group - 173,802.
(2) Percentages are calculated based on 1,873,461 total shares currently
outstanding, and 2,561,302 shares outstanding as adjusted for the effect of
the Merger, plus, in the case of each named individual and the group, the
number of additional shares (if any) that could be purchased by that
individual or persons included in the group pursuant to currently
exercisable stock options.
Board of Directors
MFC's Bylaws provide for a Board of Directors made up of not less than
eight nor more than 20 directors. The Board may set and change the number of
directors from time to time within those limits. The Board is divided into three
classes and directors are elected to staggered three-year terms. The terms of
directors in one class expire each year and directors in that class are elected
for new three-year terms. The eleven current members of MFC's Board of Directors
are listed in the following table.
57
First
Position(s) elected /
with MFC current term Principal occupation
Name and age and the Bank expires (1) and business experience
---------------------- ----------------------- ---------------- ----------------------------------------------------------
William H. Burton Director 1997 / 2003 President and Chief Executive Officer,
(46) Cafe Enterprises, Inc. (regional restaurant company)
J. W. Davis (2) President, Chief 1997 / 2004 Executive officer of MFC and the Bank
(54) Executive Officer
and Director
Danny L. Ford Director 1999 / 2004 Self-employed cattle rancher; formerly, head football
(52) coach, University of Arkansas (1993-1997)
Kenneth C. Feagin Director 1997 / 2002 President, Ken Feagin Truck & Trailer Sales; Partner,
(46) Martin-Feagin Ford Lincoln Mercury; formerly, partner
and owner, Bryan Easler Ford (automobile dealerships)
(1980-2001)
Boyd L. Hyder Chairman 1997 / 2003 President and owner, B&A Hyder Trucking, Inc. (trucking
(59) company)
J. Edward Jones Director 1998 / 2002 President, Sutherland Insurance & Realty Company
(66) (general insurance and real estate)
Ronald R. Lamb Director 1997 / 2002 Owner, Lamb Fruit Co., Inc. and Ottanola Farms (apple
(65) production and sales)
H. Steve McManus Director 2000 / 2002 President, Beacon Food Services, Inc. (restaurant),
(59) McManus Development LLC, and Moon McManus
Developers LLC (residential real estate developers);
formerly, Chief Executive Officer, Hardee's Food Systems,
Inc. (1995-1997)
Catherine H. Schroader Director 1997 / 2003 Co-owner and manager, Schroader's Honda, Inc.
(64) (motorcycle dealership)
Maurice A. Scott Director 1997 / 2003 Retired; previously served as Plant Manager for Monsanto
(56) Company (chemical manufacturer) (1981-1997)
William B. Taylor Director 1999 / 2004 Chief Executive Officer, President and Manager, Taylor
(58) Land and Cattle, Inc. (cattle ranching and real estate
development and sales) and Taylor Contracting Co., Inc.
(grading contractor)
------------------
(1) Each person first became a director of MFC during January 2001 at the time
it was incorporated. Each director previously served, and continues to
serve, as a director of MountainBank. The term "First elected" refers to the
year in which each individual first took office as a director of
MountainBank.
(2) Mr. Davis' employment agreement provides that he be nominated each year for
election as a director.
Directors' Compensation
Director Fees. MountainBank pays each of its directors a monthly retainer
of $100 and fees of $650 for his or her attendance at each meeting of its Board
of Directors and $100 for attendance at each meeting of a committee of the
Board. Directors currently do not receive any additional compensation for their
services as members of MFC's Board of Directors.
Director Stock Options. Since the incorporation of the MountainBank during
1997, options have been granted to MFC's current directors pursuant to the 1997
Director Stock Option Plan which was
58
approved by shareholders during 1998. At the time the Reorganization became
effective, those options and the Plan were assumed by MFC and the options were
converted into options to purchase MFC Stock. The numbers of shares of MFC Stock
covered by options currently held by MFC's directors under the Plan are as
follows: Mr. Burton - 20,287; Mr. Feagin- 20,582; Mr. Ford - 14,602; Mr. Hyder -
25,440; Mr. Jones - 12,886; Mr. Lamb -12,717; Mr. McManus - 5,391; Ms.
Schroader - 22,254; Mr. Scott -18,554; and Mr. Taylor - 15,515.
Executive Officers
J. W. Davis, age 54, serves as President and Chief Executive Officer of MFC
and MountainBank. He was first employed by MountainBank's organizers during 1996
to coordinate and direct its initial organization, and he was elected President
when MountainBank opened for business during 1997. Previously, Mr. Davis was
employed for 15 years with NationsBank where he held various positions, the most
recent of which was Senior Vice President and Regional Executive for that bank's
western South Carolina branches. He has a total of 32 years of banking
experience.
Vincent K. Rees, age 34, has served as MountainBank's Chief Lending Officer
since it opened for business during 1997. He was elected Executive Vice
President of the bank during 1999. He previously was employed for seven years
by NationsBank where he served as Vice President and in various positions in
branch management, credit analysis, and consumer and commercial lending. Mr.
Rees has a total of 12 years of banking experience.
Gregory L. Gibson, age 44, serves as MFC's Chief Financial Officer and as
MountainBank's Senior Vice President and Chief Financial Officer. He became a
full-time employee of MountainBank during 2000, but he previously had served as
Chief Financial Officer on a part-time basis since 1999. From 1997 until he was
employed by MountainBank, he operated his own public accounting and financial
institutions consulting firm (which was retained by MountainBank to provide it
with financial consulting services). From 1994 to 1997, he was employed as
Senior Vice President of Bank of Mecklenburg, Charlotte, North Carolina. Mr.
Gibson is a certified public accountant and has 21 years of experience in the
banking industry. He has served as an executive officer of six community banks
and bank holding companies.
Executive Compensation
Cash Compensation. The following table shows the cash and certain other
compensation received or deferred by MountainBank's Chief Executive Officer and
Executive Vice President for each of the listed years. MFC's executive officers
are the same as those of MountainBank, and they are paid by MountainBank for
their services as bank officers and employees. MFC does not pay its officers
any separate compensation for their services as officers of the holding company.
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------
Annual Compensation Long term compensation
------------------------------------- ----------------------
Name and Other annual Securities All other
principal position(s) Year Salary (1) Bonus compensation (2) underlying options compensation
--------------------- ---- ---------- ------- ---------------- ---------------------- -------------
J. W. Davis (3) 2000 $144,000 $75,000 -0- 12,500 $5,500 (4)
President and Chief
Executive Officer 1999 128,000 25,000 -0- -0- 4,100
1998 113,989 15,000 -0- 36,000 3,467
Vincent K. Rees 2000 78,333 35,000 -0- 7,500 1,961 (4)
Executive Vice
President 1999 65,625 11,500 -0- -0- 1,640
1998 59,519 10,000 -0- 18,000 1,488
-----------------------
59
(1) Includes amounts deferred at each officer's election pursuant to
MountainBank's Section 401(k) plan.
(2) In addition to compensation paid in cash, MountainBank's executive officers
receive certain personal benefits. The value of non-cash benefits received
by each named officer during 2000 did not exceed 10% of his cash
compensation.
(3) Mr. Davis serves as President and Chief Executive Officer of MountainBank
pursuant to an employment agreement which provides for a term of three
years (which, absent notice of non-renewal from either party, is extended
by one additional year on each anniversary date of the agreement), annual
base salary, an annual bonus, and certain other benefits. In the event
there is a "change in control" (as defined in the agreement) of
MountainBank which is not approved by at least two-thirds of its directors
who are not affiliated with the acquiring person, or if, following any
approved change in control, and without his consent, Mr. Davis is required
to move his residence or principal job location more than 50 miles from
Hendersonville, his salary or benefits are reduced, or his responsibilities
or authority are reduced below the level associated with his current
position, then he may terminate his employment and be entitled to continue
to receive salary, bonuses and employee benefits for a period of three
years. The agreement may be terminated by MountainBank for "just cause"
(as defined in the agreement).
(4) For 2000, consists of, for Mr. Davis, MountainBank's $3,100 contribution to
the Section 401(k) plan for his account and $2,400 in directors' fees, and,
for Mr. Rees, the bank's contribution to the Section 401(k) plan for his
account.
Employee Stock Options. Since MountainBank was organized during 1997,
options have been granted to its executive officers pursuant to its 1997
Employee Stock Option Plan which was approved by shareholders during 1998. The
following tables contain information about stock options granted by MountainBank
during 2000 to the executive officers named above in the Summary Compensation
Table, and about all options held by those executive officers on December 31,
2000. When MFC became the parent company of MountainBank on March 30, 2001, it
assumed the bank's obligations under all outstanding options and the Plan and
converted the options into options to purchase MFC Stock rather than
MountainBank's common stock.
OPTION GRANTS IN LAST FISCAL YEAR
-----------------------------------------------------------------------------------------------------------
Potential realizable
value at assumed
annual rates of stock
price appreciation
Individual grants for option term
----------------------------------------------------------------------------- -----------------------
% of total
No. of securities options
underlying granted to Exercise or
options employees in base price Expiration
Name granted (#) (1) fiscal year ($/share) (1) date 5% ($) 10% ($)
------------- ----------------- ------------ -------------- ---------- ---------- ----------
J. W. Davis 12,500 21.0% $16.00 10/15/10 $125,779 $318,748
V. K. Rees 7,500 12.6% 16.00 10/15/10 75,467 191,249
------------------
(1) The options were granted on October 16, 2000, and become exercisable as to
one-fifth of the covered shares on October 16 of each year, beginning in
2001, and they expire ten years following the date of grant. The numbers of
shares and exercise prices have been adjusted to reflect the five-for-four
split in the bank's common stock which became effective on March 30, 2001.
60
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
-----------------------------------------------------------------------------------------------------------------
Number of securities Value of unexercised
underlying unexercised in-the-money options
options at fiscal year-end (2) at fiscal year-end (2) (3)
-------------------------------- ----------------------------
Shares acquired Value
Name on exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------ --------------- -------- ----------- ------------- ----------- -------------
J. W. Davis (1) - 31,300 48,500 $450,407 $474,815
V. K. Rees (1) - 15,900 25,500 228,801 238,170
--------------
(1) No options were exercised during 2000.
(2) All share and dollar amounts have been adjusted, or calculated based on a
market value or exercise price that has been adjusted, for the five-for-
four stock split which became effective on March 30, 2001.
(3) Represents the aggregate fair market value on December 31, 2000, of shares
underlying unexercised options held on that date, minus the aggregate
exercise or purchase price of those shares. On October _____, 2001, the
numbers of exercisable and unexercisable shares, respectively, were ______
and _____ for Mr. Davis, and _____ and _____ for Mr. Rees. On that date,
the value of the Mr. Davis' exercisable and unexercisable options were
$_______ and $________, respectively, and the value of Mr. Rees'
exercisable and unexercisable options were $________ and $________,
respectively, based on the then current last known sales price per share of
MFC Stock.
Transactions with Management
MountainBank has had, and will continue to have in the future, banking
transactions in the ordinary course of business with certain of its and MFC's
directors and executive officers and their associates. All loans included in
those transactions were made on substantially the same terms, including interest
rates, repayment terms and collateral, as those prevailing at the time the loans
were made for comparable transactions with other persons, and those loans do not
involve more than the normal risk of collectibility or present other unfavorable
features.
During 1997, and in connection with MountainBank's initial organization,
its Chairman, Boyd L. Hyder, constructed and leased to the bank its main banking
and executive offices in Hendersonville, North Carolina. The bank's lease
agreement calls for an initial term of 20 years (with two five-year renewal
options) and current rental payments of $6,700 per month (with rent adjustments
each five years based on the consumer price index). Before entering into the
lease arrangement, the bank's Board of Directors obtained an independent
estimate of the rental value of the building and compared the terms of the lease
to lease terms on comparable properties. Additionally, during 1998,
MountainBank entered into a lease agreement with Mr. Hyder for approximately
2,400 square feet of space in Four Seasons Shopping Center that is used as the
bank's administration/operations facility. During 2000, the space leased from
Mr. Hyder was increased to approximately 4,800 square feet and, during 2001, the
leased space again was increased to approximately 6,800 square feet. The lease
agreements for that additional space call for initial terms of ten years (with
one five-year renewal option) and aggregate additional rental payments of $3,200
per month. The Board of Directors believes the terms of each of these lease
arrangements with Mr. Hyder are comparable to those it could have obtained in a
lease of similar facilities from an unrelated lessor.
61
FIRST WESTERN BANK
General
Business. First Western is a North Carolina-chartered commercial bank that
first began banking operations on December 15, 1997. Its deposits are insured
by the Bank Insurance Fund of the FDIC to the maximum amount permitted by law.
On June 30, 2001, First Western's unaudited interim financial statements
reflected total assets of approximately $77.5 million, total loans of
approximately $60.8, total deposits of approximately $60.7 million, and total
shareholders' equity of approximately $13.4 million.
First Western is a community-oriented financial institution which offers a
variety of financial services to meet the needs of the communities it serves.
Its operations are primarily retail oriented and directed to individuals and
small- to medium-sized businesses located in its market area. While its
deposits and loans are derived primarily from customers in its banking market,
it also makes loans and has deposit relationships with individual and business
customers in areas surrounding its immediate banking market. First Western
currently does not accept deposits over the Internet. First Western provides
most traditional commercial and consumer banking services, including personal
and commercial checking and savings accounts, money market accounts,
certificates of deposit, individual retirement accounts and related business and
individual banking services. Its lending activities are concentrated in
residential lending, but it also makes commercial loans to small- to medium-
sized businesses located primarily in its market area for various purposes, and
it makes various consumer-type loans to individuals, including installment loans
and equity lines of credit. First Western's primary source of revenue is
interest income it derives from its lending activities.
First Western's principal executive offices are located at 600 West Bypass,
Burnsville, North Carolina 28714, and its telephone number is (828) 682-1115.
Banking Offices. In addition to First Western's main office in Burnsville
(Yancey County), North Carolina, it operates two branch offices in Spruce Pine
(Mitchell County), North Carolina, and one branch office in Weaverville
(Buncombe County), North Carolina.
Banking Market. First Western's principal banking market consists of the
area immediately surrounding its banking offices, including portions of Yancey,
Mitchell, and Buncombe Counties, and is located in the mountains of North
Carolina north of the City of Asheville.
Competition. First Western competes for deposits in its banking market
with other commercial banks, savings banks and other thrift institutions, credit
unions, agencies issuing United States government securities and all other
organizations and institutions engaged in money market transactions. In its
lending activities, First Western competes with all other financial institutions
as well as consumer finance companies, mortgage companies and other lenders.
Commercial banking in the First Western's banking market and in North
Carolina as a whole is extremely competitive. North Carolina is the home of two
of the largest commercial banks in the United States, each of which has branches
located in the First Western's banking market, and five other commercial banks,
thrift institutions and credit unions also are represented in its banking
market.
Interest rates, both on loans and deposits, and prices of fee-based
services, are significant competitive factors among financial institutions
generally. Other important competitive factors include office location, office
hours, the quality of customer service, community reputation, continuity of
personnel and services, and, in the case of larger commercial customers,
relative lending limits and the ability to offer sophisticated cash management
and other commercial banking services. Many of First Western's competitors have
greater resources, broader geographic markets and higher lending limits than
First Western, and they can offer more products and services and can better
afford and make more effective use of media advertising, support services and
electronic technology than can First Western. To
62
counter these competitive disadvantages, First Western depends on its reputation
as a community bank in its local market, its direct customer contact, its
ability to make credit and other business decisions locally, and its
personalized service.
In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial
institutions, but also with out-of-state financial institutions which may
acquire North Carolina institutions, establish or acquire branch offices in
North Carolina, or otherwise offer financial services across state lines,
thereby adding to the competitive atmosphere of the industry in general. In
terms of assets, First Western is one of the smaller commercial banks in North
Carolina, and there is no assurance that First Western will be or continue to be
an effective competitor in the current financial services environment.
Employees. On June 30, 2001, First Western had 36 full-time employees
(including its executive officers) and eight part-time employees. First Western
and its employees are not parties to any collective bargaining agreement, and it
considers its relations with its employees to be good.
Legal Proceedings. From time to time, First Western may become involved in
legal proceedings occurring in the ordinary course of its business. However,
subject to the uncertainties inherent in any litigation, management of First
Western believes there currently are no pending or threatened proceedings that
are reasonably likely to result in a material adverse change in First Western's
consolidated financial condition or operations.
Properties. First Western's main office in Burnsville and its branch
office in Weaverville are located in facilities owned by First Western, and its
two branch offices in Spruce Pine are in leased facilities. On June 30, 2001,
First Western's investment in premises and banking equipment (cost less
accumulated depreciation) was approximately $3.7 million.
First Western Financial Statements; Other Available Information
First Western's audited financial statements as of and for the years ended
December 31, 2000 and 1999, and its unaudited consolidated interim statements of
condition, statements of income, and statements of cash flows, as of and for the
six-month periods ended June 30, 2001 and 2000, are included in this Proxy
Statement/Prospectus under the caption "Financial Statements of First Western
Bank" on page F-31.
First Western is subject to the informational requirements of Sections 13
and 15(d) of the Securities Exchange Act of 1934 Act, as amended (the "1934
Act"), and it files reports and other information, including annual reports,
quarterly reports and proxy statements, with the FDIC under the 1934 Act. You
may inspect and copy any reports, proxy statements and other information filed
by First Western with the FDIC under the 1934 Act at the offices of the FDIC's
Registration, Disclosure and Securities Operations Unit located at 550 17/th/
Street, N.W., Room F-6043, Washington, DC 20429. You also may obtain copies of
those reports and other documents by contacting the FDIC by telephone at (202)
898-8913 or by facsimile at (202) 898-3909.
63
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis is provided to assist in
understanding and evaluating First Western's results of operations and financial
condition. First Western was incorporated and began operations in December of
1997. References herein to operations in 1997 relate to the period from December
1, 1997 (date of incorporation) through December 31, 1997. First Western began
accepting deposits on December 15, 1997. The following discussion should be read
in conjunction with the financial statements and related notes included
elsewhere in this Proxy Statement/Prospectus.
Results of Operations. The following discussion relates to the results
of operations for the year ended December 31, 2000 compared to the year ended
December 31, 1999, the year ended December 31, 1999 compared to the year ended
December 31, 1998 and the year ended December 31, 1998 compared to the period
ended December 31, 1997.
2000 Compared to 1999. For the year ended December 31, 2000, net income
was $438,539 or $.30 per share compared to $235,609 or $.16 per share for the
year ended December 31, 1999. The 2000 earnings produced a return on average
assets of 0.65% and a return on average equity of 3.20%.
Net interest income increased 19.85% to $2,725,950 in 2000 compared to
$2,274,376 in 1999. Interest income increased 18.74% to $4,968,264 in 2000
compared to $4,184,149 in 1999. Interest income increased as the result of
increases in average interest earning assets and average interest rates earned
on interest earning assets. Average interest earning assets were $60,938,744 in
2000, an increase of $3,669,953 or 6.41% as compared to $57,268,791 in 1999. The
increase in average interest earning assets can be primarily attributed to the
growth in average loans of $7,829,168 to $45,260,450 in 2000 as compared to
$37,431,282 in 1999. The increase in average loans during the year was somewhat
offset by decreases in lower yielding assets such as federal funds sold and
interest bearing deposits at other institutions. As a result, the average
interest rate earned on interest earning assets increased by 84 basis points to
8.15% in 2000 compared to 7.31% in 1999. Interest expense increased 17.41% to
$2,242,314 in 2000 compared to $1,909,773 in 1999. Interest expense increased as
a result of increases in average interest bearing liabilities and average
interest rates incurred on interest bearing liabilities. Average interest
bearing liabilities increased $3,735,468 or 8.90% to $45,706,009 in 2000
compared to $41,970,541 in 1999. Average interest-bearing deposits increased by
8.87% to $45,683,703 in 2000 from $41,960,541 in 1999.
Provision for loan losses increased by $132,400 to $198,500 in 2000
compared to $66,100 in 1999. The increase in the provision for loan losses can
be attributed to the increase in gross loans outstanding of $12,462,556 to
$52,267,647 as of December 31, 2000 compared to $39,805,091 as of December 31,
1999. The ending balance in the allowance for loan losses of $714,215 is the
amount that management has determined to be adequate to provide for potential
losses inherent in the loan portfolio as of December 31, 2000.
Other income was $611,560 in 2000, an increase of $284,562, or 87.02%
compared to $326,998 in 1999. For the year ended December 31, 2000, service
charges on deposit accounts increased $86,105 or 60.74%, which can be attributed
to higher average balances of deposit accounts, and an overall larger number of
accounts compared to the same period in 1999. Other service charges and fees
increased by $132,631, or 82.62%, in 2000, which included increases in
commissions earned on the sale of credit life, accident, and health insurance of
$56,872 and in mortgage loan origination fees of $37,731. Other income increased
by $65,826 in 2000 primarily attributable to the gain of $53,267 on the sale of
a fixed asset. Other expenses totaled $3,049,232, an increase of $749,567, or
32.59%, in 2000. The increase in other expenses can be attributed to increases
in salaries and benefits of $327,842, occupancy expenses and equipment expenses
of $153,499, advertising expenses of $69,923 and data processing costs of
$41,762. The increases in those items mentioned above can be attributed to the
opening of the new corporate headquarters in Burnsville, the opening of the
Wal-Mart in-store branch and the opening of the Weaverville branch office.
64
During 2000, First Western reversed the valuation allowance in the
amount of $391,439 that was reserved against deferred tax assets as of December
31, 1999, which contributed to an overall income tax benefit in the amount of
$348,761. At December 31, 1999, management believed the realization of the
valuation allowance was not reasonably assured. Based upon the taxable income
being generated in 2000 and management's expectations of continued
profitability, management now believes the realization of the deferred tax asset
is more likely than not.
1999 Compared to 1998. For the year ended December 31, 1999, net income
was $235,609 or $.16 per share compared to a net loss of $861,215 or $1.18 per
share for the year ended December 31, 1998. The 1999 earnings provided a return
on average assets of 0.39% and a return on average equity of 1.72%.
Net interest income increased 226.81% to $2,274,376 in 1999 compared to
$695,929 in 1998. The increase in interest income and interest expense can be
primarily attributed to First Western completing its acquisition of Mitchell
Bancorp, Inc. ("Mitchell") that was accounted for by the purchase method of
accounting and was effective December 31, 1998. Accordingly, the results of
operations of Mitchell for the year ended December 31, 1998 were excluded from
the accompanying financial statements. Interest income increased 263.56% to
$4,184,149 in 1999 compared to $1,150,869 in 1998. Interest income increased as
the result of increases in average interest earning assets and average interest
rates earned on interest earning assets. Average interest earning assets were
$57,268,791 in 1999, an increase of $40,408,625 or 239.67% as compared to
$16,860,166 in 1998. The increase in average interest earning assets can be
primarily attributed to the growth in average loans of $32,764,132 to
$37,431,282 in 1999 as compared to $4,667,150 in 1998. Interest expense
increased 319.79% to $1,909,773 in 1999 compared to $454,940 in 1998. Interest
expense increased as a result of increases in average interest earning
liabilities. Average interest earning liabilities increased $32,695,991 or
352.53% to $41,970,541 in 1999 compared to $9,274,550 in 1998. Average
interest-bearing deposits increased by 359.85% to $41,960,541 in 1999 from
$9,124,550 in 1998. The increase in volume was partially offset by a decrease in
average interest rates paid on interest bearing liabilities of 36 basis points
to 4.55% in 1999 compared to 4.91% in 1998.
Provision for loan losses decreased by $65,500 to $66,100 in 1999
compared to $131,600 in 1998. Although the provision for loan losses decreased
by $65,500, the ratio of allowance for loan losses to gross loans was
approximately 1.40% for each of the years ended December 31, 1999 and 1998. The
ending balance in the allowance for loan losses of $562,083 was the amount that
management had determined to be adequate to provide for potential losses
inherent in the loan portfolio as of December 31, 1999.
Other income was $326,998 in 1999, an increase of $225,123, or 221.04%
compared to $101,855 in 1998. For the year ended December 31, 1999, service
charges on deposit accounts increased $83,063, or 141.52%, in 1999, which can be
attributed to higher volumes of deposit accounts, and an overall larger number
of accounts compared to the same period in 1998 which can be primarily
attributed to the acquisition of Mitchell and the overall increase in deposit
customers during 1999. Other service charges and fees increased by $142,265 in
1999, which can be primarily attributed to an increase of $112,201 in mortgage
loan origination fees. Other expenses totaled $2,299,665, an increase of
$833,724 or 56.87%, in 1999 compared to $1,465,941. The increase in other
expenses can be primarily attributed to increases in salaries and benefits of
$360,863, advertising expenses of $26,201 and data processing costs of $174,721.
The increases in those items mentioned above can be attributed to the
acquisition of Mitchell of which operations were reported for the entire year of
1999.
1998 Compared to 1997. Net loss for the year ended December 31, 1998
was $861,215 or $1.18 per share compared to $135,251 or $.19 per share for the
period ended December 31, 1997. The net loss for the first full year of
operations was in line with management expectations as the deployment of capital
and the development of deposits evolved to levels necessary to support First
Western's basic infrastructure. Net interest income increased to $695,929 in
1998, compared to $30,004 the period ended December 31, 1997. Other income
increased to $101,855 from $92 for the period ended December 31, 1997. Other
expenses increased to $1,465,941 in 1998 from $165,347 in 1997.
65
Net Interest Income. Net interest income (the difference between interest
earned on interest-earning assets and interest paid on interest-bearing
liabilities, which primarily are deposits in First Western) represents the most
significant portion of First Western's earnings. It is management's ongoing
policy to optimize and increase net interest income. Net interest income totaled
$2,725,950, $2,274,376 and $695,929 in 2000, 1999 and 1998, respectively,
representing increases of 19.85% for 2000 over 1999, 226.81% for 1999 over 1998,
and 2219.45% for 1998 over 1997. Average earning assets increased by 6.41% in
2000 and 239.67% in 1999. The net yield on average earning assets (net interest
income divided by average earning assets) increased 50 basis points to 4.47% in
2000 from 3.97% in 1999. The net yield on average earning assets increased 48
basis points in 1999 over 1998. Increases in 1998 over 1997 are primarily due to
the short period of operations in 1997 compared to a full year in 1998.
Average interest-bearing liabilities increased by 8.90% in 2000 and 352.52%
in 1999. The average interest rate paid on these deposits increased by 36 basis
points in 2000 and decreased by 36 basis points in 1999. The spread on interest
bearing funds was 3.24% in 2000, 2.76% in 1999 and 1.92% in 1998 and First
Western will continue efforts to maximize this spread through management of both
loan and deposit rates and mix in order to achieve overall earnings growth.
The following table presents the daily average balances, interest
income/expense, and average rates on interest-earning assets and interest-
bearing liabilities of First Western for the last three years.
(Dollars in Thousands)
Year Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ----------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income/ Interest Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets:
Loans (1) $45,260 $4,017 8.88% $37,431 $3,164 8.45% $ 4,667 $ 489 10.48%
Taxable securities 11,305 680 6.02% 4,786 241 5.04% 1,794 102 5.69%
Federal funds sold 3,128 193 6.17% 11,251 576 5.12% 4,081 220 5.39%
Interest-bearing balances
at other institutions 1,246 78 6.26% 3,800 203 5.34% 6,319 340 5.38%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 60,939 4,968 8.15% 57,268 4,184 7.31% 16,861 1,151 6.83%
Cash and due from banks 2,012 2,112 901
All other assets 4,688 3,152 856
------- ------- -------
Total assets $67,639 $62,532 $18,618
======= ======= =======
Liabilities and Shareholders' Equity:
Interest-bearing deposits $45,706 $2,242 4.91% $41,961 $1,909 4.55% $ 9,125 $ 440 4.82%
Other borrowings - - - 10 1 10.00% 150 15 10.00%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 45,706 2,242 4.91% 41,971 1,910 4.55% 9,275 455 4.91%
Noninterest-bearing deposits 7,538 5,734 2,077
Other liabilities 701 1,089 48
Shareholders' equity 13,694 13,738 7,218
------- ------- -------
Total liabilities and
shareholders' equity $67,639 $62,532 $18,618
======= ======= =======
Interest rate spread (2) 3.24% 2.76% 1.92%
Net interest income $2,726 $2,274 $ 696
------ ------ ------
Net yield on earning assets (3) 4.47% 3.97% 4.13%
(1) Non-accrual loans have been included.
(2) The interest rate spread is the average interest-earning assets rate
less the average interest-bearing liabilities rate.
(3) Net yield on earning assets is computed by dividing net interest
income by average earning assets.
66
Changes in interest income and interest expense can result from changes
in both volume and rates. The following table sets forth the dollar amount of
increase (decrease) in interest income and interest expense resulting from
changes in the volume of interest-earning and interest-bearing liabilities and
from changes in yields and rates.
(Dollars in Thousands)
------------------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
------------------------------------- --------------------------------------
Volume(1) Rate(1) Total Volume(1) Rate(1) Total
Interest-earning assets:
Loans $ 679 $ 174 $ 853 $ 3,102 $ (427) $ 2,675
Taxable securities 359 80 439 160 (21) 139
------- ------- ------- --------- ------ -------
Total 1,038 254 1,292 3,262 (448) 2,814
Federal funds sold (458) 75 (383) 377 (21) 356
Interest-bearing balances
at other institutions (146) 21 (125) (135) (2) (137)
------- ------- ------- --------- ------ -------
Total interest income $ 434 $ 350 $ 784 $ 3,504 $ (471) $ 3,033
======= ======= ======= ========= ====== =======
Interest-bearing liabilities:
Interest-bearing deposits $ 177 $ 157 $ 334 $ 1,538 $ (69) $ 1,469
Other borrowings - (1) (1) (14) - (14)
------- ------- ------- --------- ------ -------
Total interest expense $ 177 $ 156 $ 333 $ 1,524 $ (69) $ 1,455
======= ======= ======= ========= ====== =======
(1) The rate/volume variances for each category have been allocated
equally on a consistent basis between rate and volume.
Liquidity. "Liquidity" refers to the ability of First Western to
generate adequate amounts of cash to meet its cash needs. First Western actively
manages the levels, types, and maturities of earning assets in relation to the
sources available. The objectives of First Western's liquidity management policy
include providing adequate funds to meet the needs of depositors and borrowers
at all times, to meet the basic needs for ongoing operations of First Western,
and to meet regulatory requirements. First Western satisfies its liquidity
requirements primarily through two categories of funds. The first is core
deposits, which includes demand deposits, savings accounts and certificates of
deposit that are less than $100,000. First Western considers these deposits to
be a stable portion of its liquidity mix. They are the result of generally
stable, ongoing consumer and commercial banking relationships. At December 31,
2000 core deposits totaled $45,532,717 or 78.01% of First Western's total
liabilities.
The other principal method of funding utilized by First Western
consists of large-denomination certificates of deposit ($100,000 or more), and
federal funds purchased. It is First Western's policy to emphasize core deposit
growth as the cost of funds are normally lower for these types of deposits as
compared to the cost of funds related to certificate of deposits ($100,000 or
more) and federal funds purchased.
Capital Resources. Future growth and expansion of First Western are
dictated by the ability to create capital, which is generated principally by
earnings. Adequacy of First Western's capital is also monitored to ensure
compliance with regulatory requirements. As of December 31, 2000, First
Western's total capital to risk weighted assets was 25.09%. Management considers
First Western to be well capitalized and expects to be able to meet future needs
caused by growth and expansion, as well as capital requirements implemented by
the regulatory agencies.
Management is not aware of any current recommendations by the
regulatory authorities, which, if implemented, would have a material effect on
liquidity, capital resources, or operations.
67
Historically, First Western has made both consumer and commercial loans
within its market area of Yancey and Mitchell counties of North Carolina. Total
loans, net of the allowance for loan losses and net of deferred loan origination
fees, at December 31, 2000 and December 31, 1999 were $51,314,564 and
$39,079,445 respectively, representing increases of 31.31% for 2000 over 1999
and 9.92% for 1999 over 1998. First Western has a diversified loan portfolio
with no significant concentrations to any one borrower or industry. The amounts
of loans outstanding at December 31, 2000 and 1999, by category, are shown in
Note 3 of the Notes to the Financial Statements included herein.
Interest Rate Sensitivity. The ability to maximize net interest income
depends largely upon achieving a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities that either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which First Western's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising rates, a negative gap
within shorter maturities would result in a decrease in net interest income.
Conversely, during a period of falling interest rates, negative gap within
shorter maturities would result in an increase in net interest income.
The following table presents First Western's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at December 31,
2000.
(Dollars in Thousands)
---------------------------------------------------------------------------
One to Three to One to Three Over
Three Twelve Three to Five Five
Immediate Months Months Years Years Years Total
Interest-bearing due from banks $ - $ 270 $ - $ - $ - $ - $ 270
Securities (at amortized cost):
US Government agencies - 667 3,076 5,474 - 982 10,199
Mortgage-backed securities - 68 208 241 211 467 1,195
Loans (gross) 11,364 5,112 9,206 7,996 5,515 13,075 52,268
------- ------ -------- ------- ------ ------- -------
Total interest-earning assets $11,364 $6,117 $ 12,490 $13,711 $5,726 $14,524 $63,932
======= ====== ======== ======= ====== ======= =======
Interest-bearing liabilities
Savings accounts $ 580 $ - $ - $ 2,318 $ - $ - $ 2,898
NOW accounts 408 - - 3,670 - - 4,078
Money market accounts 2,049 - - 4,781 - - 6,830
Time deposits of $100,000 or more - 2,424 7,017 1,945 - - 11,386
Other time deposits - 4,426 16,770 2,238 224 - 23,658
Other borrowings 710 - - - - - 710
------- ------ -------- ------- ------ ------- -------
Total interest bearing liabilities $ 3,747 6,850 $ 23,787 $14,952 $ 224 $ - $49,560
======= ====== ======== ======= ====== ======= =======
Interest sensitivity gap $ 7,617 $ (733) $(11,297) $(1,241) $5,502 $14,524 $14,372
======= ====== ======== ======= ====== ======= =======
68
In addition to gap analysis, First Western measures interest rate risk
through the simulation of net interest income under varying rate scenarios and
the theoretical impact of immediate and sustained rate changes referred to as
"rate shocks." The following table summarizes the estimated theoretical impact
on First Western's net interest income and market value of equity from
hypothetical "rate shocks" of plus and minus 1%, 2%, 3%, and 4% compared to the
estimated theoretical impact of rates remaining unchanged. The effects of these
hypothetical interest rate changes are based upon numerous assumptions including
relative and estimated levels of key interest rates. "Rate shock" modeling does
not take into account the pricing strategies management would undertake in
response to the depicted sudden rate changes. Additionally, management does not
believe rate changes of the magnitude described are likely in the forecast
period presented.
(Dollars in thousands)
---------------------------------------------------------------------------
Hypothetical Estimated Resulting Estimated Resulting
Immediate and Sustained Theoretical Tax Equivalent Theoretical Market
Rate Change Net Interest Income Value of Equity
---------------------------------- --------------------------------------
% %
Amount Change Amount Change
4% $2,990 1.01% $10,581 (18.14)%
3% 2,984 0.81% 11,164 (13.62)%
2% 2,978 0.61% 11,724 (9.29)%
1% 2,969 0.30% 12,316 (4.71)%
0% 2,960 0.00% 12,925 0.00%
(1)% 2.936 (0.81)% 13,444 4.02%
(2)% 2,902 (1.96)% 13,848 7.14%
(3)% 2,869 (3.07)% 14,270 10.41%
(4)% 2,834 (4.26)% 14,690 13.66%
Maturities and Sensitivities of Loans to Changes in Interest Rates. The
following table presents the maturity distribution of First Western's loans as
of December 31, 2000, including the maturity distribution of variable and fixed
rate loans.
(Dollars in Thousands)
Loan Maturities and Rate Sensitivities
----------------------------------------------------------------
One Five
Within to Five Years
One Year Years or More Total
Predetermined rate, maturity greater
than one year $ 5,026 $ 11,215 $ 24,663 $ 40,904
Variable rate maturing within one year 11,364 - - 11,364
---------- --------- --------- ---------
$ 16,390 $ 11,215 $ 24,663 $ 52,268
========== ========= ========= =========
Allowance and Provisions for Loan Losses. The allowance for loan losses
represents management's estimate of an amount adequate to provide for potential
losses inherent in the loan portfolio. Management determines the allowance for
loan losses based on a number of factors, including a review and evaluation of
First Western's loan portfolio, and current and projected economic conditions
locally and nationally. The allowance is monitored and analyzed in conjunction
with First Western's loan analysis and grading program, and provisions for loan
losses are made to maintain an adequate allowance for loan losses.
The allowance for loan losses is created by direct charges to
operations. Losses on loans are charged against the allowance for loan losses in
the accounting period in which they are determined by management to be
uncollectible. Recoveries during the period are credited to the allowance.
69
The provision for loan losses is the amount necessary to adjust the
allowance for loan losses to the amount that management has determined to be
adequate to provide for potential losses inherent in the loan portfolio. First
Western made provisions for loan losses of $198,500 for the year ended December
31, 2000 and $66,100 for the year ended December 31, 1999.
Management realizes that general economic trends greatly affect loan
losses, and no assurances can be made that future charges to the loan loss
allowance may not be significant in relation to the amount provided during a
particular period, or that future evaluations of the loan portfolio based on
conditions then prevailing will not require sizable additions to the allowance,
thus necessitating similarly sizable charges to income. Management does consider
however, the allowance for loan losses to be adequate for the reporting periods,
in their best judgment, evaluation, and analysis of the loan portfolio.
Loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed do not; 1)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources or, 2) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
The following table presents the allocation of the allowance for loan
losses by category.
(Dollars in thousands)
December 31,
-------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
Residential real estate
loans $ 180 46.92% $ 100 62.11% $ 100 62.32%
Commercial loans 300 38.47% 200 26.99% 175 14.95%
Land loans 30 3.88% 25 4.68% 25 11.40%
Consumer loans 80 10.73% 215 6.22% 200 11.33%
Unallocated 124 0.00% 22 0.00% 13 0.00%
--------- ------ --------- ----- -------- ------
Total 714 100.00% 562 100.00% 513 100.00%
========= ====== ========= ====== ======= ======
The allowance for loan losses was 1.37% and 1.41% of gross loans
outstanding at December 31, 2000 and 1999, respectively. For 2000 and 1999, the
ratio of net charge-offs during the year to average loans outstanding was less
than 1% for each year.
70
The following table presents activity in the allowance for loan loss.
(Dollars in Thousands)
Years Ended December 31,
--------------------------------
2000 1999 1998
Balance, beginning of year $ 562 $ 513 $ -
Provision for loan losses 199 66 132
Allowance from Mitchell - - 381
Loans charged off:
Commercial, financial, and agricultural (28) (2) -
Consumer (29) (24) -
Recoveries:
Commercial 2 - -
Consumer 8 9 -
------ ------ ------
Balance, end of year $ 714 $ 562 $ 513
====== ====== ======
Interest accruals on loans are discontinued when management believes,
after consideration of economic and business conditions and collection efforts,
that collection of interest is doubtful. Additionally, all loans contractually
past due 90 days or more and not in the process of collection or adequately
secured are placed on non-accrual status.
The following table presents nonperforming assets at the indicated
dates.
(Dollars in Thousands)
December 31,
----------------------------------------
2000 1999 1998
Nonaccrual loans $ 316 $ 489 $ 583
===== ===== =====
Investment Securities. First Western's investment portfolio is
comprised primarily of U.S. Government Agency securities. Management considers
its investment securities to be a source of interest income, and not a trading
account to be used to enhance First Western's income through speculative buying
and selling of investments.
See Note 2 of the Notes to Financial Statements included herein for a
summary of First Western's security portfolio composition at December 31, 2000.
71
The following table presents in summary form the maturities and
weighted average yields of First Western's available for sale and held to
maturity securities at December 31, 2000.
(Dollars in Thousands)
------------------------------------------------------------------------------------
After One Year After Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years
--------------------- ------------------- -------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
Available for sale
U.S. Government agency $ 2,244 6.40% $ 5,474 6.91% $ 982 7.19% $ - -
Mortgage-backed securities - 0.00% - 0.00% 916 7.34% - -
FHLMC stock - 0.00% - 0.00% - 0.00% 860 -
------- ------- -------- ------
Total $ 2,244 6.40% $ 5,474 6.91% $ 1,898 7.26% $ 860 -
======= ======= ======== ======
Held to maturity
U.S. Government agency $ 1,500 5.36% $ - 0.00% $ - 0.00% $ - -
Mortgage-backed securities - 0.00% - 0.00% 279 5.96% - -
------- ------- -------- ------
Total $ 1,500 5.36% $ - 0.00% $ 279 5.96% $ - -
======= ======= ======== ======
All securities are stated at amortized cost.
Deposits. First Western continuously monitors market pricing,
competition, rates and internal interest rate spreads to work toward growth and
profitability. Because deposits are the principal source of funds for continued
growth, First Western attempts to structure rates so as to promote deposit and
asset growth, while at the same time increasing the overall profitability of
First Western.
The daily average amounts of deposits and the average rates paid for
the year ended December 31, 2000 are summarized below. The table includes
certificates of deposit of $100,000 and over, which at December 31, 2000 totaled
$11,385,666. Of that total, $2,570,043 had scheduled maturities within three
months, $7,016,384 after three but within twelve months and $1,799,239 after
twelve months but within 36 months.
(Dollars in Thousands)
Years Ended December 31,
-------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- -------------------------
Amount Rate Amount Rate Amount Rate
Demand deposits $ 7,538 - $ 5,734 - $ 2,077 -
NOW's 3,607 0.62% 2,725 0.69% 1,146 1.32%
Savings 2,881 1.98% 2,765 2.07% 421 1.88%
MMDA's 7,721 3.97% 8,615 3.85% 1,547 4.51%
Time 31,472 5.90% 27,856 5.39% 6,011 5.78%
-------- -------- --------
$ 53,219 $ 47,695 $ 11,202
======== ======== ========
Acquisition. Effective December 31, 1998, First Western completed the
acquisition of Mitchell for $9,727,450 cash plus 781,377 shares of common stock
with a total value of $7,032,393. The Mitchell acquisition has been accounted
for by the purchase method of accounting, and accordingly, the results of
operations of Mitchell for the year ended December 31, 1998 were excluded from
the accompanying financial statements. Assets and liabilities assumed have been
recorded at their estimated fair values. The excess of purchase price over the
estimated fair value of net assets acquired of $1,354,746 was allocated to
goodwill and is being amortized on a straight-line basis over a twelve-year
period.
72
Impact of Inflation. The financial statements and related financial
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Because the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
While the effect of inflation on banks is normally not as significant
as is its effect on those businesses that have large investments in plant and
inventories, inflation does have an effect on banks.
During periods of high inflation, there are normally corresponding
increases in the money supply and banks normally experience above average growth
in assets, loans and deposits. Also, general increases in the prices of goods
and services will result in increased operating expenses.
Forward Looking Statements. The discussions presented in this annual
report contain statements that could be deemed forward looking statements within
the meaning of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform Act of 1995, which statements are inherently subject to risks
and uncertainties. Forward looking statements are statements that include
projection, prediction, expectations or beliefs about future events or results
or otherwise are not statements of historical fact. Such statements are often
characterized by the use of qualifying words (and their derivatives) such as
"expect," "believe," "estimate," "plan," "project," or other statements
concerning opinions or judgments of First Western and its management about
future events. Factors that could influence the accuracy of such forward looking
statements include, but are not limited to, the financial success or changing
strategies of First Western's customers or vendors, actions of government
regulators, the level of market interest rate, and the general economic
conditions.
73
Changes in Financial Condition: June 30, 2001 Compared to December 31,
2001. Total assets increased $5,695,739 or 7.93%, from December 31, 2000 to June
30, 2001. Cash and cash equivalents decreased $57,146 or 2.36% at June 30, 2001
as compared to December 31, 2000. Investment securities decreased $2,745,626 or
22.12%. The change in cash and cash equivalents and investment securities during
the first six months can be attributed to net investment maturities and excess
cash that were used to fund loan growth during the first six months of 2001.
Loans, the largest category of total assets, increased $8,728,648, or 17.01%.
The declining interest rate environment and First Western's presence in the
Weaverville market has contributed to increases in loan originations during the
first six months of 2001.
Total liabilities increased $5,760,839, or 9.87% from December 31, 2000
to June 30, 2001. Deposits, the largest category of total liabilities, increased
$3,786,061, or 6.65% at June 30, 2001 as compared to December 31, 2000. Demand,
NOW, money market, and savings accounts increased $2,249,626, or 10.28%. Time
deposits increased $1,536,435, or 4.38%, from December 31, 2000 to June 30,
2001. First Western's gross loan to deposit ratio was 100.67% and 91.83% as of
June 30, 2001 and December 31, 2000, respectively. Management believes that the
increase in deposits can be attributed to the competitive interest rates offered
by First Western and consumers transferring funds from the sluggish equity
markets. Other borrowings increased by $1,844,179 or 259.74% due to an increase
in securities sold under agreements to repurchase in the amount of $1,983,179
offset by a decrease of $139,000 in federal funds purchased.
Common stock outstanding decreased by 22,000 shares or 1.58%, at June
30, 2001 as compared to December 31, 2000. First Western repurchased 22,000
shares under the stock repurchase plan at an average price of $8.60 per share.
Earnings for the first six months were retained which resulted in a decrease of
$64,526, or 13.33% in the accumulated deficit as of June 30, 2001 as compared to
December 31, 2000. Accumulated other comprehensive income, net of deferred
income taxes, increased $59,524, or 61.40% at June 30, 2001 as compared to
December 31, 2000 primarily because the value of securities available-for-sale
rose when interest rates declined during the period.
Three-Month Periods Ended June 30, 2001 and June 30, 2000. Net interest
income increased $147,508 or 22.11% over the second quarter of 2000. Total
interest income increased $262,282 or 21.94% from $1,195,613 for the three
months ended June 30, 2000 to $1,457,895 for the three months ended June 30,
2001. This change reflects increases in the average balances of interest-earning
assets along with an increase in the yield on average interest-earning assets.
Average earning assets increased $9,061,263 and yields increased 45 basis points
from 7.98% to 8.43%. Interest and fees on loans increased $331,594 or 34.63%
from $957,509 to $1,289,103 as a result of a $13,829,339 or 31.26% increase in
average loans outstanding from $44,238,814 to $58,068,153. Interest on
securities increased $7,938 offset by a decrease of $77,250 in interest in fed
funds sold and interest on deposits with other banks. The decrease in interest
income on federal funds sold can be attributed to a decrease in federal funds
sold during the period as excess cash was used to fund loan growth during the
period. Interest expense increased $114,774 or 21.72% from $528,376 for the
three months ended June 30, 2000 to $643,150 for the three months ended June 30,
2001. This increase was the result of higher volumes of interest-bearing
liabilities combined with an increase in the average cost of funds. Average
interest-bearing liabilities increased $8,190,987 from $44,655,648 to
$52,846,635 while the cost of funds increased 12 basis points from 4.76% to
4.88%.
The provision for loan losses for the three-month period ended June 30,
2001 was $113,600 compared to $130,000 for the three-month period ended June 30,
2000. See the heading of Allowance and Provision for Loan Losses on page 10 for
a more detailed discussion.
Other income increased $73,149 or 48.95% from $149,446 for the three
months ended June 30, 2000 to $222,595 for the same period in 2001. The increase
was attributable to higher service charges and fees earned on deposit accounts,
other service charges and fees and other income. The increase in service charges
on deposit accounts can be attributed to a higher number of deposit accounts
compared to the same period in 2000. The increase in other service charges and
fees can be attributed primarily to increases in merchant discount income. The
increase in other income of $62,503 is primarily the result of gains on the sale
of securities of $60,059.
74
Other expenses increased $61,271 or 7.76% from $789,526 to $850,797 for
the three months ended June 30, 2001compared to the same period in the prior
year. The increase in other expenses can be attributed to increases in salaries
and wages and occupancy expense, offset by decreases in employee benefits and
other expenses. Salaries and wages expense increased primarily due to the
opening of the new branch office in Weaverville along with yearly payroll
increases. Occupancy expense increased due to the opening of a new corporate
headquarters and the opening of the Weaverville branch. Employee benefits
decreased for the period due to a one-time insurance premium assessment that was
paid in April 2000 for $28,471. Other expenses decreased $19,459 or 5.61%
primarily due to decreased general expenses, legal fees, advertising, telephone,
postage, and printing costs.
Income before income taxes was $72,943 for the three-month period ended
June 30, 2001 compared to a loss of $102,843 for the comparable period in 2000.
Income tax expense was $35,000 for the three months ended June 30, 2001 compared
to an income tax benefit of $391,439 during the same period in 2000. For the
period ended June 30, 2001, the effective tax rate was 47.98%. The primary
reason for the tax provision being in excess of the amount computed by applying
the statutory federal tax rate to income before income taxes was an adjustment
for non-deductible goodwill in the amount of $29,417 for the three month period
ended June 30, 2001. First Western reported a tax benefit during the second
quarter of 2000, which was the result of the reversal of a tax valuation
allowance. Net income for the quarter was $37,943.
Six-Month Periods Ended June 30, 2001 and June 30, 2000. Net interest
income increased $261,385 or 20.29% over the first six months of 2000. Total
interest income increased $582,182 or 25.52% from $2,281,154 for the six months
ended June 30, 2000 to $2,863,336 for the six months ended June 30, 2001. This
change reflects increases in the average balances of interest-earning assets
along with an increase in the yield on average interest-earning assets. Average
earning assets increased $9,650,397 and yields increased 63 basis points from
7.87% to 8.50%. Interest and fees on loans increased $672,780 or 36.89% from
$1,823,553 to $2,496,333 as a result of a $13,228,924 or 31.07% increase in
average loans outstanding from $42,579,639 to $55,808,563. Interest on
securities increased $64,022 offset by a decrease of $154,620 in interest in fed
funds sold and interest on deposits with other banks. The decrease in interest
income on federal funds sold can be attributed to a decrease in federal funds
sold during the period as excess cash was used to fund loan growth during the
period. Interest expense increased $320,797 or 32.32% from $992,620 for the six
months ended June 30, 2000 to $1,313,417 for the six months ended June 30, 2001.
This increase was the result of higher volumes of interest-bearing liabilities
combined with an increase in the average cost of funds. Average interest-bearing
liabilities increased $8,644,818 from $43,208,694 to $51,853,512 while the cost
of funds increased 49 basis points from 4.62% to 5.11%.
The provision for loan losses for the six-month period ended June 30,
2001 was $113,600 compared to $172,500 for the six-month period ended June 30,
2000.
Other income increased $96,129 or 35.50% from $270,780 for the six
months ended June 30, 2000 to $366,909 for the same period in 2001. The increase
was attributable to higher service charges and fees earned on deposit accounts,
other service charges and fees and other income. The increase in service charges
on deposit accounts can be attributed to a higher number of deposit accounts
compared to the same period in 2000. The increase in other service charges and
fees can be attributed primarily to increases in mortgage loan fees, merchant
discount income, ATM fees, and check cashing fees. The increase in other income
of $49,213 is primarily the result of gains on the sale of securities of $60,059
offset by a decrease of $9,496 in miscellaneous income.
Other expenses increased $234,400 or 16.28% from $1,440,202 to
$1,674,602 during the six-month period ended June 30, 2001 as compared to the
six months ended June 30, 2000. The increase in other expenses can be attributed
to increases in salaries and wages, employee benefits, occupancy expense, and
other expenses. Salaries and wages expense and employee benefits increased
primarily due to the opening of the new branch office in Weaverville, increased
health insurance premiums, along with other additions to staff. Occupancy
expense increased due to the opening of a new corporate headquarters, the
relocation of the Downtown Spruce Pine branch, and the opening of the
Weaverville branch. Other expenses increased $12,463 or 1.98% primarily due to
increases in consulting fees, deposit write-up amortization, maintenance
agreements, and merchant services expense offset by decreases in general
expenses, advertising, legal fees, and accounting fees.
75
Income before income taxes was $128,626 for the six-month period ended
June 30, 2001 compared to a loss of $53,388 for the comparable period in 2000.
Income tax expense was $64,100 for the six months ended June 30, 2001 compared
to an income tax benefit of $391,439 during the same period in 2000. For the
period ended June 30, 2001, the effective tax rate was 49.83%. The primary
reason for the tax provision being in excess of the amount computed by applying
the statutory federal tax rate to income before income taxes was an adjustment
for non-deductible goodwill in the amount of $58,834. Net income for the quarter
was $64,526.
Liquidity and Market Risks. "Liquidity" refers to the ability of First
Western to generate adequate amounts of cash to meet its cash needs. First
Western actively manages the levels, types, and maturities of earning assets in
relation to the sources available. The objectives of First Western's liquidity
management policy include providing adequate funds to meet the needs of
depositors and borrowers at all times, to meet the basic needs for ongoing
operations of First Western, and to meet regulatory requirements. First Western
satisfies its liquidity requirements primarily through two categories of funds.
The first is core deposits, which include demand deposits, savings accounts and
certificates of deposit that are less than $100,000. First Western considers
those deposits to be a stable portion of First Western's liquidity mix. They are
the result of generally stable, ongoing consumer and commercial banking
relationships. At June 30, 2001, core deposits totaled $ 47,620,944 or 74.26% of
First Western's total liabilities.
The other principal methods of funding utilized by First Western
consist of large-denomination certificates of deposit ($100,000 or more),
federal funds purchased, and repurchase agreements. It is First Western's policy
to emphasize core deposit growth.
First Western has not experienced a material change in the mix of its
rate-sensitive assets and liabilities or in interest rates in the market that it
believes would result in a material change in its interest rate sensitivity
since reported at December 31, 2000.
Allowance and Provisions for Loan Losses. The allowance for loan losses
represents management's estimate of an amount adequate to provide for potential
losses inherent in the loan portfolio. Management determines the allowance for
loan losses based on a number of factors, including a review and evaluation of
First Western's loan portfolio, and current and projected economic conditions
locally and nationally. The allowance is monitored and analyzed in conjunction
with First Western's loan analysis and grading program, and provisions for loan
losses are made to maintain an adequate allowance for loan loss.
The following table presents an analysis of changes in the allowance
for loan losses for the six months ended June 30, 2001.
Six Months Ended
June 30,
--------------------------------
2001 2000
Allowance for loan losses, beginning of the period $714,215 $562,083
Charge-offs (31,723) (30,295)
Recoveries 740 -
Provision for loan losses 113,600 172,500
-------- --------
Allowance for loan losses, end of the period $796,832 $704,288
======== ========
76
There was an $113,600 provision for loan losses for the six-month
period ended June 30, 2001 compared to a provision of $172,500 for the six-month
period ended June 30, 2000. First Western determined that to support loan growth
and the deterioration of the overall economic climate that affects credit
quality, that an increase in the allowance for loan losses was required. As
noted in the table above, net charge-offs for the six months ended June 30, 2001
were $30,983, or .06% of average loans outstanding compared to $30,295, or .07%
of average outstanding loans in the same period 2000. The provision for loan
losses is the amount necessary to adjust the allowance for loan losses to the
amount that management has determined to be adequate to provide for potential
losses inherent in the loan portfolio
The allowance for loan losses is created by direct charges to
operation. Losses on loans are charged against the allowance for loan losses in
the accounting period in which they are determined by management to be
uncollectible. Recoveries during the period are credited to the allowance.
As of June 30, 2001, First Western had nonperforming assets of $585,241
compared to $402,432 at June 30, 2000. The allowance for loan losses was
$796,832 or 1.31% of total loans at June 30, 2001 compared to $704,288 or 1.51%
of total loans at June 30, 2000. The allowance coverage of nonperforming loans
was 136.15% and 175.01% as of June 30, 2001 and 2000, respectively.
Management realizes that general economic trends greatly affect loan
losses, and no assurances can be made that future charges to the loan loss
allowance may not be significant in relation to the amount provided during a
particular period, or that future evaluations of the loan portfolio based on
conditions then prevailing will not require sizable additions to the allowance,
thus necessitating similarly sizable charges to income. Management does consider
however, allowance for loan losses to be adequate for the reporting periods in
their best judgment, evaluation, and analysis of the loan portfolio.
Loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed do not: (i)
represent or result from trends or uncertainties which management reasonably
expect will materially impact future operation results, liquidity, or capital
resources or, (ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
Accounting and Regulatory Matters. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 was amended by SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Effective January 1, 2001,
First Western adopted the Standard. The adoption of the Standard had no effect
on First Western's financial statements and current disclosures.
In September 2000, FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125 without reconsideration. The statement became
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001. The adoption of the Standard had no
effect on First Western's financial statements and current disclosures.
77
On June 29, 2001, SFAS No. 141, Business Combinations, was approved by
FASB. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The statement became effective on July 1, 2001.
The adoption of the standard had no effect on First Western's financial
statements and current disclosures.
On June 29, 2001, SFAS No. 142, Goodwill and Other Intangible Assets,
was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill
recorded in business combinations, which occurred prior to June 30, 2001 will
cease effective January 1, 2002. The statement further requires that the fair
value of goodwill and other intangible assets with indefinite lives be tested
for impairment upon adoption of this statement, annually and upon the occurrence
of certain events. First Western's management estimates that the adoption of
SFAS No. 142 will result in the elimination of annual amortization expense
related to goodwill in the amount of $117,468, however, the impact of related
impairment, if any, on First Western's financial position or results of
operations has not been determined.
From time to time, the FASB issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements on the financial statements of First
Western and monitors the status of changes to and proposed effective dates of
exposure drafts.
Factors That May Affect Future Results. The foregoing discussion
contains certain forward-looking statements about First Western's financial
condition and results of operations, which are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
judgment only as to the date hereof. First Western undertakes no obligation to
publicly revise these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
78
Beneficial Ownership of Securities
The following table describes the beneficial ownership of First Western
Stock as of September 30, 2001, by First Western's current directors and Chief
Executive Officer, individually, and by all its current directors and executive
officers as a group. On October ____, 2001, Van F. Phillips (who is included in
the table) was the only person known to management of First Western to
beneficially own more than 5% of the outstanding shares of First Western Stock.
Name and address Amount and nature of Percent of
of beneficial owner beneficial ownership (1) class (2)
------------------------------------- ------------------------ -----------
Robert L. Bailey..................... 22,235 1.61%
William A. Banks..................... 16,405 1.19%
Walter G. Church..................... 16,810 1.22%
Ronnie E. Deyton..................... 36,680 2.67%
Jerry Duncan......................... 17,435 1.26%
F. Warren Hughes..................... 14,315 1.04%
David R. McIntosh.................... 15,936 1.16%
Ray V. Miller........................ 23,880 1.73%
Ronnie C. Odom....................... 21,780 1.58%
Van F. Phillips...................... 86,923 6.32%
Jack Dean Pitman..................... 30,961 2.25%
All current directors and executive
officers as a group (13 persons)... 337,660 24.58%
----------------------
(1) Except as otherwise noted, the individuals named and included in the group
exercise sole voting and investment power with respect to all listed
shares. Individuals named and included in the group exercise shared voting
and investment power with respect to certain of the listed shares as
follows: Mr. Bailey -10,000 shares; Mr. Church - 3,000 shares; Mr. Duncan
- 655 shares; Mr. McIntosh - 456 shares; Mr. Miller - 1,600 shares; Mr.
Odom - 9,000 shares; Mr. Phillips - 65,407 shares; Mr. Pitman - 13,800
shares; and all individuals included in the group - 109,399 shares. The
listed shares include the following numbers of shares that could be
acquired by individuals named and included in the group pursuant to
currently exercisable stock options and with respect to which shares they
may be deemed to have sole investment power only: Mr. Bailey - 11,780
shares; Mr. Banks - 11,780 shares; Mr. Church - 6,500 shares; Mr. Deyton -
26,480 shares; Mr. Duncan - 11,780 shares; Mr. Hughes - 11,780 shares; Mr.
McIntosh -11,780 shares; Mr. Miller - 11,780 shares; Mr. Odom - 11,780
shares; Mr. Phillips - 11,780 shares; Mr. Pitman - 11,780 shares; and all
individuals included in the group - 167,200 shares.
(2) Percentages are calculated based on 1,375,682 total outstanding shares
plus, in the case of each named individual and the group, the number of
additional shares (if any) that could be purchased by that individual or by
persons included in the group pursuant to currently exercisable stock
options.
Board of Directors
First Western's Bylaws provide that its Board of Directors will consist of
not less than ten nor more than 15 members divided into three classes, with each
class elected to staggered three-year terms. The Board of Directors is
authorized to set and change the actual number of First Western's directors from
time to time within those limits. The eleven current members of the Board of
Directors are listed in the following table.
79
First
elected /
Position(s) with current term Principal occupation and
Name and age First Western expires (1) business experience
-------------------- -------------------- -------------- -------------------------------------------------
Robert L. Bailey Director 1997 / 2004 President and Chief Executive Officer, New Buck
(56) Corporation (wood stove manufacturers)
William A. Banks Director 1997 / 2004 President, BanCo Lumber, Inc. (logging/lumber
(77) manufacturing)
Walter G. Church Director 1999 / 2004 Member of the North Carolina House of
(74) Representatives
Ronnie E. Deyton President, Chief 1997 / 2004 Executive officer of First Western Bank
(54) Executive Officer
and Director
Jerry Duncan (2) Director 1997 / 2003 President, Maryland Home Center, Inc. (retail sales
(57) of manufactured homes), Spruce Pine, NC; Vice
President, Vision Mortgage (consultant)
F. Warren Hughes Director 1997 / 2003 Clerk of Superior Court, Yancey County
(45)
David R. McIntosh Director 1997 / 2003 Sole proprietor and manager, David's Limited
(55) (retail clothing); Co-owner, Heritage Lumber Co.
(retail building supplies)
Ray V. Miller Director 1997 / 2002 President, "C" Cablevision, Inc. and Cablevision
(68) Industries, Inc., Myrtle Beach, SC
Ronnie C. Odom Director 1997 / 2002 President, Industrial Installations, Inc. (general
(51) mechanical contractors)
Van F. Phillips Director 1997 / 2002 Vice President, Great Meadows, Inc. (real estate
(49) development)
Jack Dean Pitman (2) Director 1997 / 2002 President, Grassy Creek Hardware & Building
(56) Supply Co.; President, Yancey Mobile Home Sales
-------------------
(1) The term "First elected" refers to the year in which each individual first
took office as a director. With the exception of Mr. Church, each Director
has served since First Western's incorporation during 1997.
(2) Jerry Duncan is the uncle of Jack Dean Pitman.
Directors' Compensation
Director Fees. For their services as directors, First Western's directors
are paid $400 per regular Board of Directors meeting regardless of whether or
not they attended, unless they missed more than two meetings, and $65 for all
Board committee meetings actually attended.
Director Stock Options. First Western has granted to each of its current
directors options to purchase shares of First Western Stock pursuant to its 1998
Nonstatutory Stock Option Plan and 1999 Nonstatutory Stock Option Plan which
were approved by First Western's shareholders during 1998 and 1999,
respectively. Under the 1998 Plan, options to purchase 6,600 shares were
granted to each director during 1998 at a price of $11.00 per share. Under the
1999 Plan, options to purchase 6,500 shares were granted to each director during
1999 at a price of $9.50 per share. Each option expires ten years following the
date of grant (or earlier upon certain events described in the plan). (See "The
Merger -- Interests of Certain Persons with Respect to the Merger" on page
_____.)
80
Executive Officers
Ronnie E. Deyton, age 54, serves as First Western's President and Chief
Executive Officer. He was one of the three original primary organizers of First
Western beginning in January 1997 and later was employed by First Western's
Board of Directors in his current position at the time First Western commenced
operations on December 15, 1997. He previously served as Vice President and
Senior Market Officer of Centura Bank from 1996 to 1997, and prior to that, he
was employed as Vice President and Area Executive for Mitchell and Yancey
Counties for First Commercial Bank.
Charles L. Ownbey, age 68, serves as First Western's Senior Vice President
of Loan Administration. He was one of the three original primary organizers of
First Western beginning in January 1997 and later was employed by First
Western's Board of Directors in his current position at the time First Western
commenced operations on December 15, 1997. He previously served as Regional
Commercial Credit Support Manager for Centura Bank in Asheville, North Carolina.
Prior to that, he served as Senior Vice President of Loan Administration at
First Commercial Bank, also in Asheville.
Martin J. Shuford, age 61, serves as First Western's Senior Vice President
for Business Development. He was one of the three original primary organizers
of First Western beginning in January 1997 and later was employed by First
Western's Board of Directors in his current position at the time First Western
commenced operations on December 15, 1997. Until his retirement in 1995, he had
previously served as Area Manager of Burnsville, Bakersville, and Spruce Pine
for First Commercial Bank, Asheville, North Carolina.
Executive Compensation
Cash Compensation. The following table shows cash and certain other
compensation paid to or deferred by First Western's Chief Executive Officer for
the years indicated.
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------
Annual compensation Long term compensation
----------------------------------- ----------------------
Name and Other annual Securities All other
principal position(s) Year Salary (1) Bonus compensation (2) underlying options compensation
------------------------ ---- ---------- ----- ---------------- ------------------ -------------
Ronnie E. Deyton 2000 $92,653 $-0- $-0- -0- $5,970 (3)
President and Chief
Executive Officer
1999 83,450 -0- -0- 14,000 -0-
1998 71,500 -0- -0- 22,600 -0-
-------------------
(1) Includes amounts of salary deferred by Mr. Deyton under First Western's
Section 401(k) plan.
(2) In addition to compensation paid in cash, First Western's executive
officers receive certain personal benefits. The value of non-cash benefits
received each year by Mr. Deyton did not exceed 10% of his cash
compensation for that year.
(3) Includes the amount of directors' fees paid to Mr. Deyton for 2000.
Employee Stock Options. First Western has granted to certain of its
officers and employees options to purchase shares of First Western Stock
pursuant to its 1998 Incentive Stock Option Plan and 1999 Incentive Stock Option
Plan which were approved by First Western's shareholders during 1998 and 1999,
respectively.
81
The following table contains information regarding outstanding options held
by First Western's Chief Executive Officer on December 31, 2000, under the
Plans.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
--------------------------------------------------------------------------------------------------------------------
Number of
securities Value of
underlying unexercised
unexercised in-the-money
options at options
December 31, at December 31,
2000 2000 (2)
---------------- ----------------
Share
acquired Value
Name on exercise realized Exercisable Unexercisable Exercisable Unexercisable
------------------ ------------- ---------- ----------- ------------- ----------- -------------
Ronnie E. Deyton (1) - 19,160 17,440 $-0- $-0-
-------------------
(1) No options were exercised during 2000.
(2) On December 31, 2000, the options had no value as the fair market value of
the shares underlying unexercised options held on that date (based on the
then current last known sales price per share of $8.50 for First Western
Stock) was less than the aggregate exercise price of the options (at $11.00
per share for an aggregate of 22,600 shares and $9.50 per share for an
aggregate of 14,000 shares). On October _____, 2001, the numbers of shares
as to which the options were exercisable and unexercisable were 26,480 and
10,120, respectively, and the values of the exercisable and unexercisable
options were $_______ and $________, respectively, based on the then
current last known sales price per share of First Western Stock.
Employment Agreement; Change-in-Control Arrangement. Ronnie E. Deyton is
employed as President and Chief Executive Officer of First Western pursuant to
an employment agreement entered into on June 1, 1998, which provides for an
initial term of three years. Absent notice from either party, the term is
extended by one additional year on each anniversary date of the agreement. The
agreement provides for an initial annual base salary of $71,500, subject to at
least annual review, and Mr. Deyton is eligible for discretionary bonuses as
determined by the Board of Directors. Mr. Deyton's annual base salary under the
agreement for 2001 is $100,000. The agreement also provides for participation
in employee benefit programs and compensation plans offered by First Western for
all employees and fringe benefits normally associated with Mr. Deyton's
position. In addition, Mr. Deyton is entitled to term insurance providing a
death benefit of up to $250,000. Mr. Deyton's employment may be terminated by
First Western for "cause" (as defined in the agreement).
Upon the occurrence of a "termination event" within twenty-four months
following a "change in control" of First Western (as those terms are defined in
the agreement), Mr. Deyton may terminate the employment agreement and become
entitled to receive, among other things, payment in cash of an amount equal to
299% of his then current "base amount" as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended.
The Merger will result in a "change in control" of First Western and a
"termination event" as those terms are defined in the agreement. (See "The
Merger -- Interests of Certain Persons with Respect to the Merger" on page
_____.)
Transactions with Related Parties
First Western has had, and expects to have in the future, banking
transactions in the ordinary course of its business with certain of its current
directors, executive officers and principal shareholders, and their associates.
All loans included in those transactions were made on substantially the same
terms, including interest rates, repayment terms and collateral, as those
prevailing at the time the loans were made for comparable transactions with
other persons, and those loans do not involve more than the normal risk of
collectibility or present other unfavorable features.
82
The highest aggregate outstanding balance of loans to First Western's
current directors, executive officers, and their associates, as a group, during
2000, was $5,599,532 which represented approximately 40.67% of First Western's
then current equity capital accounts. The balance of loans to those persons on
September 30 2001, was $3,785,770 which represented approximately 28.28% of
First Western's equity capital accounts. Of those loans, two of First Western's
current directors and their respective associates each had aggregate outstanding
loans during 2000 which exceeded 10% of First Western's equity capital accounts.
Van F. Phillips' highest aggregate outstanding loan balance during 2000, was
$2,281,516 which represented approximately 16.98% of First Western's then
current equity capital accounts. The balance of his loans on September 30, 2001,
was $1,927,516 which represented approximately 14.40% of First Western's equity
capital accounts. Robert L. Bailey's highest aggregate outstanding loan balance
during 2000, was $2,295,859 which represented approximately 16.68% of First
Western's then current equity capital accounts. The balance of his loans on
September 30, 2001, was $866,966 which represented approximately 6.48% of First
Western's equity capital accounts.
SUPERVISION AND REGULATION
The business and operations of MFC, MountainBank and First Western are
subject to extensive federal and state governmental regulation and supervision.
The following is a summary of some of the basic statutes and regulations that
apply to MFC, MountainBank and First Western, but it is not a complete
discussion of all the laws that affect their businesses.
Regulation of MFC
MFC is a bank holding company registered with the Federal Reserve Board
(the"FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA").
It is subject to supervision and examination by, and the regulations and
reporting requirements of, the FRB. Under the BHCA, MFC's activities are
limited to banking, managing or controlling banks, or engaging in any other
activities which the FRB determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits MFC from acquiring direct or indirect control of more
than 5.0% of the outstanding voting stock, or substantially all of the assets,
of any financial institution, or merging or consolidating with another bank
holding company or savings bank holding company, without prior approval of the
FRB. Additionally, the BHCA prohibits MFC from engaging in, or acquiring
ownership or control of more than 5.0% of the outstanding voting stock of any
company engaged in, a nonbanking activity unless that activity is determined by
the FRB to be closely related and a proper incident to banking. In approving an
application by MFC to engage in a nonbanking activity, the FRB must consider
whether that activity can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
There are a number of obligations and restrictions imposed by law on a bank
holding company and its insured depository institution subsidiaries that are
designed to minimize potential loss to depositors and the FDIC insurance funds.
For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the terms
of any capital restoration plan filed with its federal banking agency. Also, a
bank holding company is required to serve as a source of financial strength to
its depository institution subsidiaries and to commit resources to support those
institutions in circumstances where it otherwise might not do so, absent such
policy. Under the BHCA, the FRB may require a bank holding company to terminate
any activity or to relinquish control of a nonbank subsidiary if the FRB
determines that the activity or control constitutes a serious risk to the
financial soundness and stability of a depository institution subsidiary of the
bank holding company.
83
Regulation of MountainBank and First Western
MountainBank and First Western each is an insured, North Carolina-chartered
bank that is not a member of the Federal Reserve System. Their deposits are
insured by the FDIC's Bank Insurance Fund, and they are subject to supervision
and examination by, and the regulations and reporting requirements of, the FDIC
and the Commissioner, which are their primary federal and state banking
regulators.
As insured banks, MountainBank and First Western each is prohibited from
engaging as a principal in an activity that is not permitted for national banks
unless (i) the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund and (ii) the bank is, and continues to
be, in compliance with all applicable capital standards. Insured banks also are
prohibited from directly acquiring or retaining any equity investment of a type
or in an amount not permitted for national banks.
The FDIC and the Commissioner have broad powers to enforce laws and
regulations that apply to MountainBank and First Western and to require
corrective action of conditions that affect their safety and soundness. Among
others, these powers include issuing cease and desist orders, imposing civil
penalties, and removing officers and directors.
Though neither is a member of the Federal Reserve System, the business of
both MountainBank and First Western is influenced by prevailing economic
conditions and governmental policies, both foreign and domestic, and by the
monetary and fiscal policies of the FRB. The actions and policy directives of
the FRB determine to a significant degree the cost and the availability of funds
obtained from money market sources for lending and investing and also influence,
directly and indirectly, the rates of interest paid by commercial banks on their
time and savings deposits. The nature and impact on MountainBank and First
Western of future changes in economic conditions and monetary and fiscal
policies are not predictable.
MountainBank, as the surviving bank in the Merger, will continue to be an
insured, North Carolina-chartered non-member bank, subject to the same
supervision, examination and reporting requirements as currently apply to both
it and First Western.
Gramm-Leach-Bliley Act
The federal Gramm-Leach-Bliley Act (the "GLB Act") was adopted by Congress
during 1999 and dramatically changed various federal laws governing the banking,
securities and insurance industries. The GLB Act has expanded opportunities for
banks and bank holding companies to provide services and engage in other
revenue-generating activities that previously were prohibited to them.
With respect to bank holding companies, the GLB Act in general (i) expands
opportunities to affiliate with securities firms and insurance companies; (ii)
overrides certain state laws that would prohibit certain banking and insurance
affiliations; (iii) expands the activities in which banks and bank holding
companies may participate; (iv) requires that banks and bank holding companies
engage in some activities only through affiliates owned or managed in accordance
with certain requirements; (v) reorganizes responsibility among various federal
regulators for oversight of certain securities activities conducted by banks and
bank holding companies; and (vi) requires banks to adopt and implement policies
and procedures for the protection of the financial privacy of their customers,
including procedures that allow customers to elect that certain financial
information not be disclosed to certain persons.
The GLB Act has expanded opportunities for MFC, MountainBank and First
Western to provide other services and obtain other revenues in the future but,
at present, it has not had a significant effect on their operations as they are
presently conducted. However, this expanded authority also may present
84
each of them with new challenges as their larger competitors are able to expand
their services and products into areas that are not feasible for smaller,
community oriented financial institutions. The economic effects of the GLB Act
on the banking industry, and on competitive conditions in the financial services
industry generally, may be profound.
Payment of Dividends
Under federal law, MountainBank and First Western, as insured banks, each
is prohibited from making any capital distributions, including paying a cash
dividend, if it is, or after making the distribution it would become,
"undercapitalized" as that term is defined in the Federal Deposit Insurance Act
(the "FDIA"). Additionally, if in the opinion of the FDIC an insured bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), the FDIC may require, after notice and hearing, that
the bank cease and desist from that practice. The federal banking agencies have
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsafe and unsound banking practice. (See
"-Prompt Corrective Action" below.) The federal agencies have issued policy
statements which provide that insured banks generally should only pay dividends
out of current operating earnings, and under the FDIA no dividend may be paid by
an FDIC-insured bank while it is in default on any assessment due the FDIC. The
payment of dividends by MountainBank and First Western also may be affected or
limited by other factors, such as requirements that their regulators have
authority to impose on them to maintain their capital above regulatory
guidelines.
Under North Carolina banking law, a bank may pay dividends only out of its
undivided profits. If a bank's surplus is less than 50% of its paid-in capital
stock, it may not declare a cash dividend until it has transferred from
undivided profits to surplus 25% of its undivided profits or any lesser
percentage that may be required to restore its surplus to an amount equal to 50%
of its paid-in capital stock. However, no cash dividends may be paid at any time
by a bank when it is insolvent or when payment of a dividend would render it
insolvent or be contrary to its Articles of Incorporation. Additionally, there
are statutory provisions regarding the calculation of undivided profits from
which dividends may be paid.
MFC is authorized to pay dividends such as are declared by its Board of
Directors, provided that no such distribution results in its insolvency on a
going concern or balance sheet basis. However, since MFC's only source of funds
with which it could pay dividends to its shareholders would be dividends it
receives from MountainBank, MFC's ability to pay dividends effectively is
subject to the same limitations that apply to MountainBank.
Capital Adequacy
MFC, MountainBank and First Western each is required to comply with the
capital adequacy standards established by the FRB in the case of MFC, and by the
FDIC in the case of MountainBank and First Western. The FRB and the FDIC have
promulgated risk-based capital and leverage capital guidelines for determining
the adequacy of the capital of a bank holding company or a bank, and all
applicable capital standards must be satisfied for a bank holding company or a
bank to be considered in compliance with these capital requirements.
Under the risk-based capital measure, the minimum ratio ("Total Capital
Ratio") of an entity's total capital ("Total Capital") to its risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) is 8.0%. At least half of Total Capital must be composed of common
equity, undivided profits, minority interests in the equity accounts of
consolidated subsidiaries, qualifying noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder ("Tier 2
Capital") may consist of certain subordinated debt, certain hybrid capital
instruments and other qualifying preferred stock, and a limited amount of loan
loss reserves. On June 30, 2001, MountainBank's and First Western's Total
Capital Ratios, at 8.13% and 21.99%, respectively, and their ratios of
85
Tier 1 Capital to risk-weighted assets ("Tier 1 Capital Ratio"), at 6.88% and
20.70%, respectively, were above the minimum required levels under the FDIC's
standards. On the same date, MFC's Total Capital Ratio was 6.78% which was below
the minimum required level under the FRB's standards, although its Tier 1
Capital Ratio, at 5.53%, was above the FRB's minimum level. A bank holding
company that does not satisfy minimum capital requirements may be required to
adopt and implement a plan acceptable to the FRB to achieve an adequate level
of capital.
Under the leverage capital measure, the minimum ratio (the "Leverage
Capital Ratio") of Tier 1 Capital to average assets, less goodwill and certain
other intangible assets, is 3.0% for entities that meet certain specified
criteria, including having the highest regulatory rating. All others generally
are required to maintain an additional cushion of 100 to 200 basis points above
the stated minimum. The FDIC's guidelines also provide that banks experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum levels without significant
reliance on intangible assets, and the FDIC has indicated that it will consider
a bank's "Tangible Leverage Ratio" (deducting all intangibles) and other indicia
of capital strength in evaluating proposals for expansion or new activities. On
June 30, 2001, MFC's, MountainBank's and First Western's Leverage Capital Ratios
were 5.59%, 6.95% and 16.22%, respectively, which exceeded the required minimum
levels.
Failure to meet capital guidelines could subject a bank holding company or
bank to a variety of enforcement remedies, including the issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
the taking of brokered deposits, and certain other restrictions on its business.
As described below, substantial additional restrictions can be imposed on FDIC-
insured banks that fail to meet applicable capital requirements. (See "--
Prompt Corrective Action" below.)
The FRB and the FDIC also consider interest rate risk (when the interest
rate sensitivity of an institution's assets does not match the sensitivity of
its liabilities or its off-balance-sheet position) in the evaluation of an
entity's capital adequacy. The bank regulatory agencies' methodology for
evaluating interest rate risk requires banks with excessive interest rate risk
exposure to hold additional amounts of capital against their exposure to losses
resulting from that risk.
Prompt Corrective Action
Current federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under this system, the
federal banking regulators have established five capital categories ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized"). The regulators are
required to take certain mandatory supervisory actions, and they are authorized
to take other discretionary actions, with respect to institutions in the three
undercapitalized categories. The severity of any actions taken will depend upon
the capital category in which an institution is placed. Generally, subject to a
narrow exception, current federal law requires the banking regulators to appoint
a receiver or conservator for an institution that is critically
undercapitalized.
Under the final agency rules implementing the prompt corrective action
provisions, an institution is deemed to be "well capitalized" if it (i) has a
Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or
greater, and a Leverage Ratio of 5.0% or greater, and (ii) is not subject to any
written agreement, order, capital directive, or prompt corrective action
directive issued by the appropriate federal banking agency. An institution is
considered to be "adequately capitalized" if it has a Total Capital Ratio of
8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio
of 4.0% or greater. A depository institution that has a Total Capital Ratio of
less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of
less than 4.0%, is considered to be "undercapitalized." A depository
institution that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital
Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered to
be "significantly undercapitalized," and an institution that has a tangible
equity capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." For purposes of the regulation, the term
"tangible equity" includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards, plus the amount of outstanding
cumulative perpetual preferred stock (including related surplus), minus all
intangible assets with certain exceptions. A depository institution may be
deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating.
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An institution that is categorized as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" is required to submit an
acceptable capital restoration plan to its federal banking agency. An
"undercapitalized" institution also is generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
"undercapitalized" depository institution to take any of the actions it is
required to or may take with respect to a "significantly undercapitalized"
institution as described above if it determines that those actions are necessary
to carry out the purpose of the law. On June 30, 2001, First Western had the
requisite capital levels to qualify as "well capitalized," while MountainBank
was classified as "adequately capitalized" on that date.
Reserve Requirements
Pursuant to regulations of the FRB, all FDIC-insured banks must maintain
average daily reserves against their transaction accounts. No reserves are
required to be maintained on the first $4.7 million of transaction accounts, but
reserves equal to 3.0% must be maintained on the aggregate balances of those
accounts between $4.7 million and $47.8 million, and reserves equal to 10.0%
must be maintained on aggregate balances in excess of $47.8 million. Those
percentages are subject to adjustment by the FRB. Because required reserves must
be maintained in the form of vault cash or in a non-interest-bearing account at
a Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the bank's interest-earning assets.
FDIC Insurance Assessments
The FDIC currently uses a risk-based assessment system that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities for purposes of calculating deposit insurance assessments
to be paid by insured banks. The risk-based assessment system categorizes banks
as "well capitalized," "adequately capitalized" or "undercapitalized." These
three categories are substantially similar to the prompt corrective action
categories described above, with the "undercapitalized" category including banks
that are "undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" for prompt corrective action purposes. Banks also are
assigned by the FDIC to one of three supervisory subgroups within each capital
group, with the particular supervisory subgroup to which a bank is assigned
being based on a supervisory evaluation provided to the FDIC by the bank's
primary federal banking regulator and information which the FDIC determines to
be relevant to the bank's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
bank's state supervisor). A different insurance assessment rate (ranging from
zero to 31 basis points) applies to each of the nine assessment risk
classifications (i.e., combinations of capital groups and supervisory
subgroups). A bank's assessment rate is determined based on the capital
category and supervisory subgroup to which it is assigned.
A bank's deposit insurance may be terminated by the FDIC upon a finding
that the bank has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by regulations
of the federal bank regulatory agencies, an insured bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for banks, nor does it limit a bank's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the federal bank
regulatory agencies, in connection with their examination of insured banks, to
assess the
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banks' records of meeting the credit needs of their communities, using the
ratings of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance," and to take that record into account in its evaluation of
certain applications by those banks. All insured banks are required to make
public disclosure of their CRA performance ratings. MountainBank and First
Western each received a "satisfactory" rating in its most recent CRA
examination.
CAPITAL STOCK OF MFC AND FIRST WESTERN
Capital Stock of MFC
Authorized Capital. MFC's authorized capital stock currently consists of
10,000,000 shares of $4.00 par value common stock, of which 1,873,461 shares
were issued and outstanding on September 30, 2001.
MFC's Board of Directors has approved a proposed amendment to MFC's
Articles of Incorporation which, if approved by MFC's shareholders, would
authorize MFC to issue up to 2,000,000 shares of no par value preferred stock.
As proposed to be amended, the Articles of Incorporation would authorize MFC's
Board of Directors to issue shares of the new preferred stock from time to time,
to create separate series of preferred stock within that class, and to determine
the numbers of shares, designations, terms, relative rights, preferences and
limitations of the preferred stock, or of shares within each series of preferred
stock, at the time of issuance, all by its resolution and without any further
shareholder approval. MFC has called a special meeting of its shareholders to
be held on ___________, 2001, for the shareholders to vote on a proposal to
approve the amendment.
Any shares of preferred stock issued by MFC likely would have certain
preferences over, or special terms that differed from, the outstanding shares of
MFC Stock. Among other things, those preferences and special terms might
include:
. the right to receive dividends (which may be cumulative or noncumulative)
at a stated rate before any dividend could be paid on MFC Stock;
. the right to receive a stated distribution upon any liquidation of MFC
before any distribution could be made to holders of MFC Stock;
. if they are voting shares, special voting rights, including rights to vote
as a separate group or class in matters submitted for a vote of MFC's
shareholders;
. terms providing for the conversion of shares of preferred stock into shares
of MFC Stock, either automatically or at the option of the holders of the
preferred stock, at specified rates; and
. terms providing for the redemption of shares of the preferred stock, either
at the option of MFC or the holders of those shares or both, or upon the
happening of a specified event, and, if they are redeemable, the redemption
prices and the conditions and times upon which redemption may take place.
The issuance of any shares of preferred stock in the future would dilute
the relative percentage equity interests of the current holders of MFC Stock.
MFC's current shareholders do not have preemptive rights to acquire any
additional shares of capital stock issued by MFC, and they would have no right
to purchase a proportionate share, or any portion of, of any shares of preferred
stock issued by MFC.
Voting Rights. Holders of MFC Stock are entitled to one vote per share
held of record on all matters submitted to a vote of shareholders.
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The North Carolina Control Share Acquisition Act, in general, provides that
shares of voting stock of a corporation (to which that Act applies) acquired in
a "control share acquisition" ("Control Shares") will have no voting rights
unless those rights are granted by resolution adopted by the holders of at least
a majority of the outstanding shares of the corporation entitled to vote in the
election of directors, excluding shares held by the person who has acquired or
proposes to acquire the Control Shares and excluding shares held by any officer
or director who is also an employee of the corporation. "Control Shares" are
defined as shares of a corporation acquired by any person which, when added to
the shares already owned by that person, would entitle the person (except for
the application of the Act) to voting power in the election of directors equal
to or greater than (i) one-fifth of all voting power, (ii) one-third of all
voting power, or (iii) a majority of all voting power. "Control share
acquisition" means the acquisition by any person of beneficial ownership of
Control Shares with certain exceptions, including an acquisition pursuant to
certain agreements of merger or consolidation to which the corporation is a
party, and purchases of shares directly from the corporation.
Charter Amendments. Subject to certain conditions, an amendment to MFC's
charter, including an amendment to increase or change MFC's authorized capital
stock, may be effected if the amendment is recommended to MFC's shareholders by
the Board of Directors and if the votes cast by shareholders in favor of the
amendment exceed the votes cast opposing the amendment.
Merger, Share Exchange, Sale of Assets and Dissolution. In general, North
Carolina law requires that any merger, share exchange, voluntary liquidation or
transfer of substantially all the assets (other than in the ordinary course of
business) of a business corporation be recommended to its shareholders by its
board of directors and be approved by the affirmative vote of the holders of at
least a majority of the outstanding shares of its voting stock.
However, under the North Carolina Shareholder Protection Act, the
affirmative vote of the holders of 95% of MFC's outstanding voting shares
(voting as a single class, but excluding shares owned by an "interested
shareholder") is required to approve certain business combinations between MFC
and an entity which owns more than 10% of MFC's voting shares.
Dividends. Holders of MFC Stock are entitled to dividends if and when
declared by MFC's Board of Directors from funds legally available, whether in
cash or in stock. (See "-- Differences in Capital Stock" below.)
Liquidation. Holders of MFC Stock are entitled, upon a liquidation,
dissolution or winding up of MFC, to participate ratably in the distribution of
assets legally available for distribution to holders of common stock.
Miscellaneous. Holders of MFC Stock do not have preemptive rights to
acquire other or additional shares which might be issued by MFC in the future or
any redemption or sinking fund rights. First-Citizens Bank & Trust Company
currently serves as the registrar and transfer agent for MFC Stock.
Differences in Capital Stock
General. Upon completion of the Merger, First Western's shareholders will
receive MFC Stock for their First Western Stock and will become shareholders of
MFC. Certain legal distinctions exist between owning First Western Stock and
owning MFC Stock.
First Western is a North Carolina banking corporation, and the rights of
the holders of First Western Stock are governed by its Articles of
Incorporation, Chapter 53 of the North Carolina General Statutes which is
applicable to banks ("Chapter 53"), and, to the extent not inconsistent with
Chapter 53, by Chapter 55 of the North Carolina General Statutes which is
applicable to business corporations ("Chapter 55"). MFC is a North Carolina
business corporation, and the rights of the holders of its capital stock are
governed solely by its Articles of Incorporation and Chapter 55. There are
differences in
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Chapter 53 and Chapter 55. Therefore, in some ways, the rights of First
Western's shareholders are different from those of MFC's shareholders. While it
is not practicable to describe all differences, those basic differences which
MFC's and First Western's managements believe will have the most significant
effect on the rights of First Western's shareholders when they become MFC
shareholders are discussed below.
The following is only a general summary of certain differences in the
rights of holders of MFC Stock and those of holders of First Western Stock. You
should consult with your own legal counsel with respect to specific differences
and changes in your rights as a shareholder which will result from the Merger.
Dividends. First Western's shareholders are entitled to dividends if and
when declared by First Western's Board of Directors, subject to the restrictions
described below. Pursuant to Chapter 53, First Western may pay dividends only
out of its undivided profits. Should at any time its surplus be less than 50%
of its paid-in capital stock, First Western may not declare a cash dividend
until it has transferred from undivided profits to surplus 25% of its undivided
profits or any lesser percentage that may be required to restore its surplus to
an amount equal to 50% of its paid-in capital stock. However, no cash dividends
may be paid at any time by a bank when it is insolvent or when payment of a
dividend would render it insolvent or be contrary to its Articles of
Incorporation. Additionally, there are statutory provisions regarding the
calculation of undivided profits from which dividends may be paid, and banking
regulators may restrict or prohibit the payment of dividends by banks which have
been found to have inadequate capital. (See "Supervision and Regulation --
Payment of Dividends" on page _____.)
Pursuant to Chapter 55, MFC is authorized to pay dividends such as are
declared by its Board of Directors, provided that no such distribution results
in its insolvency on a going concern or balance sheet basis. However, while
there are fewer legal restrictions under Chapter 55 on MFC's ability to pay
dividends than apply to First Western under Chapter 53, MFC's principal asset is
its ownership of all of the outstanding capital stock of MountainBank, and its
sole source of funds for the payment of dividends on MFC Stock in the future
would be dividends it receives (as MountainBank's sole shareholder) from
MountainBank on the MountainBank capital stock it holds. Therefore, MFC's
ability to pay dividends is subject to MountainBank's ability to pay dividends
and, since MountainBank is subject to Chapter 53, MFC's ability to pay dividends
effectively is subject to the same restrictions on dividends that apply to both
MountainBank and First Western.
Merger, Share Exchange, Sale of Assets or Dissolution. Pursuant to Chapter
53, First Western may not merge or consolidate with, or sell substantially all
of its assets to, any other entity, or be dissolved, without the prior approval
of the holders of at least two-thirds of its outstanding shares.
Pursuant to Chapter 55, the merger of MFC with, or a sale of substantially
all of MFC's assets to, any other entity, or a dissolution of MFC, requires the
prior approval of by only a majority of the votes entitled to be cast by the
holders of MFC's voting stock. Furthermore, Chapter 55 provides that the prior
approval of MFC's shareholders is not required to effect a merger of another
entity into a subsidiary of MFC, provided that MFC remains in control of its
subsidiary following consummation of that transaction. Assuming that a
sufficient number of shares of capital stock have been authorized in MFC's
Articles of Incorporation, it is possible that future acquisitions by MFC could
be effected through the merger of a third party bank or other entity with or
into MountainBank or another subsidiary of MFC, including acquisitions involving
the issuance of MFC Stock, without the approval of MFC's shareholders.
MFC and First Western both are subject to the North Carolina Shareholder
Protection Act which requires the affirmative vote of the holders of 95% of
their outstanding voting shares (voting as a single class, but excluding shares
owned by an "interested shareholder") to approve business combinations between
either of them and an entity which owns more than 10% of their voting shares.
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Repurchase of Capital Stock. Under Chapter 53, First Western must obtain
the prior approval of holders of two-thirds of its outstanding shares, as well
as the prior approval of the Commissioner and the FDIC, before it can repurchase
any of its shares of capital stock.
Under Chapter 55, MFC may repurchase its capital stock by action of its
Board of Directors without the prior approval of its shareholders. However, as
a bank holding company, MFC is required to give the FRB at least 45 days prior
written notice of the purchase or redemption of any shares of its outstanding
equity securities if the gross consideration to be paid for that purchase or
redemption, when aggregated with the net consideration paid by MFC for all
purchases or redemptions of its equity securities during the 12 months preceding
the date of notification, equals or exceeds 10% of MFC's consolidated net worth
as of the date of the notice. The FRB may permit a purchase or redemption to be
accomplished prior to expiration of the 45-day notice period if it determines
that the repurchase or redemption would not constitute an unsafe or unsound
practice and that it would not violate any applicable law, rule, regulation or
order, or any condition imposed by, or written agreement with, the FRB.
Assessability. Shares of First Western Stock generally are not
assessable. However, under Chapter 53, if First Western's capital becomes
impaired due to losses or any other cause, and if its surplus and undivided
profits are not sufficient to make good that impairment, the Commissioner may
require First Western's Board of Directors to assess the holders of First
Western Stock for the amount of the impairment. A shareholder's failure to pay
such an assessment could result in a forced sale of the shareholder's stock with
the proceeds being applied first to payment of the assessment.
Under Chapter 55, shares of MFC Stock generally are not assessable
(although the shares of MountainBank's common stock held by MFC are subject to
the same assessment provisions of Chapter 53 that apply to First Western Stock).
Regulation of Transferability. The capital stock of First Western, unlike
that of MFC, is exempt from the registration requirements of the federal
Securities Act of 1933 Act (the "1933 Act") and the North Carolina Securities
Act. The effect on First Western of that exemption is to allow First Western to
sell shares of First Western Stock without registration under those laws. In
contrast, the public sale by MFC of its stock, and resales of its stock by
certain persons who are at the time of resale "affiliates" of MFC, are required
to be registered under the 1933 Act and the North Carolina Securities Act or
meet certain statutory and regulatory requirements to qualify for other
exemptions from registration. These requirements also will apply to persons who
were "affiliates" of First Western at the time of the Special Meeting at which
First Western's shareholders vote on approval of the Merger Agreement and the
Merger. (See "The Merger -- Restrictions on Resale of MFC Stock Received by
Certain Persons.")
In the case of a person who is an affiliate of First Western before the
Merger, for a period of two years following the Effective Time that person may
not resell or transfer any MFC Stock into which his or her First Western Stock
is converted unless (i) the resale or transfer has been registered by MFC under
the 1933 Act, (ii) the resale or transfer is made in compliance with Rule 145
promulgated under the 1933 Act (which permits limited sales under certain
circumstances), or (iii) another exemption from the registration requirements of
the 1933 Act is available for that resale or transfer. Rule 145 is the method
used most commonly by affiliates of acquired companies to resell securities they
receive in transactions similar to the Merger.
In the case of persons who become affiliates of MFC in connection with or
at any time following the Merger, similar restrictions will apply to all shares
of MFC Stock held by those persons (whether or not those shares were acquired in
connection with the Merger). Those restrictions will continue in effect for as
long as those persons continue to be affiliates of MFC.
The above restrictions are expected to apply to the directors and executive
officers of First Western and MFC (and to any relative or spouse of any such
person or any relative of any such spouse,
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any of whom live in the same home as such person, and any trusts, estates,
corporations, or other entities in which such persons have a 10% or greater
beneficial or equity interest), and may apply to any current shareholder of
First Western or MFC that owns an amount of stock sufficient to be considered to
"control" First Western or MFC or that otherwise is an "affiliate" of First
Western or MFC.
Instructions will be given by MFC to its stock transfer agent to restrict
the transfer of shares of MFC Stock held by its and First Western's affiliates,
and the certificates evidencing MFC Stock held by affiliates will contain an
appropriate legend pertaining to these restrictions. MFC is under no obligation
to register the resale or transfer of MFC Stock by its or First Western's
affiliates or to take any other action necessary in order to make an exemption
from the registration requirements of the 1933 Act available to its or First
Western's affiliates. (See "The Merger -- Restrictions on Resale of MFC Stock
Received by Certain Persons.")
As a condition to consummation of the Merger, each shareholder of First
Western who is considered by MFC to be an affiliate of First Western, or who is
expected to become an affiliate of MFC in connection with the Merger, and each
of those persons' related parties who are covered by these restrictions on
resale, must execute and deliver to MFC a written agreement to the effect that
they will not offer, sell, pledge, transfer or otherwise dispose of any MFC
Stock received in connection with the Merger except in compliance with the
restrictions.
INDEMNIFICATION
General
Permissible Indemnification. Chapter 55 allows a corporation, by charter,
bylaw, contract, or resolution, to indemnify or agree to indemnify its officers,
directors, employees, and agents and any person who is or was serving at the
corporation's request as a director, officer, employee, or agent of another
entity or enterprise or as a trustee or administrator under an employee benefit
plan, against liability and expenses, including reasonable attorneys' fees, in
any proceeding (including without limitation a proceeding brought by or on
behalf of the corporation itself) arising out of their status as such or their
activities in any of the foregoing capacities as summarized herein. Any
provision in a corporation's charter or bylaws or in a contract or resolution
may include provisions for recovery from the corporation of reasonable costs,
expenses and attorneys' fees in connection with the enforcement of rights to
indemnification granted therein and may further include provisions establishing
reasonable procedures for determining and enforcing such rights.
The corporation may indemnify such person against liability expenses
incurred only where such person conducted himself or herself in good faith and
reasonably believed (i) in the case of conduct in his or her official corporate
capacity, that his or her conduct was in the corporation's best interests, and
(ii) in all other cases, that his or her conduct was at least not opposed to the
corporation's best interests; and, in the case of a criminal proceeding, he or
she had no reasonable cause to believe his or her conduct was unlawful.
However, a corporation may not indemnify such person either in connection with a
proceeding by or in the right of the corporation in which such person was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to such person (whether or not involving
action in an official capacity) in which such person was adjudged liable on the
basis that personal benefit was improperly received.
Mandatory Indemnification. Unless limited by the corporation's charter,
Chapter 55 requires a corporation to indemnify a director or officer of the
corporation who is wholly successful, on the merits or otherwise, in the defense
of any proceeding to which such person was a party because he or she is or was a
director or officer of the corporation against reasonable expenses incurred in
connection with the proceeding.
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Advance for Expenses. Expenses incurred by a director, officer, employee,
or agent of the corporation in defending a proceeding may be paid by the
corporation in advance of the final disposition of the proceeding as authorized
by the board of directors in the specific case, or as authorized by the charter
or bylaws or by any applicable resolution or contract, upon receipt of an
undertaking by or on behalf of such person to repay amounts advanced, unless it
ultimately is determined that such person is entitled to be indemnified by the
corporation against such expenses.
Court-Ordered Indemnification. Unless otherwise provided in the
corporation's charter, a director or officer of the corporation who is a party
to a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court deems necessary, may
order indemnification if it determines either (i) that the director or officer
is entitled to mandatory indemnification as described above, in which case the
court also will order the corporation to pay the reasonable expenses incurred to
obtain the court-ordered indemnification, or (ii) that the director or officer
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not such person met the requisite standard of conduct
or was adjudged liable to the corporation in connection with a proceeding by or
in the right of the corporation or on the basis that personal benefit was
improperly received in connection with any other proceeding so charging (but if
adjudged so liable, indemnification is limited to reasonable expenses incurred).
Parties Entitled to Indemnification. Chapter 55 defines "director" to
include former directors and the estate or personal representative of a
director. Unless its charter provides otherwise, a corporation may indemnify
and advance expenses to an officer, employee or agent of the corporation to the
same extent as to a director and also may indemnify and advance expenses to an
officer, employee or agent who is not a director to the extent, consistent with
public policy, as may be provided in its charter or bylaws, by general or
specific action of its board of directors, or by contract.
Indemnification by First Western and MFC
The Bylaws of First Western and MFC provide for indemnification of their
respective directors and officers to the fullest extent permitted by North
Carolina law and require the Board of Directors to take all actions necessary
and appropriate to authorize such indemnification.
Under North Carolina law, a corporation also may purchase insurance on
behalf of any person who is or was a director or officer against any liability
arising out of his status as such. First Western and MFC each currently
maintain a directors' and officers' liability insurance policy and its coverage
is applicable to all their respective directors and officers.
VALIDITY OF SECURITIES
The validity of the MFC Stock to be issued in connection with the Merger is
being passed upon for MFC by Ward and Smith, P.A., Raleigh, North Carolina.
Certain legal matters relating to the Merger will be passed upon for First
Western by Maupin Taylor & Ellis, P.A., Raleigh, North Carolina.
EXPERTS
The consolidated financial statements of MFC as of December 31, 2000, 1999
and 1998, and for the years then ended, which are included in this Proxy
Statement/Prospectus, have been audited by Larrowe & Company PLLC, independent
accountants, as indicated in their report which is included herein.
The financial statements of First Western as of December 31, 2000 and 1999,
and for the three years then ended, which are included in this Proxy
Statement/Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in MFC's
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Registration Statement, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
PROPOSALS FOR ANNUAL MEETINGS OF SHAREHOLDERS
If the Merger is completed, then First Western will not have a 2002 annual
meeting of shareholders. However, in the event that the Merger is not
completed, First Western currently expects that its next annual meeting of
shareholders would be held during April 2002. Any proposal of a First Western
shareholder intended to be presented for action at that annual meeting would
have to be received by First Western in writing at its main office in
Burnsville, North Carolina, no later than November 13, 2001, to be considered
timely received for inclusion in the proxy statement and form of appointment of
proxy distributed by First Western in connection with that meeting.
In order for a proposal to be included in First Western's proxy materials
for a particular meeting, the person submitting the proposal must own,
beneficially or of record, at least 1% or $2,000 in market value of shares of
First Western Stock entitled to be voted on that proposal at its annual meeting
and must have held those shares for a period of at least one year and continue
to hold them through the date of the meeting. Also, the proposal and the
shareholder submitting it must comply with certain other eligibility and
procedural requirements contained in rules of the SEC.
If First Western has a 2002 annual meeting, then written notice of a
shareholder proposal intended to be presented at that meeting, but which is not
intended to be included in First Western's proxy statement and form of
appointment of proxy, must be received by First Western at its main office in
Burnsville, North Carolina, no later than January 28, 2002, in order for that
proposal to be considered timely received for purposes of the discretionary
authority of the proxies at that meeting to vote on other matters presented for
action by shareholders at the meeting.
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CONSOLIDATED FINANCIAL STATEMENTS OF
MOUNTAINBANK FINANCIAL CORPORATION
Index to Consolidated Financial Statements
Page
----
Audited Consolidated Financial Statements
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets -- December 31, 2000 and 1999............................. F-3
Consolidated Statements of Income -- For the years ended
December 31, 2000, 1999 and 1998.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity -- For the years
ended December 31, 2000, 1999 and 1998.............................................. F-5
Consolidated Statements of Cash Flows -- For the years ended
December 31, 2000, 1999 and 1998.................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
Unaudited Interim Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) -- June 30, 2001 and December 31, 2000........ F-24
Consolidated Statement of Operations (Unaudited) -- For the
six and three months ended June 30, 2001 and 2000................................... F-25
Consolidated Statements of Cash Flows (Unaudited) -- For the six months ended
June 30, 2001 and 2000.............................................................. F-26
Consolidated Statements of Changes in Stockholders' Equity -- For the six months
ended June 30, 2001 and 2000........................................................ F-27
Notes to Consolidated Financial Statements (Unaudited)................................ F-28
F-1
Independent Auditor's Report
Board of Directors and Stockholders
MountainBank Financial Corporation
We have audited the accompanying consolidated balance sheets of MountainBank
Financial Corporation and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The consolidated financial statements give retroactive effect to the merger of
MountainBank Financial Corporation and MountainBank on March 30, 2001, which has
been accounted for in a manner similar to pooling-of-interests as described in
Note 17 to the consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These consolidated financial statements
do not extend through the date of consummation. However, they will become the
historical consolidated financial statements of MountainBank Financial
Corporation and subsidiary after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MountainBank
Financial Corporation and subsidiary as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/ Larrowe & Company, PLC
Galax, Virginia
January 25, 2001, except for Note 17, as to which
the date is March 30, 2001
F-2
--------------------------------------------------------------------------------
MoutainBank Financial Corporation
Consolidated Balance Sheets
December 31, 2000 and 1999
--------------------------------------------------------------------------------
Assets 2000 1999
------------ ------------
Cash and due from banks $ 7,797,745 $ 4,298,207
Interest bearing deposits with banks 3,667,612 11,260,158
Federal funds sold 9,220,000 1,570,000
Investment securities available for sale 35,415,821 18,587,525
Restricted equity securities 453,300 167,200
Loans, net of allowance for loan losses $3,006,842
in 2000 and $1,247,068 in 1999 197,372,973 88,498,368
Property and equipment, net 2,322,157 1,636,121
Accrued income 2,007,804 824,402
Other assets 851,608 368,900
------------ ------------
Total assets $259,109,020 $127,210,881
============ ============
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits $ 15,531,055 $ 6,782,066
Interest-bearing deposits 217,807,421 107,104,095
------------ ------------
Total deposits 233,338,476 113,886,161
Securities sold under agreements to repurchase 3,145,147 1,267,522
Obligations under capital lease 759,804 780,484
Accrued interest payable 2,840,440 826,707
Other liabilities 814,734 227,515
------------ ------------
Total liabilities 240,898,601 116,988,389
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, $4 par value; 10,000,000 shares
authorized; 1,871,938 and 1,442,433 shares issued
and outstanding in 2000 and 1999, respectively 7,487,752 5,769,730
Surplus 9,400,906 4,385,302
Retained earnings 1,182,510 126,541
Accumulated other comprehensive income (loss) 139,251 (59,081)
------------ ------------
Total stockholders' equity 18,210,419 10,222,492
------------ ------------
Total liabilities and stockholders' equity $259,109,020 $127,210,881
============ ============
See Notes to Consolidated Financial Statements
F-3
--------------------------------------------------------------------------------
MoutainBank Financial Corporation
Consolidated Balance Sheets
December 31, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999 1998
----------- ---------- ----------
Interest income
Loans and fees on loans $13,210,158 $5,649,738 $3,014,080
Federal funds sold 241,412 331,405 327,280
Investment securities, taxable 1,857,850 513,415 137,749
Investment securities, nontaxable 6,708 - -
Deposit with banks 504,981 257,071 -
----------- ---------- ----------
Total interest income 15,821,109 6,751,629 3,479,109
----------- ---------- ----------
Interest expense
Deposits 8,795,951 3,444,426 1,673,831
Securities sold under agreements to repurchase 152,766 54,853 28,718
Other borrowed funds 67,720 61,968 62,098
----------- ---------- ----------
Total interest expense 9,016,437 3,561,247 1,764,647
----------- ---------- ----------
Net interest income 6,804,672 3,190,382 1,714,462
Provision for loan losses 1,905,000 826,500 471,118
----------- ---------- ----------
Net interest income after provision for loan
losses 4,899,672 2,363,882 1,243,344
----------- ---------- ----------
Noninterest income
Service charges on deposit accounts 460,984 230,715 99,886
Mortgage origination income 499,212 493,077 320,951
Gain on sale of loans 150,977 - -
Other service charges and fees 60,240 35,018 22,629
Other income 146,514 22,893 25,848
----------- ---------- ----------
Total noninterest income 1,317,927 781,703 469,314
----------- ---------- ----------
Noninterest expense
Salaries and employee benefits 2,416,831 1,396,715 807,381
Occupancy 315,702 209,841 173,718
Equipment 348,619 196,212 72,283
Data processing 298,178 157,521 59,089
Other general and administrative 1,199,182 859,468 470,086
----------- ---------- ----------
Total noninterest expense 4,578,512 2,819,757 1,582,557
----------- ---------- ----------
Income before income taxes 1,639,087 325,828 130,101
Income tax expense 583,118 - -
----------- ---------- ----------
Net income $ 1,055,969 $ 325,828 $ 130,101
=========== ========== ==========
Basic earnings per share $ .62 $ .26 $ .12
=========== ========== ==========
Diluted earnings per share $ .57 $ .23 $ .11
=========== ========== ==========
Weighted average shares outstanding 1,701,426 1,270,721 1,092,780
=========== ========== ==========
See Notes to Consolidated Financial Statements
F-4
================================================================================
MountainBank Financial Corporation
Consolidated Statements of Changes in Stockholder's Equity
For the years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
Accumulated
Common Stock Retained Other
-------------------------- Earnings Comprehensive
Shares Amount Surplus (Deficit) Income (Loss) Total
------------- ----------- ----------- -------------- ------------- ------------
Balance, December 31, 1997 756,343 $3,025,370 $3,277,877 $ (329,388) $ 1,618 $ 5,975,477
Comprehensive income
Net income - - - 130,101 - 130,101
Net change in unrealized
appreciation on
investment securities
available for sale - - - - 20,843 20,843
-----------
Total comprehensive income 150,944
Stock options exercised 5,715 22,860 27,432 - - 50,292
Stock split, effected in the
form of a dividend 152,400 609,600 (609,600) - - -
Fractions redeemed - - (130) - - (130)
--------- ---------- ---------- ------------- ------------ -----------
Balance, December 31, 1998 914,458 3,657,830 2,695,579 (199,287) 22,461 6,176,583
Comprehensive income
Net income - - - 325,828 - 325,828
Net change in unrealized
appreciation on
investment securities
available for sale - - - - (81,542) (81,542)
-----------
Total comprehensive income 244,286
Shares issued 280,434 1,121,735 2,627,813 - - 3,749,548
Stock options exercised 7,159 28,635 23,880 - - 52,515
Stock split, effected in the
form of a dividend 240,382 961,530 (961,530) -
Fractions redeemed (440) (440)
--------- ---------- ---------- ------------- ------------ -----------
Balance, December 31, 1999 1,442,433 5,769,730 4,385,302 126,541 (59,081) 10,222,492
Comprehensive income
Net income - - - 1,055,969 - 1,055,969
Net change in unrealized
appreciation on
investment securities
available for sale - - - - 198,332 198,332
-----------
Total comprehensive income 1,254,301
Fractional shares
purchased (81) (323) 323 - - -
Shares sold 426,331 1,705,325 5,005,128 - - 6,710,453
Stock options exercised 3,255 13,020 10,153 - - 23,173
--------- ---------- ---------- ------------- ------------ -----------
Balance, December 31, 2000 1,871,938 $7,487,752 $9,400,906 $ 1,182,510 $ 139,251 $18,210,419
========= ========== ========== ============= ============ ===========
See Notes to Consolidated Financial Statements
F-5
================================================================================
MountainBank Financial Corporation
Consolidated Statements of Changes in Stockholder's Equity
For the years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
2000 1999 1998
------------- ------------ ------------
Cash flows from operating activities
Net income $ 1,055,969 $ 325,828 $ 130,101
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 298,096 185,897 120,668
Provision for loan losses 1,905,000 826,500 471,118
Deferred income taxes (536,147) (97,591) (136,514)
Accretion of discount on securities, net of
amortization of premiums (33,062) (5,570) 893
Changes in assets and liabilities:
Accrued income (1,183,402) (473,653) (236,525)
Other assets (18,298) (110,778) (13,981)
Accrued interest payable 2,013,733 269,138 447,598
Other liabilities 587,219 94,703 117,261
------------- ------------ ------------
Net cash provided by operating activities 4,089,108 1,014,474 900,619
------------- ------------ ------------
Cash flows from investing activities
Net (increase) decrease in federal funds sold (7,650,000) (1,250,000) 3,250,000
Net (increase)decrease in interest-bearing deposits with banks 7,592,546 (11,260,158) -
Purchases of investment securities (24,435,517) (14,923,637) (7,141,340)
Sales of investment securities - 500,000 -
Maturities of investment securities 7,624,252 1,764,056 1,492,987
Net increase in loans (110,779,605) (41,717,141) (30,280,979)
Purchases of property and equipment (984,132) (532,842) (298,299)
------------- ------------ ------------
Net cash used in investing activities (128,632,456) (67,419,722) (32,977,631)
------------- ------------ ------------
Cash flows from financing activities
Net increase in noninterest-bearing deposits 8,748,989 2,090,510 3,126,338
Net increase in interest-bearing deposits 110,703,326 61,435,915 30,454,719
Net increase in securities sold under agreements
to repurchase 1,877,625 663,000 551,524
Repayment of obligations under capital lease (20,680) (22,124) (18,364)
Proceeds from the issuance of common stock, net 6,733,626 3,801,623 50,162
------------- ------------ ------------
Net cash provided by financing activities 128,042,886 67,968,924 34,164,379
------------- ------------ ------------
Net increase in cash and cash equivalents 3,499,538 1,563,676 2,087,367
Cash and cash equivalents, beginning 4,298,207 2,734,531 647,164
------------- ------------ ------------
Cash and cash equivalents, ending $ 7,797,745 $ 4,298,207 $ 2,734,531
============= ============ ============
Supplemental disclosures of cash flow information
Interest paid $ 7,002,704 $ 3,292,109 $ 1,317,049
============= ============ ============
Income taxes paid $ 620,965 $ 90,843 $ 45,000
============= ============ ============
F-6
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization
MountainBank Financial Corporation (the Company) was incorporated as a North
Carolina corporation on January 10, 2001 to acquire the stock of MountainBank
(the Bank). The Bank was acquired by the Company on March 30, 2001.
MountainBank was organized and incorporated under the laws of the State of North
Carolina on June 25, 1997 and commenced operations on June 26, 1997. The Bank
currently serves Henderson, Polk, Rutherford, and Buncombe counties, North
Carolina and surrounding areas through seven banking offices. As a state
chartered bank which is not a member of the Federal Reserve, the Bank is subject
to regulation by the State of North Carolina Banking Commission and the Federal
Deposit Insurance Corporation.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
the Bank, which is wholly owned. All material intercompany transactions and
balances have been eliminated in consolidation.
Business segments
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers the materiality
of a potential segment and components of the business about which financial
information is available and regularly evaluated relative to resource allocation
and performance assessment.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.
Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse, but influenced to an extent by the
retirement, manufacturing and agricultural segments.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.
Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"cash and due from banks.
F-7
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Trading securities
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
Securities held to maturity
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. All securities held by the Bank at
December 31, 2000 and 1999 were classified as available for sale.
Securities available for sale
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
F-8
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
Property and equipment
Bank premises, furniture and equipment, and leasehold improvements are carried
at cost, less accumulated depreciation and amortization computed principally by
the straight-line method over the following estimated useful lives:
Years
-----
Buildings and improvements 5-40
Furniture and equipment 3-10
For assets recorded under the terms of capital leases, the present value of
future minimum lease payments is treated as cost.
Foreclosed properties
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in loss on foreclosed real estate.
F-9
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Stock-based compensation
The Bank accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Bank is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting had been applied.
Transfers of financial assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
Income taxes
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Basic earnings per share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.
Diluted earnings per share
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.
Comprehensive income
Annual comprehensive income reflects the change in the Bank's equity during the
year arising from transactions and events other than investment by and
distributions to shareholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholder's equity rather than as income or expense.
Financial instruments
Any derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit. Such
financial instruments are recorded in the financial statements when they are
funded or related fees are incurred or received.
The Bank does not utilize interest-rate exchange agreements or interest-rate
futures contracts.
F-10
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Available-for-sale and held-to-maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
Short-term debt: The carrying amounts of short-term debt approximate their fair
values.
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates.
The carrying amounts of other liabilities approximates fair value.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net
income and stockholders' equity previously reported were not affected by these
reclassifications.
F-11
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 2. Restrictions on Cash
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $336,000 and $3,417,000 for the periods including December 31,
2000 and 1999, respectively.
Note 3. Securities
Debt and equity securities have been classified in the balance sheets according
to management's intent. The carrying amounts of securities (all available-for-
sale) and their approximate fair values at December 31 follow:
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
---- ----------- ---------- ---------- -----------
Available for sale
U.S. Treasury securities $ - $ - $ - $ -
U.S. Government agency securities 9,385,060 21,397 62,487 9,343,970
State and municipal securities 813,947 547 2,793 811,701
Mortgage-backed securities 25,005,827 268,965 14,642 25,260,150
Restricted equity securities 453,300 - - 453,300
----------- -------- ------- -----------
$35,658,134 $290,909 $79,922 $35,869,121
=========== ======== ======= ===========
1999
----
Available for sale
U.S. Treasury securities $ - $ - $ - $ -
U.S. Government agency securities 11,374,722 21,924 93,818 11,302,828
Mortgage-backed securities 7,271,884 12,813 - 7,284,697
Restricted equity securities 167,200 - - 167,200
----------- -------- ------- -----------
$18,813,806 $ 34,737 $93,818 $18,754,725
=========== ======== ======= ===========
Investment securities with amortized cost of approximately $7,200,000 and
$2,900,000 at December 31, 2000 and 1999, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted by
law.
There were no realized gains or losses on the sale or maturity of investment
securities for the periods ended December 31, 2000, 1999 and 1998.
The scheduled maturities of investment securities (all available for sale) at
December 31, 2000 were as follows:
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ - $ -
Due after one year through five years 813,978 811,701
Due after five years through ten years 2,951,650 2,967,600
Due after ten years 31,439,206 31,636,520
Restricted equity securities 453,300 453,300
----------- -----------
$35,658,134 $35,869,121
=========== ===========
F-12
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 4. Loans Receivable
The major components of loans in the balance sheets at December 31, 2000 and
1999, are as follows (in thousands):
2000 1999
---------- --------
Commercial $ 29,381 $ 17,471
Real estate:
Construction and land development 32,602 13,480
Residential, 1-4 families 36,971 20,480
Residential, 5 or more families 596 455
Farmland 385 565
Nonfarm, nonresidential 78,493 27,727
Agricultural 996 218
Consumer 20,968 9,277
Other - -
---------- --------
200,392 89,673
Unearned loan origination fees, net of costs (12) 72
---------- --------
200,380 89,745
Allowance for loan losses (3,007) (1,247)
---------- --------
$ 197,373 $ 88,498
========== ========
Note 5. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses is as follows:
2000 1999 1998
---------- ---------- --------
Balance, beginning $1,247,068 $ 751,816 $280,698
Provision charged to expense 1,905,000 826,500 471,118
Recoveries of amounts charged off 4,800 630 -
Amounts charged off (150,026) (331,878) -
---------- ---------- --------
Balance, ending $3,006,842 $1,247,068 $751,816
========== ========== ========
F-13
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 5. Allowance for Loan Losses, continued
The following is a summary of information pertaining to impaired loans at
December 31:
2000 1999
---------- ----------
Impaired loans without a valuation allowance $ - $ -
Impaired loans with a valuation allowance 79,945 291,526
---------- ----------
Total impaired loans $ 79,945 $ 291,526
========== ==========
Valuation allowance related to impaired loans $ 60,516 $ 21,555
========== ==========
2000 1999 1998
------- ---------- ----------
Average investment in impaired loans $21,393 $ 142,117 $ 410,678
======= ========== ==========
Interest income recognized for the year $ 492 $ 2,432 $ 22,593
======= ========== ==========
Interest income recognized on a cash basis for the year $ 492 $ 2,432 $ 22,593
======= ========== ==========
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Note 6. Property and Equipment
Components of property and equipment
Components of property and equipment and total accumulated depreciation at
December 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
Land, buildings and improvements $1,221,110 $1,075,486
Furniture and equipment 1,751,863 913,355
---------- ----------
Property and equipment, total 2,972,973 1,988,841
Less accumulated depreciation 650,816 352,720
---------- ----------
Property and equipment, net of depreciation $2,322,157 $1,636,121
========== ==========
Capital lease
The Bank leases its primary banking office under the provisions of an agreement
with the Chairman of the Bank's Board of Directors which is accounted for as a
capital lease. Minimum lease payments relating to the building have been
capitalized as its cost. The lease calls for monthly payments of $6,700 per
month for the first five years of the term with five-year segment adjustments
based on changes in the CPI, and expires June 30, 2017. The lease also provides
the Bank an option for two consecutive five-year renewal periods at the
expiration of the original 20 year term. The banking office under capital lease
at December 31, 2000 has a cost of $836,883, accumulated amortization of
$147,200 and a net book value of $689,683. Amortization relating to the leased
property is included in depreciation expense.
F-14
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 6. Property and Equipment, continued
The future minimum lease payments under capital lease and the net present value
of the future minimum lease payments at December 31, 2000 and 1999 are as
follows:
2000 1999
---------- ----------
Total minimum lease payments $1,326,600 $1,407,000
Amount representing interest (566,796) (626,516)
---------- ----------
Obligation under capital lease $ 759,804 $ 780,484
========== ==========
Operating leases
The Bank leases five branch facilities under operating leases which commenced on
March 1, 1998, May 10, 1999, December 1, 1999, November 1, 2000 and September 1,
2000 and expire March 2003, August 2009, November 2009, October 2005, and August
2003, respectively. The leases call for minimum monthly payments of $2,670,
$1,800, $1,200, $2,100, and $1,000, respectively.
The Bank also leases an operations center under an operating lease with the
Chairman of the Bank's Board of Directors. The lease commenced on December 1,
1998 and continues for a period of five years with monthly lease payments of
$1,050.
Rental expense under operating leases was $168,141 and $103,539 for 2000 and
1999, respectively. Future minimum commitments under noncancellable leases are
as follows:
Operating Capital
Leases Leases
--------- ----------
2001 $117,840 $ 80,400
2002 117,840 80,400
2003 86,090 80,400
2004 61,200 80,400
2005 57,000 80,400
Thereafter 133,800 924,600
-------- ----------
$573,770 $1,326,600
======== ==========
Note 7. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2000 and 1999 was $66,386,988 and $25,936,405, respectively.
At December 31, 2000, the scheduled maturities of time deposits are as follows:
2001 $153,252
2002 12,384
2003 3,096
2004 423
2005 181
Thereafter -
--------
$169,336
========
F-15
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 8. Short-term Debt
Short-term debt consists of securities sold under agreements to repurchase,
which generally mature within one to four days from the transaction date.
Additional information at December 31, 2000 and 1999 and for the periods then
ended is summarized below:
2000 1999
---------- ----------
Outstanding balance at December 31 $3,145,147 $1,267,522
========== ==========
Year-end weighted average rate 5.98% 4.78%
========== ==========
Daily average outstanding during the period $2,069,879 $1,424,335
========== ==========
Average rate for the period 5.89% 3.79%
========== ==========
Maximum outstanding at any month-end during the period $3,267,082 $1,943,402
========== ==========
The Bank has established various credit facilities to provide additional
liquidity if and as needed. These consist of unsecured lines of credit in the
aggregate amount of $2,000,000 and secured lines of credit of approximately
$37,000,000. There were no amounts outstanding under these arrangements as of
December 31, 2000 and 1999.
Note 9. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
December 31, 2000 December 31, 1999
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- -------- --------------- --------
Financial assets
Cash and cash equivalents $ 7,798 $ 7,798 $ 4,298 $ 4,298
Interest-bearing deposits 3,668 3,668 11,260 11,260
Federal funds sold 9,220 9,220 1,570 1,570
Securities, available-for-sale 35,416 35,416 18,588 18,588
Restricted equity securities 453 453 167 167
Loans, net of allowance for loan losses 197,373 197,317 88,498 87,559
Financial liabilities
Deposits 233,338 228,522 113,886 111,039
Short-term debt 3,145 3,145 1,268 1,268
Long-term debt 760 760 780 780
Off-balance-sheets assets (liabilities)
Commitments to extend credit and
standby letters of credit - - - -
Note 10. Earnings per Share
The following table details the computation of basic and diluted earnings per
share for the periods ended December 31, 2000, 1999 and 1998:
2000 1999 1998
---------- ---------- ----------
Net income (loss) (income available to common shareholders) $1,055,969 $ 325,828 $ 130,101
========== ========== ==========
Weighted average common shares outstanding 1,701,426 1,270,721 1,092,780
Effect of dilutive securities, options 162,862 115,402 46,146
---------- ---------- ----------
Weighted average common shares outstanding, diluted 1,864,288 1,386,123 1,138,926
========== ========== ==========
Basic earnings per share $ .62 $ .26 $ .12
========== ========== ==========
Diluted earnings per share $ .57 $ .23 $ .11
========== ========== ==========
F-16
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 11. Stock Options
On December 8, 1997, the Bank adopted a qualified incentive stock option plan
which reserves up to 60,000 (108,000 adjusted for the December 1998 and 1999 and
March 2001 stock splits) shares for the benefit of certain of the Bank's
employees. Options granted under this plan are exercisable at no less than fair
market value of the Bank's common stock at the date of grant, vest according to
the terms of each particular grant and expire in no more than ten years. On
October 16, 2000, the Bank amended the plan to reserve up to 63,268 (79,085
adjusted for the March 2001 stock split) additional shares for the benefit of
certain of the Bank's employees.
Also on December 8, 1997, the Bank adopted a non-qualified stock option plan
which reserves up to 60,000 (108,000 adjusted for the December 1998 and 1999 and
March 2001 stock splits) shares for purchase by directors. Options granted under
this plan are exercisable at no less than fair market value of the Bank's common
stock at the date of grant, vest according to the terms of each particular grant
and expire in no more than ten years. On October 16, 2000, the Bank also
amended this plan to reserve up to 63,268 (79,085 adjusted for the March 2001
stock split) additional shares for purchase by directors.
Activity under Bank plans during the periods ended December 31, 2000, 1999 and
1998 is summarized below:
Qualified Plan Non-Qualified Plan
-------------------------- --------------------
Available Available
For Grant Granted For Grant Granted
--------------- ---------- ---------- --------
Balance, December 31, 1997 30,000 30,000 4,998 55,002
Granted (17,000) 17,000 - -
Exercised - (160) - (4,412)
Forfeited 4,820 (4,820) 6,761 (6,761)
Stock split 3,564 8,404 2,352 8,766
------- ------- ------- -------
Balance, December 31, 1998 21,384 50,424 14,111 52,595
Granted (22,388) 22,388 (14,111) 14,111
Exercised - (432) - (5,295)
Forfeited 1,004 (1,004) - -
Stock split - 14,275 - 12,282
------- ------- ------- -------
Balance, December 31, 1999 - 85,651 - 73,693
Amendment to plan 63,268 - 63,268 -
Granted (51,864) 51,864 (63,268) 63,268
Exercised - (2,201) - -
Forfeited 4,260 (4,260) - -
Stock split 3,916 32,764 - 34,240
------- ------- ------- -------
Balance, December 31, 2000 19,580 163,818 - 171,201
======= ======= ======= =======
F-17
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 11. Stock Options, continued
Additional information related to options for the periods ended December 31,
2000, 1999 and 1998 is detailed below:
2000 1999 1998
-------- -------- -------
Outstanding options:
Weighted average exercise price, beginning of the year $ 7.79 $ 6.17 $ 6.11
Weighted average exercise price, end of the year $ 10.54 $ 7.79 $ 6.17
Range of exercise prices:
From $ 6.11 $ 6.11 $ 6.11
To $ 16.00 $ 13.34 $ 9.17
Weighted averaged remaining contractual life in months 100 101 107
Exercisable options outstanding at December 31:
Number 178,303 89,120 48,725
Weighted average exercise price $ 7.16 $ 6.54 $ 6.17
Weighted average exercise price of options:
Granted during the year $ 16.00 $ 12.10 $ 6.52
Exercised during the year $ 7.12 $ 6.11 $ 6.11
Forfeited during the year $ 10.78 $ 8.71 $ 6.40
Expired during the year $ - $ - $ -
Grant-date fair value:
Options granted during the year $918,778 $296,010 $95,085
Significant assumptions used in determining
fair value of options granted:
Risk-free interest rate 5.25% 6.0% 6.0%
Expected life in years 10 10 10
Expected dividends - - -
Expected volatility 0.85% 1.40% 1.35%
Results of operations:
Compensation cost recognized in income for all
stock-based compensation awards $ - $ - $ -
======== ======== =======
Pro forma net income, based on SFAS No. 123 $449,576 $ 29,818 $35,016
======== ======== =======
Pro forma earnings per common share,
based on SFAS No. 123 $ 0.26 $ 0.02 $ 0.03
======== ======== =======
Note 12. Benefit Plans
Defined contribution plans
The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees at least 21
years of age who have completed three months of service. Participants may
contribute a percentage of compensation, subject to a maximum allowed under the
Code. In addition, the Bank may make additional contributions at the discretion
of the Board of Directors. The Bank contribution was approximately $24,572,
$13,629, and $10,332 for 2000, 1999 and 1998, respectively.
Cafeteria plan
The Bank adopted a cafeteria plan on December 18, 2000 which provides its
employees with a choice between compensation and certain qualified benefit plans
including medical reimbursement, group accident and health insurance, dependent
care assistance, and group term life insurance. The plan does not go into
effect until 2001.
F-18
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 13. Income Taxes
Current and deferred income tax components
The components of income tax expense are as follows:
2000 1999 1998
---------- --------- --------
Current $1,119,265 $ 211,233 $136,514
Deferred (490,229) (97,591) (72,054)
Deferred tax asset valuation allowance change (45,918) (113,642) (64,460)
---------- --------- --------
$ 583,118 $ - $ -
========== ========= ========
Rate reconciliation
A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate to income tax expense included in the statements of
income follows:
2000 1999 1998
-------- --------- --------
Tax at statutory federal rate $557,290 $ 110,782 $ 44,234
State income tax, net of federal benefit 80,818 2,945 20,136
Tax exempt interest (6,033) - -
Other (3,039) (85) 90
Deferred tax asset valuation allowance change (45,918) (113,642) (64,460)
-------- --------- --------
$583,118 $ - $ -
======== ========= ========
Deferred income tax analysis
The components of net deferred tax assets (substantially all Federal) at
December 31, 2000 and 1999, are summarized as follows:
2000 1999
--------- --------
Deferred tax assets $ 940,932 $424,867
Deferred tax liabilities (128,774) (31,202)
Deferred tax asset valuation allowance - (45,918)
--------- --------
Net deferred tax asset $ 812,158 $347,747
========= ========
The tax effects of each significant item creating deferred taxes are summarized
below:
2000 1999
--------- --------
Net unrealized appreciation on securities
available for sale $ (71,736) $ -
Allowance for loan losses 903,761 361,457
Pre-opening expenses 37,171 63,410
Other - (7,655)
Depreciation (50,895) (22,867)
Accretion of bond discount (6,143) (680)
--------- --------
$ 812,158 $393,665
========= ========
Note 14. Commitments and Contingencies
Litigation
In the normal course of business the Bank is involved in various legal
proceedings. After consultation with legal counsel, management believes that
any liability resulting from such proceedings will not be material to the
financial statements.
F-19
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 14. Commitments and Contingencies, continued
Financial instruments with off-balance-sheet risk
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments. A summary of the Bank's
commitments (approximately) at December 31, 2000 and 1999, is as follows:
2000 1999
----------- -----------
Commitments to extend credit $39,351,000 $12,908,000
Standby letters of credit 1,498,000 -
----------- -----------
$40,849,000 $12,908,000
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the party. Collateral held varies, but may include
accounts receivable, inventory, property and equipment, residential real estate
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
Concentrations of credit risk
Substantially all of the Bank's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. The concentrations of
credit by type of loan are set forth in Note 4. The distribution of commitments
to extend credit approximates the distribution of loans outstanding. The Bank,
as a matter of policy, does not extend credit to any single borrower or group of
related borrowers in excess of approximately $2,000,000. Although the Bank has
a reasonably diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon economic conditions in and
around its market area. A significant amount of the real estate loans set forth
in Note 4 are secured by commercial real estate. In addition, the Bank has a
loan concentration relating to customers who are in the business of land
development and loans secured by commercial real estate. Total loans to this
industrial group amounted to approximately $84,502,000 at December 31, 2000 and
$31,601,000 at December 31, 1999.
The Bank from time to time has cash and cash equivalents on deposit with
financial institutions which exceed federally-insured limits.
Other commitments
The Bank has entered into employment agreements with certain of its key officers
covering duties, salary, benefits, provisions for termination and Bank
obligations in the event of merger or acquisition.
F-20
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 15. Regulatory Restrictions
Dividends
The Company's dividend payments are made from dividends received from the Bank.
The Bank, as a North Carolina chartered bank, may pay dividends only out of its
undivided profits as determined pursuant to North Carolina General Statutes
Section 53-87. However, regulatory authorities may limit payment of dividends
by any bank when it is determined that such a limitation is in the public
interest and is necessary to ensure financial soundness of the Bank.
Intercompany Transactions
The Bank's legal lending limit on loans to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit
for the Bank on loans to the Company was approximately $1,821,000 at December
31, 2000. No 23A transactions were deemed to exist between the Company and the
Bank at December 31, 2000.
Capital requirements
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2000, the Bank met the criteria to be considered adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table.
F-21
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 15. Regulatory Restrictions, continued
Capital requirements, continued
The Bank's actual capital amounts and ratios are also presented in the table (in
thousands).
To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ----------- ------ ---------- ------
December 31, 2000:
Total Capital
(to Risk-Weighted Assets) $20,693 9.9% *$16,741 *8.0% *$20,926 *10.0%
Tier I Capital
(to Risk-Weighted Assets) $18,072 8.6% *$ 8,371 *4.0% *$12,556 * 6.0%
Tier I Capital
(to Average Assets) $18,072 7.6% *$ 9,565 *4.0% *$11,956 * 5.0%
December 31, 1999:
Total Capital
(to Risk-Weighted Assets) $11,424 12.5% *$ 7,299 *8.0% *$ 9,124 *10.0%
Tier I Capital
(to Risk-Weighted Assets) $10,282 11.3% *$ 3,650 *4.0% *$ 5,475 * 6.0%
Tier I Capital
(to Average Assets) $10,282 8.7% *$ 4,734 *4.0% *$ 5,917 * 5.0%
* greater than or equal to
Note 16. Transactions with Related Parties
Loans
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
Aggregate loan transactions with related parties were as follows:
2000 1999
---------- -----------
Balance, beginning $2,048,318 $ 1,654,782
New loans 2,103,478 1,889,600
Repayments (812,424) (1,496,064)
Relationship changes - -
---------- -----------
Balance, ending $3,339,372 $ 2,048,318
========== ===========
Building lease
The Bank has entered into certain lease agreements with the Chairman of the
Bank's Board of Directors for the rental of a bank building and office space for
bank operations. (See also Note 6).
F-22
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 17. Subsequent Events
On March 30, 2001, and pursuant to a charter amendment, the Bank effected a
five-for-four stock split of the Bank's common stock increasing the number of
shares of common stock from 1,497,615 to 1,871,938. Additionally, by way of the
same charter amendment, the Bank reduced the post-split par value of the common
stock from $5.00 per share to $4.00 per share. All references to the number of
common shares and per share amounts in the financial statements have been
restated as appropriate to reflect the effect of the split, for all periods
presented. Additionally, common stock, capital surplus, and retained earnings
have been restated for all periods presented as appropriate to reflect the stock
split and the change in par value.
On March 30, 2001, the Bank was acquired by the Company which was formed by the
Bank on January 10, 2001, for the purpose of becoming the Bank's parent holding
Company. Each outstanding share of the Bank's common stock was exchanged for
one share of the Company's common stock with the Bank becoming a wholly-owned
subsidiary of the Company. The Company's primary purpose is to serve as the
parent of the Bank. This transaction was accounted for in a manner similar to a
pooling-of-interests whereby the historical book values of the Bank's accounts
were combined with the Company's accounts on the date of the merger.
F-23
================================================================================
MountainBank Financial Corporation
Consolidated Balance Sheets
At June 30, 2001 and December 31, 2000
--------------------------------------------------------------------------------
Assets June 30, 2001 December 30, 2000
------------- -----------------
Cash and due from banks $ 6,151,127 $ 7,797,745
Interest bearing deposits with banks 22,199,695 3,667,612
Federal funds sold 10,039,000 9,220,000
Investment securities available for sale 43,434,794 35,415,821
Restricted equity securities 1,421,200 453,300
Loans, net of allowance for loan losses of $4,424,528
at June 30, 2001 and $3,006,842 at December 31, 2000 315,714,002 197,372,973
Property and equipment, net 2,831,096 2,322,157
Accrued income 2,513,827 2,007,804
Other assets 1,393,476 851,608
------------ ------------
Total assets $405,698,217 $259,109,020
============ ============
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits $ 25,351,163 $ 15,531,055
Interest-bearing deposits 320,380,568 217,807,421
------------ ------------
Total deposits 345,731,731 233,338,476
Federal funds purchased and
securities sold under agreements to repurchase 3,603,485 3,145,147
FHLB advance 25,000,000 -
Note payable 5,000,000 -
Obligations under capital lease 747,986 759,804
Accrued interest payable 5,479,949 2,840,440
Other liabilities 1,073,179 814,734
------------ ------------
Total liabilities 386,636,330 240,898,601
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, $4 par value; 10,000,000 shares
authorized; 1,871,938 and 1,873,461 shares issued and
outstanding at December 31, 2000 and June 30, 2001 7,493,844 7,487,752
Surplus 9,404,066 9,400,906
Retained earnings (deficit) 1,979,441 1,182,510
Unrealized appreciation on investment securities
available for sale 184,536 139,251
------------ ------------
Total stockholders' equity 19,061,887 18,210,419
------------ ------------
Total liabilities and stockholders' equity $405,698,217 $259,109,020
============ ============
See Notes to Consolidated Financial Statements
F-24
================================================================================
MountainBank Financial Corporation
Consolidated Balance Sheets
For the six and three months ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------- ---------- ------------ ----------
Interest income
Deposits with banks $ 95,111 $ 178,927 $ 146,905 $ 339,169
Federal funds sold 97,909 63,249 189,403 115,387
Investment securities, taxable 514,040 376,406 1,062,026 664,892
Loans and fees on loans 6,418,697 2,886,171 11,671,352 5,123,497
---------- ---------- ----------- ----------
Total interest income 7,125,757 3,504,753 13,069,686 6,242,945
---------- ---------- ----------- ----------
Interest expense
Deposits 3,794,146 1,871,445 7,205,011 3,337,074
Federal funds purchases and securities sold
under agreements to repurchase 55,814 33,523 109,328 56,854
Other borrowed funds 332,403 21,032 346,612 34,576
---------- ---------- ----------- ----------
Total interest expense 4,182,363 1,926,000 7,660,951 3,428,504
---------- ---------- ----------- ----------
Net interest income 2,943,394 1,578,753 5,408,735 2,814,441
Provision for loan losses 865,000 395,000 1,492,000 785,000
---------- ---------- ----------- ----------
Net interest income after provision
for loan losses 2,078,394 1,183,753 3,916,735 2,029,441
---------- ---------- ----------- ----------
Noninterest income
Service charges on deposit accounts 202,590 112,725 351,475 209,106
Mortgage origination income 189,506 102,984 320,351 196,747
Gain on sale of loan - - - 150,977
Other service charges and fees 110,984 57,762 198,338 85,003
---------- ---------- ----------- ----------
Other income 503,080 273,471 870,164 641,833
---------- ---------- ----------- ----------
Noninterest expense
Salaries and employee benefits 1,097,811 567,723 1,860,573 1,035,841
Occupancy expense 297,299 161,139 550,548 300,202
Other expense 684,748 344,579 1,158,847 599,759
---------- ---------- ----------- ----------
Total noninterest expense 2,079,858 1,073,441 3,569,968 1,935,802
---------- ---------- ----------- ----------
Income before income taxes 501,616 383,783 1,216,931 735,472
Income tax expense 210,000 107,940 420,000 220,538
---------- ---------- ----------- ----------
Net income $ 291,616 $ 275,843 $ 796,931 $ 514,934
========== ========== =========== ==========
Basic earnings per share $ 0.16 $ 0.17 $ 0.43 $ 0.34
========== ========== =========== ==========
Diluted earnings per share $ 0.14 $ 0.16 $ 0.39 $ 0.31
========== ========== =========== ==========
Weighted average shares outstanding 1,873,461 1,607,509 1,873,461 1,524,970
========== ========== =========== ==========
Notes to Consolidated Financial Statements
F-25
================================================================================
MountainBank Financial Corporation
Consolidated Statements of Cash Flows
For the six months ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
June 20, 2001 June 30, 2000
-------------- --------------
Cash flows from operating activities
Net income (loss) $ 796,931 $ 514,934
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization 225,844 132,605
Provision for loan losses 1,492,000 785,000
Deferred income taxes - -
Accretion of discount on securities, net of
amortization of premiums (39) (4,509)
Changes in assets and liabilities:
Accrued income (506,023) (298,620)
Other real estate owned - -
Other assets (541,868) (339,522)
Accrued interest payable 2,639,509 523,649
Other liabilities 258,445 148,670
------------- ------------
Net cash provided (used) by operating activities 4,364,799 1,462,207
------------- ------------
Cash flows from investing activities
Net (increase) decrease in federal funds sold (819,000) 1,570,000
Net (increase) decrease in interest-bearing deposits with bank (18,532,083) (236,237)
Purchases of investment securities (17,316,055) (12,197,415)
Maturities of investment securities 8,374,506 1,160,618
Net increase in loans (119,833,029) (43,469,503)
Purchases of property and equipment (734,783) (306,752)
------------- ------------
Net cash used in investing activities (148,860,444) (53,479,289)
------------- ------------
Cash flows from financing activities
Net increase in noninterest-bearing deposits 9,820,108 1,932,630
Net increase in interest-bearing deposits 102,573,147 41,785,288
Net increase in Federal funds purchased securities sold
under agreements to repurchase 458,338 5,344,451
Net increase in notes payable 5,000,000 -
Increase in FHLB advances 25,000,000 -
Repayment of obligations under capital lease (11,818) (9,225)
Proceeds from the exercise of stock options 9,252 -
Proceeds from the issuance of common stock, net - 4,648,800
------------- ------------
Net cash provided by financing activities 142,849,027 53,701,944
------------- ------------
Net increase in cash and cash equivalents (1,646,618) 1,684,862
Cash and cash equivalents, beginning 7,797,745 4,298,207
------------- ------------
Cash and cash equivalents, ending $ 6,151,127 $ 5,983,069
============= ============
Supplemental disclosures of cash flow information
Interest paid $ 5,021,442 $ 2,904,855
============= ============
Income taxes paid $ 420,000 $ 220,538
============= ============
See Notes to Consolidated Financial Statements
F-26
================================================================================
MountainBank Financial Corporation
Consolidated Statements of Cash Flows
For the six months ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
Accumulated
Common Stock Retained Other
---------------------- Earnings Comprehensive
Shares Amount Surplus (Deficit) Income (Loss) Total
---------- ---------- ---------- ----------- ------------- -----------
Balance, December 31, 1999 1,442,433 $5,769,730 $4,385,302 $ 126,541 $ (59,081) $10,222,492
Comprehensive income
Net income - - - 514,934 - 514,934
Net change in unrealized
appreciation on
investment securities
available for sale - - - - 91,892 91,892
-----------
Total comprehensive income - - - - - 606,826
Shares issued pursuant to
secondary stock offering 292,493 1,169,975 3,478,825 - - 4,648,800
--------- ---------- ---------- ---------- ----------- -----------
Balance, June 30, 2000 1,734,926 $6,939,705 $7,864,127 $ 641,475 $ 32,811 $15,478,118
========= ========== ========== ========== =========== ===========
Balance, December 31, 2000 1,871,938 $7,487,752 $9,400,906 $1,182,510 $139,251 $18,210,419
Comprehensive income
Net income - - - 796,931 - 796,931
Net change in unrealized
appreciation on
investment securities
available for sale - - - - 45,285 45,285
-----------
Total comprehensive income - - - - - 842,216
Shares issued pursuant to
secondary stock offering
and Employee and Director
stock option plans 1,523 6,092 3,160 - - 9,252
--------- ---------- ---------- ---------- ----------- -----------
Balance, June 30, 2001 1,873,461 $7,493,844 $9,404,066 $1,979,441 $ 184,536 $19,061,887
========= ========== ========== ========== =========== ===========
See Notes to Consolidated Financial Statements
F-27
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization:
MountainBank Financial Corporation (the "Company") is a single bank holding
company incorporated on January 10, 2001 by the Board of Directors of
MountainBank (the "Bank"). Prior to its acquisition of the Bank, the Company
conducted no business or operations other than those activities related to the
acquisition. On March 30, 2001, the Company acquired the Bank under North
Carolina law and in accordance with the terms of an Agreement and Plan of
Reorganization and Share Exchange dated January 11, 2001 (the "Agreement").
MountainBank, the Company's wholly owned bank subsidiary, is a state
chartered, full service commercial banking institution, insured by the FDIC and
incorporated under the laws of North Carolina. The Bank currently operates nine
full service banking offices, one loan production office and an administration
center. The Bank's full service offices are located in Hendersonville, N.C. (2),
Columbus, N.C., Fletcher, N.C., Asheville, N.C., Lake Lure, N.C., Forest City,
N.C., Marion, N.C. and Waynesville, N.C. The Bank has received approval from
regulators to open an additional branch office in Morganton, N.C. and expects to
open this office by year end 2001. The Bank is subject to regulation by the FDIC
and the North Carolina State Banking Commission.
Basis of Presentation:
The financial statements as of June 30, 2001 and for the periods ended June
30, 2001 and 2000, have been prepared by MountainBank Financial Corporation
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the information furnished in
the interim financial statements reflects all adjustments necessary to present
fairly the Company's financial position, results of operations and cash flows
for such interim periods. Management believes that all interim period
adjustments are of a normal recurring nature. These financial statements should
be read in conjunction with the Company's audited financial statements and the
notes thereto as of December 31, 2000, included its Annual Report on Form 10KSB
for the fiscal year ended December 31, 2000.
Statements in this report as to the Company's projections for expansion,
capital expenditures, earnings and other such issues as well as for future
financial or economic performance of the Company are "forward looking"
statements, and are being provided in reliance upon the "safe harbor" provision
of the Private Securities Litigation Reform Act of 1995. Important factors that
could cause actual results or events to differ materially from those projected,
estimated, assumed or anticipated in any such forward looking statements include
changes in general economic conditions in the Company's markets, loan losses,
including loan losses resulting from adverse economic conditions, increased
competition, any loss of the Company's key management personnel, changes in
governmental regulations and other factors.
The accounting and reporting policies of the Company follow generally
accepted accounting principles and general practices within the financial
services industry. The accounting policies followed are set forth in Note 1 to
the Company's 2000 Financial Statements incorporated in the Company's 2000 Form
10KSB.
Commitments and Other Contingencies:
In the normal course of business there are various commitments and
contingent liabilities such as commitments to extend credit, which are not
reflected on the financial statements. Management does not anticipate any
significant losses to result from these transactions. The unfunded portion of
loan commitments and standby letters of credit as of June 30, 2001 was $58.0
million.
F-28
================================================================================
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Properties and Equipment:
Bank properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed by the straight-line method over periods
of two to thirty-five years for capital leases and leasehold improvements and
from two to twenty years for furniture and equipment.
F-29
[This page intentionally left blank.]
F-30
FINANCIAL STATEMENTS OF
FIRST WESTERN BANK
Index to Financial Statements
Page
----
Audited Financial Statements
Independent Auditors' Report............................................................. F-32
Balance Sheets -- December 31, 2000 and 1999............................................. F-33
Statements of Operations and Comprehensive Income (Loss) -- Years ended
December 31, 2000, 1999 and 1998...................................................... F-34
Statements of Changes in Shareholders' Equity -- Years ended
December 31, 2000, 1999 and 1998...................................................... F-35
Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998................. F-36
Notes to Financial Statements -- Years ended December 31, 2000, 1999 and 1998............ F-38
Unaudited Interim Financial Statements
Balance Sheets -- June 30, 2001 (Unaudited) and December 31, 2000........................ F-53
Statements Income and Comprehensive Income (Unaudited) --
Three- and six-month periods ended June 30, 2001 and 2000.............................. F-54
Statements of Cash Flows (Unaudited) -- Six months ended
June 30, 2001 and 2000................................................................ F-55
Notes to Financial Statements (Unaudited) -- Three- and six-month periods
ended June 30, 2001 and 2000........................................................... F-56
F-31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
First Western Bank:
We have audited the accompanying balance sheets of First Western Bank (the
"Bank") as of December 31, 2000 and 1999 and the related statements of
operations and comprehensive income (loss), changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Bank at December 31, 2000 and 1999 and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
January 19, 2001
Raleigh, North Carolina
F-32
FIRST WESTERN BANK
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
--------------------------------------------------------------------------------
2000 1999
ASSETS:
Cash and cash equivalents (Notes 1 and 13):
Cash and due from banks $ 2,152,491 $ 3,201,365
Interest-bearing deposits 270,456 2,665,135
Federal funds sold - 5,260,000
----------- -----------
Total cash and cash equivalents 2,422,947 11,126,500
----------- -----------
Investment securities (Notes 1, 2 and 13):
Available for sale, at fair value (amortized cost of $10,475,611 and
$4,817,562 at December 31, 2000 and 1999, respectively) 10,634,393 4,588,180
Held to maturity, at amortized cost (fair value of $1,769,716 and
$4,307,288 at December 31, 2000 and 1999, respectively) 1,778,722 4,347,521
----------- -----------
Total investments 12,413,115 8,935,701
----------- -----------
Loans, net of allowance for loan losses of $714,215 and $562,083 at
December 31, 2000 and 1999, respectively (Notes 1, 3 and 13) 51,314,564 39,079,445
Premises and equipment, net (Notes 1, 4 and 9) 3,814,451 1,973,972
Accrued interest receivable 378,637 228,941
Federal Home Loan Bank stock 246,200 246,200
Income taxes receivable - 53,096
Goodwill (Note 1) 1,176,670 1,292,143
Other assets 72,122 152,768
----------- -----------
TOTAL $71,838,706 $63,088,766
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Notes 5 and 13):
Demand $ 8,068,635 $ 6,659,888
NOW accounts 4,077,517 3,472,532
Money market accounts 6,829,967 8,351,942
Savings 2,898,209 2,677,420
Time deposits of $100,000 or more 11,385,666 9,989,333
Other time deposits 23,658,389 17,029,018
----------- -----------
Total deposits 56,918,383 48,180,133
Federal funds purchased 710,000 -
Accrued interest and other liabilities (Note 7) 413,895 622,072
Deferred income taxes (Note 6) 324,877 455,833
----------- -----------
Total liabilities 58,367,155 49,258,038
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (Notes 1 and 11):
Preferred stock, no par value, authorized - 1,000,000, none issued - -
Common stock, $5.00 par value, authorized - 5,000,000 shares;
issued and outstanding - 1,395,282 and 1,507,796 shares at
December 31, 2000 and 1999, respectively 6,976,410 7,538,980
Additional paid-in capital 6,882,093 7,353,565
Accumulated deficit (483,896) (922,435)
Accumulated other comprehensive income (loss) 96,944 (139,382)
----------- -----------
Total shareholders' equity 13,471,551 13,830,728
----------- -----------
TOTAL $71,838,706 $63,088,766
=========== ===========
See notes to financial statements.
F-33
FIRST WESTERN BANK
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
2000 1999 1998
INTEREST INCOME (Note 1):
Interest and fees on loans $4,016,817 $ 3,163,593 $ 489,023
Interest on deposits with other banks 78,477 203,235 340,023
Interest income on federal funds sold 192,558 576,383 220,255
Interest on securities 680,412 240,938 101,568
---------- ----------- ----------
Total interest income 4,968,264 4,184,149 1,150,869
---------- ----------- ----------
INTEREST EXPENSE (Note 1):
Deposits 2,242,314 1,908,709 440,032
Mortgage payable - 1,064 14,908
---------- ----------- ----------
Total interest expense 2,242,314 1,909,773 454,940
---------- ----------- ----------
NET INTEREST INCOME 2,725,950 2,274,376 695,929
PROVISION FOR PROBABLE LOAN LOSSES
(Notes 1 and 3) 198,500 66,100 131,600
---------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,527,450 2,208,276 564,329
---------- ----------- ----------
OTHER INCOME:
Service charges on deposit accounts 227,862 141,757 58,694
Other service charges and fees 293,156 160,525 18,260
Other income 90,542 24,716 24,901
---------- ----------- ----------
Total other income 611,560 326,998 101,855
---------- ----------- ----------
OTHER EXPENSES:
Salaries and wages 1,123,712 868,247 585,459
Employee benefits 250,240 177,863 99,788
Occupancy expense 245,173 145,853 142,371
Equipment expense 157,965 103,786 145,309
Amortization of goodwill 115,474 62,603 -
Other (Note 10) 1,156,668 941,313 493,014
---------- ----------- ----------
Total other expenses 3,049,232 2,299,665 1,465,941
---------- ----------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 89,778 235,609 (799,757)
INCOME TAX BENEFIT (Note 6) 348,761 - -
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 1) - - (61,458)
---------- ----------- ----------
NET INCOME (LOSS) 438,539 235,609 (861,215)
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX - Unrealized holding gains (losses) on
securities available for sale 236,326 (139,382) -
---------- ----------- ----------
COMPREHENSIVE INCOME (LOSS) $ 674,865 $ 96,227 $ (861,215)
========== =========== ==========
BASIC PER SHARE AMOUNTS (Note 1):
Income (loss) before cumulative effect of change in
accounting principle $ .30 $ .16 $ (1.10)
Cumulative effect of change in accounting principle - - (0.08)
---------- ----------- ----------
Net income (loss) $ .30 $ .16 $ (1.18)
========== =========== ==========
See notes to financial statements.
F-34
FIRST WESTERN BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
Common
Common Stock Stock
Common Stock Subscribed Subscriptions
---------------------------- ---------------------------
Shares Amount Shares Amount Receivable
BALANCE, DECEMBER 31, 1997 723,689 $ 3,618,445 4,849 $ 53,339 $(47,039)
Net loss - - - - -
Issuance of stock in purchase transaction 781,377 3,906,885 - - -
Conversion of common stock subscriptions 2,730 13,650 (2,730) (47,039) 41,046
Common stock subscription refunds - - (2,119) (6,300) 5,993
--------- ----------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 1,507,796 7,538,980 - - -
Net income - - - - -
Net unrealized loss on available-for-sale
securities, net of tax - - - - -
--------- ----------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 1,507,796 7,538,980 - - -
Net income - - - - -
Repurchase of common stock (112,514) (562,570) - - -
Net unrealized gain on available-for-sale
securities, net of tax - - - - -
--------- ----------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 1,395,282 $ 6,976,410 - $ - $ -
========= =========== ======== ======== ========
Accumulated
Additional Other
Paid-In Comprehensive Accumulated
Capital Income (Loss) Deficit
BALANCE, DECEMBER 31, 1997 $ 4,200,661 $ - $ (296,829)
Net loss - - (861,215)
Issuance of stock in purchase transaction 3,125,508 - -
Conversion of common stock subscriptions 27,396 - -
Common stock subscription refunds - - -
----------- --------- ----------
BALANCE, DECEMBER 31, 1998 7,353,565 - (1,158,044)
Net income - - 235,609
Net unrealized loss on available-for-sale
securities, net of tax - (139,382) -
----------- --------- ----------
BALANCE, DECEMBER 31, 1999 7,353,565 (139,382) (922,435)
Net income - - 438,539
Repurchase of common stock (471,472) - -
Net unrealized gain on available-for-sale
securities, net of tax - 236,326 -
----------- --------- ----------
BALANCE, DECEMBER 31, 2000 $ 6,882,093 $ 96,944 $ (483,896)
=========== ========= ==========
See notes to financial statements.
F-35
FIRST WESTERN BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 438,539 $ 235,609 $ (861,215)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan loss 198,500 66,100 131,600
Depreciation 242,916 110,649 65,815
Amortization of (discount) premium on investment
securities (41,836) 2,487 1,705
Amortization of goodwill 115,473 62,603 -
Gain on asset disposal (53,267) - -
Deferred income tax benefit (282,794) - -
Increase in accrued interest receivable (149,697) (138,206) (67,508)
Decrease in income taxes receivable 53,096 591,404 -
Decrease (increase) in other assets 80,646 58,634 (290,430)
(Decrease) increase in accrued interest payable and
other liabilites (208,172) (235,591) 120,229
------------ ------------ ------------
Net cash provided by (used in) operating activities 393,404 753,689 (899,804)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities (6,689,458) (3,957,043) (1,001,075)
Purchases of held to maturity securities - (2,500,000) (1,948,376)
Maturities of available for sale securities 1,075,180 1,045,200 -
Maturities of held to maturity securities 2,566,862 97,071 -
Net increase in loans (12,433,619) (3,592,916) (8,697,015)
Proceeds from sale of other real estate 85,000 - -
Cash paid for Mitchell Savings Bank, less cash acquired - (228,032) 427,244
Capital expenditures (2,115,128) (1,400,689) (122,140)
------------ ------------ ------------
Net cash used in investing activities (17,511,163) (10,536,409) (11,341,362)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and
savings accounts 712,544 8,655,611 8,769,879
Net increase (decrease) in time deposits 8,025,704 (264,656) 8,555,213
Net change in federal funds purchased 710,000 - -
Net (decrease) increase in mortgage notes payable - (147,492) 147,492
Refund of stock subscriptions - - (6,300)
Repurchase of common stock (1,034,042) - -
Issuance of common stock - - 41,046
------------ ------------ ------------
Net cash provided by financing activities 8,414,206 8,243,463 17,507,330
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,703,553) (1,539,257) 5,266,164
CASH AND CASH EQUIVALENTS:
Beginning of year 11,126,500 12,665,757 7,399,593
------------ ------------ ------------
End of year $ 2,422,947 $ 11,126,500 $ 12,665,757
============ ============ ============
F-36
FIRST WESTERN BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
2000 1999 1998
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 2,139,900 $ 1,942,592 $ 394,175
On December 31, 1998, the Bank purchased all of the =========== =========== =========
common stock of Mitchell Bancorp, Inc. for cash of
$9,727,450 and common stock valued at $7,032,393. The
fair value of assets acquired was $39,429,999 (including
cash equivalents of $10,154,695), and liabilities assumed
totaled $23,337,362.
See notes to financial statements.
F-37
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - First Western Bank (the "Bank") is a state chartered
commercial bank headquartered in Burnsville, North Carolina which provides
consumer and commercial banking services in Mitchell and Yancey Counties
and surrounding areas. The Bank was incorporated in North Carolina on
December 1, 1997 and began accepting deposits and making loans on December
15, 1997.
Effective December 31, 1998, First Western Bank completed the acquisition
of Mitchell Bancorp, Inc. ("Mitchell") for $9,727,450 cash, plus 781,377
shares of common stock with total value of $7,032,393. The Mitchell
acquisition was accounted for by the purchase method of accounting and,
accordingly, the results of operations of Mitchell for the year ended
December 31, 1998 were excluded from the accompanying financial
statements. Assets and liabilities assumed have been recorded at their
estimated fair values. The excess of purchase price over the estimated
fair value of net assets acquired was allocated to goodwill and is being
amortized on a straight-line method over a 12-year period. As the
acquisition occurred on December 31, 1998, no goodwill amortization was
recorded in 1998.
The following unaudited pro forma information presents the results of
operations of the Bank as if the acquisition had taken place January 1,
1998:
Year Ended
December 31,
1998
Interest and non-interest income $ 3,818,869
Net loss $(1,063,215)
Net loss per share $ (1.46)
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred
on the date indicated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and interest-bearing
deposits with banks. Generally, federal funds sold are purchased and sold
for one-day periods.
Investment Securities - The Bank classifies investment securities into
three categories. Debt securities that the Bank has the positive intent
and ability to hold to maturity are classified as "held to maturity
securities" and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling in the
near term are classified as "trading securities" and reported at fair
value, with unrealized gains and losses included in earnings. Debt
securities not classified as either held to maturity securities or trading
securities and equity securities not classified as trading securities are
classified as "available for sale securities" and reported at fair value,
with unrealized gains and losses
F-38
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
excluded from earnings and reported as a separate component of
shareholders' equity, net of tax and as an item of other comprehensive
income. Declines in the fair value of individual held to maturity and
available for sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized
losses.
Transfers of securities between classifications are accounted for at fair
value. The Bank has not classified any securities as trading securities.
Realized gains and losses on investment securities are recognized at the
time of sale based upon the specific identification method. Premiums and
discounts are amortized to expense and accreted to income over the lives
of the securities.
Loans and Allowance for Loan Losses - The Bank grants mortgage,
commercial, and consumer loans to customers. A substantial portion of the
loan portfolio is represented by commercial and real estate loans
throughout Mitchell and Yancey counties. The ability of the Bank's debtors
to honor their contracts is dependent upon the real estate and general
economic conditions of this area.
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Loans that are deemed to be impaired (i.e.,
probable that the Bank will be unable to collect all amounts due according
to the terms of the loan agreement) are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical matter, at the loan's observable market
value or fair value of the collateral if the loan is collateral dependent.
A valuation reserve is established to record the difference between the
stated loan amount and the present value, market value or fair value of
collateral, as appropriate, of the impaired loan. Impaired loans may be
valued on a loan-by-loan basis (e.g., loans with similar risk
characteristics). The total of impaired loans, impaired loans on
nonaccrual basis, the related allowance for loan losses, and interest
income recognized on impaired loans is disclosed in Note 3.
Non-accrual loans are those loans on which the accrual of interest has
ceased. Loans are placed on nonaccrual status if, in the opinion of
management, principal or interest is not likely to be paid in accordance
with the terms of the loan agreement, or when principal or interest is
past due 90 days or more. Interest accrued but not collected at the date a
loan is placed on nonaccrual status is reversed against interest income in
the current period. Interest income on nonaccrual loans is recognized only
to the extent received in cash. However, where there is doubt regarding
the ultimate collectibility of the loan principal, cash receipts, whether
designated as principal or interest, are thereafter applied to reduce the
carrying value of the loan. Loans are restored to accrual status only when
interest and principal payments are brought current and future payments
are reasonably assured.
There were no loans restructured for the years ended December 31, 2000,
1999 and 1998.
The provision for loan losses charged to operations is an amount
sufficient to bring the allowance for loan losses to an estimated balance
considered adequate to absorb potential losses in the portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, current economic conditions, historical loan
loss experience, and other risk factors. Recovery of the carrying value of
loans is dependent to some extent on future economic, operating and other
conditions that may be beyond the Bank's control. Unanticipated future
adverse changes in such conditions could result in material adjustments to
the allowance for loan losses.
F-39
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
Premises and Equipment and Other Long-Lived Assets - Premises and
equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization, computed by the straight-line
method, are charged to operations over the properties' estimated useful
lives (5 to 15 years for furniture and equipment, 20 to 50 years for
buildings and building improvements) and, in the case of leasehold
improvements, the term of the lease, if shorter. Maintenance and repairs
are charged to operations in the year incurred. Gains and losses on
dispositions are included in current operations.
The Bank reviews long-lived assets and certain identifiable intangibles to
be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows is less than the stated
amount of the asset, an impairment loss is recognized.
Real Estate Acquired by Foreclosure - Real estate acquired by foreclosure
is stated at the lower of cost or fair value. Any initial losses at the
time of foreclosure are charged against the allowance for loan losses with
any subsequent losses or writedowns included in the statements of
operations as a component of other expenses.
Goodwill - Goodwill includes the excess of acquisition costs over fair
value of net assets acquired in the purchase of Mitchell Bancorp, Inc. and
is being amortized using the straight-line basis over a period of 12
years.
Income Taxes - Deferred taxes are computed using the asset and liability
approach. The tax effects of differences between the tax and financial
accounting bases of assets and liabilities are reflected in the balance
sheet at the tax rates expected to be in effect when the differences
reverse. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes. A
valuation allowance is provided for deferred tax assets until it is more
likely than not that the asset will be realized.
Interest Income and Expense - The Bank utilizes the accrual method of
accounting, except for immaterial amounts of loan income and other fees
which are recorded as income when collected. Substantially all loans earn
interest on the level yield method based on the daily outstanding balance.
The accrual of interest is discontinued when, in the opinion of
management, principal or interest is not likely to be paid in accordance
with the terms of the loan agreement, or when principal or interest is
past due 90 days or more.
The Bank defers the immediate recognition of certain loan origination fees
and certain loan origination costs when new loans are originated and
amortizes these deferred amounts over the life of each related loan as an
adjustment to interest income.
Start-up Costs - Effective January 1, 1998, the Bank expensed the
unamortized balance of previously capitalized start-up costs to conform to
a newly issued accounting standard. This expense has been reported as the
cumulative effect of a change in accounting principle.
Stock-Based Compensation - The Bank measures compensation costs related to
employee stock options using the intrinsic value of the equity instrument
granted (i.e., the excess of the market price at the grant date of the
stock to be issued over the exercise price of the option) rather than the
fair value of the option granted.
F-40
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
Common Stock Repurchase Plan - In April 2000, the Bank's shareholders
approved a plan to reduce equity capital through the repurchase and
retirement of up to 150,000 shares of its outstanding common stock at a
price not to exceed $14.00 per share. The Plan covers a period of one year
through April 2001. The Bank obtained the necessary regulatory agencies'
approvals. During 2000, the Bank purchased 112,514 shares at a total cost
of $1,034,042.
Per Share Amounts - Per share amounts have been computed using both the
weighted average number of shares outstanding of common stock for the
purposes of computing basic earnings per share and the weighted average
number of shares outstanding of common stock plus dilutive common stock
equivalents for the purpose of computing diluted earnings per share. The
basic earnings per share weighted average shares were 1,464,821 in 2000,
1,507,796 in 1999, and 728,429 in 1998. Since the effect of outstanding
stock options would be antidilutive, diluted net income (loss) per share
does not differ from basic net income (loss) per share as presented.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses.
Reclassifications - Certain 1999 and 1998 balances have been reclassified
to conform to 2000 presentation.
Impact of Newly Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. The new standard requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. SFAS No. 133 was amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date for FASB Statement No. 133, which delays the Bank's effective date
until January 1, 2001. As of December 31, 2000, management does not
believe that SFAS No. 133 will have an effect on the Bank's financial
statements and current disclosures.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS
No. 140 revises the standards for accounting for securitization and other
transfers of financial assets and collateral and requires certain
disclosures, but carries over most of the provisions of SFAS No. 125
without reconsideration. The statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. Management does not believe that SFAS No. 140 will
have a material effect on the Bank's financial statements and current
disclosures.
F-41
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of
investment securities at December 31, 2000 and 1999 are as follows:
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
Available for sale -
Federal Home Loan Mortgage
Corporation common stock $ 859,854 $ 59,214 $ - $ 919,068
US Government agency debt
securities:
Within one year 2,243,801 - 2,972 2,240,829
After one year but within 5 years 5,473,640 78,832 - 5,552,472
After 5 years but within 10 years 982,037 8,744 - 990,781
Mortgage-backed securities 916,279 14,964 - 931,243
Total $ 10,475,611 $ 161,754 $ 2,972 $ 10,634,393
============ ========= ========= ============
Held to maturity -
US Government agency debt
securities - within one year $ 1,500,000 $ - $ 5,625 $ 1,494,375
Mortgage-backed securities 278,722 - 3,381 275,341
------------ --------- --------- ------------
Total held to maturity securities $ 1,778,722 $ - $ 9,006 $ 1,769,716
============ ========= ========= ============
1999
Available for sale -
Federal Home Loan Mortgage
Corporation common stock $ 859,854 $ - $ 231,852 $ 628,002
US Government agency debt
securities:
Within one year 1,000,452 8 - 1,000,460
After one year but within 5 years 2,957,256 2,462 - 2,959,718
------------ --------- --------- ------------
Total $ 4,817,562 $ 2,470 $ 231,852 $ 4,588,180
============ ========= ========= ============
Held to maturity -
US Government agency debt
securities:
Within one year $ 2,500,347 $ - $ 12,379 $ 2,487,968
After one year but within 5
years 1,500,000 - 19,219 1,480,781
------------ --------- --------- ------------
Total US Government agencies 4,000,347 - 31,598 3,968,749
------------ --------- --------- ------------
Mortgage-backed securities 347,174 - 8,635 338,539
------------ --------- --------- ------------
Total held to maturity securities $ 4,347,521 $ - $ 40,233 $ 4,307,288
============ ========= ========= ============
As of December 31, 2000, there were no investments with call options.
There were no gross realized gains or losses on sales of securities in the
years ended December 31, 2000, 1999 and 1998.
F-42
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
3. LOANS
Loans at December 31, 2000 and 1999 consisted of the following:
2000 1999
Residential (1-4 family) real estate loans $ 24,524,676 $ 24,723,056
Commercial loans 20,108,767 10,743,567
Land loans 2,025,454 1,863,433
Consumer loans 5,608,750 2,475,035
------------- -------------
Subtotal 52,267,647 39,805,091
Allowance for loan losses (714,215) (562,083)
Net deferred loan origination fees (238,868) (163,563)
------------- -------------
Total $ 51,314,564 $ 39,079,445
============= =============
Directors and officers of the Bank and companies with which they are
affiliated may be customers of and borrowers from the Bank in the ordinary
course of business. At December 31, 2000 and 1999, directors, principal
officers, and other related parties had $4,682,273 and $6,782,602 of
direct or indirect indebtedness to the Bank, respectively. In the opinion
of management, these loans do not involve more than normal risk of
collectibility, nor do they present other unfavorable features.
The changes in the allowance for loan losses consisted of the following:
2000 1999 1998
Allowance, beginning of year $ 562,083 $ 512,600 $ -
Provision for loan losses 198,500 66,100 131,600
Write-offs (56,037) (25,385) -
Recoveries 9,669 8,768 -
Allowance recorded in connection with loans acquired
from Mitchell Bancorp, Inc. - - 381,000
---------- ---------- ----------
Allowance, end of year $ 714,215 $ 562,083 $ 512,600
========== ========== ==========
Loans considered impaired by management and not currently accruing
interest at December 31, 2000 and 1999 totaled $322,787 and $489,326,
respectively. For the years ended December 31, 2000, 1999 and 1998, the
Bank recognized interest income on those impaired loans of approximately
$9,815, $3,852 and $16,628, respectively. No specific allowance for these
loans was considered necessary by management.
The Company is not committed to lend additional funds to debtors whose
loans have been modified.
F-43
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
2000 1999
Land and land improvements $ 340,170 $ 356,420
Buildings and building improvements 2,398,187 151,231
Furniture and equipment 1,103,333 599,342
Construction in progress 562,277 1,290,038
Total 4,403,967 2,397,031
Less accumulated depreciation and amortization 589,516 423,059
----------- -----------
Total $ 3,814,451 $ 1,973,972
=========== ===========
5. DEPOSITS
The scheduled maturities of time deposits of $100,000 or more and other
time deposits are as follows:
2000 1999
2001 $ 28,251,879 $ 13,455,954
2002 2,848,427 11,752,628
2003 2,294,195 1,809,769
2004 805,761 -
2005 and thereafter 843,793 -
------------ ------------
Total $ 35,044,055 $ 27,018,351
============ ============
Deposits in excess of $100,000 are not federally insured.
6. INCOME TAXES
The components of the income tax benefit for the year ended December 31,
2000 follows:
Income tax benefit:
Current $ 65,967
Deferred 282,794
-----------
Total $ 348,761
===========
The Bank recorded no income tax benefit or expense for the years ended
December 31, 1999 and 1998. A deferred tax provision of $151,838 and a
benefit of $90,000 related to unrealized gains and losses on investment
securities available for sale during 2000 and 1999, respectively, were
allocated to shareholders' equity in the respective years.
F-44
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
A reconciliation of reported income tax benefit for the years ended
December 31, 2000, 1999 and 1998 to the amount of income tax expense
(benefit) computed by multiplying income (loss) before income taxes by the
statutory federal income tax rate of 34% follows:
2000 1999 1998
Tax expense (benefit) at statutory rate $ 30,525 $ 80,107 $ (292,813)
Change in income taxes resulting from:
State income taxes (benefit) net of federal tax
benefit (6,362) 10,885 (41,209)
Change in valuation allowance for deferred tax
assets (391,439) (83,330) 338,631
Other, net 18,515 (7,662) (4,609)
----------- ---------- ----------
Income tax benefit reported $ (348,761) $ - $ -
=========== ========== ==========
The tax effect of the cumulative temporary differences and carryforwards
that gave rise to the deferred tax assets and liabilities are as follows:
2000 Assets Liabilities Total
Net operating loss carryforward $ 160,276 $ - $ 160,276
First Home Loan Bank stock dividends - (50,052) (50,052)
Basis difference on fixed assets 4,975 - 4,975
Intangible assets 39,390 - 39,390
Unrealized gain on available-for-sale securities - (61,838) (61,838)
Purchase accounting adjustments - (701,760) (701,760)
Allowance for loan losses 278,656 - 278,656
Other, net 21,040 (15,564) 5,476
----------- ----------- -----------
Total $ 504,337 $ (829,214) $ (324,877)
----------- ----------- -----------
1999
Net operating loss carryforward $ 258,857 $ - $ 258,857
First Home Loan Bank stock dividends - (50,052) (50,052)
Basis difference on fixed assets - (19,310) (19,310)
Intangible assets 59,938 - 59,938
Unrealized loss on available-for-sale securities 90,000 - 90,000
Purchase accounting adjustments - (740,438) (740,438)
Allowance for loan losses 202,001 - 202,001
Deferred loan fees 63,168 - 63,168
Other, net 74,361 (2,919) 71,442
----------- ----------- -----------
748,325 (812,719) (64,394)
Valuation allowance (391,439) - (391,439)
----------- ----------- -----------
Total $ 356,886 $ (812,719) $ (455,833)
=========== =========== ===========
F-45
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
7. EMPLOYEE BENEFIT PLANS
During 1999, the Bank established a defined contribution 401(k) retirement
plan ("retirement plan") covering substantially all employees. In order to
participate in the retirement plan, employees must be at least 21 years of
age and have completed at least 1,000 hours of service to the Bank.
Employees may contribute up to 15% of eligible compensation annually into
the retirement plan. The plan does not provide for an employer matching
contribution. Employee contributions to the plan totaled $41,993 and
$5,845 during 2000 and 1999, respectively.
During 2000, the Bank terminated the Mitchell defined benefit pension plan
assumed in the December 31, 1998 acquisition (Note 1) which covered all
full-time employees over the age 20-1/2 who had completed six months of
continuous employment. The Plan's participants received lump-sum
distributions of their benefits under the Plan. The distribution from the
Plan totaled $120,647 during 2000. The total payments made equaled the
total value of the plan assets at the time of distribution.
8. STOCK OPTIONS
In February 1999 and April 1998, the Bank's shareholders adopted the 1999
and 1998 Incentive Stock Option Plan (the "ISO Plan") and the 1999 and
1998 Nonstatutory Stock Option Plan (the "NSSO Plan"). At December 31,
2000 and 1999, an aggregate of 150,879 shares were reserved for issuance
for both the ISO Plan and NSSO Plan. The ISO Plan is for the employees of
the Bank only, while both the directors and employees are eligible to
receive options under the NSSO Plan. The plans provide for the granting of
options to purchase shares of the Bank's common stock at a price not less
than the fair market value at the time of the grant of the option. Options
granted under the ISO Plans and the 1998 NSSO Plan become exercisable as
to one-fifth of the grant per year over a five-year period commencing on
the date of grant. Options granted under the 1999 NSSO plan were 100%
vested at the date of grant. Upon termination, unexercised options held by
employees are rolled back into the plans for future grants. During May
1998, options to purchase 56,750 and 66,000 shares at $11.00 per share
were granted under the ISO and NSSO Plans, respectively. During May 1999,
options to purchase 38,825 and 71,500 at $9.50 per share were granted
under the ISO and NSSO Plans, respectively.
F-46
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
Certain option information for the years ended December 31, 2000, 1999 and
1998 follows:
Shares
-------------------------
NSSO ISO
Plan Plan
Outstanding at December 31, 1997 - -
Granted 66,000 56,570
Exercised - -
Expired or canceled - -
------- ------
Outstanding at December 31, 1998 66,000 56,570
Granted 71,500 38,825
Exercised - -
Expired or canceled - 2,500
------- ------
Outstanding at December 31, 1999 137,500 92,895
Granted - -
Exercised - -
Expired or canceled - 250
------- ------
Outstanding at December 31, 2000 137,500 92,645
======= ======
For various price ranges, weighted average characteristics of outstanding
stock options as of December 31, 2000 are as follows:
Outstanding Shares Exercisable Options
--------------------------------------------- -------------------------
Stock Range of Weighted Weighted
Option Exercise Remaining Average Average
Plan Prices Shares Life (Years) Price Shares Price
NSSO Plans $ 11.00 137,500 8.5 $ 11.00 107,200 $ 11.00
ISO Plans $ 9.50 92,645 8.5 $ 9.50 48,030 $ 9.50
------- -------
$9.50 - $11.00 230,145 8.5 $ 10.54 155,230 $ 10.54
======= =======
F-47
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
The Bank accounts for compensation costs related to the Bank's stock
option plans in accordance with the intrinsic method. Therefore, no
compensation cost has been recognized for stock option awards because the
options are granted at exercise prices based on the market value of the
Bank's stock on the date of grant. Had compensation cost for the Bank's
stock option plans been determined consistent with the fair value method,
the Bank's pro forma net income and earnings per share for the years ended
December 31, 2000, 1999 and 1998 would have been as follows:
2000 1999 1998
Net income (loss):
As reported $ 438,539 $ 235,609 $ (861,215)
Pro forma 232,107 (375,300) (1,023,564)
Net income (loss) per share:
As reported:
Basic $ .30 $ .16 $ (1.18)
Diluted .30 .16 (1.18)
Pro forma:
Basic $ .16 $ (.25) $ (1.41)
Diluted .16 (.25) (1.41)
The fair value of stock options granted by the Bank was estimated through
the use of the Black-Scholes option-pricing model applying the following
assumptions:
1999 1998
Risk-free interest rate 6.8% 4.7%
Expected option life 9 years 9 years
Expected volatility 45% 45%
Expected dividend yield 0% 0%
9. LEASES
The Bank leases banking facilities and certain real estate under operating
lease agreements. Rental expense charged to operations was $51,017,
$69,510, and $64,877 for the years ended December 31, 2000, 1999 and 1998.
F-48
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
As of December 31, 2000, future minimum lease payments under noncancelable
operating leases are as follows:
Year Payments
2001 $ 50,400
2002 50,400
2003 46,050
2004 16,200
2005 1,350
----------
$ 164,400
==========
10. OTHER INCOME AND EXPENSES
For the years ended December 31, 2000, 1999 and 1998, items included in
other expense that exceeded 1% of total revenues are set forth below:
2000 1999 1998
Items included in other expense:
Telephone $ 57,665 $ 60,801 $ 26,886
Advertising 110,795 40,872 14,671
Director's fees 61,500 - -
Accounting expense 82,272 61,460 71,248
Data processing expense 299,538 257,776 83,055
Merchant services expense 61,713 56,582 20,634
11. REGULATION AND REGULATORY RESTRICTIONS
The Bank is regulated by the Federal Deposit Insurance Corporation
("FDIC") and the North Carolina State Banking Commission.
The Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-49
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). As of December 31, 2000, the most recent
regulatory notifications categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. Management believes
as of December 31, 2000 and 1999, that the Bank meets all capital adequacy
requirements to which it is subject. To be categorized as adequately
capitalized under the regulatory framework for prompt corrective action,
the Bank must maintain the minimum capital ratios as set forth in the
table below.
The Bank's actual capital amounts and ratios are also presented in the
table (dollars in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
December 31, 2000:
Total Capital (to Risk Weighted
Assets) $ 12,839 25.09% $ 4,094 8% $ 5,117 10%
Tier I Capital (to Risk Weighted
Assets) $ 12,198 23.84% $ 2,047 4% $ 3,070 6%
Tier I Capital (to Average Assets) $ 12,198 17.57% $ 2,777 4% $ 3,472 5%
December 31, 1999:
Total Capital (to Risk Weighted
Assets) $ 13,009 34.78% $ 2,992 8% $ 3,740 10%
Tier I Capital (to Risk Weighted
Assets) $ 12,540 33.43% $ 1,496 4% $ 2,244 6%
Tier I Capital (to Average Assets) $ 12,540 20.43% $ 2,456 4% $ 3,070 5%
12. COMMITMENTS AND CONTINGENCIES
The Bank has various financial instruments (outstanding commitments) with
off-balance-sheet risk that are issued in the normal course of business to
meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit.
Commitments to extend credit are legally binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts outstanding do not
necessarily represent future cash requirements. Standby letters of credit
represent conditional commitments issued by the Bank to assure the
performance of a customer to a third party. The unused portion of
commitments to extend credit at December 31, 2000 and 1999 was $5,848,214
and $2,450,447, respectively.
The Bank's exposure to credit loss for commitments to extend credit and
standby letters of credit is the contractual amount of those financial
instruments. The Bank uses the same credit policies for making commitments
and issuing standby letters of credit as it does for on-balance sheet
financial instruments. Each customer's creditworthiness is evaluated on an
individual case-by-case basis. The amount and
F-50
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
type of collateral, if deemed necessary by management, is based upon this
evaluation of creditworthiness. Collateral held varies, but may include
marketable securities, deposits, property, plant and equipment, investment
assets, inventories and accounts receivable. Management does not
anticipate any significant losses as a result of these financial
instruments.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Bank could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair values (in thousands):
December 31, 2000 December 31, 1999
---------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and cash equivalents $ 2,423 $ 2,423 $11,127 $11,127
Securities available for sale 10,634 10,634 4,588 4,588
Securities held to maturity 1,779 1,770 4,348 4,307
Loans 52,029 51,855 39,642 37,575
Liabililties:
Demand deposits $ 21,874 $ 21,874 $ 21,162 $21,162
Time deposits 35,044 35,180 27,018 27,018
Off-balance-sheet liabilities - commitments
to extend credit $ 5,848 $ 2,450
The carrying amounts of cash and cash equivalents approximate their fair
value.
The fair value of marketable securities is based on quoted market prices
and prices obtained from independent pricing services.
The fair value of loans estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit rating and for the same remaining maturities.
The fair value of demand deposits and savings accounts is the amount
payable on demand at December 31, 2000. The fair value of fixed-maturity
certificates of deposit and individual retirement accounts is estimated
using the present value of the projected cash flows using rates currently
offered for similar deposits with similar maturities.
F-51
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
The notional amounts of commitments to lend for unused lines of credit,
first mortgages, and standby letters of credit approximate their fair
values.
The fair value estimates presented above are based on pertinent
information available to management as of December 31, 2000 and 1999.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
F-52
FIRST WESTERN BANK
BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
-----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2001 2000
(Unaudited)
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 2,294,901 $ 2,152,491
Interest-bearing deposits 70,900 270,456
----------- -----------
Total cash and cash equivalents 2,365,801 2,422,947
----------- -----------
Investment securities:
Available for sale, at fair value (amortized cost of $9,170,573
at June 30, 2001 and $10,475,611 at December 31, 2000) 9,427,040 10,634,393
Held to maturity, at amortized cost (fair value of $243,493
at June 30, 2001 and $1,769,716 at December 31, 2000) 240,449 1,778,722
----------- -----------
Total investments 9,667,489 12,413,115
----------- -----------
Loans, net of allowance for loan losses of $796,832 at
June 30, 2001 and $714,215 at December 31, 2000 60,043,212 51,314,564
Premises and equipment, net 3,678,078 3,814,451
Accrued interest receivable 356,088 378,637
Federal Home Loan Bank Stock 246,200 246,200
Goodwill 1,117,837 1,176,670
Other assets 59,740 72,122
----------- -----------
TOTAL $77,534,445 $71,838,706
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 9,272,339 $ 8,068,635
NOW accounts 4,690,597 4,077,517
Money market accounts 6,748,142 6,829,967
Savings 3,412,876 2,898,209
Time deposits of $100,000 or more 13,083,500 11,385,666
Other time deposits 23,496,990 23,658,389
----------- -----------
Total deposits 60,704,444 56,918,383
Overnight and other borrowings 2,554,179 710,000
Accrued interest payable and other liabilities 447,125 413,895
Deferred income taxes 422,246 324,877
----------- -----------
Total liabilities 64,127,994 58,367,155
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $5.00 par value, authorized - 5,000,000
shares; issued and outstanding - 1,373,282 shares at
June 30, 2001 and 1,395,282 at December 31, 2000 6,866,410 6,976,410
Additional paid-in capital 6,802,943 6,882,093
Accumulated deficit (419,370) (483,896)
Accumulated other comprehensive income 156,468 96,944
----------- -----------
Total shareholders' equity 13,406,451 13,471,551
----------- -----------
TOTAL $77,534,445 $71,838,706
=========== ===========
See notes to financial statements.
F-53
FIRST WESTERN BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - UNAUDITED
THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
INTEREST INCOME:
Interest and fees on loans $ 1,289,103 $ 957,509 $ 2,496,333 $ 1,823,553
Interest on deposits with other banks 838 18,423 3,146 47,129
Interest on federal funds sold 5,560 65,225 13,816 124,453
Interest on investment securities 162,394 154,456 350,041 286,019
----------- ---------- ----------- -----------
Total interest income 1,457,895 1,195,613 2,863,336 2,281,154
----------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 627,384 528,376 1,282,749 992,620
Overnight and other borrowings 15,766 - 30,668 -
----------- ---------- ----------- -----------
Total interest expense 643,150 528,376 1,313,417 992,620
----------- ---------- ----------- -----------
NET INTEREST INCOME 814,745 667,237 1,549,919 1,288,534
PROVISION FOR POSSIBLE LOAN LOSSES 113,600 130,000 113,600 172,500
----------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 701,145 537,237 1,436,319 1,116,034
----------- ---------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 68,740 60,081 128,077 106,895
Other service charges and fees 85,941 83,954 168,496 142,762
Gain/loss on sale of securities 60,059 - 60,059 -
Other income 7,855 5,411 10,277 21,123
----------- ---------- ----------- -----------
Total other income 222,595 149,446 366,909 270,780
----------- ---------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 323,444 268,758 629,239 517,371
Employee benefits 71,132 82,181 144,130 132,012
Occupancy expense 128,836 91,743 260,084 162,133
Other 327,385 346,844 641,149 628,686
----------- ---------- ----------- -----------
Total other expenses 850,797 789,526 1,674,602 1,440,202
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 72,943 (102,843) 128,626 (53,388)
INCOME TAX EXPENSE (BENEFIT) 35,000 (391,439) 64,100 (391,439)
----------- ---------- ----------- -----------
NET INCOME 37,943 288,596 64,526 338,051
OTHER COMPREHENSIVE INCOME, NET OF TAX -
Unrealized holding (losses) gains on securities
available for sale (6,308) (31,591) 59,524 (59,789)
----------- ---------- ----------- -----------
COMPREHENSIVE INCOME $ 31,635 $ 257,005 $ 124,050 $ 278,262
=========== ========== =========== ===========
BASIC NET INCOME PER COMMON SHARE $ 0.03 $ 0.19 $ 0.05 $ 0.23
=========== ========== =========== ===========
DILUTED NET INCOME PER COMMON SHARE $ 0.03 $ 0.19 $ 0.05 $ 0.23
=========== ========== =========== ===========
See notes to financial statements.
F-54
FIRST WESTERN BANK
STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
--------------------------------------------------------------------------------
Six Months Ended
June 30,
-------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 64,526 $ 338,051
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan loss 113,600 172,500
Depreciation 167,980 82,366
Amortization of goodwill 58,834 88,636
Net gain on sales and calls of investments (60,059) -
Amortization of discount on investment securities (58,631) (15,417)
Decrease (increase) in accrued interest receivable 22,549 (66,869)
Deferred income taxes 59,369 (391,439)
Decrease in other assets 12,381 25,368
Increase (decrease) in accrued interest payable and other liabilities 33,230 (238,650)
------------ ------------
Net cash provided by (used in) operating activities 413,779 (5,454)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (8,842,248) (7,066,673)
Maturities of investment securities 1,537,670 1,527,973
Proceeds from sales and calls of investment securities 2,438,466 -
Purchases of investment securities (1,014,296) (4,741,318)
Capital expenditures (31,607) (2,030,494)
------------ ------------
Net cash used in investing activities (5,912,015) (12,310,512)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and savings accounts 2,249,626 878,445
Net increase in time deposits 1,536,435 6,949,669
Increase in overnight and other borrowings 1,844,179 -
Cash paid for common stock repurchase (189,150) (395,217)
------------ ------------
Net cash provided by financing activities 5,441,090 7,432,897
NET DECREASE IN CASH AND CASH EQUIVALENTS (57,146) (4,883,069)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,422,947 11,126,500
------------ ------------
End of period $ 2,365,801 $ 6,243,431
============ =============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ 1,336,536 $ 953,120
Noncash transactions:
Increase (decrease) in deferred income taxes on unrealized gain or $ 38,000 $ (35,000)
losses on securities available-for-sale ("AFS")
Increase (decrease) on unrealized gain or losses on AFS securities $ 97,524 $ (94,789)
See notes to financial statements.
F-55
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying financial statements of First Western Bank (the "Bank")
are unaudited; however, in the opinion of management, all adjustments
(consisting only of items of a normal recurring nature) necessary for a
fair presentation of the financial position at June 30, 2001 and December
31, 2000 and the results of operations for the three and six-month periods
ended June 30, 2001 and 2000, and cash flows for the six-month period have
been included. The results for the three and six-month periods ended June
30, 2001 are not necessarily indicative of the results that may be
expected for the full year or any other interim period.
These financial statements do not include all disclosures required by
generally accepted accounting principles and should be read in conjunction
with the Bank's annual financial statements and related notes for the
period ended December 31, 2000.
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments and
contingent liabilities such as commitments to extend credit, which are not
reflected on the financial statements. Management does not anticipate any
significant losses to result from these transactions. The unfunded portion
of loan commitments and standby letters of credit as of June 30, 2001 and
December 31, 2000 were as follows:
June 30, December 31,
2001 2000
Unfunded commitments $ 7,726,712 $ 5,848,214
Letters of credit 122,100 66,232
3. SHAREHOLDERS' EQUITY
At the Annual Meeting of Shareholders held April 27, 2000, the
shareholders of First Western Bank approved a stock repurchase plan
authorizing the Bank to repurchase of up to 150,000 of the Bank's
outstanding common stock through April 27, 2001. Acquisition of shares was
to be made in accordance with applicable federal securities laws through
purchases in both the open market and privately negotiated transactions
with the time, manner, and amount of such purchases to be determined by
the Bank's Board of Directors. Through the first six months of 2001, the
Bank repurchased 18,000 shares under this plan at an average price of
$8.61 per share.
At the Annual Meeting of Shareholders held April 26, 2001, the
shareholders of First Western Bank approved a stock repurchase plan
authorizing the Bank to repurchase of up to 130,000 of the Bank's
outstanding common stock through April 26, 2002. Acquisition of shares was
to be made in accordance with applicable federal securities laws through
purchases in both the open market and privately negotiated transactions
with the time, manner, and amount of such purchases to be determined by
the Bank's Board of Directors. Through the first six months of 2001, the
Bank repurchased 4,000 shares under this plan at an average price of $8.56
per share.
F-56
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
--------------------------------------------------------------------------------
Earnings per share have been computed using the weighted average number of
shares of common stock and potentially dilutive common stock equivalents
outstanding. Weighted average shares outstanding totaled 1,375,853 and
1,488,069 during the three months ended June 30, 2001 and 2000,
respectively. Weighted average shares outstanding totaled 1,383,177 and
1,497,932 during the six months ended June 30, 2001 and 2000,
respectively. There were no potentially dilutive common stock equivalents
outstanding during the three and six-month periods ended June 30, 2001 or
2000.
4. INCOME TAXES
During the three and six months ended June 30, 2001, the Bank recorded
income tax provisions of $35,000 and $64,100, respectively. The primary
reason for the tax provisions being in excess of the amount computed by
applying the statutory federal tax rate to income before income taxes was
an adjustment for non-deductible goodwill. The provisions for current
income taxes related to taxable income for the periods ended June 30, 2000
were offset by a deferred income tax benefit.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 was
amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value.
Effective January 1, 2001, the Bank adopted the Standard. The adoption of
the Standard had no effect on the Bank's financial statements and current
disclosures.
In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No. 140 revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
carries over most of the provisions of SFAS No. 125 without
reconsideration. The statement became effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. The adoption of the Standard had no effect on the
Bank's financial statements and current disclosures.
On June 29, 2001, SFAS No. 141, Business Combinations, was approved by
FASB. SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and not be
amortized. On an annual basis, and when there is reason to suspect that
their values have been diminished or impaired, these assets must be tested
for impairment, and write-downs may be necessary. The statement became
effective on July 1, 2001. The adoption of the standard had no effect on
the Bank's financial statements and current disclosures.
F-57
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
--------------------------------------------------------------------------------
On June 29, 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Amortization
of goodwill recorded in business combinations, which occurred prior to
June 30, 2001 will cease effective January 1, 2002. The statement further
requires that the fair value of goodwill and other intangible assets with
indefinite lives be tested for impairment upon adoption of this statement,
annually and upon the occurrence of certain events. The Bank's management
estimates that the adoption of SFAS No. 142 will result in the elimination
of annual amortization expense related to goodwill in the amount of
$117,468, however, the impact of related impairment, if any, on the Bank's
financial position or results of operations has not been determined.
From time to time, the FASB issues exposure drafts for proposed statements
of financial accounting standards. Such exposure drafts are subject to
comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management
considers the effect of the proposed statements on the financial
statements of the Bank and monitors the status of changes to and proposed
effective dates of exposure drafts.
F-58
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Index to Pro Forma Financial Statements
Page
----
Pro Forma Condensed Combined Financial Statements
as of and for the Year Ended December 31, 2000
Pro Forma Condensed Combined Balance Sheet (Unaudited) -- June 30, 2001....... F-61
Pro Forma Condensed Combined Income Statements -- For the six months
ended June 30, 2001........................................................... F-62
Pro Forma Condensed Combined Income Statements -- For the year ended
December 31, 2000............................................................. F-63
Notes to Condensed Combined Financial Statements.............................. F-64
F-59
================================================================================
MountainBank Financial Corporation and First Western Bank
Unaudited Pro forma Condensed Combined Financial Statements
--------------------------------------------------------------------------------
We are providing the following unaudited pro forma condensed combined financial
statements to aid you in your analysis of the financial aspects of the proposed
merger. The unaudited pro forma condensed combined balance sheet gives effect to
the proposed purchase transaction as if it has occurred on June 30, 2001. The
unaudited pro forma condensed combined statements of income for the six months
ended June 30, 2001 and the year ended December 31, 2000 give effect to the
merger of MFC and First Western, as if the purchase transaction had occurred
January 1, 2000. The statements include pro forma adjustments as described in
the notes accompanying the financial statements.
We derived this information from the unaudited consolidated financial statements
for the six months ended June 30, 2001 and the audited consolidated financial
statements for the year ended December 31, 2000 of MFC and First Western. The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the unaudited and audited historical consolidated financial
statements and related notes of MFC and First Western which are included in this
prospectus-proxy statement.
The unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and does not purport to be indicative of the
operating results or financial position that would have actually occurred if the
consolidation had been in effect on the dates indicated, not is it indicative of
the future operating results of financial position of the consolidated company.
The pro forma adjustments are based on the information and assumptions available
at the time of the printing of this prospectus-proxy statement.
F-60
================================================================================
MountainBank Financial Corporation and First Western Bank
Unaudited Pro forma Condensed Combined Financial Statements
June 30, 2001 (in thousands - unaudited)
--------------------------------------------------------------------------------
MountainBank
Financial Corp. First Western Pro forma
& Subsidiary Bank Adjustments Combined
--------------- -------------- ------------ --------
Assets
Cash and cash equivalents $ 6,151 $ 2,366 $- $ 8,517
Interest-bearing deposits with banks 22,200 - - 22,200
Investment securities 43,435 9,667 - 53,102
Federal funds sold 10,039 - - 10,039
Loans receivable, net 315,714 60,043 - 375,757
Bank premises and equipment, net 2,831 3,678 - 6,509
Restricted equity securities 1,421 246 - 1,667
Core deposit intangibles - - 2,945 /D/ 2,945
Goodwill - 1,118 (2,618)/C/
1,500 /E/ -
Other assets 3,907 416 - 4,323
-------- ------- ------- --------
Total assets $405,698 $77,534 $ 1,827 $485,059
======== ======= ======= ========
Liabilities and Stockholders' Equity
Liabilities
Deposits $345,731 $60,704 $ - $406,435
Borrowings 34,352 2,554 - 36,906
Other liabilities 6,553 870 1,500 /E/ 8,923
-------- ------- ------- --------
Total liabilities 386,636 64,128 1,500 452,264
-------- ------- ------- --------
Stockholders' equity
Common stock, $4, par value,
10,000,000 shares authorized,
pro forma 2,560,102 shares issued 7,494 6,866 (6,866)/B/ 10,241
2,747 /A/
Surplus 9,404 6,803 (6,803)/B/ 20,390
10,986 /A/
Retained earnings (accumulated deficit) 1,979 (419) 419 /B/ 1,979
Accumulated other
comprehensive income 185 156 (156)/B/ 185
-------- ------- ------- --------
Total stockholders' equity 19,062 13,406 327 32,795
-------- ------- ------- --------
Total liabilities and
stockholders' equity $405,698 $77,534 $ 1,827 $485,059
======== ======= ======= ========
F-61
================================================================================
MountainBank Financial Corporation and First Western Bank
Unaudited Pro forma Condensed Combined Financial Statements
For the six months ended June 30, 2001 (in thousands - unaudited)
--------------------------------------------------------------------------------
MountainBank
Financial Corp. First Western Pro forma
& Subsidiary Bank Adjustments Combined
--------------- ------------- ----------- --------
Interest income
Loans and fees on loans $ 11,671 $ 2,496 $ - $ 14,167
Investment securities 1,062 350 - 1,412
Federal funds sold 190 14 - 204
Deposits with banks 147 3 150
---------- ------------- ---------- -----------
Total interest income 13,070 2,863 - 15,933
---------- ------------- ---------- -----------
Interest expense
Deposits 7,205 1,283 - 8,488
Short-term debt 456 30 - 486
---------- ------------- ---------- -----------
Total interest expense 7,661 1,313 - 8,974
---------- ------------- ---------- -----------
Net interest income 5,409 1,550 - 6,959
Provision for loan losses 1,492 114 - 1,606
---------- ------------- ---------- -----------
Net interest income after provision for loan losses 3,917 1,436 - 5,353
---------- ------------- ---------- -----------
Noninterest income
Service charges on deposit accounts 352 128 - 480
Other service charges and fees 198 169 367
Security gains (losses) - 60 - 60
Other 320 10 - 330
---------- ------------- ---------- -----------
Total other income 870 367 - 1,237
---------- ------------- ---------- -----------
Noninterest expense
Salaries 1,861 773 - 2,634
Occupancy 550 260 - 810
Other 1,159 641 (58)/G/ 1,832
90 /F/
---------- ------------- ---------- -----------
Total other expense 3,570 1,674 32 5,276
---------- ------------- ---------- -----------
Income before income taxes 1,217 129 (32) 1,314
Income taxes 420 64 - 484
---------- ------------- ---------- -----------
Net income $ 797 $ 65 $ (32) $ 830
========== ============= ========== ===========
Basic earnings per share $ 0.43 $ 0.05 $ 0.32
========== ============= ===========
Weighted average shares outstanding 1,873,461 1,383,177 2,565,049
========== ============= ===========
F-62
================================================================================
MountainBank Financial Corporation and First Western Bank
Unaudited Pro forma Condensed Combined Financial Statements
For the year ended December 31, 2000 (in thousands - unaudited)
--------------------------------------------------------------------------------
MountainBank
Financial Corp. First Western Pro forma
& Subsidiary Bank Adjustments Combined
-------------- ------------- ------------- -----------
Interest income
Loans and fees on loans $ 13,210 $ 4,017 $ - $ 17,227
Investment securities 1,865 680 - 2,545
Federal funds sold 241 193 - 434
Deposits with banks 505 78 - 583
-------------- ------------ ------------- ----------
Total interest income 15,821 4,968 - 20,789
-------------- ------------ ------------- ----------
Interest expense
Deposits 8,796 2,242 - 11,038
Short-term debt 220 - - 220
-------------- ------------ ------------- ----------
Total interest expense 9,016 2,242 - 11,258
-------------- ------------ ------------- ----------
Net interest income 6,805 2,726 - 9,531
Provision for loan losses 1,905 199 - 2,104
-------------- ------------ ------------- ----------
Net interest income after
provision for loan losses 4,900 2,527 - 7,427
-------------- ------------ ------------- ----------
Noninterest income
Service charges on deposit accounts 461 228 - 689
Other service charges and fees 60 293 353
Security gains (losses) - - - -
Other 797 91 - 888
-------------- ------------ ------------- ----------
Total other income 1,318 612 - 1,930
-------------- ------------ ------------- ----------
Noninterest expenses
Salaries 2,417 1,374 - 3,791
Occupancy 316 245 - 561
Other 1,846 1,430 (115)/G/ 3,341
180 /F/
-------------- ------------ ------------- ----------
Total other expense 4,579 3,049 65 7,693
-------------- ------------ ------------- ----------
Income before income taxes 1,639 90 (65) 1,664
Income taxes (benefit) 583 (349) 349 614
31 /H/
-------------- ------------ ------------- ----------
Net income $ 1,056 $ 439 $ (445) $ 1,050
============== ============ ============= ==========
Basic earnings per share $ 0.62 $ 0.30 $ 0.43
============== ============ ==========
Weighted average shares outstanding 1,701,426 1,464,821 2,433,836
============== ============ ==========
F-63
================================================================================
MountainBank Financial Corporation and First Western Bank
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
--------------------------------------------------------------------------------
Note 1. Basis of Presentation and First Western Acquisition
Basis of presentation:
The unaudited Pro Forma Condensed Combined Financial Statements give effect to
the merger of MFC and First Western in a business combination accounted for as a
purchase. As a result of the merger, First Western will be merged into MFC's
wholly owned subsidiary, MountainBank.
First Western acquisition:
Each of the outstanding 1,373,282 shares of First Western Common Stock is to be
exchanged for .50 shares of MFC Common Stock ($4 par value). The pro forma
balance sheet reflects the proposed exchange as if it had occurred on June 30,
2001, based on a market value estimated by MFC's financial advisor of $20 per
share at that date. This estimate will be refined and updated as of the date of
the exchange and may be more or less than the value indicated in these Pro Forma
Condensed Combined Financial Statements, depending upon operating results from
July 1, 2001 to the exchange date, changes in market conditions and other
factors. Described below is the pro forma estimate of the total purchase price
of the transaction as well as the adjustments to allocate the purchase price
based on preliminary estimates of the fair values of the assets and liabilities
of First Western.
(in thousands)
Estimated fair value of shares to be issued to First Western shareholders $ 13,733
Estimated transaction costs 1,500
-------------
Total 15,233
Equity of First Western 13,406
-------------
Excess of cost over book value 1,827
Adjustments to goodwill reflected on
First Western's financial statements 1,118
-------------
Core deposit intangible assets $ 2,945
=============
There is no adjustment to other asset or liability groups as the fair market
values and book values are not expected to be materially different at the
exchange date.
Note 2. The purchase accounting and pro forma adjustments related to the
unaudited pro forma condensed combined balance sheet and income
statements are described below:
A Issuance of 686,641 (1,373,282 X .50) shares, with a par value of
$4.00 per share of MFC's common stock with a measurement date
value of $20.00.
B Elimination of First Western's equity accounts.
C Elimination of First Western's goodwill account.
D To record the core deposit intangible resulting from the purchase
of First Western. For pro forma purposes, no goodwill is being
estimated as a result of this transaction.
E To record the estimated acquisition costs.
F Amortization of core deposit intangible. MFC estimates that the
core deposit intangible will be amortized on a straight line
basis over 15 years.
G Elimination of First Western goodwill amortization.
H The income tax effect of the pro forma adjustments reflected in
the income statement at the federal statutory rate of 34%.
F-64
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
By and Between
FIRST WESTERN BANK
and
MOUNTAINBANK
and
MOUNTAINBANK FINANCIAL CORPORATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement")
is entered into as of the 17th day of September, 2001, by and between
----
FIRST WESTERN BANK ("Western"), MOUNTAINBANK ("MountainBank") and MOUNTAINBANK
FINANCIAL CORPORATION ("MFC").
WHEREAS, Western is a North Carolina banking corporation with its
principal office and place of business located in Burnsville, North Carolina;
and,
WHEREAS, MountainBank is a North Carolina banking corporation with its
principal office and place of business located in Hendersonville, North
Carolina; and,
WHEREAS, MFC is a North Carolina business corporation with its
principal office and place of business located in Hendersonville, North
Carolina, and is the owner of all the outstanding shares of common stock of
MountainBank; and,
WHEREAS, Western, MountainBank and MFC have agreed that it is in their
mutual best interests and in the best interests of their respective shareholders
for Western to be merged with and into MountainBank in the manner and upon the
terms and conditions contained in this Agreement; and,
WHEREAS, to effectuate the foregoing, Western, MountainBank and MFC
desire to adopt this Agreement as a plan of reorganization in accordance with
the provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended; and,
WHEREAS, Western's Board of Directors has approved this Agreement and
will recommend to Western's shareholders that they approve the transactions
described herein; and,
WHEREAS, MFC's and MountainBank's Boards of Directors have approved
this Agreement and the transactions described herein.
NOW, THEREFORE, in consideration of the premises, the mutual benefits
to be derived from this Agreement, and the representations, warranties,
conditions, covenants and promises herein contained, and subject to the terms
and conditions hereof, Western, MountainBank and MFC hereby adopt and make this
Agreement and mutually agree as follows:
ARTICLE I. THE MERGER
1.01. Names of Merging Corporations. The names of the banking
-----------------------------
corporations proposed to be merged are FIRST WESTERN BANK ("Western") and
MOUNTAINBANK ("MountainBank").
1.02. Nature of Transaction; Plan of Merger. Subject to the provisions of
-------------------------------------
this Agreement, at the "Effective Time" (as defined in Paragraph 1.07 below),
Western will be merged into and with MountainBank (the "Merger") as provided in
the plan of merger (the "Plan of Merger") attached as Exhibit A to this
Agreement.
A-1
1.03. Effect of Merger; Surviving Corporation. At the Effective Time, and
---------------------------------------
by reason of the Merger, the separate corporate existence of Western shall cease
while the corporate existence of MountainBank as the surviving corporation in
the Merger shall continue with all of its purposes, objects, rights, privileges,
powers and franchises, all of which shall be unaffected and unimpaired by the
Merger. Following the Merger, MountainBank shall continue to operate as a
wholly-owned banking subsidiary of MFC and, as a North Carolina banking
corporation, will conduct its business at the then legally established branch
and main offices of MountainBank and Western, except to the extent that any of
such offices are closed in connection with or following the Merger. The
duration of the corporate existence of MountainBank, as the surviving
corporation, shall be perpetual and unlimited.
1.04. Assets and Liabilities of Western. At the Effective Time, and by
---------------------------------
reason of the Merger, and in accordance with applicable law, all of the
property, assets and rights of every kind and character of Western (including
without limitation all real, personal or mixed property, all debts due on
whatever account, all other choses in action and every other interest of or
belonging to or due to Western, whether tangible or intangible) shall be
transferred to and vest in MountainBank, and MountainBank shall succeed to all
the rights, privileges, immunities, powers, purposes and franchises of a public
or private nature of Western (including all trust and other fiduciary
properties, powers and rights), all without any conveyance, assignment or
further act or deed; and, MountainBank shall become responsible for all of the
liabilities, duties and obligations of every kind, nature and description of
Western (including duties as trustee or fiduciary) as of the Effective Time.
1.05. Conversion and Exchange of Stock.
--------------------------------
(a) Conversion of Western Stock. Except as otherwise provided in
---------------------------
this Agreement, at the Effective Time all rights of Western's shareholders with
respect to all outstanding shares of Western's $5.00 par value common stock
("Western Stock") shall cease to exist and, as consideration for and to effect
the Merger, each such outstanding share shall be converted, without any action
by Western, MountainBank, MFC or any Western shareholder, into the right to
receive 0.5 shares of MFC's $4.00 par value common stock ("MFC Stock").
At the Effective Time, and without any action by Western,
MountainBank, MFC or any Western shareholder, Western's stock transfer books
shall be closed and there shall be no further transfers of Western Stock on its
stock transfer books or the registration of any transfer of a certificate
evidencing Western Stock (a "Western Certificate") by any holder thereof, and
the holders of Western Certificates shall cease to be, and shall have no further
rights as, stockholders of Western other than as provided in this Agreement.
Following the Effective Time, Western Certificates shall evidence only the right
of the registered holders thereof to receive a certificate evidencing the number
of shares of MFC Stock into which their Western Stock was converted at the
Effective Time or, in the case of Western Stock held by shareholders who
properly shall have exercised their right of dissent and appraisal under Article
13 of the North Carolina Business Corporation Act ("Dissenters' Rights"), cash
as provided in that statute.
(b) Exchange and Payment Procedures; Surrender of Certificates. As
----------------------------------------------------------
promptly as practicable, but not more than five business days following the
Effective Time, MFC shall send or cause to be sent to each former Western
shareholder of record immediately prior to the Effective Time written
instructions and transmittal materials (a "Transmittal Letter") for use in
surrendering Western Certificates to MFC or to an exchange agent appointed by
MFC. Upon the proper surrender and delivery to MFC or its agent (in accordance
with its instructions, and accompanied by a properly completed Transmittal
Letter) by a former shareholder of Western of his or her Western Certificate(s),
and in exchange therefor, MFC shall as soon as practicable issue and deliver to
the shareholder a stock certificate evidencing the number of shares of MFC Stock
into which the shareholder's Western Stock was converted at the Effective Time.
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Subject to Paragraph 1.05(f), no certificate evidencing MFC Stock
shall be issued or delivered to any former Western shareholder unless and until
that shareholder shall have properly surrendered to MFC or its agent the Western
Certificate(s) formerly representing his or her shares of Western Stock,
together with a properly completed Transmittal Letter. Further, until a former
Western shareholder's Western Certificates are so surrendered and certificates
evidencing the MFC Stock into which his or her Western Stock was converted at
the Effective Time actually are issued to him or her, no dividend or other
distribution payable by MFC with respect to that MFC Stock as of any date
subsequent to the Effective Time shall be paid or delivered to the former
Western shareholder. However, upon the proper surrender of the shareholder's
Western Certificate, MFC shall pay to the shareholder the amount of any such
dividends or other distributions which have accrued but remain unpaid with
respect to that MFC Stock.
(c) Antidilutive Adjustments. If, prior to the Effective Time,
------------------------
Western or MFC shall declare any dividend payable in shares of Western Stock or
MFB Stock, respectively, or shall subdivide, split, reclassify or combine the
presently outstanding shares of Western Stock or MFC Stock, then an appropriate
and proportionate adjustment shall be made in the number of shares of MFC Stock
into which each share of Western Stock will be converted at the Effective Time
pursuant to this Agreement.
(d) Dissenters. Any shareholder of Western who properly exercises
----------
Dissenters' Rights shall be entitled to receive payment of the fair value of his
or her shares of Western Stock in the manner and pursuant to the procedures
provided for in Article 13 of the North Carolina Business Corporation Act.
Shares of Western Stock held by persons who exercise Dissenters' Rights shall
not be converted as described in Paragraph 1.05(a). However, if any shareholder
of Western who exercises Dissenters' Rights shall fail to perfect those rights,
or effectively shall waive or lose such rights, then each of his or her shares
of Western Stock shall be deemed to have been converted into MFC Stock as of the
Effective Time as provided in Paragraph 1.05(a).
(e) Fractional Shares. If the conversion of the shares of Western
-----------------
Stock held by any shareholder of Western results in a fraction of a share of MFC
Stock, then, in lieu of issuing that fractional share, MFC will pay to that
shareholder cash in an amount equal to that fraction multiplied by the average
of the closing prices of a share of MFC Stock on the OTC Bulletin Board on the
ten trading days immediately preceding the Effective Time as reasonably
determined by MFC.
(f) Lost Certificates. Following the Effective Time, shareholders of
-----------------
Western whose Western Certificates have been lost, destroyed, stolen or
otherwise are missing shall be entitled to receive certificates for the MFC
Stock into which their Western Stock was converted in accordance with and upon
compliance with reasonable conditions imposed by MFC, including without
limitation a requirement that those shareholders provide lost instruments
indemnities or surety bonds in form, substance and amounts satisfactory to MFC.
1.06. Articles of Incorporation, Bylaws and Management. The Articles of
------------------------------------------------
Incorporation and Bylaws of MountainBank in effect at the Effective Time shall
be the Articles of Incorporation and Bylaws of MountainBank as the surviving
corporation in the Merger. Except as otherwise may be provided herein, the
officers and directors of MountainBank in office at the Effective Time shall
continue to hold such offices until removed as provided by law or until the
election or appointment of their respective successors.
1.07. Closing; Effective Time. The consummation and closing of the Merger
-----------------------
and other transactions contemplated by this Agreement (the "Closing") shall take
place at the offices of MFC's legal counsel, Ward and Smith, P.A., in Raleigh,
North Carolina, or at such other place as MFC shall designate, on a date
mutually agreeable to Western and MFC (the "Closing Date") after the expiration
of any and all required waiting periods following the effective date of required
approvals of the Merger by governmental or regulatory authorities (but in no
event more than sixty (60) days following the
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expiration of all such required waiting periods). At the Closing, Western,
MountainBank and MFC shall take such actions (including without limitation the
delivery of certain closing documents and the execution of Articles of Merger
under North Carolina law) as are required in this Agreement and as otherwise
shall be required by law to consummate the Merger and cause it to become
effective.
Subject to the terms and conditions set forth in this Agreement, the Merger
shall become effective on the date and at the time (the "Effective Time")
specified in Articles of Merger executed by MountainBank and filed by it with
the North Carolina Secretary of State in accordance with applicable law;
provided, however, that the Effective Time shall in no event be more than ten
(10) days following the Closing Date.
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF WESTERN
Except as otherwise specifically provided in this Agreement or as
"Previously Disclosed" (as defined in Paragraph 10.12) by Western to MFC and
MountainBank, Western hereby makes the following representations and warranties
to MFC and MountainBank.
2.01. Organization; Standing; Power. Western (i) is duly organized and
-----------------------------
incorporated, validly existing and in good standing as a banking corporation
under the laws of the State of North Carolina; (ii) has all requisite power and
authority (corporate and other) to own, lease and operate its properties and to
carry on its business as it now is being conducted; (iii) is duly qualified to
do business and is in good standing in each jurisdiction in which the character
of the properties owned, leased or operated by it therein, or in which the
transaction of its business, makes such qualification necessary, except where
failure so to qualify would not have a material adverse effect on Western; and
(iv) is not transacting business or operating any properties owned or leased by
it in violation of any provision of federal, state or local law or any rule or
regulation promulgated thereunder, except where such violation would not have a
material adverse effect on Western.
2.02. Capital Stock. Western's authorized capital stock consists of
-------------
5,000,000 shares of common stock, $5.00 par value, of which 1,373,282 shares are
issued and outstanding and constitute Western's only outstanding securities, and
1,000,000 shares of no par value preferred stock of which no shares have been
issued or are outstanding.
Each outstanding share of Western Stock (i) has been duly authorized
and is validly issued and outstanding, and is fully paid and nonassessable
(except to the extent provided in N.C. Gen. Stat. (S) 53-42), and (ii) has not
been issued in violation of the preemptive rights of any shareholder. The
Western Stock is registered with the Federal Deposit Insurance Corporation (the
"FDIC") under the Securities Exchange Act of 1934, as amended (the "1934 Act")
and Western is subject to the registration and reporting requirements of the
1934 Act.
2.03. Principal Shareholders. Except as listed below, no person or entity
----------------------
is known to management of Western to beneficially own, directly or indirectly,
more than 5% of the outstanding shares of Western Stock.
As of the date of this Agreement, the following person owned,
beneficially and of record, more than 5% of the outstanding shares of Western
Stock:
Number
Name of Shares
--------------- -----------------
Van F. Phillips 86,923
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2.04. Subsidiaries. Western has no subsidiaries, direct or indirect, and,
------------
except for equity securities included in its investment portfolio at June 30,
2001, does not own any stock or other equity interest in any other corporation,
service corporation, joint venture, partnership or other entity.
2.05. Convertible Securities, Options, Etc. Western does not have any
------------------------------------
outstanding (i) securities or other obligations (including debentures or other
debt instruments) which are convertible into shares of Western Stock or any
other securities of Western, (ii) options, warrants, rights, calls or other
commitments of any nature which entitle any person to receive or acquire any
shares of Western Stock or any other securities of Western, or (iii) plan,
agreement or other arrangement pursuant to which shares of Western Stock or any
other securities of Western, or options, warrants, rights, calls or other
commitments of any nature pertaining to any securities of Western, have been or
may be issued.
2.06. Authorization and Validity of Agreement. This Agreement has been
---------------------------------------
duly and validly approved by Western's Board of Directors. Subject only to
approval of this Agreement by the shareholders of Western in the manner required
by law and required approvals of governmental or regulatory authorities having
jurisdiction over Western, MountainBank or MFC (collectively, the "Regulatory
Authorities") or the transactions described herein, (i) Western has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations and agreements and carry out the transactions described
in this Agreement, (ii) all corporate proceedings and approvals required to
authorize Western to enter into this Agreement and to perform its obligations
and agreements and carry out the transactions described herein have been duly
and properly completed or obtained, and (iii) this Agreement constitutes the
valid and binding agreement of Western enforceable in accordance with its terms
(except to the extent enforceability may be limited by (A) applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect which affect creditors' rights generally, (B) legal and equitable
limitations on the availability of injunctive relief, specific performance and
other equitable remedies, and (C) general principles of equity and applicable
laws or court decisions limiting the enforceability of indemnification
provisions).
2.07. Validity of Transactions; Absence of Required Consents or Waivers.
-----------------------------------------------------------------
Subject to approval of this Agreement by the shareholders of Western in the
manner required by law and receipt of required approvals of Regulatory
Authorities, neither the execution and delivery of this Agreement, nor the
consummation of the transactions described herein, nor compliance by Western
with any of its obligations or agreements contained herein, nor any action or
inaction by Western required herein, will: (i) conflict with or result in a
breach of the terms and conditions of, or constitute a default or violation
under any provision of, the Articles of Incorporation or Bylaws of Western, or
any material contract, agreement, lease, mortgage, note, bond, indenture,
license, or obligation or understanding (oral or written) to which Western is
bound or by which it or its business, capital stock or any of its properties or
assets may be affected; (ii) result in the creation or imposition of any
material lien, claim, interest, charge, restriction or encumbrance upon any of
the properties or assets of Western; (iii) violate any applicable federal or
state statute, law, rule or regulation, or any judgment, order, writ, injunction
or decree of any court, administrative or regulatory agency or governmental
body, which violation will or may have a material adverse effect on Western, its
financial condition, results of operations, prospects, businesses, assets, loan
portfolio, investments, properties or operations, or on Western's ability to
consummate the transactions described herein or to carry on the business of
Western as presently conducted; or (iv) result in the acceleration of any
material obligation or indebtedness of Western.
No consents, approvals or waivers are required to be obtained from
any person or entity in connection with Western's execution and delivery of this
Agreement, or the performance of its obligations or agreements or the
consummation of the transactions described herein, except for required approvals
of Western's shareholders and of Regulatory Authorities.
2.08. Western Books and Records. Western's books of account and business
-------------------------
records have been maintained in all material respects in compliance with all
applicable legal and accounting requirements, and such books and records are
complete and reflect accurately in all material respects
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Western's items of income and expense and all of its assets, liabilities and
stockholders' equity. The minute books of Western are complete and accurately
reflect in all material respects all corporate actions which its shareholders
and board of directors, and all committees thereof, have taken during the time
periods covered by such minute books, and, all such minute books have been or
will be made available to MFC and its representatives.
2.09. Western Reports. To the "Best Knowledge" (as defined in Paragraph
---------------
10.13) of management of Western, since December 15, 1997, Western has filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that were required to be filed with (i) the North
Carolina Commissioner of Banks (the "Commissioner"), (ii) the Federal Deposit
Insurance Corporation (the "FDIC"), or (iii) any other Regulatory Authorities.
All such reports, registrations and statements filed by Western with the
Commissioner, the FDIC or any other Regulatory Authorities are collectively
referred to in this Agreement as the "Western Reports." To the Best Knowledge
of management of Western, the Western Reports complied in all material respects
with all the statutes, rules and regulations enforced or promulgated by the
Regulatory Authorities with which they were filed and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Western has not been
notified that any such Western Reports were deficient in any material respect as
to form or content.
2.10. Western Financial Statements. Western has Previously Disclosed to
----------------------------
MFC a copy of its audited statements of financial condition as of December 31,
1999 and 2000, and its audited statements of income, stockholders' equity and
cash flows for the three years ended December 31, 1998, 1999 and 2000, together
with notes thereto (collectively, the "Western Audited Financial Statements"),
and its unaudited statements of financial condition as of June 30, 2001, and
unaudited statements of income and cash flows for the six-months ended June 30,
2000 and 2001, together with notes thereto (collectively, the "Western Interim
Financial Statements"). Following the date of this Agreement, Western promptly
will deliver to MFC all other annual or interim financial statements prepared by
or for Western. The Western Audited Financial Statements and the Western
Interim Financial Statements (i) were prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods indicated, (ii) are in accordance with Western's books and records,
and (iii) present fairly Western's financial condition, assets and liabilities,
results of operations, changes in stockholders' equity and changes in cash flows
as of the dates indicated and for the periods specified therein. The Western
Audited Financial Statements have been audited by Deloitte & Touche, LLP, which
serves as Western's independent certified public accountants.
2.11. Tax Returns and Other Tax Matters. (i) Western has timely filed or
---------------------------------
caused to be filed all federal, state and local income tax returns and reports
which are required by law to have been filed, and, to the Best Knowledge of
management of Western, all such returns and reports were true, correct and
complete and contained all material information required to be contained
therein; (ii) all federal, state and local income, profits, franchise, sales,
use, occupation, property, excise, withholding, employment and other taxes
(including interest and penalties), charges and assessments which have become
due from or been assessed or levied against Western or its respective properties
have been fully paid or, if not yet due, a reserve or accrual, which is adequate
in all material respects for the payment of all such taxes to be paid and the
obligation for such unpaid taxes, is reflected on the Western Interim Financial
Statements; (iii) the income, profits, franchise, sales, use, occupation,
property, excise, withholding, employment and other tax returns and reports of
Western have not been subjected to audit by the Internal Revenue Service (the
"IRS") or the North Carolina Department Revenue in the last ten years and
Western has not received any indication of the pendency of any audit or
examination in connection with any such tax return or report and, to the Best
Knowledge of management of Western, no such return or report is subject to
adjustment; and (iv) Western has not executed any waiver or extended
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the statute of limitations (or been asked to execute a waiver or extend a
statute of limitations) with respect to any tax year, the audit of any such tax
return or report, or the assessment or collection of any tax.
2.12. Absence of Material Adverse Changes or Certain Other Events.
-----------------------------------------------------------
(a) Since June 30, 2001, Western has conducted its businesses only in
the ordinary course, and there has been no material adverse change, and there
has occurred no event or development, and there currently exists no condition or
circumstance, which, with the lapse of time or otherwise, may or could cause,
create or result in a material adverse change in or affecting the financial
condition of Western or its results of operations, prospects, business, assets,
loan portfolio, investments, properties or operations.
(b) Since June 30, 2001, and except as described in Paragraph 2.13
below, Western has not incurred any material liability, engaged in any material
transaction, entered into any material agreement, increased the salaries,
compensation or general benefits payable or provided to its employees (with the
exception of routine increases in the salaries of certain employees effected by
Western at such times and in such amounts as is consistent with its past
practices and its salary administration and review policies and procedures in
effect prior to June 30, 2001), suffered any material loss, destruction or
damage to any of its properties or assets, or made a material acquisition or
disposition of any assets or entered into any material contract or lease.
2.13. Absence of Undisclosed Liabilities. Western does not have any
----------------------------------
material liabilities or obligations, whether known or unknown, matured or
unmatured, accrued, absolute, contingent or otherwise, whether due or to become
due (including without limitation tax liabilities or unfunded liabilities under
employee benefit plans or arrangements), other than (i) those reflected in the
Western Financial Statements or Western Interim Financial Statements, (ii)
increases in deposit accounts in the ordinary course of business since June 30,
2001, or (iii) unfunded loan commitments permitted under this Agreement since
June 30, 2001, which do not exceed $25,000 in the case of any individual loan or
commitment.
2.14. Compliance with Existing Obligations. Western has performed in all
------------------------------------
material respects all obligations required to be performed by it under, and it
is not in default in any material respect under, or in violation in any material
respect of, the terms and conditions of its Articles of Incorporation, Bylaws
and/or any material contract, agreement, lease, mortgage, note, bond, indenture,
license, obligation, understanding or other undertaking (whether oral or
written) to which it is bound or by which its business, operations, capital
stock or any property or asset may be affected.
2.15. Litigation and Compliance with Law.
----------------------------------
(a) There are no actions, suits, arbitrations, controversies or other
proceedings or investigations (or, to the Best Knowledge of management of
Western, any facts or circumstances which reasonably could result in such),
including without limitation any such action by any Regulatory Authority, which
currently exist or are ongoing, pending or, to the Best Knowledge of management
of Western, are threatened, contemplated or probable of assertion, against,
relating to or otherwise affecting Western or any of its properties, assets or
employees.
(b) Western has all licenses, permits, orders, authorizations or
approvals ("Permits") of all federal, state, local or foreign governmental or
regulatory agencies that are material to or necessary for the conduct of its
business or to own, lease and operate its properties; all such Permits are in
full force and effect; no violations have occurred with respect to any such
Permits; and no proceeding is pending or, to the Best Knowledge of management of
Western, threatened or probable of assertion to suspend, cancel, revoke or limit
any Permit.
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(c) Western is not subject to any supervisory agreement, enforcement
order, writ, injunction, capital directive, supervisory directive, memorandum of
understanding or other similar agreement, order, directive, memorandum or
consent of, with or issued by any Regulatory Authority (including without
limitation the Commissioner or the FDIC) relating to its financial condition,
directors or officers, employees, operations, capital, regulatory compliance or
any other matter; there are no judgments, orders, stipulations, injunctions,
decrees or awards against Western which limit, restrict, regulate, enjoin or
prohibit in any material respect any present or past business or practice of
Western; and, Western has not been advised nor has any reason to believe that
any Regulatory Authority or any court is contemplating, threatening or
requesting the issuance of any such agreement, order, writ, injunction,
directive, memorandum, judgment, stipulation, decree or award.
(d) To the Best Knowledge of management of Western, Western is not in
violation or default in any material respect under, and it has complied in all
material respects with, all laws, statutes, ordinances, rules, regulations,
orders, writs, injunctions or decrees of any court or federal, state, municipal
or other Regulatory Authority having jurisdiction or authority over it or its
business operations, properties or assets (including without limitation all
provisions of North Carolina law relating to usury, the Consumer Credit
Protection Act, and all other federal and state laws and regulations applicable
to extensions of credit by Western). To the Best Knowledge of management of
Western, there is no basis for any claim by any person or authority for
compensation, reimbursement, damages or other penalties or relief for any
violations described in this subparagraph (d).
2.16. Real Properties. Western has Previously Disclosed to MFC a listing
---------------
of all real property owned by Western (including Western's banking facilities
and all other real estate or foreclosed properties, including improvements
thereon (collectively, the "Real Property"). With respect to each parcel of
Real Property, Western has good and marketable fee simple title to that Real
Property and owns the same free and clear of all mortgages, liens, leases,
encumbrances, title defects and exceptions to title other than (i) the lien of
current taxes not yet due and payable, and (ii) such imperfections of title and
restrictions, covenants and easements (including utility easements) which do not
materially affect the value or marketability of that Real Property or materially
detract from, interfere with or restrict the present or future use of that Real
Property.
The Real Property complies in all material respects with all
applicable federal, state and local laws, regulations, ordinances or orders of
any governmental or regulatory authority, including those relating to zoning,
building and use permits, and the parcels of Real Property upon which Western's
banking or other offices are situated, or which are used by Western in
conjunction with its banking or other offices or for other purposes, may, under
applicable zoning ordinances, be used for the purposes for which they currently
are used as a matter of right rather than as a conditional or nonconforming use.
With respect to each parcel of Real Property that currently is used by
Western as a banking office, all improvements and fixtures included in or on
that Real Property are in good condition and repair, ordinary wear and tear
excepted, and there does not exist any condition which in any material respect
interferes with Western's use (or will interfere with MountainBank's use after
the Merger) of that Real Property or those improvements and fixtures as a
banking office, or that affects the economic value of that Real Property or
those improvements and fixtures.
Western leases space for its banking offices which are located at 2514
Halltown Road, Spruce Pine, North Carolina, and 11995 South 226 Highway, Spruce
Pine, North Carolina. Otherwise, Western is not a party (whether as lessee or
lessor) to any lease or rental agreement with respect to any real property.
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2.17. Loans, Accounts, Notes and Other Receivables.
--------------------------------------------
(a) All loans, accounts, notes and other receivables reflected as
assets on Western's books and records (i) have resulted from bona fide business
transactions in the ordinary course of Western's operations, (ii) in all
material respects were made in accordance with Western's standard practices and
procedures, and (iii) are owned by Western free and clear of all liens,
encumbrances, assignments, participation or repurchase agreements or other
exceptions to title or to the ownership or collection rights of any other person
or entity.
(b) All records of Western regarding all outstanding loans, accounts,
notes and other receivables, and all other real estate owned, are accurate in
all material respects, and, each loan which Western's loan documentation
indicates is secured by any real or personal property or property rights ("Loan
Collateral") is secured by valid, perfected and enforceable liens on all such
Loan Collateral having the priority described in Western's records of such loan.
(c) To the Best Knowledge of management of Western, each loan
reflected as an asset on Western's books, and each guaranty therefor, is the
legal, valid and binding obligation of the obligor or guarantor thereon, and no
defense, offset or counterclaim has been asserted with respect to any such loan
or guaranty.
(d) Western has Previously Disclosed to MFC a written listing of (i)
each loan, extension of credit or other asset of Western which, as of August 31,
2001, was classified by the Commissioner, the FDIC or Western as "Loss,"
"Doubtful," "Substandard" or "Special Mention" (or otherwise by words of similar
import), or which Western otherwise has designated as a special asset, a
"potential problem loan," or for special handling, or placed on any "watch list"
because of concerns regarding the ultimate collectibility or deteriorating
condition of such asset or any obligor or Loan Collateral therefor, (ii) each
loan or extension of credit of Western which, as of August 31, 2001, was past
due more than 30 days as to the payment of principal and/or interest, and (iii)
each loan as to which any obligor thereon (including the borrower or any
guarantor) was in default (other than as a result of nonpayment of principal or
interest), was the subject of a proceeding in bankruptcy, or has indicated any
inability or intention not to repay such loan or extension of credit in
accordance with its terms.
(e) To the Best Knowledge of management of Western, each of
the loans and other extensions of credit of Western (with the exception of those
loans and extensions of credit specified in the written listings described in
Paragraph 2.17(d) above) is collectible in the ordinary course of Western's
business in an amount which is not less than the amount at which it is carried
on Western's books and records.
(f) Western's reserve for possible loan losses (the "Loan Loss
Reserve") has been established in conformity with GAAP, sound banking practices
and all applicable requirements, rules and policies of the Commissioner and the
FDIC and, in the best judgment of management of Western, is reasonable in view
of the size and character of Western's loan portfolio, current economic
conditions and other relevant factors, and is adequate to provide for losses
relating to or the risk of loss inherent in Western's loan portfolios and other
real estate owned.
2.18. Securities Portfolio and Investments. Western has Previously
------------------------------------
Disclosed to MFC a listing of all securities owned, of record or beneficially,
by Western as of August 31, 2001. All securities owned, of record or
beneficially, by Western are held free and clear of all mortgages, liens,
pledges, encumbrances or any other restriction or rights of any other person or
entity, whether contractual or statutory (other than customary pledges in the
ordinary course of Western's business to secure public funds deposits), which
would materially impair the ability of Western to dispose freely of any such
security and/or otherwise to realize the benefits of ownership thereof at any
time. There are no voting trusts or other agreements or undertakings to which
Western is a party with respect to the voting of any such securities. With
respect to all "repurchase agreements" under which Western has "purchased"
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securities under agreement to resell, Western has a valid, perfected first lien
or security interest in the government securities or other collateral securing
the repurchase agreement, and the value of the collateral securing each such
repurchase agreement equals or exceeds the amount of the debt owed to Western
which is secured by such collateral.
Since June 30, 2001, there has been no material deterioration or
adverse change in the quality, or any material decrease in the value, of
Western's securities portfolio as a whole.
2.19. Personal Property and Other Assets. All banking equipment, data
----------------------------------
processing equipment, vehicles, and other personal property used by Western and
material to the operation of its business are owned by Western free and clear of
all liens, encumbrances, leases, title defects or exceptions to title. To the
Best Knowledge of management of Western, all of Western's personal property
material to its business is in good operating condition and repair, ordinary
wear and tear excepted.
2.20. Patents and Trademarks. To the Best Knowledge of management of
----------------------
Western, Western owns, possesses or has the right to use any and all patents,
licenses, trademarks, trade names, copyrights, trade secrets and proprietary and
other confidential information necessary to conduct its business as now
conducted. Western has not violated, and currently is not in conflict with, any
patent, license, trademark, trade name, copyright or proprietary right of any
other person or entity.
2.21. Environmental Matters.
---------------------
(a) As used in this Agreement, "Environmental Laws" shall mean:
(i) all federal, state and local statutes, regulations,
ordinances, orders, decrees, and similar provisions having the force or effect
of law (including without limitation the Comprehensive Environmental Response,
Compensation and Liability Act; the Superfund Amendment and Reauthorization Act;
the Federal Insecticide, Fungicide and Rodenticide Act; the Hazardous Materials
Transportation Act; the Resource Conservation and Recovery Act; the Clean Water
Act; the Clean Air Act; the Toxic Substances Control Act; the Oil Pollution Act;
the Coastal Zone Management Act; any "Superfund" or "Superlien" law; the North
Carolina Oil Pollution and Hazardous Substances Control Act; the North Carolina
Water and Air Resources Act; and the North Carolina Occupational Safety and
Health Act; and any amendments to any of the same from time to time), and,
(ii) all common law concerning public health and safety, worker
health and safety, and pollution or protection of the environment, including
without limitation all standards of conduct and bases of obligations relating to
the presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, reporting, testing, processing,
discharge, release, threatened release, control, or clean-up of any "Hazardous
Substances" (as defined below).
"Hazardous Substance" shall mean any materials, substances,
wastes, chemical substances, or mixtures presently listed, defined, designated,
or classified as hazardous, toxic, or dangerous, or otherwise regulated, under
any Environmental Laws, whether by type or quantity, including without
limitation pesticides, pollutants, contaminants, toxic chemicals, oil, or other
petroleum products or byproducts, asbestos or materials containing (or presumed
to contain) asbestos, polychlorinated biphenyls, urea formaldehyde foam
insulation, lead, radon, methyl tertiary butyl ether, or radioactive material.
(b) Western has Previously Disclosed to MFC copies of all written
reports, correspondence, notices or other information or materials, if any, in
its possession pertaining to environmental surveys or assessments of the Real
Property and any improvements thereon, the presence
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of any Hazardous Substance on any of the Real Property, or any violation or
alleged violation of Environmental Laws on, affecting or otherwise involving the
Real Property or involving Western.
(c) There has been no presence, use, production, generation,
handling, transportation, treatment, storage, disposal, emission, discharge,
release, or threatened release of any Hazardous Substances by any person on,
from or relating to the Real Property which constitutes a violation of any
Environmental Laws, or any removal, clean-up or remediation of any Hazardous
Substances from, on or relating to the Real Property.
(d) Western has not violated any Environmental Laws relating to
any of the Real Property, and there has been no violation of any Environmental
Laws relating to any of the Real Property by any other person or entity for
whose liability or obligation with respect to any particular matter or violation
Western is or may be responsible or liable.
(e) Western is not subject to any claims, demands, causes of
action, suits, proceedings, losses, damages, penalties, liabilities,
obligations, costs or expenses of any kind and nature which arise out of, under
or in connection with, or which result from or are based upon the presence, use,
production, generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, emission, discharge,
release, threatened release, control, removal, clean-up or remediation of any
Hazardous Substances on, from or relating to the Real Property or by any person
or entity.
(f) No facts, events or conditions relating to the Real Property,
or the operations of Western at any of its office locations, will prevent,
hinder or limit continued compliance with Environmental Laws or give rise to any
investigatory, emergency removal, remedial or corrective actions, obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to Environmental Laws.
(g) To the Best Knowledge of management of Western (it being
understood by MFC and MountainBank that, for purposes of this representation,
management of Western has not undertaken a review of each of Western's loan
files with respect to all Loan Collateral), (i) there has been no violation of
any Environmental Laws with respect to any Loan Collateral by any person or
entity for whose liability or obligation with respect to any particular matter
or violation Western is or may be responsible or liable, (ii) Western is not
subject to any claims, demands, causes of action, suits, proceedings, losses,
damages, penalties, liabilities, obligations, costs or expenses of any kind and
nature which arise out of, under or in connection with, or which result from or
are based upon, the presence, use, production, generation, handling,
transportation, treatment, storage, disposal, distribution, labeling, reporting,
testing, processing, emission, discharge, release, threatened release, control,
removal, clean-up or remediation of any Hazardous Substances on, from or
relating to any Loan Collateral, by any person or entity, and (iii) there are no
facts, events or conditions relating to any Loan Collateral that will give rise
to any investigatory, emergency removal, remedial or corrective actions,
obligations or liabilities pursuant to Environmental Laws.
2.22. Absence of Brokerage or Finders Commissions. Except for the
-------------------------------------------
engagement by Western of The Carson Medlin Company and Western's obligations to
that firm pursuant to an engagement letter dated July 2, 2001, (i) all
negotiations relative to this Agreement and the transactions described herein
have been carried on by Western directly (or through its legal counsel) with
MFC, and no person or firm has been retained by or has acted on behalf of,
pursuant to any agreement, arrangement or understanding with, or under the
authority of, Western or its Board of Directors, as a broker, finder or agent or
has performed similar functions or otherwise is or may be entitled to receive or
claim a brokerage fee or other commission in connection with or as a result of
the transactions described herein; and, (ii) Western has not agreed, and has no
obligation, to pay any brokerage fee or other commission, fee or other
compensation to any person or entity in connection with or as a result of the
transactions described herein.
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2.23. Material Contracts. Other than a benefit plan or employment
------------------
agreement Previously Disclosed to MFC pursuant to Paragraph 2.25, Western is not
a party to or bound by any agreement (i) involving money or other property in an
amount or with a value in excess of $5,000, (ii) which is not to be performed in
full prior to December 31, 2001, (iii) which calls for the provision of goods or
services to Western and cannot be terminated without material penalty upon
written notice to the other party thereto, (iv) which is material to Western and
was not entered into in the ordinary course of business, (v) which involves
hedging, options or any similar trading activity, or interest rate exchanges or
swaps, (vi) which commits Western to extend any loan or credit (with the
exception of letters of credit, lines of credit and loan commitments extended in
the ordinary course of Western's business), (vii) which involves the sale of any
assets of Western which are used in and material to the operation of its
business, (viii) which involves any purchase or sale of real property, or which
involves the purchase of any other assets in the amount of more than $5,000 in
the case of any single transaction or $15,000 in the case of all such
transactions, (ix) which involves the purchase, sale, issuance, redemption or
transfer of any capital stock or other securities of Western, or (x) with any
director, officer or principal shareholder of Western (including without
limitation any consulting agreement, but not including any agreements relating
to loans or other banking services which were made in the ordinary course of
Western's business and on substantially the same terms and conditions as were
prevailing at that time for similar agreements with unrelated persons).
Western is not in default in any material respect, and there has not
occurred any event which with the lapse of time or giving of notice or both
would constitute such a default, under any contract, lease, insurance policy,
commitment or arrangement to which it is a party or by which it or its property
is or may be bound or affected or under which it or its property receives
benefits, where the consequences of such default would have a material adverse
effect on the financial condition, results of operations, prospects, business,
assets, loan portfolio, investments, properties or operations of Western.
2.24. Employment Matters; Employee Relations. Western has Previously
--------------------------------------
Disclosed to MFC a listing of the names, years of credited service and current
base salary or wage rates of all of its employees as of August 15, 2001.
Western (i) has in all material respects paid in full to or accrued on behalf of
all its respective directors, officers and employees all wages, salaries,
commissions, bonuses, fees and other direct compensation for all labor or
services performed by them to the date of this Agreement, and all vacation pay,
sick pay, severance pay, overtime pay and other amounts for which it is
obligated under applicable law or Western's existing agreements, benefit plans,
policies or practices, and (ii) is in compliance with all applicable federal,
state and local laws, statutes, rules and regulations with regard to employment
and employment practices, terms and conditions, and wages and hours and other
compensation matters; and, no person has, to the Best Knowledge of management of
Western, asserted that Western is liable in any amount for any arrearage in
wages or employment taxes or for any penalties for failure to comply with any of
the foregoing.
There is no action, suit or proceeding by any person pending or, to
the Best Knowledge of management of Western, threatened, against Western (or any
of its employees), involving employment discrimination, sexual harassment,
wrongful discharge or similar claims.
Western is not a party to or bound by any collective bargaining
agreement with any of its employees, any labor union or any other collective
bargaining unit or organization. There is no pending or threatened labor
dispute, work stoppage or strike involving Western and any of its employees, or
any pending or threatened proceeding in which it is asserted that Western has
committed an unfair labor practice; and, to the Best Knowledge of management of
Western, there is no activity involving it or any of its employees seeking to
certify a collective bargaining unit or engaging in any other labor organization
activity.
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2.25. Employment Agreements; Employee Benefit Plans.
---------------------------------------------
(a) Western has Previously Disclosed to MFC a true and complete
list of all bonus, deferred compensation, pension, retirement, profit-sharing,
thrift, savings, employee stock ownership, stock bonus, stock purchase,
restricted stock and stock option plans; all employment and severance contracts;
all medical, dental, health, and life insurance plans; all vacation, sickness
and other leave plans, disability and death benefit plans; and all other
employee benefit plans, contracts, or arrangements maintained or contributed to
by Western for the benefit of any employees, former employees, directors, former
directors or any of their beneficiaries (collectively, the "Plans"). True and
complete copies of all Plans, including, but not limited to, any trust
instruments and/or insurance contracts, if any, forming a part thereof or
applicable to the administration of any such Plans or the assets thereof, and
all amendments thereto, previously have been supplied to MFC Except as
Previously Disclosed, Western does not maintain, sponsor, contribute to or
otherwise participate in any "Employee Benefit Plan" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), any "Multi-employer Plan" within the meaning of Section 3(37) of
ERISA, or any "Multiple Employer Welfare Arrangement" within the meaning of
Section 3(40) of ERISA. Each Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA and which is intended to be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") has received or applied for a favorable determination letter from
the IRS to the effect that they are so qualified, and Western is not aware of
any circumstances reasonably likely to result in the revocation or denial of any
such favorable determination letter. All reports and returns with respect to the
Plans (and any Plans previously maintained by Western) required to be filed with
any governmental department, agency, service or other authority, including
without limitation Internal Revenue Service Form 5500 (Annual Report), have been
properly and timely filed.
(b) All "Employee Benefit Plans" maintained by or otherwise
covering employees or former employees of Western, to the extent subject to
ERISA, currently are, and at all times have been, in compliance with all
material provisions and requirements of ERISA. There is no pending or threatened
litigation relating to any Plan or any employee benefit plan, contract or
arrangement previously maintained by Western. Western has not engaged in a
transaction with respect to any Plan that could subject Western to a tax or
penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA.
(c) Western has delivered to MFC a true, correct and complete copy
(including copies of all amendments thereto) of each retirement Plan maintained
by it which is intended to be a plan qualified under Section 401(a) of the Code
(collectively, the "Retirement Plans"), together with true, correct and complete
copies of the summary plan descriptions relating to the Retirement Plans, the
most recent determination letters received from the IRS regarding the Retirement
Plans, and the most recent Annual Reports (Form 5500 series) and related
schedules, if any, for the Retirement Plans.
The Retirement Plans are qualified under the provisions of
Section 401(a) of the Code, the trusts under the Retirement Plans are exempt
trusts under Section 501(a) of the Code, and determination letters have been
issued or applied for with respect to the Retirement Plans to said effect,
including determination letters covering the current terms and provisions of the
Retirement Plans. There are no issues relating to said qualification or
exemption of the Retirement Plans currently pending before the IRS, the United
States Department of Labor, the Pension Benefit Guaranty Corporation or any
court. The Retirement Plans and the administration thereof meet (and have met
since the establishment of the Retirement Plans) in all material respects all of
the applicable requirements of ERISA, the Code and all other laws, rules and
regulations applicable to the Retirement Plans and do not violate (and since the
establishment of the Retirement Plans have not violated) in any material respect
any of the applicable provisions of ERISA, the Code and such other laws, rules
and regulations. Without limiting the generality of the foregoing, all reports
and returns with respect to the Retirement Plans required to be filed with any
governmental department, agency, service or other authority have been properly
and timely filed. There are no issues or disputes with respect to the Retirement
Plans or the administration thereof
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currently existing between Western, or any trustee or other fiduciary
thereunder, and any governmental agency, any current or former employee of
Western or beneficiary of any such employee, or any other person or entity. No
"reportable event" within the meaning of Section 4043 of ERISA has occurred at
any time with respect to the Retirement Plans.
(d) No liability under subtitle C or D of Title IV of ERISA has
been or is expected to be incurred by Western with respect to the Retirement
Plans or with respect to any other ongoing, frozen or terminated defined benefit
pension plan currently or formerly maintained by Western. Western does not
presently contribute to a "Multiemployer Plan" and has not contributed to such a
plan since December 31, 1995. All contributions required to be made pursuant to
the terms of each of the Plans (including without limitation the Retirement
Plans and any other "pension plan" (as defined in Section 3(2) of ERISA,
provided such plan is intended to qualify under the provisions of Section 401(a)
of the Code) maintained by Western have been timely made. Neither the Retirement
Plans nor any other "pension plan" maintained by Western have an "accumulated
funding deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA. Western has not provided, and is not required
to provide, security to any "pension plan" or to any "Single Employer Plan"
pursuant to Section 401(a)(29) of the Code. Under the Retirement Plans and any
other "pension plan" maintained by Western as of the last day of the most recent
plan year ended prior to the date hereof, the actuarially determined present
value of all "benefit liabilities," within the meaning of Section 4001(a)(16) of
ERISA (as determined on the basis of the actuarial assumptions contained in the
plan's most recent actuarial valuation) did not exceed the then current value of
the assets of such plan, and there has been no material change in the financial
condition of any such plan since the last day of the most recent plan year.
(e) Except as provided in the terms of the Retirement Plans
themselves, there are no restrictions on the rights of Western to amend or
terminate any Retirement Plan without incurring any liability thereunder.
Neither the execution and delivery of this Agreement nor the consummation of the
transactions described herein will, except as otherwise specifically provided in
this Agreement, (i) result in any payment to any person (including without
limitation any severance compensation or payment, unemployment compensation,
"golden parachute" or "change in control" payment, or otherwise) becoming due
under any plan or agreement to any director, officer, employee or consultant,
(ii) increase any benefits otherwise payable under any plan or agreement, or
(iii) result in any acceleration of the time of payment or vesting of any such
benefit.
2.26. Insurance. Western has Previously Disclosed to MFC a listing of
---------
each blanket bond, liability insurance, life insurance or other insurance policy
in effect on August 27, 2001, and in which it was an insured party or
beneficiary (the "Policies"). The Policies provide coverage in such amounts and
against such liabilities, casualties, losses or risks as is customary or
reasonable for entities engaged in the businesses of Western or as is required
by applicable law or regulation; and, in the reasonable opinion of management of
Western, the insurance coverage provided under the Policies is reasonable and
adequate in all respects for Western. Each of the Policies is in full force and
effect and is valid and enforceable in accordance with its terms, and is
underwritten by an insurer of recognized financial responsibility and which is
qualified to issue those policies in North Carolina; and, Western has complied
in all material respects with requirements (including the giving of required
notices) under each such Policy in order to preserve all rights thereunder with
respect to all matters. Western is not in default under the provisions of, has
not received notice of cancellation or nonrenewal of or any premium increase on,
and has not failed to pay any premium on, any Policy, and, to the Best Knowledge
of management of Western, there has not been any inaccuracy in any application
for any Policy. There are no pending claims with respect to any Policy, and, to
the Best Knowledge of management of Western, there currently are no conditions,
and there has occurred no event, that is reasonably likely to form the basis for
any such claim.
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2.27. Insurance of Deposits. All deposits of Western are insured by the
---------------------
Bank Insurance Fund of the FDIC to the maximum extent permitted by law, all
deposit insurance premiums due from Western to the FDIC have been paid in full
in a timely fashion, and, to the Best Knowledge of management of Western, no
proceedings have been commenced or are contemplated by the FDIC or otherwise to
terminate such insurance.
2.28. Obstacles to Regulatory Approval. To the Best Knowledge of
--------------------------------
management of Western, there exists no fact or condition (including Western's
record of compliance with the Community Reinvestment Act) relating to Western
that may reasonably be expected to prevent or materially impede or delay MFC or
Western from obtaining the regulatory approvals required in order to consummate
the transactions described in this Agreement; and, if any such fact or condition
becomes known to Western, Western shall promptly (and in any event within three
days after obtaining such Knowledge) give notice of such fact or condition to
MFC in the manner provided herein.
2.29. Disclosure. To the Best Knowledge of management of Western, no
----------
written statement, certificate, schedule, list or other written information
furnished by or on behalf of Western to MFC or MountainBank in connection with
this Agreement and the transactions described herein, when considered as a
whole, contains or has contained any untrue statement of a material fact or
omits or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF
MFC AND MOUNTAINBANK
Except as otherwise specifically described in this Agreement or as
Previously Disclosed to Western, MFC and MountainBank hereby make the following
representations and warranties to Western.
3.01. Organization; Standing; Power. MFC and MountainBank each (i) is
-----------------------------
duly organized and incorporated, validly existing and in good standing under the
laws of North Carolina, (ii) has all requisite power and authority (corporate
and other) to own its respective properties and conduct its respective
businesses as it now is being conducted, and (iii) is duly qualified to do
business and is in good standing in each jurisdiction in which the character of
the properties owned or leased by it therein, or in which the transaction of its
respective businesses, makes such qualification necessary, except where failure
so to qualify would not have a material adverse effect on MFC and MountainBank
considered as one enterprise.
3.02. Capital Stock. MFC's authorized capital stock consists of
--------------
10,000,000 shares of common stock, $4.00 par value, of which 1,873,755 shares
are issued and outstanding and constitute MFC's only outstanding securities.
The shares of MFC Stock into which shares of Western Stock are converted at the
Effective Time pursuant to this Agreement will, at the time of issuance, be duly
authorized, validly issued, fully paid and nonassessable.
3.03. Authorization and Validity of Agreement. This Agreement has been
----------------------------------------
duly and validly approved by MFC's and MountainBank's Boards of Directors.
Subject only to receipt of required approvals of Regulatory Authorities (as
contemplated by Paragraph 6.02), (i) MFC and MountainBank each has the corporate
power and authority to execute and deliver this Agreement and to perform its
obligations and agreements and carry out the transactions described herein, (ii)
all corporate proceedings required to be taken to authorize MFC and MountainBank
to enter into this Agreement and to perform their respective obligations and
agreements and carry out the transactions described herein have been duly and
properly taken, and (iii) this Agreement constitutes the valid and binding
agreement of MFC and MountainBank enforceable in accordance with its terms
(except to the extent enforceability may be limited by (A) applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect which affect creditors' rights generally, (B) legal and equitable
limitations on the availability of injunctive relief, specific performance and
other equitable remedies, and (C) general
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principles of equity and applicable laws or court decisions limiting the
enforceability of indemnification provisions).
3.04. Validity of Transactions; Absence of Required Consents or Waivers.
-----------------------------------------------------------------
Subject to receipt of required approvals of Regulatory Authorities (as
contemplated by Paragraph 6.02), and except where the same would not have a
material adverse effect on MFC and MountainBank considered as one enterprise,
neither the execution and delivery of this Agreement, nor the consummation of
the transactions described herein, nor compliance by MFC or MountainBank with
any of their respective obligations or agreements contained herein, will: (i)
conflict with or result in a breach of the terms and conditions of, or
constitute a default or violation under any provision of, MFC's or
MountainBank's Articles of Incorporation or Bylaws, or any material contract,
agreement, lease, mortgage, note, bond, indenture, license, or obligation or
understanding (oral or written) to which MFC or MountainBank is bound or by
which either of them, or their respective businesses, capital stock or any of
their respective properties or assets may be affected; (ii) result in the
creation or imposition of any material lien, claim, interest, charge,
restriction or encumbrance upon any of MFC's or MountainBank's properties or
assets; (iii) violate any applicable federal or state statute, law, rule or
regulation, or any order, writ, injunction or decree of any court,
administrative or regulatory agency or governmental body, which violation will
or may have a material adverse effect on MFC or MountainBank considered as one
entity or their respective abilities to consummate the transactions described
herein; or (iv) result in the acceleration of any material obligation or
indebtedness of MFC or MountainBank.
No consents, approvals or waivers are required to be obtained from
any person or entity in connection with MFC's or MountainBank's execution and
delivery of this Agreement, or the performance of their respective obligations
or agreements or the consummation of the transactions described herein, except
for required approvals of Regulatory Authorities described in Paragraph 6.02.
3.05. MFC Financial Statements. MFC has Previously Disclosed to Western a
------------------------
copy of its audited consolidated statements of financial condition as of
December 31, 1999 and 2000, and its audited consolidated statements of income,
stockholders' equity and cash flows for the two years ended December 31, 1999
and 2000, together with notes thereto (collectively, the "MFC Audited Financial
Statements"), and its unaudited consolidated statements of financial condition
as of June 30, 2001, and unaudited consolidated statements of income and cash
flows for the six-months ended June 30, 2000 and 2001, together with notes
thereto (collectively, the "MFC Interim Financial Statements"). The MFC Audited
Financial Statements and the MFC Interim Financial Statements (i) were prepared
in accordance with GAAP applied on a consistent basis throughout the periods
indicated, (ii) are in accordance with MFC's books and records, and (iii)
present fairly MFC's consolidated financial condition, assets and liabilities,
results of operations, changes in stockholders' equity and changes in cash flows
as of the dates indicated and for the periods specified therein. The MFC
Audited Financial Statements have been audited by Larrowe & Company PLLC which
serves as MFC's independent certified public accountants.
3.06. Absence of Material Adverse Changes or Certain Other Events. Since
-----------------------------------------------------------
June 30, 2001, there has been no material adverse change in MFC's consolidated
assets, liabilities or operations, and there currently exists no condition or
circumstance in MFC's assets, liabilities or operations which, with the lapse of
time or otherwise, may or could cause, create or result in a material adverse
change in or affecting the consolidated financial condition of MFC or its
consolidated results of operations, prospects, business, assets, loan portfolio,
investments, properties or operations.
3.07. Litigation and Compliance with Law. There are no actions, suits,
----------------------------------
arbitrations, controversies or other proceedings or investigations (or, to the
Best Knowledge and belief of the executive officers of MFC, any facts or
circumstances which reasonably could result in such), including without
limitation any such action by any governmental or regulatory authority, which
currently exist or are ongoing, pending or, to the Best Knowledge of the
executive officers of MFC, threatened, contemplated or probable of assertion,
against, relating to or otherwise affecting MFC or MountainBank
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or any of their properties, assets or employees which, if determined adversely,
could have a material adverse effect on the ability of MFC or MountainBank to
consummate the Merger.
3.08. Obstacles to Regulatory Approval. To the Best Knowledge of the
--------------------------------
executive officers of MFC and MountainBank, no fact or condition (including
MountainBank's record of compliance with the Community Reinvestment Act)
relating to MFC or MountainBank exists that may reasonably be expected to
prevent or materially impede or delay MFC, MountainBank or Western from
obtaining the regulatory approvals required in order to consummate the
transactions described in this Agreement; and, if any such fact or condition
becomes known to the executive officers of MFC or MountainBank, MFC or
MountainBank promptly (and in any event within three days after obtaining such
Knowledge) shall communicate such fact or condition to the Chairman of Western.
3.09. Shareholder Approval. By its execution of this Agreement, MFC
--------------------
represents that it approves the Merger in MFC's capacity as MountainBank's sole
shareholder.
3.10. Disclosure. To the Best Knowledge of the executive officers of MFC
----------
and MountainBank, no written statement, certificate, schedule, list or written
information furnished by or on behalf of MFC or MountainBank to Western in
connection with this Agreement, when considered as a whole, contains or will
contain any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading.
ARTICLE IV. COVENANTS OF WESTERN
4.01. Affirmative Covenants of Western. Western hereby covenants and
--------------------------------
agrees as follows with MFC and MountainBank:
(a) Western Shareholders' Meeting. Western agrees to cause a
-----------------------------
meeting of its shareholders (the "Western Shareholders' Meeting") to be duly
called and held as soon as practicable after the date of this Agreement for the
purpose of voting by Western's shareholders on the approval of the Merger and
the ratification and adoption of this Agreement. In connection with the call and
conduct of, and all other matters relating to, the Western Shareholders' Meeting
(including the solicitation of appointments of proxies), Western will comply in
all material respects with all provisions of applicable law and regulations and
with its Articles of Incorporation and Bylaws.
Western will solicit appointments of proxies from its shareholders
for use at the Western Shareholders' Meeting and, in connection with that
solicitation, it will distribute to its shareholders proxy solicitation
materials (a "Proxy Statement") in the form of the "Proxy Statement/Prospectus"
described in Paragraph 6.01 below.
Unless, due to a material change in circumstances after the date
hereof, Western's Board of Directors reasonably believes in good faith, based on
the written opinion of its legal counsel, that such a recommendation would
violate the directors' duties or obligations as such to Western or to its
shareholders, Western covenants that its Board of Directors will recommend to
and actively encourage Western's shareholders that they vote their shares of
Western Stock at the Western Shareholders' Meeting in favor of ratification and
approval of this Agreement and the Merger, and the Proxy Statement distributed
to Western's shareholders in connection with the Western Shareholders' Meeting
will so indicate and state that Western's Board of Directors considers the
Merger to be advisable and in the best interests of Western and its
shareholders.
(b) Filing of Proxy Statement. As soon as practicable following
-------------------------
the date of this Agreement, Western will file the Proxy Statement in preliminary
form with the FDIC under the 1934 Act. Following the preliminary filing, Western
will respond to comments of the FDIC with respect to the Proxy Statement, file
any necessary amendments thereto, and otherwise will take all such other actions
as
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reasonably shall be necessary, to cause the FDIC to approve the Proxy Statement;
provided, however, that Western shall not be required to file any such
amendment, or take any such other action, which it shall, in good faith,
reasonably consider to be excessively burdensome or to involve excessive expense
in relation to the benefits expected to be derived by it from the Merger, or
which it, in good faith, reasonably believes would have a material adverse
affect on its business.
(c) Affiliates Letters. With respect persons whose shares of MFC
------------------
Stock to be received in connection with the Merger are deemed by MFC to be
subject to the transfer restrictions under the 1933 Act described in Paragraph
6.12(a) below, Western will use its best efforts to cause each such person to
execute and deliver to MFC prior to the Effective Time a written agreement (an
"Affiliate's Agreement") relating to those transfer restrictions. Each
Affiliate's Agreement shall be in form and content reasonably satisfactory to
MFC and substantially in the form attached as Exhibit B to this Agreement.
(d) Conduct of Business Prior to Effective Time. While the
-------------------------------------------
parties recognize that the operation of Western until the Effective Time is the
responsibility of Western's Board of Directors and officers, Western agrees
that, between the date of this Agreement and the Effective Time, and except as
otherwise provided herein or expressly agreed to in writing by MFC's President,
Western will carry on its business in and only in the regular and usual course
in substantially the same manner as such business heretofore was conducted, and,
to the extent consistent with such business and within its ability to do so,
Western agrees that it will:
(i) preserve intact its present business organization, keep
available its present officers and employees, and preserve its relationships
with customers, depositors, creditors, correspondents, suppliers, and others
having business relationships with it;
(ii) maintain all of its properties and equipment in
customary repair, order and condition, ordinary wear and tear excepted;
(iii) maintain its books of account and records in the usual,
regular and ordinary manner in accordance with sound business practices applied
on a consistent basis;
(iv) comply in all material respects with all laws, rules
and regulations applicable to it, its properties, assets or employees and to the
conduct of its business;
(v) not change its existing loan underwriting guidelines,
policies or procedures in any material respect except as may be required by law;
(vi) continue to maintain in force insurance such as is
described in Paragraph 2.26; not modify any bonds or policies of insurance in
effect as of the date hereof unless the same, as modified, provides
substantially equivalent coverage; and, not cancel, allow to be terminated or,
to the extent available, fail to renew, any such bond or policy of insurance
unless the same is replaced with a bond or policy providing substantially
equivalent coverage; and,
(vii) promptly provide to MFC such information about its
financial condition, results of operations, prospects, businesses, assets, loan
portfolio, investments, properties, employees or operations, as MFC reasonably
shall request.
(e) Periodic Financial and Other Information. Following the date
----------------------------------------
of this Agreement and until the Effective Time, Western promptly will deliver to
MFC:
(i) an income statement and a statement of condition within
five days after each month end;
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(ii) a copy of all interim financial statements within 15
days after each quarter end;
(iii) a copy of each report, registration, statement, or
other communication or regulatory filing made with or to any Regulatory
Authority at the time it is filed or made;
(iv) an analysis of the Loan Loss Reserve and management's
assessment of the adequacy of the Loan Loss Reserve, which analysis and
assessment shall include a list of all classified or "watch list" loans, along
with the outstanding balance and amount specifically allocated to the Loan Loss
Reserve for each such classified or "watch list" Loan, all within five days
after each calendar month end; and,
(v) the following information with respect to loans and
other extensions of credit (such assets being referred to in this Agreement as
"Loans") as of, and within five days following each calendar month end:
(A) a list of Loans in nonaccrual status;
(B) a list of all Loans without principal reduction
for a period of longer than one year;
(C) a list of all foreclosed real property or other
real estate owned and all repossessed personal
property;
(D) a list of each reworked or restructured Loan still
outstanding, including original terms,
restructured terms and status; and
(E) a list of any actual or threatened litigation by
or against Western pertaining to any Loan or
credit, which list shall contain a description of
circumstances surrounding such litigation, its
present status and management's evaluation of such
litigation.
(vi) the following information by the close of Western's
business each Wednesday:
(A) a listing of each new Loan made during the prior
calendar week;
(B) a listing of each renewal, extension or
modification of the terms of an existing Loan
effected during the prior calendar week;
(C) a listing of each commitment to extend credit
issued during the prior calendar week;
(D) a then current listing of all Loans past due as to
principal or interest; and,
(E) a then current listing of all documentation or
compliance exceptions relating to Western's Loans.
(f) Notice of Certain Changes or Events. Following the
-----------------------------------
execution of this Agreement and up to the Effective Time, Western promptly will
notify MFC in writing of and provide to it such information as it shall request
regarding (i) any material adverse change in Western's financial condition,
results of operations, prospects, business, assets, loan portfolio, investments,
properties or operations, or of the actual or prospective occurrence of any
condition or event which, with the lapse of time or otherwise, may or could
cause, create or result in any such material adverse change, or of (ii) the
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actual or prospective existence or occurrence of any condition or event which,
with the lapse of time or otherwise, has caused or may or could cause any
statement, representation or warranty of Western herein to be or become
inaccurate, misleading or incomplete in any material respect, or which has
resulted or may or could cause, create or result in the breach or violation in
any material respect of any of Western's covenants or agreements contained
herein or in the failure of any of the conditions described in Paragraphs 7.01
or 7.03.
(g) Accruals for Loan Loss Reserve, Expenses and Other Accounting
-------------------------------------------------------------
Matters. Western will make such appropriate accounting entries in its books and
-------
records and take such other actions as MFC, in its sole discretion, deems to be
required by generally accepted accounting principles, or which MFC otherwise
deems to be necessary, appropriate or desirable in anticipation of the Merger,
including without limitation additional provisions to Western's Loan Loss
Reserve or accruals or the creation of reserves for employee benefit and Merger-
related expenses; provided, however, that notwithstanding any provision of this
Agreement to the contrary, and except as otherwise agreed to by Western and MFC,
Western shall not be required to make any such accounting entries until
immediately prior to the Closing.
(h) Loan Charge-Offs. Western will make such appropriate
----------------
accounting entries in its books and records and take such other actions as MFC
deems to be necessary, appropriate or desirable to charge-off any loans on
Western's books, or any portions thereof, that MFC, in its sole discretion,
considers to be losses or that MFC otherwise believes, in good faith, are
required to be charged off pursuant to applicable banking regulations, generally
accepted accounting principles or otherwise, or that otherwise would be charged
off by MountainBank after the Effective Time in accordance with its loan
administration and charge-off policies and procedures; provided, however, that
notwithstanding any provision of this Agreement to the contrary, and except as
otherwise agreed to by Western and MFC, Western shall not be required to make
any such accounting entries or take any such actions until immediately prior to
the Closing.
(i) Credit Files and Documentation. Prior to the Effective Time,
------------------------------
and to facilitate the merging of Western's credit files with those of
MountainBank, Western will adopt and implement MountainBank's policies and
procedures for the creation, content and maintenance of credit files. Western
will review each existing credit file relating to an outstanding loan on its
book having a principal balance of $25,000 or more and will take all such
actions as are necessary or that MFC specifies to conform the content and format
of those credit files, and to cause those credit files to contain all items of
information and documentation required by, MountainBank's policies and
procedures; and, First Western will use its best efforts in good faith to take
those same actions with respect to its other credit files.
(j) Correction of Credit Documentation and Compliance
-------------------------------------------------
Deficiencies. If, during the course of its continuing review of Western's credit
------------
files after the date of this Agreement, MFC notifies Western of situations or
circumstances relating to specific loans or credit files that MFC has identified
and that MFC, in its discretion, considers to be deficiencies in loan
documentation or to constitute violations of applicable banking rules or
regulations relating to loans, Western will promptly take all such actions as
are necessary or that MFC specifies in order to correct those deficiencies or
violations, and each of those deficiencies or violations shall be corrected to
MFC's reasonable satisfaction prior to the Effective Time.
(k) Consents to Assignment of Leases. With respect to each lease
--------------------------------
or rental agreement pertaining to real or personal property to which Western is
a party, Western will obtain the written consent of the other parties to that
agreement to the assignment to MFC of Western's rights and obligations under the
agreement, each of which consents shall be in a form reasonably satisfactory to
MFC.
(l) Access. Western agrees that, following the date of
------
this Agreement and to and including the Effective Time, it will provide MFC and
MountainBank and their respective employees,
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accountants, legal counsel, environmental consultants or other representatives
access to all its books, records, files (including credit files and loan
documentation and records) and other information (whether maintained
electronically or otherwise), to all its properties and facilities, and to all
its employees, accountants, legal counsel and consultants, as MFC or
MountainBank shall, in their respective sole discretion, consider to be
necessary or appropriate for the purpose of conducting ongoing reviews and
investigations of the assets and business affairs of Western, preparing for
consummation of the Merger and the consolidation of Western's operations into
those of MountainBank, determining the accuracy of Western's representations and
warranties in this Agreement or its compliance with its covenants in this
Agreement, or for any other reason; provided, however, that any investigation or
reviews conducted by or on behalf of MFC or MountainBank shall be performed in
such a manner as will not interfere unreasonably with Western's normal
operations or with its relationship with its customers or employees, and shall
be conducted in accordance with procedures established by the parties.
(m) Deposit Liabilities. Following the date of this Agreement,
-------------------
Western will make pricing decisions with respect to its deposit accounts in a
manner consistent with its past practices based on competition and prevailing
market rates in its banking markets.
(n) Further Action; Instruments of Transfer. Western covenants and
---------------------------------------
agrees with MFC and MountainBank that it (i) will use its best efforts in good
faith to take or cause to be taken all action required of it under this
Agreement as promptly as practicable so as to permit the consummation of the
transactions described herein at the earliest possible date, (ii) shall perform
all acts and execute and deliver to MFC and MountainBank all documents or
instruments required of it herein, or as otherwise shall be reasonably necessary
or useful to or requested by MFC or MountainBank, in consummating such
transactions, and, (iii) will cooperate with MFC and MountainBank in every way
in carrying out, and will pursue diligently the expeditious completion of, such
transactions.
4.02. Negative Covenants of Western. Western hereby covenants and agrees
-----------------------------
that, between the date hereof and the Effective Time, it will not do any of the
following things or take any of the following actions without the prior written
consent and authorization of MFC's President.
(a) Amendments to Articles of Incorporation or Bylaws. Western will
-------------------------------------------------
not amend its Articles of Incorporation or Bylaws.
(b) Change in Capitalization. Western will not make any change in
------------------------
its authorized capital stock, create any other or additional authorized capital
stock or other securities, or reclassify, combine or split any shares of its
capital stock or other securities.
(c) Sale or Issuance of Shares. Western will not sell or issue any
--------------------------
additional shares of capital stock or other securities, including any securities
convertible into capital stock, or enter into any agreement or understanding
with respect to any such action. However, notwithstanding anything contained
herein to the contrary, Western may issue and sell shares of Western Stock to a
director, officer of employee of Western upon that person's exercise of a stock
option that was granted prior to, and remained outstanding and in effect on, the
date of this Agreement, provided that the stock option is exercisable in
accordance with its terms at the time of such exercise and that the sale of
Western Stock upon such exercise is in accordance with the terms and conditions
of that stock option as in effect on the date of this Agreement.
(d) Purchase or Redemption of Shares. Western will not purchase,
--------------------------------
redeem, retire or otherwise acquire any shares of its capital stock.
(e) Options, Warrants and Rights. Western will not grant or issue
----------------------------
any options, warrants, calls, puts or other rights of any kind relating to the
purchase, redemption or conversion of shares of its capital stock or any other
securities (including securities convertible into capital stock) or enter into
any agreement or understanding with respect to any such action.
A-21
(f) Dividends. Western will not declare or pay any dividends on its
---------
outstanding shares of capital stock or make any other distributions on or in
respect of any shares of its capital stock or otherwise to its shareholders.
(g) Employment, Benefit or Retirement Agreements or Plans. Except as
-----------------------------------------------------
required by law, Western will not (i) enter into or become bound by any oral or
written contract, agreement or commitment for the employment or compensation of
any director, officer, employee or consultant which is not immediately
terminable by Western without cost or other liability on no more than 30 days'
notice; (ii) adopt, enter into or become bound by any new or additional profit-
sharing, bonus, incentive, change in control or "golden parachute," stock
option, stock purchase, pension, retirement, insurance (hospitalization, life or
other), paid leave (sick leave, vacation leave or other) or similar contract,
agreement, commitment, understanding, plan or arrangement (whether formal or
informal) with respect to or which provides for benefits for any of its current
or former directors, officers, employees or consultants; or (iii) enter into or
become bound by any contract with or commitment to any labor or trade union or
association or any collective bargaining group.
(h) Increase in Compensation; Bonuses. Western will not increase the
---------------------------------
compensation or benefits of, or pay any bonus or other special or additional
compensation to, any of its directors, officers, employees or consultants.
However, notwithstanding anything contained herein to the contrary, prior to the
Effective Time Western may review and make routine increases in the salaries of
its employees at such time and in such amounts as is consistent with its past
practices and its salary administration and review policies and procedures in
effect on the date of this Agreement.
(i) Accounting Practices. Western will not make any changes in its
--------------------
accounting methods, practices or procedures or in depreciation or amortization
policies, schedules or rates heretofore applied (except as required by GAAP or
governmental regulations).
(j) Acquisitions; Additional Branch Offices. Western will not
---------------------------------------
directly or indirectly (i) acquire or merge with, or acquire any branch or all
or any significant part of the assets of, any other person or entity, (ii) open
any new branch office, or (iii) enter into or become bound by any contract,
agreement, commitment or letter of intent relating to, or otherwise take or
agree to take any action in furtherance of, any such transaction or the opening
of a new branch office.
(k) Changes in Business Practices. Except as may be required by the
-----------------------------
Commissioner, the FDIC or any other governmental or other regulatory agency, or
as shall be required by applicable law, regulation or this Agreement, Western
will not (i) change in any material respect the nature of its business or the
manner in which it conducts its business, (ii) discontinue any material portion
or line of its business, or (iii) change in any material respect its lending,
investment, asset-liability management or other material banking or business
policies.
(l) Exclusive Merger Agreement. Unless, due to a material change in
--------------------------
circumstances after the date hereof, Western's Board of Directors reasonably
believes in good faith, based on the written opinion of its legal counsel, that
any such action or inaction would violate the directors' duties or obligations
as such to Western or to its shareholders, Western will not, directly, or
indirectly through any person, (i) encourage, solicit or attempt to initiate or
procure discussions, negotiations or offers with or from any person or entity
(other than MFC or MountainBank) relating to a merger or other acquisition of
Western or the purchase or acquisition of any Western Stock, any branch office
of Western or all or any significant part of Western's assets, or provide
assistance to any person in connection with any such offer; (ii) except to the
extent required by law, disclose to any person or entity any information not
customarily disclosed to the public concerning Western or its business, or
afford to any other person or entity access to its properties, facilities, books
or records; (iii) sell or transfer any branch office of Western or all or any
significant part of Western's assets to any other person or entity; or (iv)
enter into or become bound by any contract, agreement, commitment or letter of
intent relating to, or otherwise take or agree to take any action in furtherance
of, any such transaction.
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(m) Acquisition or Disposition of Assets. Western will not:
------------------------------------
(i) Sell or lease (as lessor), or enter into or become bound
by any contract, agreement, option or commitment relating to the sale, lease (as
lessor) or other disposition of, any real estate in any amount;
(ii) Sell or lease (as lessor), or enter into or become bound
by any contract, agreement, option or commitment relating to the sale, lease (as
lessor) or other disposition of, any equipment or any other fixed or capital
asset (other than real estate) having a book value or a fair market value,
whichever is greater, of more than $5,000 for any individual item or asset or in
the aggregate for all such items or assets;
(iii) Purchase or lease (as lessee), or enter into or become
bound by any contract, agreement, option or commitment relating to the purchase,
lease (as lessee) or other acquisition of, any real property in any amount;
(iv) Purchase or lease (as lessee), or enter into or become
bound by any contract, agreement, option or commitment relating to the purchase,
lease (as lessee) or other acquisition of, any equipment or any other fixed
asset (other than real estate) having a purchase price, or involving aggregate
lease payments, in excess of $5,000 for any individual item or asset or in the
aggregate for all such items or assets;
(v) Enter into any purchase or other commitment or contract
for supplies or services which obligates Western for a period longer than 30
days;
(vi) Except in the ordinary course of its business consistent
with its past practices, sell, purchase or repurchase, or enter into or become
bound by any contract, agreement, option or commitment to sell, purchase or
repurchase, any loan or other receivable or any participation in any loan or
other receivable; or
(v) Sell or dispose of, or enter into or become bound by any
contract, agreement, option or commitment relating to the sale or other
disposition of, any other asset (whether tangible or intangible, and including
without limitation any trade name, trademark, copyright, service mark or
intellectual property right or license); or assign its right to or otherwise
give any other person its permission or consent to use or do business under the
corporate name of Western or any name similar thereto; or release, transfer or
waive any license or right granted to it by any other person to use any
trademark, trade name, copyright, service mark or intellectual property right.
(n) Debt; Liabilities. Western will not (i) enter into or become
-----------------
bound by any promissory note, loan agreement or other agreement or arrangement
pertaining to its borrowing of money, (ii) assume, guarantee, endorse or
otherwise become responsible or liable for any obligation of any other person or
entity, or (iii) except in the ordinary course of its business consistent with
its past practices, incur any other liability or obligation (absolute or
contingent).
(o) Liens; Encumbrances. Western will not mortgage, pledge or subject
-------------------
any of its assets to, or permit any of its assets to become or, except for those
liens or encumbrances Previously Disclosed to MFC, remain subject to, any lien
or any other encumbrance (other than in the ordinary course of business
consistent with its past practices in connection with securing public funds
deposits or repurchase agreements).
(p) Waiver of Rights. Western will not waive, release or compromise
----------------
any rights in its favor against or with respect to any of its officers,
directors or shareholders or members of families of officers, directors or
shareholders, nor will Western waive, release or compromise any material rights
against or with respect to any other person or entity except in the ordinary
course of business and in good faith for fair value in money or money's worth.
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(q) Other Contracts. Western will not enter into or become bound by
---------------
any contracts, agreements, commitments or understandings (other than those
permitted elsewhere in this Paragraph 4.02) (i) for or with respect to any
charitable contributions; (ii) with any governmental or regulatory agency or
authority; (iii) pursuant to which Western would assume, guarantee, endorse or
otherwise become liable for the debt, liability or obligation of any other
person or entity; (iv) which is entered into other than in the ordinary course
of its business; or (v) which, in the case of any one contract, agreement,
commitment or understanding, and whether or not in the ordinary course of its
business, would obligate or commit Western to make expenditures over any period
of time of more than $5,000 (other than contracts, agreements, commitments or
understandings entered into in the ordinary course of Western's lending
operations).
(r) Deposit Liabilities. Western will not make any material change in
-------------------
its current deposit policies and procedures or take any actions designed to
materially increase or decrease the aggregate level of its deposits as of the
date of this Agreement.
(s) Foreclosures. In connection with any foreclosure of a mortgage or
------------
deed of trust securing a loan, Western will not bid for or purchase any real
property which is covered by that mortgage or deed of trust or which is the
subject of that foreclosure.
(t) Loans, Extensions of Credit and Loan Commitments. Without the
------------------------------------------------
prior approval of lending personnel designated by MountainBank, Western will not
(i) make a Loan, or issue a commitment to make a Loan, in excess of $25,000 or
which would cause its credit exposure to that borrower to exceed that amount, or
(ii) renew, extend or modify the terms of, or issue any commitment to renew,
extend or modify the terms of, any existing Loan to a borrower to whom it has a
credit exposure in excess of $25,000.
ARTICLE V. COVENANTS OF MFC AND MOUNTAINBANK
MFC and MountainBank hereby covenant and agree as follows with Western:
5.01 Registration Statement. As soon as practicable following the date
----------------------
of this Agreement, MFC will prepare and file with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933 (the "1933 Act") a
registration statement on Form S-4, or other appropriate form (the "MFC
Registration Statement") which covers MFC's offer of MFC Stock to Western's
shareholders in exchange for their shares of Western Stock as described in this
Agreement. The "Prospectus" contained in the MFC Registration Statement will be
in the form of the "Proxy Statement/Prospectus" described in Paragraph 6.01
below. Following the filing of the MFC Registration Statement, MFC will respond
to comments of the SEC with respect thereto, file any necessary amendments
thereto, and take all such other actions as reasonably shall be necessary, to
cause the MFC Registration Statement to be declared effective by the SEC;
provided, however, that MFC shall not be required to file any such amendment, or
take any such other action, which it shall, in good faith, reasonably consider
to be excessively burdensome or to involve excessive expense in relation to the
benefits expected to be derived by it from the Merger, or which it, in good
faith, reasonably reasonably believes would have a material adverse affect on
its business.
5.02. "Blue Sky" Approvals. As soon as practicable following the date of
-------------------
this Agreement, MFC will take all actions, if any, required by applicable state
securities or "blue sky" laws (i) to cause the MFC Stock to be issued at the
Effective Time, at the time of the issuance thereof, to be duly qualified or
registered (unless exempt) under such laws, or to cause all conditions to any
exemptions from qualification or registration thereof under such laws to have
been satisfied, and (ii) to obtain any and all other approvals or consents to
the issuance of the MFC Stock that are required under state or federal law.
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5.03. Employees; Employee Benefits.
----------------------------
(a) Employment of Western Employees. Provided they remain
-------------------------------
employed by Western at the Effective Time, MountainBank will attempt in good
faith to locate positions with MountainBank for which employment may be offered
to as many employees of Western as MountainBank, in its discretion, considers to
be feasible. However, notwithstanding anything contained in this Agreement to
the contrary, neither MountainBank nor MFC shall have any obligation to employ
or provide employment to any employee of Western or to any particular number of
such employees, and any employment offered to an employee of Western shall be in
such a position, at such location within MountainBank's branch system, and for
such rate of compensation, as MountainBank shall determine in its sole
discretion. The employment of each former Western employee who becomes an
employee of MountainBank at the Effective Time will be on an "at-will" basis,
and nothing in this Agreement shall be deemed to constitute an employment
agreement between MountainBank and any such person or to obligate MountainBank
to employ any such person for any specific period of time, in any specific
position, or at any specific salary or rate of compensation, or to restrict
MountainBank's right to terminate the employment of any such person at any time
and for any reason satisfactory to it.
(b) Employee Benefits. Except as otherwise provided in this
-----------------
Agreement, any employee of Western who becomes an employee of MountainBank at
the Effective Time (a "New Employee") shall be entitled to receive all employee
benefits and to participate in all benefit plans provided by MountainBank on the
same basis (including cost) and subject to the same eligibility and vesting
requirements, and to the same conditions, restrictions and limitations, as
generally are in effect and applicable to other newly hired employees of
MountainBank. Each New Employee shall be given credit for his or her full years
of service with Western for purposes of (i) eligibility for participation and
vesting in MountainBank's Section 401(k) savings plan, and (ii) for all purposes
under MountainBank's other benefit plans (including entitlement to vacation and
sick leave). For purposes of MountainBank's health insurance coverage, a New
Employee's participation will be without regard to pre-existing condition
requirements under MountainBank's health insurance plan, provided that any such
pre-existing condition at the Effective Time was covered under Western's health
insurance plan at the Effective Time and the New Employees provide evidence of
such previous coverage in a form satisfactory to MountainBank's health insurance
carrier.
Any Western employee who is not offered employment by
MountainBank at the Effective Time may obtain continued health insurance
coverage through the exercise of his or her COBRA rights.
For the calendar year during which the Effective Time occurs,
MountainBank will grant to each New Employee a number of days of sick leave and
vacation leave, respectively, equal, in each case, to (i) the full number of
such days to which the New Employee would be entitled for that year, based on
his or her credited years of service and in accordance with MountainBank's
standard leave policies, less (ii) the number of days of sick leave and vacation
leave used by the New Employee as an employee of Western during that calendar
year.
5.04. Directors. So long as they remain directors of Western at the
---------
Effective Time, then, immediately following the Effective Time: (i) the number
of members of MFC's Board of Directors will be increased by two, and Van F.
Phillips and William A. Banks each will be appointed to serve as a director of
MFC, with Van F. Phillips being appointed to serve as Vice Chairman of MFC's
Board of Directors, in each case for a term of office extending to the next
annual meeting of MFC's shareholders at which its directors are elected; (ii)
the number of members of MountainBank's Board of Directors will be increase by
four, and Van F. Phillips, William A. Banks, Jerry Duncan, and David R. McIntosh
each will be appointed to serve as a director of MountainBank, in each case
until the next annual meeting of MountainBank's sole shareholder at which its
directors are elected; and (iii) the remaining members of First Western's Board
of Directors will be appointed to serve as members of MountainBank's advisory
board for its Yancey/Mitchell County branch offices. Following their initial
appointments, the continued
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service of those individuals as directors and/or advisory board members of MFC
and/or MountainBank will be subject to the normal nomination and election
processes.
5.05 Employment Agreement. At the Effective Time, MountainBank will enter
--------------------
into a employment agreement (the "Employment Agreement") with Ronnie E. Deyton
which shall contain terms (including the covenant prohibiting him from competing
against MountainBank) substantially as are contained in, and which shall be
substantially in the form of, Exhibit C to this Agreement.
5.06 Further Action; Instruments of Transfer. MFC and MountainBank each
---------------------------------------
covenants and agrees with Western that it (i) will use its best efforts in good
faith to take or cause to be taken all action required of it under this
Agreement as promptly as practicable so as to permit the consummation of the
transactions described herein at the earliest possible date, (ii) shall perform
all acts and execute and deliver to Western all documents or instruments
required of it herein, and, (iii) will cooperate with Western in every way in
carrying out, and will pursue diligently the expeditious completion of, such
transactions.
ARTICLE VI. ADDITIONAL AGREEMENTS
6.01. Preparation and Distribution of Proxy Statement/Prospectus. Western
----------------------------------------------------------
and MFC jointly will prepare a "Proxy Statement/Prospectus" for distribution to
Western's shareholders as Western's Proxy Statement described in Paragraph
4.01(b) above and as MFC's Prospectus contained in the MFC Registration
Statement as described in Paragraph 5.01 above. The Proxy Statement/Prospectus
will (i) be prepared, in all material respects, in such form, and will contain
or be accompanied by such information regarding the Western Shareholders'
Meeting, this Agreement, the parties hereto, the Merger and other transactions
described herein, or otherwise, as is required by the 1933 Act and rules and
regulations of the SEC to be included in MFC's Prospectus and as is required by
the 1934 Act and rules and regulations of the SEC and the FDIC to be included in
Western's Proxy Statement.
Western and MFC will mail the Proxy Statement/Prospectus, to
Western's shareholders on a date mutually agreed upon by Western and MFC, but in
no event less than 20 days prior to the scheduled date of the Western
Shareholders' Meeting; provided, however, that no such materials shall be mailed
to Western's shareholders unless and until the SEC shall have declared the MFC
Registration Statement to be effective and the FDIC shall have approved
Western's Proxy Statement, and until MFC and Western shall have mutually agreed
on the form and content of such materials. The Proxy Statement/Prospectus mailed
to Western's shareholders shall be in the form of the final Prospectus contained
in the MFC Registration Statement as it is declared effective by the SEC and the
Proxy Statement approved by the FDIC.
6.02. Regulatory Approvals. Western, MountainBank and MFC each agrees
--------------------
with the other that, as soon as practicable following the date of this
Agreement, it will prepare and file, or cause to be prepared and filed, all
applications required to be filed by it under applicable law and regulations for
approvals by Regulatory Authorities of the Merger or other transactions
described in this Agreement, including without limitation any required
applications for the approval of the Commissioner, the FDIC, the Federal Reserve
Board (the "FRB") and the North Carolina Banking Commission (the "Commission").
Western, MountainBank and MFC each agrees (i) to use its best efforts in good
faith to obtain all necessary approvals of Regulatory Authorities required for
consummation of the Merger and other transactions described herein, and (ii)
before the filing of any such application required to be filed, to give each
other party an opportunity to review and comment on the form and content of such
application. Should the appearance of any of the officers, directors, employees
or counsel of Western, MountainBank or MFC be requested by each other or by any
Regulatory Authority at any hearing in connection with any such application, it
will use its best efforts to arrange for such appearance.
6.03. Information for Proxy Statement/Prospectus and Applications for
---------------------------------------------------------------
Regulatory Approvals. Western, MountainBank and MFC each covenants with the
--------------------
other that (i) it will cooperate with the other parties in the preparation of
the Proxy Statement/Prospectus, and applications for required
A-26
approvals of Regulatory Authorities, and it will promptly respond to requests by
the other parties and their legal counsel for information, and will provide all
information, documents, financial statements or other material, that is required
for, or that may be reasonably requested by any other party for inclusion in,
any such document; (ii) none of the information provided by it for inclusion in
any of such documents will contain any untrue statement of a material fact, or
omit any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading, at the time (A) MFC's Registration Statement is
filed with and/or declared effective by the SEC, (B) Western's Proxy Statement
is filed with the FDIC and/or is approved by the FDIC, (C) the Proxy
Statement/Prospectus is mailed to Western's shareholders, or (D) the
applications for required approvals of Regulatory Authorities are filed and/or
such approvals are granted.
6.04. Announcements. Western, MountainBank and MFC each agrees that no
-------------
persons other than the parties to this Agreement are authorized to make any
public announcements or statements about this Agreement or any of the
transactions described herein, and that, without the prior review and consent of
the other parties (which consent shall not unreasonably be denied or delayed),
it will not make any public announcement, statement or disclosure as to the
terms and conditions of this Agreement or the transactions described herein,
except for such disclosures as may be required incidental to obtaining the
required approval of any Regulatory Authority to the consummation of the
transactions described herein. However, notwithstanding anything contained
herein to the contrary, neither Western, MountainBank nor MFC shall be required
to obtain the prior consent of the other parties for any such disclosure which
it, in good faith and upon the advice of its legal counsel, believes is required
by law.
6.05. Real Property Matters. At its option and expense, MountainBank may
---------------------
cause to be conducted (i) a title examination, physical survey, zoning
compliance review, and structural inspection of the Real Property and
improvements thereon (collectively, the "Property Examination") and (ii) site
inspections, historic reviews, regulatory analyses, and Phase 1 environmental
assessments of the Real Property, together with such other studies, testing and
intrusive sampling and analyses as MountainBank shall deem necessary or
desirable (collectively, the "Environmental Survey").
If, in the course of the Property Examination or Environmental
Survey, MountainBank discovers a "Material Defect" (as defined below) with
respect to the Real Property, MountainBank will give prompt written notice
thereof to Western describing the facts or conditions constituting the Material
Defect, and MountainBank shall have the option exercisable upon written notice
to Western to (i) waive the Material Defect, or (ii) terminate this Agreement.
For purposes of this Agreement, a "Material Defect" shall include:
(i) the existence of any lien (other than the lien of real
property taxes not yet due and payable), encumbrance, zoning restriction,
easement, covenant, or other restriction, title imperfection or title
irregularity, or the existence of any facts or conditions that constitute a
breach of Western's representations and warranties contained in Paragraph 2.16
or 2.21, in either such case that MountainBank reasonably believes will affect
its use of any parcel of the Real Property for the purpose for which it
currently is used or the value or marketability of any parcel of the Real
Property, or as to which MountainBank otherwise objects; or
(ii) the existence of any structural defects or conditions of
disrepair in the improvements on the Real Property (including any equipment,
fixtures or other components related thereto) that MountainBank reasonably
believes would cost an aggregate of $50,000 or more to repair, remove or correct
as to all such Real Property;
(iii) the existence of facts or circumstances relating to any of
the Real Property reflecting that (A) there likely has been a discharge,
disposal, release, threatened release, or emission by any person of any
Hazardous Substance on, from, under, at, or relating to the Real Property, or
(B) any action has been taken or not taken, or a condition or event likely has
occurred or exists, with respect to the Real Property which constitutes or would
constitute a violation of any Environmental Laws or any contract or other
agreement between Western and any other person or entity, as to which, in either
such case,
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MountainBank reasonably believes, based on the advice of legal counsel or other
consultants, that Western could become responsible or liable, or that
MountainBank or MFC could become responsible or liable following the Effective
Time, for assessment, removal, remediation, monetary damages, or civil, criminal
or administrative penalties or other corrective action and in connection with
which the amount of expense or liability which MountainBank could incur, or for
which MountainBank could become responsible or liable, following consummation of
the Merger at any time or over any period of time could equal or exceed an
aggregate of $50,000 or more as to all such Real Property.
It is contemplated that MountainBank will conduct the Property
Examination and the Environmental Survey following the date of this Agreement
and prior to the Effective Time. It is the intent of this Agreement, and
Western understands and agrees, that, upon completion of the Property
Examination and Environmental Survey, any of the above facts, conditions,
circumstances or other matters may be deemed by MountainBank to constitute a
"Material Defect," with the result that it may exercise its right to terminate
this Agreement, without regard to any knowledge on the part of MFC or
MountainBank or their officers or advisors of that Material Defect or the facts,
conditions, circumstances or other matters pertaining thereto on the date of
this Agreement and without regard to the fact that any such Material Defect or
the facts, conditions, circumstances or other matters relating thereto have been
disclosed by Western to MountainBank, MFC, or any of their officers or advisors
prior to the date of this Agreement (whether pursuant to Paragraph 10.12 below
or otherwise).
6.06. Termination of Employment Agreements. The employment agreements
------------------------------------
currently in effect between Western and each of Ronnie E. Deyton, Charles Ownbey
and Martin Shuford will be terminated effective as of the Effective Time, and
First Western may make a payment to each them under the "change in control"
provision of his respective agreement which shall not exceed $234,479, $221,961
and $172,976, respectively; provided, however, that in no event shall the
payment by First Western to either such person exceed an amount which, when
combined with all other payments to such person which are contingent on the
Merger, would cause the aggregate amount of such payments to result in the
imposition of an excise tax with respect to any such payments under Section 4999
of the Code or would result in the denial of a deduction with respect to any
such payments under Section 280G of the Code. Western will obtain from each of
those persons, and will deliver to MFC at the Closing, a written termination
agreement, in a form specified by MFC (an "Employment Termination Agreement"),
to the effect that, in consideration of the above payment received by him from
First Western, he confirms and agrees to the termination of his employment
agreement with Western, accepts his above payment as full payment and settlement
of all compensation, benefits and other payments due him and all First Western's
obligations owed to him under his agreement, waives any further rights or
benefits thereunder, and releases Western, MFC and MountainBank from any further
obligation or liability thereunder.
6.07. Treatment of Stock Options. Western and MFC agree that, as of the
--------------------------
Effective Time, all options to purchase shares of Western Stock that are
outstanding on the date of this Agreement, and which remain in effect and
unexercised at the Effective Time (each a "Western Option" and collectively the
"Western Options") held under its nonstatutory stock option plan by its
directors, or held under its incentive stock option plans by each of its
officers and employees as of the date of this Agreement who becomes an officer
or employee of MountainBank at the Effective Time, will be assumed by MFC on
their then current terms and conditions and be converted into options to
purchase shares of MFC Stock, such conversion to be made such that, following
the Effective Time, each such Western Option will represent an option to
purchase 0.50 shares of MFC Stock, at a purchase price appropriately adjusted to
reflect the Merger and the conversion of Western Stock into MFC Stock, for every
one share of Western Stock covered by that Western Option prior to the Effective
Time. Western will obtain from each person who holds a Western Option to be
assumed by MFC, and will deliver to MFC at the Closing, a written agreement, in
a form specified by MFC (an "Option Modification Agreement"), to the effect that
the holder confirms and agrees to the conversion of his or her Western Option on
the terms and in the manner described above. Western Options held by officers
or employees who do not become officers or employees of MountainBank will
terminate in accordance with their terms in effect on the date of this
Agreement.
6.08. Treatment of 401(k) Plan. As may be agreed upon mutually by Western
------------------------
and MFC, Western's Section 401(k) plan will either be:
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(i) terminated, in which case each participant in Western's
plan on the termination date may elect, upon completion of the termination and
the final liquidation of the plan, to receive a distribution of the assets
credited to his or her plan account at that time or, if the participant has
become a participant in MountainBanks's Section 401(k) plan, to have those
assets credited as a "roll-over" to the participant's plan account under
MountainBank's plan; or,
(ii) merged into MountainBank's Section 401(k) plan.
Western agrees that, prior to the Effective Time, it will take or
cause to be taken such actions as MFC and MountainBank shall reasonably consider
to be necessary or desirable in connection with or to effect or facilitate any
such plan termination or merger. MountainBank agrees that it will assume, as of
the Effective Time, any and all administrative and fiduciary duties of Western
with respect to the day-to-day operation of Western's plan, including duties
relating to filings with the Internal Revenue Service relating to the plan.
6.09. Directors' and Officers' Liability Insurance. Western and MFC agree
--------------------------------------------
that, to the extent the same can be purchased at a cost to which they both
agree, then immediately prior to the Effective Time Western shall purchase
"tail" coverage, effective at the Effective Time, under and in the same amount
of coverage as is provided by its then current directors' and officers'
liability insurance policy.
6.10. Tax Opinion. Western and MFC each agrees to use its best efforts to
-----------
cause the Merger, and the conversion of outstanding shares of Western Stock
into shares of MFC Stock, on the terms contained in this Agreement, to be
treated as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and to obtain the written opinion of a firm of independent
certified public accountants, or a law firm, which shall in either case be
mutually satisfactory to them (the "Tax Opinion"), addressed jointly to the
Boards of Directors of Western and MFC, to the foregoing effect.
6.11. Final Tax Return. Western and MFC each agrees that MFC will make
----------------
all necessary arrangements for its independent accountants, Larrowe & Company
PLLC, to prepare, and MFC will cause to be filed, Western's final federal and
state income tax returns for the year in which the Effective Time occurs.
6.12 Restrictions on MFC Stock Issued to Certain Persons.
---------------------------------------------------
(a) Affiliates of Western. The transfer restrictions provided for
---------------------
in Subsection (d) of the SEC's Rule 145 will apply to shares of MFC Stock issued
in connection with the Merger to persons who are deemed by MFC to be
"underwriters" pursuant to Subsection (c) of that Rule, including without
limitation all persons who are "affiliates" of Western (as that term is defined
in the SEC's Rule 144(a)) on the date of the Western Shareholders' Meeting and
to those persons' related parties. Certificates evidencing the shares of MFC
Stock issued to those persons and their related parties will bear a restrictive
legend relating to those restrictions substantially in the form set forth in the
form of Affiliates' Agreements attached as Exhibit B hereto.
(b) Affiliates of MFC. MFC Stock issued in connection with the
-----------------
Merger to persons who are "affiliates" of MFC (as that term is defined in the
SEC's Rule 144(a)) following the Merger, and to those persons' related parties,
may only be resold or otherwise transferred pursuant to the procedures described
in Rule 144, an effective registration statement filed with and declared
effective by the SEC, or another exemption from registration under the 1933 Act.
Certificates evidencing the shares of MFC Stock issued to those persons and
their related parties may, at MFC's option, bear a restrictive legend relating
to those restrictions.
6.13. Expenses. Subject to the provisions of Paragraph 8.03, and whether
--------
or not this Agreement shall be terminated or the Merger shall be consummated,
Western, MountainBank and MFC each agrees to pay its own legal, accounting and
financial advisory fees and all its other costs and expenses incurred or to be
incurred in connection with the execution and performance of its obligations
under this Agreement, or otherwise in connection with this Agreement and the
transactions described herein (including without
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limitation all accounting fees, legal fees, consulting or advisory fees, filing
fees, printing and mailing costs, and travel expenses). For purposes of this
Agreement, expenses associated with the printing and mailing of the Proxy
Statement/Prospectus and amounts payable with respect to the Tax Opinion will be
deemed to have been incurred by Western and MFC equally. All amounts owed by
Western to The Carson Medlin Company, including its consulting fees and fees for
rendering the "Western Fairness Opinion" described in Paragraph 7.01(d)(i), will
be deemed to have been incurred solely by Western. All amounts owed by MFC to
Scott & Stringfellow, including its consulting fees and fees for rendering the
"MFC Fairness Opinion" described in Paragraph 7.01(d)(ii), will be deemed to
have been incurred solely by MFC.
ARTICLE VII. CONDITIONS PRECEDENT TO MERGER
7.01. Conditions to all Parties' Obligations. Notwithstanding any other
--------------------------------------
provision of this Agreement to the contrary, the obligations of each of the
parties to this Agreement to consummate the transactions described herein shall
be conditioned upon the satisfaction of each of the following conditions
precedent on or prior to the Closing Date:
(a) Approval by Regulatory Authorities; Disadvantageous Conditions.
--------------------------------------------------------------
(i) The Merger and other transactions described in this Agreement shall have
been approved, to the extent required by law, by the FDIC, the Commissioner and
the Commission, and by all other Regulatory Authorities having jurisdiction over
such transactions; (ii) no Regulatory Authority shall have objected to or
withdrawn its approval of such transactions or imposed any condition on such
transactions or its approval thereof, which condition is reasonably deemed by
MFC to so adversely impact the economic or business benefits of this Agreement
to MFC and MountainBank as to render it inadvisable for it to consummate the
Merger; (iii) the 15-day or 30-day waiting period, as applicable, required
following necessary approvals by the FDIC for review of the transactions
described herein by the United States Department of Justice shall have expired,
and, in connection with any such review, no objection to the Merger shall have
been raised; and (iv) all other consents, approvals and permissions, and the
satisfaction of all of the requirements prescribed by law or regulation,
necessary to the carrying out of the transactions contemplated herein shall have
been procured.
(b) Adverse Proceedings, Injunction, Etc. There shall not be (i)
-------------------------------------
any order, decree or injunction of any court or agency of competent jurisdiction
which enjoins or prohibits the Merger or any of the other transactions described
in this Agreement or any of the parties hereto from consummating any such
transaction, (ii) any pending or threatened investigation of the Merger or any
of such other transactions by the United States Department of Justice, or any
actual or threatened litigation under federal antitrust laws relating to the
Merger or any other such transaction, (iii) any suit, action or proceeding by
any person (including any governmental, administrative or regulatory agency),
pending or threatened before any court or governmental agency in which it is
sought to restrain or prohibit Western, MountainBank or MFC from consummating
the Merger or carrying out any of the terms or provisions of this Agreement, or
(iv) any other suit, claim, action or proceeding pending or threatened against
Western, MountainBank or MFC or any of their respective officers or directors
which shall reasonably be considered by Western, MountainBank or MFC to be
materially burdensome in relation to the proposed Merger or materially adverse
in relation to the financial condition, results of operations, prospects,
businesses, assets, loan portfolio, investments, properties or operations of
either such corporation, and which has not been dismissed, terminated or
resolved to the satisfaction of all parties hereto within 90 days of the
institution or threat thereof.
(c) Approval by Boards of Directors and Shareholders. The Boards of
------------------------------------------------
Directors of Western, MountainBank and MFC shall have duly approved, adopted and
ratified this Agreement by appropriate resolutions, and the shareholders of
Western shall have duly approved, ratified and adopted this Agreement at the
Western Shareholders' Meeting, all to the extent required by and in accordance
with the provisions of this Agreement, applicable law, and applicable provisions
of their respective Articles of Incorporation and ByLaws.
(d) Fairness Opinions.
-----------------
(i) Western shall have received from its financial advisor, The
Carson Medlin Company, a written opinion, in a form satisfactory to it (the
"Western Fairness Opinion"), to the effect that
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the consideration to be received by Western's shareholders in the Merger is
fair, from a financial point of view, to Western and its shareholders; and, The
Carson Medlin Company shall have delivered a letter to Western, dated as of a
date within five business days preceding the Closing Date, to the effect that it
remains its opinion that the terms of the Merger are fair, from a financial
point of view, to Western and its shareholders.
(ii) MFC shall have received from its financial advisor, Scott
& Stringfellow, a written opinion, in a form satisfactory to it (the "MFC
Fairness Opinion"), to the effect that the terms of the Merger are fair, from a
financial point of view, to MFC and its shareholders; and, Scott & Stringfellow
shall have delivered a letter to MFC, dated as of a date within five business
days preceding the Closing Date, to the effect that it remains its opinion that
the terms of the Merger are fair, from a financial point of view, to MFC and its
shareholders.
(e) Tax Opinion. Western and MFC shall have received the Tax
-----------
Opinion in form satisfactory to each of them.
(f) No Termination or Abandonment. This Agreement shall not have
-----------------------------
been terminated or abandoned by any party hereto.
(g) Articles of Merger; Other Actions. The Articles of Merger
---------------------------------
described in Paragraph 1.07 shall have been duly executed by MountainBank and
filed with the North Carolina Secretary of State as provided in that Paragraph.
(h) Execution and Delivery of Employment Agreement. The Employment
----------------------------------------------
Agreement shall have been executed and delivered by each of MountainBank and
Ronnie E. Deyton.
7.02. Additional Conditions to Western's Obligations. Notwithstanding any
----------------------------------------------
other provision of this Agreement to the contrary, Western's separate obligation
to consummate the transactions described herein shall be conditioned upon the
satisfaction of each of the following conditions precedent on or before the
Closing Date:
(a) Material Adverse Change. There shall not have occurred any
-----------------------
material adverse change in the consolidated financial condition or results of
operations of MFC, and there shall not have occurred any event or development,
and there shall not exist any condition or circumstance which, with the lapse of
time or otherwise, may or could cause, create or result in any such material
adverse change.
(b) Compliance with Laws. MFC and MountainBank shall have complied
--------------------
in all material respects with all federal and state laws and regulations
applicable to them in connection with the transactions described in this
Agreement where the violation of or failure to comply with any such law or
regulation could or may have a material adverse effect on MFC's or
MountainBank's ability to consummate the Merger.
(c) MFC's and MountainBank's Representations and Warranties and
-----------------------------------------------------------
Performance of Agreements; Officers' Certificate. Unless waived in writing by
------------------------------------------------
Western as provided in Paragraph 10.02, each of the representations and
warranties of MFC and MountainBank contained in this Agreement shall have been
true and correct in all material respects as of the date hereof, and they shall
remain true and correct on and as of the Closing Date with the same force and
effect as though made on and as of such date, except (i) for changes which are
not, in the aggregate, material and adverse to MFC's consolidated financial
condition or results of operations, or to MFC's or MountainBank's ability to
consummate the Merger and other transactions described herein, and (ii) as
otherwise contemplated by this Agreement; and MFC and MountainBank each shall
have performed in all material respects all of its obligations, covenants and
agreements hereunder to be performed by it on or before the Closing Date.
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Western shall have received a certificate dated as of the
Closing Date and executed by each of MFC and MountainBank and their respective
Presidents and Chief Financial Officers to the effect that the conditions of
this subparagraph have been met and as to such other matters as may be
reasonably requested by Western.
(d) Legal Opinion of MFC's Counsel. Western shall have received
------------------------------
the written legal opinion of Ward and Smith, P.A., counsel for MFC and
MountainBank, dated as of the Closing Date and in form and substance reasonably
satisfactory to Western.
(e) Other Documents and Information. MFC and MountainBank shall
-------------------------------
have provided to Western correct and complete copies (certified by their
respective Secretaries) of resolutions of their respective Boards of Directors
pertaining to approval of this Agreement and the Merger and other transactions
contemplated herein, together with a certificate of the incumbency of their
officers who executed this Agreement or any other documents delivered to Western
in connection with the Closing.
(f) Acceptance by Western's Counsel. The form and substance of all
-------------------------------
legal matters described in this Agreement or related to the transactions
contemplated herein shall be reasonably acceptable to Western's legal counsel.
7.03. Additional Conditions to MFC's and MountainBank's Obligations.
-------------------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary, MFC's and
MountainBank's separate obligations to consummate the transactions described
herein shall be conditioned upon the satisfaction of each of the following
conditions precedent on or before the Closing Date:
(a) Material Adverse Change. There shall not have occurred any
-----------------------
material adverse change in the financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties or
operations of Western, and there shall not have occurred any event or
development, and there shall not exist any condition or circumstance which, with
the lapse of time or otherwise, may or could cause, create or result in any such
material adverse change.
(b) Compliance with Laws. Western shall have complied in all
--------------------
material respects with all federal and state laws and regulations applicable to
it in connection with the transactions described in this Agreement and where the
violation of or failure to comply with any such law or regulation could or may
have a material adverse effect on the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of Western, or of MFC or MountainBank after the
Effective Time, or on Western's ability to consummate the Merger.
(c) Western's Representations and Warranties and Performance of
-----------------------------------------------------------
Agreements; Officers' Certificate. Unless waived in writing by MFC or
---------------------------------
MountainBank as provided in Paragraph 10.02, each of the representations and
warranties of Western contained in this Agreement shall have been true and
correct in all material respects as of the date hereof, and they shall remain
true and correct at and as of the Closing Date with the same force and effect as
though made on and as of such date, except (i) for changes which are not, in the
aggregate, material and adverse to the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of Western or to Western's ability to consummate the
Merger and other transactions described herein, and (ii) as otherwise
contemplated by this Agreement; and, Western shall have performed in all
material respects all its obligations, covenants and agreements hereunder to be
performed by it on or before the Closing Date.
MFC shall have received a certificate dated as of the Closing Date
and executed by Western and its Chairman and President to the effect that the
conditions of this subparagraph have been met and as to such other matters as
may be reasonably requested by MFC.
(d) Affiliates Agreements. Western shall have delivered to MFC an
---------------------
Affiliates Agreement described in Paragraph 4.01(c), in form and content
reasonably satisfactory to MFC and substantially in the form attached as Exhibit
B to this Agreement, and signed by each person who is deemed by MFC or its
counsel to be subject to the transfer restrictions described in Paragraph
6.12(a).
A-32
(e) Option Modification Agreements. Western shall have delivered
------------------------------
to MFC the Option Modification Agreements described in Paragraph 6.07, in form
and content reasonably satisfactory to MFC, properly signed by the holder of
each outstanding Western Option.
(f) Employment Termination Agreements. Western shall have
---------------------------------
delivered to MFC the Employment Termination Agreements described in Paragraph
6.06, in form and content reasonably satisfactory to MFC, properly signed by
each of Ronnie E. Deyton, Charles Ownbey and Martin Shuford.
(g) Legal Opinion of Western's Counsel. MFC shall have received
----------------------------------
the written legal opinion of Maupin Taylor & Ellis, P.A., counsel to Western,
dated as of the Closing Date and in form and substance reasonably satisfactory
to MFC.
(h) Other Documents and Information. Western shall have provided
-------------------------------
to MFC correct and complete copies (all certified by Western's Secretary) of
Western's Articles of Incorporation and Bylaws, and resolutions of its Board of
Directors and shareholders pertaining to approval of this Agreement and the
Merger and other transactions contemplated herein, together with a certificate
as to the incumbency of Western's officers who executed this Agreement or any
other documents delivered to MFC or MountainBank in connection with the Closing.
(i) Merger Expenses. Expenses incurred by Western in connection
---------------
with this Agreement and the Merger (including without limitation the entire
amount of fees payable to The Carson Medlin Company for the Western Fairness
Opinion and its financial consulting services, and fees payable to Western's
accountants and attorneys) shall not exceed an aggregate of $400,000.
(j) Acceptance by MFC's Counsel. The form and substance of all
---------------------------
legal matters described in this Agreement or related to the transactions
contemplated herein shall be reasonably acceptable to MFC's legal counsel.
ARTICLE VIII. TERMINATION; BREACH; REMEDIES
8.01. Mutual Termination. At any time prior to the Effective Time (and
------------------
whether before or after approval hereof by the shareholders of Western), this
Agreement may be terminated by the mutual agreement of MFC and Western. Upon
any such mutual termination, all obligations of Western, MountainBank and MFC
hereunder shall terminate and each party shall pay its own costs and expenses as
provided in Paragraph 6.04.
8.02. Unilateral Termination. Prior to the Effective Time, this Agreement
----------------------
may be terminated by either MFC, MountainBank or Western (whether before or
after approval hereof by Western's shareholders) upon written notice to the
other parties in the manner provided herein and under the circumstances
described below.
(a) Termination by MFC and MountainBank. This Agreement may be
-----------------------------------
terminated by MFC and MountainBank by action of their Boards of Directors or
Executive Committees:
(i) if any of the conditions to the obligations of MFC or
MountainBank set forth in Paragraph 7.01 and 7.03 shall not have been satisfied
in all material respects or effectively waived in writing by MFC by February 28,
2002 (except to the extent that the failure of such condition to be satisfied
has been caused by the failure of MFC or MountainBank to satisfy any of its
obligations, covenants or agreements contained herein);
(ii) if Western shall have violated or failed to fully
perform any of its obligations, covenants or agreements contained in Article IV
or VI herein in any material respect;
(iii) if MFC or MountainBank determines at any time that any
of Western's representations or warranties contained in Article II above or in
any other certificate or writing delivered pursuant to this Agreement shall have
been false or misleading in any material respect when made or would
A-33
have been false or misleading in any material respect except for the fact that
the representation or warranty was limited to or qualified based on the Best
Knowledge of any person, or that there has occurred any event or development or
that there exists any condition or circumstance which has caused or, with the
lapse of time or otherwise, may or could cause any such representations or
warranties to become false or misleading in any material respect or that would
cause any such representation or warranty to become false or misleading in any
material respect except for the fact that the representation or warranty was
limited to or qualified based on the Best Knowledge of any person;
(iv) if, notwithstanding MFC's and MountainBank's
satisfaction of their respective obligations under Paragraphs 6.01 and 6.03,
Western's shareholders do not ratify and approve this Agreement and the Merger
at the Western Shareholders' Meeting, or if the Western Shareholders' Meeting is
not held by December 28 , 2001;
(v) if the Merger shall not have become effective on or
before February 28, 2002, or such later date as shall be mutually agreed upon in
writing by MFC and Western; or,
(vi) under the circumstances described in Paragraph 6.06.
However, before MFC and MountainBank may terminate this
Agreement for any of the reasons specified above in (i), (ii) or (iii) of this
Paragraph 8.02(a), they shall give written notice to Western in the manner
provided herein stating their intent to terminate and a description of the
specific breach, default, violation or other condition giving rise to their
right to so terminate, and, such termination by MFC and MountainBank shall not
become effective if, within 30 days following the giving of such notice, Western
shall cure such breach, default or violation or satisfy such condition to the
reasonable satisfaction of MFC and MountainBank. In the event Western cannot or
does not cure such breach, default or violation or satisfy such condition to the
reasonable satisfaction of MFC and MountainBank within such notice period,
termination of this Agreement by MFC and MountainBank thereafter shall be
effective upon their giving of written notice thereof to Western in the manner
provided herein.
(b) Termination by Western. Prior to the Effective Time, this
----------------------
Agreement may be terminated by Western:
(i) if any of the conditions to the obligations of Western
set forth in Paragraph 7.01 and 7.02 shall not have been satisfied in all
material respects or effectively waived in writing by Western by February 28,
2002 (except to the extent that the failure of such condition to be satisfied
has been caused by the failure of Western to satisfy any of its obligations,
covenants or agreements contained herein);
(ii) if MFC or MountainBank shall have violated or failed to
fully perform any of their respective obligations, covenants or agreements
contained in Article V or VI herein in any material respect;
(iii) if Western determines that any of MFC's or
MountainBank's respective representations and warranties contained in Article
III herein or in any other certificate or writing delivered pursuant to this
Agreement shall have been false or misleading in any material respect when made
or would have been false or misleading in any material respect except for the
fact that the representation or warranty was limited to or qualified based on
the Best Knowledge of any person, or that there has occurred any event or
development or that there exists any condition or circumstance which has caused
or, with the lapse of time or otherwise, may or could cause any such
representations or warranties to become false or misleading in any material
respect or that would cause any such representation or warranty to become false
or misleading in any material respect except for the fact that the
representation or warranty was limited to or qualified based on the Best
Knowledge of any person;
(iv) if, notwithstanding Western's satisfaction of its
obligations contained in Paragraphs 6.01 and 6.03, its shareholders do not
ratify and approve this Agreement and approve the Merger at the Western
Shareholders' Meeting; or
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(v) if the Merger shall not have become effective on or
before February 28, 2002, unless such date is extended as evidenced by the
written mutual agreement of the parties hereto.
However, before Western may terminate this Agreement for any of the
reasons specified above in clause (i), (ii) or (iii) of this Paragraph 8.02(b),
it shall give written notice to MFC in the manner provided herein stating its
intent to terminate and a description of the specific breach, default, violation
or other condition giving rise to its right to so terminate, and, such
termination by Western shall not become effective if, within 30 days following
the giving of such notice, MFC or MountainBank shall cure such breach, default
or violation or satisfy such condition to the reasonable satisfaction of
Western. In the event MFC or MountainBank cannot or does not cure such breach,
default or violation or satisfy such condition to the reasonable satisfaction of
Western within such notice period, termination of this Agreement by Western
thereafter shall be effective upon its giving of written notice thereof to MFC
in the manner provided herein.
8.03. Breach; Remedies. Except as otherwise provided below, (i) in the
----------------
event of a breach by Western of any of its representations or warranties
contained in Article II of this Agreement or in any other certificate or writing
delivered pursuant to this Agreement, or in the event of its failure to perform
or violation of any of its obligations, agreements or covenants contained in
Articles IV or VI of this Agreement, then MFC's and MountainBank's sole right
and remedy shall be to terminate this Agreement prior to the Effective Time as
provided in Paragraph 8.02(a) or, in the case of a failure to perform or
violation of any obligations, agreements or covenants, to seek specific
performance thereof; and (ii) in the event of any such termination of this
Agreement by MFC or MountainBank due to a failure by Western to perform or of
any of its obligations, agreements or covenants contained in Articles IV or VI
of this Agreement, then Western shall be obligated to reimburse MFC and
MountainBank for up to (but not more than) $250,000 in expenses described in
Paragraph 6.13 which actually have been incurred by MFC and MountainBank.
Likewise, and except as otherwise provided below, (i) in the event
of a breach by MFC or MountainBank of any of its representations or warranties
contained in Article III of this Agreement, or in the event of its failure to
perform or violation of any of its obligations, agreements or covenants
contained in Articles V or VI of this Agreement, then Western's sole right and
remedy shall be to terminate this Agreement prior to the Effective Time as
provided in Paragraph 8.02(b), or, in the case of a failure to perform or
violation of any obligations, agreements or covenants, to seek specific
performance thereof; and (ii) in the event of any such termination of this
Agreement by Western due to a failure by MFC or MountainBank to perform or of
any of its obligations, agreements or covenants contained in Articles V or VI of
this Agreement, then MFC or MountainBank shall be obligated to reimburse Western
for up to (but not more than) $250,000 in expenses described in Paragraph 6.13
which actually have been incurred by Western.
Notwithstanding any provision of this Agreement to the contrary, if
any party to this Agreement breaches this Agreement by willfully or
intentionally failing to perform or violating any of its obligations, agreements
or covenants contained in Articles IV, V or VI of this Agreement, such party
shall be obligated to pay all expenses of the other parties described in
Paragraph 6.13, together with other damages recoverable at law or in equity.
ARTICLE IX. INDEMNIFICATION
9.01. Indemnification Following Termination of Agreement.
--------------------------------------------------
(a) By Western. Western agrees that, in the event this Agreement
----------
is terminated for any reason and the Merger is not consummated, it will
indemnify, hold harmless and defend MFC and MountainBank and their respective
officers, directors, attorneys and financial advisors from and against any and
all claims, disputes, demands, causes of action, suits or proceedings of any
third party (including any Regulatory Authority), together with all losses,
damages, liabilities, obligations, costs and expenses of every kind and nature
in connection therewith (including without limitation reasonable attorneys' fees
and legal costs and expenses in connection therewith), whether known or unknown,
and whether now existing or
A-35
hereafter arising, which may be threatened against, incurred, undertaken,
received or paid by MFC or MountainBank:
(i) in connection with or which arise out of, result from,
or are based upon (A) Western's operations or business transactions or its
relationship with any of its employees, or (B) Western's failure to comply with
any statute or regulation of any federal, state or local government or agency
(or any political subdivision thereof) in connection with the transactions
described in this Agreement;
(ii) in connection with or which arise out of, result from,
or are based upon any fact, condition or circumstance that constitutes a breach
by Western of, or any inaccuracy, incompleteness or inadequacy in, any of its
representations or warranties under or in connection with this Agreement, or any
failure of Western to perform any of its covenants, agreements or obligations
under or in connection with this Agreement; or,
(iii) in connection with or which arise out of, result from,
or are based upon any information provided by Western which is included in the
Proxy Statement and which information causes the Proxy Statement at the time of
its mailing to Western's shareholders to contain any untrue statement of a
material fact or to omit any material fact required to be stated therein or
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not false or misleading; and,
(b) By MFC and MountainBank. MFC and MountainBank agree that, in
-----------------------
the event this Agreement is terminated for any reason and the Merger is not
consummated, it will indemnify, hold harmless and defend Western and its
officers, directors, attorneys and financial advisors from and against any and
all claims, disputes, demands, causes of action, suits, proceedings of any third
party (including any Regulatory Authority), together with all losses, damages,
liabilities, obligations, costs and expenses of every kind and nature in
connection therewith (including without limitation reasonable attorneys' fees
and legal costs and expenses in connection therewith), whether known or unknown,
and whether now existing or hereafter arising, which may be threatened against,
incurred, undertaken, received or paid by Western:
(i) in connection with or which arise out of, result from,
or are based upon (A) MFC's or MountainBank's operations or business
transactions or its relationship with any of its employees, or (B) MFC's or
MountainBank's failure to comply with any statute or regulation of any federal,
state or local government or agency (or any political subdivision thereof) in
connection with the transactions described in this Agreement;
(ii) in connection with or which arise out of, result from,
or are based upon any fact, condition or circumstance that constitutes a breach
by MFC or MountainBank of, or any inaccuracy, incompleteness or inadequacy in,
any of its representations or warranties under or in connection with this
Agreement, or any failure of MFC or MountainBank to perform any of its
covenants, agreements or obligations under or in connection with this Agreement;
or,
(iii) in connection with or which arise out of, result from,
or are based upon any information provided by MFC or MountainBank which is
included in the Proxy Statement and which information causes the Proxy Statement
at the time of its mailing to Western's shareholders to contain any untrue
statement of a material fact or to omit any material fact required to be stated
therein or necessary in order to make the statements contained therein, in light
of the circumstances under which they were made, not false or misleading.
9.02. Procedure for Claiming Indemnification. If any matter subject to
--------------------------------------
indemnification under this Article IX arises in the form of a claim (herein
referred to as a "Third Party Claim") against MFC, MountainBank or Western, or
their respective successors and assigns, or any of their respective subsidiary
corporations, officers, directors, attorneys or financial advisors
(collectively, "Indemnitees"), the Indemnitee promptly shall give notice and
details thereof, including copies of all pleadings and pertinent documents, to
the party obligated for indemnification hereunder (the "Indemnitor"). Within 15
days of such notice, the Indemnitor either (i) shall pay the Third Party Claim
either in full or upon agreed compromise, or (ii) shall
A-36
notify the applicable Indemnitee that the Indemnitor disputes the Third Party
Claim and intends to defend against it, and thereafter shall so defend and pay
any adverse final judgment or award in regard thereto. Such defense shall be
controlled by the Indemnitor and the cost of such defense shall be borne by it,
except that the Indemnitee shall have the right to participate in such defense
at its own expense and provided that the Indemnitor shall have no right in
connection with any such defense or the resolution of any such Third Party Claim
to impose any cost, restriction, limitation or condition of any kind that
compromises the Indemnitee hereunder. In the case of an Indemnitee that is an
officer, director or attorney of a party to this Agreement, then that party
agrees that it shall cooperate in all reasonable respects in the defense of any
such Third Party Claim, including making personnel, books and records relevant
to the Third Party Claim available to the Indemnitor without charge therefor
except for out-of-pocket expenses. If the Indemnitor fails to take action within
15 days as hereinabove provided or, having taken such action, thereafter fails
diligently to defend and resolve the Third Party Claim, the Indemnitee shall
have the right to pay, compromise or defend the Third Party Claim and to assert
the indemnification provisions hereof. The Indemnitee also shall have the right,
exercisable in good faith, to take such action as may be necessary to avoid a
default prior to the assumption of the defense of the Third Party Claim by the
Indemnitor.
ARTICLE X. MISCELLANEOUS PROVISIONS
10.01. Survival of Representations, Warranties, Indemnification and Other
------------------------------------------------------------------
Agreements.
----------
(a) Representations, Warranties and Other Agreements. None of the
------------------------------------------------
representations, warranties or agreements contained in this Agreement shall
survive the effectiveness of the Merger, and no party shall have any right after
the Effective Time to recover damages or any other relief from any other party
to this Agreement by reason of any breach of representation or warranty, any
nonfulfillment or nonperformance of any agreement contained herein, or
otherwise.
(b) Indemnification. The parties' indemnification agreements and
---------------
obligations pursuant to Paragraph 9.01 shall become effective only in the event
this Agreement is terminated and shall survive any such termination, and neither
of the parties shall have any obligations under Paragraph 9.01 in the event of
or following consummation of the Merger.
10.02. Waiver. Any term or condition of this Agreement may be waived
------
(except as to matters of regulatory approvals and other approvals required by
law), either in whole or in part, at any time by the party which is, and whose
shareholders are, entitled to the benefits thereof; provided, however, that any
such waiver shall be effective only upon a determination by the waiving party
(through action of its Board of Directors) that such waiver would not adversely
affect the interests of the waiving party or its shareholders; and, provided
further, that no waiver of any term or condition of this Agreement by any party
shall be effective unless such waiver is in writing and signed by the waiving
party, nor shall any such waiver be construed to be a waiver of any succeeding
breach of the same term or condition or a waiver of any other or different term
of condition. No failure or delay of any party to exercise any power, or to
insist upon a strict compliance by any other party of any obligation, and no
custom or practice at variance with any terms hereof, shall constitute a waiver
of the right of any party to demand full and complete compliance with such
terms.
10.03. Amendment. This Agreement may be amended, modified or supplemented
---------
at any time or from time to time prior to the Effective Time, and either before
or after its approval by the shareholders of Western, by an agreement in writing
approved by the Boards of Directors of MFC, MountainBank and Western executed in
the same manner as this Agreement; provided however, that, except with the
further approval of Western's shareholders of that change or as otherwise
provided herein, following approval of this Agreement by Western's shareholders
no change may be made in the amount of consideration into which each share of
Western Stock will be converted.
10.04. Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed to have been duly given if delivered personally
or by courier, or by U.S. mail, first class postage prepaid, and addressed as
follows:
A-37
If to Western, to: With copy to:
First Western Bank Ronald D. Raxter
600 West By-Pass Maupin Taylor & Ellis, P.A.
Burnsville, NC 28714 3200 Beechleaf Court
Att: Ronnie E. Deyton, President Raleigh, NC 27604
If to MFC or MountainBank, to: With copy to:
MountainBank Financial Corporation William R. Lathan, Jr.
201 Wren Drive Ward and Smith, P.A.
Hendersonville, NC 28792 1001 College Court
Att: Gregory L. Gibson, Chief Financial Officer New Bern, NC 28562
10.05. Further Assurance. Western, MountainBank and MFC each agrees to
-----------------
furnish to each other party such further assurances with respect to the matters
contemplated in this Agreement and their respective agreements, covenants,
representations and warranties contained herein, including the opinion of legal
counsel, as such other party may reasonably request.
10.06. Headings and Captions. Headings and captions of the Paragraphs of
---------------------
this Agreement have been inserted for convenience of reference only and do not
constitute a part hereof.
10.07. Entire Agreement. This Agreement (including all schedules and
----------------
exhibits attached hereto and all documents incorporated herein by reference)
contains the entire agreement of the parties with respect to the transactions
described herein and supersedes any and all other oral or written agreement(s)
heretofore made, and there are no representations or inducements by or to, or
any agreements between, any of the parties hereto other than those contained
herein in writing.
10.08. Severability of Provisions. The invalidity or unenforceability of
--------------------------
any term, phrase, clause, paragraph, restriction, covenant, agreement or other
provision hereof shall in no way affect the validity or enforceability of any
other provision or part hereof.
10.09. Assignment. This Agreement may not be assigned by any party hereto
----------
except with the prior written consent of the other parties hereto.
10.10. Counterparts. Any number of counterparts of this Agreement may be
------------
signed and delivered, each of which shall be considered an original and which
together shall constitute one agreement.
10.11. Governing Law. This Agreement is made in and shall be construed
-------------
and enforced in accordance with the laws of North Carolina.
10.12. Previously Disclosed Information. As used in this Agreement,
--------------------------------
"Previously Disclosed" shall mean the disclosure of information by Western to
MFC and MountainBank, or by MFC and MountainBank to Western, in a letter
delivered by the disclosing party or parties to the other parties prior to the
date hereof, specifically referring to this Agreement, and arranged in
paragraphs corresponding to the Paragraphs, Subparagraphs and items of this
Agreement applicable thereto. Information shall be deemed Previously Disclosed
for the purpose of a given Paragraph, Subparagraph or item of this Agreement
only to the extent that a specific reference thereto is made in connection with
disclosure of such information at the time of such delivery.
10.13 Best Knowledge. The terms "Best Knowledge" and "Knowledge" as used
--------------
in this Agreement with reference to certain facts or information shall be deemed
to refer to facts or information of which officers (including the Chairman) of
Western, or officers of MFC or MountainBank, as the case may be, are
A-38
consciously aware or of which they should have become consciously aware in the
ordinary course of business and the performance of their management duties.
10.14. Inspection. Any right of MFC or MountainBank under this Agreement
----------
to investigate or inspect the assets, books, records, files and other
information of Western in no way shall establish any presumption that MFC or
MountainBank should have conducted any investigation or that such right has been
exercised by MFC or MountainBank, their respective agents, representatives or
others. Any investigations or inspections actually made by MFC or MountainBank
or their respective agents, representatives or others prior to the date of this
Agreement or otherwise prior to the Effective Time shall not be deemed in any
way in derogation or limitation of the covenants, representations and warranties
made by or on behalf of Western in this Agreement.
IN WITNESS WHEREOF, Western, MountainBank and MFC each has caused this
Agreement to be executed in its name by its duly authorized officers and its
corporate seal to be affixed hereto as of the date first above written.
[Signatures Omitted.]
A-39
EXHIBIT A
PLAN OF MERGER
By and Between
FIRST WESTERN BANK and MOUNTAINBANK
1.01. Names of Merging Corporations. The names of the banking
-----------------------------
corporations proposed to be merged are FIRST WESTERN BANK ("Western") and
MOUNTAINBANK ("MountainBank").
1.02. Nature of Transaction; Plan of Merger. Subject to the provisions of
-------------------------------------
this Plan OF Merger, at the "Effective Time" (as defined in Paragraph 1.07
below), Western will be merged into and with MountainBank (the "Merger").
1.03. Effect of Merger; Surviving Corporation. At the Effective Time, and
---------------------------------------
by reason of the Merger, the separate corporate existence of Western shall cease
while the corporate existence of MountainBank as the surviving corporation in
the Merger shall continue with all of its purposes, objects, rights, privileges,
powers and franchises, all of which shall be unaffected and unimpaired by the
Merger. Following the Merger, MountainBank shall continue to operate as a
wholly-owned banking subsidiary of MFC and, as a North Carolina banking
corporation, will conduct its business at the then legally established branch
and main offices of MountainBank and Western, except to the extent that any of
such offices are closed in connection with or following the Merger. The
duration of the corporate existence of MountainBank, as the surviving
corporation, shall be perpetual and unlimited.
1.04. Assets and Liabilities of Western. At the Effective Time, and by
---------------------------------
reason of the Merger, and in accordance with applicable law, all of the
property, assets and rights of every kind and character of Western (including
without limitation all real, personal or mixed property, all debts due on
whatever account, all other choses in action and every other interest of or
belonging to or due to Western, whether tangible or intangible) shall be
transferred to and vest in MountainBank, and MountainBank shall succeed to all
the rights, privileges, immunities, powers, purposes and franchises of a public
or private nature of Western (including all trust and other fiduciary
properties, powers and rights), all without any conveyance, assignment or
further act or deed; and, MountainBank shall become responsible for all of the
liabilities, duties and obligations of every kind, nature and description of
Western (including duties as trustee or fiduciary) as of the Effective Time.
1.05. Conversion and Exchange of Stock.
--------------------------------
(a) Conversion of Western Stock. Except as otherwise provided in
---------------------------
this Plan of Merger, at the Effective Time all rights of Western's shareholders
with respect to all outstanding shares of Western's $5.00 par value common stock
("Western Stock") shall cease to exist and, as consideration for and to effect
the Merger, each such outstanding share shall be converted, without any action
by Western, MountainBank, MFC or any Western shareholder, into 0.5 shares of
MFC's $4.00 par value common stock ("MFC Stock").
At the Effective Time, and without any action by Western,
MountainBank, MFC or any Western shareholder, Western's stock transfer books
shall be closed and there shall be no further transfers of Western Stock on its
stock transfer books or the registration of any transfer of a certificate
evidencing Western Stock (a "Western Certificate") by any holder thereof, and
the holders of Western Certificates shall cease to be, and shall have no further
rights as, stockholders of Western other than as provided in this Plan of
Merger. Following the Effective Time, Western Certificates shall evidence only
the right of the registered holders thereof to receive a certificate evidencing
the number of shares of MFC Stock into which their Western Stock was converted
at the Effective Time or, in the case of Western Stock held by shareholders who
properly shall have exercised their right of dissent and appraisal under Article
13 of the North Carolina Business Corporation Act ("Dissenters' Rights"), cash
as provided in that statute.
A-40
(b) Exchange and Payment Procedures; Surrender of Certificates. As
----------------------------------------------------------
promptly as practicable, but not more than five business days following the
Effective Time, MFC shall send or cause to be sent to each former Western
shareholder of record immediately prior to the Effective Time written
instructions and transmittal materials (a "Transmittal Letter") for use in
surrendering Western Certificates to MFC or to an exchange agent appointed by
MFC. Upon the proper surrender and delivery to MFC or its agent (in accordance
with its instructions, and accompanied by a properly completed Transmittal
Letter) by a former shareholder of Western of his or her Western Certificate(s),
and in exchange therefor, MFC shall as soon as practicable issue and deliver to
the shareholder a stock certificate evidencing the number of shares of MFC Stock
into which the shareholder's Western Stock was converted at the Effective Time.
Subject to Paragraph 1.05(f), no certificate evidencing MFC Stock
shall be issued or delivered to any former Western shareholder unless and until
that shareholder shall have properly surrendered to MFC or its agent the Western
Certificate(s) formerly representing his or her shares of Western Stock,
together with a properly completed Transmittal Letter. Further, until a former
Western shareholder's Western Certificates are so surrendered and certificates
evidencing the MFC Stock into which his or her Western Stock was converted at
the Effective Time actually are issued to him or her, no dividend or other
distribution payable by MFC with respect to that MFC Stock as of any date
subsequent to the Effective Time shall be paid or delivered to the former
Western shareholder. However, upon the proper surrender of the shareholder's
Western Certificate, MFC shall pay to the shareholder the amount of any such
dividends or other distributions which have accrued but remain unpaid with
respect to that MFC Stock.
(c) Antidilutive Adjustments. If, prior to the Effective Time,
------------------------
Western or MFC shall declare any dividend payable in shares of Western Stock or
MFB Stock, respectively, or shall subdivide, split, reclassify or combine the
presently outstanding shares of Western Stock or MFC Stock, then an appropriate
and proportionate adjustment shall be made in the number of shares of MFC Stock
into which each share of Western Stock will be converted at the Effective Time
pursuant to this Plan of Merger.
(d) Dissenters. Any shareholder of Western who properly exercises
----------
Dissenters' Rights shall be entitled to receive payment of the fair value of his
or her shares of Western Stock in the manner and pursuant to the procedures
provided for in Article 13 of the North Carolina Business Corporation Act.
Shares of Western Stock held by persons who exercise Dissenters' Rights shall
not be converted as described in Paragraph 1.05(a). However, if any shareholder
of Western who exercises Dissenters' Rights shall fail to perfect those rights,
or effectively shall waive or lose such rights, then each of his or her shares
of Western Stock shall be deemed to have been converted into MFC Stock as of the
Effective Time as provided in Paragraph 1.05(a).
(e) Fractional Shares. If the conversion of the shares of Western
-----------------
Stock held by any shareholders of Western results in a fraction of a share of
MFC Stock, then, in lieu of issuing that fractional share, MFC will pay to that
shareholder cash in an amount equal to that fraction multiplied by the average
of the closing prices of a share of MFC Stock on the OTC Bulletin Board on the
ten trading days immediately preceding the Effective Time as reasonably
determined by MFC.
(f) Lost Certificates. Following the Effective Time, shareholders of
-----------------
Western whose Western Certificates have been lost, destroyed, stolen or
otherwise are missing shall be entitled to receive certificates for the MFC
Stock into which their Western Stock was converted in accordance with and upon
compliance with reasonable conditions imposed by MFC, including without
limitation a requirement that those shareholders provide lost instruments
indemnities or surety bonds in form, substance and amounts satisfactory to MFC.
1.06. Articles of Incorporation, Bylaws and Management. The Articles of
------------------------------------------------
Incorporation and Bylaws of MountainBank in effect at the Effective Time shall
be the Articles of Incorporation and Bylaws of MountainBank as the surviving
corporation in the Merger. Except as otherwise may be provided herein, the
officers and directors of MountainBank in office at the Effective Time shall
A-41
continue to hold such offices until removed as provided by law or until the
election or appointment of their respective successors.
1.07. Closing; Effective Time. The consummation and closing of the Merger
-----------------------
and other transactions contemplated by this Plan of Merger (the "Closing") shall
take place at the offices of MFC's legal counsel, Ward and Smith, P.A., in
Raleigh, North Carolina, or at such other place as MFC shall designate, on a
date mutually agreeable to Western and MFC (the "Closing Date") after the
expiration of any and all required waiting periods following the effective date
of required approvals of the Merger by governmental or regulatory authorities
(but in no event more than sixty (60) days following the expiration of all such
required waiting periods). At the Closing, Western, MountainBank and MFC shall
take such actions (including without limitation the delivery of certain closing
documents and the execution of Articles of Merger under North Carolina law) as
are required in this Plan of Merger and as otherwise shall be required by law to
consummate the Merger and cause it to become effective.
Subject to the terms and conditions set forth in this Plan of Merger, the
Merger shall become effective on the date and at the time (the "Effective Time")
specified in Articles of Merger executed by MountainBank and filed by it with
the North Carolina Secretary of State in accordance with applicable law;
provided, however, that the Effective Time shall in no event be more than ten
(10) days following the Closing Date.
A-42
EXHIBIT B
FORM OF AFFILIATES AGREEMENT
____________________________, 2001
MountainBank Financial Corporation
201 Wren Drive
Hendersonville, North Carolina 28792
Dear Sirs and Madams:
Pursuant to the terms of that certain Agreement and Plan of Reorganization
and Merger dated as of September 17, 2001 (the "Agreement"), by and among
MountainBank Financial Corporation ("MFC"), MountainBank, and First Western Bank
("First Western"), it is proposed that (i) First Western merge into and with
MountainBank which is a wholly-owned subsidiary of MFC (the "Merger"), (ii) at
the effective time of the Merger, each share of First Western's outstanding
common stock ("First Western Stock") held of record by its shareholders
automatically will be converted into 0.50 shares of MFC's common stock ("MFC
Stock"), and (iii) subject to certain limitations described in the Agreement,
First Western's shareholders will have the right to elect the form of
consideration into which their First Western Stock will be converted.
For purposes of this letter, the following terms shall have the meanings
indicated below:
A. "Commission" - The Securities and Exchange Commission.
B. "Act" - The Securities Act of 1933, as amended.
C. "Rule 144" and "Rule 145" - Rules 144 and 145 promulgated by the
Commission under the Act.
D. "Person" - A "Person" as such term is defined in Rule 144.
E. "Affiliate" - An "Affiliate," as such term is defined in Rule 144, of
First Western or MFC.
F. "Related Person" - A Person related to an Affiliate.
The undersigned understands and agrees that he or she is considered to be
an Affiliate or a Related Person of MFC or First Western. The undersigned
further understands and agrees that the Act requires that certain transfer and
resale restrictions be placed on any shares of MFC Stock received by an
Affiliate or by a Related Person in connection with the Merger, and that MFC has
an obligation to take reasonable steps to prevent violations of those
restrictions. For that reason, the undersigned is entering into this Agreement
with MFC to evidence the undersigned's agreement to comply with restrictions
under the Act with respect to the MFC Stock received by the undersigned.
A-43
The undersigned (jointly and severally if more than one) hereby represents
and warrants to, and agrees with, MFC as follows:
A. The undersigned Affiliate and Related Persons, if any, each agrees
that he or she is an Affiliate, or a Related Person, of First Western or MFC.
B. The names of all Related Persons, if any, of the undersigned Affiliate
who may receive BancShares Stock in connection with the Merger are listed on the
signature page hereto and this letter agreement also has been signed by them or
on their behalf.
C. The undersigned Affiliate and each of the undersigned Related Persons,
if any, have carefully read this letter and have discussed its requirements and
other applicable limitations upon the sale, transfer or other disposition of all
MFC Stock received by them in connection with the Merger, to the extent they
deem necessary, with their own legal counsel.
D. The undersigned Affiliate and each of the undersigned Related Persons,
if any, are not participants in or aware of any plan, arrangement, understanding
or proposal (whether written or oral, formal or informal) pursuant to which any
individual holder or group of holders of 50% or more of the outstanding shares
of First Western's capital stock intend to sell or otherwise dispose of the MFC
Stock to be received by them pursuant to the Merger.
The undersigned (jointly and severally if more than one) hereby covenants
and agrees with MFC as follows:
A. The undersigned Affiliate and each of the undersigned Related Persons,
if any, has been informed that, since at the time the Merger is to be submitted
to a vote of First Western's shareholders the Affiliate and each such Related
Person was considered to be an Affiliate of First Western or MFC, any resale by
the Affiliate or a Related Person of any such MFC Stock would require either (i)
the registration under the Act of the MFC Stock to be sold, (ii) compliance by
the Affiliate or such Related Person with the requirements of Rule 145(d)
promulgated under the Act, or (iii) the availability of another exemption from
the registration requirements of the Act.
B. Following the date of the Merger, neither the undersigned Affiliate
nor any of the undersigned Related Persons, if any, will make any sale, transfer
or other disposition of MFC Stock acquired by them in connection with the Merger
except in compliance with the requirements of the Act and the rules and
regulations of the Commission (including Rule 145) promulgated thereunder.
C. The undersigned understands that MFC is under no obligation to
register the sale, transfer or other disposition of the MFC Stock for them or on
their behalf or to take any other action necessary in order to render available
an exemption (including without limitation Rule 145) from the registration
requirements of the Act. Therefore, they may be compelled to hold such shares
for a period of at least two years after which such shares may be sold,
transferred, or otherwise disposed of without restriction, provided that at the
time of any such sale, transfer or other disposition they are not considered to
be Affiliates of MFC. Further, if the undersigned Affiliate or Related Person
is or becomes an "affiliate" of MFC, then the above two-year rule will not apply
and that person's MFC Stock may have to be held indefinitely.
D. MFC may place transfer restrictions on the shares of MFC Stock held by
the Affiliate and each of the Related Persons, if any, which are subject to this
Agreement, and there will be placed on the certificates evidencing such shares,
and any substitutions therefor, a legend stating in substance as follows:
"The shares of Preferred Stock of MountainBank Financial Corporation
("MFC"), represented by this certificate were issued in a transaction to
which Rule 145 promulgated under the Securities Act of 1933 applies and may
be transferred only in accordance with the terms of an Agreement
A-44
dated __________, 2001, between the registered holder hereof and MFC, a
copy of which Agreement is on file at MFC's principal office in
Hendersonville, North Carolina.
Yours very truly,
Affiliate:
______________________________ (Seal)
Related Persons:
______________________________ (Seal)
______________________________ (Seal)
A-45
EXHIBIT C
FORM OF EMPLOYMENT AGREEMENT
STATE OF NORTH CAROLINA
COUNTY OF HENDERSON
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the _____
day of _____________, 20___ (the "Effective Date"), by and between MOUNTAINBANK
("Employer") and RONNIE E. DEYTON ("Employee").
W I T N E S S E T H:
WHEREAS, Employee heretofore has been employed as President of FIRST
WESTERN BANK ("FWB") pursuant to an employment agreement between him and FWB,
and in such position he has provided leadership and guidance in the growth and
development of FWB's business; and,
WHEREAS, as of the Effective Date, FWB has been merged into Employer; and,
WHEREAS, Employee's experience and knowledge of FWB's operations, customers
and affairs, and his knowledge of and standing and reputation in FWB's market
area, would be of benefit to Employer in its continuation of FWB's business;
and, for that reason, Employer desires to retain Employee's services as an
employee of Employer for the Term of Employment specified below, and Employee
desires to become an employee of Employer, all subject to the terms and
conditions provided herein; and,
WHEREAS, Employer and Employee desire to terminate Employee's existing
employment agreement with FWB and to set forth the terms and conditions of
Employee's employment with Employer in a new written agreement which will
supercede and replace the existing employment agreement and, for that purpose,
Employer and Employee have agreed and desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises,
covenants and conditions hereinafter set forth, and for other good and valuable
considerations, the receipt and sufficiency of which hereby are acknowledged,
Employer and Employee hereby agree as follows:
1. Employment. Employer agrees to employ Employee, and Employee accepts
----------
employment with Employer, all upon the terms and conditions stated herein. As a
part-time employee of Employer, during the Term of Employment Employee will (i)
serve as a Senior Vice President of Employer at such location as shall be
designated by Employer from time to time, (ii) provide such assistance and
advice to Employer as it may request from time to time regarding matters
involving the former customers and employees of FWB, loan quality control and
review, product conversion and other tasks relating to the former operations of
FWB and the transition of control over such operations to Employer, (iii)
promote Employer and its business and engage in business development activities
on Employer's behalf, and (iv) have such other functional duties and
responsibilities as shall reasonably be assigned to him by Employer from time to
time.
2. Term. Unless sooner terminated as provided in this Agreement, and
----
subject to the right of either Employee or Employer to terminate Employee's
employment at any time as provided herein, the term of Employee's employment
with Employer under this Agreement (the "Term of Employment") shall be for a
period of two (2) years commencing on the Effective Date and terminating at the
close of Employer's business on ____________, 20____ (the "Expiration Date").
A-46
3. Compensation. For all services rendered by Employee to Employer under
------------
this Agreement, Employer shall pay Employee (i) salary at an annual rate of
Thirty Thousand and no/100 Dollars ($30,000.00) ("Base Salary") during the Term
of Employment, and (ii) compensation attributable to Employee's covenants and
agreements pursuant to Paragraph 6 hereof in an amount equal to One Hundred
Three Thousand Three Hundred Ninety Five and no/100Dollars ($103,395.96) for
each year of the Restriction Period after the Term of Employment, as defined
below ("Non-Compete Payment"). Employee's Base Salary may be increased from time
to time during the Term of Employment at the discretion of Employer's Board of
Directors. Base Salary paid under this Agreement shall be payable not less
frequently than in accordance with Employer's payroll policies and procedures.
The Non-Compete Payment, although earned ratably over the term of the
Restriction Period, shall be payable to Employee as follows: for the years 2002
through 2008, in eighty-four (84) equal monthly installments of Four Thousand
Seven Hundred Twenty-Nine and 17/100 Dollars each, and for the years 2011
through 2026, in two hundred sixteen (216) equal monthly installments of Two
Thousand One Hundred Twenty-Five and no/100 Dollars each. The period from 2002
through 2026 shall be referred to hereinafter as the "Deferral Period".
All compensation hereunder shall be subject to such applicable
withholding taxes and/or other employment taxes as are required by law.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. Employee shall receive credit for past full years of service with FWB
--------
prior to the Effective Date for purposes of (i) participation and vesting in
Employer's Section 401(k) savings plan (the "Savings Plan"), and (ii) except as
described below, for all purposes under all other Employer benefit plans
(including coverage under Employer's health insurance plan and entitlement to
vacation and sick leave). For purposes of Employer's health insurance plan,
Employee's participation will be without regard to pre-existing condition
requirements under that plan, provided that any such pre-existing condition at
the Effective Time would have been covered under the health insurance plan of
FWB. Notwithstanding anything contained herein to the contrary, if Employer
shall believe in good faith that the granting of any such past service credit
would not be permissible under the terms and requirements of the Employee
Retirement Income Security Act of 1974, as amended, the Internal Revenue Code of
1986, as amended, any governmental rules, regulations and policies thereunder,
or any other law or regulations applicable to the operation of any such plan or
program, or otherwise would expose any such plan or program or Employer or MFC
to any penalty, then Employer shall not be required to give Employee any such
credit for past service with FWB.
Employee acknowledges that the terms and provisions of Employer's
employee benefit plans and programs may be determined only by reading the actual
plan documents under which Employer, MFC or the plan administrator, as
applicable, may make certain administrative determinations with discretion, and
that Employer and MFC reserve the right to modify or terminate each plan or
program and any benefits provided thereunder.
5. Standards of Performance and Conduct. During the Term of Employment,
------------------------------------
Employee faithfully and diligently shall discharge his obligations under this
Agreement and shall perform the duties associated with his position with
Employer in a manner which is competent and reasonably satisfactory to Employer,
and Employee shall comply with and use his best efforts to implement Employer's
policies and procedures currently in effect or as are established from time to
time by Employer.
Employee, in the execution of his employment duties under this
Agreement, at all times and in all material respects shall comply with all
personnel policies and procedures, and any code of employee conduct, as are
established or modified, amended or supplemented from time to time by Employer
during the Term of Employment, and with all federal and state statutes, and all
rules, regulations, administrative orders, statements of policy and other
pronouncements or standards promulgated thereunder, which are applicable to
Employer and MFC and their business, operations and employees.
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6. Noncompetition; Confidentiality.
-------------------------------
(a) General. Employee hereby acknowledges and agrees that (i) FWB has
-------
made a significant investment in the development of its business in the
geographic area identified below as the "Relevant Market" and that, by virtue of
Employer's acquisition of FWB, Employer has acquired a valuable economic
interest in FWB's business in the Relevant Market which it is entitled to
protect; (ii) in the course of his past service on behalf of FWB and future
service as an employee of Employer, he has gained and will continue to gain
substantial knowledge of and familiarity with FWB's and Employer's customers and
their dealings with them, and other information concerning FWB's and Employer's
businesses, all of which constitute valuable assets and privileged information;
and, (iii) in order to protect Employer's interest in and to assure it the
benefit of its succession to FWB's business, it is reasonable and necessary to
place certain restrictions on Employee's ability to compete against Employer and
on his disclosure of information about Employer's and FWB's business and
customers. For that purpose, and in consideration of Employer's agreements
contained herein, Employee covenants and agrees as provided below.
(b) Covenant Not to Compete. During the "Restriction Period" (as
-----------------------
defined below), Employee shall not "Compete" (as defined below), directly or
indirectly, with Employer in the "Relevant Market" (as defined below).
For purposes of this Paragraph 6, the following terms shall have the
meanings set forth below:
Compete. The term "Compete" means: (i) soliciting or securing
-------
deposits from any Person residing or engaged in business in the Relevant Market
for any Financial Institution; (ii) soliciting any Person residing or engaged in
business in the Relevant Market to become a borrower from any Financial
Institution, or assisting (other than through the performance of ministerial or
clerical duties) any Financial Institution in making loans to any such Person;
(iii) soliciting any Person residing or engaged in business in the Relevant
Market to obtain any other service or product from any Financial Institution,
(iv) inducing or attempting to induce any Person who was a Customer of FWB at
the time of its acquisition by Employer, or who was a Customer of Employer on
the date of termination of Employee's employment with Employer, to change any
depository, loan and/or other banking relationship of the Customer from FWB or
Employer to another Financial Institution; (v) acting as a consultant, officer,
director, advisory director, independent contractor, or employee of any
Financial Institution that has its main or principal office in the Relevant
Market, or, in acting in any such capacity with any other Financial Institution,
to maintain an office or be employed at or assigned to or to have any direct
involvement in the management, supervision, business, marketing activities,
solicitation of business for or operation of any office of such Financial
Institution located in the Relevant Market; or (vi) communicating to any
Financial Institution the names or addresses or any financial information
concerning any Person who was a Customer of FWB at the time of its acquisition
by Employer, or who was a Customer of Employer at the date of termination of
this Agreement or Employee's employment with Employer for any reason.
Customer. The term "Customer of FWB" means any Person with whom FWB
--------
has or has had a depository or loan relationship and/or to whom FWB has provided
any other service or product, and the term "Customer of Employer" means any
Person who or which is a resident of or located within the Relevant Market (as
defined above) with whom Employer has or has had a depository or loan
relationship and/or to whom Employer has provided any other service or product.
Financial Institution. The term "Financial Institution" means (i) any
---------------------
federal or state chartered bank, savings bank, savings and loan association or
credit union, (ii) any holding company for, or corporation that owns or
controls, any such entity, (iii) any subsidiary or service corporation of any
such entity or holding company, or any entity controlled in any way by any such
entity or holding company, or (iv) any other Person engaged in the business of
making loans of any type, soliciting or taking deposits, or providing any other
service or product that is provided by Employer or one of its affiliated
corporations.
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Person. The term "Person" means any natural person or any
------
corporation, partnership, proprietorship, joint venture, limited liability
company, trust, estate, governmental agency or instrumentality, fiduciary,
unincorporated association or other entity.
Relevant Market. The term "Relevant Market" means the geographic area
---------------
consisting of Henderson County, Yancey County, Mitchell County and Buncombe
County, North Carolina.
Restriction Period. The term "Restriction Period" means Term of
------------------
Employment and the five-year period commencing on ____________, 20_____ and
ending on ______________, 20_____; provided however, that, following an
involuntary termination of Employee's employment by Employer without "Cause" (as
defined in Paragraph 8(c) below), the Restriction Period shall immediately
expire upon a failure by Employer to make the payments for which it is obligated
under Paragraph 3 above.
(c) Confidentiality Covenant. Employee covenants and agrees that any
------------------------
and all data, figures, projections, estimates, lists, files, records, documents,
manuals or other such materials or information (whether financial or otherwise,
and including any files, data or information maintained electronically, on
microfiche or otherwise) relating to FWB or Employer and their respective
lending and deposit operations and related businesses, regulatory examinations,
financing sources, financial results and condition, Customers (including lists
of Customers and former customers and information regarding their accounts and
business dealings with FWB or Employer), prospective customers, contemplated
acquisitions (whether of business or assets), ideas, methods, marketing
investigations, surveys, research, policies and procedures, computer systems and
software, shareholders, employees, officers and directors (herein referred to as
"Confidential Information") are confidential and proprietary to Employer and are
valuable, special and unique assets of Employer's business which are not
directly reproducible from any other source and to which Employee has had access
as an officer and employee of FWB and will have access during his employment
with Employer. Employee agrees that (i) all such Confidential Information shall
be considered and kept as the confidential, private and privileged records and
information of Employer, and (ii) during the Term of Employment and at all times
following the termination of this Agreement or his employment for any reason,
and except as shall be required in the course of the performance by Employee of
his duties on behalf of Employer or otherwise pursuant to the direct, written
authorization of Employer, Employee will not: divulge any such Confidential
Information to any other Person; remove any such Confidential Information in
written or other recorded form from Employer's premises; or make any use of any
Confidential Information for his own purposes or for the benefit of any Person
other than Employer. However, following the termination of Employee's
employment with Employer, this Paragraph 6(c) shall not apply to any
Confidential Information which then is in the public domain (provided that
Employee was not responsible, directly or indirectly, for permitting such
Confidential Information to enter the public domain without Employer's consent),
or which is obtained by Employee from a third party which or who is not
obligated under an agreement of confidentiality with respect to such information
and who did not acquire such Confidential Information in a manner which
constituted a violation of the covenants contained in this Paragraph 6(c) or
which otherwise breached any duty of confidentiality. Further, the above
obligations of confidentiality shall not prohibit the disclosure of any such
Confidential Information by Employee to the extent such disclosure is required
by subpoena or order of a court or regulatory authority of competent
jurisdiction or to the extent that, in the reasonable opinion of legal counsel
to Employee, disclosure otherwise is required by law.
(d) Reasonableness of Restrictions. If any of the restrictions set
------------------------------
forth in this Paragraph 6 shall be declared invalid for any reason whatsoever by
a court of competent jurisdiction, the validity and enforceability of the
remainder of such restrictions shall not thereby be adversely affected. Employee
acknowledges that FWB has had a substantial business presence in the Relevant
Market, that Employer, through its acquisition of FWB, has acquired the
legitimate economic interest of FWB in those geographic areas which this
Paragraph 6 specifically is intended to protect, and that the Relevant Market
and Restriction Period are limited in scope to the geographic territory and
period of time reasonably necessary to protect Employer's economic interest and
otherwise are reasonable and proper. In the event the Restriction Period or any
other such time limitation is deemed to be unreasonable by a court of competent
jurisdiction, Employee hereby agrees to submit to such reduction of the
Restriction Period as the court shall deem reasonable. In the event the
Relevant Market is deemed by a court of
A-49
competent jurisdiction to be unreasonable, Employee hereby agrees that the
Relevant Market shall be reduced by excluding any separately identifiable and
geographically severable area necessary to make the remaining geographic
restriction reasonable, but this Paragraph 6 shall be enforced as to all other
areas included in the Relevant Market which are not so excluded.
(e) Remedies for Breach. Employee understands and acknowledges that a
-------------------
breach or violation by him of any of the covenants contained in Paragraphs 6(b)
and 6(c) shall be deemed a material breach of this Agreement and will cause
substantial, immediate and irreparable injury to Employer, and that Employer
will have no adequate remedy at law for such breach or violation. In the event
of Employee's actual or threatened breach or violation of the covenants
contained in either such Paragraph, Employer shall be entitled to bring a civil
action seeking, and shall be entitled to, an injunction restraining Employee
from violating or continuing to violate such covenant or from any threatened
violation thereof, or for any other legal or equitable relief relating to the
breach or violation of such covenant. Employee agrees that, if Employer
institutes any action or proceeding against Employee seeking to enforce any of
such covenants or to recover other relief relating to an actual or threatened
breach or violation of any of such covenants, Employee shall be deemed to have
waived the claim or defense that Employer has an adequate remedy at law and
shall not urge in any such action or proceeding the claim or defense that such a
remedy at law exists. However, the exercise by Employer of any such right,
remedy, power or privilege shall not preclude Employer or its successors or
assigns from pursuing any other remedy or exercising any other right, power or
privilege available to it for any such breach or violation, whether at law or in
equity, including the recovery of damages, all of which shall be cumulative and
in addition to all other rights, remedies, powers or privileges of Employer.
Notwithstanding anything contained herein to the contrary,
Employee agrees that the provisions of Paragraphs 6(b) and 6(c) above and the
remedies provided in this Paragraph 6(e) for a breach by Employee shall be in
addition to, and shall not be deemed to supersede or to otherwise restrict,
limit or impair the rights of Employer under any state or federal law or
regulation dealing with or providing a remedy for the wrongful disclosure,
misuse or misappropriation of trade secrets or other proprietary or confidential
information.
(f) Survival of Covenants. Employee's covenants and agreements and
---------------------
Employer's rights and remedies provided for in this Paragraph 6 shall survive
and remain fully in effect following expiration of the Term of Employment or any
actual termination of Employee's employment with Employer during the Term of
Employment.
7. Deferral of Non-Compete Payment.
-------------------------------
(a) Election to Defer. As described in Paragraph 3 hereof, Employee
-----------------
has elected to defer receipt of the Non-Compete Payment over the term of the
Deferral Period rather than over the term of the Restriction Period during which
the Non-Compete Payment shall be earned.
(b) Acceleration Upon Death. Upon the death of Employee prior to the
-----------------------
close of the Deferral Period, the present value of the Non-Compete Payment,
determined using a discount rate of nine percent (9%) per annum, shall be
payable to Employee's designated beneficiary(ies).
(c) Unforeseeable Emergency. Employee may withdraw all or any portion
-----------------------
of the present value (determined using a discount rate of nine percent (9%) per
annum) of the accrued Non-Compete Payment to the extent reasonably needed to
satisfy an emergency need created by an Unforeseeable Emergency. An
"Unforeseeable Emergency" is a severe financial hardship to Employee resulting
from a sudden and unexpected illness or accident of Employee or a dependent (as
defined in Section 152(a) of the Internal Revenue Code) of Employee, loss of
Employee's property due to casualty, or other similar extraordinary and
unforeseeable circumstances arising as a result of events beyond the control of
Employee. The circumstances that will constitute an Unforeseeable Emergency
will depend on the facts of each case, but in any case, payment may not be made
to the extent that such hardship is or may be relieved (i) through reimbursement
or compensation by insurance or otherwise, (ii) by liquidation of Employee's
assets, to the extent the liquidation of such assets would not itself cause
severe financial
A-50
hardship, or (iii) by cessation of all deferrals under this Paragraph 7. In the
event of an early distribution by reason of an Unforeseeable Emergency, the
amount of all subsequent installments of the Non-Compete Payment shall be
reduced, on a present value basis using a discount rate of nine percent (9%) per
annum, to reflect the amount withdrawn pursuant to this Paragraph 7(c).
(d) Employee's Rights Unsecured. The right of Employee or his
---------------------------
designated beneficiary(ies) to receive distributions hereunder shall be an
unsecured claim against the general assets of Employer, and neither Employee nor
his designated beneficiary(ies) shall have any rights in or against any specific
assets of Employer. The accrued Non-Compete Payment shall constitute general
assets of Employer and may be disposed of by Employer at such time and for such
purposes as it may deem appropriate. The accrued Non-Compete payment may not be
encumbered by Employer or any of his beneficiaries.
8. Termination and Termination Pay.
-------------------------------
(a) By Employee. The Term of Employment and Employee's employment
-----------
under this Agreement may be terminated at any time by Employee upon ninety (90)
days' written notice to Employer. Upon such termination, Employee shall be
entitled to receive his Base Salary through the effective date of such
termination, and the Non-Compete Payment, in accordance with the terms of
Paragraphs 3 and 7 hereof.
(b) Death or Retirement. The Term of Employment and Employee's
-------------------
employment under this Agreement automatically shall be terminated upon his death
during the Term of Employment or upon the effective date of Employee's
retirement with Employer's consent or under Employer's personnel policies and
procedures. Upon any such termination, Employee (or, in the case of Employee's
death, his estate) shall be entitled to receive his Base Salary through the date
of such termination, and the Non-Compete Payment, in accordance with the terms
of Paragraphs 3 and 7 hereof.
(c) By Employer. Employer may terminate the Term of Employment and
-----------
Employee's employment under this Agreement at any time for "Cause" (as defined
below) or without Cause. Upon any such termination by Employer under this
Paragraph 8(c) without Cause, Employer shall be obligated to pay Base Salary to
Employee at his then current Base Salary rate for the unexpired Term of
Employment hereunder, but shall have no further obligations hereunder except
with respect to the Non-Compete Payment. Upon any such termination with Cause,
Employee shall have no further rights under this Agreement except with respect
to the Non-Compete Payment.
For purposes of this Paragraph 8(c), Employer shall have "Cause"
to terminate Employee's employment upon:
(i) A determination by Employer, in good faith, that
Employee (A) has breached in any material respect any of the terms or conditions
of this Agreement or of the Code of Conduct, (B) has failed in any material
respect to perform or discharge his duties or responsibilities of employment in
the manner provided herein, or (C) is engaging or has engaged in willful
misconduct or conduct which is detrimental in any material respect to the
business or business prospects of Employer or which has had or likely will have
an adverse effect on Employer's business or reputation;
(ii) The violation by Employee of any applicable federal or
state law, or any applicable rule, regulation, order or statement of policy
promulgated by any governmental agency or authority having jurisdiction over
Employer, MFC or any of their affiliates or subsidiaries (a "Regulatory
Authority"), including but not limited to the Federal Deposit Insurance
Corporation, the North Carolina Banking Commissioner, the North Carolina State
Banking Commission, the Federal Reserve Board or any other banking regulator,
which results from Employee's negligence, willful misconduct or intentional
disregard of such law, rule, regulation, order or policy statement and results
in any substantial damage, monetary or otherwise, to Employer or any of its
affiliates or subsidiaries or to Employer's reputation;
A-51
(iii) The commission in the course of Employee's employment
with Employer of an act of fraud, embezzlement, theft or proven personal
dishonesty (whether or not such act or charge results in criminal indictment,
charges, prosecution or conviction);
(iv) The conviction of Employee of any felony or any criminal
offense involving dishonesty or breach of trust, or the occurrence of any event
described in Section 19 of the Federal Deposit Insurance Act or any other event
or circumstance which disqualifies Employee from serving as an employee or
executive officer of, or a party affiliated with, Employer or MFC; or, in the
event Employee becomes unacceptable to, or is removed, suspended or prohibited
from participating in the conduct of Employer's or MFC's affairs (or if
proceedings for that purpose are commenced), by any Regulatory Authority; or,
(v) The exclusion of Employee by the carrier or underwriter
from coverage under Employer's then current "blanket bond" or other fidelity
bond or insurance policy covering its directors, officers or employees, or the
occurrence of any event which Employer believes, in good faith, will result in
Employee being excluded from such coverage, or having coverage limited as to
Employee as compared to other covered officers or employees, pursuant to the
terms and conditions of such "blanket bond" or other fidelity bond or insurance
policy.
(d) Except as otherwise provided below, upon the earlier of the
Expiration Date of the Term of Employment or the effective date of any actual
termination of Employee's employment with Employer under this Agreement for any
reason, the provisions of this Agreement likewise shall terminate and be of no
further force or effect. However, Employee's covenants contained in Paragraph 6
above, and Employer's obligations, if any, for continued payments of Base Salary
and Non-Compete Payments shall survive and remain in effect in accordance with
their terms following the Expiration Date or any actual termination of
Employee's employment; provided, however, that in the event the actual
termination of Employee's employment occurs before the Expiration Date, the
Restriction Period shall terminate five years thereafter.
9. Additional Regulatory Requirements. Notwithstanding anything
----------------------------------
contained in this Agreement to the contrary, it is understood and agreed that
Employer (or any of its successors in interest) shall not be required to make
any payment or take any action under this Agreement if:
(a) Employer is declared by any Regulatory Authority to be insolvent,
in default or operating in an unsafe or unsound manner; or,
(b) in the opinion of counsel to Employer such payment or action (i)
would be prohibited by or would violate any provision of state or federal law
applicable to Employer, including without limitation the Federal Deposit
Insurance Act as now in effect or hereafter amended, (ii) would be prohibited by
or would violate any applicable rules, regulations, orders or statements of
policy, whether now existing or hereafter promulgated, of any Regulatory
Authority, or (iii) otherwise would be prohibited by any Regulatory Authority.
10. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of Employer which shall acquire, directly or
indirectly, by conversion, merger, consolidation, purchase or otherwise, all or
substantially all of the assets of Employer.
(b) Employer is contracting for the unique and personal skills of
Employee. Therefore, Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent of
Employer.
11. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the parties hereto. No waiver by either
party hereto, at any time, of any breach by the other
A-52
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party, shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties, except as herein otherwise
provided.
12. Applicable Law. The parties hereto agree that without regard to
--------------
principles of conflicts of laws, the internal laws of the State of North
Carolina shall govern and control the validity, interpretation, performance and
enforcement of this Agreement and that any suit or action relating to this
Agreement shall be instituted and prosecuted in the Courts of Henderson County,
North Carolina, and each party hereto hereby does waive any right or defense
relating to such jurisdiction and venue, except to the extent that federal law
shall be deemed to apply.
13. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Headings. The section and paragraph headings contained in this
--------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
15. Notices. Except as otherwise may be provided herein, all notices,
-------
claims, certificates, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given when hand delivered or
sent by facsimile transmission by one party to the other, or when deposited by
one party with the United States Postal Service, postage prepaid, and addressed
to the other party as follows:
If to Employer: If to Employee:
MountainBank Financial Corporation Ronnie E. Deyton
201 Wren Drive ____________________
Hendersonville, NC 28792 ____________________
Att: J.W. Davis, President and CEO
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, and each such counterpart hereof shall be deemed an original
instrument, but all such counterparts together shall constitute but one
agreement.
17. Entire Agreement. This Agreement contains the entire understanding
----------------
and agreement of the parties, and there are no agreements, promises, warranties,
covenants or undertakings other than those expressly set forth or referred to
herein.
IN WITNESS WHEREOF, Employer has caused this Agreement to be executed
by its duly authorized officer in pursuance of authority duly given by its Board
of Directors, and Employee has set hereunto his hand and adopted as his seal the
typewritten word "SEAL" appearing beside his name, all as of the day and year
first above written.
__________________________________________(SEAL)
Ronnie E. Deyton
MOUNTAINBANK
By: _____________________________________
J.W. Davis, President
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APPENDIX B
ARTICLE 13.
Dissenters' Rights.
Part 1. Right to Dissent and Obtain Payment for Shares.
(S) 55-13-01. Definitions.
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and in
the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances, giving due consideration to the rate currently paid by the
corporation on its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371,
s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-02. Right to dissent.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger whose shares are not affected under G.S.
55-11-04) is a party unless (i) approval by the shareholders of that corporation
is not required under G.S. 55-11-03(g) or (ii) such shares are then redeemable
by the corporation at a price not greater than the cash to be received in
exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, unless such shares
are then redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than as permitted by G.S. 55-12-01,
including a sale in dissolution, but not including a
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sale pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed in cash to
the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates, alters, or
abolishes a right in respect of redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the shares; (iii) alters or
abolishes a preemptive right of the holder of the shares to acquire shares or
other securities; (iv) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes; (v) reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share so created is to be
acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under
this Article may not challenge the corporate action creating his entitlement,
including without limitation a merger solely or partly in exchange for cash or
other property, unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of shareholders to dissent from, or obtain payment of the fair value of
the shares in the event of, the corporate actions set forth in subdivisions (1),
(2), or (3) of subsection (a) of this section if the affected shares are any
class or series which, at the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting at which the plan of
merger or share exchange or the sale or exchange of property is to be acted on,
were (i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealer, Inc., or (ii) held by at least 2,000 record
shareholders. This subsection does not apply in cases in which either:
(1) The articles of incorporation, bylaws, or a resolution of the
board of directors of the corporation issuing the shares provide otherwise; or
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange to
accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of
the surviving or acquiring corporation, or of any other corporation which, at
the record date fixed to determine the shareholders entitled to receive notice
of and vote at the meeting at which the plan of merger or share exchange is to
be acted on, were either listed subject to notice of issuance on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held by at least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in sub-
subdivisions a. and b. of this subdivision. (1925, c. 77, s. 1; c. 235; 1929, c.
269; 1939, c. 279; 1943, c. 270; G.S., ss. 55-26, 55-167; 1955, c. 1371, s. 1;
1959, c. 1316, ss. 30, 31; 1969, c. 751, ss. 36, 39; 1973, c. 469, ss. 36, 37;
c. 476, s. 193; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.18;
1991, c. 645, s. 12; 1997-202, s. 1.)
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(S) 55-13-03. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955,
c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s.
1.)
(S)(S) 55-13-04 to 55-13-19. Reserved for future codification purposes.
Part 2. Procedure for Exercise of Dissenters' Rights.
(S) 55-13-20. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02
is submitted to a vote at a shareholders' meeting, the meeting notice must state
that shareholders are or may be entitled to assert dissenters' rights under this
Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is taken
without a vote of shareholders, the corporation shall no later than 10 days
thereafter notify in writing all shareholders entitled to assert dissenters'
rights that the action was taken and send them the dissenters' notice described
in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section, such
failure shall not invalidate any corporate action taken; but any shareholder may
recover from the corporation any damage which he suffered from such failure in a
civil action brought in his own name within three years after the taking of the
corporate action creating dissenters' rights under G.S. 55-13-02 unless he voted
for such corporate action. (1925, c. 77, s. 1, c. 235; 1929, c. 269; 1939, c. 5,
c. 279; 1943, c. 270; G.S., ss. 55-26, 55-165, 55-167; 1955, c. 1371, s. 1;
1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265. s. 1.)
(S) 55-13-21. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02
is submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand payment
for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is not
entitled to payment for his shares under this Article. (1925, c. 77, s. 1; 1943,
c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469,
ss. 36, 37; 1989, c. 265, s. 1.)
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(S) 55-13-22. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02
is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after shareholder
approval, or if no shareholder approval is required, after the approval of the
board of directors, of the corporate action creating dissenters' rights under
G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the date
the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article. (1925, c. 77, s. 1;
1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973,
c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-485, s. 4.)
(S) 55-13-23. Duty to demand payment.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share certificates
where required, each by the date set in the dissenters' notice, is not entitled
to payment for his shares under this Article. (1925, c. 77, s. 1; 1943, c. 270;
G.S., s. 55- 167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss.
36, 37; 1989, c. 265, s. 1.)
(S) 55-13-24. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action. (1925, c.
77, s. 1;1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s.
39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-25. Payment.
(a) As soon as the proposed corporate action is taken, or within 30 days after
receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
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(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of payment,
an income statement for that year, a statement of cash flows for that year, and
the latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article. (1925, c. 77, s. 1; 1943, c. 270; G.S., s.
55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37;
1989, c. 265, s. 1; c. 770, s. 69; 1997-202, s. 2.)
(S) 55-13-26. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
(1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c.
751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-27. Reserved for future codification purposes.
(S) 55-13-28. Procedure if shareholder dissatisfied with corporation's payment
or failure to perform.
(a) A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of the
amount in excess of the payment by the corporation under G.S. 55-13-25 for the
fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is incorrectly
calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for demanding
payment.
(b) A dissenter waives his right to demand payment under this section unless he
notifies the corporation of his demand in writing (i) under subdivision (a)(1)
within 30 days after the corporation made payment for his shares or (ii) under
subdivisions (a)(2) and (a)(3) within 30 days after the corporation has failed
to perform timely. A dissenter who fails to notify the corporation of his demand
under subsection (a) within such 30-day period shall be deemed to have withdrawn
his dissent and demand for payment. (1925, c. 77, s. 1; 1943, c. 270; G.S., s.
55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37;
1989, c. 265, s. 1; 1997-202, s. 3.)
(S) 55-13-29. Reserved for future codification purposes.
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Part 3. Judicial Appraisal of Shares.
(S) 55-13-30. Court action.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the dissenter
may commence a proceeding within 60 days after the earlier of (i) the date
payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's payment
demand under G.S. 55-13-28 by filing a complaint with the Superior Court
Division of the General Court of Justice to determine the fair value of the
shares and accrued interest. A dissenter who takes no action within the 60-day
period shall be deemed to have withdrawn his dissent and demand for payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or not
residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is commenced
under subsection (a) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The parties are entitled to the same discovery
rights as parties in other civil proceedings. The proceeding shall be tried as
in other civil actions. However, in a proceeding by a dissenter in a corporation
that was a public corporation immediately prior to consummation of the corporate
action giving rise to the right of dissent under G.S. 55-13-02, there is no
right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his shares, plus
interest, exceeds the amount paid by the corporation. (1925, c. 77, s. 1; 1943,
c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469,
ss. 36, 37; 1989, c. 265, s. 1; 1997-202, s. 4; 1997-485, ss. 5, 5.1.)
(S) 55-13-31. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court, and shall assess the costs as it
finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either
or any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-
167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989,
c. 265, s. 1.)
B-6
APPENDIX C
October __, 2001
Board of Directors
First Western Bank
600 West Bypass
Burnsville, NC 28714
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, of the exchange ratio to be received by the shareholders of First Western
Bank ("First Western") under the terms of a certain Agreement and Plan of
Reorganization and Merger dated September 12, 2001 (the "Agreement") pursuant to
which First Western would be merged with and into MountainBank, a wholly-owned
subsidiary of MountainBank Financial Corporation ("MountainBank") (the
"Merger"). Under the terms of the Agreement, each of the outstanding common
shares of First Western shall be converted into the right to receive 0.50 shares
of MountainBank common stock. The foregoing summary of the Merger is qualified
in its entirety by reference to the Agreement.
The Carson Medlin Company is a National Association of Securities Dealers, Inc.
(NASD) member investment banking firm, which specializes in the securities of
financial institutions in the United States. As part of our investment banking
activities, we are regularly engaged in the valuation of financial institutions
in the United States and transactions relating to their securities. We
regularly publish our research on independent community banks regarding their
financial and stock price performance. We are familiar with the commercial
banking industry in North Carolina and the major commercial banks operating in
that market. We have been retained by First Western in a financial advisory
capacity to render our opinion hereunder, for which we will receive
compensation.
In reaching our opinion, we have analyzed the respective financial positions,
both current and historical, of MountainBank and First Western. We have
reviewed: (i) the Agreement; (ii) the annual reports to shareholders of
MountainBank, including audited financial statements for the three years ended
December 31, 2000; (iii) audited financial statements of First Western for the
three years ended December 31, 2000; (iv) unaudited interim financial statements
of MountainBank for the six months ended June 30, 2001; (v) unaudited interim
financial statements of First Western for the six months ended June 30, 2001;
and, (vi) certain financial and operating information with respect to the
business, operations and prospects of MountainBank and First Western. We also:
(a) held discussions with members of management of MountainBank and First
Western regarding historical and current business operations, financial
condition and future prospects of their respective companies; (b) reviewed the
historical market prices and trading activity for the common stocks of
MountainBank and First Western and compared them with those of certain publicly-
traded companies which we deemed to be relevant; (c) compared the results of
operations of MountainBank and First Western with those of certain banking
companies which we deemed to be relevant; (d) compared the proposed financial
terms of the Merger with the financial terms, to the extent publicly available,
of certain other recent business combinations of commercial banking
organizations; and (e) conducted such other studies, analyses, inquiries and
examinations as we deemed appropriate.
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We have relied upon and assumed, without independent verification, the accuracy
and completeness of all information provided to us. We have not performed or
considered any independent appraisal or evaluation of the assets of MountainBank
or First Western. The opinion we express herein is necessarily based upon
market, economic and other relevant considerations as they exist and can be
evaluated as of the date of this letter.
Based upon the foregoing, it is our opinion that the exchange ratio provided for
in the Agreement is fair, from a financial point of view, to the shareholders of
First Western Bank.
Very truly yours,
THE CARSON MEDLIN COMPANY
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
North Carolina law generally provides for the indemnification of our officers
and directors of corporations in the manner described below.
Permissible Indemnification. The North Carolina Business Corporation Act
(the "NCBCA") allows a corporation, by charter, bylaw, contract or resolution,
to indemnify or agree to indemnify its officers, directors, employees and agents
and any person who is or was serving at the corporation's request as a director,
officer, employee or agent of another entity or enterprise or as a trustee or
administrator under an employee benefit plan, against liability and expenses,
including reasonable attorneys' fees, in any proceeding (including without
limitation a proceeding brought by or on behalf of the corporation itself)
arising out of their status as such or their activities in any of the foregoing
capacities. Any provision in a corporation's charter or bylaws or in a contract
or resolution may include provisions for recovery from the corporation of
reasonable costs, expenses and attorneys' fees in connection with the
enforcement of rights to indemnification granted therein and may further include
provisions establishing reasonable procedures for determining and enforcing such
rights.
The corporation may indemnify such person against liability expenses
incurred only where such person conducted himself or herself in good faith and
reasonably believed (i) in the case of conduct in his or her official corporate
capacity, that his or her conduct was in the corporation's best interests, and
(ii) in all other cases, that his or her conduct was at least not opposed to the
corporation's best interests; and, in the case of a criminal proceeding, he or
she had no reasonable cause to believe his or her conduct was unlawful;
provided, however, that a corporation may not indemnify such person either in
connection with a proceeding by or in the right of the corporation in which such
person was adjudged liable to the corporation, or in connection with any other
proceeding charging improper personal benefit to such person (whether or not
involving action in an official capacity) in which such person was adjudged
liable on the basis that personal benefit was improperly received.
Mandatory Indemnification. Unless limited by the corporation's charter, the
NCBCA requires a corporation to indemnify a director or officer of the
corporation who is wholly successful (on the merits or otherwise) in the defense
of any proceeding to which such person was a party because he or she is or was a
director or officer of the corporation against reasonable expenses incurred in
connection with the proceeding.
Advance for Expenses. Expenses incurred by a director, officer, employee or
agent of the corporation in defending a proceeding may be paid by the
corporation in advance of the final disposition of the proceeding as authorized
by the board of directors in the specific case, or as authorized by the charter
or bylaws or by any applicable resolution or contract, upon receipt of an
undertaking by or on behalf of such person to repay amounts advanced unless it
ultimately is determined that such person is entitled to be indemnified by the
corporation against such expenses.
Court-Ordered Indemnification. Unless otherwise provided in the
corporation's charter, a director or officer of the corporation who is a party
to a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court deems necessary, may
order indemnification if it determines either (i) that the director or officer
is entitled to mandatory indemnification as described above, in which case the
court also will order the corporation to pay the reasonable expenses incurred to
obtain the court-ordered indemnification, or (ii) that the director or officer
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not such person met the requisite standard of conduct
or was adjudged liable to the corporation in connection with a proceeding by or
in the right of the corporation or on the basis that personal benefit was
improperly received in connection with any other proceeding so charging (but if
adjudged so liable, indemnification is limited to reasonable expenses incurred).
Parties Entitled to Indemnification. The NCBCA defines "director" to
include ex-directors and the estate or personal representative of a director.
Unless its charter provides otherwise, a corporation may indemnify and advance
expenses to an officer, employee or agent of the corporation to the same extent
as to a director and also may indemnify and advance expenses to an officer,
employee or agent who is not a director to the extent, consistent with public
policy, as may be provided in its charter or bylaws, by general or specific
action of its board of directors, or by contract.
II-1
Indemnification by the Registrant. The Registrant's Bylaws provide for
indemnification of its directors and officers to the fullest extent permitted by
North Carolina law and require its Board of Directors to take all actions
necessary and appropriate to authorize such indemnification.
Item 21. Exhibits and Financial Statement Schedules.
An index of exhibits appears at page II-6 and is incorporated herein by
reference.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(b) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
"Calculation of Registration Fee" table in the effective
Registration Statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of this offering;
4. That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(b) of the Securities Exchange Act of 1934 that is
incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
5. That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes
that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form;
6. That every prospectus: (i) that is filed pursuant to Paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of
an amendment to the
II-2
Registration Statement and wil not be used until such amendment is
effective, and that, for purposes of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof;
7. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction, the question whether such indemnification by
it is against public policy as expressed in the Securities Act and
will each be governed by the final adjudication of such issue;
8. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of
this Form S-4, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement
through the date of responding to the request; and,
9. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of an included in the Registration
Statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, at Hendersonville,
North Carolina, on October 12, 2001.
MOUNTAINBANK FINANCIAL CORPORATION
/s/ J. W. Davis
By:------------------------------------------
J. W. Davis
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacity and on the dates indicated.
Signature Title Date
------------------------------------ --------------------- ----------------
/s/ J. W. Davis President, Chief Executive October 12, 2001
------------------------------------ Officer and Director
J. W. Davis (principal executive officer)
/s/ Gregory L. Gibson
------------------------------------ Chief Financial Officer October 12, 2001
Gregory L. Gibson (principal financial and
accounting officer)
*
/s/ Boyd L. Hyder Chairman October 12, 2001
------------------------------------
Boyd L. Hyder
*/s/ William H. Burton III Director October 12, 2001
------------------------------------
William H. Burton III
*/s/ Kenneth C. Feagin Director October 12, 2001
------------------------------------
Kenneth C. Feagin
*/s/ Danny L. Ford Director October 12, 2001
------------------------------------
Danny L. Ford
*/s/ J. Edward Jones Director October 12, 2001
------------------------------------
J. Edward Jones
*/s/ Ronald R. Lamb Director October 12, 2001
------------------------------------
Ronald R. Lamb
II-4
*/s/ H. Steve McManus Director October 12, 2001
------------------------------------
H. Steve McManus
*/s/ Catherine H. Schroader Director October 12, 2001
------------------------------------
Catherine H. Schroader
*/s/ Maurice A. Scott Director October 12, 2001
------------------------------------
Maurice A. Scott
*/s/ William B. Taylor Director October 12, 2001
------------------------------
William B. Taylor
* Gregory L. Gibson hereby signs this Registration Statement on Form S-4 on
October 12, 2001, on behalf of each of the indicated persons for whom he is
attorney-in-fact pursuant to a Power of Attorney filed herewith.
/s/ Gregory L. Gibson
By: ----------------------------------
Gregory L. Gibson
As Attorney-In-Fact
II-5
EXHIBIT INDEX
Exhibit
Number Description
------ ----------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization and Merger dated as of September
17, 2001 between Registrant, MountainBank and First Western Bank
(included as Appendix A to the Proxy Statement/Prospectus included in
this Registration Statement)
2.2 Form of Plan of Merger between MountainBank and First Western Bank
(included as Exhibit A to the Agreement and Plan of Reorganization and
Merger which is included as Appendix A to the Proxy
Statement/Prospectus included in this Registration Statement)
3.1 Registrant's Articles of Incorporation (incorporated herein by
reference from exhibits to Registrant's Current Report on Form 8K/A
dated March 30, 2001)
3.2 Registrant's By-laws (incorporated herein by reference from exhibits
to Registrant's Current Report on Form 8K/A dated March 30, 2001)
5.1 * Opinion of Ward and Smith, P.A. as to the validity of the shares of
Registrant's common stock
8.1 * Opinion of Ward and Smith, P.A. as to federal income tax matters
10.1 Employment Agreement dated June 26, 1997, between MountainBank and J.
W. Davis
10.2 Addendum and Amendment to Employment Contract dated October 1, 1998,
between MountainBank and J.W. Davis
10.3 1997 Employee Stock Option Plan, as amended
10.4 Form of Employee Stock Option Agreement for 1998 and 1999 grants
10.5 Form of Employee Stock Option Agreement for 2000 grants
10.6 1997 Director Stock Option Plan, as amended
10.7 Form of Director Stock Option Agreement
10.8 Lease Agreement pertaining to Registrant's Main Office
10.9 Lease Agreements pertaining to Registrant's administration/operations
facility
23.1 Consent of Larrowe & Company PLLC for Registrant
23.2 Consent of Deloitte & Touche LLP for First Western Bank
23.3 Consent of Ward and Smith, P.A. (included in Exhibit 5.1)
23.4 Consent of Ward and Smith, P.A. (included in Exhibit 8.1)
23.5 Consent of The Carson Medlin Company
24.1 Powers of Attorney
99.1 Form of Appointment of Proxy for First Western Bank special
meeting of shareholders
__________________
* To be filed by amendment.
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