As filed with the Securities and Exchange Commission on March 13, 1998
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------------------
ANSON BANCORP, INC.
(Name of small business issuer in its charter)
North Carolina 6036 56-2073894
(State or other jurisdiction (Primary Standard Industrial (I.R.S Employer
of incorporation or Classification Code Number) Identification
organization) Number)
211 South Greene Street/Post Office Box 249
Wadesboro, North Carolina 28170
(704) 694-2122
(Address and telephone number of principal executive offices and principal
place of business)
---------------
EUGENE M. WARD, President
Anson Bancorp, Inc.
211 South Greene Street
Wadesboro, North Carolina 28170
(704) 694-2122
(Name, address, and telephone number, of agent for service)
---------------
Copies to:
EDWARD C. WINSLOW III
JEAN C. BROOKS
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
2000 Renaissance Plaza
Post Office Box 26000
Greensboro, North Carolina 27420
----------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
===============================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum
Securities Amount Offering Price Aggregate Amount of
to be Registered to be Registered Per Share Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------
Common Stock,
no par value........... 872,850/(1)/ $10.00 $8,728,500 $2,574.91
===============================================================================================
(1) The estimate maximum number of shares to be registered is based upon the
maximum of the valuation range of Anson Savings Bank, SSB and the
Registrant, as established by an independent appraisal, divided by the
proposed offering price per share.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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PROSPECTUS
Up to 872,850 Shares of Common Stock
ANSON BANCORP, INC.
211 South Greene Street
Wadesboro, North Carolina 28170
(704) 694-2122
================================================================================
Anson Savings Bank, SSB (the "Bank") is converting from a North
Carolina chartered mutual savings bank to a North Carolina chartered stock
savings bank. As part of the Conversion, the Bank will become a wholly owned
subsidiary of Anson Bancorp, Inc. (the "Company"). The Company was formed in
March 2, 1998 and upon completion of the Conversion will own all of the shares
of the Bank. The Common Stock of the Company is being offered to the public in
accordance with a Plan of Conversion. The Plan of Conversion must be approved by
the Administrator of the Savings Institutions Division of the North Carolina
Department of Commerce (the "Administrator") and the Federal Deposit Insurance
Corporation (the "FDIC") and by a majority of the votes eligible to be cast by
members of the Bank. The offering will not go forward if the Bank does not
receive these approvals and the Company does not sell at least the minimum
number of shares.
The shares of Common Stock are first being offered pursuant to
nontransferable subscription rights in a Subscription Offering. Depositor and
borrower members as of certain eligibility dates will receive subscription
rights. Shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a Community Offering with preference given to certain
residents of Anson County, North Carolina.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted Bank to
be between $5,610,000 and $7,590,000, which establishes the number of shares to
be offered at a price of $10.00 per share. Subject to the approval of the
Administrator, up to 872,850 shares, an additional 15% above the maximum number
of shares, may be offered. Based on these estimates, we are making the following
offering of shares of Common Stock:
. Price Per Share: $10.00
. Number of Shares Minimum/
Maximum, as adjusted: 561,000 to 872,850
. Offering Expenses: $488,000 to $566,000
. Net Proceeds to the Company
Minimum/Maximum, as adjusted: $5,122,000 to $8,163,000
. Net Proceeds Per Share
Minimum/Maximum, as adjusted: $9.13 to $9.35
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the FDIC or any other government agency.
Neither the Securities and Exchange Commission, the Administrator, the FDIC, nor
any state securities regulator has approved or disapproved these securities or
determined if this prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at (704)
694-2122.
TRIDENT SECURITIES, INC.
The date of this Prospectus is , 1998.
---------------
TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering....................................................................4
Summary...........................................................................................................6
Selected Financial and Other Data of the Bank.....................................................................9
Risk Factors.....................................................................................................10
Anson Bancorp, Inc...............................................................................................15
Anson Savings Bank, SSB..........................................................................................15
Use of Proceeds..................................................................................................16
Dividend Policy..................................................................................................18
Market for Common Stock..........................................................................................19
Capitalization...................................................................................................19
Pro Forma Data...................................................................................................22
Historical and Pro Forma Capital Compliance......................................................................27
Stock Purchases by Directors and Executive Officers..............................................................29
Management's Discussion and Analysis of Financial Condition and Results of Operations............................31
Business of the Company..........................................................................................42
Business of the Bank.............................................................................................43
Taxation.........................................................................................................62
Supervision and Regulation.......................................................................................64
Management of the Company........................................................................................75
Management of the Bank...........................................................................................76
Description of Capital Stock.....................................................................................84
Anti-Takeover Provisions Affecting the Company and the Bank......................................................86
Certain Provisions of the Charters and Bylaws of the Company and the Bank........................................91
The Conversion...................................................................................................91
Legal Opinions..................................................................................................108
Experts.........................................................................................................108
Registration Requirements.......................................................................................109
Additional Information..........................................................................................109
Glossary........................................................................................................A-1
This document contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
2
ANSON SAVINGS BANK, SSB
WADESBORO, NORTH CAROLINA
[INSERT MAP FROM TRIDENT]
3
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q. What is a mutual to stock conversion?
A. The Conversion is a change in the Bank's form of organization.
Currently, the Bank operates as a North Carolina chartered mutual
savings bank with no stockholders. As a result of the Conversion, it
will become a North Carolina chartered stock savings bank. As part of
the Conversion, the Company is offering for sale shares of its Common
Stock. The Company will be the sole stockholder of the Bank and will
purchase the Bank's stock in exchange for a portion of the proceeds
from its offering.
Q. What is the purpose of the Conversion and the Offering?
A. As a stock savings bank operating through a holding company structure,
the Bank will have the ability to plan and develop long-term growth and
improve its future access to the capital markets. The stock offering
will increase the Bank's capital and the amount of funds available for
lending and investment activities. This provides greater flexibility to
diversify operations and expand into other geographic markets if the
Bank chooses to do so. If the Company's earnings are sufficient in the
future, stockholders might also receive dividends and benefit from the
possible long-term appreciation of the Company's stock price.
Q. How many shares of stock will be sold?
A. Between 561,000 and 759,000 shares of Common Stock will be sold, all at
a price of $10.00 per share. The number of shares to be sold may be
increased to 872,850 shares without further notice to you, subject to
receipt of approval of the Administrator, if market or financial
conditions change prior to completion of the Conversion.
Q. How do I purchase the stock?
A. You must complete and return the Order Form to the Company and the Bank
together with your payment or your authorization for withdrawal of the
payment amount from an account you have with the Bank, on or before
_____________, 1998. See pages 95 to 102.
Q. How much stock may I purchase?
A. The minimum purchase is 50 shares (or $500). The maximum purchase per
eligible depositor in the Subscription Offering is 10,000 shares (or
$100,000). In certain instances, your purchase might be grouped
together with purchases by persons with other accounts with whom you
are affiliated or related and in that event the aggregate purchases may
not exceed 15,000 shares (or $150,000). The Bank may decrease or
increase the maximum purchase limitation without notifying you.
If shares are sold in a Community Offering, the maximum number of
shares that may be purchased by any party in the Community Offering is
10,000 shares (or $100,000). As with the Subscription Offering, in
certain circumstances your purchase may be combined with the number of
shares purchased by other parties with whom such party is affiliated or
related and in that event the aggregate purchases may not exceed 15,000
shares (or $150,000). See pages 105-106.
4
Q. What happens if there are not enough shares to fill all orders?
A. You might not receive any or all of the shares you want to purchase. If
there is an over subscription, the Common Stock will be offered on a
priority basis to the following persons:
. Eligible Accounts Holders - Persons who had a deposit account
with the Bank on September 30, 1996 with a balance of at least
$50.00. Any remaining shares will be offered to:
. Supplemental Eligible Account Holders - Persons who had a
deposit account with the Bank on March 31, 1998 with a balance
of at least $50.00. Any remaining shares will be offered to:
. Other Members - Other depositors and certain borrowers of the
Bank, as of [Record Date], 1998.
If the above persons do not subscribe for all of the shares, the
remaining shares will be offered to directors, officers and employees
of the Bank who are not Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members and to certain members of the general
public with preference given to people who live in Anson County, North
Carolina. In the event there is an oversubscription in any category,
the shares will be allocated among all subscribers in that category in
accordance with a formula set out in the Plan and described in "THE
CONVERSION". See pages 96 to 97.
Q. What particular factors should I consider when deciding whether or not
to buy the stock?
A. In order to make an informed investment decision, you should read this
entire Prospectus, particularly the section entitled "Risk Factors."
Q. As a depositor or borrower member of the Bank, what will happen if I do
not purchase any stock?
A. You presently have voting rights while the Bank is in the mutual form;
however, once the Bank converts to the stock form you will lose your
voting rights unless you purchase stock. You are not required to
purchase stock. Your deposit account, certificate accounts and any
loans you may have with the Bank will not be affected. See pages 93 to
95.
Q. Who can help answer any other questions I may have about the stock
offering?
A. In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
Stock Information Center
Anson Bancorp, Inc.
211 South Greene Street
Wadesboro, North Carolina 28170
(704) 694-2122
5
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the financial statements and the notes to the financial statements of the Bank.
Anson Bancorp, Inc.
Anson Bancorp, Inc. was formed on March 2, 1998 as a North Carolina
corporation to be the holding company for the Bank. The Company is not an
operating company and has not engaged in any significant business to date. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See page 15.
Anson Savings Bank, SSB
The Bank is a community and customer oriented North Carolina chartered
mutual savings bank that has been in operation since December 4, 1889 with one
office located in Wadesboro, North Carolina. The Bank has been a member of the
Federal Home Loan Bank ("FHLB") system since 1939 and its deposits have been
federally insured since 1959. The Bank emphasizes residential mortgage lending,
primarily originating one-to-four-family mortgage loans in its primary market
area, Anson County, North Carolina. To a lesser extent, the Bank also makes
nonresidential real estate loans, construction loans and loans secured by
deposit accounts. The Bank is a portfolio lender, meaning that it does not
originate loans for sale in the secondary market. At December 31, 1997, the Bank
had total assets of $20.7 million, deposits of $16.7 million, and equity of $3.9
million. See pages 15 to 16.
The Stock Offering
The Company is offering between 561,000 and 759,000 shares of Common
Stock at $10.00 per share. Subject to approval by the Administrator, the number
of shares to be sold may be increased to 872,850 shares without future notice if
market or financial conditions change prior to completion of the Conversion.
Stock Purchases
The Company is first offering its shares of Common Stock in a
Subscription Offering. Depositor and borrower members as of certain eligibility
dates will receive subscription rights. The shares of Common Stock will be
offered on a priority basis as follows: Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members and directors, officers and employees of
the Bank who do not qualify in the above-listed categories. Any remaining shares
may be offered in a Community Offering or in a Syndicated Community Offering.
See pages 95 to 103.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of shares. The Bank intends to pursue any and all
legal and equitable remedies in the event the Bank
6
becomes aware of the transfer of subscription rights. The Bank will reject
orders that are determined to involve the transfer of such rights.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro
forma market value of the Common Stock by Ferguson & Company ("Ferguson"), an
appraisal firm experienced in appraisals of savings institutions. The pro forma
market value of the shares is the Bank's market value after giving effect to the
sale of shares in this offering. Ferguson has estimated that in its opinion as
of February 27, 1998, such value ranged between $5,610,000 and $7,590,000 (with
a midpoint of $6,600,000) (the "Estimated Valuation Range"). The appraisal was
based in part upon the Bank's financial condition and operations and the effect
of the additional capital raised by the sale of Common Stock in this offering.
The $10.00 price per share was determined by our board of directors and is the
price most commonly used in stock offerings involving conversions of mutual
savings institutions. The appraisal will be updated prior to the consummation of
the Conversion. If the updated pro forma market value of the Common Stock is
either below $5,610,000 or above $8,728,500, the Company will notify you and you
will have the opportunity to modify or cancel your order. See pages 97 to 101.
Termination of the Offering
The Subscription Offering will terminate at 12:00 noon, Eastern Time,
on __________________, 1998. The Community Offering, if any, may terminate at
any time without notice but no later than __________________, 1998, without
approval by the Administrator.
Benefits to Management from the Offering
Following the Conversion, the Bank intends to implement a management
recognition plan ("MRP") under which directors and employees of the Bank will be
entitled to receive awards of restricted stock at no cost to them and a stock
option and incentive plan (the "Option Plan"), which will benefit the Bank's
employees and directors. However, the MRP and Option Plan may not be adopted
until at least six months after the Conversion and are subject to stockholder
approval and compliance with FDIC regulations if adopted within the first year
following the Bank's Conversion. See pages 79 to 84.
Use of the Proceeds from the Sale of Common Stock
The Company will retain up to 50% of the net proceeds from the offering
and will use the balance to purchase all the capital stock to be issued by the
Bank in the Conversion. The amount retained by the Company will serve as a
possible source of funds for the payment of dividends to stockholders or to
repurchase shares of Common Stock in the future and for general corporate
purposes. Net proceeds paid to the Bank will become part of the Bank's general
funds and will be initially invested in mortgage and other loans and investments
consistent with the Bank's investment policy. See pages 16 to 18.
Dividends
After the Conversion, the Board of Directors of the Company will have
the authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company expects to pay annual dividends on the
Common Stock at a rate of $0.30 per share. In addition, the Board of
7
Directors may determine from time to time to pay special, nonrecurring cash
dividends. No assurances can be given that any dividends will in fact be paid on
the Common Stock. See page 18.
Market for the Common Stock
The Company, as a newly organized company, has never issued capital
stock; consequently, there is no market for its Common Stock at this time. The
Bank and the Company have engaged Trident Securities, Inc. ("Trident
Securities") as a financial advisor and to assist in the marketing of the shares
of Common Stock, on a best efforts basis, in the stock offering. The Company
intends to list the Common Stock over-the-counter through the OTC "Electronic
Bulletin Board" under the symbol "______". Since the size of the offering is
small, it is unlikely that an active and liquid trading market for the shares
will develop and be maintained. Investors should have a long-term investment
intent. Purchasers may not be able to sell their shares when they desire or to
sell the shares at a price equal to or above $10.00. See page 19.
Important Risks in Owning the Company's Common Stock
Before you decide to purchase stock in the offering, you should read
carefully the "Risk Factors" section beginning on page 10 of this document.
8
SELECTED FINANCIAL
AND OTHER DATA OF THE BANK
Set forth below are summaries of historical financial and other data of
the Bank. This information is derived in part from, and should be read in
conjunction with, the Financial Statements and Notes to Financial Statements of
the Bank presented elsewhere herein and with the section of this Prospectus
entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
At or for the Six Months
Ended December 31, At or for the Year Ended June 30,
------------------------- ---------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
Financial condition data:
Total assets $ 20,723 $ 20,695 $ 20,720 $ 21,456
Investments/(1)/ 8,794 8,346 8,700 9,122
Loans receivable, net 11,323 11,730 11,423 11,572
Deposits 16,656 16,889 16,791 17,623
Equity/(2)/ 3,859 3,624 3,756 3,621
Operating data:
Interest income 718 743 1,442 1,559
Interest expense 412 419 819 894
--- --- --- ---
Net interest income 306 324 623 665
---
Provision for loan losses - 1 5 7
------ ------ -- --
Net interest income after
provision for loan losses 306 323 618 658
Noninterest income 4 1 6 2
Noninterest expense/(3)/ 232 348 555 481
--- --- --- ---
Income (loss) before income taxes 78 (24) 69 179
Income tax expense (benefit) 17 (4) 19 52
-- ----- --- --
Net income (loss) $ 62 $ (20) $ 50 $ 127
======= ====== ==== =====
Selected Other Data:
Number of outstanding loans 383 404 397 408
Number of deposit accounts 1,702 2,083 1,754 1,876
Number of full-service offices open 1 1 1 1
Return on average assets/(4)/ .60% (.14) % .24% .58%
Return on average equity/(4)/ 3.24% (.82) % 1.34% 3.57%
Average equity to average assets 18.50% 17.16% 17.81% 16.37%
Interest rate spread 2.25% 2.37% 2.29% 2.39%
Net yield on average interest-
earning assets 3.09% 3.15% 3.15% 3.16%
Average interest-earning assets
to average interest-bearing liabilities 120.00% 119.00% 119.00% 118.00%
Ratio of noninterest expense to
average total assets/(4)/ 2.24% 3.29% 2.65% 2.23%
Nonperforming assets to total assets 1.51% 1.29% 1.16% .92%
Loan loss reserves to nonperforming
loans at period end 32.05% 35.63% 41.67% 47.98%
- ---------------------------------------
(1) Includes interest-earning deposits, federal funds sold, FHLB stock and
investment securities.
(2) Includes unrealized gains on investments amounting to $244,000, $155,000,
$204,000 and $119,000 at December 31, 1997 and 1996, and June 30, 1997 and 1996,
respectively.
(3) Includes a non-recurring expense of $114,000 for the six months ended
December 31, 1996 and the year ended December 31, 1997 for a one-time premium to
recapitalize the SAIF.
(4) Annualized for the six months ended December 31, 1997 and 1996.
9
RISK FACTORS
In addition to the other information presented in this Prospectus,
investors should carefully consider the following risk factors before deciding
whether to invest in the Common Stock.
Potential Impact of Changes in Interest Rates
The results of operations of the Bank, as with savings institutions
generally, are dependent to a large degree on its net interest income, which is
generally the difference between interest income from loans and investments and
interest expense on deposits and borrowings. Approximately 99.5% of the Bank's
mortgage loans have rates of interest which are fixed for the term of the loan
and are originated generally with terms of up to 15 years, while deposit
accounts have significantly shorter terms to maturity. Because the Bank's
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than the Bank's interest-bearing liabilities, the yield on
the Bank's interest earning assets generally will adjust more slowly to changes
in interest rates than the cost of the Bank's interest-bearing liabilities. The
slower adjustment of interest earning assets as compared to interest-bearing
liabilities results in the Bank having a "negative gap." At December 31, 1997,
the Bank's cumulative one year interest rate gap as a percentage of total
interest-earning assets was negative 41.01% and its cumulative three year
interest rate gap as a percentage of total interest-earning assets was a
negative 39.00%. As a result, the Bank's net interest income will be adversely
affected by material and prolonged increases in interest rates. In addition,
rising interest rates may adversely affect the Bank's earnings because there
might be a lack of customer demand for loans.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset/Liability Management".
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. The relatively lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers refinanced their mortgages in order to reduce their
borrowing cost. Under these circumstances, the Bank is subject to reinvestment
risk to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the prepaid loans or securities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset/Liability Management."
Risk Associated with Nonconforming Loans
The Bank does not originate its one-to-four-family loans with the
intention that they will be sold in the secondary market. It generally
originates loans satisfying its underwriting requirements which are tailored for
its local community but which may not satisfy various requirements imposed by
FHLMC or FNMA. For example, the Bank may not require title insurance and may not
obtain all of the loan documentation normally required by FHLMC and FNMA. As a
result, to the extent such loans are sold in the secondary market, they may not
be sold on terms as favorable as those originated in conformity with secondary
market requirements. In addition, loans which are not originated in conformity
with the purchase requirements of FHLMC and FNMA, or nonconforming loans, are
generally thought to have greater risks of default and nonperformance; however,
the Bank has not experienced a greater level of nonperformance with its
nonconforming loans. See "BUSINESS OF THE BANK -- Origination and Sale of
Loans." These loans satisfy a need in the Bank's local community and generally
produce a higher yield than would be produced by conforming loans. At December
31, 1997, all of the loans in the Bank's portfolio were nonconforming.
10
Anticipated Low Return on Equity Following Conversion
The Bank's return on equity was below industry standards for the six
months ended December 31, 1997. At December 31, 1997, the Bank's ratio of
average equity to average assets was 18.50%. On a pro forma basis at December
31, 1997, assuming the sale of 759,000 shares of Common Stock in the Conversion,
the Bank's ratio of equity to assets would have been 38.24%. With its higher
capital position as a result of the Conversion, it is doubtful that the Bank
will be able to quickly deploy the capital raised in the Conversion in loans and
other assets in a manner consistent with its underwriting standards and
operating philosophies and in a manner which will generate earnings to support
its high capital position. The cost of the implementation of the MRP following
the Conversion is also expected to reduce the Company's return on equity. As a
result, it is expected that the Company's return on equity initially will be
below industry norms. Consequently, investors expecting a return on equity which
will meet or exceed industry norms for the foreseeable future should carefully
evaluate and consider the risk that such returns will not be achieved.
Following the Conversion, the Company may consider plans to reduce
capital if the opportunities to deploy it prudently are not found. Such plans
may include payment of cash dividends and repurchasing shares. Any such steps
would be taken based on conditions as they exist following the Conversion and in
compliance with applicable regulations which limit the Company's ability to pay
dividends and repurchase its stock. See "USE OF PROCEEDS," "DIVIDEND POLICY" and
"SUPERVISION AND REGULATION -- Regulation of the Company -- General" and "--
Dividend Limitations" and "SUPERVISION AND REGULATION -- Regulation of the Bank
- -- Restrictions on Dividends and Other Capital Distributions."
Limited Market for the Common Stock
The Company, as a newly organized company, has never issued capital
stock, and consequently, there is no established market for the Common Stock at
this time. Following the completion of the offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident may buy or sell shares from time to time for
its own account. However, Trident Securities will not be subject to any
obligation with respect to such efforts.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (660,000 shares at the midpoint of the
Estimated Valuation Range), it is unlikely that a stockholder base large enough
to create an active trading market will develop and be maintained. Further, even
if a market develops, there can be no assurance that the shares of Common Stock
offered in the Conversion can be resold at or above the purchase price after
completion of the Conversion. Purchasers should consider the potentially
illiquid and long-term nature of their investment in the shares of the Common
Stock. The aggregate price of the Common Stock is based upon an independent
appraisal of the pro forma market value of the Common Stock. However, there can
be no assurance that an investor will be able to sell the Common Stock purchased
in the Conversion at or above the $10.00 purchase price.
11
Risks Associated with Anson's Primary Market Area; Limited Lending
Opportunities; Competition
The Bank's office is located in Anson County, North Carolina, where the
Bank originates a substantial majority of its loans. Anson County is rural with
an approximate population of 24,309. Population growth and per capital income
levels for Anson County are lower than comparable levels for North Carolina and
the nation, while unemployment rates are higher. Management regards the Anson
County market as a low growth area in which there is significant competition
among financial services providers for market share. See "BUSINESS OF THE BANK
- -- Competition". The lower income levels and lower rates of growth in Anson
County has limited residential mortgage lending opportunities in its primary
market area, and management does not anticipate that residential mortgage
lending opportunities will increase in the future because of the lack of growth
in the local economy. In addition, lower income levels and low rates of growth
in Anson County could result in an increase in the number of delinquent or
nonperforming loans and reduce the value of the collateral securing such loans,
adversely affecting the Bank's financial condition and results of operations.
See "BUSINESS OF THE BANK -- Market Area".
Cost and Possible Dilutive Effect of the MRP and Option Plan
It is expected that the stockholders of the Company will be asked to
approve the Option Plan and the MRP at a meeting of stockholders after the
Conversion. Under the MRP, directors and employees of the Bank are expected to
be awarded an aggregate amount of Common Stock equal to 4% of the shares issued
in the Conversion. Under the Option Plan, directors and employees of the Bank
are expected to be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Conversion at exercise prices
equal to the market price of the Common Stock on the date of grants. Shares
issued to directors and certain employees under the MRP and the Option Plan may
be from authorized but unissued shares of Common Stock or they may be purchased
in the open market. In the event the shares issued under the MRP and the Option
Plan consist of newly issued shares of Common Stock, the interests of existing
stockholders would be diluted. If 759,000 shares of the Common Stock are issued
in the Conversion, it is expected that options to acquire 759,000 shares of the
Common Stock could be granted under the Option Plan, and awards of an additional
30,360 shares could be made under the MRP. At the maximum of the Estimated
Valuation Range, if all shares under the MRP and the Option Plan were newly
issued, the exercise price was $10.00 for the shares issued pursuant to the
options, and all of the options were exercised, the number of outstanding shares
of Common Stock would increase from 759,000 to 865,260, the pro forma book value
per share of the outstanding Common Stock at December 31, 1997 would have been
$13.49 compared with $13.98 if such plans did not exist, and the unannualized
pro forma net income per share of the outstanding Common Stock for the six
months ended December 31, 1997 would have been $0.21 compared with $0.22 if such
plans did not exist. The cost of the shares acquired by the MRP will be expensed
over any vesting period set forth in the MRP. If 759,000 shares of Common Stock
are issued in the Conversion and the MRP acquired 30,360 shares at a cost of
$10.00 per share, the total annual pre-tax expense of the MRP would be $60,720
per year assuming a straight line amortization method over a five-year life. See
"PRO FORMA DATA" and "MANAGEMENT OF THE BANK -- Proposed Management Recognition
Plan" and "-- Proposed Option Plan."
Anti-Takeover Considerations
Provisions in the Articles of Incorporation and Bylaws. The Company's
Articles of Incorporation and Bylaws contain certain provisions that may
discourage attempts to acquire control of the Company that are not negotiated
with the Company's Board of Directors. These provisions may result in the
Company
12
being less attractive to a potential acquiror and may result in stockholders
receiving less for their shares than otherwise might be available in the event
of a takeover attempt. In addition, these provisions may have the effect of
discouraging takeover attempts that some stockholders might deem to be in their
best interests, including takeover proposals in which stockholders might receive
a premium for their shares over the then-current market price, as well as making
it more difficult for individual stockholders or a group of stockholders to
elect directors or to remove incumbent management. The Company's Board of
Directors believes, however, that these provisions are in the best interests of
the Company and its stockholders because such provisions encourage potential
acquirors to negotiate directly with the Board of Directors, which the Board of
Directors believes is in the best position to act on behalf of all stockholders.
These provisions include, among other things, (1) supermajority voting
requirements on certain matters, (2) a staggered board of directors, (3)
non-cumulative voting for any purpose, (4) limits on the calling of special
meetings, (5) the ability of the Board of Directors to issue preferred stock
without stockholder action, (6) the removal of directors before the end of their
term only for cause and (7) the ability of the Board of Directors to change the
number of directors within a range without stockholder action.
The amended Certificate of Incorporation and Bylaws of the Bank upon
its Conversion to stock form also contain certain provisions that might
discourage potential takeover attempts of the Bank. See "ANTITAKEOVER PROVISIONS
AFFECTING THE COMPANY AND THE BANK."
Regulatory Provisions. Regulations of the Administrator contain
provisions that, for a period of three years after the Conversion, prohibit any
person from directly or indirectly acquiring or offering to acquire beneficial
ownership of more than 10% of any class of equity security of the Company or the
Bank, with certain exceptions, without the prior approval of the Administrator.
If any person should acquire beneficial ownership of more than 10% of any class
of equity security without prior approval, any shares beneficially owned in
excess of 10% would not be counted as shares entitled to vote and would not be
voted in connection with any matter submitted to the stockholders for a vote.
See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK."
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and Federal Reserve
be obtained prior to any person or company acquiring "control" of a savings bank
or a bank holding company. Restrictions applicable to the operations of bank
holding companies and conditions imposed by the Federal Reserve in connection
with its approval of such acquisitions may deter potential acquirors from
seeking to obtain control of the Company. See "SUPERVISION AND REGULATION --
Regulation of the Company."
Agreements With Employees. In connection with the Conversion, the Bank
will enter into an employment agreement with Eugene M. Ward, President and Chief
Executive Officer. See "MANAGEMENT OF THE BANK -- Employment Agreement." In
addition, the Bank intends to adopt a Severance Plan which would benefit its
employees in the event there is a change in control of the Company or the Bank.
See "MANAGEMENT OF THE BANK -- Severance Plan." The existence of the employment
agreement and severance plan may tend to discourage mergers, consolidations,
acquisitions or other transactions that would result in a change in control of
the Company or the Bank. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND
THE BANK -- The Company -- Anti-Takeover Effect of Employment Agreement and
Benefit Plans."
13
Dependence on Management
The success of the Bank's operations depends to a considerable degree
on its management and, in particular, its President and Chief Executive Officer,
Eugene M. Ward, and the loss of his services could adversely affect the Bank.
The Bank has attempted to provide for his continued employment by entering into
a three-year employment agreement with Mr. Ward. Mr. Ward could terminate his
employment at any time, however. See "MANAGEMENT OF THE BANK -- Employment
Agreement."
Financial Institution Regulation and Possible Legislation
The U.S. Congress is expected to consider legislation that may
eliminate the thrift industry as a separate industry. The Deposit Insurance
Funds Act of 1996 ("DIF Act") provides that the Savings Association Insurance
Fund ("SAIF") will be merged with the Bank Insurance Fund ("BIF") on January 1,
1999, but only if there are no thrift institutions in existence. The DIF Act
requires the Treasury Department to study the development of a common charter
for banks and thrifts and to submit a report of its finding to Congress, which
the Treasury Department has done. The Company cannot predict whether any
legislation will result from this process or what any such legislation may
provide. If Congress does not act to end the separate existence of the thrift
industry, the merger of the SAIF and BIF contemplated by the DIF Act will not
occur, without some amendment of the DIF Act. Although the SAIF currently meets
its statutory reserve ratios, there can be no assurance that it will continue to
do so. The financial burden of any future recapitalization of the SAIF, if
imposed solely on insured savings associations, would fall on a smaller
assessment base than in the past. This could increase the burden on individual
institutions, including the Bank. See SUPERVISION AND REGULATION."
Because the Bank is a North Carolina-chartered state savings bank, any
federal legislation providing for a common charter for banks and thrifts is not
expected to apply directly to the Bank. However, in addition to eliminating a
separate thrift industry, Congress is expected to consider legislation that will
restructure the banking and financial services industries generally. While such
legislation may not affect the Bank or the Company directly, it may restructure
the regulatory and competitive environments in which they operate. The Company
cannot predict the effects of such restructuring.
The Bank is subject to extensive regulation and supervision as a North
Carolina chartered savings bank. In addition, the Company, as a bank holding
company, is subject to extensive regulation and supervision. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Administrator, the Federal Reserve, the FDIC, the North Carolina General
Assembly or the U.S. Congress, could have a material impact on the Company, the
Bank, or the Conversion.
Possible Year 2000 Computer Program Problems; Impact of Technological Advances
As is the case with substantially all financial institutions, rapid and
accurate data processing is essential to the operation of the Bank. There is
concern that in the year 2000 many computers will "read" entries for the year
2000 as the year 1900 and compute payment, interest or delinquency based on the
wrong date or be unable to compute payment, interest or delinquency.
All of the material data processing of the Bank that could be affected
by this problem is provided by a third party service bureau. The service bureau
of the Bank has advised the Bank that it expects to resolve this potential
problem before the year 2000. However, if the service bureau is unable to
resolve this
14
potential problem in time, the Bank would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operations of the Bank.
In addition, the financial services industry frequently introduces new
technology-driven products and services which improve customer services and, if
used effectively, may enable financial institutions to reduce costs. The Bank's
future success will depend, in part, on its ability to address its customers
needs by using technology to provide products and services that will satisfy
customer demands for convenience, as well as increase the Bank's efficiencies in
its operations. There can be no assurances that the Bank will be able to
effectively implement new technology-driven products and services or be
successful in marketing such products and services in its market area.
ANSON BANCORP, INC.
The Company was incorporated under North Carolina law on March 2, 1998
at the direction of the Bank for the purpose of acquiring and holding all of the
outstanding capital stock of the Bank to be issued in connection with the
Conversion. The Company has received conditional approval from the Federal
Reserve and the Administrator to become a bank holding company and as such will
be subject to regulation by the Federal Reserve and the Administrator. This
structure will give the Company greater flexibility than the Bank currently has
to expand and diversify its business activities, although there are no current
plans regarding expansion or diversification. See "SUPERVISION AND REGULATION --
Regulation of the Company."
Prior to completion of the Conversion, the Company will not own any
material assets or transact any material business. Upon completion of the
Conversion, on an unconsolidated basis, the Company will have no significant
assets other than the stock of the Bank acquired in the Conversion, and the
portion of the net proceeds from the sale of Common Stock in the Conversion
which are retained by it. The Company will have no significant liabilities upon
completion of the Conversion. The management of the Company is described in
"MANAGEMENT OF THE COMPANY." The executive office of the Company is located at
the headquarters office of the Bank at 211 South Greene Street, Wadesboro, North
Carolina, and its telephone number is (704) 694-2122.
The existing management of the Company believes that it will be in the
best interests of the Company, the Bank and the Company's stockholders for the
Company to remain an independent company.
ANSON SAVINGS BANK, SSB
The Bank is a North Carolina-chartered mutual savings bank. The Bank
was organized in 1889 and has been a member of the FHLB system since 1939. The
deposits of the Bank are insured by the SAIF of the FDIC to the maximum amount
permitted by law.
The Bank is a member of the FHLB of Atlanta, which is one of the twelve
regional banks for federally insured savings institutions and other eligible
members comprising the FHLB system. As a North Carolina chartered savings bank,
the Bank is regulated by the Administrator. The Bank is also subject to
regulations of the FDIC with respect to certain other matters and, as a
subsidiary of the Company, will be
15
indirectly subject to regulation by the Federal Reserve. See "SUPERVISION AND
REGULATION -- Regulation of the Company" and "-- Regulation of the Bank."
The Bank conducts business through its one full service office in
Wadesboro, North Carolina. The Bank's primary market area is Anson County, North
Carolina. At December 31, 1997, the Bank had total assets of $20.7 million, net
loans of $11.3 million, deposits of $16.7 million and retained earnings of $3.6
million.
The Bank is a community-oriented financial institution which offers a
variety of financial services to meet the needs of the communities it serves.
The Bank is principally engaged in the business of attracting deposits from the
general public and using such deposits to make one-to-four-family residential
real estate loans, non-residential real estate loans, construction loans and
loans secured by deposit accounts.
Revenues of the Bank are derived primarily from interest on loans. The
Bank also receives interest income from its investments and interest-earning
deposit balances. The Bank also receives non-interest income from transaction
and service fees and other sources. The major expenses of the Bank are interest
on deposits and general and administrative expenses such as compensation and
employee benefits, federal deposit insurance premiums, data processing expenses
and occupancy and related expenses.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
estimated that such net proceeds will be between $5.12 million and $7.05
million, based on the current Estimated Valuation Range. If the gross proceeds
of the shares sold are increased to 15% above the maximum of the Estimated
Valuation Range, it is estimated that net proceeds will equal $8.16 million. See
"PRO FORMA DATA" for the assumptions used to arrive at these amounts. The actual
net proceeds may vary materially from the estimated amounts described herein.
The Company expects to retain 50% of the proceeds of the Offering and will use
the balance to purchase the capital stock of the Bank to be issued in the
Conversion.
The Company expects to use the portion of the net proceeds it retains
for working capital and investment purposes. The Company does not expect to have
significant operating expenses and anticipates that initially it will invest the
net proceeds it retains primarily in interest-earning deposits, U.S. government,
federal agency and other marketable securities and mortgage-backed securities.
The types and amounts of such investments will vary from time to time based upon
the interest rate environment, asset/liability mix considerations and other
factors.
Net proceeds paid to the Bank initially will become part of the Bank's
general funds and will be invested primarily in mortgage and other loans, and
investments consisting primarily of interest-earning deposit balances, U.S.
government and federal agency obligations and other marketable securities in
accordance with the Bank's lending and investment policies. The relative amounts
to be invested in each of these types of investments will depend upon loan
demand, rates of return and asset/liability matching considerations at the time
the investments are to be made. Management is not able to predict the yields
which will be produced by the investment of the proceeds of the Offering because
such yields will be significantly influenced by general economic conditions and
the interest rate environment existing at the time
16
the investments are made. Remaining net proceeds paid to the Bank will be used
for general corporate purposes.
The proceeds of the Offering will result in an increase in the Bank's
net worth and regulatory capital and may enhance the potential for growth
through increased lending and investment activities, branch expansion, ATMs or
otherwise. The net proceeds retained by the Company could be used to support the
future expansion of operations of the Company through the opening of a branch
office in or adjacent to the Bank's primary market area. The Company has no
current plans to open any additional office. Payments for shares of Common Stock
of the Company made through the withdrawal of existing deposit accounts at the
Bank will not result in the receipt of new funds for investment by the Bank.
Upon completion of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Based upon facts and circumstances which may arise following the
Conversion, the Board of Directors may determine to repurchase stock in the
future. Such facts and circumstances may include but are not limited to (i)
market and economic factors such as the price at which the Common Stock is
trading, the volume of trading, the attractiveness of other investment
alternatives in terms of the rates of return and risks involved in the
investments, (ii) the ability to increase the book value and earnings per share
of the remaining outstanding shares, and improve the Company's return on equity;
(iii) the reduction of dilution to stockholders caused by having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iv) any other circumstances in which repurchases would
be in the best interests of the Company and its stockholders.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
applicable regulatory requirements after any such repurchases and that capital
will be adequate taking into account, among other things, the level of
nonperforming assets and other risks, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. Federal regulations
require that, subject to certain exceptions, the Company must obtain approval of
the Federal Reserve prior to repurchasing Common Stock in excess of 10% of its
net worth during any twelve-month period. See "SUPERVISION AND REGULATION --
Regulation of the Company -- Dividend and Repurchase Limitations."
The Company and the Bank have no present intention to file consolidated
tax returns which will preserve for the Company the ability to use a portion of
the proceeds to make a return of capital in the future. However, the Company has
not made any decision to pay such a return of capital. The Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. See "DIVIDEND POLICY."
At any time following approval of the MRP by the Company's
stockholders, it is expected that the MRP may acquire a number of shares of
Common Stock equal to 4% of the number of shares issued in the Conversion. See
"MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan." Such shares
may be acquired in the open market or acquired through the Company's issuance of
authorized but unissued shares. In the event shares are acquired in the open
market, the funds for such purchase may be provided by the Bank from the
proceeds of the Conversion. It is estimated that between 20,400 and 30,360
shares may be acquired by the MRP Trust, assuming the issuance of between
561,000 and 759,000 shares, respectively, in the Conversion. If all such shares
were acquired by the MRP in the open market, and if such
17
shares were acquired at a price of $10.00 per share, the Bank would contribute
between $204,000 and $276,000, respectively, to the MRP for this purpose.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare semiannual dividends on the Common Stock, subject to
statutory and regulatory requirements. The Company expects to pay annual
dividends on the Common Stock at a rate of $0.30 per share which is equal to 3%
of the offering price for the Common Stock in the Conversion. The payment of
dividends is expected to begin as soon as practicable after completion of the
Conversion. In addition, the Board of Directors may determine from time to time
that it is prudent to pay special nonrecurring cash dividends. Special cash
dividends, if paid, may be in addition to, or in lieu of, regular cash
dividends. The Company's Board of Directors will periodically review its policy
concerning dividends. Declarations of dividends, if any, by the Board of
Directors will depend upon a number of factors, including investment
opportunities available to the Company and the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's results of operations and
financial condition, tax considerations and general economic conditions. Upon
review of such considerations, the Board of Directors of the Company may
authorize dividends to be paid in the future if it deems such payment
appropriate and in compliance with applicable law and regulation. No assurances
can be given that any dividends will in fact be paid on the Common Stock or, if
dividends are paid, that they will not be reduced or discontinued in the future.
In connection with the Conversion, the Bank has agreed with the FDIC
that, within the first three years after completion of the Conversion, neither
the Company nor the Bank will pay any taxable dividend or make any taxable
distribution in excess of their current and retained earnings. The Company and
the Bank have agreed to notify the FDIC before making a return of capital during
the first three years following the Conversion.
The sources of income to the Company initially will consist of earnings
on the capital retained by the Company and dividends paid by the Bank to the
Company, if any. Consequently, future declarations of cash dividends by the
Company may depend upon dividend payments by the Bank to the Company, which
payments are subject to various restrictions. Under current North Carolina
regulations, the Bank could not declare or pay a cash dividend if the effect
thereof would be to reduce its net worth to an amount which is less than the
minimum required by the FDIC and the Administrator. In addition, for a period of
five years after the consummation of the Conversion, the Bank will be required,
under existing regulations, to obtain the prior written approval of the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable. See "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions." As a result of this limitation, if the Bank had been a stock
institution at the end of fiscal 1997 and for the two preceding fiscal years, it
could not have paid a dividend in excess of $_______ without the approval of the
Administrator.
As a converted institution, the Bank also will be subject to the
regulatory restriction that it will not be permitted to declare or pay a
dividend on or repurchase any of its capital stock if the effect thereof would
be to cause its regulatory capital to be reduced below the amount required for
the liquidation account established in connection with the Conversion. See "THE
CONVERSION -- Effects of Conversion --
18
Liquidation Rights." Also, see "TAXATION -- Federal Income Taxation" for a
discussion of federal income tax provisions that may limit the ability of the
Bank to pay dividends to the Company without incurring a recapture tax.
MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital
stock, and consequently, there is no established market for the Common Stock at
this time. Following the completion of the Offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident may buy or sell shares from time to time for
its own account. However, Trident Securities will not be subject to any
obligation with respect to such efforts.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (660,000 shares at the midpoint of the
Estimated Valuation Range), it is unlikely that a stockholder base large enough
to create an active trading market will develop and be maintained. Further, even
if a market develops, there can be no assurance that the shares of Common Stock
offered in the Conversion can be resold at or above the purchase price after
completion of the Conversion. Purchasers of Common Stock should consider the
potentially illiquid and long-term nature of their investment in the shares
being offered hereby. The aggregate price of the Common Stock is based upon an
independent appraisal of the pro forma market value of the Common Stock.
However, there can be no assurance that an investor will be able to sell the
Common Stock purchased in the Conversion at or above the $10.00 purchase price.
CAPITALIZATION
The following tables present the historical capitalization of the Bank
at December 31, 1997 and the pro forma capitalization of the Company at such
date after giving effect to the sale of the Common Stock and application of the
assumptions set forth under "PRO FORMA DATA," assuming that 561,000, 660,000,
759,000 and 872,850 shares of Common Stock are sold at $10.00 per share (the
minimum, midpoint, maximum and 15% above the maximum of the current Estimated
Valuation Range). A change in the number of shares issued in the Conversion may
materially affect such pro forma capitalization. See "USE OF PROCEEDS" and "THE
CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered."
19
Company Pro Forma Capitalization at December 31, 1997
Based Upon Sale of
------------------------------------------------------
561,000 660,000
shares at a shares at a
price of price of
Capitalization $10.00 per $10.00 per
of Bank at ---------- ----------
12/31/97 share share
-------- ----- -----
(In Thousands)
Deposits/(2)/ $16,656 $16,656 $16,656
Borrowings -- -- --
------- ------- -------
Total deposits and borrowings $16,656 $16,656 $16,656
======= ======= =======
Capital Stock:
Preferred stock, no par value per share:
authorized - 5,000,000 shares; assumed outstanding - none
$ -- $ -- $ --
Common Stock, no par value per share;
authorized - 20,000,000 shares; shares to be outstanding -
as shown -- -- --
Paid-in capital -- 5,122 6,087
Less:
Common Stock acquired by MRP/(3)/ -- (224) (264)
Retained earnings -- substantially restricted 3,614 3,614 3,614
Unrealized gains on available-for-sale securities, net of tax 244 245 245
--- --- ---
Total stockholders' equity $3,859 $8,757 $9,682
====== ====== ======
759,000 872,850
shares at a shares at a
price of price of
$10.00 per $10.00 per share(1)
---------- ----------------
share
-----
(In Thousands)
Deposits(2) $16,656 $16,656
Borrowings -- --
------- -------
Total deposits and borrowings $16,656 $16,656
======= =======
Capital Stock:
Preferred stock, no par value per share:
authorized - 5,000,000 shares; assumed outstanding - none
$ -- $ --
Common Stock, no par value per share;
authorized - 20,000,000 shares; shares to be outstanding -
as shown -- --
Paid-in capital 7,053 8,163
Less:
Common Stock acquired by MRP(3) (304) (349)
Retained earnings -- substantially restricted 3,614 3,614
Unrealized gains on available-for-sale securities, net of tax 245 245
--- ---
Total stockholders' equity $10,608 $11,672
======= =======
20
- -------------------------------
(1) Represents the number of shares of Common Stock that would be issued in
the Conversion after giving effect to a 15% increase in maximum
valuation in the Estimated Valuation Range.
(2) Withdrawals from deposit accounts for the purchase of Common Stock are
not reflected. Any such withdrawals would reduce pro forma deposits by
the amount of such withdrawals.
(3) Additionally, assumes that, after the Conversion, a number of shares
equal to 4% of the shares of Common Stock offered hereby will be
purchased by the MRP. The Common Stock acquired by the MRP is reflected
as a reduction of stockholders' equity. See "RISK FACTORS -- Cost and
Possible Dilutive Effect of the MRP and Option Plan, footnote 1 to the
tables under "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -- Proposed
Management Recognition Plan".
21
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $5.12 million and $8.16 million, based upon
the following assumptions: (i) 52,000 shares of the Common Stock sold in the
Conversion will be sold to the directors and executive officers and their
associates (and that Trident Securities will not receive certain compensation
with respect to such sales), and none of the shares of Common Stock will be sold
in any Syndicated Community Offering pursuant to selected dealer agreements;
(ii) fees will be payable to Trident Securities with respect to the Subscription
and Community Offering as described in "THE CONVERSION -- Marketing
Arrangements;" and (iii) Conversion expenses, excluding the fees and commissions
to Trident Securities, will be approximately $366,000. Actual net proceeds may
vary depending upon the number of shares sold to directors, executive officers
and their associates, the number of shares, if any, sold in the Syndicated
Community Offering pursuant to selected dealer arrangements and the actual
expenses of the Conversion. Payments for shares made through withdrawals from
the existing Bank deposit accounts will not result in the receipt of new funds
for investment by the Bank. However, capital will increase and interest-bearing
liabilities will decrease by the amount of such withdrawals. See "THE CONVERSION
- -- Purchase Price of Common Stock and Number of Shares Offered."
Under the Plan, the Common Stock must be sold at an aggregate price
equal to not less than the minimum nor more than the maximum of the Estimated
Valuation Range based upon an independent appraisal. The Estimated Valuation
Range as of February 27, 1998 is from a minimum of $5,100,000 to a maximum of
$6,900,000 with a midpoint of $6,000,000. However, with the consent of the
Administrator and the FDIC, the aggregate price of the Common Stock sold may be
increased to up to 15% above the maximum of the Estimated Valuation Range, or to
$7,935,000, without a resolicitation and without any right to cancel, rescind or
change subscription orders, to reflect changes in market and financial
conditions following commencement of the Subscription Offering. See "THE
CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered."
Pro forma consolidated net earnings and book value of the Company at or
for the six months ended December 31, 1997 and the year ended June 30, 1997 have
been based upon the following assumptions: (i) the sale of shares of Common
Stock in connection with the Conversion occurred at the beginning of the
periods, and yielded net proceeds available for investment of approximately
$4.90 million, $5.82 million, $6.75 million and $7.81 million (based upon the
issuance of 561,000, 660,000, 759,000 and 872,850 shares, respectively, at
$10.00 per share) on such dates; and (ii) such net proceeds were invested on a
consolidated basis at the beginning of the period at a yield of 5.55%, which
represents the average one-year treasury rate for the last week of December
1997. The Company did not use the arithmetic average of the Bank's
weighted-average yield on interest-earning assets and weighted-average interest
rate paid on deposits during the six months ended December 31, 1997 or the year
ended June 30, 1997. Management believes that the one-year Treasury rate is a
more appropriate rate for purposes of preparing the pro forma data because
proceeds from the Conversion are expected to be initially invested in
instruments with similar yields and maturities. The effect of withdrawals from
deposit accounts for the purchase of Common Stock has not been reflected. Such
withdrawals have no effect on pro forma stockholders' equity, and management
does not believe that such withdrawals will have a material impact on pro forma
net earnings or pro forma net earnings per share. In calculating pro forma net
earnings for the six months ended December 31, 1997 and year ended June 30,
1997, an effective combined federal and state income tax rate of 34.00% has been
assumed, resulting in a yield after taxes of 3.66%. Historical and pro forma per
share amounts have been calculated by dividing the Bank's historical amounts and
the Company's pro forma amounts by the indicated number of shares of Common
Stock, assuming that such number of shares had been outstanding during the
entire period.
22
The following pro forma information is not intended to represent the
market value of the Common Stock, the value of net assets and liabilities or of
future results of operations. The assumption regarding investment yields should
not be considered indicative of actual yields for future periods. The following
information is not intended to be used as a basis for projection of results of
operations for future periods.
At or for the Six Months Ended December 31, 1997
--------------------------------------------------------------------------
561,000 660,000 759,000 872,850
shares at $10.00 shares at $10.00 shares at $10.00 shares at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (Supermaximum)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
Gross proceeds $5,610 $6,600 $7,590 $8,729
Less offering expenses and commissions (488) (513) (537) (566)
----- ----- ----- -----
Estimated net Conversion proceeds 5,122 6,087 7,053 8,163
Less Common Stock to be acquired by MRP/(1)/ (224) (264) (304) (349)
----- ----- ----- -----
Estimated proceeds available for investment $4,898 $5,823 $6,749 $7,813
====== ====== ====== ======
Pro forma net income:
Historical net income $62 $62 $62 $62
Pro forma adjustments:
Pro forma income on net proceeds/(2)/ 90 107 124 143
Pro forma MRP adjustments/(1)/ (16) (17) (20) (23)
---- ---- ---- ----
Pro forma net income $137 $151 $166 $182
---- ==== ==== ====
Pro forma net income per share/(3)/
Historical net income per share $0.11 $0.09 $0.08 $0.08
Pro forma adjustments:
Pro forma income on net proceeds/(2)/ 0.16 0.16 0.16 0.16
Pro forma MRP adjustments/(1)/ (0.03) (0.03) (0.03) (0.03)
------ ------ ------ ------
Pro forma net income per share $0.24 $0.23 $0.22 $0.21
===== ===== ===== =====
Number of shares used in calculating income per share/(4)/ 561,000 660,000 759,000 872,850
======= ======= ======= =======
Stockholders' equity (book value)/(3)/
Historical retained earnings $3,859 $3,859 $3,859 $3,859
Estimated net conversion proceeds 5,122 6,087 7,053 8,163
Less common stock acquired by:
MRP/(2)/ (224) (264) (304) (349)
----- ----- ----- -----
Pro forma stockholders' equity/(3)/ $8,757 $9,682 $10,608 $11,672
====== ====== ======= =======
Pro forma stockholders' equity per share/(4)/
Historical retained earnings $6.88 $5.85 $5.09 $4.42
Estimated net conversion proceeds 9.13 9.22 9.29 9.35
Less common stock acquired by:
MRP/(1)/ (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma stockholders' equity per share/(3)/ $15.61 $14.67 $13.98 $13.37
====== ====== ====== ======
Pro forma price to book value/(5)/ 64.1% 68.2% 71.5% 74.8%
===== ===== ===== =====
Pro forma price to earnings (P/E ratio)/(6)/ 20.8x 21.7x 22.7x 23.8x
==== ==== ==== ====
Number of shares used in calculating equity per share/(4)/ 561,000 660,000 759,000 872,850
======= ======= ======= =======
23
- ----------------------------------------
(1) It is assumed that the MRP will purchase a number of shares equal to 4%
of the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP
intends to acquire the Common Stock either through open market
purchases or from authorized but unissued shares of Common Stock of the
Company. Funds used by the MRP to purchase the shares will be
contributed to the MRP by the Bank. In calculating the pro forma effect
of the MRP, it is assumed that the required stockholder approval has
been received, that the shares were acquired by the MRP at the
beginning of the period presented in open market purchases at the
Conversion purchase price of $10.00 per share, and that 20% of the
amount contributed was amortized to expense annually during the period
(the MRP will be amortized over a five-year period), net of income tax
at an assumed combined federal and state rate of 34%. The issuance of
authorized but unissued shares of the Company's Common Stock to the MRP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.9%; pro forma net earnings per
share would be $0.24, $0.23, $0.22 and $0.21 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, for the
six-month period ended December 31, 1997; pro forma price to earnings
ratio would be 20.8, 21.7, 22.7 and 23.8; and pro forma stockholders'
equity per share would be $15.39, $14.49, $13.82 and $13.24 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, at December 31, 1997. There can be no
assurance that stockholder approval of the MRP will be obtained, or
that the actual purchase price of the shares will be equal to the
Conversion purchase price. See "MANAGEMENT OF THE BANK -- Proposed
Management Recognition Plan."
(2) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK --
Proposed Option Plan." If the Option Plan is approved by the
stockholders, an amount equal to 10% of the Common Stock issued in the
Conversion, or 56,100, 66,000, 75,900 and 87,285 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
will be reserved for future issuance upon the exercise of the options
to be granted under the Option Plan. The issuance of Common Stock
pursuant to exercise of options under the Option Plan will result in
the dilution of existing stockholders' interests. Assuming stockholder
approval of the Option Plan and exercise of all options at the
beginning of the period at an exercise price of $10.00 per share, and
the issuance of authorized but unissued shares upon exercise of such
options, the pro forma net earnings per share would be $0.24, $0.22,
$0.21 and $0.21, respectively, and pro forma stockholders' equity per
share would be $15.10, $14.25, $13.62, and $13.07, respectively, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range.
(3) The retained earnings of the Bank will be substantially restricted
after the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND
REGULATION -- Regulation of the Bank -- Restrictions on Dividends and
Other Capital Distributions."
(4) Earnings per share is calculated based on the number of shares
outstanding indicated in the previous tables which include shares to be
acquired by the MRP. The FASB has issued Statement #128, Earnings per
Share (EPS), which requires presentation of EPS for basic and diluted
per-share amounts. Diluted per-share amounts assume the Conversion,
exercise or issuance of all potential common stock instruments.
Application is required for annual and interim periods ending after
December 15, 1997 with earlier application not permitted.
(5) Pro forma net earnings per share have been annualized for purposes of
this ratio.
24
At or For the Year Ended June 30, 1997
--------------------------------------------------------------------------
561,000 660,000 759,000 872,850
shares at $10.00 shares at $10.00 shares at $10.00 shares at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (Supermaximum)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
Gross proceeds $5,610 $6,600 $7,590 $8,729
Less offering expenses and commissions (488) (513) (537) (566)
----- ----- ----- -----
Estimated net Conversion proceeds 5,122 6,087 7,053 8,163
Less Common Stock to be acquired by MRP/(1)/ (224) (264) (304) (349)
----- ----- ----- -----
Estimated proceeds available for investment $4,898 $5,823 $6,749 $7,813
====== ====== ====== ======
Pro forma net income:
Historical net income $50 $50 $50 $50
Pro forma adjustments:
Pro forma income on net proceeds/(2)/ 179 213 247 286
Pro forma MRP adjustments/(1)/ (30) (35) (41) (46)
---- ---- ---- ----
Pro forma net income $200 $228 $257 $290
---- ==== ==== ====
Pro forma net income per share/(3)/
Historical net income per share $0.09 $0.08 $0.07 $0.06
Pro forma adjustments:
Pro forma income on net proceeds/(2)/ 0.32 0.32 0.33 0.33
Pro forma MRP adjustments/(1)/ (0.05) (0.05) (0.05) (0.05)
------ ------ ------ ------
Pro forma net income per share $0.36 $0.35 $0.34 $0.33
===== ===== ===== =====
Number of shares used in calculating income per share/(4)/ 561,000 660,000 759,000 872,850
======= ======= ======= =======
Stockholders' equity (book value)/(3)/
Historical retained earnings $3,756 $3,756 $3,756 $3,756
Estimated net conversion proceeds 5,122 6,087 7,053 8,163
Less common stock acquired by:
MRP/(1)/ (224) (264) (304) (349)
----- ----- ----- -----
Pro forma stockholders' equity/(3)/ $8,654 $9,579 $10,505 $11,569
====== ====== ======= =======
Pro forma stockholders' equity per share/(4)/
Historical retained earnings $6.71 $5.69 $4.96 $4.30
Estimated net conversion proceeds 9.13 9.22 9.29 9.35
Less common stock acquired by:
MRP/(1)/ (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma stockholders' equity per share/(3)/ $15.43 $14.51 $13.84 $13.25
====== ====== ====== ======
Pro forma price to book value/(4)/ 64.8% 68.9% 72.2% 75.4%
===== ===== ===== =====
Pro forma price to earnings (P/E ratio) 27.8x 28.6x 29.4x 30.3x
==== ==== ==== ====
Number of shares used in calculating equity per share/(3)/ 561,000 660,000 759,000 872,850
======= ======= ======= =======
25
- ------------------------------------------
(1) It is assumed that the MRP will purchase a number of shares equal to 4%
of the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP
intends to acquire the Common Stock either through open market
purchases or from authorized but unissued shares of Common Stock of the
Company. Funds used by the MRP to purchase the shares will be
contributed to the MRP by the Bank. In calculating the pro forma effect
of the MRP, it is assumed that the required stockholder approval has
been received, that the shares were acquired by the MRP at the
beginning of the period presented in open market purchases at the
Conversion purchase price of $10.00 per share, and that 20% of the
amount contributed was amortized to expense annually during the period
(the MRP will be amortized over a five-year period), net of income tax
at an assumed combined federal and state rate of 34%. The issuance of
authorized but unissued shares of the Company's Common Stock to the MRP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.9%; pro forma net earnings per
share would be $0.36, $0.35, $0.34 and $0.33 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, for the
year ended June 30, 1997; pro forma price to earnings ratio would be
27.8, 28.6, 29.4 and 30.3 at the minimum, midpoint, maximum and 15%
above the maximum of Estimated Valuation Range, respectively, at June
30, 1997. There can be no assurance that stockholder approval of the
MRP will be obtained, or that the actual purchase price of the shares
will be equal to the Conversion purchase price. See "MANAGEMENT OF THE
BANK -- Proposed Management Recognition Plan."
(2) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK --
Proposed Option Plan." If the Option Plan is approved by the
stockholders, an amount equal to 10% of the Common Stock issued in the
Conversion, or 56,100, 60,000, 75,900 and 79,350 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
will be reserved for future issuance upon the exercise of the options
to be granted under the Option Plan. The issuance of Common Stock
pursuant to exercise of options under the Option Plan will result in
the dilution of existing stockholders' interests. Assuming stockholder
approval of the Option Plan and exercise of all options at the
beginning of the period at an exercise price of $10.00 per share, and
the issuance of authorized but unissued shares upon exercise of such
options, the pro forma net earnings per share would be $0.36, $0.35,
$0.34 and $0.34, respectively, at the minimum, midpoint, maximum and
15% above the maximum of Estimated Valuation Range, respectively, at
June 30, 1997.
(3) The retained earnings of the Bank will be substantially restricted
after the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND
REGULATION -- Regulation of the Bank -- Restrictions on Dividends and
Other Capital Distributions."
(4) Earnings per share is calculated based on the number of shares
outstanding indicated in the previous tables which include shares to be
acquired by the MRP. The FASB has issued Statement #128, Earnings per
Share (EPS), which requires presentation of EPS for basic and diluted
per-share amounts. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments.
Application is required for annual and interim periods ending after
December 15, 1997 with earlier application not permitted.
26
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The Bank is subject to the North Carolina savings bank requirement that
net worth, computed in accordance with the requirements of the Administrator,
equal or exceed 5% of total assets. As of December 31, 1997, the Bank's net
worth, computed in accordance with such requirements, was 17.9% of total assets.
In addition, the Bank is subject to the capital requirements of the FDIC. The
FDIC requires that institutions which receive the highest rating during their
examination process and are not experiencing or anticipating significant growth
must maintain a leverage ratio of Tier I capital to total assets (as defined in
FDIC regulations) of at least 3%. All other institutions are required to
maintain a ratio of 1% or 2% above the 3% minimum with an absolute minimum
leverage ratio of not less than 4%. The FDIC also imposes requirements that (i)
the ratio of Tier I capital to risk-weighted assets equal at least 4% and (ii)
the ratio of total capital to risk-weighted assets equal at least 8%. As
demonstrated in the table below, the Bank exceeds the FDIC Tier I and risk-based
capital requirements and North Carolina capital requirements on a historical and
pro forma basis.
The following table presents (i) the Bank's historical regulatory
capital position on December 31, 1997 and June 30, 1997 and (ii) the Bank's pro
forma regulatory capital position on such dates after giving effect to the
assumptions set forth under "PRO FORMA DATA" and "CAPITALIZATION" and further
assuming that the Company will retain 50% of the net proceeds of the Common
Stock sold in the Conversion.
27
Pro Forma Regulatory Capital Position at December 31, 1997/1/
-------------------------------------------------------------
Historical
at Minimum of 561,000 Midpoint of 660,000
December 31, 1997 Shares at Shares at
----------------- $10.00 per share $10.00 per share
---------------- ----------------
Percent of Percent of Percent of
---------- ---------- ----------
Regulatory Regulatory Regulatory
---------- ---------- ----------
Amount Assets/(2)/ Amount Assets/(2)/ Amount Assets/(2)/
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Capital under generally accepted accounting
principles $3,859 18.6% $6,420 27.6% $6,903 29.0%
====== ===== ====== ===== ====== =====
Tier 1 (leverage) capital $3,615 17.4% $6,176 26.5% $6,659 28.0%
Tier 1 (leverage) capital requirement /(3)/ 829 4.0% 931 4.0% 951 4.0%
--- ---- --- ---- --- ----
Excess $2,786 13.4% $5,245 22.5% $5,708 24.0%
====== ===== ====== ===== ====== -----
Tier 1 risk based capital $3,615 46.5% $6,176 74.6% $6,659 79.5%
Tier 1 risk based capital requirement 311 4.0% 331 4.0% 335 4.0%
--- ---- --- ---- --- ----
Excess $3,304 42.5% $5,845 70.6% $6,324 75.5%
====== ===== ====== ===== ====== -----
Total risk based capital $3,712 47.8% $6,273 75.8% $6,756 80.7%
Total risk based capital requirement 621 8.0% 662 8.0% 670 8.0%
--- ---- --- ---- --- ----
Excess $3,091 39.8% $5,611 67.8% $6,086 72.7%
====== ===== ====== ===== ====== -----
NC regulatory capital $3,712 17.9% $6,273 26.9% $6,756 28.4%
NC regulatory capital requirement 1,036 5.0% 1,164 5.0% 1,188 5.0%
----- ---- ----- ---- ----- ----
Excess $2,676 12.9% $5,109 21.9% $5,568 23.4%
====== ===== ====== ===== ====== -----
Maximum, as Adjusted,
Maximum of 759,000 of 872,850
Shares at Shares at
$10.00 per share $10.00 per share
---------------- ----------------
Percent of Percent of
---------- ----------
Regulatory Regulatory
---------- ----------
Amount Assets/(2)/ Amount Assets/(2)/
------ ----------- ------ -----------
(Dollars in Thousands)
Capital under generally accepted accounting
principles $7,386 30.5% $8,440 33.4%
====== ===== ====== =====
Tier 1 (leverage) capital $7,142 29.5% $8,196 32.4%
Tier 1 (leverage) capital requirement /(3)/ 970 4.0% 1,012 4.0%
--- ---- ----- ----
Excess $6,172 25.5% $7,184 28.4%
====== ===== ====== =====
Tier 1 risk based capital $7,142 84.3% $8,196 94.4%
Tier 1 risk based capital requirement 339 4.0% 347 4.0%
--- ---- --- ----
Excess $6,803 80.3% $7,849 90.4%
====== ===== ====== =====
Total risk based capital $7,239 85.4% $8,293 95.5%
Total risk based capital requirement 678 8.0% 695 8.0%
--- ---- --- ----
Excess $6,561 77.4% $7,598 87.5%
====== ===== ====== =====
NC regulatory capital $7,239 29.9% $8,293 32.8%
NC regulatory capital requirement 1,213 5.0% 1,265 5.0%
----- ---- ----- ----
Excess $6,027 24.9% $7,028 27.8%
====== ===== ====== =====
- --------------------------------
(1) Assumes a bank-only calculation for regulatory requirements.
(2) For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent is of total average assets. Average assets after
investment of net proceeds from the offering at the minimum, midpoint,
maximum and 15% above the maximum total $23.3 million, $23.8 million,
$24.3 million and $25.3 million, respectively. For the Tier 1
risk-based capital and total risk-based capital calculations, percent
is of total risk-weighted assets. Net proceeds were assumed to be
invested in short-term treasury securities (0% risk-weight) and
one-to-four- family residential mortgage loans (50% risk-weight) with a
weighted average risk-weight of 20%. Total risk-weighted assets after
investment of net proceeds from the offering at the minimum, midpoint,
maximum and 15% above the maximum total $8.3 million, $8.4 million,
$8.5 million and $8.7 million, respectively.
(3) As a North Carolina-chartered savings bank, the Bank is subject to the
capital requirements of the FDIC and the Administrator. The FDIC
requires state-chartered savings banks, including the Bank, to have a
minimum leverage ratio of Tier 1 capital to total assets of at least
3%; provided, however, that all institutions, other than those (i)
receiving the highest rating during the examination process and (ii)
not anticipating any significant growth, are required to maintain a
ratio of 1% to 2% above the stated minimum, with an absolute minimum
leverage ratio of at least 4%. For the purposes of this table, the Bank
has assumed that its leverage capital requirement is 4% of total
average assets.
28
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
Directors, officers and employees of the Bank will be entitled to
subscribe for shares of Common Stock in the Subscription Offering in their
capacities as such and to the extent they qualify as Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members. Shares purchased by
such persons will be purchased at the same price per share--$10.00--that will be
paid by other purchasers in the Offering. They may also purchase Common Stock in
the Community Offering or in the Syndicated Community Offering, if any, subject
to the maximum purchase limitations applicable to all purchasers of shares in
the Conversion.
The following table sets forth for the named executive officer and each
of the directors of the Bank who intends to purchase Common Stock, and for all
executive officers and directors as a group (including in each case, except as
otherwise noted, all associates of such persons) the aggregate dollar amount of
Common Stock for which such director or executive officer has informed the Bank
he intends to subscribe. The amounts reflected in the table are estimates only
and the actual shares of Common Stock actually subscribed for by the listed
individuals may differ from the amounts reflected in the table. The following
table assumes that sufficient shares will be available to satisfy the
subscriptions of the Bank's executive officers and directors.
Anticipated
Anticipated Number
Amount of Shares As a Percent
to be Paid to be of Shares
Name for Shares Purchased/1/ Issued/2/
- ---- ---------- --------- ------
Preston A. Burns, Chairman $100,000 10,000 1.52%
John J. Crawford, Director 100,000 10,000 1.52%
W. Kenneth Huntley, Director 50,000 5,000 0.76%
Emmett S. Patterson, Director 10,000 1,000 0.15%
John R. Potter, Director 25,000 2,500 0.38%
H. Patrick Taylor, Jr., Director 150,000 15,000 2.27%
Eugene M. Ward, Director, President and Chief 100,000 10,000 1.52%
Executive Officer
All executive officers and directors as a group (9 $537,000 53,700 8.14%
-------- ------ -----
persons)
29
- ---------------------
(1) Grants under the proposed MRP and shares subject to option under the
Option Plan, if approved by the stockholders of the Company at a
meeting of stockholders following the Conversion, are not aggregated
with shares of Common Stock purchased by the executive officers and
directors listed above. Under the proposed MRP, if approved by the
stockholders of the Company, a number of shares equal to 4% of the
shares issued in the Conversion are expected to be issued to directors
and certain employees of the Bank. Such shares could be purchased in
the open market at any time following approval of the MRP by the
Company's stockholders or could be issued out of authorized but
unissued shares. Recipients of shares under the MRP will have voting
control over such shares regardless of whether such shares have vested.
See "MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan."
(2) Based upon the issuance of 660,000 shares of Common Stock which is the
number of shares to be issued at the midpoint of the Estimated
Valuation Range. The same individuals would subscribe for 9.57% of the
shares issued based upon the issuance of 561,000 shares of Common Stock
which is the number of shares to be issued at the minimum of the
Estimated Valuation Range.
Without the prior written consent of the Administrator, shares of
Common Stock purchased by directors or executive officers of the Bank in the
Conversion cannot be sold during a period of one year following the Conversion,
except upon death of the director or executive officer. Such restriction also
applies to any shares issued to such person as a stock dividend, stock split or
otherwise with respect to any of such originally restricted stock.
In addition, the North Carolina conversion regulations provide that
directors and executive officers and their associates are prohibited from
purchasing outstanding shares of Common Stock for a period of three years
following the Conversion, except from or through a broker or dealer registered
with the SEC or Secretary of State of North Carolina, unless the prior written
approval of the Administrator is obtained. This provision does not apply to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to purchases of stock made by or held by one or more
tax-qualified or non-tax-qualified employee stock benefit plans of the Bank or
the Company which may be attributable to individual executive officers or
directors. Purchases and sales of Common Stock by officers and directors will
also be subject to the short-swing trading prohibitions contained in Section
16(b) of the Exchange Act, and the short-swing trading and other rules
promulgated pursuant to the Exchange Act.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Bank. The information contained in this section
should be read in conjunction with the Financial Statements, the accompanying
Notes to Financial Statements, and the other sections contained in this
Prospectus.
The Company was incorporated under North Carolina law on March 2, 1998
at the direction of the Bank for the purpose of acquiring and holding all of the
outstanding stock of the Bank to be issued in the Conversion. The Company's
principal business activities after the Conversion are expected to be conducted
solely through the Bank.
The Bank's results of operations depend primarily on net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. The Bank's
principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, office occupancy costs, data processing
expenses and federal deposit insurance premiums.
Capital Resources and Liquidity
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Bank's primary sources of internally generated funds are principal
and interest payments on loans receivable, cash flows generated from operations,
and cash flows generated by investment, including mortgage-backed securities.
External sources of funds include increases in deposits and advances from the
Federal Home Loan Bank of Atlanta (FHLB). In recent years, advances from the
FHLB have not been a primary source of liquidity for the Bank.
North Carolina-chartered savings banks must maintain liquid assets
equal to at least 10% of total assets. The computation of liquidity under North
Carolina regulation allows the inclusion of mortgage-backed securities and
investments with readily marketable value, including investments with maturities
in excess of five years. The Bank believes that it will have sufficient funds
available to meet its anticipated future loan commitments as well as other
liquidity needs.
Following the Conversion, the Company will initially conduct no
business other than holding the capital stock of the Bank. In order to provide
sufficient funds for its operations, the Company expects to retain at the
Company level and invest 50% of the net proceeds of the Conversion. In the
future, the Company's primary source of funds, other than income from its
investments is expected to be dividends from the Bank. As a North
Carolina-chartered stock savings bank, the Bank may not declare or pay a cash
dividend on or repurchase any of its capital stock if the effect of such
transaction would be to reduce the net worth of the institution to an amount
which is less than the minimum amount required by applicable federal and state
regulations. In addition, for a period of five years after the Conversion, the
Bank must obtain
31
written approval from the State of North Carolina Administrator before declaring
or paying a cash dividend on its capital stock in an amount in excess of
one-half of the greater of (i) its net income for the most recent fiscal year
end, or (ii) the average of its net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends. As a result of this limitation, if the Bank had been a stock institution
at the end of fiscal 1997 and for the two preceding years, it could not have
paid a cash dividend in excess of $61,000 without approval of the Administrator.
In connection with the Conversion, the Company and the Bank have agreed with the
FDIC that, within the first year after completion of the Conversion, they will
not pay any dividend or make any distribution that represents, or is
characterized as, or is treated for tax purposes as a return of capital. In
addition, after the Conversion, the Bank will be subject to the restriction that
it will not be permitted to declare or pay a cash dividend on or repurchase any
of its capital stock if the effect thereof would be to cause its net worth to be
reduced below the amount required for the liquidation account to be established
in connection with the Conversion. (See "THE CONVERSION -- Effects of
Conversion" and " -- Liquidation Rights."
Operating Strategy
The primary goals of management are to increase the Bank's
profitability, monitor its capital position and enhance its banking franchise.
The Bank's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on its interest-earning
assets, such as loans and investments, and the cost of its interest-bearing
liabilities, consisting of deposits. The Bank's operations are affected to a
much lesser degree by non-interest income, such as transaction and other service
fee income, and other sources of income. The Bank's net income is also affected
by, among other things, provisions for loan losses and operating expenses. The
Bank's principal operating expenses, aside from interest expense, consists of
compensation and employee benefits, office occupancy costs, data processing
expenses and federal deposit insurance premiums. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies concerning monetary and fiscal affairs, housing and
financial institutions and the attendant actions of regulatory authorities.
In guiding the operations of the Bank, management has implemented
various strategies designed to continue the institution's profitability while
maintaining its safety and soundness. These strategies include: (i) emphasizing
one-to-four family residential lending; (ii) maintaining asset quality; (iii)
controlling operating expenses; and (iv) monitoring interest-rate risk. It is
anticipated, subject to market conditions, that the strategies presently in
place will be continued following completion of the Conversion.
Emphasis on One-to-Four-Family Residential Housing. The Bank has been
predominantly a one-to-four family residential lender. As of December 31, 1997,
approximately 95.88% of its loan portfolio, before net items, was composed of
permanent one-to-four-family residential loans. As of such date, an additional
4.27% of its loan portfolio, before net items, was composed of nonresidential
real estate loans and 3.23% of its loan portfolio before net items was composed
of construction loans. As a result, the Bank has developed expertise in mortgage
loan underwriting and origination. The Bank has established methods to generate
loan origination through contacts with realtors, homebuilders and past and
present customers. The institution also uses advertising and community
involvement to gain exposure within the communities is operates.
32
Maintenance of Asset Quality. At December 31, 1997, the Bank's ratio of
nonperforming assets to total assets was 1.51%. Since 1991, no net loan
charge-offs have been necessary. The Bank has attempted to maintain asset
quality through its underwriting and collection procedures.
Control of Noninterest Expenses. The Bank closely monitors its
noninterest expenses and seeks to control them while maintaining the necessary
personnel to properly serve its customers. Since June 30, 1996, the Bank's ratio
of noninterest expenses to average assets has averaged 2.4%. Exclusive of a
one-time charge for federal deposit insurance premiums amount of $114,000 in
September 1996, the Bank's ratio of noninterest expenses to average assets
averaged 2.18%.
Interest Rate Risk
The Bank's asset/liability management, or interest rate risk
management, program is focused primarily on evaluating and managing the
composition of its assets and liabilities in view of various interest rate
scenarios. Factors beyond the Bank's control, such as market interest rates and
competition, may also have an impact on the Bank's interest income and interest
expense.
In the absence of other factors, the yield or return associated with
the Bank's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest expense which are brought about by changes in market and interest
rates, the Bank can significantly influence its net interest income.
Net Portfolio Value Analysis. In addition to the interest rate gap
analysis as discussed below, management monitors the Bank's interest rate
sensitivity through the use of a model which estimates the change in net
portfolio value ("NPV") in response to a range of assumed changes in market
interest rates. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet items. The model estimates the effect on the
Bank's NPV of instantaneous and permanent 100 to 400 basis point increases and
decreases in market interest rates.
33
The following table presents information regarding possible changes in
the Bank's NPV as of September 30, 1997, based on information provided by the
FHLB of Atlanta's interest rate risk model.
Change
in Interest Net Portfolio Value
Rates in basis -------------------
Points
(Rate Shock) Amount $Change %Change
------------ ------ ------- -------
($000's)
Up 400 $2,479 $(1,139) (31%)
Up 300 2,780 (838) (23%)
Up 200 3,081 (537) (15%)
Up 100 3,349 (269) (7%)
Static 3,618 -- --
Down 100 3,750 132 4%
Down 200 3,881 263 7%
Down 300 3,991 373 10%
Down 400 4,101 483 13%
The table set forth above indicates that, in the event of a 200 basis
point decrease in interest rates, the Bank could experience a 7.0% increase in
NPV. In the event of a 200 basis point increase in interest rates, the Bank
could experience a 15.0% decrease in NPV.
Interest Rate Gap Analysis. As a part of the Bank's interest rate risk
management policy, the Bank calculates an interest rate "gap". Interest rate
"gap" analysis is a common, though imperfect, measure of interest rate risk,
which measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the different between the
amounts of such liabilities maturing or otherwise repricing within that period
which exceeds the amount of interest-earning assets maturity or otherwise
repricing within the same period. Accordingly, in a declining interest rate
environment, an institution with a negative gap would generally be expected,
absent the effects of other factors, to experience a lower decease in the yield
of its assets relative to the cost of its liabilities and its income should be
positively affected. Conversely, the cost of funds for an institution with a
negative gap would generally be expected to increase more quickly than the yield
on its assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."
The Bank's one year interest sensitivity gap as a percentage of total
interest-earning assets at December 31, 1997 was a negative 41.01%. At December
31, 1997 the Bank's three year and five-year
34
cumulative interest sensitivity gaps as a percentage of total interest-earning
assets were negative 39.00% and negative 32.49%, respectively.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997 which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liability. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts, money market deposit accounts or other transaction accounts are
assumed to be subject to immediate repricing and depositor availability and have
been placed in the shortest period. In making the gap computations, none of the
assumptions sometimes made regarding prepayments rates and deposit decay rates
have been used for any other interest-earning assets or interest-bearing
liabilities. In addition, the table does not reflect scheduled principal
payments which will be received throughout the lives of the loans. The interest
rate sensitivity of the Bank's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differed from that indicated by such assumptions.
Terms to Repricing at December 31, 1997
-------------------------------------------------------------------------------
Six Six More Than More Than
Months Months to 1 Years to 3 Years to More than
or Less 1 Year 3 Years 5 Years 5 Years Total
------- --------- ---------- ---------- --------- -----
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans receivable:
Adjustable rate residential 1-4 family $ 60 $ -- $ -- $ --- $ -- $ 60
Fixed rate residential 1-4 family 194 68 345 1,197 8,727 10,531
Other secured real estate - fixed -- 44 -- 78 633 755
Other loans 77 -- -- -- -- 77
Interest-bearing deposits 5,290 -- -- -- -- 5,290
Investments 1,630 -- 1,000 41 692 3,363
FHLB common stock -- -- -- -- 143 143
--------- --------- --------- --------- -------- --------
Total interest-earning assets $ 7,251 $ 112 $ 1,345 $ 1,316 $ 10,195 $ 20,219
========= ========= ========= ========= ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts 3,585 -- -- -- -- 3,585
Money market deposit accounts 101 -- -- -- -- 101
Certificates of deposit 5,833 6,135 940 -- -- 12,908
--------- --------- --------- --------- -------- --------
Total interest-bearing liabilities $ 9,519 $ 6,135 $ 940 $ -- $ -- $ 16,594
========= ========= ========= ========= ======== ========
INTEREST SENSITIVITY GAP PER PERIOD (2,268) (6,023) 405 1,316 10,195 3,625
CUMULATIVE INTEREST SENSITIVITY GAP (2,268) (8,291) (7,886) (6,570) 3,625 3,625
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (11.21)% (41.01)% (39.00)% (32.49)% 17.93% 17.93%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING 76.17% 47.03% 52.48% 60.41% 121.85% 121.85%
LIABILITIES
35
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not reflect
any actions management may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented
in both the NPV and net interest income computations and in the gap computations
presented in the tables above. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, adjustable-rate mortgages have interest rate caps
which restrict changes in interest rates on a short-term basis and over the life
of the assets. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in the tables. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of a sustained interest rate
increase.
The Bank's net income during recent periods has been positively
impacted by decreasing interest rates, and its net income in the near future is
likely to be reduced if interest rates increase. However, management did not
view the Bank's interest rate sensitivity position at December 31, 1997 to be
unacceptable in view of the Bank's historical results of operations and highly
capitalized position.
The Bank does not originate its loans for sale, or sell its loans, in
the secondary market. This tends to increase its exposure to interest rate risk.
Net Interest Income
Net interest income represents the difference between income derived
from interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Bank's assets and liabilities for the six months ended
December 31, 1997 and 1996 and for the years ended June 30, 1997 and 1996. For
the periods indicated, the table reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities (derived by dividing
income or expense by the monthly average balance of interest-earning assets or
interest-bearing liabilities, respectively) as well as the net yield on
interest-earning assets (which reflects the impact of the net earning balance).
36
For the Six Months Ended December 31,
At ----------------------------------------------------------------------
December 31,
1997/(1)/ 1997 1996
------------ --------------------------------- ---------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate/(2)/ Balance Interest Rate/(2)/
------- ---- ------- -------- --------- ------- -------- ---------
Interest earning assets:
Interest-earning deposits $5,290 5.48% $5,335 $150 5.62% $5,032 $137 5.45%
Investments/(3)/ 3,504 6.19% 3,059 93 6.08% 3,686 111 6.02%
---
Loans/(4)/ 11,323 7.84% 11,558 475 8.24% 11,842 495 8.36%
--- ------- ---- ------- ---- ------- ----
Total interest-earning assets 20,117 6.94% 19,952 718 7.21% 20,560 743 7.23%
---- ----
Other Assets 606 744 633
------- ------- -------
Total Assets $20,723 $20,696 $21,193
======= ======= =======
Interest-bearing liabilities:
Deposits $16,655 4.92% $16,567 411 4.96% $17,243 419 4.86%
Other Liabilities 209 301 313
Retained Earnings 3,859 3,828 3,637
------- ------- -------
Total liabilities and retained
earnings $20,723 $20,696 $21,193
======= ======= =======
Net interest income and interest
rate spread/(5)/ 2.02% $307 2.25% $324 2.37%
==== ====
Net yield on interest-earning 3.09% 3.15%
assets/(6)/
Ratio of interest-earning assets
to interest-bearing liabilities 120.00% 119.00%
For the Year Ended June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest earning assets:
Interest-earning deposits $4,783 $263 5.50% $4,218 $242 5.74%
Investments/(3)/ 3,635 215 5.91% 4,675 285 6.10%
---
Loans/(4)/ 11,771 963 8.18% 12,145 1,032 8.50%
--- ------- ----- ------- -----
Total interest-earning assets 20,189 1,441 7.14% 21,038 1,559 7.41%
----- -----
Other Assets 731 539
------- -------
Total Assets $20,920 $21,577
======= =======
Interest-bearing liabilities:
Deposits $16,899 819 4.85% $17,796 894 5.02%
Other Liabilities 296 249
Retained Earnings 3,725 3,532
------- -------
Total liabilities and retained
earnings $20,920 $21,577
======= =======
Net interest income and interest
rate spread/(5)/ $622 2.29% $665 2.39%
==== ====
Net yield on interest-earning 3.15% 3.16%
assets/(6)/
Ratio of interest-earning assets
to interest-bearing liabilities 119.00% 118.00%
- ---------------------------------------------------
(1) The weighted average rate represents the coupon associated with each asset
and liability, weighted by the principle balance associated with each asset
and liability.
(2) Average yield/rate for the six months ended December 31,
1997 and 1996.
(3) Includes investment securities and FHLB of Atlanta common stock.
(4) Loans placed on nonperforming status have been included in the computation
of average balances.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net yield on interest-earning assets represents net interest income divided
by average interest-earning assets.
37
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
Six Months Ended Year Ended June 30,
December 31, 1997 vs. 1996
-----------------------
1997 vs. 1996
-----------------------
Increase (Decrease) Increase (Decrease)
------------------- -------------------
Attributable to Attributable to
--------------- ---------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In Thousands)
Interest income on:
Interest-earning balances 9 4 13 32 (10) 22
Investments (19) 1 (18) (62) (8) (70)
Loans (12) (7) (19) (32) (38) (70)
---- ---- ------ ---- ---- ----
Total interest income (22) (2) (24) (62) (56) (118)
Interest expense:
Deposits (16) 8 (8) (45) (30) (75)
------ --- ----- ------ ------ ------
Net interest income (6) (10) (16) (17) (26) (43)
-------- ------- ------- ------- ------- ------
Comparison of Financial Condition
Total assets of the Bank amounted to $20.73 million at December 31,
1997, compared to $20.72 million at June 31, 1997 and $21.45 million at June 30,
1996. The decline from June 30, 1996 to December 31, 1997 is primarily
attributed to the decrease in investments and loans receivable.
The principal category of earnings assets is loans receivable which
amounted to $11.32 million, $11.42 million and $11.57 million at December 31,
1997, June 30, 1997 and 1996, respectively. Loan originations for the six months
ended December 31, 1997 total $1.03 million and were funded by loan principal
repayments of $1.14 million as the loan portfolio decreased by $100,000. Loan
originations for the year ended June 30, 1997 totaled $1.90 million and
principal repayments for 1997 totaled $2.05 million. The Bank experience a net
decrease in the loan portfolio of $149,000 over 1996. Management believes
competitive rates within its community contributed to the decreased loan demand
in 1997. The Bank
38
maintains underwriting and credit standards designed to maintain the quality of
the loan portfolio. Nonperforming loans at December 31, 1997, June 30, 1997 and
1996 totaled $312,000, $240,000 and $198,000, respectively and were 2.76%, 2.10%
and 1.71% of total loans, respectively.
In addition to loans, the Bank invests in U.S. Treasury and Government
agency securities. Management does not engage in the practice of trading
securities, rather, Anson's investment portfolio consists primarily of
investments designated and held to maturity. Investment securities, including
interest-bearing deposits and FHLB stock, at December 31, 1997, June 30, 1997
and 1996 totaled $8.79 million, $8.70 million and $9.12 million, respectively.
The decline in investments and loans is primarily attributed to the decline in
deposits.
The Bank has experienced some decline in savings deposits. At December
31, 1997 and June 30, 1997, the Bank's deposits decreased $135,000 and $832,000
to $16.66 million and $16.79 million, respectively. The Bank has priced its
deposits in a fashion to be at or near the top of the market because of its
dependence on the local market for funds availability.
The Bank's equity, which consists entirely of retained earnings and
unrealized gains on securities available for sale, net of tax, amounted to $3.86
million, $3.76 million and $3.62 million at December 31, 1997, June 30, 1997 and
1996, respectively. The Bank has classified a portion if its investments as
available for sale which requires reporting such investments at market with
unrealized gains or losses, net of tax, shown as a separate component of equity.
The equity component for net unrealized gains (losses) at December 31, 1997,
June 30, 1997 and 1996 amounted to $244,000, $204,000 and $119,000,
respectively.
Comparison of Results of Operations for the Six Months Ended December 31, 1997
and 1996
Net Income. The Bank's net income for the six months ended December 31,
1997 and 1996 was $62,000 and $(20,000) loss, respectively. Net income was
positively affected in 1997 by an overall sustained downward trend in interest
rates. Net income was negatively affected for the six months ended December 31,
1996 by a one-time charge of $114,000 related to a one-time assessment of
deposit insurance premiums by the United States Government. See "Insurance
Premium Surcharge". Exclusive of the one-time assessment for insurance premiums,
net income for the six months ended December 31, 1997 and 1996 would have been
approximately $62,000 and $71,000, respectively. Net interest income has
declined in conjunction with the decrease in interest earning assets and
liabilities.
Net Interest Income. Net interest income has decreased 5% to $306,000
for the six months ended December 31, 1997 from $324,000 for the six months
ended December 31, 1996. This general decline in net interest income reflects
the decrease in both loans receivable and deposits and the downward trend in
interest rate spread.
Provisions for Loan Losses. The provision for loan losses was $0 and
$500 for the six months ended December 31, 1997 and 1996, respectively. The
provisions and the resulting loan loss allowances are amounts management
believes will be adequate to absorb possible losses on existing loans. At
December 31, 1997 and 1996, the Bank's loan loss allowances totaled $100,000 and
$95,500, respectively, representing 32% and 36%, respectively, of nonperforming
loans at such dates. Loans are charged off against the allowance when management
believes collectibility is unlikely, although management continues to actively
pursue collection of loans which have been charged off. Management decisions
regarding the provisions and resulting allowance are based both on prior loan
loss experience and other factors, such as existing loan
39
levels and types of loans outstanding, nonperforming loans, industry standards
and general economic conditions. The Bank experienced no loan charge-offs during
the six months ended December 31, 1997 and 1996.
Noninterest Income. Noninterest income consists primarily of fees
related to safe deposit boxes and other miscellaneous items and amounted to
$4,000 and $1,000 for the six months ended December 31, 1997 and 1996,
respectively.
Noninterest Expense. Noninterest expense consisted primarily of
operating expenses for compensation and employee benefits, occupancy, federal
deposit insurance premiums, data processing charges and other operating
expenses. Noninterest expense decreased to $232,000 from $349,000 for the six
months ended December 31, 1997 and 1996. Exclusive of the impact of a one-time
insurance premium surcharge in December, 1996, see "Insurance Premium
Surcharge", noninterest expense decreased from $235,000 to $232,000 for the six
months ended December 31, 1996 to the six months ended December 31, 1997. The
Bank anticipates that its noninterest expense may increase in the future because
of costs associated with funding the MRP with operating as a publicly held
company and with purchasing the computer equipment necessary for year 2000
compliance. See "MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan"
and "RISK FACTORS -- Possible Year 2000 Computer Problems; Impact of
Technological Advances".
Income Taxes. Income tax expense (benefit) was $17,000 and $(4,000) for
the six month periods ended December 31, 1997 and 1996, respectively. The
fluctuations were primarily attributable to corresponding fluctuations in income
before income taxes.
Comparison of Results of Operations for the Years Ended June 30, 1997 and 1996
Net Income. The Bank's net income for the years ended June 30, 1997 and
1996 was $50,000 and $127,000, respectively. Net income was positively affected
in 1997 by an overall sustained downward trend in interest rates. Net income was
negatively affected for the year ended June 30, 1997 by a one-time charge of
$114,000 related to a one-time assessment of deposit insurance premiums by the
United States Government, see "Insurance Premium Surcharge". Exclusive of the
one-time assessment for insurance premiums, net income for years ended June 30,
1997 and 1996 would have been approximately $127,000 and $128,000, respectively.
Net Interest Income. Net interest income for the fiscal year ended June
30, 1997 decreased 6% from the fiscal year ended June 30, 1996 from $655,000 to
$623,000. This general decline in net interest income reflects the decrease in
both loans receivable and deposits and the downward trend in interest rate
spread.
Provision for Loan Losses. The provision for loan losses was $5,000 and
$7,000 for the years ended June 30, 1997 and 1996, respectively. For the years
ended June 30, 1997 and 1996, the Bank's loan loss allowances totaled $100,000
and $95,000, respectively, representing 42% and 48%, respectively, of
nonperforming loans at such dates. The Bank experienced no loan charge-offs
during the years ended June 30, 1997 and 1996.
40
Noninterest Income. Noninterest income consists primarily of fees
related to safe deposit boxes and other miscellaneous items and amounted to
$6,000 and $2,000 for the years ended June 30, 1997 and 1996, respectively.
Noninterest Expense. Noninterest expense for the years ended June 30,
1997 and 1996 were $555,000 and $481,000, respectively. Exclusive of the impact
of a one-time insurance premium surcharge discussed above, general and
administrative expenses decreased from $481,000 to $441,000 for fiscal years
ended June 30, 1997 and June 30, 1996, respectively. This reduction is largely
due to a reduction in payroll and the related tax and fringe benefits.
Income Taxes. Income tax expense decreased to $19,000 in the fiscal
year ended June 30, 1997 from $52,000 in the fiscal year ended June 30, 1996.
The fluctuations were primarily attributable to corresponding fluctuations in
income before income taxes.
Insurance Premium Surcharge
A comprehensive continuing appropriations bill which was passed by the
United States Congress and signed by the President on September 30, 1996,
provided for a one-time assessment to recapitalized the Savings Association
Insurance Fund (SAIF). The assessment equaled 65.7 cents per each $100 of
insured domestic deposits and was payable in 1996. This assessment had the
effect of reducing the capital of the Bank by the amount of the assessment, net
of the income tax benefit. The assessment was $114,000 before income taxes and
was accrued as an expense during the quarter ended September 30, 1996. As a
result of this expense, the Bank experienced a net loss for that fiscal quarter
and the six months ended December 31, 1996. (See "SUPERVISION AND REGULATION --
Regulation of the Bank -- Insurance Deposit.")
Recapture of Bad Debts
Recently enacted federal legislation has repealed the reserve method of
accounting for thrift loan debt reserves and would require thrifts to recapture
into income over a six-year period their post-1987 additions to their excess bad
debt tax reserves, thereby generating additional tax liability. At December 31,
1997, the Bank had no material post-1987 excess reserves.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepting accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
The FASB has issued SFAS No. 123, Accounting for Stock-Based
Compensation, which the Bank has not been required to adopt as of December 31,
1997.
41
The Statement, which will be in effect for the Bank's fiscal year
ending June 30, 1998, will require that an entity account for stock based
compensation plans using a fair value based method which measures compensation
cost at the grant date based upon the value of the award, which is then
recognized over the service period, usually the vesting period. The accounting
requirements of the Statement apply to grants of awards entered into in fiscal
years that begin after December 15, 1995. The Statement allows entities to
continue to use APB Opinion No. 25 to measure compensation cost, but requires
that the pro forma effects on net income and earnings per share be disclosed to
reflect the difference between the compensation cost, if any, from applying APB
Opinion No. 25 and the related cost measured by the fair value method defined in
the Statement. The Statement is not expected to have a material effect on the
Bank's financial statements, should the Bank elect to adopt a restricted stock
plan subsequent to conversion to the stock form, because management is expected
to elect to continue to use the accounting and reporting permitted by APB
Opinion No. 25 and will disclose the differences, if any, in notes to the
financial statements as pro forma effects of not utilizing the fair value method
prescribed in SFAS No. 123.
In February, 1997 the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which is effective for financial
statements for periods ending after December 31, 1997. This statement applies to
both public and nonpublic entities. The Bank anticipates that adoption of this
statement will not have a material effect on the Bank.
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a full set for general financial statements. Under
this statement, enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statements and display
the balance of other comprehensive income separate in the equity section of a
statement of financial position. Statement 130 is effective for both interim and
annual periods beginning after December 15, 1997. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect the provisions of the statement. It is not anticipated the adoption of
this statement will materially effect the Bank's current method of financial
reporting.
Also in June, 1997 the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". This statement establishes
standards for the way public enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. Statement 131 is effective for financial
statements for period beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated unless
it is impractical to do so. It is not anticipated that the adoption of this
statement will materially effect the Bank's current method of financial
reporting.
BUSINESS OF THE COMPANY
Prior to the Conversion, the Company will not transact any material
business. Following the Conversion, in addition to directing, planning and
coordinating the business activities of the Bank, the Company will invest the
proceeds of the Conversion which are retained by it. See "USE OF PROCEEDS." Upon
consummation of the Conversion, the Company will have no significant assets
other than the shares of the Bank's capital stock acquired in the Conversion and
that portion of the net proceeds of the Conversion retained by it, and it will
have no significant liabilities. Cash flow to the Company will be dependent upon
42
investment earnings from the net proceeds retained by it and any dividends
received from the Bank. Initially, the Company will neither own nor lease any
property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, the Company does not intend to employ any persons
other than its officers (who are not anticipated to be separately compensated by
the Company), but will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future. In the future, the Company may consider
using some of the proceeds of the Conversion retained by it to expand its
operations in its existing primary market and other nearby areas by acquiring
other financial institutions or their branches. The Company has no current plans
with respect to any such acquisitions, however. Existing management of the
Company believes that it is in the best interest of the Company and its
shareholders for the Company to remain an independent company.
BUSINESS OF THE BANK
General
The Bank is engaged primarily in the business of attracting deposits
from the general public and using such deposits to make mortgage loans secured
by real estate. The Bank makes one-to-four-family residential real estate loans,
loans secured by nonresidential real property, and construction loans. The Bank
also makes loans which are not secured by real property, such as loans secured
by pledged deposit accounts. The Bank's primary source of revenue is interest
income from its lending activities. The Bank's other major sources of revenue
are interest and dividend income from investments, interest income from its
interest-earning deposit balances in other depository institutions, and
transaction and fee income from its lending and deposit activities. The major
expenses of the Bank are interest on deposits and general and administrative
expenses such as employee compensation and benefits, federal deposit insurance
premiums, data processing expenses and occupancy expenses.
As a North Carolina chartered savings bank, the Bank is subject to
examination and regulation by the FDIC and the Administrator. Upon consummation
of the Conversion, the Bank, as a subsidiary of the Company, will be subject to
indirect regulation by the Federal Reserve. The business and regulation of the
Bank are subject to legislative and regulatory changes from time to time. See
"SUPERVISION AND REGULATION -- Regulation of the Bank."
Market Area
The Bank's primary market area is Anson County, North Carolina. The
Bank also makes loans to residents of Union, Stanley and Mecklenburg counties in
North Carolina from time to time. Anson County is rural with a population of
24,309 located on the North Carolina/South Carolina border and Wadesboro is
located 50 miles east of Charlotte, North Carolina.
Employment in the Bank's primary market area is diversified among
manufacturing, mining, agriculture, retail and wholesale trade, government and
service. Other non-manufacturing employers include the county government, school
systems and the county hospital.
In recent years unemployment rates in Anson County have been high,
averaging 9.2% in 1995. But a steady increase in employment over the last year
resulted in an average yearly employment of 7.5% through September 1996.
However, this rate is still above that of North Carolina and national averages.
Comparative data indicates that income levels in Anson County are below the
North Carolina and the national average for
43
1997. From 1990-1994, population in Anson County increased by 1.6% which was
below the national and North Carolina averages. Management regards Anson County
as a low-growth area in which there is significant competition among financial
service providers for market shares. Due primarily of the economic factors
discussed above, the Bank has limited residential mortgage lending opportunities
in its local market area and does not anticipate that residential mortgage
lending opportunities will increase in the future because of lack of growth in
the local economy. See "BUSINESS OF THE BANK -- Competition." Management
believes that opportunities for future earnings growth in the Bank's primary
market area are limited in light of these factors. In addition, lower income
levels and low rates of growth in Anson County could result in an increase in
the number of delinquent or nonperforming loans and reduce the value of the
collateral securing such loans, adversely affecting the Bank's financial
condition and results of operations. See "RISK FACTORS -- Risks Associated with
Anson's Primary Market Area; Limited Lending Opportunities; Competition".
Lending Activities
General. The Bank's primary source of revenue is interest and fee
income from its lending activities, consisting primarily of mortgage loans for
the purchase or refinancing of one-to-four-family residential real property
located in its primary market area. The Bank also makes loans secured by
multi-family and nonresidential properties, construction loans, and loans
secured by pledged deposit accounts. Less than 1.0% of the Bank's loan
portfolio, before net items, is not secured by real estate. On December 31,
1997, the Bank's largest single outstanding loan had a balance of approximately
$265,000. In addition to interest earned on loans, the Bank receives fees in
connection with loan originations, loan modifications, late payments, loan
assumptions and other miscellaneous services. The Bank generally does not sell
its loans; loans are originated with the intention that they will be held in the
Bank's loan portfolio. The Bank also originates mortgage loans with a call
feature that varies from five to 15 years, enabling the Bank to call the loan
and increase the interest rate from the original fixed contractual rate.
Interest on such loans is amortized over the contractual life of the loan. For
purposes of the discussion and in the tables that follow, such loans with call
provisions are shown as fixed rate loans maturing at the date of the call
provisions.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $11.3 million at December 31, 1997 representing 54.6% of the
Bank's total assets at such date. At December 31, 1997, 95.8% of the Bank's loan
portfolio, before net items, was composed of one-to-four-family residential
mortgage loans. Nonresidential real estate loans represented 4.27% of the Bank's
loan portfolio, before net items, on such date. Construction loans represented
3.23% of the Bank's loan portfolio, before net items, on such date. As of
December 31, 1997, 0.05% of the loans in the Bank's loan portfolio, before net
items, had adjustable interest rates.
The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
44
At December 31, At June 30,
----------------------------------------- -----------------------------------------
1997 1996 1997 1996
------------------ ---------------- ------------------- -----------------
% of % of % of % of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Real estate loans:
One-to-four-family residential $10,857 95.88% $11,295 96.29% $10,888 95.32% $11,241 97.14%
Nonresidential 483 4.27 375 3.20 543 4.75 400 3.46
Construction 366 3.23 319 2.72 349 3.06 199 1.72
--- ---- --- ---- --- ------- --- ----
Total real estate loans 11,706 103.38 11,989 102.21 11,780 103.13 11,840 102.32
Other loans:
Loans secured by deposits 77 .68 45 .38 75 .66 46 .40
-- --- -- --- -- --- -- ---
Total other loans 77 .68 45 .38 75 .66 46 .40
-- --- -- --- -- --- -- ---
Total loans 11,783 104.06 12,034 102.59 11,855 103.79 11,886 102.72
Less:
Allowance for loan losses 100 .88 95 .81 100 .88 95 .82
Undisbursed portion of construction loans 319 2.82 164 1.40 288 2.52 174 1.50
Net deferred loan origination fees 41 .36 45 .38 44 .39 46 .40
-- --- -- --- -- --- -- ---
Total reductions 460 4.06 304 2.59 432 3.79 315 2.72
--- ---- --- ---- --- ---- --- ----
Total loans receivable, net $11,323 100.00% $11,730 100.00% $11,423 100.00% $11,571 100.00%
======= ====== ======= ====== ======= ====== ======= ======
45
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 1997. Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change, while fixed rate and other loans are shown as due in the period of
contractual maturity. Demand loans, loans having no stated maturity and
overdrafts are reported as due in one year or less. The table does not include
prepayments or scheduled principal repayments. Amounts in the table are net of
loans in process and are net of unamortized loan fees.
At December 31, 1997
-----------------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
------- --------- --------- ------- -----
(In Thousands)
TOTAL LOANS:
- -----------
Real estate loans:
Adjustable rate residential 1-4 family $60 $ -- $ -- $ -- $60
Fixed rate residential 1-4 family 262 345 1,197 8,727 10,531
Other real estate loans - fixed 44 -- 78 633 755
Other loans 77 -- -- -- 77
---- ---- ----- ----- ------
Total 443 345 1,275 9,360 11,423
Less:
Allowance for loan losses (100) -- -- -- (100)
---- ---- ----- ----- ------
Totals $343 $345 $1,275 $9,360 $11,323
==== ==== ===== ===== ======
The following table sets forth the dollar amount at December 31, 1997
of all loans maturing or repricing on or after December 31, 1998 which have
fixed or adjustable interest rates.
Fixed Adjustable
Rates Rates
----- ----------
(In Thousands)
Real estate loans $10,980 $ --
Other loans -- --
------- -----
$10,980 $ --
======= =====
Origination and Sale of Loans. The Bank generally does not originate
its one-to-four-family residential mortgage or other loans with the intention
that they will be sold in the secondary market. Although the Bank believes that
many of its one-to-four-family residential loans could be sold to investors,
some of such loans could be sold only after the Bank incurred certain costs
and/or discounted the purchase price. As a result, with respect to potential
private sales of whole loans, the Bank's loan portfolio may be less valuable
than would be the case if it was composed entirely of loans originated in
conformity with secondary market requirements.
46
The table below sets forth the Bank's loan origination, purchase and
sale activity and loan portfolio repayment experience during the periods
indicated.
Six Months Ended
December 31, Year Ended June 30,
---------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
Loans receivable, net, beginning of period $11,423 $11,572 $11,572 $11,910
Loan originations:
Residential 1-4 family 839 776 1,365 1,619
Nonresidential real estate -- -- -- 67
Residential construction 171 264 486 253
Loans secured by deposits 22 8 53 69
------- ------- ------- -------
Total loan originations 1,032 1,048 1,904 2,008
Loans purchased -- -- -- --
Principal repayments (1,135) (892) (2,051) (2,342)
Other changes, net /(1)/ 3 2 (2) (4)
------- ------- ------- -------
Increase (decrease) in loans receivable (100) (149) (149) (338)
------- ------- ------- -------
Loans receivable, net, end of period $ 11,323 $ 11,423 $ 11,423 $ 11,572
======= ======= ======= =======
--------------------
(1) Includes changes in deferred loan fees and the allowance for loan
losses.
One-to-Four-Family Residential Real Estate Lending. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance one-to-four-family residential real property. Consistent
with the Bank's emphasis on being a community-oriented financial institution, it
is and has been the Bank's strategy to focus its lending efforts in its primary
market area. On December 31, 1997, approximately 95.9% of the Bank's real estate
loan portfolio, before net items, consisted of one-to-four-family residential
real estate loans. These include both loans secured by detached single-family
residences and condominiums and loans secured by housing containing not more
than four separate dwelling units. Of such loan amounts, less than one percent
had adjustable interest rates.
The Bank does not originate its one-to-four-family loans with the
intention that they will be sold in the secondary market. The Bank generally
originates loans satisfying its underwriting requirements which are tailored for
its local community but which may not satisfy various requirements imposed by
FHLMC or FNMA. For example, the Bank may not require title insurance and may not
obtain all the loan documentation normally required by FHLMC and FNMA. As a
result, to the extent such loans are sold in the secondary market, they may not
be sold on terms as favorable as those originated in conformity with secondary
market requirements. In addition, loans which are not originated in conformity
with the purchase requirements of
47
FHLMC and FNMA, or nonconforming loans, are generally thought to have greater
risks of default and nonperformance; however, the Bank has not experienced a
higher level of nonperformance with its nonconforming loans. These loans satisfy
a need in the Bank's local community and generally produce a higher yield than
would be produced by conforming loans. The Bank plans to continue its practice
of originating primarily nonconforming loans.
The Bank originates conventional mortgage loans secured by owner
occupied property in amounts of up to 95% of the value of the property. Private
mortgage insurance is generally required if the loan amount exceeds 80% of the
value of the property. The loans have both fixed and adjustable rates. The
maximum term for fixed and adjustable rate loans is 30 years. The interest rates
on adjustable rate loans are generally adjustable every year and are tied to the
one-year United States treasury bill rate. The loans have rate caps which limit
the amount of changes at the time of each adjustment and over the lives of the
loans. The Bank offers loans which require monthly payments.
Adjustable rate loans are generally considered to involve a greater
degree of credit risk than fixed rate loans because borrowers may have
difficulty meeting their payment obligations if interest rates and required
payment amounts increase substantially. Substantially all of the fixed-rate
loans in the Bank's mortgage loan portfolio have due on sale provisions allowing
the Bank to declare the unpaid balance due and payable in full upon the sale or
transfer of an interest in the property securing the loan.
While one-to-four-family residential loans are normally originated for
between 15 to 25 year terms, such loans customarily remain outstanding for
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans.
The Bank generally does not require title insurance for its
one-to-four-family residential loans but does require an attorney's opinion of
title. The Bank also generally requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the loan amount or replacement cost of the improvements on the
property securing the loans, whichever is greater.
Nonresidential Real Estate Lending. On December 31, 1997, the Bank had
$483,000 outstanding in loans secured by nonresidential properties, comprising
approximately 4.3% of its loan portfolio, before net items, as of that date.
These loans are secured by office, retail and church properties. These loans
generally do not exceed 80% of the appraised value of the real estate securing
the loans. Nonresidential real estate loans have terms of up to 15 years. See
"-- One-to-Four-Family Residential Real Estate Lending."
The Bank requires title insurance or an attorney's opinion in
connection with its nonresidential real estate loans. The Bank also requires
that fire and extended coverage casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the loan amount or the
replacement cost of the improvements on the property securing the loans,
whichever is greater.
Loans secured by nonresidential real estate generally are larger than
one-to-four-family residential loans and involve greater concentration of assets
and a greater degree of risk. Payments on these loans depend to a large degree
on results of operations and management of the properties and may be affected to
a greater extent by adverse conditions in the real estate market or the economy
in general. Since commercial lending is frequently secured by leased or
operating commercial properties, repayment frequently depends upon the results
of operations of the tenant or operating entity. Nonresidential loans also
generally involve more
48
specialized and complicated underwriting decisions than one-to-four-family
residential real estate lending. The Bank intends to continue to make
nonresidential real estate loans.
Construction Lending. The Bank makes construction loans for the
construction of single-family dwellings, and for the construction of
multi-family and commercial buildings. The aggregate outstanding balance of such
loans on December 31, 1997 was approximately $366,000, representing
approximately 3.2% of the Bank's loan portfolio, before net items, and included
construction loans in process of approximately $319,000. Some of these loans
were made to persons who are constructing properties for the purpose of
occupying them; others were made to builders who were constructing properties
for sale. Construction loans are "construction-permanent" loans which generally
provide for the payment of interest only during a construction period, after
which the loans convert to a permanent loan at fixed or adjustable interest
rates having terms similar to one-to-four-family residential loans.
Construction loans for one-to-four-family real estate to be occupied by
the borrower may have a maximum loan-to-value ratio of 95% of the appraised
value of the property with private mortgage insurance. Other construction loans
are made at loan to value ratios of up to 80%. Title insurance or an attorney's
opinion is generally required for construction loans. In addition, the Bank
generally requires builders risk or casualty insurance (and, if appropriate,
flood insurance) on such loans.
Loans Secured by Deposits. The Bank also offers loans secured by
deposit accounts. At December 31, 1997, such loans totaled $77,000, representing
0.68% of the Bank's loan portfolio, before net items. The interest rates on
these loans are variable and are generally 2% above the interest rate being paid
on the deposit account serving as collateral. The maximum amounts of these loans
is generally 90% of the related deposit account.
Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.
During its loan approval process, the Bank assesses the applicant's
ability to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the responsible officer or loan officer
of the Bank analyzes the loan application and the property involved, and an
appraiser inspects and appraises the property. The Bank generally requires
independent fee appraisals on all loans in excess originated primarily on the
basis of real estate collateral. The Bank also obtains information concerning
the income, financial condition, employment and the credit history of the
applicant.
All real estate loans must be approved by the Bank's loan committee
which is made up of any three members of the Bank's board of directors. Loans
secured by deposits are approved by any two employees of the Bank, at least one
of which must be an officer.
Normally, upon approval of a residential mortgage loan application, the
Bank gives a commitment to the applicant that it will make the approved loan at
a stipulated rate any time within a 15-day period. The loan is typically funded
at such rate of interest and on other terms which are based on market conditions
existing as of the date of the commitment. As of December 31, 1997, the Bank had
$132,000 in such unfunded
49
mortgage loan commitments. In addition, on such date the Bank had $319,000 in
undisbursed construction loans.
Interest Rates, Terms, Points and Fees. Interest rates and fees charged
on the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in
connection with originating loans. Fees for loan modifications, late payments,
loan assumptions and other miscellaneous services in connection with loans are
also charged by the Bank.
Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. In this event, the normal procedure
followed by the Bank is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status, and late charges
are assessed as allowed by law. In most cases, delinquencies are cured. If a
delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrower, commences foreclosure proceedings. If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale. In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable to the borrower than those
normally offered. Any property acquired as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold or otherwise disposed of by the Bank in an effort to recover its
investment. As of December 31, 1997, the Bank had no real estate acquired in
settlement of loans. Real estate acquired through, or in lieu of, loan
foreclosure is initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of cost or
fair value minus costs to sell. Costs relating to the development and
improvement of the property are capitalized, and costs relating to holding the
property are charged to expenses.
Interest on loans is recorded as borrowers' monthly payments become
due. Accrual of interest on loans continues until the Board of Directors decides
to institute foreclosure procedures.
The following table sets forth information with respect to
nonperforming assets identified by the Bank, including real estate owned at the
date indicated. At such dates, the Bank had no loans which were "troubled debt
restructurings", as defined in SFAS No. 15, Accounting by Debtors and Creditors
for Troubled Debt Restructurings.
At December 31, At June 30,
------------------------------ -------------------------
1997 1996 1997 1996
------------- ------------ ---------- ---------
(Dollars in Thousands)
Accruing loans past due 90 days or more 312 268 240 198
---- ---- ---- ----
Total non-performing loans 312 268 240 198
Foreclosed real estate -- -- ---- ----
---- ---- ---- ----
Total nonperforming assets $312 $268 $240 $198
==== ==== ==== ====
Non-performing assets to total assets 1.51% 1.29% 1.16% 0.92%
==== ==== ==== ====
50
Applicable regulations require the Bank to "classify" its own assets on
a regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. "Substandard" assets include those characterized by well-defined
weakness with possible risk of loss if the deficiency is not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable." Assets classified "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a loss reserve is not warranted.
As of December 31, 1997, the Bank had approximately $312,000 of loans
internally classified as "substandard," no loans classified as "doubtful" and no
loans classified as "loss." Total classified loans as of June 30, 1997 and 1996
were approximately $240,000 and approximately $198,000, respectively.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as "loss,"
it charges off, or writes down the balance of, the asset. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the FDIC and the Administrator
which can order the establishment of additional loss allowances.
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets are
maintained on a "watch list" and do not yet warrant adverse classification. At
December 31, 1997, the Bank's watch list consisted of one loan with an aggregate
outstanding balance of approximately $43,000.
Allowance for Loan Losses. In originating loans, the Bank recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions. It
is management's policy to maintain an allowance for loan losses based on, among
other things, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the security for the loans.
Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.
51
The following table describes the activity related to the Bank's
allowance for loan losses for the periods indicated.
Six Months Ended
December 31, Year Ended June 30,
------------------ ---------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars In Thousands)
Balance, beginning of period $100 $ 95 $ 95 $ 88
---- ---- ---- ----
Loans Charged off:
Real Estate -- -- -- --
Other -- -- -- --
------ ------ ------ ------
Total loans charged off -- -- -- --
Recoveries:
Real Estate -- -- -- --
Other -- -- -- --
------ ------ ------ ------
Net loans charged off (recovered) -- -- -- --
Provision for loan losses -- 1 5 7
------ ------ ------ ------
Balance at end of period $100 $ 96 $100 $ 95
==== ==== ==== ====
Ratio of net charge-offs (recoveries) to
average loans outstanding during the
period 0% 0% 0% 0%
== == == ==
The following table sets forth the composition of the allowance for
loan losses by type of loan at the dates indicated. The allowance is allocated
to specific categories of loans for statistical purposes only, and may be
applied to loan losses incurred in any loan category.
52
December 31,
--------------------------------------------------------------
1997 1996
------------------------------------- -----------------------------------
Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- ---------- -------- --------- ---------- --------
(Dollars in Thousands)
Real estate loans:
Residential 1-4 family $40 40% 92.1% $40 41.7% 93.8%
Nonresidential 20 20 4.1 16 16.7 3.1
Construction 20 20 3.1 20 20.8 2.7
-- --- ---- -- ----- ----
Total real estate loans 80 80 99.3 76 79.2 99.6
Other loans:
Loans secured by deposits -- -- 0.7 -- -- 0.4
---- ---- ----- ---- ---- ----
Total other loans -- -- 0.7 -- -- 0.4
---- ---- ----- ---- ---- ----
Unallocated 20 20 -- 20 20.8 --
-- --- ------ -- ----- ------
Total allowance for loan losses $100 100% 100% $96 100.0% 100.0%
==== ==== ==== === ====== ======
At June 30,
-------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------------
Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- ---------- -------- --------- ---------- --------
Real estate loans:
Residential 1-4 family $40 40% 91.8% $40 42.1% 94.5%
Nonresidential 20 20 4.6 15 15.7 3.4
Construction 20 20 2.9 20 21.1 1.7
-- --- ---- -- ----- ----
Total real estate loans 80 80 99.3 75 78.9 99.6
Other loans:
Loans secured by deposits -- -- 0.7 -- -- 0.4
---- ---- ---- ---- ----- -----
Total other loans -- -- 0.7 -- -- 0.4
---- ---- ---- ---- ----- -----
Unallocated 20 20 -- 20 21.1 --
-- -- ------ -- ----- ------
Total allowance for loan losses $100 100% 100.0% $95 100.0% 100.0%
==== ==== ====== === ====== ======
53
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to the Bank after interest on
loans. In addition, the Bank receives interest income from deposits in other
financial institutions. At December 31, 1997, the Bank's investment portfolio
totaled approximately $8.79 million and consisted of U.S. government and agency
securities, interest-earning deposits in other financial institutions,
certificates of deposit and stock of the FHLB of Atlanta.
The FASB has issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in three categories and accounted for as follows: (1) debt securities that the
entity has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (2) debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with net
unrealized gains and losses included in earnings; and (3) debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as securities available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity. At December 31, 1997, the Bank had no trading securities.
The Bank adopted SFAS No. 115 as of July 1, 1994. The adoption affected only the
held-to- maturity and available-for-sale classifications. Net unrealized
securities gains on the securities available-for- sale of $244,000, net of
related deferred taxes of $127,000, are reported as a separate component of
equity in its financial statements at December 31, 1997. See Notes 2 and 6 of
"Notes to Financial Statements."
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income from
investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Prior to the
adoption of SFAS No. 115, the Bank stated its debt securities at amortized cost
and its marketable equity securities at the lower of cost or market. Accumulated
changes in net unrealized losses on marketable equity securities were included
in retained earnings.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As of
December 31, 1997, the Bank's investment in stock of the FHLB of Atlanta was
$143,000.
North Carolina regulations require the Bank to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "SUPERVISION AND REGULATION -- Regulation of the Bank --
Liquidity." The Bank is also permitted to make certain other securities
investments.
The Bank's current investment policy provides that investment decisions
will be made by Eugene M. Ward, President and Chief Executive Officer, and
reviewed monthly by the Board of Directors. The investment policy provides that
the objectives of the investment portfolio are to: (i) provide and maintain
liquidity within regulatory guidelines, (ii) maintain a balance of high quality,
diversified investments, (iii) provide collateral for pledging requirements,
(iv) serve as a counter-cyclical balance to earnings, and (v) maximum returns
without sacrificing liquidity and safety.
54
Permitted investments include U.S. Treasury obligations, FHLB daily and
time deposits, insured certificates of deposit, federal agency securities and
federal funds.
The following table sets forth the carrying value of the Bank's
investment portfolio at the dates indicated.
At December 31, At June 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
Securities available for sale:
U.S. government and agency securities $380 $250 $318 $194
---- ---- ---- ----
Securities held to maturity:
U.S. government and agency securities 1,500 1,992 2,496 1,994
Mortgage-backed securities 732 898 800 940
--- --- --- ---
Total securities held to maturity 2,232 2,890 3,296 2,934
----- ----- ----- -----
Total investment securities 2,612 3,140 3,614 3,128
----- ----- ----- -----
Interest-earning balances in other banks 6,039 5,067 4,944 5,851
Federal Home Loan Bank stock 143 143 143 143
----- ----- ----- -----
6,182 5,210 5,087 5,994
----- ----- ----- -----
Total investments $8,794 $8,350 $8,701 $9,122
====== ====== ====== ======
At December 31, 1997, the market value of the Bank's investment
securities available for sale and held to maturity were $380,000 and $2.23
million, respectively.
55
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the Bank's
investment portfolio as of December 31, 1997.
More than Six Months More than One Year
Less Than Six Months to One Year to Five Years
-------------------- -------------------- ------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- --------- -------- ---------
(Dollars in Thousands)
Securities available for sale:
FHLMC Stock $380 _____% $ -- --% $ -- --%
Securities held to maturity:
U.S. government and agency securities -- -- 500 5.70 1,000 5.64
Mortgage-backed securities -- -- -- -- 43 7.76
Other:
Interest-earning balances in other banks 6,039 5.48 -- -- -- --
Federal Home Loan Bank stock -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total $6,419 5.16 $500 .95% $1,043 5.73%
====== ==== ==== ==== ====== =====
More than Five Years
to Ten Years After Ten Years Total
-------------------- -------------------- -----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Securities available for sale:
FHLMC Stock $ -- --% $ -- --% $380 ___%
Securities held to maturity:
U.S. government and agency securities -- -- -- -- 1,500 5.66
Mortgage-backed securities 259 7.00 430 6.50 732 6.95
Other:
Interest-earning balances in other banks -- -- -- -- 6,039 5.48
Federal Home Loan Bank stock -- -- 143 7.25 143 7.25
-------- ------- --- ---- ---- ----
Total $259 7.00% $573 6.69% $8,794 5.43%
==== ===== ==== ===== ====== =====
56
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, interest
income and advances from the FHLB of Atlanta and otherwise from its operations.
Loan repayments are a relatively stable source of funds while deposit inflows
and outflows may be significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a variety of accounts and rates. The Bank offers
passbook savings accounts, statement savings accounts, negotiable order of
withdrawal accounts, money market deposit accounts, non-interest-bearing
accounts, and fixed interest rate certificates with varying maturities. At
December 31, 1997, 77.8% of the Bank's deposits consisted of certificate
accounts, 21.6% consisted of passbook savings accounts and 0.61% consisted of
money market deposit accounts. Deposit flows are greatly influenced by economic
conditions, the general level of interest rates, competition, and other factors,
including the restructuring of the thrift industry. The Bank's savings deposits
traditionally have been obtained primarily from its primary market area. The
Bank utilizes traditional marketing methods to attract new customers and savings
deposits, including print, television and radio media advertising and direct
mailings. The Bank does not advertise for deposits outside of its local market
area or utilize the services of deposit brokers.
The following table sets forth certain other information regarding the
Bank's savings deposits at the dates indicated.
57
At December 31, 1997 At June 30, 1997
---------------------------------- ----------------------------------
----- -----
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
------ -------- -------- ------ -------- --------
(Dollars in Thousands)
Demand accounts:
Passbook savings $3,585 3.25% 21.60% $3,673 3.25% 21.96%
Money market deposit accounts 101 3.05 0.61 105 3.10 0.63
------ ---- ---- ------ ---- ----
3,686 3.24 22.21 3,778 3.24 22.59
Certificate of accounts with
original maturities of:
6 months 3,955 5.07 23.84 4,372 5.08 26.14
12 months 2,101 5.11 12.66 2,414 5.15 14.43
14, 18, 30 and 36 months 6,852 5.67 41.29 6,163 5.74 36.84
----- ---- ----- ----- ---- -----
Total certificates 12,908 5.40 77.79 12,949 5.41 77.41
------ ---- ----- ------ ---- -----
Total deposits $16,594 4.92% 100.00% $16,727 4.92% 100.00%
======= ===== ======= ======= ===== =======
At June 30, 1996
--------------------------------
Weighted
Average % of
Amount Rate Deposits
------ -------- --------
(Dollars in Thousands)
Demand accounts:
Passbook savings $4,149 3.25% 23.66%
Money market deposit accounts 181 3.10 1.02
------ ---- ----
4,330 3.24 24.68
Certificate of accounts with
original maturities of:
6 months 5,619 5.01 32.04
12 months 2,809 5.22 16.02
14, 18, 30 and 36 months 4,781 5.56 27.26
----- ---- -----
Total certificates 13,209 5.26 75.32
------ ---- -----
Total deposits $17,539 4.76% 100.00%
======= ===== =======
58
The following table presents the maturities and weighted average rates
paid on all certificates of deposit as of December 31, 1997.
Amount Due During the Year Ending December 31,
----------------------------------------------------
1998 1999 2000 Thereafter Total
--------------- --------------- --------------- --------------- ---------------
Weighted Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ ------- ------ --------
(Dollars in Thousands)
Certificates of
$100,000 or more $1,251 5.95% $ -- -- % $ -- -- % $ -- --% $1,251 5.95%
Certificates of less
than $100,000 8,948 5.28% 2,196 5.51% 513 5.77% -- -- 11,657 5.34
----- ----- ----- ----- --- ----- -------- ------- ------ ------
Total $10,199 5.36% $2,196 5.1% $513 5.77% $ -- --- $12,908 5.40%
======= ===== ====== ==== ==== ===== ======== ========= ====== ======
59
As of December 31, 1997, the aggregate amount of time certificates of
deposit in amounts greater than or equal to $100,000 outstanding was
approximately $1.3 million. The following table presents the maturity of these
time certificates of deposit at such date.
At
December 31, 1997
-----------------
(In Thousands)
6 Months or less $ 539
Over 6 months through 12 months 712
Over 12 months ---
----------
Total $1,251
======
Borrowings. The Bank's principal available source of long-term
borrowings are advances from the FHLB of Atlanta. The FHLB system functions in a
reserve credit capacity for savings institutions. As a member, the Bank is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances from the FHLB of Atlanta on the security of that stock and a
floating lien on certain of its real estate secured loans and other assets. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of an institution's net worth or on the FHLB of Atlanta's assessment
of the institution's creditworthiness. The Bank has had no borrowings
outstanding from the FHLB of Atlanta since 1987 and has no immediate plans to
seek any advances from the FHLB of Atlanta.
Subsidiaries
As a North Carolina-chartered savings bank, the Bank is able to invest
up to 10% of its total assets in subsidiary service corporations. However, any
investment in service corporations which would cause the Bank to exceed an
investment of 3% of assets must receive prior approval of the FDIC. The Bank has
no subsidiaries.
Properties
The Bank operates from one office located in Wadesboro, North Carolina.
Specific information related to this office as of December 31, 1997 is as
follows:
Net Book Value
---------------------------------------------
Furniture, Fixtures
and
Land Building Equipment
---- -------- ---------
211 South Greene Street
Wadesboro, North Carolina $30,808 $180,392 $3,695
======= ======== ======
The properties are considered by the Bank's management to be in good condition.
60
Legal Proceedings
From time to time, the Bank is a party to legal proceedings which arise
in the ordinary course of its business. Most commonly, such proceedings are
commenced by the Bank to enforce obligations owed to it. From time to time,
claims are asserted against the Bank directly or as defenses and counterclaims
in actions filed by the Bank. At this time, the Bank is not a party to any legal
proceeding which is expected to have a material effect on its financial
condition or results of operations.
Competition
The Bank is the only financial institution headquartered in Anson
County and has operated there for more than 100 years. It faces strong
competition both in attracting deposits and making real estate and other loans.
Its most direct competition for deposits has historically come from other
savings institutions, credit unions, brokerage firms and commercial banks
located in its primary market area, including large financial institutions which
have greater financial and marketing resources available to them. As of June 30,
1997, there were four FDIC-insured depository institutions with nine offices in
Anson County, North Carolina. Based upon 1997 comparative data, the Bank had
10.9% and 8.3% of the federally insured deposits in Wadesboro and Anson County,
respectively.
The Bank has also faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The ability of the Bank to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from
other savings institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans primarily through the interest rates and loan fees
it charges, the efficiency and quality of services it provides borrowers, and
its more flexible underwriting standards. Competition may increase as a result
of the continuing reduction of restrictions on the interstate operations of
financial institutions. See "RISK FACTORS -- Risks Associated with Anson's
Primary Market Area; Limited Lending Opportunities; Competition."
Employees
As of December 31, 1997, the Bank had 5 full-time employees. The Bank
provides its employees with basic and major medical insurance, dental insurance,
disability insurance, life insurance, sick leave and vacation benefits. The Bank
also maintains a non-contributory defined benefit pension plan ("Pension Plan")
for its employees. All full-time employees of the Bank who have completed one
year of service and who are at least twenty-one (21) years of age are covered
under the Pension Plan. Participants are fully vested in amounts contributed to
the Pension Plan on their behalf after seven (7) years of service, as follows:
less than 3 years of service, 0%; 3 years, 20%; 4 years, 40%; 5 years, 60%; 6
years, 80%; 7 years, 100%. Benefits under the Pension Plan are payable in the
event of the participant's retirement, death, disability or termination of
employment.
The Boards of Directors of the Company and the Bank are expected to
adopt, and stockholders of the Company will be asked to approve, a MRP and a
Option Plan at a meeting of stockholders after the first anniversary following
the Conversion. See "MANAGEMENT OF THE BANK -- Proposed Option Plan" and
"--Proposed Management Recognition Plan."
61
Employees are not represented by any union or collective bargaining
group, and the Bank considers its employee relations to be good.
TAXATION
Federal Income Taxation
Savings institutions such as the Bank are subject to the taxing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for
corporations, as modified by certain provisions specifically applicable for
financial or thrift institutions. Income is reported using the accrual method of
accounting. The maximum corporate federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Code were permitted certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans (generally loans secured by interests in real property improved
or to be improved) under (i) a method based on a percentage of the institution's
taxable income, as adjusted (the "percentage of taxable income method") or (ii)
a method based on actual loss experience (the "experience method"). The reserve
for nonqualifying loans was computed using the experience method.
The addition to the bad debt reserve under the percentage of taxable
income method was limited to 8% of taxable income. This method could not raise
the reserve to exceed 6% of qualifying real property loans at the end of the
year. Moreover, the current year addition for qualifying real property loans,
when added to the experience method deduction for nonqualifying loans, could not
exceed the amount by which 12% of total deposits or withdrawable accounts
exceeded the sum of surplus, undivided profits and reserves at the beginning of
the year. The experience method was the amount necessary to increase the balance
of the reserve at the close of the year to the greater of (i) the amount which
bore the same ratio to loans outstanding at the close of the year as the total
net bad debts sustained during the current and five preceding years bore to the
sum of the loans outstanding at the close of such six years or (ii) the balance
in the reserve account at the close of the last taxable year beginning before
1988 (assuming that the loans outstanding have not declined since such date).
In order to qualify for the percentage of taxable income method, an
institution had to have at least 60% of its assets as "qualifying assets," which
generally included, cash, obligations of the United States government or an
agency or instrumentality thereof or of a state or political subdivision,
residential real estate-related loans, or loans secured by savings accounts and
property used in the conduct of its business. In addition, it had to meet
certain other supervisory tests and operate principally for the purpose of
acquiring savings and investing in loans.
Institutions which became ineligible to use the percentage of taxable
income method had to change to either the reserve method or the specific
charge-off method that applied to banks. Large thrift institutions, those
generally exceeding $500 million in assets, had to convert to the specific
charge-off method. In computing its bad debt reserve for federal income taxes,
the Bank used the reserve method in fiscal years 1996 and 1997.
62
Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") must be included in taxable income upon
certain distributions to shareholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place, the thrift is required to reduce its reserve by such
amount and simultaneously recognize the amount as an item of taxable income
increased by the amount of income tax imposed on the inclusion. Dividends not in
excess of earnings and profits accumulated since December 31, 1951 will not
require inclusion of part or all of the bad debt reserve in taxable income. The
Bank has accumulated earnings and profits since December 31, 1951 and has an
excess bad debt reserve. Distributions in excess of current and accumulated
earnings and profits will increase taxable income. Net retained earnings at
December 31, 1997 includes approximately $1.0 million for which no provision for
federal income tax has been made.
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post- 1987 excess reserves over a six-year period. At December 31, 1997, the
Bank's post-1987 excess reserves subject to recapture were not significant.
The Bank may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative minimum taxable income ("AMTI") subject to applicable statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain adjustments to the corporation's regular taxable income. Preference
items and adjustments generally applicable to financial institutions include,
but are not limited to, the following: (i) the excess of the bad debt deduction
over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings
and profits over its AMTI (as otherwise determined with certain adjustments).
Net operating loss carryovers, subject to certain adjustments, may be utilized
to offset up to 90% of the AMTI. Credit for AMT paid may be available in future
years to reduce future regular federal income tax liability to the extent it
exceeds the year's AMT. The Bank has not been subject to the AMT in recent
years.
The Bank's federal income tax returns have not been audited in the last
ten tax years.
State and Local Taxation
Under North Carolina law, the corporate income tax is 7.5% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1991, 1992, 1993 and 1994,
corporate taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise, payable by it. An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institutions (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
The North Carolina corporate tax rate will drop to 7.25% in 1998, 7% in
1999, and 6.9% thereafter.
63
SUPERVISION AND REGULATION
Regulation of the Company
Bank holding companies and state savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the
Company and the Bank. This summary is qualified in its entirety by reference to
the particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
Similarly, Federal Reserve approval (or, in certain cases,
non-disapproval) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person acquires more than 25% of any class of voting stock of the holding
company or controls in any manner the election of a majority of the directors of
the holding company. Control is presumed to exist if a person acquires more than
10% of any class of voting stock and the stock is registered under Section 12 of
the Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
to avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
as of the time the institution fails to comply with such capital restoration
plan. Under a policy of the Federal Reserve with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. The
64
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve
has adopted capital adequacy guidelines for bank holding companies and banks
that are members of the Federal Reserve system and have consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal
Reserve's risk-based capital guidelines. Under these regulations, the minimum
ratio of total capital to risk-weighted assets (including certain off-balance
sheet activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal Reserve
has adopted a minimum Tier I capital (leverage) ratio, under which a bank
holding company must maintain a minimum level of Tier I capital to average total
consolidated assets of at least 3% in the case of a bank holding company which
has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
Dividend and Repurchase Limitations. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will pay any
taxable dividend or make any other taxable distribution to its stockholders in
excess of their current or retained earnings. Also, the Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during
65
any twelve-month period unless the Company (i) both before and after the
redemption satisfies capital requirements for "well capitalized" state member
banks; (ii) received a one or two rating in its last examination; and (iii) is
not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the
Company are subject to the requirements and limitations of North Carolina
corporate law, except as set forth in this paragraph, neither the Administrator
nor the FDIC have promulgated any regulations specifically limiting the right of
the Company to pay dividends and repurchase shares. However, the ability of the
Company to pay dividends or repurchase shares may be dependent upon the
Company's receipt of dividends from the Bank. The Bank's ability to pay
dividends is limited. See " -- Regulation of the Bank -- Restrictions on
Dividends and Other Capital Distributions."
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank, the
Company was required to execute a Capital Maintenance Agreement whereby it has
agreed to maintain the Bank's capital in an amount sufficient to enable the Bank
to satisfy all regulatory capital requirements.
Federal Securities Law. The Company has registered its Common Stock
with the SEC pursuant to Section 12(g) of the Exchange Act and will not
deregister the Common Stock for a period of three years following the completion
of the Conversion. As a result of such registration, the proxy and tender offer
rules, insider trading reporting requirements, annual and periodic reporting and
other requirements of the Exchange Act are applicable to the Company.
The registration under the Securities Act of the Offering of the Common
Stock does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company are subject to the
resale provisions of Rule 144 under the Securities Act. So long as the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
Regulation of the Bank
General. Federal and state legislation and regulation have
significantly affected the operations of federally insured savings institutions
and other federally regulated financial institutions in the past several years
and have increased competition among savings institutions, commercial banks and
other providers of financial services. In addition, federal legislation has
imposed new limitations on investment authority, and higher insurance and
examination assessments on savings institutions and has made other changes that
may adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
66
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North
Carolina-chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
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Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act and its
implementing regulations with respect to loans to directors, executive officers
and principal stockholders. Under Section 22(h), loans to directors, executive
officers and stockholders who own more than 10% of a savings bank, and certain
affiliated entities of any of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated entities, the savings
bank's loans-to-one borrower limit as established by federal law and all loans
to such persons may not exceed the institution's unimpaired capital and
unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting. The
Federal Reserve has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of unimpaired
capital and unimpaired surplus (up to $500,000). Further, pursuant to Section
22(h) the Federal Reserve requires that loans to directors, executive officers,
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and not involve more than the normal
risk of repayment or present other unfavorable features. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
Deposit Insurance. The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum extent permitted by law. The Bank pays deposit
insurance premiums to the FDIC based on a risk- based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the
FDIC imposed a special assessment on each depository institution with
SAIF-assessable deposits which resulted in the SAIF achieving its designated
reserve ratio. In connection therewith, the FDIC reduced the assessment schedule
for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with
most institutions paying 0%. This assessment schedule is the same as that for
the BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an assessment
to help pay interest on the FICO bonds at a rate of approximately .013% until
the earlier of December 31, 1999 or the date upon which the last savings
association ceases to exist, after which time the assessment will be the same
for all insured deposits.
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The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act, as amended ("CRA").
A purpose of this Act is to encourage financial institutions to help meet the
credit needs of its entire community, including the needs of low- and
moderate-income neighborhoods. A savings bank is evaluated and rated under three
categories: a lending test, an investment test and a service test. For each of
these three tests, the savings bank is given a rating of either "outstanding,"
"high satisfactory," "low satisfactory," "needs to improve" or "substantial
non-compliance." A set of criteria for each rating is included in the
regulation. If an institution disagrees with a particular rating, the
institution has the burden of rebutting the presumption by clearly establishing
that the quantitative measures do not accurately present its actual performance,
or that demographics, competitive conditions or economic or legal limitations
peculiar to the service area should be considered. The ratings received under
the three tests are used to determine the overall composite CRA rating or
"outstanding," "satisfactory," "needs to improve" or "substantial
non-compliance."
During the Bank's last compliance examination, which was performed by
the FDIC under the old CRA regulations in July 1996, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
Capital Requirements Applicable To The Bank. The FDIC requires the Bank
to have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder ("Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.
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An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At December 31, 1997,
the Bank had a leverage ratio of 17.4%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At December 31, 1997, the Bank complied with each of the capital
requirements of the FDIC and the Administrator. For a description of the Bank's
required and actual capital levels on December 31, 1997, see "HISTORICAL AND PRO
FORMA CAPITAL COMPLIANCE."
Each federal banking agency was required by law to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk- based capital
rules to take account of interest rate risk. The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
The final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure. The final regulation has not had a
material impact on the Bank's capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint
policy statement announcing the agencies' election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time. Rather,
the policy statement (i) identifies the main elements of sound interest rate
risk management, (ii) describes prudent principles and practices for each of
those elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
Loans-To-One-Borrower. The Bank is subject to the Administrator's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize savings
banks to make loans-to-one-borrower, for any purpose, in an amount not to exceed
$500,000. A savings bank also is authorized to make loans-to-one-borrower to
develop domestic residential housing units, not to exceed the lesser of $30
million or 30% of the savings bank's net
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worth, provided that the purchase price of each single-family dwelling in the
development does not exceed $500,000 and the aggregate amount of loans made
under this authority does not exceed 150% of net worth. These limits also
authorize a savings bank to make loans-to-one-borrower to finance the sale of
real property acquired in satisfaction of debts in an amount up to 50% of net
worth.
As of December 31, 1997, the largest aggregate amount of loans which
the Bank had to any one borrower was $265,000. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1997, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $143,000.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings
banks, not otherwise exempt from the regulations, to maintain reserves against
their transaction accounts (primarily negotiable order of withdrawal accounts)
and certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1997, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of voting
stock. In addition, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings bank or prejudice the interests of its depositors; or
(iii) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisitions of control by such
person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than 10%
of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as
71
shares entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Bank or its underwriters or the selling group acting on its behalf or (ii)
any offer to acquire or acquisition of beneficial ownership of more than 10% of
the common stock of the Bank by a corporation whose ownership is or will be
substantially the same as the ownership of the Bank, provided that the offer or
acquisition is made more than one year following the consummation of the
Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Boards of Directors of the Company and the Bank support the
acquisition and (iii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Company and the Bank and the public interests will not
be adversely affected.
Liquidity. The Bank is subject to the Administrator's requirement that
the ratio of liquid assets to total assets equal at least 10%. The computation
of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable value, including investments with
maturities in excess of five years. On December 31, 1997, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 41%. At December 31, 1997, the Bank had stable, core-like time
deposits of $100,000 or more of approximately $1.3 million.
Additional Limitations on Activities. FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
72
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions.
States may require the bank or savings bank being acquired to have been in
existence for a certain length of time but not in excess of five years. In
addition, no bank or saving bank may acquire more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in any
one state, unless the state has specifically legislated a higher deposit cap.
States are free to legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may deny
interstate branching if it specifically elects to do so by June 1, 1997. States
may choose to allow interstate branching prior to June 1, 1997 by opting-in to a
group of states that permits these transactions. These states generally allow
interstate branching via a merger of an out-of-state bank with an in-state bank,
or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its Conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, no stock repurchases may be made by
the savings bank during the first year following a Conversion from mutual to
stock, except that stock repurchases of no greater than 5% of the bank's
outstanding shares may be repurchased during the first year where compelling and
valid business reasons are established to the satisfaction of the FDIC.
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Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
Conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash
dividend on or repurchase any of its capital stock if the effect thereof would
be to cause its net worth to be reduced below the amount required for the
liquidation account established in connection with the Bank's Conversion from
mutual to stock ownership.
In connection with the Conversion, the Bank has agreed with the FDIC
that, during the first three years after the Conversion, neither the Company nor
the Bank will pay any taxable dividend or make any other taxable distribution in
excess of their current and retained earnings. The Bank has also agreed to
notify the FDIC before making a return of capital during the first three years
following the Conversion.
Restrictions on Benefit Plans. FDIC regulations provide that for a
period of one year from the date of the Conversion, the Bank may not implement
or adopt a stock option plan or restricted stock plan, other than a
tax-qualified plan or an employee stock ownership plan, unless: (1) the plans
are fully disclosed in the Conversion proxy soliciting and stock offering
material, (2) all such plans are approved by a majority of the Company's
stockholders prior to implementation and no earlier than six months following
the Conversion, (3) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, and (4) for
restricted stock plans, no stock issued in connection with the Conversion may be
used to fund the plan.
The FDIC regulations provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the Conversion, the FDIC
will presume that excessive compensation will result if stock based benefit
plans fail to satisfy percentage limitations on management stock-based benefit
plans set forth in the regulations of the Office of Thrift Supervision ("OTS").
Those regulations provide that (1) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares issued
in the Conversion, (2) for restricted stock plans, the shares issued may not
exceed 3% of the shares issued in the Conversion (4% for institutions with
tangible capital of 10% or greater after the Conversion), (3) the aggregate
amount of stock purchased by an employee stock ownership plan shall not exceed
10% (8% for well-capitalized institutions utilizing a 4% restricted stock plan),
(4) no individual employee may receive more than 25% of the available awards
under any plan, and (5) directors who are not employees may not receive more
than 5% individually or 25% in the aggregate of the awards under any plan. The
awards and grants to be made under the MRP and Option Plan will conform to these
requirements if such plans are submitted for stockholder approval within one
year after the Conversion is consummated.
Other North Carolina Regulations. As a North Carolina chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
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The Administrator conducts regular examinations of North Carolina
chartered savings banks. The purpose of such examinations is to assure that
institutions are being operated in compliance with applicable North Carolina law
and regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina chartered savings bank must maintain net worth,
computed in accordance with the Administrator's requirements, of 5% of total
assets and liquidity of 10% of total assets, as discussed above. Additionally, a
North Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company currently consists of seven
directors: Preston A. Burns, John J. Crawford, W. Kenneth Huntley, Emmett S.
Patterson, John R. Potter, H. Patrick Taylor, Jr. and Eugene M. Ward. Each of
these persons is also a director of the Bank, and biographical information with
respect to each is set forth under "MANAGEMENT OF THE BANK -- Directors" and "
- -- Executive Officers." Each director is elected for a one-year term. However,
at such time, if any, as the number of directors is at least nine, the Articles
of Incorporation and Bylaws of the Company provide for staggered elections so
that approximately
75
one-third of the directors will each be initially elected to one, two and
three-year terms, respectively, and thereafter, all directors will be elected to
terms of three years each.
The executive officers of the Company, each of whom is also currently
an executive officer of the Bank, and each of whom serves at the discretion of
the Board of Directors of the Company, are as follows:
Age at Position Held
Name December 31, 1997 With the Company
---- ----------------- ----------------
Eugene M. Ward 63 President and Chief Executive
Officer
Nancy H. Allen 52 Treasurer and Assistant
Secretary
Veda H. Edwards 57 Secretary
Biographical information with respect to each of these officers is set
forth below under "MANAGEMENT OF THE BANK -- Executive Officers." There are no
other employees of the Company. No officer, director or employee of the Company
has received remuneration from the Company to date, and it is currently expected
that no compensation will be paid by the Company after the Conversion.
Information concerning the principal occupations and employment of, and
compensation paid by the Bank to, the directors and executive officers of the
Company is set forth under "MANAGEMENT OF THE BANK." See "MANAGEMENT OF THE BANK
- -- Employment Agreement" for a description of the employment agreement expected
to be entered into with the Chief Executive Officer of the Company and the Bank.
MANAGEMENT OF THE BANK
Directors
The direction and control of the Bank, as a mutual North Carolina
chartered savings bank, has been vested in its seven-member Board of Directors
elected by the depositor and borrower members of the Bank. Upon Conversion of
the Bank to capital stock form, each director of the Bank immediately prior to
the Conversion will continue to serve as a director of the Bank as a stock
institution. All directors currently serve for one-year terms. The Bank's
proposed Bylaws, which would become effective after the Conversion, provide for
staggered elections of its directors, if and when the number of directors equals
at least nine, so that approximately one-third of the directors would be elected
each year for three-year terms. Upon consummation of the Conversion, the Company
will own all of the issued and outstanding shares of capital stock of the Bank,
and the Company will elect the directors of the Bank. The Company now plans to
nominate and re-elect all members of the Bank's existing board of directors when
their existing terms expire. The following table sets forth certain information
with respect to the persons who currently serve as members of the Board of
Directors of the Bank.
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Age on
December 31, Principal Occupation Director
Name 1997 During Last Five Years Since
- ---- ------ ---------------------- --------
Preston A. Burns, 83 Retired, former President of Wadesboro Auto 1958
Chairman Supply
John J. Crawford 77 Retired, former owner of Crawford Motor 1960
Company
W. Kenneth Huntley 48 President, Huntley Oil and Gas Company, Inc. 1989
Emmett S. Patterson 59 General Manager and Executive Vice President, 1988
PeeDee Electric Membership Corporation
John R. Potter 79 Retired, former Anson County Agricultural 1962
Extension Agent
H. Patrick Taylor, Jr. 73 Attorney 1961
Eugene M. Ward 63 President, Anson Savings Bank, SSB 1962
Board Meetings and Committees
The Bank's Board of Directors has regular monthly meetings, and held 12
regular and special meetings in the fiscal year ended June 30, 1997. The Board
has also established three committees to whom certain responsibilities have been
delegated - an Executive Committee, a Nominating/Compensation Committee and a
Proxy Committee. In addition, all of the directors serve on the Loan Committee
and the Audit Committee; however, only 3 directors are asked to attend any one
meeting of the Loan Committee. No director attended fewer than 75% of the total
number of Board meetings and meetings of Board committees (other than the Loan
Committee) on which he served during the year ended June 30, 1997. In addition,
no director attended few than 75% of the total number of Loan Committee meetings
he was requested to attend during the year ended June 30, 1997.
The Executive Committee is composed of directors Preston Burns, Eugene
Ward, John Potter and John Crawford. The Executive Committee makes
recommendations to the full Board and acts on policies adopted by the full Board
in the absence of a meeting of the entire Board. The Executive Committee meets
on an as needed basis and did not meet during the year ended June 30, 1997.
The Nominating/Compensation Committee is composed of directors John
Crawford, John Potter and Emmett Patterson. This committee recommends
individuals to be elected to serve as directors of the Bank and recommends to
the Board of Directors the compensation to be paid to the Bank's officers. The
Nominating/Compensation Committee generally meets on an annual basis and met one
time during the year ended June 30, 1997.
The Proxy Committee is composed of directors John Potter, Kenneth
Huntley, and John Crawford. The Proxy Committee meets on an as needed basis and
met one time during the year ended June 30, 1997.
The full Board of Directors serves as a Loan Committee with any three
directors constituting a quorum for purposes of approving loans. The Loan
Committee meets on an as needed basis and met 35 times during the year ended
June 30, 1997.
77
The full Board of Directors also serves the function of an Audit
Committee. The Board meets with and retains independent auditors, oversees the
adequacy of internal controls, insuring compliance with the Bank's policies and
procedures and with generally accepted accounting principles.
Directors' Fees
For their service on the Bank's Board of Directors, all members of the
Bank's Board of Directors, including Mr. Ward, receive an annual retainer of
$600.00 and an additional $200.00 per meeting attended. Board fees are subject
to adjustment annually. The Executive Committee members, including Mr. Ward,
receive $50.00 per meeting attended; all of the directors, excluding Mr. Ward,
receive $50.00 per month for their services on the Loan Committee.
Executive Officers
The Bank has three executive officers. The following table sets forth
certain information with respect such executive officers:
Name and Principal Age on Positions and Occupations Employed By
Position December 31, 1997 During Last Five Years the Bank Since
-------- ----------------- ------------------------ --------------
Eugene M. Ward 63 President and Chief Executive 1962
Officer
Nancy H. Allen 52 Treasurer and Assistant 1964
Secretary
Veda H. Edwards 57 Secretary 1959
Executive Compensation
The following table sets forth for the fiscal year ended June 30, 1997
certain information regarding compensation received by (i) the chief executive
officer of the Bank and (ii) all other executive officers whose cash
compensation exceeded $100,000 (there were none).
Other Annual
Name and Compensation All Other
Principal Position Salary Bonus ($)/2/ Compensation
------------------ ------ ----- ------------ ------------
Eugene M. Ward, President and $64,000/1/ $7,320 --- $395/3/
Director
- --------------------
/1/ Includes directors' fees of $3,000 received by Mr. Ward.
/2/ Under the "Other Annual Compensation" category, perquisites for the
fiscal year ended June 30, 1997 did not exceed the lesser of $50,000 or
10% of salary and bonus as reported for Mr. Ward.
/3/ Represents the amount of the insurance premium paid by the Bank for
term life insurance for the benefit of Mr. Ward.
78
The Bank's Nominating/Compensation Committee determines the
compensation of the executive officers. The salaries of each of the executive
officers is determined based upon the executive officer's contributions to the
Bank's overall profitability, maintenance of regulatory compliance standards,
professional leadership, and management effectiveness in meeting the needs of
day to day operations. The Board of Directors also compares the compensation of
the Bank's executive officers with compensation paid to executives of comparable
financial institutions in North Carolina and executives of other businesses in
the Bank's market area. Mr. Ward participates in the deliberations of the Board
of Directors regarding compensation of executive officers other than himself. He
does not participate in the discussion or decisions regarding his own
compensation.
Bonus Compensation
The Board of Directors of the Bank has established a plan for awarding
an annual bonus to all employees of the Bank. Under the terms of the annual
bonus plan, if the profits of the Bank exceed a certain target amount, which
target amount is determined annually by the Bank's Board of Directors, an
aggregate amount equal to 10% of the profits of the Bank is divided pro rata
among the full-time employees based on each employee's base salary. However, the
annual bonus paid to each of the Bank's employees may not exceed 20% of each
such employee's annual base salary. However, as is the case with the Bank's
compensation arrangements in general, the Bank's bonus compensation is subject
to regulatory oversight and, therefore, could be changed in the future in
response to regulatory requirements or otherwise.
Other Benefits
The Bank maintains a Pension Plan for its employees. All full-time
employees of the Bank who have completed one year of service and who are at
least twenty-one (21) years of age are covered under the Pension Plan.
Participants are fully vested in amounts contributed to the Pension
Plan on their behalf after six (6) years of service, as follows: less than 2
years of service, 0%; 2 years, 20%; 3 years, 40%; 4 years, 60%; 5 years, 80%; 6
years, 100%. Benefits under the Pension Plan are payable in the event of the
participant's retirement, death, disability or termination of employment.
Normal retirement age under the Pension Plan is the later of (a) age
sixty-five (65), or (b) the fifth anniversary of the participant's joining the
plan ("Normal Retirement Age"). Subject to certain restrictions on maximum
benefits required by federal law, upon reaching Normal Retirement Age, each
participant will receive a retirement benefit in the form of a straight life
annuity, determined pursuant to a formula which takes into consideration a
participant's "average monthly compensation" and up to seven (7) years of
service. For purposes of the Pension Plan, a participant's "average monthly
compensation" is defined as a participant's compensation converted to a monthly
amount and then averaged over the five (5) consecutive plan years of the last
ten (10) calendar years immediately preceding his retirement.
As of June 30, 1997, Mr. Ward's expected benefit under the Pension Plan
at Normal Retirement Age was $33,444 per year.
The Bank also provides its employees with group medical, dental, life
and disability insurance benefits and provides vacation leave.
79
Employment Agreement
In connection with the Conversion, the Bank will enter into an
employment agreement with Eugene M. Ward, President and Chief Executive Officer,
in order to establish his duties and compensation and to provide for his
continued employment with the Bank. The agreement will provide for an initial
annual base salary of $__________ and an initial term of employment of three
years. Commencing on the first anniversary date and continuing on each
anniversary date thereafter, following a performance evaluation of the employee,
each agreement may be extended for an additional year so that the remaining term
shall be three years, unless written notice of non-renewal is given by the Board
of Directors. The agreements also provide that the base salary shall be reviewed
by the Board of Directors not less often than annually. In the event of a change
in control (as defined below), Mr. Ward's base salary shall be increased by at
least 6% annually and the agreements will automatically be extended so that it
will have a three-year term after the change in control. In addition, the
employment agreement provides for possible profitability and discretionary
bonuses and participation in all other pension, profit-sharing or retirement
plans maintained by the Bank or the Company for employees of the Bank, as well
as fringe benefits normally associated with Mr. Ward's office. It is
contemplated that Mr. Ward will receive holiday bonuses computed on the same
basis as those paid to other employees. The employment agreement provides that
it may be terminated by the Bank for cause, as defined in the agreement, and
that they may otherwise be terminated by the Bank (subject to vested rights) or
by Mr. Ward.
The employment agreement provides that the nature of Mr. Ward's
compensation, duties or benefits cannot be diminished following a change in
control of the Bank or the Company. For purposes of the employment agreement, a
change in control generally will occur if (i) after the effective date of the
employment agreement, any "person" (as such term is defined in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) directly or indirectly, acquires beneficial
ownership of voting stock, or acquires irrevocable proxies or any combination of
voting stock and irrevocable proxies, representing 25% or more of any class of
voting securities of either the Company or the Bank, or acquires in any manner
control of the election of a majority of the directors of either the Company or
the Bank, (ii) either the Company or the Bank consolidates or merges with or
into another corporation, association or entity, or is otherwise reorganized,
where neither the Company nor the Bank is the surviving corporation in such
transaction, or (iii) all or substantially all of the assets of either the
Company or the Bank are sold or otherwise transferred to, or are acquired by,
any other entity or group. The agreement also provides that, in the event of the
employee's death following a change in control, the remaining payments to be
made under the agreements will be made to the employee's beneficiary or the
beneficiary's estate.
The employment agreement could have the effect of making it less likely
that the Bank or the Company will be acquired by another entity. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK -- The Company --
Anti-Takeover Effect of Employment Agreement and Benefit Plans."
Severance Plan
In connection with the Conversion, the Bank's Board of Directors plans
to adopt a Severance Plan for the benefit of its employees. The Severance Plan
provides that in the event there is a "change in control" (as defined in the
Severance Plan) of the Bank or the Company and (i) the Bank or any successor of
the Bank terminates the employment of any full time employee of the Bank in
connection with, or within 24 months after the change in control, other than for
"cause" (as defined in the Severance Plan), or (ii) an employee terminates his
or her employment with the Bank or any successor following a decrease in the
level of such employee's
80
annual base salary rate or a transfer of such employee to a location more than
40 miles distant from the employee's primary work station within 24 months after
a change in control, the employee shall be entitled to a severance benefit equal
to the following: (a) if the employee has been an employee for less than twenty
(20) years, the employee shall be entitled to a benefit equal to the greater of
(1) an amount equal to two weeks' salary at the employee's existing salary rate
multiplied times the employee's number of complete years of service as a Bank
employee or (2) the amount of one month's salary at the employee's salary rate
at the time of termination; or (b) if the employee has been an employee for at
least twenty (20) years, the employee shall be entitled to a benefit equal to
the greater of (1) an amount equal to two weeks' salary of the employee's
existing salary rate multiplied times the employee's number of complete years of
service as a Bank employee or (2) an amount equal to two years of the employee's
annual salary at the employee's existing salary rate. Officers of the Bank who,
at the time of a "change in control," are parties to an employment agreement
having a remaining term of more than two years are not covered by the Severance
Plan.
Proposed Management Recognition Plan
The Boards of Directors of the Company and the Bank intend to adopt the
MRP, subject to approval of the stockholders of the Company at a meeting to be
held no sooner than six months following the Conversion. The MRP will serve as a
means of providing the directors and employees of the Bank with an ownership
interest in the Company in a manner designed to encourage such persons to
continue their service to the Bank. All directors and certain employees of the
Bank would receive benefits under the MRP.
The Company's directors are expected to act by majority as trustees of
the trust associated with the MRP (the "MRP Trust"). The trustees of the MRP
Trust (the "MRP Trustees") will have the responsibility to hold and invest all
funds contributed to the MRP Trust.
At any time following approval of the MRP by the Company's
stockholders, the Company and the Bank expect to contribute sufficient funds to
the MRP Trust so that the MRP Trust could purchase a number of shares of Common
Stock equal to 4% of the shares issued in the Conversion. Such shares would be
provided by the issuance of authorized but unissued shares of Common Stock or
shares purchased by the MRP Trust in the open market. Whether such shares will
be purchased in the open market or newly issued by the Company, and the timing
of such purchases, will depend on market and other conditions and the
alternative uses of capital available to the Company. Shares issued to
recipients under the MRP will be restricted and subject to forfeiture as
described below.
Recipients would not be required to pay for shares issued to them under
the MRP. To the extent that the MRP acquires authorized but unissued shares of
Common Stock after the Conversion, the interests of existing shareholders will
be diluted. Assuming the issuance of 759,000 shares in the Conversion and
receipt of stockholder approval, 30,360 shares would be issued pursuant to the
MRP. Under applicable regulations, if the proposed MRP is submitted to and
approved by the stockholders of the Company within one year after consummation
of the Conversion, (i) no employee of the Bank (including Mr. Ward) could
receive more than 25% of the shares issued under the MRP, or 7,590 shares,
assuming the issuance of 759,000 shares in the Conversion, (ii) the six
non-employee directors of the Bank could receive restricted stock grants for an
aggregate of not more than 25% of the shares issued under the MRP, or 7,590
shares, assuming the issuance of 759,000 shares in the Conversion and (iii) none
of the six non-employee directors of the Bank could receive individually more
than 5% of the shares issued under the MRP, or 1,518 shares, assuming the
issuance of 759,000 shares in the Conversion. If the MRP is submitted to and
approved by the Company's stockholders more than one year after consummation of
the Conversion, the regulatory percentage limitations set forth above would not
apply.
81
After the grant of shares of Common Stock under the MRP, recipients
will be entitled to vote all vested and unvested shares and receive all
dividends and other distributions with respect thereto. If the MRP is submitted
for stockholder approval within twelve months after consummation of the
Conversion, the MRP will provide that 20% of the shares granted will vest and
become nonforfeitable on the first anniversary of the date of the grant under
the MRP, and 20% will vest and become nonforfeitable on each subsequent
anniversary date, so that the shares would be completely vested at the end of
five years after the date of grant. Grants of Common Stock under the MRP will
immediately vest upon the disability or death of a recipient.
If the MRP is submitted to the Company's stockholders and approved by
them more than one year after the consummation of the Conversion, the MRP may
provide for a different or no vesting schedule and may provide that grants of
Common Stock under the MRP will become automatically vested upon retirement or
upon a change in control of the Company or the Bank. In such event, it is
expected that a "change in control" would have the same meaning as is set forth
in the employment agreement with Mr. Ward. See "-- Employment Agreement."
Until shares become vested, the right to direct the voting of such
shares and the right to receive dividends thereon may not be sold, assigned,
transferred, exchanged, pledged or otherwise encumbered. If the recipient of
shares under the MRP terminates his service to the Bank prior to the time shares
become vested (and such shares are not automatically vested under the terms of
the MRP), unvested shares would be forfeited to the MRP and would be subject to
future allocations to others. In addition, the recipient would be required to
repay all dividends received with respect to shares that did not become vested.
It is expected that the MRP will provide that it cannot be terminated upon a
change in control of the Company or the Bank unless the acquiror provides for an
equivalent benefit.
If the MRP is approved by the stockholders, the Bank expects to
recognize a compensation expense for the MRP awards in the amount of the fair
market value of the Common Stock granted. The expense would be recognized pro
rata over the years during which shares vest. The recipients of stock grants
would be required to recognize ordinary income equal to the fair market value of
the stock.
Proposed Option Plan
The Boards of Directors of the Company and the Bank intend to adopt the
Option Plan, subject to approval of the stockholders of the Company at a meeting
to be held no sooner than six months following the Conversion. As soon as
practicable following stockholder approval of the Option Plan, Common Stock in
the aggregate amount equal to 10% of the shares issued in the Conversion would
be reserved for future issuance by the Company upon the exercise of the stock
options granted under the Option Plan. Assuming the issuance of between 561,000
and 759,000 shares in the Conversion, an aggregate of between 56,100 and 75,900
shares of Common Stock would be reserved for issuance. However, some or all of
the shares issued upon the exercise of options granted under the Option Plan may
be purchased in the open market at the time of exercise.
Assuming the Option Plan is approved by the stockholders of the
Company, the Option Plan would be administered by a committee of the Company's
Board of Directors. Options granted under the Option Plan will have an option
exercise price of not less than the fair market value of the Common Stock on the
date the options are granted. Options granted under the Option Plan will have a
term of ten years, will not be transferable except upon death and will continue
to be exercisable upon retirement, death or disability. If the Option Plan is
submitted for stockholder approval within twelve months after consummation of
the Conversion, options granted under the Option Plan will have a vesting
schedule which will provide that 20% of the options granted would vest and
become nonforfeitable on the first anniversary of the date of the option
82
grant and 20% will vest and become nonforfeitable on each subsequent anniversary
date, so that the options would be completely vested at the end of five years
after the date of the option grant. Options would become 100% vested upon death
or disability.
If the Option Plan is submitted to and approved by the Company's
stockholders more than one year after consummation of the Conversion, the Option
Plan may provide for a different or no vesting schedule and may provide that
options will become automatically vested upon retirement or upon a change in
control of the Company or the Bank. In such event, it is expected that a "change
in control" would have the same meaning as is set forth in the employment
agreement with Mr. Ward. See "-- Employment Agreement." The Option Plan is
expected to provide that the Plan cannot be terminated upon a change in control
of the Company or the Bank unless the acquiror provides for an equivalent
benefit to holders of unvested options.
Under applicable regulations, if the proposed Option Plan is submitted
to and approved by the stockholders of the Company within one year after
consummation of the Conversion, (i) no employee of the Bank (including Mr. Ward)
could receive more than 25% of the options issued under the Option Plan, or
options to purchase 18,975 shares, assuming the issuance of 759,000 shares in
the Conversion, (ii) the six non-employee directors of the Bank could receive
not more than 25% of the options issued under the Option Plan, or options to
purchase 18,975 shares, assuming the issuance of 759,000 shares in the
Conversion, and (iii) none of the six non-employee directors of the Bank could
receive individually more than 5% of the options issued under the Option Plan,
or options to purchase 3,795 shares, assuming the issuance of 759,000 shares in
the Conversion. If the Option Plan is submitted to and approved by the Company's
stockholders more than one year after consummation of the Conversion, the
regulatory percentage limitations set forth above would not apply.
Options granted to employees under the Option Plan may be "incentive
stock options" which are designed to result in beneficial tax treatment to the
employee but no tax deduction to the Company or the Bank. The holder of an
incentive stock option generally is not taxed for federal income tax purposes on
either the grant or the exercise of the option. However, the optionee must
include in his or her federal alternative minimum tax income any excess (the
"Bargain Element") of the acquired common stock's fair market value at the time
of exercise over the exercise price paid by the optionee. Furthermore, if the
optionee sells, exchanges, gives or otherwise disposes of such common stock
(other than in certain types of transactions) either within two years after the
option was granted or within one year after the option was exercised (an "Early
Disposition"), the optionee generally must recognize the Bargain Element as
compensation income for regular federal income tax purposes. Any gain realized
on the disposition in excess of the Bargain Element is subject to recognition
under the usual rules applying to dispositions of property. If a taxable sale or
exchange is made after such holding periods are satisfied, the difference
between the exercise price and the amount realized upon the disposition of the
common stock generally will constitute a capital gain or loss for tax purposes.
If an optionee exercises an incentive stock option and delivers shares of common
stock as payment for part or all of the exercise price of the stock purchased
("Payment Stock"), no gain or loss generally will be recognized with respect to
the Payment Stock; provided, however, if the Payment Stock was acquired pursuant
to the exercise of an incentive stock option, the optionee will be subject to
recognizing as compensation income the Bargain Element on the Payment Stock as
an Early Disposition if the exchange for the new shares occurs prior to the
expiration of the holding periods for the Payment Stock. The Company generally
would not recognize gain or loss or be entitled to a deduction upon either the
grant of an incentive stock option or the optionee's exercise of an incentive
stock option. However, if there is an Early Disposition, the Company generally
would be entitled to deduct the Bargain Element as compensation paid the
optionee.
83
Options granted to directors under the Option Plan would be
"non-qualified stock options." In general, the holder of a non-qualified stock
option will recognize compensation income equal to the amount by which the fair
market value of the common stock received on the date of exercise exceeds the
sum of the exercise price and any amount paid for the non-qualified stock
option. If the optionee elects to pay the exercise price in whole or in part
with common stock, the optionee generally will not recognize any gain or loss on
the common stock surrendered in payment of the exercise price. The Company would
not recognize any income or be entitled to claim any deduction upon the grant of
a non-qualified stock option. At the time the optionee is required to recognize
compensation income upon the exercise of the non-qualified stock option, the
Company would recognize a compensation expense and be entitled to claim a
deduction in the amount equal to such compensation income.
If the Option Plan is approved by the stockholders of the Company, the
options granted to employees and directors pursuant to the Option Plan would be
issued in recognition of the recipients' past service to the Bank and as an
incentive for their continued performance. No cash consideration will be paid
for the options.
Certain Indebtedness and Transactions of Management
The Bank makes loans to executive officers and directors of the Bank in
the ordinary course of its business. These loans are made on the same terms,
including interest rates and collateral, as those then prevailing for comparable
transactions with nonaffiliated persons, and do not involve more than the normal
risk of collectibility or present any other unfavorable features. The Bank does
not make loans to executive officers and directors of the Bank on terms more
favorable than could be obtained by persons not affiliated with the Bank. There
were no loans outstanding at December 31, 1997 which were made to directors and
officers and their affiliates.
DESCRIPTION OF CAPITAL STOCK
The Company
The Company is authorized to issue 20,000,000 shares of Common Stock
and 5,000,000 shares of preferred stock. Neither the authorized Common Stock nor
the authorized preferred stock has any par value.
Common Stock. General. The Company's Common Stock will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other governmental entity. Upon payment of the
purchase price for the Common Stock, all such stock will be duly authorized,
validly issued, fully paid, and nonassessable.
Dividends. The holders of the Company's Common Stock will be entitled
to receive and share ratably in such dividends on Common Stock as may be
declared by the Board of Directors of the Company out of funds legally available
therefor, subject to applicable statutory and regulatory restrictions. See
"SUPERVISION AND REGULATION -- Regulation of the Company -- Restrictions on
Dividends." The ability of the Company to pay dividends may be dependent on the
receipt of dividends from the Bank. See "DIVIDEND POLICY," "SUPERVISION AND
REGULATION -- Regulation of the Bank -- Restrictions on Dividends and Other
Capital Distributions," and "TAXATION."
Stock Repurchases. The shares of Common Stock do not have any
redemption provisions. Stock repurchases are subject to North Carolina corporate
laws regarding capital distributions.
84
Voting Rights. Upon Conversion, the holders of Common Stock, as the
only class of capital stock of the Company then outstanding, will possess
exclusive voting rights with respect to the Company. Such holders will have the
right to elect the Company's Board of Directors and to act on such other matters
as are required to be presented to stockholders under North Carolina law or as
are otherwise presented to them. Each holder of Common Stock will be entitled to
one vote per share. The holders of Common Stock will have no right to vote their
shares cumulatively in the election of directors. As a result, the holders of a
majority of the shares of Common Stock will have the ability to elect all of the
directors on the Company's Board of Directors.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock of the Company would be
entitled to ratably receive, after payment of or making of adequate provisions
for, all debts and liabilities of the Company and after the rights, if any, of
preferred stockholders of the Company, all remaining assets of the Company
available for distribution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued
by the Company.
Shares Owned by Directors and Executive Officers. All shares of Common
Stock issued in the Conversion to directors and executive officers of the
Company and the Bank will contain a restriction providing that such shares may
not be sold without the written permission of the Administrator for a period of
one year following the date of purchase, except in the event of death of the
director or the executive officer.
Preferred Stock. None of the 5,000,000 shares of the Company's
authorized preferred stock have been issued and none will be issued in the
Conversion. Such stock may be issued in one or more series with such rights,
preferences and designations as the Board of Directors of the Company may from
time to time determine subject to applicable law and regulations. If and when
such shares are issued, holders of such shares may have certain preferences,
powers and rights (including voting rights) senior to the rights of the holders
of the Common Stock. The Board of Directors can (without stockholder approval)
issue preferred stock with voting and conversion rights which could, among other
things, adversely affect the voting power of the holders of the Common Stock and
assist management in impeding an unfriendly takeover or attempted change in
control of the Company that some stockholders may consider to be in their best
interests but to which management is opposed. See "ANTI-TAKEOVER PROVISIONS
AFFECTING THE COMPANY AND THE BANK --The Company -- Restrictions in Articles of
Incorporation and Bylaws." The Company has no current plans to issue preferred
stock.
Restrictions on Acquisition. Acquisitions of the Company and
acquisitions of the capital stock of the Company are restricted by provisions in
the Articles of Incorporation and Bylaws of the Company and by various federal
and state laws and regulations. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE
COMPANY AND THE BANK -- The Company -- Restrictions in Articles of Incorporation
and Bylaws" and "-- Regulatory Restrictions."
The Bank
Common Stock. After consummation of the Conversion, the Bank will be
authorized to issue 100,000 shares of common stock, no par value ("the Bank
Common Stock"). The Bank Common Stock will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other governmental entity.
85
Dividends. The payment of dividends by the Bank is subject to
limitations which are imposed by North Carolina law and regulations. See
"DIVIDEND POLICY" and "SUPERVISION AND REGULATION -- Regulation of the Bank --
Restrictions on Dividends and Other Capital Distributions." In addition, federal
income tax law considerations may affect the ability of the Bank to pay
dividends and make other capital distributions. See "TAXATION." The holders of
the Bank Common Stock will be entitled to receive and share ratably in such
dividends on the Bank Common Stock as may be declared by the Board of Directors
of the Bank out of funds legally available therefor, subject to applicable
statutory and regulatory restrictions.
Voting Rights. As a mutual North Carolina chartered savings bank, the
Bank currently has no stockholders, and voting rights in the Bank are currently
held by the Bank's members (depositors and borrowers). Members elect the Bank's
Board of Directors and vote on such other matters as are required to be
presented to them under North Carolina law.
Upon Conversion, the Company, as sole stockholder of the Bank, will
possess the exclusive voting rights with respect to the Bank Common Stock, will
elect the Bank's Board of Directors and will act on such other matters as are
required to be presented to stockholders under North Carolina law or as are
otherwise presented to stockholders by the Bank's Board of Directors. The
holders of the Bank Common Stock will have no right to vote their shares
cumulatively in the election of directors of the Bank.
Liquidation Rights. After the Conversion, in the event of any
liquidation, dissolution or winding up of the Bank, the Company, as holder of
all of the Bank's outstanding capital stock, would be entitled to receive all
remaining assets of the Bank available for distribution, after payment of or
making of adequate provisions for, all debts and liabilities of the Bank
(including all deposit accounts and accrued interest thereon) and after
distribution of the balance in the liquidation account established in connection
with the Conversion to Eligible Account Holders and Supplemental Eligible
Account Holders. See "THE CONVERSION -- Effects of Conversion -- Liquidation
Rights."
Preemptive Rights. Holders of the Bank Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued by
the Bank.
Restrictions on Acquisition. Acquisitions of the Bank and acquisitions
of its capital stock are restricted by various federal and state laws and
regulations. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK --
The Bank."
ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK
The Company
Restrictions in Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of the Company contain certain provisions that are
intended to encourage a potential acquiror to negotiate any proposed acquisition
of the Company directly with the Company's Board of Directors. An unsolicited
non-negotiated takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management. The Board of Directors believes that these provisions will encourage
such negotiations and discourage hostile takeover attempts. It is also the Board
of Directors' view that these provisions should not discourage persons from
proposing a merger or transaction at prices reflective of the true value of the
Company and that otherwise is
86
in the best interests of all stockholders. However, these provisions may have
the effect of discouraging offers to purchase the Company or its securities
which are not approved by the Board of Directors but which certain of the
Company's stockholders may deem to be in their best interests or pursuant to
which stockholders would receive a substantial premium for their shares over the
current market prices. Therefore, the existence of such anti-takeover provisions
in fact may not always be in the best interests of all shareholders.
Stockholders who might desire to participate in such a takeover not supported by
management may not have an opportunity to do so. Such provisions will also
render the removal of the current Board of Directors and management more
difficult. Nevertheless, the Boards of Directors of the Bank and the Company
believe these provisions are in the best interests of the stockholders because
they will assist the Company's Board of Directors in managing the affairs of the
Company in the manner they believe to be in the best interests of stockholders
generally and because a company's board of directors is often best able in terms
of knowledge regarding the company's business and prospects, as well as
resources, to negotiate the best transaction for its stockholders as a whole.
The following description of certain of the provisions of the Articles
of Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each instance to such Articles of Incorporation and Bylaws.
See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these documents.
Board of Directors. The Bylaws of the Company provide that the number
of directors shall not be less than five nor more than 15. The initial number of
directors is seven, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Company to gain majority representation on the Board of Directors
in a relatively short period of time. The Company believes these provisions to
be important to continuity in the composition and policies of the Board of
Directors.
The Articles of Incorporation provide that, if and when the number of
directors is at least nine, there will be staggered elections of directors so
that the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years each. This provision also has
the effect of making it more difficult for a person seeking to acquire control
of the Company to gain majority representation on the Board of Directors.
The Articles of Incorporation and Bylaws of the Company provide that
directors may be removed prior to the end of their term only for cause.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Company's shares cannot be assured representation on the Board
of Directors, the absence of cumulative voting may discourage accumulations of
the Company's shares or proxy contests that would result in changes in the
Company's management. The Board of Directors believes that (i) elimination of
cumulative voting will help to assure continuity and stability of management and
policies; (ii) directors should be elected by a majority of the stockholders to
represent the interests of the stockholders as a whole rather than be the
special representatives of particular minority interests; and (iii) efforts to
elect directors representing specific minority interests are potentially
divisive and could impair the operations of the Company.
87
Special Meetings. The Bylaws of the Company provide that special
meetings of stockholders of the Company may be called by the Chairman of the
Board, the Chief Executive Officer, the President, or by the Board of Directors.
If a special meeting is not called by such persons or entities, stockholder
proposals cannot be presented to the stockholders for action until the next
annual meeting.
Capital Stock. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock and 5,000,000 shares of
preferred stock. The shares of common stock and preferred stock authorized in
addition to the number of shares of Common Stock to be issued pursuant to the
Conversion were authorized to provide the Company's Board of Directors with
flexibility to issue additional shares, without further stockholder approval,
for proper corporate purposes, including financing, acquisitions, stock
dividends, stock splits, director and employee stock options, grants of
restricted stock to directors and certain employees and other appropriate
purposes. However, issuance of additional authorized shares may also have the
effect of impeding or deterring future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms
of any one or more series of preferred stock, including voting rights,
conversion rates, dividend rights, and liquidation preferences, which could
adversely affect the voting power of the holders of the Common Stock and
discourage an attempt to acquire control of the Company. The Board of Directors
does not intend to issue any preferred stock, except on terms which it deems to
be in the best interests of the Company and its stockholders. However, the Board
of Directors has the power, to the extent consistent with its fiduciary duties,
to issue preferred stock to persons friendly to management or otherwise in order
to impede attempts by third parties to acquire voting control of the Company and
to impede other transactions not favored by management. The Board of Directors
currently has no plans for the issuance of additional shares of Common Stock
(except for such shares as may be necessary to fund a MRP and a Option Plan) or
of shares of preferred stock.
Director Nominations. The Bylaws of the Company require a stockholder
who intends to nominate a candidate for election to the Board of Directors at a
stockholders' meeting to give written notice to the Secretary of the Company at
least 50 days (but not more than 90 days) in advance of the date of the meeting
at which such nominations will be made. The nomination notice is also required
to include specified information concerning the nominee and the proposing
stockholder. The Board of Directors of the Company believes that it is in the
best interests of the Company and its stockholders to provide sufficient time
for the Board of Directors to study all nominations and to determine whether to
recommend to the stockholders that such nominees be considered.
Supermajority Voting Provisions. The Company's Articles of
Incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 75% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on the Company's Board of Directors. "Continuing
Directors" generally includes all members of the Board of Directors who are not
affiliated with any individual, partnership, trust or other person or entity (or
the affiliates and associates of such person or entity) which is a beneficial
owner of 10% or more of the voting shares of the Company. This provision could
tend to make the acquisition of the Company more difficult to accomplish without
the cooperation or favorable recommendation of the Company's Board of Directors.
Anti-Takeover Effect of Employment Agreements and Benefit Plans. If
approved by the stockholders of the Company at a meeting of stockholders
following the Conversion, the MRP and the Option Plan will provide for the
ownership of additional shares of Common Stock by the employees and the
directors of the Bank and for voting control by directors and certain employees
over shares held by the MRP and Option
88
Plan which are attributable to grants made to them under such plans even though
the grants are not yet vested. See "MANAGEMENT OF THE BANK -- Proposed
Management Recognition Plan" and "-- Proposed Option Plan."
If (i) the Option Plan is approved by the stockholders of the Company
within one year after the Conversion and all of the stock options which could be
granted to directors and executive officers under the Option Plan are granted
and exercised or the shares for such options are acquired by the Option Plan and
all option shares are acquired in the open market, (ii) the MRP is approved by
the stockholders of the Company within one year after the Conversion, all of the
MRP shares which could be granted to directors and executive officers are
granted and issued and all such shares are acquired in the open market, (iii)
the Company did not issue any additional shares of its Common Stock, the shares
held by directors and executive officers and their associates as a group,
including (a) shares purchased outright in the Conversion, (b) shares purchased
pursuant to the Option Plan and (c) shares granted under the MRP, would give
such persons effective control over as much as 19.37% or 16.88%, at the minimum
and maximum of the Estimated Valuation Range, respectively, of the Common Stock
issued and outstanding.
The existence of the employment agreements with employees could make a
business combination with the Bank more costly and could discourage such
transactions. See "MANAGEMENT OF THE BANK -- Employment Agreements."
Regulatory Restrictions. Applicable North Carolina regulations provide
that for a period of three years following the Conversion, the prior written
approval of the Administrator will be required before any person may, directly
or indirectly, acquire beneficial ownership of or make any offer to acquire any
stock or other equity security of the Company if, after the acquisition or
consummation of such offer, such person would be the beneficial owner of more
than 10% of such class of stock or other class of equity security of the
Company. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Company or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of the Company by a corporation whose ownership is or
will be substantially the same as the ownership of the Company, provided that
the offer or acquisition is made more than one year following the consummation
of the Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Board of Directors of the Company and the Bank support the
acquisition and (ii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Company and the Bank and the public interests will not
be adversely affected.
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and Federal Reserve
be obtained prior to any person or company acquiring "control" of a North
Carolina-chartered savings bank or a North Carolina-chartered savings bank
Company. Upon acquiring control, such acquiror will be deemed to be a bank
Company. Control is conclusively presumed to exist if, among other things, an
individual or company acquires the power, directly or indirectly, to direct the
management or policies of the Company or the Bank or to vote 25% or more of any
class of voting stock.
89
Control is rebuttably presumed to exist under the Change in Bank Control Act if,
among other things, a person acquires more than 10% of any class of voting
stock, and the issuer's securities are registered under Section 12 of the
Exchange Act or the person would be the single largest stockholder. Restrictions
applicable to the operations of bank holding companies and conditions imposed by
the Federal Reserve in connection with its approval of such acquisitions may
deter potential acquirors from seeking to obtain control of the Company.
See "SUPERVISION AND REGULATION -- Regulation of the Company."
The Bank
Upon consummation of the Conversion, the Bank will become a
wholly-owned subsidiary of the Company, and, consequently, restrictions on the
acquisition of the Bank would have a more limited effect than if the Bank's
common stock were held directly by the stockholders purchasing in the
Conversion. However, restrictions on the acquisition of the Bank may discourage
takeover attempts of the Company in order to gain immediate control of the Bank.
Regulatory Restrictions. The Administrator and the Federal Reserve have
conditionally approved the Company's acquisition of all of the stock of the Bank
issued in the Conversion. For three years following completion of a conversion,
North Carolina conversion regulations require the prior written approval of the
Administrator before any person may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of an equity
security of a converting state savings bank such as the Bank. If any person were
to so acquire the beneficial ownership of more than 10% of any class of any
equity security without prior written approval, the securities beneficially
owned in excess of 10% would not be counted as shares entitled to vote and would
not be voted or counted as voting shares in connection with any matter submitted
to stockholders for a vote. Approval is not required for (i) any offer with view
toward public resale made exclusively to the Bank or its underwriters or the
selling group acting on its behalf or (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Bank by a
corporation whose ownership is or will be substantially the same as the
ownership of the Bank, provided that the offer or acquisition is made more than
one year following the consummation of the Conversion. Similarly, Federal
Reserve approval is required before any person or entity may acquire "control"
of the Bank. See "-- The Company-- Regulatory Restrictions."
Board of Directors. The amended Articles of Incorporation of the Bank
upon consummation of the Conversion will provide that the number of directors
may be no less than five. The initial number of directors will be five, but such
number may be changed by resolution of the Board of Directors. This provision
has the effect of enabling the Board of Directors to elect directors friendly to
management in the event of a non-negotiated takeover attempt. The Bank's Bylaws
also provide for staggered elections of directors if and when the total number
of directors is at least nine. These provisions are designed to make it more
difficult for a person seeking to acquire control of the Bank to gain majority
representation on the Board of Directors in a relatively short period of time.
The Bank believes these provisions to be important to continuity in the
composition and policies of its Board of Directors.
90
CERTAIN PROVISIONS OF THE CHARTERS AND BYLAWS OF
THE COMPANY AND THE BANK
Limitations of Liability
The Charters of both the Company and the Bank provide that the
directors of each shall not be personally liable to the corporation they serve
or its stockholders for money damages for breach of any duty as a director to
the fullest extent permitted by North Carolina law. The North Carolina Business
Corporation Act authorizes such provisions, but provides that they shall not be
effective with respect to (i) acts or omissions of directors that the director
knew or believed at the time were clearly in conflict with the best interests of
the corporation, (ii) transactions from which the director derived an improper
personal benefit, (iii) liability for certain unlawful distributions of
corporation assets, and (iv) with respect to acts or omissions that occurred
prior to the effectiveness of the provisions. The Bank's mutual charter contains
a similar provision.
Indemnification
The Bylaws of both the Company and the Bank provide that any person who
serves as a director, officer, employee or agent of the corporation shall have a
right to be indemnified by the corporation they serve to the full extent allowed
by applicable law for liability or litigation expense arising out of activities
in such capacities. Both the Bylaws and the North Carolina Business Corporation
Act provide that there shall be no indemnification for liability or expense
arising out of activities which were known or believed by such persons at the
time of such activities to be clearly in conflict with the best interests of the
corporation. The Bank's mutual bylaws contain a similar provision.
Disclosure of SEC Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company and the Bank pursuant to the foregoing provisions, or otherwise, the
Company and the Bank have been advised that in the opinion of the SEC 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 Company and the Bank of
expenses incurred or paid by a director, officer or controlling person of the
Company and the Bank 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 Company and the Bank will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED AND THE ADMINISTRATOR HAS
APPROVED COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN SUBJECT TO
APPROVAL BY THE MEMBERS OF THE BANK AND TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. APPROVAL BY THE ADMINISTRATOR DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN BY THE ADMINISTRATOR.
91
General
The Bank was organized and has operated as a traditional savings and
loan association. It recognizes that the banking and financial services
industries are in the process of fundamental changes, reflecting changes in the
local, national and international economies, technological changes and changes
in state and federal laws. As a result, for several years the Bank has been
studying the environment in which it operates and its strategic options.
As a result of its study of its strategic options, the Bank adopted the
Plan. The Bank believes that converting the bank from the mutual to stock form
and organizing the Company will provide increased flexibility for the Bank and
the Company to react to changes in their operating environment, regardless of
the strategies ultimately chosen.
The existing management of the Bank and the Company believes that at
this time it is in the best interests of the Bank, the Company and the
stockholders of the Company for the Company to remain an independent financial
institution. Assuming the consummation of the Conversion, the Company and the
Bank intend to pursue the business strategy described in this Prospectus with
the goal of enhancing shareholder value over the long term. Neither the Company
nor the Bank has any existing plan to consider any business combination, and
neither company has any agreement or understanding with respect to any possible
business combination.
The Board of Director's adoption of the Plan is subject to approval by
the members of the Bank and receipt of required regulatory approvals. Pursuant
to the Plan, the Bank will be converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank and will become a
wholly-owned subsidiary of the Company. The Company will issue the Common Stock
to be sold in the Conversion and will use that portion of the net proceeds
thereof which it does not retain to purchase the capital stock of the Bank. By
letter dated ________________, 1998, the Administrator approved the Plan,
subject to approval by the members of the Bank and satisfaction of certain other
conditions. The Special Meeting will be held on _________________, 1998 for the
purpose of considering approval of the Plan.
Consummation of the Conversion is contingent also upon receipt of the
approvals of the Federal Reserve and the Administrator for the Company to
acquire the Bank. Those approvals have been received. The Conversion cannot be
consummated until the expiration of the Bank Merger Act of 1956 waiting period
which began to run upon approval by the Federal Reserve of the Company's
application and expires ________________, 1998. Finally, consummation of the
Conversion is contingent upon receipt from the FDIC of a final non-objection
letter with respect to the transaction. The FDIC has issued a conditional
notification that it does not intend to object to the Conversion.
The following is a summary of all material provisions of the Plan. It
is qualified in its entirety by the provisions of the Plan, which contains a
more detailed description of the terms of the Conversion. The Plan is attached
as Attachment I to the Bank's Proxy Statement for the Special Meeting which has
been delivered to all members of the Bank. The Plan can also be obtained by
written request from the Bank. See "ADDITIONAL INFORMATION."
92
Purposes of Conversion
The Bank, as a mutual savings bank, now has no stockholders and no
authority to issue capital stock. By converting to the stock form of
organization, the Bank will be structured in the form used by most commercial
banks, other business entities and a substantial number of savings institutions.
Conversion to a North Carolina-chartered capital stock savings bank and the
formation of a Company offers a number of advantages which may be important to
the future and performance of the Bank, including (i) a larger capital base for
the Bank's operations, (ii) an enhanced future access to capital markets and
(iii) an opportunity for depositors of the Bank to become stockholders of the
Company.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Articles of Incorporation will permit the
Company, subject to market conditions, to raise additional equity capital
through further sales of securities. Following the Conversion, the Company will
also be able to use stock-related incentive programs to attract, retain and
provide incentives for qualified directors and executive and other personnel of
the Company and the Bank. See "MANAGEMENT OF THE BANK -- Stock Based Benefits."
Formation of the Company will provide greater flexibility than the Bank
would otherwise have to expand and diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, both mutual and stock institutions, as well as other companies. However,
there are no current plans, arrangements, understandings or agreements regarding
any such business combinations.
Effects of Conversion
General. Each person with a deposit account in the Bank has pro rata
rights, based upon the balance in his or her account, in the net worth of the
Bank upon liquidation. However, this right is tied to the depositor's account
and has no tangible market value separate from such deposit account. Further,
the Bank's depositors can realize value with respect to their interests only in
the unlikely event that the Bank is liquidated and has a positive net worth. In
such an event, the depositors of record at that time, as owners, would share pro
rata in any residual surplus after other claims, including those with respect to
the deposit accounts of depositors, are paid.
Upon the Bank's Conversion to stock form, its Certificate of
Incorporation will be amended to authorize the issuance of permanent
nonwithdrawable capital stock to represent the ownership of the Bank, including
its net worth. The capital stock will be separate and apart from deposit
accounts and will not be insured by the FDIC or any other governmental entity.
Certificates will be issued to evidence ownership of the capital stock. All of
the outstanding capital stock of the Bank will be acquired by the Company, which
in turn will issue its Common Stock to purchasers in the Conversion. The stock
certificates issued by the Company will be transferable and, therefore, subject
to applicable law, the stock could be sold or traded if a purchaser is available
with no effect on any deposit account the seller may hold at the Bank.
Voting Rights. Under the Bank's current Certificate of Incorporation
and Bylaws, deposit account holders and borrowers have voting rights with
respect to certain matters relating to the Bank, including the election of
directors. After the Conversion, (i) neither deposit account holders nor
borrowers will have voting rights with respect to the Bank and will therefore
not be able to elect directors of the Bank or control its affairs; (ii) voting
rights with respect to the Bank will be vested in the Company as the sole
stockholder of the Bank; and (iii) voting rights with respect to the Company
will be vested in the Company's stockholders. Each
93
purchaser of Common Stock will be entitled to vote on any matters to be
considered by the Company's stockholders. For a description of the voting rights
of the holders of Common Stock, see "DESCRIPTION OF CAPITAL STOCK."
Deposit Accounts and Loans. The account balances, interest rates and
other terms of deposit accounts at the Bank and the existing deposit insurance
coverage of such accounts will not be affected by the Conversion (except to the
extent that a depositor directs the Bank to withdraw funds to pay for his or her
Common Stock). Furthermore, the Conversion will not affect any loan account, the
balances, interest rates, maturities or other terms of these accounts, or the
obligations of borrowers under their individual contractual arrangements with
the Bank.
Continuity. The Bank will continue without interruption, during and
after completion of the Conversion, to provide its services to depositors and
borrowers pursuant to existing policies and will maintain its office operated by
the existing management and employees of the Bank.
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank, either before or after Conversion, account holders would have claims
for the amount of their deposit accounts, including accrued interest, and would
receive the protection of deposit insurance up to applicable limits. In addition
to deposit insurance coverage, depositor liquidation rights before and after
Conversion would be as follows:
Liquidation Rights Prior to the Conversion. Prior to the Conversion, in
the event of a complete liquidation of the Bank, each holder of a deposit
account in the Bank would receive such holder's pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts, including
accrued interest). Such holder's pro rata share of such remaining assets, if
any, would be in the same proportion of such assets as the value of such
holder's deposit account was to the total value of all deposit accounts in the
Bank at the time of liquidation.
Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan provides that, upon completion of the
Conversion, a memorandum account called a "Liquidation Account" will be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. The amount of the Liquidation Account will be equal to
the net worth of the Bank as of the date of its latest statement of financial
condition contained in the final prospectus relating to the sale of shares of
Common Stock in the Conversion. Under applicable regulations, the Bank will not
be permitted to pay dividends on, or repurchase any of, its capital stock if its
net worth would thereby be reduced below the aggregate amount then required for
the Liquidation Account. See "DIVIDEND POLICY" and SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions." After the Conversion, Eligible Account Holders and Supplemental
Eligible Account Holders will be entitled, in the event of a liquidation of the
Bank, to receive liquidating distributions of any assets remaining after payment
of all creditors' claims (including the claims of all depositors to the
withdrawal values of their deposit accounts, including accrued interest), before
any distributions are made on the Bank's capital stock, equal to their
proportionate interests at that time in the Liquidation Account.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have an initial interest ("subaccount balance") in the Liquidation Account
for each deposit account held as of September 30, 1997 (the Eligibility Record
Date) or as of March 31, 1998 (the Supplemental Eligibility Record Date),
respectively. Each initial subaccount balance will be the amount determined by
multiplying the total opening balance in the Liquidation Account by the
Qualifying Deposit (a deposit of at least $50 as of the Eligibility Record Date
or Supplemental Eligibility Record Date, as applicable) of such deposit account
divided by the total of all
94
Qualifying Deposits on that date. If the amount in the deposit account on any
subsequent annual closing date of the Bank is less than the balance in such
deposit account on any other annual closing date or the balance in such an
account on the Eligibility Record Date or Supplemental Eligibility Record Date,
as the case may be, this interest in the Liquidation Account will be reduced by
an amount proportionate to any such reduction, and will not thereafter be
increased despite any subsequent increase in the related deposit account. An
Eligible Account Holder's or Supplemental Eligible Account Holder's interest in
the Liquidation Account will cease to exist if the deposit account is closed.
The Liquidation Account will never increase and will be correspondingly reduced
as the interests in the Liquidation Account are reduced or cease to exist. In
the event of a liquidation, any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Company, as sole stockholder of the Bank.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC- insured depository institution, whether or not
the Bank is the surviving institution, would not be viewed as a complete
liquidation for purposes of distribution of the Liquidation Account. In any such
transaction, the Liquidation Account would be assumed by the surviving
institution to the full extent authorized by regulations of the Administrator as
then in effect.
Offering of Common Stock
As part of the Conversion, the Company is making the Subscription
Offering of Common Stock in the priorities and to the persons described below
under "-- Subscription Offering." In addition, any shares which remain
unsubscribed for in the Subscription Offering will be offered in the Community
Offering to members of the general public, with priority being given to natural
persons and trusts of natural persons residing or located in the Local
Community, including IRAs, Keogh accounts and similar retirement accounts
established for the benefit of natural persons who are residents of the Local
Community. See "-- Community Offering." If necessary, all shares of Common Stock
not purchased in the Subscription Offering and Community Offering, if any, may
be offered for sale to the general public through a syndicate of registered
broker-dealers as selected dealers to be managed by Trident Securities. See "--
Syndicated Community Offering." The Plan requires that the aggregate dollar
amount of the Common Stock sold equal not less than the minimum nor more than
the maximum of the Estimated Valuation Range which is established in connection
with the Conversion; provided, however, with the consent of the Administrator
and the FDIC the aggregate dollar amount of the Common Stock sold may be
increased to as much as 15% above the maximum of the Estimated Valuation Range,
without a resolicitation of subscribers or any right to cancel subscriptions, in
order to reflect changes in market and financial conditions following
commencement of the Subscription Offering. See "-- Purchase Price of Common
Stock and Number of Shares Offered." If the Syndicated Community Offering is not
feasible or successful and Common Stock having an aggregate value of at least
the minimum of the Estimated Valuation Range is not subscribed for in the
Subscription and Community Offering, the Company will consult with the
Administrator to determine an appropriate alternative method of selling all
shares of Common Stock offered in the Conversion and not subscribed for in the
Offering. The same per share price ($10.00) will be paid by purchasers in the
Subscription, Community and Syndicated Community Offering.
The Subscription Offering will expire at the Expiration Time, which is
12:00 noon, Eastern Time, on ___________________, 1998, unless, with the
approval of the Administrator, the offering period is extended by the Company
and the Bank. The Community Offering, if any, may begin at any time after the
Subscription Offering begins and will terminate at the Expiration Time or at any
time thereafter, but not later than ________________, 1998, unless extended with
the approval of the Administrator. The Syndicated
95
Community Offering, if any, or other sale of all shares not subscribed for in
the Subscription and Community Offering, will be made as soon as practicable
following the Expiration Time. The sale of the Common Stock must, under the
North Carolina conversion regulations, be completed within 45 days after the
Expiration Time unless such period is extended with the approval of the
Administrator. In the event such an extension is approved, subscribers would be
resolicited and would be given the opportunity to increase (subject to maximum
purchase limitations), decrease (subject to minimum purchase limitations) or
rescind their subscriptions. If a subscriber fails to respond to the
resolicitation by the end of the resolicitation period, the subscription of such
subscriber will be canceled, funds submitted with the subscription will be
refunded promptly with interest at the Bank's passbook savings rate, and holds
on accounts from which withdrawals were designated will be released. Any such
solicitation will be by means of an amended prospectus filed with the SEC. In
such event, substantial additional printing, legal and accounting expenses may
be incurred in completing the Conversion.
The commencement and completion of any required Community or Syndicated
Community Offering will be subject to market conditions and other factors beyond
the Company's control. Accordingly, no assurance can be given that any required
Community or Syndicated Community Offering or other sale of Common Stock will be
commenced at any particular time or as to the length of time that will be
required to complete the sale of all shares of Common Stock offered, and
significant changes may occur in the estimated pro forma market value of the
Common Stock, together with corresponding changes in the offering price, the
number of shares being offered, and the net proceeds realized from the sale of
the Common Stock. The Plan requires that the Conversion be completed within 24
months after the date of approval of the Plan by the Bank's members.
Subscription Offering
In accordance with North Carolina conversion regulations,
non-transferable Subscription Rights have been granted under the Plan to the
following persons in the following order of priority: (i) the Bank's Eligible
Account Holders, who are depositors as of September 30, 1996 who had aggregate
deposits at the close of business on such date of at least $50.00 ("Qualifying
Deposits"); (ii) the Bank's Supplemental Eligible Account Holders, who are
depositors as of December 31, 1997 who had Qualifying Deposits on such date;
(iii) the Bank's Other Members, who are depositor and borrower members as of
______________, 1998, the voting record date for the Special Meeting, who are
not Eligible Account Holders or Supplemental Eligible Account Holders; and (iv)
directors, officers and employees of the Bank who are not Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members, in the
priorities and subject to the limitations described herein. All subscriptions
received will be subject to the availability of Common Stock after satisfaction
of subscriptions of all persons having prior rights in the Subscription
Offering, and to the maximum purchase limitations and other terms and conditions
set forth in the Plan and described below.
In order to ensure proper identification of Subscription Rights, it is
the responsibility of subscribers in the Subscription Offering to provide
correct account verification information on the Order Forms.
Eligible Account Holders. Each Eligible Account Holder has been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the maximum purchase limitation described in
"--Minimum and Maximum Purchase Limitations." If Eligible Account Holders
subscribe for more shares of Common Stock than are available for purchase, the
shares offered will first be allocated among the subscribing Eligible Account
Holders so as to enable each subscribing Eligible Account Holder to the extent
possible, to purchase the number of shares necessary to make his or her total
allocation
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of Common Stock equal to the lesser of 100 shares of Common Stock or the number
of shares subscribed for by such Eligible Account Holder. Any shares remaining
after such allocation will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that each such
Eligible Account Holder's Qualifying Deposits bears to the total of the
Qualifying Deposits of all such Eligible Account Holders.
Supplemental Eligible Account Holders. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, each Supplemental Eligible Account Holder has been granted, without
payment therefor, non-transferable Subscription Rights to purchase Common Stock
up to the maximum purchase limitation described in "-- Minimum and Maximum
Purchase Limitations." If Supplemental Eligible Account Holders subscribe for
more shares of Common Stock than are available for purchase, the shares offered
will first be allocated among the subscribing Supplemental Eligible Account
Holders so as to enable each subscribing Supplemental Eligible Account Holder to
the extent possible, to purchase the number of shares necessary to make his or
her total allocation of Common Stock equal to the lesser of 100 shares of Common
Stock or the number of shares subscribed for by such Supplemental Eligible
Account Holder. Any shares remaining after such allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that each such Supplemental Eligible
Account Holder's Qualifying Deposits bears to the total of the Qualifying
Deposits of all such Supplemental Eligible Account Holders.
Other Members. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders and Supplemental
Eligible Account Holders, members of the Bank as of ________________, 1998 (the
voting record date for the Special Meeting), other than Eligible Account Holders
and Supplemental Eligible Account Holders (Other Members) have each been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the maximum purchase limitation described in "--
Minimum and Maximum Purchase Limitations." If Other Members subscribe for more
shares of Common Stock than remain available for purchase by Other Members,
shares will be allocated among the subscribing Other Members in the proportion
that the number of votes eligible to be cast by each Other Member bears to the
total number of votes eligible to be cast at the Special Meeting by all Other
Members whose subscriptions remain unsatisfied.
Employees, Officers, and Directors. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members, the Bank's
employees, officers and directors who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members have each been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "-- Minimum and
Maximum Purchase Limitations." If more shares are subscribed for by such
employees, officers and directors than are available for purchase by them, the
available shares will be allocated among subscribing employees, officers and
directors pro rata on the basis of the amount of their respective subscriptions.
Community Offering
Any shares of Common Stock which remain unsubscribed for in the
Subscription Offering may be offered by the Company to members of the general
public in the Community Offering, which may commence at any time after
commencement of the Subscription Offering, with priority given to natural
persons and trusts of natural persons residing or located in Anson County in
North Carolina (the Local Community), including IRA accounts, Keogh accounts and
similar retirement accounts established for the benefit of natural persons
97
who are residents of, the Local Community. The Community Offering may terminate
at the Expiration Time or at any time thereafter, but no later than
________________, 1998, unless further extended with the consent of the
Administrator. The opportunity to subscribe for shares of Common Stock in the
Community Offering is subject to the right of the Bank and the Company, in their
sole discretion, to accept or reject any such orders, in whole or in part,
either at the time of receipt of an order or as soon as practicable following
the termination of the Community Offering. In the event the Bank and the Company
reject any such orders after receipt, subscribers will be promptly notified and
all funds submitted with subscriptions will be returned with interest at the
Bank's passbook savings rate.
In the event that subscriptions by subscribers in the Community
Offering whose orders would otherwise be accepted exceed the shares available
for purchase in the Community Offering, then subscriptions of natural persons
and trusts of natural persons residing in the Local Community, including IRAs,
Keogh accounts and similar retirement accounts established for the benefit of
natural persons who are residents of the Local Community ("First Priority
Community Subscribers") will be filled in full up to applicable purchase
limitations (to the extent such subscriptions are not rejected by the Bank and
the Company) prior to any allocation to other subscribers in the Community
Offering.
In the event of an oversubscription by First Priority Community
Subscribers whose orders would otherwise be accepted, shares of Common Stock
will be allocated first to each First Priority Community Subscriber whose order
is accepted in full or in part by the Bank and the Company in the entire amount
of such order up to a number of shares no greater than 7,500 shares, which
number shall be determined by the Board of Directors of the Bank prior to the
time the Conversion is consummated with the intent to provide for a wide
distribution of shares among such subscribers. Any shares remaining after such
allocation will be allocated to each First Priority Community Subscriber whose
order is accepted in full or in part on an equal number of shares basis until
all orders are filled. Such allocation shall also be applied to subscriptions by
other subscribers in the Community Offering, in the event shares are available
for such subscribers but there is an oversubscription by them.
In order to ensure proper allocation of shares in the event of an
oversubscription, it is the responsibility of subscribers in the Community
Offering to provide correct addresses of residence on the Order Forms.
Syndicated Community Offering
The Plan provides that, if necessary, all shares of Common Stock not
purchased in the Subscription and Community Offering, if any, may be offered for
sale to the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers as selected dealers ("Selected Dealers")
to be formed and managed by Trident Securities acting as agent of the Company in
the sale of the Common Stock. The Company and the Bank have the right to reject
orders, in whole or in part, in their sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Syndicated Community Offering; however, Trident Securities has agreed to use
its best efforts in the sale of shares in the Syndicated Community Offering.
Common Stock sold in the Syndicated Community Offering will be sold at the
purchase price of $10.00 per share which is the same price as all other shares
being offered in the Conversion.
It is estimated that the Selected Dealers will receive a negotiated
commission based on the amount of Common Stock sold by the Selected Dealer,
payable by the Company. During the Syndicated Community Offering, Selected
Dealers may only solicit indications of interest from their customers to place
orders with
98
the Company as of a certain date (the "Order Date") for the purchase of shares
of Common Stock. When and if Trident Securities and the Company believe that
enough indications and orders have been received in the Offering to consummate
the Conversion, Trident Securities will request, as of the Order Date, Selected
Dealers to submit orders to purchase shares for which they have received
indications of interest from their customers. Selected Dealers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected Dealers will debit the accounts of their customers on a
date which will be three business days from the Order Date ("Debit Date").
Customers who authorize Selected Dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Debit Date. On the next business day following the Debit Date, Selected Dealers
will remit funds to the account that the Company established for each Selected
Dealer. After payment has been received by the Company from Selected Dealers,
funds will earn interest at the Bank's passbook savings rate until the
consummation of the Conversion. In the event the Conversion is not consummated
as described above, funds with interest will be returned promptly to the
Selected Dealers, who, in turn, will promptly credit their customers' brokerage
accounts.
The Syndicated Community Offering may close at any time after the
Expiration Time at the discretion of the Bank and the Company, but in no case
later than ____________________, 1998.
Prospectus Delivery
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, in accordance with Rule 15c2-8 under the Exchange
Act, no Prospectus will be mailed later than five days or hand delivered any
later than two days prior to the Expiration Time. Execution of the Order Form
will confirm receipt or delivery of a Prospectus in accordance with Rule 15c2-8.
Order Forms will be distributed only with a Prospectus. Neither the Company, the
Bank, nor Trident Securities is obligated to deliver a Prospectus and an Order
Form by any means other than the U.S. Postal Service.
Fractional Shares
In making allocations in the event of oversubscriptions, all
computations will be rounded down to the nearest whole share; no fractional
shares will be issued. Excess and other amounts sent by subscribers which are
not used to satisfy subscriptions will be refunded with interest at the Bank's
passbook savings rate, and amounts designated for withdrawal from deposit
accounts will be released.
Purchase Price of Common Stock and Number of Shares Offered
The purchase price of shares of Common Stock sold in the Offering will
be $10.00 per share. The purchase price was determined by the Boards of
Directors of the Company and the Bank in consultation with the Bank's financial
advisor and sales agent, Trident Securities. The North Carolina regulations
governing conversions of North Carolina-chartered mutual savings banks to stock
form require that the aggregate purchase price of the shares of Common Stock of
the Company sold in connection with the Conversion be equal to not less than the
minimum, nor more than the maximum, of the Estimated Valuation Range which is
established by an independent appraisal in the Conversion and is described
below; provided, however, that with the consent of the Administrator and the
FDIC the aggregate purchase price of the Common Stock sold may be increased to
up to 15% above the maximum of the Estimated Valuation Range, without a
resolicitation of subscribers or any right to cancel, rescind or change
subscription orders, to reflect changes in market and financial conditions
following commencement of the Subscription Offering.
99
FDIC rules with respect to appraisals require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the Conversion pursuant to its business plan.
The Bank has retained Ferguson, an independent appraisal firm
experienced in the valuation and appraisal of savings institutions and their
holding companies, to prepare an appraisal of the pro forma market value of the
Bank and the Company and to assist the Bank in preparing a business plan. For
its services in determining such valuation and assisting with the business plan,
Ferguson will receive an aggregate fee of $25,000 and will be reimbursed for its
out-of-pocket expenses.
Ferguson has informed the Bank that its appraisal has been made in
reliance upon the information contained in this Prospectus, including the
financial statements of the Bank. Ferguson has further informed the Bank that it
also considered the following factors, among others, in making the appraisal:
(i) the present and projected operating results and financial condition of the
Company and the Bank; (ii) the economic and demographic conditions in the Bank's
existing market area; (iii) certain historical, financial and other information
relating to the Bank; (iv) the proposed dividend policy of the Company; (v) a
comparative evaluation of the operating and financial statistics of the Bank
with those of other savings institutions; (vi) the aggregate size of the
offering of the Common Stock; and (vii) the trading market for the securities of
institutions Ferguson believes to be comparable in relevant respects to the
Company and the Bank and general conditions in the markets for such securities.
In addition, Ferguson has advised the Bank that it has considered the effect of
the Conversion on the net worth and earnings potential of the Company and the
Bank.
On the basis of its consideration of the above factors, Ferguson has
advised the Bank that, in its opinion, at February 27, 1998, the Estimated
Valuation Range of the Bank and the Company was from a minimum of $5,610,000 to
a maximum of $7,590,000, with a midpoint of $6,600,000. Based upon such
valuation and a purchase price for shares offered in the Conversion of $10.00
per share, the number of shares to be offered ranges from a minimum of 561,000
shares to a maximum of 759,000 shares, with a midpoint of 660,000 shares.
The Board of Directors of the Bank has reviewed the methodology and
assumptions used by Ferguson in preparing the appraisal and has determined that
the Estimated Valuation Range, as well as the methodology and assumptions used,
were reasonable and appropriate.
Upon completion of the Offering, Ferguson will confirm or update its
valuation of the estimated aggregate pro forma market value of the Bank and the
Company. Based on the confirmed or updated appraisal, a determination will be
made of the total number of shares of Common Stock which shall be offered and
sold in the Conversion.
With the consent of the Administrator and the FDIC, the aggregate price
of the shares sold in the Conversion may be increased by up to 15% above the
maximum of the Estimated Valuation Range, or to $8,728,500 (872,850 shares),
without a resolicitation of subscribers and without any right to cancel, rescind
or change subscription orders, to reflect changes in market and financial
conditions following commencement of the Subscription Offering.
100
No sale of shares of Common Stock may be consummated unless, after the
expiration of the offering period, Ferguson confirms to the Bank, the Company,
the Administrator and the FDIC, that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause Ferguson to conclude that the aggregate purchase price of the Common
Stock sold in the Conversion is incompatible with its estimate of the aggregate
pro forma market value of the Bank and the Company at the conclusion of the
Offering. If the aggregate pro forma market value of the Bank and the Company as
of such date is within the Estimated Valuation Range (or, with the consent of
the Administrator and FDIC, not more than 15% above the maximum of the Estimated
Valuation Range), then such pro forma market value will determine the number of
shares of Common Stock to be sold in the Conversion. If there has occurred a
change in the aggregate pro forma market value of the Bank and the Company so
that the aggregate pro forma market value is below the minimum of the Estimated
Valuation Range or more than 15% above the maximum of the Estimated Valuation
Range, a resolicitation of subscribers may be made based upon a new Estimated
Valuation Range, the Plan may be terminated or such other actions as the
Administrator and the FDIC may permit may be taken.
In the event of a resolicitation, subscribers would be given a
specified time period within which to respond to the resolicitation. If a
subscriber fails to respond to the resolicitation by the end of such period, the
subscription of such subscriber will be canceled, funds submitted with the
subscription will be refunded promptly with interest at the Bank's passbook
savings rate, and holds on accounts from which withdrawals were designated will
be released. Any such resolicitation will be by means of an amended prospectus
filed with the SEC. A resolicitation may delay completion of the Conversion. If
the Plan is terminated, all funds will be returned promptly with interest at the
Bank's passbook savings rate from the date payment was deemed received, and
holds on funds authorized for withdrawal from deposit accounts will be released.
See "-- Exercise of Subscription Rights and Purchases in the Community
Offering."
The valuation by Ferguson is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing Common
Stock. Ferguson did not independently verify the financial statements and other
information provided by the Bank, nor did Ferguson value independently the
assets or liabilities of the Bank. The valuation considers the Bank as a going
concern and should not be considered as an indication of the liquidation value
of the Bank or the Company. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing such shares in the Conversion will thereafter be able to sell shares
at prices in the range of the foregoing valuation of the pro forma market value
thereof.
A copy of the complete appraisal by Ferguson is on file and available
for inspection at the office of the Savings Institutions Division of the North
Carolina Department of Commerce, Tower Building, Suite 301, 1110 Navaho Drive,
Raleigh, North Carolina 27609. A copy is also available for inspection at the
Stock Information Center, 211 South Greene Street, Wadesboro, North Carolina
28170. A copy of the appraisal has also been filed as an exhibit to the
Registration Statement filed with the SEC with respect to the Common Stock
offered hereby. See "ADDITIONAL INFORMATION."
Exercise of Subscription Rights and Purchases in Community Offering
In order for Subscription Rights to be effectively exercised in the
Subscription Offering and in order to purchase in the Subscription Offering, the
original signed Order Forms (including an original signed form of certification)
and the required payment for the aggregate dollar amount of Common Stock desired
or appropriate instructions authorizing withdrawal from one or more the Bank
deposit accounts (other than
101
negotiable order of withdrawal accounts or other demand deposit accounts), must
be received by the Bank by the Expiration Time, which is 12:00 noon, Eastern
Time, on ________________, 1998. Subscription Rights (i) for which the Bank does
not receive original signed Order Forms by the Expiration Time (unless such time
is extended), or (ii) for which Order Forms are executed defectively or are not
accompanied by full payment (or appropriate withdrawal instructions) for
subscribed shares, will expire whether or not the Bank has been able to locate
the persons entitled to such rights. In order to purchase in the Community
Offering, the Order Forms, accompanied by the required payment for the aggregate
dollar amount of Common Stock desired or appropriate instructions authorizing
withdrawal from one or more of the Bank's deposit accounts (other than
negotiable order of withdrawal accounts or other demand deposit accounts), must
be received by the Bank prior to the time the Community Offering terminates,
which could be at any time at or subsequent to the Expiration Time. No orders
will be accepted from persons who do not have Subscription Rights in the
Subscription Offering unless a Community Offering is commenced.
In the event that an Order Form is not delivered and is returned to the
Bank by the United States Postal Service (or the Bank is unable to locate the
addressee), is not received or is received after the Expiration Time, is
defectively completed or executed, or is not accompanied by full payment for the
shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment), the subscription rights for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed Order Form within the time period specified. The Bank may,
but will not be required to, waive any irregularity on any Order Form or require
the submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Bank specify. The waiver of an
irregularity on an order form in no way obligates the Bank to waive any other
irregularity on that, or any irregularity on any other Order Form. Waivers will
be considered on a case-by-case basis. Photocopies of Order Forms, including
copies sent by facsimile, payments from private third parties, payments made by
wire transfer or electronic transfers of funds will not be accepted. The Bank's
interpretation of the terms and conditions of the Plan and of the acceptability
of the Order Forms will be final. The Bank has the right to investigate any
irregularity on any Order Form.
Executed Order Forms once received by the Bank, may not be modified,
amended or rescinded without the consent of the Bank. The Bank has the right to
extend the subscription period subject to applicable regulations, unless
otherwise ordered by the Administrator, or to waive or permit correction of
incomplete or improperly executed Order Forms, but does not represent that it
will do so.
The amount to be remitted with the Order Forms shall be the aggregate
dollar amount that a subscriber or purchaser desires to invest in the
Subscription and Community Offering. Complete payment must accompany all
completed Order Forms submitted in the Subscription and Community Offering in
order for subscriptions to be valid. See "-- Purchase Price of Common Stock and
Number of Shares Offered."
Payment for shares will be permitted to be made by any of the following
means: (i) in cash, if delivered in person to either office of the Bank; (ii) by
check, bank draft, negotiable order of withdrawal or money order, provided that
the foregoing will only be accepted subject to collection and payment; or (iii)
by appropriate authorization of withdrawal from any deposit account in the Bank
(other than a negotiable order of withdrawal account or other demand deposit
account). Order Forms directing that payment for shares be made by authorization
of withdrawal will be accepted only if, at the time the Order Forms are
received, there exists sufficient funds in the account from which withdrawal is
authorized to pay the full purchase price for the number of shares ordered. In
order to ensure proper identification of Subscription Rights and proper
allocations in the event of an oversubscription, it is the responsibility of
subscribers to provide correct
102
account verification information on the Order Forms. Order Forms submitted by
unauthorized purchasers or in amounts exceeding purchase limitations will not be
honored.
For purposes of determining the withdrawal balance of deposit accounts
from which withdrawals have been authorized, such withdrawals will be deemed to
have been made upon receipt of appropriate authorization therefor, but interest
will be paid by the Bank on the amount deemed to have been withdrawn at the
contractual rate of interest paid on such accounts until the date on which the
Conversion is completed or terminated.
Interest will be paid by the Bank on payments for Common Stock made in
cash or by check, bank draft, negotiable order of withdrawal or money order at
the Bank's passbook savings rate. Such interest shall be paid from the date the
order is accepted for processing and payment in good funds is received by the
Bank until consummation or termination of the Conversion. The Bank shall be
entitled to invest all amounts paid on subscriptions for Common Stock for its
own account until completion or termination of the Conversion. The Bank may not
knowingly lend funds or otherwise extend credit to any person to purchase Common
Stock. After amounts submitted for payment are applied to the purchase price for
shares sold, they will no longer earn interest, and they will not be insured by
the FDIC or any other government agency or other entity.
The Order Forms contain appropriate means by which authorization of
withdrawals from deposit accounts may be made to pay for subscribed shares. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be withdrawn (except by the Bank as payment for Common Stock) until the
Conversion is completed or terminated. Savings accounts will be permitted to be
established for the purpose of making payment for subscribed shares of Common
Stock. Funds authorized for withdrawal will continue to earn interest at the
applicable contract interest rate until completion or termination of the
Conversion or, in the case of an order submitted in the Community Offering,
until it is determined that such order cannot or will not be accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of Common
Stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied, such certificate
account will be canceled and the remaining balance thereof will earn interest at
the Bank's passbook savings rate.
Upon completion or termination of the Conversion, the Bank will return
to subscribers all amounts paid with subscriptions which are not applied to the
purchase price for shares, plus interest at its passbook savings rate from the
date good funds are received until the consummation or termination of the
Conversion, and the Bank will release deposit account withdrawal orders given in
connection with the subscriptions to the extent funds are not withdrawn and
applied toward the purchase of shares.
Delivery of Stock Certificates
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to persons entitled thereto at the
address of such persons appearing on the Order Forms as soon as practicable
following consummation of the Conversion. Any certificates returned as
undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of Common Stock for which they
have subscribed, even though trading of the Common Stock may have commenced.
Shares sold prior to receipt of a stock certificate are the responsibility of
the purchaser. Allocations of Common Stock will be deemed final only upon
stockholder receipt of the certificate representing the Common Stock.
103
Persons in Non-Qualified or Foreign Jurisdictions
The Company will make reasonable efforts to comply with the securities
laws of all states of the United States in which Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members entitled to subscribe
for shares of Common Stock reside. However, no shares of Common Stock or
Subscription Rights under the Plan will be offered or sold in a foreign country,
or in a state in the United States (i) where a small number of persons otherwise
eligible to subscribe for shares under the Plan reside or (ii) if the Company
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including, but not limited to, a
requirement that the Company, the Bank or any employee or representative thereof
register as a broker, dealer, agent or salesperson or register or otherwise
qualify the Subscription Rights or Common Stock for sale in such state. No
payments will be made in lieu of the granting of Subscription Rights to persons
residing in such jurisdictions.
Marketing Arrangements
The Bank has retained Trident Securities to consult with and advise the
Bank and the Company and to assist the Company, on a best-efforts basis, in the
marketing of shares in the Offering. Trident Securities is a broker-dealer
registered with the SEC and a member of the NASD. Trident Securities is
headquartered in Raleigh, North Carolina, and its telephone number is (919)
781-8900. Trident Securities will assist the Bank and the Company in the
Conversion as follows: (i) it will act as marketing advisor with respect to the
Subscription Offering and will assist the Company on a best-efforts basis in the
marketing of the Common Stock in the Community Offering and Syndicated Community
Offering; (ii) members of its staff will conduct training sessions to educate
directors, officers and employees of the Bank regarding the Conversion process;
and (iii) it will provide assistance in the establishment and supervision of the
Stock Information Center, including training staff to record and tabulate orders
for the purchase of Common Stock and to respond to customer inquiries.
For rendering its services, the Bank has agreed to pay Trident
Securities a commission equal to 2.5% of the aggregate dollar amount of Common
Stock sold in the Subscription and Community Offering, excluding shares
purchased by directors, executive officers and their "associates" (as defined in
the Plan). The Bank has also agreed to pay to Selected Dealers, if any,
negotiated commissions.
The Bank has agreed to reimburse Trident Securities for its reasonable
out-of-pocket expenses, including but not limited to travel, communications,
legal fees and postage, and to indemnify Trident Securities against certain
claims or liabilities, including certain liabilities under the Securities Act.
Trident has agreed that the Bank is not required to pay its legal fees to the
extent they exceed $27,500 or its other out of pocket expenses to the extent
they exceed $10,000. Total fees and commissions to Trident Securities are
expected to be between $126,855 and $204,788 at the minimum and 15% above the
maximum, respectively, of the Estimated Valuation Range. See "PRO FORMA DATA"
for the assumptions used to determine these estimates.
Sales of Common Stock will be made primarily through registered
representatives affiliated with Trident Securities or by the broker-dealers
managed by Trident Securities. In addition, subject to applicable law, executive
officers of the Company and the Bank may participate in the solicitation of
offers to purchase Common Stock. Other employees of the Bank may participate in
the Offering in clerical capacities, providing administrative support in
effecting sales transactions and answering questions of a mechanical nature
relating to the proper execution of the Order Forms. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. Such other
104
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. A Stock Information
Center will be established in the Bank's office, in an area separate from the
Bank's banking operations. Employees will inform prospective purchasers that
their questions should be directed to the Stock Information Center and will
provide such persons with the telephone number of the Stock Information Center.
Stock orders will be accepted at the Bank's office and will be promptly
forwarded to the Stock Information Center for processing. Sales of Common Stock
by registered representatives will be made from the Stock Information Center. In
addition, the Bank may hire one or more temporary clerical persons to assist in
typing, opening mail, answering the phone, and with other clerical duties. An
employee of the Bank will also be present at the Stock Information Center to
process funds and answer questions regarding payment for stock, including
verification of account numbers in the case of payment by withdrawal
authorization and similar matters. Subject to applicable state law, the Company
will rely on Rule 3a4-1 under the Exchange Act, and sales of Common Stock will
be conducted within the requirements of Rule 3a4-1, so as to permit officers and
current full and part-time the Bank employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the Bank will
be compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
The engagement of Trident Securities and the work performed by Trident
Securities pursuant to its engagement should not be construed by purchasers of
Common Stock as constituting an endorsement or recommendation relating to such
investment or a verification of the accuracy or completeness of information
contained in this Prospectus.
Minimum and Maximum Purchase Limitations
Each person subscribing for Common Stock in the Conversion must
subscribe for at least fifty shares of the Common Stock to be offered in the
Conversion. In addition, the maximum number of shares of Common Stock which may
be purchased in the Conversion by (i) any person or entity, (ii) persons or
entities exercising Subscription Rights through a single account or (iii) group
of persons or entities otherwise acting in concert, is 10,000 shares. In
addition, no person or entity, or group of persons or entities acting in
concert, together with any associate (as defined in the Plan), may subscribe for
more than 15,000 shares of Common Stock sold in the Conversion. The Board of
Directors of the Bank may in its absolute discretion (i) reduce the
above-described 10,000 and 15,000 share maximum purchase limitations to an
amount not less than 1% of the number of shares offered and sold in the
Conversion or (ii) increase such 10,000 and 15,000 share maximum purchase
limitations to an amount of up to 5% of the shares of Common Stock offered and
sold. Any reduction or increase in the maximum purchase limitation by the Bank's
Board of Directors may occur at any time prior to consummation of the
Conversion, either before or after the Special Meeting on ________________,
1998. In the event the 10,000 or 15,000 share maximum purchase limitation is
increased, any subscriber or group of subscribers in the Subscription, Community
or Syndicated Community Offering who has subscribed for the maximum amount which
is increased, and certain other large subscribers in the discretion of the
Company, shall be given the opportunity to increase their subscriptions up to
the then applicable maximum purchase limitation.
The Plan further provides that for purposes of the foregoing
limitations the term "associate" is used to indicate any of the following
relationships with a person:
(i) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of the Bank, the Company or any subsidiary
of the Bank or of the Company;
105
(ii) any corporation or organization (other than the Bank, the
Company or a majority-owned subsidiary of the Bank or the
Company) of which the person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of
any class of equity security; and
(iii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person
serves as a trustee or in a similar fiduciary capacity, except
for any tax-qualified employee stock benefit plan or any
charitable trust which is exempt from federal taxation
pursuant to Section 501(c)(3) of the Code.
For purposes of the foregoing limitations, directors and officers of
the Bank or the Company shall not be deemed to be associates or a group of
persons acting in concert solely as a result of their serving in such
capacities.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or interdependent conscious parallel action towards a common goal (whether or
not pursuant to an express agreement), with respect to the purchase, ownership,
voting or sale of Common Stock or (ii) engaged in a combination or pooling of
voting or other interests in the securities of the Company for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. The Company and the Bank will presume
that certain persons are acting in concert based upon, among other things, joint
account relationships, accounts with the same address registration and the fact
that such persons have filed joint Schedules 13D with the SEC with respect to
other companies.
Approval, Interpretation, Amendment and Termination
Under the Plan, the Administrator's approval thereof, and applicable
North Carolina conversion regulations, consummation of the Conversion is subject
to satisfaction of certain conditions, including the following: (i) approval of
the Plan by the affirmative vote of a majority of the votes eligible to be cast
by members of the Bank at the Special Meeting; (ii) sale of shares of Common
Stock for an aggregate purchase price equal to not less than the minimum or more
than the maximum of the Estimated Valuation Range unless the aggregate purchase
price is increased to as much as 15% above the maximum with the consent of the
Administrator and FDIC, and (iii) receipt by the Company and the Bank of
favorable opinions of counsel or other tax advisor as to the federal and state
tax consequences of the Conversion. See "-- Income Tax Consequences."
If all conditions for consummation of the Conversion are not satisfied,
no Common Stock will be issued, the Bank will continue to operate as a North
Carolina-chartered mutual savings bank, all subscription funds will be promptly
returned with interest at the Bank's passbook savings rate, and all deposit
withdrawal authorizations (and holds placed on such accounts) will be canceled.
In such an event, the Company would not acquire control of the Bank.
All interpretations by the Bank and the Company of the Plan and of the
Order Forms and related materials for the Subscription and Community Offering
will be final, subject to the authority of the Administrator. The Bank and the
Company may reject Order Forms that are not properly completed. However, the
Company and the Bank retain the right, but will not be required, to waive
irregularities in submitted Order Forms or to require the submission of
corrected Order Forms or the remittance of full payment for all shares
subscribed for by such dates as they may specify. In addition, the Plan may be
substantively amended by a two-thirds vote of the Bank's Board of Directors at
any time prior to the Special Meeting, and
106
at any time thereafter by a two-thirds vote of the Bank's Board of Directors
with the concurrence of the Administrator and the FDIC. If the Bank determines
upon the advice of counsel and after consultation with the Administrator that
any such amendment is material, subscribers would be given the opportunity to
increase, decrease or cancel their subscriptions. Also, as required by the
regulations of the Administrator, the Plan provides that the transactions
contemplated thereby may be terminated by a two-thirds vote of the Bank's Board
of Directors at any time prior to the Special Meeting and may be terminated by a
two-thirds vote of the Bank's Board of Directors at any time thereafter but
prior to the completion of the Conversion with the concurrence of the
Administrator, notwithstanding approval of the Plan by the Members at the
Special Meeting.
Certain Restrictions on Transfer of Subscription Rights; False or Misleading
Order Forms
The Subscription Rights granted under the Plan are non-transferable.
Subscription Rights may be exercised only by the person to whom they are issued
and only for his or her own account. Persons exercising Subscription Rights are
required to certify that they are purchasing shares for their own accounts
within the purchase limitations set forth in the Plan and that they have no
agreement or understanding for the sale or transfer of such shares.
The Bank reserves the right to make an independent investigation of any
facts or circumstances brought to its attention that indicate or tend to
indicate that one or more persons acting independently or as a group acting in
concert may be attempting to violate or circumvent the regulatory prohibition on
transferability of Subscription Rights. The nature and extent of such
investigation will be at the Bank's sole discretion and the Bank may require a
holder of Subscription Rights to provide certified affidavits and other
documentation to satisfy the Bank that its Plan and North Carolina and federal
conversion regulations regarding nontransferability are not being subverted by
actions of holders of Subscription Rights. In extreme cases the Bank reserves
the right to seek legal advice from the General Counsel for the Administrator as
to compliance with all regulations governing the Conversion, including the
nontransferability of Subscription Rights.
The Plan provides that, if the Bank's Board of Directors determines
that a subscriber (i) has submitted a false or misleading information on his or
her Order Forms or otherwise in connection with the attempted purchase of
shares, (ii) has attempted to purchase shares of Common Stock in violation of
provisions of the Plan or (iii) fails to cooperate with attempts by the Bank or
the Company or their employees or agents to verify information with respect to
purchase rights, the Board of Directors may reject the order of such subscriber.
Income Tax Consequences
The Bank has received an opinion from its special counsel, Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P., of Greensboro, North Carolina, to
the effect that for federal income tax purposes: (i) the Conversion will
constitute a tax free reorganization with respect to the Bank and no gain or
loss will be recognized by the Bank either in its mutual or stock form; (ii) no
gain or loss will be recognized by the Bank upon the purchase of the Bank's
stock by the Company or upon the sale by the Company of its Common Stock; (iii)
no gain or loss will be recognized by the Bank's depositors with respect to
their deposit accounts at the Bank as a consequence of the Conversion; (iv) the
tax basis of depositors' deposit accounts at the Bank will not be changed as a
result of the Conversion; (v) assuming the Subscription Rights have no value, no
gain or loss will be recognized by Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members, or directors, officers and employees of
the Bank upon either the issuance to them of the Subscription Rights or the
exercise or lapse thereof; (vi) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the distribution
to them of interests in the Liquidation Account;
107
(vii) assuming the Subscription Rights have no value, the tax basis for Common
Stock purchased in the Conversion will be the amount paid therefor; and (viii)
the tax basis of interests in the Liquidation Account will be zero. The Bank has
been further advised by its special counsel, Brooks, Pierce, McLendon, Humphrey
& Leonard, L.L.P., that the tax effects of the Conversion under North Carolina
tax laws will be consistent with the federal income tax consequences.
Several of the foregoing legal opinions are premised on the assumption
that the Subscription Rights will have no value. The Bank has been advised by
Ferguson that, in its opinion, the Subscription Rights will not have any
ascertainable value, based on the fact that such rights are acquired by the
recipients without cost, are non-transferable, are of short duration and afford
the recipients the right only to purchase Common Stock at a price equal to its
estimated fair market value as of the date such rights are issued, which will be
the same price paid by all purchasers in the Conversion. The opinion of Ferguson
is not binding on the IRS and if the Subscription Rights were ultimately
determined to have ascertainable value, recipients of Subscription Rights would
have to include in gross income an amount equal to the value of the Subscription
Rights received by them. The basis of the Common Stock purchased pursuant to
Subscription Rights would be increased by the amount of income realized with
respect to the receipt or exercise of the Subscription Rights. Moreover,
recipients of Subscription Rights could then have to report the transaction to
the IRS. Each Eligible Account Holder, Supplemental Eligible Account Holder,
Other Member or other recipient of Subscription Rights is encouraged to consult
with his, her or its own tax advisor as to the tax consequences in the event the
Subscription Rights are deemed to have ascertainable value.
No legal opinion has been or will be received with respect to any tax
consequences of the Conversion not specifically described above, including the
tax consequences to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, other recipients of Subscription Rights or purchasers of
Common Stock under the laws of any other state, local or foreign taxing
jurisdiction to which they may be subject. Special counsel expresses no opinion
regarding the value of the Subscription Rights.
LEGAL OPINIONS
The validity of the issuance of the Common Stock in the Conversion has
been passed upon for the Company by its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., Greensboro, North Carolina, which firm has
also rendered its opinion to the Bank concerning certain federal and North
Carolina income tax aspects of the Conversion as described herein under "THE
CONVERSION -- Income Tax Consequences." Certain legal matters will be passed
upon for Trident Securities by Thacher Proffitt & Wood, Washington, D.C.
EXPERTS
The Financial Statements of the Bank as of June 30, 1997 and 1996 and
for each of the years in the two-year period ended June 30, 1997 have been
included herein in reliance upon the report of Faulkner and Thompson, P.A.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Ferguson has consented to being named as an expert herein and to the
summary herein of its appraisal report as to the estimated pro forma market
value of the Bank and the Company and its opinion with respect to Subscription
Rights.
108
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to
Section 12 of the Exchange Act in connection with the Conversion and will not
deregister the Common Stock for a period of three years following the completion
of the Conversion. Upon such registration, the proxy and tender offer rules,
insider trading reporting requirements and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable to the
Company.
ADDITIONAL INFORMATION
The Company has filed a registration statement with the SEC on Form S-1
under the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail
from the SEC at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including the Company; the address is (http://www.sec.gov.). The statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions of each material feature thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Bank has filed an Application to Convert a Mutual Savings Bank to a
Stock Owned Savings Bank with the Administrator. Pursuant to the North Carolina
conversion regulations, this Prospectus omits certain information contained in
such Application. The Application, which contains a copy of Ferguson's
appraisal, may be inspected at the office of the Administrator, Savings
Institutions Division, North Carolina Department of Commerce, Tower Building,
Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. Copies of the Plan,
which includes a copy of the Bank's proposed Amended Certificate of
Incorporation and Stock Bylaws, and copies of the Company's Articles of
Incorporation and Bylaws are available for inspection at each office of the Bank
and may be obtained by writing to the Bank at 211 South Greene Street,
Wadesboro, North Carolina 28170, Attention: Eugene M. Ward, President, or by
telephoning the Bank at (704) 694-2122. A copy of Ferguson's independent
appraisal is also available for inspection at the Stock Information Center, 211
South Greene Street, Wadesboro, North Carolina 28170.
109
Index to Financial Statements
Page
----
Report of Independent Auditors...............................................F-2
Financial Statements
Statements of Financial Condition........................................F-3
Statements of Operations.................................................F-4
Statements of Equity.....................................................F-5
Statements of Cash Flows.................................................F-6
Notes to Financial Statements............................................F-8
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in
the financial statements of Anson Savings Bank, S.S.B. or related notes. No
financial statements are provided for the Holding Company since it was not
in operation for any of the periods presented.
F-1
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors
Anson Savings Bank, S.S.B.
Wadesboro, North Carolina
We have audited the accompanying statements of financial condition of
Anson Savings Bank, S.S.B. (the Bank) as of June 30, 1997 and 1996, and the
related statements of operations, equity and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Anson Savings Bank,
S.S.B. as of June 30, 1997 and 1996 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
August 26, 1997
Charlotte, North Carolina
F-2
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
--------------------- -----------------------------------
1997 1997 1996
--------------------- --------------- ---------------
(Unaudited)
ASSETS
Cash and cash equivalents
Non-interest bearing deposits and cash $ 171,850 $ 197,056 $ 252,484
Interest earning deposits 3,289,475 3,843,554 3,050,877
Federal funds sold 750,000 600,000 300,000
--------------- -------------- ---------------
4,211,325 4,640,610 3,603,361
Investment securities
Held to maturity (fair value at December 31,
1997, June 30, 1997 and 1996 of $4,386,630,
$3,933,344 and $5,559,174, respectively) 4,374,212 3,938,524 5,577,031
Available for sale 380,459 317,521 193,914
Loans receivable, net 11,323,178 11,422,892 11,571,502
Premises and equipment, net 214,895 222,125 233,083
Interest receivable 52,493 59,976 85,909
Other assets 109,457 61,719 133,714
Deferred income taxes 57,000 57,000 57,000
--------------- -------------- ---------------
$ 20,723,019 $ 20,720,367 $ 21,455,514
=============== ============== ===============
LIABILITIES AND EQUITY
LIABILITIES
Savings deposits, plus accrued interest
thereon $ 16,655,697 $ 16,791,101 $ 17,623,069
Accounts payable and accrued expenses 49,747 36,624 50,965
Accrued pension obligation - - 62,589
Deferred income taxes 158,701 136,200 98,000
--------------- -------------- ---------------
16,864,145 16,963,925 17,834,623
COMMITMENTS - Notes 4, 12 and 14
EQUITY
Retained earnings - substantially restricted 3,614,437 3,552,442 3,502,297
Unrealized gains on securities
available for sale, net of tax 244,437 204,000 118,594
--------------- -------------- ---------------
3,858,874 3,756,442 3,620,891
--------------- -------------- ---------------
$ 20,723,019 $ 20,720,367 $ 21,455,514
=============== ============== ===============
See Notes to Financial Statements.
F-3
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF OPERATIONS
For the six months ended For the years ended
December 31, June 30,
--------------------------------------- ---------------------------------
1997 1996 1997 1996
----------------- ----------- ------------ --------------
(Unaudited)
INTEREST INCOME
Interest and fees on loans $ 475,383 $ 493,791 $ 963,385 $ 1,032,084
Interest on investments and
deposits in other banks 242,747 249,482 478,076 526,444
----------------- ----------- ------------ --------------
Total interest income 718,130 743,273 1,441,461 1,558,528
INTEREST EXPENSE
Interest on savings deposits 411,866 419,310 818,740 893,945
----------------- ----------- ------------ --------------
Net interest income 306,264 323,963 622,721 664,583
PROVISION FOR LOAN LOSSES -- 500 5,000 7,000
----------------- ----------- ------------ --------------
Net interest income after
provision for loan losses 306,264 323,463 617,721 657,583
NON-INTEREST INCOME 4,269 1,289 5,963 1,678
NON-INTEREST EXPENSE
Salaries and employee benefits 134,185 132,028 246,347 244,703
Federal insurance premiums 5,228 125,034 130,552 40,628
Data processing 15,846 15,643 31,946 31,139
Examinations and audit 16,640 12,360 26,268 34,581
Occupancy including depreciation 10,480 14,146 22,598 25,050
Other 49,175 49,523 97,128 104,860
----------------- ----------- ------------ --------------
Total non-interest expense 231,554 348,734 554,739 480,961
----------------- ----------- ------------ --------------
Income (loss) before income
taxes 78,979 (23,982) 68,945 178,300
INCOME TAXES
Current expense 16,984 8,800 18,800 54,000
Deferred expense (benefit) -- (12,400) -- (2,000)
----------------- ----------- ------------ --------------
16,984 (3,600) 18,800 52,000
----------------- ----------- ------------ --------------
Net income (loss) $ 61,995 $ (20,382) $ 50,145 $ 126,300
================= =========== ============ ==============
See Notes to Financial Statements.
F-4
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF EQUITY
Unrealized gains
Retained Earnings on securities
substantially available Total
restricted for sale Equity
----------------- ---------------- -------------
BALANCE AT JUNE 30, 1995 $ 3,375,997 $ 94,605 $ 3,470,602
Net income 126,300 - 126,300
Changes in unrealized gain on
securities available
for sale, net of tax - 23,989 23,989
------------- ------------- -------------
BALANCE AT JUNE 30, 1996 3,502,297 118,594 3,620,891
Net income 50,145 - 50,145
Changes in unrealized gain on
securities available
for sale, net of tax - 85,406 85,406
------------- ------------- -------------
BALANCE AT JUNE 30, 1997 3,552,442 204,000 3,756,442
Net income (unaudited) 61,995 - 61,995
Changes in unrealized gain on
securities available for
sale, net of tax (unaudited) - 40,437 40,437
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997
(Unaudited) $ 3,614,437 $ 244,437 $ 3,858,874
============= ============= =============
See Notes to Financial Statements.
F-5
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS
For the six months ended For the years ended
December 31, June 30,
--------------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 61,995 $ (20,382) $ 50,145 $ 126,300
Adjustments to reconcile net
income (loss) to net cash provided
by (used for) operating activities
Provision for loan losses - 500 5,000 7,000
Provision for depreciation 7,230 12,600 14,419 17,212
Deferred income taxes - (12,400) - (2,000)
(Increase) decrease in assets
Interest receivable 7,483 (16,288) 25,933 (3,268)
Other assets (47,738) 6,426 71,995 28,507
Increase (decrease) in
liabilities
Accounts payable and
accrued expenses 13,123 (50,433) (76,931) (34,068)
----------- ----------- -----------
Net cash provided by
(used for) operating
activities 42,093 (79,977) 90,561 139,683
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in loans
receivable 99,714 (158,844) 143,610 336,853
Purchases of securities
held to maturity (2,499,922) (2,498,203) (2,501,384) (4,997,148)
Proceeds from maturities of
securities held to maturity 2,064,234 3,545,040 4,139,891 5,658,620
Purchases of premises and
equipment - (1,432) (3,461) (18,626)
----------- ----------- ----------- -----------
Net cash provided by
(used for) investing
activities (335,974) 886,561 1,778,656 979,699
----------- ----------- ----------- -----------
(Continued)
F-6
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS
(Continued)
For the six months ended For the years ended
December 31, June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
FINANCING ACTIVITIES
Net decrease in savings deposits $ (135,404) $ (733,877) $ (831,968) $ (131,711)
---------- ---------- ---------- ----------
Increase (decrease) in cash
and cash equivalents $ (429,285) $ 72,707 $ 1,037,249 $ 987,671
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD $ 4,640,610 $ 3,603,361 $ 3,603,361 $ 2,615,690
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,211,325 $ 3,676,068 $ 4,640,610 $ 3,603,361
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE:
Total increase in unrealized
gain on securities available
for sale, net of tax $ 40,437 $ 36,248 $ 85,406 $ 23,989
========== ========== ========== ==========
Cash paid during the period
for interest $ 415,331 $ 431,623 $ 840,875 $ 888,560
========== ========== ========== ==========
Cash paid during the period
for income taxes $ 6,294 $ 25,382 $ 25,382 $ 35,525
========== ========== ========== ==========
See Notes to Financial Statements.
F-7
ANSON SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Anson Savings, S.S.B. (the Bank)
conform to generally accepted accounting principles and to general
practice within the savings bank industry. The following is a description
of the more significant accounting and reporting policies that the Bank
follows in preparing its financial statements.
Organization and Operations
Anson Savings Bank, S.S.B. (the Bank) is a state chartered savings bank
primarily engaged in the business of obtaining savings deposits and
providing loans to the general public in Anson County, North Carolina.
The Bank qualifies as a savings and loan for tax purposes.
Unaudited Financial Statements
The unaudited financial statements furnished reflect all adjustments,
consisting of normal recurring accruals which are, in the opinion of
management, necessary for a fair presentation of the financial position
as of December 31, 1997 and the results of operations,changes in equity
and cash flows for the six months ended December 31, 1997 and 1996. The
results for the six month periods are not necessarily indicative of the
operating results of the Bank for the entire year.
Use of Estimates
The preparation of the 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
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.
Investment Securities
The Bank accounts for investment securities in accordance with Statement
of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, debt
securities are classified upon purchase as available for sale, held to
maturity or trading. Such assets classified as available for sale are
carried at market value. Unrealized holding gains or losses are reported
as a component of equity net of deferred income taxes. Securities
classified as held to maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. In order to
qualify as held to maturity the Bank must have the intent and ability to
hold the securities to maturity. Trading securities are carried at
market value. Gains or losses on disposition of securities are based on
the difference between the net proceeds and the adjusted carrying amount
of the securities sold, using the specific identification method. The
Bank held no trading securities at December 31, 1997, June 30, 1997 or
1996.
F-8
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, Continued
Loans
The Bank's loan portfolio consists principally of long-term conventional
mortgage loans secured by first deeds of trust. Loans are stated at the
principal balance outstanding and origination fees and certain direct
originating costs are capitalized and recognized as an adjustment of the
yield of the related loan. Interest income on loans is accrued and taken
into income based upon the interest method. The recognition of interest
income is discontinued when, in management's judgment, the interest is
not collectible in the normal course of business.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard
requires that all creditors value loans at the loan's fair value if it
is probable that the creditor will be unable to collect all amounts due
according to the terms of the loan agreement. Fair value may be
determined based upon the present value of expected cash flows, market
prices of the loan, if available, or value of the underlying collateral.
Expected cash flows are required to be discounted at the loan's
effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to
allow a creditor to use existing methods for recognizing interest income
on an impaired loan and by requiring additional disclosures about how a
creditor recognizes interest income on an impaired loan. When the
ultimate collectibility of an impaired loan's principal is in doubt,
wholly or partially, all cash receipts are applied to principal. When
this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to principal then to
interest income. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income, to the extent
that any interest has been foregone. Further cash receipts are recorded
as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a
troubled debt restructuring. For these accruing impaired loans, cash
receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest
income is recognized on these loans using the accrual method of
accounting. As of December 31, 1997 and 1996 and June 30, 1997 and 1996,
the Bank had no impaired loans.
Allowance for loan losses
The allowance for loan losses is based on management's ongoing
evaluation of the loan portfolio and reflects an amount that, in
management's opinion, is adequate to absorb losses in the existing
portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions,
prior loan loss experience, adequacy of collateral, the composition of
the loan portfolio, and management's estimate of anticipated
F-9
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, Continued
credit losses. Loans are charged against the allowance at such time as
they are determined to be losses. Subsequent recoveries are credited to
the allowance. Management considers the year-end allowance appropriate
and adequate to cover possible losses in the loan portfolio; however,
management's judgment is based upon a number of assumptions about future
events, which are believed to be reasonable, but which may or may not
prove valid. Thus, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
increases in the allowance for loan losses will not be required.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. For financial reporting purposes, depreciation is
computed by use of the straight-line method over the estimated useful
lives of the various classes of assets.
Income Taxes
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect for
the years in which the differences are expected to reverse. The
significant components of deferred tax assets and liabilities arise
principally from temporary differences related to unrealized gains on
investments, depreciation expense, loan loss reserves, deferred loan fee
income and prepaid pension.
Cash Equivalents
The Bank considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Reclassifications
Certain 1996 balance sheet and income statement accounts have been
reclassified to conform to the 1997 presentation. This reclassification
had no effect on income or equity for any period.
F-10
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
Investment securities are as follows:
December 31, 1997
-----------------------------------------------------------------
(Unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $ 499,922 $ 2,375 $ -- $ 502,297
Due after one year through five years 1,000,000 7,657 -- 1,007,656
--------- --------- --------- ---------
1,499,922 10,032 -- 1,509,954
--------- --------- --------- ---------
Government National Mortgage
Association Securities:
Due after one year through five years 41,431 1,608 -- 43,039
Due after five years through ten years 259,236 6,130 -- 265,366
Due after ten years 431,023 -- 5,352 425,671
--------- --------- --------- ---------
731,690 7,738 5,352 734,076
--------- --------- --------- ---------
Federal Home Loan Bank stock 142,600 -- -- 142,600
--------- --------- --------- ---------
Fixed-rate, fixed-term deposits 2,000,000 -- -- 2,000,000
--------- --------- --------- ---------
Total $4,374,212 $ 17,770 $ 5,352 $4,386,630
========= ========= ========= =========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $ 371,576 $ -- $ 380,459
========= ========= ========= =========
F-11
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES, Continued
June 30, 1997
-----------------------------------------------------------------
(Unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $ 1,496,406 $ 3,594 $ -- $1,500,000
Due after one year through five years 1,000,000 -- -- 1,000,000
--------- --------- --------- ---------
2,496,406 3,594 -- 2,500,000
--------- --------- --------- ---------
Government National Mortgage
Association Securities:
Due after one year through five years 47,016 2,362 -- 49,378
Due after five years through ten years 281,481 2,625 -- 284,106
Due after ten years 471,021 -- 13,761 457,260
--------- --------- --------- ---------
799,518 4,987 13,761 790,744
--------- --------- --------- ---------
Federal Home Loan Bank stock 142,600 -- -- 142,600
--------- --------- --------- ---------
Fixed-rate, fixed-term deposits 500,000 -- -- 500,000
--------- --------- --------- ---------
Total $ 3,938,524 $ 8,581 $ 13,761 $3,933,344
========= ========= ========= =========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $ 308,638 $ -- $ 317,521
========= ========= ========= =========
F-12
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES, Continued
June 30, 1996
-----------------------------------------------------------------
(Unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $ 1,494,709 $ 4,119 $ 351 $ 1,498,477
Due after one year through five years 499,258 -- 3,984 495,274
--------- ---------- ---------- ---------
1,993,967 4,119 4,335 1,993,751
--------- ---------- ---------- ---------
Government National Mortgage
Association Securities:
Due after one year through five years $ 82,323 $ 3,536 $ -- $ 85,859
Due after five years through ten years 33,195 3,340 -- 36,535
Due after ten years 824,896 -- 24,517 800,379
--------- ---------- ---------- ---------
940,414 6,876 24,517 922,773
--------- ---------- ---------- ---------
Federal Home Loan Bank stock 142,600 -- -- 142,600
--------- ---------- ---------- ---------
Fixed-rate, fixed-term deposits 2,500,000 -- -- 2,500,000
--------- ---------- ---------- ---------
Total $ 5,577,031 $ 10,995 $ 28,852 $5,559,174
========== ========== ========== =========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $ 185,031 $ -- $ 193,914
========== ========== ========== =========
NOTE 3 - FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank (FHLB) stock is a required deposit with the FHLB
that is classified as a restricted investment security, carried at cost
and evaluated for impairment. These shares can only be sold at their par
value of $100 per share and only to the FHLB or to another member
institution.
F-13
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31, June 30,
------------------- ---------------------------------------
1997 1997 1996
------------------- ---------------- -----------------
Principal Balances: (Unaudited)
Real estate loans
One-to-four family
residential $ 10,857,928 $ 10,887,058 $ 11,242,399
Nonresidential 482,713 543,015 400,040
Secured by deposits 76,599 75,131 45,787
Construction loans 365,858 349,794 198,942
------------------- ---------------- -----------------
11,783,098 11,854,998 11,887,168
------------------- ---------------- -----------------
Allowance for loan losses (100,000) (100,000) $ (95,000)
Undisbursed portion of construction
loans (318,714) (288,281) (174,194)
Net deferred loan origination fees (41,198) (43,825) (46,472)
------------------- ---------------- -----------------
(459,912) (432,106) (315,666)
------------------- ---------------- -----------------
$ 11,323,178 $ 11,422,892 $ 11,571,502
=================== ================ =================
Loan commitments outstanding were $132,000 at December 31, 1997 and $169,400
and $239,500 at June 30, 1997 and 1996, respectively. At December 31, 1997,
June 30, 1997 and 1996, there were no loans that were in a nonaccrual status.
Set forth below is an analysis of the allowance for loan losses:
Six Months Ended Year Ended
December 31, June 30,
------------------------------------ ------------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(Unaudited)
Balance, beginning of period $ 100,000 $ 95,000 $ 95,000 $ 88,000
Loans charged-off - - - -
Recoveries of loans charged-off - - - -
Provision for loan losses - 500 5,000 7,000
--------------- --------------- --------------- ---------------
Balance, end of period $ 100,000 $ 95,500 $ 100,000 $ 95,000
================ =============== =============== ===============
F-14
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31, June 30,
-------------------------------------------------------------
1997 1997 1996
------------------- ---------------- -------------
(Unaudited)
Land $ 30,808 $ 30,808 $ 30,808
Land improvements 2,774 2,774 2,774
Building 562,545 562,545 559,277
Furniture and equipment 227,590 227,590 227,397
------------------- ---------------- -------------
823,717 823,717 820,256
Less allowances for depreciation 608,822 601,592 587,173
------------------- ---------------- -------------
$ 214,895 $ 222,125 $ 233,083
================== =============== =============
NOTE 6 - INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
December 31, June 30,
-------------------------------------------------------------
1997 1997 1996
------------------- ---------------- -------------
(Unaudited)
Accrued interest on interest bearing
deposits and investments $ 44,207 $ 42,497 $ 79,509
Accrued interest on loans receivable 8,286 7,479 6,400
------------------- ---------------- -------------
$ 52,493 $ 59,976 $ 85,909
================== =============== =============
F-15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - COMPOSITION OF SAVINGS DEPOSITS
The composition of savings deposits by interest rate is as follows:
December 31, 1997 June 30, 1997
-------------------------------- --------------------------------
Amount % Amount %
--------------- ------------- --------------- -------------
(Unaudited)
3.25 % passbook $ 3,645,425 21.88 % $ 3,441,163 20.49 %
Term certificates, 3.25% 31,002 .19 41,521 .25
Term certificates, 4.4% - 5.5% 8,613,564 51.71 8,872,711 52.84
Term certificates, 5.6% - 7.0% 3,460,166 20.78 3,345,034 19.92
Money market, 3.1% 100,895 .61 104,710 .62
Deposits greater than $100,000,
3.25% - 7.0% 743,138 4.46 920,991 5.49
--------------- ------------- --------------- -------------
16,594,190 16,726,130
Accrued interest payable on
deposits 61,507 .37 64,971 .39
--------------- ------------- --------------- -------------
$ 16,655,697 100.00 % $ 16,791,101 100.00 %
=============== ============= =============== =============
June 30, 1996
-----------------------------
Amount %
---------------- ----------
3.25 % passbook $ 4,145,598 23.52 %
Term certificates, 3.25% - 3.92% 50,935 .29
Term certificates, 4.1% - 5.5% 9,559,472 54.24
Term certificates, 5.6% - 7.0% 2,967,162 16.84
Money market, 3.3% 181,405 1.03
Deposits greater than $100,000,
3.25% - 7.0% 634,390 3.60
---------------- --------
17,538,962
Accrued interest payable on
deposits 84,107 .48
---------------- --------
$ 17,623,069 100.00 %
================ ========
F-16
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7 - COMPOSITION OF SAVINGS DEPOSITS, Continued
Scheduled maturities of certificate accounts are as follows:
December 31, 1997
-----------------
(Unaudited)
1998 $ 10,198,756
1999 2,195,991
2000 512,993
--------------
$ 12,907,740
===============
Interest expense on savings deposits consists of the following components
for the six months ended December 31 and the years ended June 30:
December 31, June 30,
-------------------------------- ---------------------------------
1997 1996 1997 1996
------------- ------------ ------------- ---------------
(Unaudited)
Passbook accounts $ 61,750 $ 65,196 $ 128,355 $ 134,829
Money market accounts 1,580 2,369 3,994 4,942
Certificate accounts 348,536 351,745 686,391 754,174
-------------- ------------- ------------- --------------
$ 411,866 $ 419,310 $ 818,740 $ 893,945
============== ============= ============= ==============
NOTE 8 - INCOME TAXES
The differences between income taxes at the U.S. statutory rate and the
effective income taxes as reflected in the financial statements are as
follows:
Six months ended Year ended
December 31, June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- -------------- ------------
(Unaudited)
Income tax expense at federal
statutory rate of 34% $ 27,000 $ (8,200) $ 23,400 $ 61,000
Effect of graduated income
tax rates (15,000) (4,600) (4,600) (8,000)
Other 4,984 - - (1,000)
----------- --------- --------- ---------
$ 16,984 $ (3,600) $ 18,800 $ 52,000
=========== ========= ========= =========
F-17
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES, Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Bank's deferred tax assets are as follows:
December 31, June 30,
-------------------- ---------------------------------------
1997 1997 1996
-------------------- ----------------- ----------------
(Unaudited)
Deferred tax assets:
Deferred revenue $ 18,000 $ 18,000 $ 18,000
Loan loss reserve 39,000 39,000 37,000
Other - - 2,000
------------------- ---------------- ---------------
Total deferred income
tax assets $ 57,000 $ 57,000 $ 57,000
=================== ================ ===============
Deferred tax liabilities:
Unrealized gain on investments $ 127,000 $ 103,200 $ 66,000
Book basis versus tax basis
for premises and equipment 8,000 8,000 8,000
Prepaid pension 22,000 21,000 18,000
Other 1,701 4,000 6,000
------------------- ---------------- ---------------
Total deferred income tax
liabilities $ 158,701 $ 136,200 $ 98,000
=================== ================ ===============
Legislation has been passed which repeals the "reserve" method of
accounting for thrift bad debt reserves for the first tax year beginning
after December 31, 1995 (the fiscal year ending June 30, 1996 for the
Bank). This legislation requires all thrifts (including the Bank) to
account for bad debts using either the specific charge-off method
(available to all thrifts) or the experience method (available only to
thrifts that qualify as "small banks", i.e. under $500 million in assets).
The Bank currently uses the experience method of accounting for its tax
bad debt reserves. The legislation also suspends recapture of bad debt
reserves taken through 1987 (i.e., the base year reserve), but requires
thrifts to recapture or repay bad debt deductions taken after 1987 over
six years. As of December 31, 1997, bad debt reserves subject to recapture
were not significant. As permitted under SFAS 109, no deferred tax
liability is provided for approximately $1,000,000 ($340,000 approximate
tax effect) of such tax bad debt reserves that arose prior to October 1,
1988.
F-18
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - PENSION PLAN
The Bank established a noncontributory defined benefit plan in 1990 which
covers substantially all employees. The plan benefits as of June 30, 1994
were frozen and the current plan benefits are based on plan years of
service and the employee's compensation during the last ten years of
service. The Bank's policy is to fund pension costs accrued. Pension
expense for the six months ended December 31, 1997 and 1996 and the years
ended June 30, 1997 and 1996, was approximately $25,000, $19,000, $38,000
and $38,000, respectively. The components of pension expense are as
follows:
Six months ended Year ended
December 31, June 30,
------------------------------ ---------------------------------
1997 1996 1997 1996
------------- ------------ ------------- --------------
(Unaudited)
Service costs $ 22,000 $ 17,000 $ 34,000 $ 31,000
Interest cost on projected
benefit obligation 14,000 11,000 22,000 18,000
Expected return on plan
assets (9,000) (7,000) (14,000) (15,000)
Amortization (2,000) (2,000) (4,000) 4,000
------------ ----------- ------------ ------------
Net period pension cost $25,000 $19,000 $38,000 $38,000
============ =========== ============ ============
A summary of the Plan's funded status and the pension liability
recognized in the Bank's financial statements at December 31, 1997,
June 30, 1997 and 1996 is as follows:
Six months ended For the years ended
December 31, June 30,
----------------------- -------------------------------
1997 1997 1996
----------------------- --------------- --------------
(Unaudited)
Accumulated benefit obligation $ 317,000 $ 294,700 $ 249,400
=============== ============= =============
Plan assets at fair value $ 318,000 $ 295,500 $ 237,700
--------------- ------------- -------------
Projected benefit obligation for service rendered to date:
Vested (254,000) (236,000) (249,400)
Additional benefits based on
estimated future salary levels (107,000) (99,500) (24,900)
-------------- ------------ ----------
(361,000) (335,500) (274,300)
-------------- ------------ ----------
(continued)
F-19
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - PENSION PLAN, Continued
Six months ended For the years ended
December 31, June 30,
----------------------- -------------------------------
1997 1997 1996
----------------------- --------------- --------------
(Unaudited)
Projected benefit obligation in
excess of plan assets $ (43,000) $ (40,000) $ (36,600)
Unrecognized net transition liability 57,000 53,000 56,600
Unrecognized net prior service cost gain (72,000) (67,600) (72,200)
Unrecognized net loss 113,000 105,100 103,200
Minimum liability - - (62,500)
---------- --------- -----------
(Accrued) prepaid pension cost $ 55,000 $ 50,500 $ (11,500)
========== ========= ===========
Assumptions used in the actuarial calculation at December 31, 1997, June
30, 1997 and 1996 were 8% for the weighted-average discount rate and
expected long-term rate of return on assets and 4% for the rate of
increase in compensation levels. At December 31, 1997, June 30, 1997 and
1996, 92% of the plan assets were invested in a certificate of deposit at
the Bank.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information, whether or not recognized
in the statement of financial position, when it is practical to estimate
the fair value. SFAS 107 defines a financial instrument as cash, evidence
of an ownership interest in an entity or contractual obligations which
require the exchange of cash or other financial instruments. Certain items
are specifically excluded from the disclosure requirements, including the
Bank's common stock, premises and equipment and other assets and
liabilities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents and Short-Term Investments
For cash and cash equivalents and short-term investments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices and dealer quotes. The carrying values of
restricted equity securities approximate fair values.
F-20
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
Loans Receivable
Fair values of real estate loans and savings deposit loans are estimated
using discounted cash flow analyses, with interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Accrued Interest
The carrying amounts of accrued interest approximate fair values.
Savings Deposits
The fair value of savings accounts and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of
certificates of deposit is based upon the discounted value of the
contractual cash flows. The discount rates used in these calculations
approximates the current rates offered for deposits of similar remaining
maturities.
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates.
The estimated fair value of the Bank 's financial instruments were as
follows at:
December 31, 1997
--------------------------------------
Carrying Fair
Amount Value
--------------- --------------
Financial Assets: (Unaudited)
Cash, interest bearing deposits,
and federal funds sold $ 4,211,325 $ 4,211,325
Investments
Securities available for sale 380,459 380,459
Securities held to maturity 4,374,212 4,386,630
Loans receivable 11,323,178 11,454,531
Interest receivable 52,493 52,493
Financial Liabilities:
Savings deposits 16,655,697 16,685,382
Unrecognized Financial Instruments:
Commitments to extend credit 132,000 132,000
F-21
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - RELATED PARTIES
The Bank has entered into transactions with its officers and directors.
The aggregate amount of loans to such related parties at December 31,
1997, June 30, 1997 and 1996, were $0, $890 and $2,621, respectively.
During the six months ended December 31, 1997 and the years ended June 30,
1997 and 1996, new loans to such related parties amounted to $0, $0 and
$2,621, and repayments amounted to $890, $1,731 and $27,254, respectively.
Such loans were made substantially on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other borrowers and do not involve more than the normal
risks of collectibility. The Bank also had related party deposits of
$649,677, $531,244 and $518,834 at December 31, 1997, June 30, 1997 and
1996, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend
credit, which are not reflected in the accompanying financial statements.
Although these commitments do expose the Bank to certain types of risk,
management does not expect losses to result from these transactions.
Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Existing credit and commitments are reviewed continually to ensure there
is no deterioration in the credit worthiness of the borrower. Outstanding
commitments at December 31, 1997 are $132,000. Collateral held is obtained
based on management's credit evaluation of the customer and generally
includes either real property or savings deposits.
NOTE 13 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Deposit
Insurance Corporation (FDIC) and the State of North Carolina. Failure to
meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material effect on the Bank and
the financial statements. Under the regulatory capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines involving 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 under the prompt corrective action guidelines
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-22
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS, Continued
The FDIC requires the Bank to have a minimum leverage ratio of Tier I
Capital (principally consisting of retained earnings and any future common
stockholders' equity, less any intangible assets) to all assets of at
least 3%, provided that it receives the highest rating during the
examination process. For institutions that receive less than the highest
rating, the Tier I capital requirements is 1% to 2% above the stated
minimum. The FDIC also requires the Bank to have a ratio of total capital
to risk-weighted assets of 8%, of which at least 4% must be in the form of
Tier I capital. The state regulations require a net worth equal to at
least 5% of total assets.
As shown below, at December 31, 1997 the Bank complied with all the
capital requirements described above and also all of the requirements to
be classified as well-capitalized.
Leverage Tier I N.C.
Ratio of Risk- Savings
GAAP Tier I Adjusted Risk-Based Bank
Equity Capital Capital Capital Capital
-------- --------- --------- ------------- ----------
(Dollars in Thousands)
(Unaudited)
GAAP Equity $ 3,860 $ 3,860 $ 3,860 $ 3,860 $ 3,860
========
Unrealized gains on
securities available for sale (245) (245) (245) (245)
General loan loss allowance -- -- 97 97
-------- -------- -------- --------
Regulatory capital 3,615 3,615 3,712 3,712
Minimum capital requirement 829 311 621 1,036
-------- -------- -------- --------
Excess regulatory capital $ 2,786 $ 3,304 $ 3,091 $ 2,676
======== ======== ======== ========
Total assets at December 31, 1997 $ 20,723 $ 20,723
======== ========
Risk-weighted assets at December 31, 1997 $ 7,767 $ 7,767
======== ========
Capital as a percentage of assets:
Actual 17.4 % 46.5 % 47.8 % 17.9 %
Required 4.0 4.0 8.0 5.0
-------- -------- -------- --------
Excess 13.4 % 42.5 % 39.8 % 12.9 %
======== ======== ======== ========
F-23
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14 - SUBSEQUENT EVENTS - PLAN OF CONVERSION (UNAUDITED)
On December 11, 1997, the Board of Directors of the Bank unanimously
adopted a Plan of Holding Company Conversion whereby the Bank will convert
from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank and will become a wholly-owned
subsidiary of a holding company formed in connection with the conversion.
The holding company will issue common stock to be sold in the conversion
and will use that portion of the net proceeds thereof which it does not
retain to purchase the capital stock of the Bank. The Plan is subject to
approval by regulatory authorities and the members of the Bank at a
special meeting.
The stockholders of the holding company will be asked to approve a
proposed stock option plan and a proposed management recognition plan at a
meeting of the stockholders after the conversion. Shares issued to
directors and employees under these plans may be from authorized but
unissued shares of common stock or they may be purchased in the open
market. In the event that options or shares are issued under these plans,
such issuances will be included in the earnings per share calculation;
thus, the interests of existing stockholders would be diluted.
At the time of conversion, the Bank will establish a liquidation account
in an amount equal to its net worth as reflected in its latest statement
of financial condition used in its final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible deposit
account holders who continue to maintain their deposit accounts in the
Bank after conversion. Only in the event of a complete liquidation will
each eligible deposit account holder be entitled to receive a subaccount
balance for deposit accounts then held before any liquidation distribution
may be made with respect to common stock. Dividends paid by the Bank
subsequent to the conversion cannot be paid from this liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of
its common stock if its net worth would thereby be reduced below either
the aggregate amount then required for the liquidation account or the
minimum regulatory capital requirements imposed by federal and state
regulations.
Conversion costs of approximately $17,500 have been incurred and are
included in prepaid expenses and other assets of December 31, 1997. If the
conversion is ultimately successful, conversion costs will be accounted
for as a reduction of the stock proceeds. If the conversion is
unsuccessful, conversion costs will be charged to the Bank's operations.
NOTE 15 - RECENTLY ISSUED ACCOUNTING STANDARDS
In February, 1997 the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which is effective for financial statements for
periods ending after December 31, 1997. This statement applies to both
public and nonpublic entities. The Bank anticipates that adoption of this
standard will not have a material effect on the Bank.
F-24
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15 - RECENTLY ISSUED ACCOUNTING STANDARDS, Continued
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Under this statement, enterprises are required to
classify items of "other comprehensive income" by their nature in the
financial statements and display the balance of other comprehensive income
separate in the equity section of a statement of financial position.
Statement 130 is effective for both interim and annual periods beginning
after December 15, 1997. Comparative financial statements provided for
earlier periods are required to be reclassified to reflect the provisions
of the statement. It is not anticipated that the adoption of these
statement will materially affect the Bank's current method of financial
reporting.
Also in June, 1997 the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". This statement
establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. Statement
131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated unless it is impractical
to do so. It is not anticipated that the adoption of this statement will
materially affect the Bank's current method of financial reporting.
NOTE 16 - YEAR 2000
The Bank recognizes that there is a business risk in computerized systems
as the calendar rolls over into the next century. The Federal Financial
Institutions Examination Council (FFIEC) issued an interagency statement
on May 5, 1997 outlining five phases for institutions to effectively
manage the Year 2000 challenge. The phases were: Awareness; Assessment;
Renovation; Validation; and, Implementation. The FFIEC encouraged
institutions to have all critical applications identified and priorities
set by September 30, 1997 and to have renovation work largely completed
and testing well underway by December 31, 1998. The Bank has an ongoing
program designed to ensure that its operational and financial systems will
not be adversely affected by year 2000 software failures, due to
processing errors arising from calculations using the year 2000 date. The
Board of Directors and management of the Bank have established year 2000
compliance as a strategic initiative. While the Bank believes that it has
available resources to assure year 2000 compliance, it is to some extent
dependent on vendor cooperation. At the present time, the Bank expects its
most critical application software vendor to have all of its system in
compliance by December 31, 1998. The Bank expects to install the necessary
software releases in 1998 and have testing of such systems substantially
completed by December 31, 1998.
At this time, the Bank has not determined the cost of making any
modifications to correct any year 2000 problems; however, equipment and
software expenses are not expected to materially differ from past results.
The Bank routinely upgrades and purchases technologically advanced
software and hardware on a continual basis and expects to specifically
evaluate and test such purchases for year 2000 compliance.
F-25
GLOSSARY
Administrator The Administrator of the Savings Institutions Division
of the North Carolina Department of Commerce
Bank Anson Savings Bank, SSB
BIF Bank Insurance Fund of the FDIC
Common Stock The Common Stock, no par value per share, of Anson
Bancorp, Inc.
Community Offering Offering for sale to certain members of the
general public of any shares of Common Stock not
subscribed for in the Subscription Offering, including
the possible offering of Common Stock in a Syndicated
Community Offering
Company Anson Bancorp, Inc.
Conversion Simultaneous conversion of the Bank to stock form, the
issuance of the Bank's outstanding capital stock to the
Company and the Company's offer and sale of Common Stock
Eligible Account
Holders Savings account holders of Anson Savings Bank, SSB with
account balances of at least $50.00 as of the close of
business on September 30, 1996
ERISA Employee Retirement Income Security of 1974, as amended
Estimated
Valuation Range Estimated pro forma market value of the common stock
ranging from $5,610,000 to $7,590,000. The maximum of
the Estimated Valuation Range may be increased to
$8,728,500 without a resolicitation of subscribers.
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Time 12:00 noon, local time, on _________________, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve System The Board of Governors of the Federal Reserve System
Ferguson Ferguson & Company
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRS Internal Revenue Service
A-1
MRP Management Recognition Plan to be adopted no earlier
than six months after the Conversion
NASD National Association of Securities Dealers, Inc.
NPV Net Portfolio Value
Offering Subscription Offering, Community Offering and Syndicated
Community Offering, collectively
Option Plan Stock option plan to be adopted no earlier than six
months after the Conversion
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Savings account holders (other than Eligible Account
Holders and Supplemental Eligible Account Holders) and
certain borrowers (borrowers whose loans were
outstanding on _________________ and continue to be
outstanding) who are entitled to vote at the Special
Meeting due to the existence of a savings account or a
borrowing relationship, respectively, on the Voting
Record Date for the Special Meeting
OTC Bulletin Board An electronic stock data system operated by Nasdaq
Plan of Conversion Plan of the Bank to convert from a North Carolina
chartered mutual savings bank to a North Carolina
chartered stock savings bank and the issuance of all of
the Bank's outstanding capital stock to the Company and
the issuance of the Company's stock to the public
Purchase Price $10.00 per share price of the Common Stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by
FASB
Special Meeting Special Meeting of members of the Bank called for the
purpose of approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe for the
Common Stock, in order of priority, to Eligible Account
Holders, Supplemental Eligible Account Holders and Other
Members
Supplemental Eligible
Account Holders Depositors, who are not Eligible Account Holders of the
Bank, with account balances of at least $50.00 on March
31, 1998
A-2
Syndicated Community Offering of shares of Common Stock remaining after the
Offering Subscription Offering and undertaken prior to the end
and as part of the Community Offering, and which may, at
the Company's and the Bank's discretion be made to the
general public on a best efforts basis by a selling
group of broker-dealers.
Trident Securities Trident Securities, Inc.
Voting Record Date The close of business on ___________________, 1998, the
date for determining members entitled to vote at the
Special Meeting.
A-3
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by Anson Bancorp, Inc. or Anson Savings
Bank, SSB. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the shares of Common
Stock offered hereby to any person in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale hereunder shall, under any circumstances, create any implication that
information herein is correct as of any time subsequent to the date hereof.
Anson Bancorp, Inc.
(Proposed Holding Company for
Anson Savings Bank, Inc.)
Up to 872,850 Shares
Common Stock
($10.00 par value per share)
PROSPECTUS
TRIDENT SECURITIES, INC.
____________, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR
GUARANTEED
Until ___________, 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers. The Registrant's
-----------------------------------------
Articles of Incorporation provide that, to the fullest extent permitted by the
North Carolina Business Corporation Act (the "NCBCA"), no person who serves as a
director shall be personally liable to the Registrant or any of its stockholders
or otherwise for monetary damages for breach of any duty as director. The
Registrant's Bylaws state that any person who at any time serves or has served
as a director or officer of the Registrant, or who, while serving as a director
or officer of the Registrant, serves or has served at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, or
as a trustee or administrator under an employee benefit plan, shall have a right
to be indemnified by the Registrant to the fullest extent permitted by law
against (a) reasonable expenses, including attorneys' fees, incurred by him in
connection with any threatened, pending or completed civil, criminal,
administrative, investigative, or arbitrative action, suit, or proceeding (and
any appeal therein), whether or not brought by or on behalf of the Registrant,
seeking to hold him liable by reason of the fact that he is or was acting in
such capacity, and (b) reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan) or penalty for which he may have become liable in any
such action, suit or proceeding, or in connection with a settlement approved by
the Board of Directors of any such action, suit or proceeding.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions
prescribing the extent to which directors and officers shall or may be
indemnified. Section 55-8-51 of the NCBCA permits a corporation, with certain
exceptions, to indemnify a present or former director against liability if (i)
the director conducted himself in good faith, (ii) the director reasonably
believed (x) that the director's conduct in the director's official capacity
with the corporation was in its best interests and (y) in all other cases the
director's conduct was at least not opposed to the corporation's best interests,
and (iii) in the case of any criminal proceeding, the director had no reasonable
cause to believe the director's conduct was unlawful. A corporation may not
indemnify a director in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or in
connection with a proceeding charging improper personal benefit to the director.
The above standard of conduct is determined by the board of directors, or a
committee or special legal counsel or the shareholders as prescribed in Section
55-8-55.
Sections 55-8-52 and 55-8-26 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
II-1
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
The foregoing is only a general summary of certain aspects of North
Carolina law dealing with indemnification of directors and officers and does not
purport to be complete. It is qualified in its entirety by reference to the
relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
Item 25. Other Expenses of Issuance and Distribution. Set forth below is an
-------------------------------------------
estimate of the amount of fees and expenses (other than the Underwriters
commissions) to be incurred in connection with the issuance and distribution of
the shares.
Registration and Filing Fees.............................. $ 25,000
Postage and Printing...................................... $ 50,000
Accounting Fees and Expenses.............................. $ 40,000
Appraisal Fees and Expenses............................... $ 32,500
Legal Fees and Expenses................................... $125,000
Sales Agent Expenses...................................... $ 37,500
Data Processing Expenses.................................. $ 6,000
Transfer Agent............................................ $ 7,500
Sales Agent Fees and Commissions.......................... $171,000*
Other..................................................... $ 50,000
--------
$544,500
========
*At the maximum of the Valuation Range.
Item 26. Recent Sales of Unregistered Securities. On March 10, 1998,
---------------------------------------
Registrant sold one share of common stock, no par value per share, to Eugene M.
Ward for an aggregate purchase price of $10.00. Such sale was exempt from
registration under Section 4(2) of Securities Act of 1933.
Item 27. Exhibits. The following exhibits and financial statement schedules
--------
are filed herewith or will, as noted, be filed by amendment.
II-2
(a) Exhibits
--------
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-B) Description
--------------- -----------
(1)(a) Engagement letter dated September 11, 1997 between
Anson Savings Bank, SSB and Trident Securities, Inc.
(1)(b) Form of Sales Agency Agreement among Anson Bancorp,
Inc., Anson Savings Bank, SSB and Trident Securities,
Inc. (to be filed supplementally)
(2) Plan of Holding Company Conversion of Anson Savings
Bank, SSB
(3)(i) Articles of Incorporation of Anson Bancorp, Inc.
(3)(ii) Bylaws of Anson Bancorp, Inc.
(4) Form of Stock Certificate for Anson Bancorp, Inc. and
Anson Savings Bank, SSB (to be filed supplementally)
(5) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to legality of securities
to be registered hereby
(8)(a) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to federal and state tax
consequences
(8)(b) Opinion of Ferguson & Company as to the value of
subscription rights
(10)(a) Letter Agreement dated November 12, 1997 between Anson
Savings Bank, SSB and Ferguson & Company
(10)(b) Form of Employment Agreement between Anson Savings
Bank, SSB and Eugene M. Ward
II-3
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
(10)(c) Form of the Management Recognition Plan of Anson
Savings Bank, SSB if the Plan is adopted and
approved by the stockholders of Anson Bancorp, Inc.
within one year after the conversion of Anson
Savings Bank, Inc., SSB to stock form
(10)(d) Form of Stock Option Plan of Anson Bancorp, Inc. if
the Plan is adopted and approved by the
stockholders of Anson Bancorp, Inc. within one year
after the conversion of Anson Savings Bank, Inc.,
SSB to stock form
(10)(e) Form of Anson Savings Bank, Inc., SSB Severance
Plan
(10)(f) Form of Capital Maintenance Agreement between Anson
Bancorp, Inc. and Anson Savings Bank, Inc., SSB
(23)(a) Consent of Faulkner & Thompson, P.A.
(23)(b) Consent of Ferguson & Company
(27) Financial Data Schedule
(99)(a) Appraisal Report of Ferguson & Company as of
February 28, 1998
(99)(b) Form of Stock Order Form (to be filed
supplementally)
(99)(c) Form of Summary Proxy Statement
(b) Financial Statement Schedules
-----------------------------
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
II-4
Item 28. Undertakings.
------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which IT offers or sells securities, a
post-effective amendment to this registration statement:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 ("Securities Act").
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information 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 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer 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 small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense
II-5
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the small
business issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Wadesboro, State of North Carolina on March 12, 1998.
ANSON BANCORP, INC.
By: /s/ Eugene M. Ward
-----------------------------------
Eugene M. Ward, Director,
President and Chief Executive
Officer
Signatures Title Date
---------- ----- ----
/s/ Eugene M. Ward Director, President and Chief March 12, 1998
- ----------------------------- Executive Officer (Principal
Eugene M. Ward Executive Officer)
/s/ Nancy H. Allen Treasure (Principal Financial March 12, 1998
- ----------------------------- and Accounting Officer)
Nancy H. Allen
/s/ Preston A. Burns Chairman of the Board March 12, 1998
- -----------------------------
Preston A. Burns
/s/ John J. Crawford Director March 12, 1998
- -----------------------------
John J. Crawford
/s/ W. Kenneth Huntley Director March 12, 1998
- -----------------------------
W. Kenneth Huntley
Director March 12, 1998
- -----------------------------
Emmett S. Patterson
/s/ John R. Potter
- ----------------------------- Director March 12, 1998
John R. Potter
/s/ H. Patrick Taylor, Jr.
- ----------------------------- Director March 12, 1998
H. Patrick Taylor, Jr.