SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
[X] Filed by the Registrant
[_] Filed by a Party other than the Registrant
Check the appropriate box:
--------------------------
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BOC FINANCIAL CORP.
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(Name of Registrant as Specified In Its Charter)
Not Applicable
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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[_] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
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(2) Aggregate number of securities to which transaction applies:
805,000
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$ 9.45 [Average of bid ($9.00) and Asked ($9.90) on Sep. 24, 2001]
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(4) Proposed maximum aggregate value of transaction:
$ 7,607,250
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(5) Total fee paid:
$ 1,521.45
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO] Bank of the
Carolinas
------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
BOC FINANCIAL CORP
A Special Meeting of Shareholders (the "BOC Special Meeting") of BOC
Financial Corp will be held at _____ __.m. on ________, _____________, 2001, at
BOC Financial Corp's headquarters located at 107 South Central Avenue in Landis,
North Carolina.
The purposes of the meeting are:
1. Proposal to Approve the Merger Agreement and Merger. To consider and vote
on a proposal to approve the Agreement and Plan of Reorganization and
Merger, dated as of July 20, 2001 (the "Merger Agreement"), between BOC
Financial Corp ("BOC"), Bank of the Carolinas ("Carolinas"), and Bank of
Davie ("Davie") (a copy of which is attached as Appendix A to the Joint
Proxy Statement/Offering Circular which accompanies this Notice), and to
approve the transactions described in the Merger Agreement, including,
without limitation, the mergers of BOC into Davie (the "Merger") and
Carolinas into Davie (the "Bank Merger"), with the result that each
outstanding share of BOC's common stock will be converted into the right to
receive 0.92 shares of Davie's common stock, all as more fully described in
the Joint Proxy Statement/Offering Circular; and
2. Other Business. To transact any other business properly presented for
action at the BOC Special Meeting.
BOC's Board of Directors recommends that you vote "FOR" the Merger
Agreement and the transactions described in it.
If the Merger is approved and completed, you will have the right under
North Carolina law to dissent and demand payment of the fair value of your
shares. Your right to dissent is conditioned on your strict compliance with the
requirements of Article 13 of Chapter 55 of the North Carolina General Statutes.
The full text of that statute is attached as Appendix B to the Joint Proxy
Statement/Offering Circular which accompanies this Notice.
You are invited to attend the BOC Special Meeting in person. However, even
if you plan to attend, you are requested to complete, sign and date the enclosed
appointment of proxy and return it promptly in the accompanying envelope to
ensure that a quorum is present at the meeting. Signing an appointment of proxy
will not affect your right to revoke it or to attend the meeting and vote in
person.
By Order of the Board of Directors
/s/ Stephen R. Talbert
Stephen R. Talbert
President and Chief Executive Officer
_____________, 2001
Bank of Davie
-------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
BANK OF DAVIE
A Special Meeting of Shareholders (the "Davie Special Meeting") of Bank of
Davie will be held at _____ ___.m. on ________, _____________, 2001, at Bank of
Davie's headquarters located at 135 Boxwood Village Drive in Mocksville, North
Carolina.
The purposes of the meeting are:
1. Proposal to Approve the Merger Agreement and Merger. To consider and vote
on a proposal to approve the Agreement and Plan of Reorganization and
Merger, dated as of July 20, 2001 (the "Merger Agreement"), between Bank of
Davie ("Davie"), BOC Financial Corp ("BOC"), and Bank of the Carolinas
("Carolinas") (a copy of which is attached as Appendix A to the Joint Proxy
Statement/Offering Circular which accompanies this Notice), and to approve
the transactions described in the Merger Agreement, including, without
limitation, the mergers of BOC into Davie (the "Merger") and Carolinas into
Davie (the "Bank Merger"), with the result that each outstanding share of
BOC's common stock will be converted into the right to receive 0.92 shares
of Davie's common stock, all as more fully described in the Joint Proxy
Statement/Offering Circular; and
2. Other Business. To transact any other business properly presented for
action at the Davie Special Meeting.
Davie's Board of Directors recommends that you vote "FOR" the Merger
Agreement and the transactions described in it.
If the Merger is approved and completed, you will have the right under
North Carolina law to dissent and demand payment of the fair value of your
shares. Your right to dissent is conditioned on your strict compliance with the
requirements of Article 13 of Chapter 55 of the North Carolina General Statutes.
The full text of that statute is attached as Appendix B to the Joint Proxy
Statement/Offering Circular which accompanies this Notice.
You are invited to attend the Davie Special Meeting in person. However,
even if you plan to attend, you are requested to complete, sign and date the
enclosed appointment of proxy and return it promptly in the accompanying
envelope to ensure that a quorum is present at the meeting. Signing an
appointment of proxy will not affect your right to revoke it or to attend the
meeting and vote in person.
By Order of the Board of Directors
/s/ Robert E. Marziano
Robert E. Marziano
President and Chief Executive Officer
_____________, 2001
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[LOGO] Bank of the Bank of Davie
Carolinas -------------
------------------
JOINT PROXY STATEMENT / OFFERING CIRCULAR
The Mergers. BOC Financial Corp ("BOC") and Bank of Davie ("Davie") are
proposing to merge. BOC and its bank subsidiary, Bank of the Carolinas
("Carolinas"), each would be merged into Davie, and Davie would change its name
to "Bank of the Carolinas."
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Facts for BOC Shareholders. Facts for Davie Shareholders.
. In the mergers, you will receive 0.92 shares of . In the mergers, you will keep the Davie common
Davie common stock for each BOC share you own. stock you own.
. Your Board of Directors recommends the merger. . Your rights as a shareholder of Davie will not be
. After the mergers, BOC shareholders will own affected by the mergers.
about 43.4% of the combined bank. . Your Board of Directors recommends the mergers.
. The mergers will be tax free to you, other than with . After the mergers, Davie shareholders will own
respect to cash you receive for a fractional share or about 56.6% of the combined bank.
as a "dissenting" shareholder. . The mergers will be tax free to you.
. In connection with the mergers, you have . In connection with the mergers, you have
"dissenters rights" under North Carolina law. "dissenters rights" under North Carolina law.
. BOC plans to hold a special meeting of its . Davie plans to hold a special meeting of its
shareholders on ________, 2001, to vote on the shareholders on ________, 2001, to vote on the
mergers. mergers.
------------------------------------------------------------------------------------------------------------------------
Merger Consideration. The number of Davie shares that BOC shareholders will
receive in the mergers is fixed. The dollar value of the consideration will
change depending on changes in the market price of Davie shares and will not be
known at the time of the special meeting of either BOC's or Davie's
shareholders. BOC's common stock and Davie's common stock are traded on the OTC
Bulletin Board under the symbols "BOCF" for BOC stock and "BADN" for Davie
stock. Based on the average of last high and low sale prices of Davie's common
stock before we announced the mergers, the value of consideration to be received
by BOC's shareholders for each share of BOC stock would have been $12.01. On
October ____, 2001, the value would have been $______.
Voting. Even if you plan to attend your special meeting of shareholders,
please vote as soon as possible by completing and returning the enclosed
appointment of proxy. Not voting at all will have the same effect as voting
against the mergers.
This Document. This document is a Joint Proxy Statement/Offering Circular
that is being distributed to the shareholders of both BOC and Davie in
connection with the special shareholders' meetings. It contains important
information about the mergers and you should read it carefully.
Neither the Securities and Exchange Commission, the FDIC, the North
Carolina Commissioner of Banks, nor any state securities commission has approved
of the Davie stock to be issued in the mergers or determined if this document is
accurate or complete. It is illegal to tell you otherwise.
The shares of Davie stock to be issued to BOC's shareholders are not
deposits or savings accounts and are not obligations of or guaranteed by Davie.
They are not insured by the FDIC or any other government agency and are subject
to investment risk, including the possible loss of principal.
This Joint Proxy Statement/Offering Circular is dated _________, 2001, and
it is being mailed to BOC's and Davie's shareholders on or about ________, 2001.
______________________________
TABLE OF CONTENTS
Page Page
---- ----
SUMMARY.................................................... Management's Discussion and Analysis of
RISK FACTORS............................................... Financial Condition and Results of Operations...........
A WARNING ABOUT FORWARD-LOOKING............................ Beneficial Ownership of Securities.......................
STATEMENTS AND OTHER MATTERS............................. Board of Directors.......................................
THE SPECIAL MEETINGS OF SHAREHOLDERS....................... Directors' Compensation..................................
Special Meeting of BOC's Shareholders.................... Executive Officers.......................................
Special Meeting of Davie's Shareholders.................. Executive Compensation...................................
THE MERGER................................................. Transactions with Related Parties........................
General.................................................. BOC FINANCIAL CORP.........................................
The Merger............................................... General..................................................
Conversion of BOC Stock.................................. BOC Financial Statements; Available Information..........
Surrender and Exchange of Certificates................... Management's Discussion and Analysis of
Treatment of Fractional Shares........................... Financial Condition and Results of Operations...........
Recommendation........................................... Beneficial Ownership ....................................
Background of and Reasons for the Merger................. Board of Directors.......................................
Opinion of BOC's Financial Advisor....................... Directors' Compensation..................................
Opinion of Davie's Financial Advisor..................... Executive Officers.......................................
Effect of Merger on Outstanding Davie Stock.............. Executive Compensation...................................
Required Shareholder Approvals........................... Transactions with Related Parties........................
Required Regulatory Approvals............................ SUPERVISION AND REGULATION.................................
Conduct of Business Pending the Merger................... CAPITAL STOCK OF DAVIE AND BOC.............................
Dividends................................................ Capital Stock of Davie...................................
Prohibition on Solicitation.............................. Differences in Capital Stock.............................
Accounting Treatment..................................... INDEMNIFICATION............................................
Certain Income Tax Consequences.......................... INDEPENDENT ACCOUNTANTS....................................
Conditions to the Merger................................. FINANCIAL STATEMENTS OF
Waiver; Amendment of Merger Agreement.................... BANK OF DAVIE............................................ F-1
Termination of Merger Agreement.......................... FINANCIAL STATEMENTS OF
Closing Date and Effective Time.......................... BOC FINANCIAL CORP....................................... F-31
Interests of Certain Persons With Respect to the Merger.. PRO FORMA FINANCIAL STATEMENTS............................. F-61
Expenses................................................. APPENDIX A - Agreement and Plan of
RIGHTS OF DISSENTING SHAREHOLDERS.......................... Reorganization and Merger................................ A-1
MARKET AND DIVIDEND INFORMATION............................ APPENDIX B - Article 13 of Chapter 55 of the
BOC's Capital Stock...................................... North Carolina General Statutes Relating to
Davie's Capital Stock.................................... the Rights of Dissenting Shareholders.................... B-1
CAPITALIZATION............................................. APPENDIX C - Fairness Opinion of
BANK OF DAVIE.............................................. Sterne, Agee and Leach, Inc.............................. C-1
General.................................................. APPENDIX D - Fairness Opinion of
Davie Financial Statements; Available Information........ Scott & Stringfellow..................................... D-1
______________________________
2
________________________________________________________________________________
SUMMARY
The following is a brief summary of the information in this document. The
summary is not intended to be complete, and it may not contain all the
information that is important to you. To better understand the mergers that will
be considered by BOC's shareholders and Davie's shareholders at their special
meetings, we urge you to read this entire document carefully. Each item in this
summary includes a page reference directing you to a more complete discussion of
the information in that item.
The Special Meetings of Shareholders
The BOC Special
Meeting BOC plans to hold its special meeting on _______, 2001, at
______ __.M. at BOC's headquarters located at 107 South
Central Avenue in Landis, North Carolina. At the meeting,
BOC's shareholders will vote on a proposal to approve the
plans of merger contained in the agreement between BOC and
Davie that provides for BOC and Carolinas each to be merged
into Davie.
You can vote at BOC's special meeting if you owned BOC
common stock at the close of business on _________, 2001. On
that date, there were 805,000 outstanding shares of BOC's
common stock. You can cast one vote for each share of BOC
common stock that you owned of record on that date. (See
"The Special Meetings of Shareholders" on page ___.)
The Davie Special
Meeting Davie plans to hold its special meeting on _______, 2001, at
______ __.M. at Davie's headquarters located at 135 Boxwood
Village Drive in Mocksville, North Carolina. At the meeting,
Davie's shareholders will vote on a proposal to approve the
plans of merger contained in the agreement between BOC and
Davie that provides for BOC and Carolinas each to be merged
into Davie.
You can vote at Davie's special meeting if you owned Davie
common stock at the close of business on _________, 2001. On
that date, there were 893,100 outstanding shares of Davie
common stock. You can cast one vote for each share of Davie
common stock that you owned of record on that date. (See
"The Special Meetings of Shareholders" on page ___.)
The Mergers
Parties to the
Mergers BOC is a North Carolina business corporation which is
registered with the Federal Reserve Board as a bank holding
company and is the parent company of Carolinas. BOC's
principal office is located at 107 South Central Avenue,
Landis, North Carolina 28088, and its telephone number is
(704) 857-7277. (See "BOC Financial Corp" on page ____.)
Carolinas is a North Carolina banking corporation. Its
principal office is located at 107 South Central Avenue,
Landis, North Carolina 28088, and its telephone number is
(704) 857-7277. (See "BOC Financial Corp" on page ____.)
Davie also is a North Carolina banking corporation. Its
principal office is located at 135 Boxwood Village Drive,
Mocksville, North Carolina 27028, and its telephone number
is (336) 751-5755. (See "Bank of Davie" on page _____.)
________________________________________________________________________________
3
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The Merger Agreement The terms and conditions of the mergers are provided
for in the merger agreement (the "Merger Agreement")
entered into between BOC, Carolinas and Davie. A copy
of the Merger Agreement is attached as Appendix A to
this Joint Proxy Statement/Offering Circular. (See
"The Merger" on page _____.)
Effect of Mergers When the merger of BOC into Davie becomes effective
(the "Effective Time"), (i) BOC will be merged into
Davie (the "Merger"), (ii) each outstanding share of
BOC common stock ("BOC Stock") held by its
shareholders (other than shareholders who "dissent")
will be converted into the right to receive 0.92
shares of Davie common stock ("Davie Stock"), and
(iii) Carolinas will become a wholly-owned subsidiary
of Davie. Immediately following the Effective Time,
Carolinas also will be merged into Davie (the "Bank
Merger"). Davie will be the surviving corporation in
the Merger and the Bank Merger and will change its
name and operate after the Bank Merger as "Bank of
the Carolinas." (See "The Merger" on page _____.)
Conversion of BOC Stock At the Effective Time, each share of BOC Stock
(except for shares held by BOC shareholders who
"dissent") automatically will be converted into 0.92
shares of Davie Stock. (See "The Merger -- Conversion
of BOC Stock" on page _____, and "Rights of
Dissenting Shareholders" on page _____.)
Treatment of
Fractional Shares If the conversion of a BOC shareholder's shares of
BOC Stock results in a fraction of a share of Davie
Stock, Davie will pay the shareholder cash rather
than issuing the fractional share. The amount of cash
will be calculated by multiplying that fraction by
the market value of a share of Davie Stock at the
time the Merger is completed. (See "The Merger --
Treatment of Fractional Shares" on page _____.)
BOC's Board of Directors
Recommends that BOC's
shareholders vote "FOR"
the Merger Agreement BOC's Board of Directors has approved the Merger
Agreement and believes the Merger and the Bank Merger
are in the best interests of BOC, Carolinas, and
BOC's shareholders. BOC's Board of Directors
recommends that BOC's shareholders vote "FOR"
approval of the Merger Agreement. (See "The Merger --
Recommendation" on page ____, and "--Background of
and Reasons for the Merger" on page _____.)
Davie's Board of Directors
Recommends that Davie's
shareholders vote "FOR"
the Merger Agreement Davie's Board of Directors has approved the Merger
Agreement and believes the Merger and the Bank Merger
are in the best interests of Davie and its
shareholders. Davie's Board of Directors recommends
that Davie's shareholders vote "FOR" approval of the
Merger Agreement. (See "The Merger -- Recommendation"
on page ____, and "--Background of and Reasons for
the Merger" on page _____.)
Opinion of BOC's
Financial Advisor BOC's Board of Directors retained Sterne, Agee &
Leach, Inc. ("Sterne Agee") as its financial advisor
in connection with its consideration of the Merger
Agreement. Sterne Agee has provided BOC's Board of
Directors
________________________________________________________________________________
4
________________________________________________________________________________
with its written opinion which states that it
believes the consideration to be received by BOC's
shareholders in connection with the Merger as
provided in the Merger Agreement is fair from a
financial point of view. A copy of the opinion is
attached as Appendix C to this Joint Proxy
Statement/Offering Circular. (See "The Merger --
Opinion of BOC Financial Advisor" on page _____.)
Opinion of Davie's
Financial Advisor Davie's Board of Directors retained Scott &
Stringfellow ("Scott & Stringfellow") as its
financial advisor in connection with its
consideration of the Merger Agreement. Scott &
Stringfellow has provided Davie's Board of Directors
with its written opinion which states that it
believes the terms of the Merger as provided in the
Merger Agreement are fair from a financial point of
view to Davie and its shareholders. A copy of the
opinion is attached as Appendix D to this Joint Proxy
Statement/Offering Circular. (See "The Merger --
Opinion of Davie Financial Advisor" on page _____.)
Required Approval of
BOC's Shareholders In order to approve the Merger Agreement, the holders
of a majority of the total outstanding shares of BOC
Stock must vote in favor of approval. (See "The
Merger -- Required Shareholder Approvals" on page
____.) BOC's directors and executive officers
beneficially own and have a right to vote an
aggregate of 70,334 shares of BOC Stock which amounts
to approximately 8.74% of the total outstanding
shares.
Required Approval of
Davie's Shareholders In order to approve the Merger Agreement, the holders
of at least two-thirds of the total outstanding
shares of Davie Stock must vote for approval. (See
"The Merger -- Required Shareholder Approvals" on
page ____.) Davie's directors and executive officers
beneficially own and have a right to vote an
aggregate of 167,307 shares of Davie Stock which
amounts to approximately 18.73% of the total
outstanding shares.
Required Regulatory
Approvals The Merger and Bank Merger are subject to approval by
the North Carolina Commissioner of Banks, the FDIC,
and the North Carolina Banking Commission. An
application for each of those regulatory approvals
has been filed. (See "The Merger -- Required
Regulatory Approvals" on page _____.)
Conditions to Merger In addition to required shareholder and regulatory
approvals, completion of the Merger is conditioned on
the satisfaction of various other conditions
described in the Merger Agreement. (See "The Merger
-- Conditions to Merger" on page _____.)
Termination of the
Merger Agreement Before the Effective Time, the Merger Agreement may
be terminated by the mutual agreement of BOC,
Carolinas and Davie, and, under certain conditions
described in the Merger Agreement, it also may be
terminated by either BOC or Davie. (See "The Merger
-- Termination of Merger Agreement" on page _____.)
Effective Time Assuming that all required regulatory approvals are
received and that BOC's and Davie's shareholders
approve the Merger Agreement, BOC and Davie expect
that the Merger and the Bank Merger each will become
effective during the fourth quarter of 2001. (See
"The Merger-- Closing Date and Effective Time" on
page _____.)
________________________________________________________________________________
5
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Directors BOC's current five directors will be appointed to serve
with Davie's current directors as directors of Davie
following the Effective Time.
Interests of Certain
Persons Certain of BOC's and Carolinas' executive officers and
directors have interests in the Merger and will receive
certain benefits at the Effective Time that are in
addition to their interests as shareholders of BOC
generally. (See "The Merger -- Interests of Certain
Persons with Respect to the Merger" on page _____.)
Accounting Treatment The Merger will be accounted for as a "purchase" for
accounting purposes. (See "The Merger -- Accounting
Treatment" on page ___.)
Income Tax Consequences BOC and Davie expect that the Merger will be treated as
a "tax-free reorganization" for federal income tax
purposes. A condition of the Merger is that BOC and
Davie receive a written opinion from Davie's legal
counsel to that effect. (See "The Merger -- Certain
Income Tax Consequences" on page _____.)
Rights of Dissenting
Shareholders If the Merger is completed, BOC's shareholders and
Davie's shareholders will have the right to dissent and
to receive the "fair value" of their shares of BOC
Stock or Davie Stock, respectively, in cash. In order
to dissent, a shareholder must, among other things:
. give to BOC (if you are a BOC shareholder), or give to
Davie (if you are a Davie shareholder), before the vote
on the Merger Agreement is taken at the BOC Special
Meeting or at the Davie Special Meeting, timely written
notice of your intent to demand payment for your shares
if the Merger is completed;
. not vote your shares in favor of the Merger Agreement;
. demand payment and deposit your share certificates by
the date set forth in and in accordance with the terms
and conditions of a "dissenters' notice" that will be
sent to you by BOC or Davie; and,
. otherwise satisfy the requirements of the North
Carolina statutes which are attached as Appendix B to
this Joint Proxy Statement/Offering Circular.
In order to dissent, you must follow carefully all
steps prescribed in Appendix B, including giving the
required written notice before the vote on the Merger
is taken. (See "Rights of Dissenting Shareholders" on
page ____ and Appendix B.)
Differences in Capital
Stock of Davie and BOC When BOC shareholders receive Davie Stock for their BOC
Stock, they will become shareholders of Davie. There
are certain differences under North Carolina law
between the rights of holders of Davie Stock and the
rights of shareholders of BOC. (See "Capital Stock of
Davie and BOC -- Differences in Capital Stock" on page
_____.)
Risk Factors There are some risk factors that you should consider
before you decide how to vote on the Merger. (See "Risk
Factors" on page _____.)
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6
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Selected Financial Information
Davie
The following table contains certain selected historical financial
information for Davie on the dates and for the periods indicated. This selected
financial information has been derived from, and you should read it in
conjunction with, Davie's audited financial statements and unaudited interim
financial statements, together with related financial statement footnotes, which
are included in this Joint Proxy Statement/Offering Circular. (See "Financial
Statements of Bank of Davie" on page F-1.)
As of and for the As of and for the
six months ended year ended
June 30, 2001 December 31, 2000
------------------------ ------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
Selected balance sheet data:
Gross loans......................................... $ 71,662 $ 59,338
Securities.......................................... 11,887 12,662
Total assets........................................ 93,561 83,784
Deposits............................................ 81,507 73,741
Stockholders' equity................................ 7,156 7,133
Selected results of operations:
Net interest income................................. $ 1,333 $ 2,238
Provision for loan losses........................... 190 370
Non-interest income................................. 145 116
Non-interest expense................................ 1,386 2,028
Income taxes........................................ - -
-------- --------
Net loss............................................ $ ( 98) $ ( 44)
======== ========
Per share (1):
Net loss (basic and diluted)........................ $ (0.11) $ (0.05)
======== ========
Book value......................................... $ 8.01 $ 7.99
======== ========
Selected ratios:
Return on average assets (2)........................ (0.22) % (0.07) %
======== ========
Return on average stockholders' equity (2).......... (2.73) % (0.64) %
======== ========
Stockholders' equity to average total assets........ 7.90 % 11.33 %
======== ========
______________________________
(1) Per share numbers have been restated to reflect the effect of the six-for-
five stock split that Davie effected in the form of a 20% stock dividend
on December 21, 2000.
(2) Annualized.
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7
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BOC
The following table sets forth certain selected historical consolidated
financial information for BOC on the dates and for the periods indicated. This
selected financial information has been derived from, and you should read it in
conjunction with, BOC's audited consolidated financial statements and unaudited
interim consolidated financial statements, together with the related financial
statement footnotes, which are included in this Joint Proxy Statement/Offering
Circular. (See "Financial Statements of BOC Financial Corp" on page F-31.)
As of and for the As of and for the
six months ended year ended
June 30, 2001 December 31, 2000
------------------------ ------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
Selected balance sheet data:
Gross loans................................... $35,413 $25,677
Securities.................................... 1,515 5,230
Total assets.................................. 41,122 34,998
Deposits...................................... 30,743 26,584
Stockholders' equity.......................... 8,192 8,208
Selected results of operations:
Net interest income........................... $ 594 $ 1,151
Provision for loan losses..................... 150 9
Non-interest income........................... 105 73
Non-interest expense.......................... 544 998
Income taxes.................................. - -
------- -------
Net income.................................... $ 5 $ 156
======= =======
Per share:
Net income (basic and diluted)................ $ 0.01 $ 0.22
======= =======
Book value................................... $ 10.18 $ 10.20
======= =======
Selected ratios:
Return on average assets (1).................. 0.01 % 0.47 %
======= =======
Return on average stockholders' equity (1).... 0.06 % 1.92 %
======= =======
Stockholders' equity to average total assets.. 21.42 % 24.93 %
======= =======
______________________________
(1) Annualized.
================================================================================
8
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Pro Forma Combined
The following table sets forth certain selected historical financial
information for Davie as the surviving entity in the Merger on a pro forma basis
on the dates and for the periods indicated. The pro forma data has been prepared
assuming that the Merger had been completed on each of the dates indicated (for
balance sheet data) and as of the beginning of the earliest period presented
(for results of operations data) using the "purchase" method of accounting. This
information has been prepared based on estimates of the fair values of BOC's
tangible and identifiable intangible assets and liabilities and of restructuring
and Merger-related charges. The final purchase accounting adjustments and
restructuring and Merger-related charges may be materially different from those
used in preparing the pro forma data presented below. Any decrease in the net
fair value of the assets and liabilities of BOC as compared to the information
shown below will have the effect of increasing the amount of the purchase price
allocable to goodwill. (See "The Merger -- Accounting Treatment" on page _____.)
You should read the information below in conjunction with Davie's and BOC's
audited financial statements and unaudited interim financial statements,
together with the related financial statement footnotes, which are included in
this Joint Proxy Statement/Offering Circular. (See "Financial Statements of Bank
of Davie" on page F-1 and "Financial Statements of BOC Financial Corp" on page
F-31.)
As of and for the As of and for the
six months ended year ended
June 30, 2001 December 31, 2000
----------------- -----------------
(Dollars in thousands, except per share amounts)
Selected balance sheet data:
Gross loans.................................... $ 107,075 $ 85,015
Securities..................................... 13,402 17,892
Total assets................................... 134,698 118,781
Deposits....................................... 112,250 100,325
Stockholders' equity........................... 14,686 14,663
Selected results of operations:
Net interest income............................ $ 1,927 $ 3,389
Provision for loan losses...................... 340 379
Non-interest income............................ 250 189
Non-interest expense........................... 1,935 3,037
Income taxes................................... - -
---------- ----------
Net income..................................... $ (98) $ 162
========== ==========
Per share:
Net income (basic and diluted)................. $ (0.06) $ 0.10
========== ==========
Book value..................................... $ 9.31 $ 9.29
========== ==========
Selected ratios:
Return on average assets (1)................... (0.28)% 0.17 %
========== ==========
Return on average stockholders' equity (1)..... (2.54)% 1.12 %
========== ==========
Stockholders' equity to average total assets... 11.03 % 15.13 %
========== ==========
______________________________
(1) Annualized.
--------------------------------------------------------------------------------
9
--------------------------------------------------------------------------------
Comparative Per Share Data
The following table includes data relating to Davie Stock and BOC Stock,
including book values, cash dividends declared ,and net income per share on the
dates and for the periods presented:
. for Davie and BOC on a historical basis,
. for Davie on a pro forma combined basis, and
. on an equivalent per share of BOC Stock basis
The pro forma and equivalent per share data has been calculated assuming
that the Merger became effective on the specified dates and was accounted for as
a "purchase". (See "The Merger -- Accounting Treatment" on page ____.)
At and for the At and for the
six months ended year ended
June 30 , 2001 December 31, 2000
----------------- -----------------
Book value per share:
Davie.................................. $ 8.01 $ 7.99
BOC.................................... 10.18 10.20
Pro forma combined (1)................. 9.31 9.29
Equivalent per share for BOC (2)....... 8.57 8.55
Cash dividends per share:
Davie.................................. $ - $ -
BOC.................................... 0.10 0.20
Pro forma combined (3)................. - -
Equivalent per share for BOC (3)....... - -
Income per share:
Davie.................................. $ (0.11) $ (0.05)
BOC.................................... 0.01 0.22
Pro forma combined (1)................. (0.06) 0.10
Equivalent per share for BOC (2)....... (0.06) 0.09
______________________________
(1) "Pro forma combined" and "Equivalent per share for BOC" amounts have been
calculated assuming that the Merger became effective on June 30, 2001, and
on December 31, 2000.
(2) Equivalent per share amounts have been calculated by multiplying the "Pro
forma combined" amounts by the exchange rate of 0.92 shares of Davie Stock
for each share of BOC Stock.
(3) In the case of "Cash dividends per share," no "pro forma combined" or
"Equivalent per share for BOC" amounts are shown since Davie has not yet
begun paying dividends on the Davie Stock and does not expect to pay
dividends following the Effective Time.
The following table lists the market value (average of the last high
and low sales prices) of Davie Stock and BOC Stock prior to the first public
announcement of the Merger), and the equivalent per share market value of BOC
Stock based on the terms of the Merger.
Equivalent per share
Davie Stock BOC Stock of BOC Stock
----------- --------- --------------------
Market value $ 13.05 $ 6.325 $ 12.01
--------------------------------------------------------------------------------
10
RISK FACTORS
In deciding how to vote on the Merger, BOC's shareholders will be making an
investment decision to take Davie Stock in exchange for their BOC Stock. In
addition to normal investment risks, there are certain factors that they should
be aware of in making their decisions. They should carefully consider the
following risk factors in addition to the other information in this document.
Because the market price of Davie Stock may fluctuate, BOC's shareholders cannot
be sure of the market value of the Davie Stock that they will receive in the
Merger.
Upon completion of the Merger, each share of BOC Stock will be converted
into 0.92 shares of Davie Stock. The exchange ratio will not be adjusted for
changes in the market price of either BOC Stock or Davie Stock. So, changes in
the prices of BOC Stock and Davie Stock prior to the Merger will affect the
market value that BOC's shareholders will receive on the date of the Merger. It
also will affect the market value of the Davie Stock that Davie's shareholders
will continue to hold after the Merger is completed. Stock price changes may
result from a variety of factors, including general market and economic
conditions, changes in our businesses, operations and prospects and regulatory
considerations. Many of these factors are beyond our control. Neither BOC nor
Davie is permitted to terminate the Merger Agreement as a result of changes in
the market price of either company's common stock.
The prices of BOC Stock and Davie Stock at the closing of the Merger may
vary from their prices on the date the Merger Agreement was signed, on the date
of this Joint Proxy Statement/Offering Circular, on the date of the special
shareholders' meetings, and on the date the Merger is completed. As a result,
the value represented by the exchange ratio also may be different on each of
those dates. Because the date the Merger is completed will be after the dates
of the special shareholders' meetings, at the time of the meetings BOC's and
Davie's shareholders will not know the market value of the combined company's
common stock that they will hold upon completion of the Merger. (See "Market
and Dividend Information" on page _____.)
Davie currently does not pay cash dividends on Davie Stock.
Davie has only operated since 1998, and it currently is not permitted to
pay cash dividends on its common stock. BOC has paid a cash dividend of $0.05
per share each quarter since the second quarter of 1999. Following the Merger,
BOC's shareholders will not receive any cash dividends on the Davie Stock they
receive until Davie begins to pay cash dividends. Davie cannot predict when or
if it will begin to pay dividends. (See "Market and Dividend Information" on
page _____.)
Combining BOC and Davie may be more difficult, costly or time-consuming that we
expect.
Until completion of the Merger, BOC and Davie will continue to operate as
separate companies. When we begin to integrate the two companies' operations, it
is possible that there will be disruptions in each company's ongoing operations.
For example, when we begin working out inconsistencies in the two companies'
business procedures, controls, product descriptions, personnel policies, and
data processing systems, there could be problems that affect our relationships
with our customers, that cause us to lose key employees, or that affect our
ability to realize all anticipated benefits of the Merger. Neither BOC nor
Davie have previous experience completing a merger.
BOC's directors and officers may have interests in the Merger that differ from
the interests of BOC's other shareholders.
BOC's directors and executive officers have interests in the Merger other
than their interests as BOC shareholders. These interests may cause them to
view the Merger proposal differently that you may view it. (See "The Merger --
Interests of Certain Persons with Respect to the Merger" on page _____.)
11
We may record additional allowance for loan losses in connection with the
Merger.
The determination of the appropriate level of any bank's allowance for loan
losses is a subjective process that involves both quantitative and qualitative
factors. Our preliminary analysis performed during due diligence has revealed
that there are certain differences in the methodologies employed by BOC and
Davie in determining the levels of their respective allowances for loan losses.
We have selected Davie's methodology for the combined company.
Historically, BOC's loan portfolio has included primarily one-to-four
family residential mortgages which, generally, have a lower degree of risk than
other types of loans. However, more recently, BOC has begun to diversify its
portfolio by making more commercial loans and other types of consumer loans. We
intend for that process to continue following the Merger.
In connection with preparations for combining BOC and Davie, we will
complete our analysis of their allowances for loan losses and further analyze
the attributes of the combined loan portfolio. Based on our preliminary
analysis, we expect that BOC will record an additional provision for loan losses
in its results of operations prior to completion of the Merger. The actual
addition to the allowance will be determined and recorded immediately prior to
the Merger and will be based on a comprehensive analysis of the loan portfolio
taking into account credit conditions existing at that time. We currently do
not believe that the increase in BOC's allowance for loan losses will exceed
$250,000.
Future results of the combined companies may materially differ from the pro
forma financial information presented in this document.
Future results of the combined companies may be materially different from
those shown in the pro forma financial statements included in this document.
Those pro forma financial statements only show a combination of our historical
results. We have estimated that the combined company will record approximately
$1,025,000 in restructuring charges, merger-related charges and purchase
accounting adjustments. The charges may be higher or lower than we have
estimated, depending upon how costly or difficult it is to integrate our two
companies. These charges may decrease capital of the combined company that
could be used for profitable, income-earning investments in the future.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
AND OTHER MATTERS
This Joint Proxy Statement/Offering Circular includes forward-looking
statements. These statements usually will contain words such as "may," "will,"
"expect," "likely," "estimate," or similar terms. BOC and Davie have based
these forward-looking statements on current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions, including, among other things, the factors
discussed in "Risk Factors" above. Therefore, the events described in any
forward-looking statements in this document might not occur, or they might occur
in a different way than they are described in the statements.
In deciding how to vote on the Merger, you should rely only on the
information contained in this document. The information contained in this
document regarding BOC and Carolinas has been furnished by them, and the
information contained herein regarding Davie has been furnished by Davie.
Neither BOC nor Davie has authorized any person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it, and you should not assume that the information
appearing in this document is accurate as of any date other than the date on the
cover.
The Davie Stock is being offered under exemptions from registration under
the federal Securities Act of 1933, as amended, and under various state
securities laws. Davie has not filed any registration statement with the
Securities and Exchange Commission or any state securities regulator. Davie is
not offering Davie Stock to any person in any state where the offer or sale of
the stock is not permitted.
12
THE SPECIAL MEETINGS OF SHAREHOLDERS
Special Meeting of BOC's Shareholders
General. This Joint Proxy Statement/Offering Circular is being furnished
to BOC's shareholders in connection with the solicitation by BOC's Board of
Directors of appointments of proxy in the enclosed form for use at the special
meeting of BOC's shareholders (the "BOC Special Meeting") and at any
adjournments of that meeting. The BOC Special Meeting will be held on
_____________, __________, 2001, at _____ ___.m. at BOC's headquarters located
at 107 South Central Avenue in Landis, North Carolina. This Joint Proxy
Statement/Offering Circular is being mailed to BOC's shareholders on or about
_______, 2001.
Purposes of BOC Special Meeting. The purposes of the BOC Special Meeting
are (i) to consider and vote on a proposal to approve the Merger Agreement and
the transactions described in it, including the Merger, and (ii) to transact any
other business that may properly be presented for action at the BOC Special
Meeting. (See "The Merger" on page _____.) A copy of the Merger Agreement is
attached as Appendix A to this Joint Proxy Statement/Offering Circular.
Solicitation and Voting of Proxies. A form of appointment of proxy is
included with this Joint Proxy Statement/Offering Circular which names Stephen
R. Talbert, John A. Drye, and Henry H. Land (the "BOC Proxies") to act as
proxies and represent BOC's shareholders at the BOC Special Meeting. BOC's Board
of Directors requests that you sign and date an appointment of proxy and return
it to BOC in the enclosed envelope.
If you correctly execute an appointment of proxy and return it to BOC
before the BOC Special Meeting, then the shares of BOC common stock you hold of
record will be voted by the BOC Proxies according to your directions in the
appointment of proxy. If you sign and return an appointment of proxy but do not
give any directions, then your shares will be voted by the BOC Proxies "FOR"
approval of the Merger Agreement and Merger. The Board of Directors is not
aware of any other business that will be brought before the BOC Special Meeting
but, if any other matter is properly presented for action by shareholders, the
BOC Proxies will be authorized to vote shares represented by your appointment of
proxy according to their best judgment.
The costs of this solicitation of appointments of proxy for the BOC Special
Meeting, including costs of preparing and mailing this Joint Proxy
Statement/Offering Circular, will be shared equally by BOC and Davie. In
addition to solicitation by mail, appointments of proxy may be solicited
personally or by telephone by officers, employees and directors of BOC, without
additional compensation.
Revocation of Appointments of Proxy. If you execute an appointment of
proxy, you can revoke it at any time before the voting takes place at the BOC
Special Meeting by filing with BOC's Secretary either a written instrument
revoking it or an executed appointment of proxy dated as of a later date, or by
attending the BOC Special Meeting and announcing an intention to vote in person.
Record Date. The close of business on _________, 2001, is the record date
(the "BOC Record Date") for determining which shareholders are entitled to
receive notice of and to vote at the BOC Special Meeting. You must have been a
record holder of BOC Stock on the BOC Record Date in order to be eligible to
vote at the BOC Special Meeting.
Voting Securities. BOC's voting securities are the outstanding shares of
BOC Stock. There were 805,000 outstanding shares of BOC Stock on the BOC Record
Date. At the BOC Special Meeting, you may cast one vote for each share you held
of record on the BOC Record Date on each matter to be voted on by shareholders.
13
On the BOC Record Date, the directors and executive officers of BOC and
their affiliates beneficially owned and were entitled to vote an aggregate of
144,393 shares, or approximately 17.94%, of the outstanding shares of BOC Stock.
The directors and executive officers of BOC are expected to vote their shares
for approval of the Merger Agreement and the Merger. Additional information
regarding the beneficial ownership of BOC Stock by BOC's directors, executive
officers and principal shareholders is included in this Joint Proxy
Statement/Offering Circular under the caption "BOC Financial Corp -- Beneficial
Ownership of Securities" on page _____.
Votes Required for Approval. Under North Carolina law, the affirmative
vote of the holders of a majority of the total outstanding shares of BOC Stock
is required to approve the Merger Agreement and the Merger. Broker non-votes
and abstentions will have the same effect as votes against the Merger Agreement
and the Merger.
Special Meeting of Davie's Shareholders
General. This Joint Proxy Statement/Offering Circular is being furnished
to Davie's shareholders in connection with the solicitation by Davie's Board of
Directors of appointments of proxy in the enclosed form for use at the special
meeting of Davie's shareholders (the "Davie Special Meeting") and at any
adjournments of that meeting. The Davie Special Meeting will be held on
_____________, __________, 2001, at _____ ___.m. at Davie's headquarters located
at 135 Boxwood Village Drive in Mocksville, North Carolina. This Joint Proxy
Statement/Offering Circular is being mailed to Davie's shareholders on or about
_______, 2001.
Purposes of Davie Special Meeting. The purposes of the Davie Special
Meeting are (i) to consider and vote on a proposal to approve the
MergerAgreement and the transactions described in it, including the Merger and
the Bank Merger, and (ii) to transact any other business that may properly be
presented for action at the Davie Special Meeting. (See "The Merger" on page
_____.) A copy of the Merger Agreement is attached as Appendix A to this Joint
Proxy Statement/Offering Circular.
Solicitation and Voting of Proxies. A form of appointment of proxy is
included with this Joint Proxy Statement/Offering Circular which names William
A. Burnette, Thomas G. Fleming, and Steven G. Laymon (the "Davie Proxies") to
act as proxies and represent Davie's shareholders at the Davie Special Meeting.
Davie's Board of Directors requests that you sign and date an appointment of
proxy and return it to Davie in the enclosed envelope.
If you correctly execute an appointment of proxy and return it to Davie
before the Davie Special Meeting, then the shares of Davie common stock you hold
of record will be voted by the Davie Proxies according to your directions in the
appointment of proxy. If you sign and return an appointment of proxy but do not
give any directions, then your shares will be voted by the Davie Proxies "FOR"
approval of the Merger Agreement, Merger and Bank Merger. The Board of
Directors is not aware of any other business that will be brought before the
Davie Special Meeting but, if any other matter is properly presented for action
by shareholders, the Davie Proxies will be authorized to vote shares represented
by your appointment of proxy according to their best judgment.
The costs of this solicitation of appointments of proxy for the Davie
Special Meeting, including costs of preparing and mailing this Joint Proxy
Statement/Offering Circular, will be shared equally by BOC and Davie. In
addition to solicitation by mail, appointments of proxy may be solicited
personally or by telephone by officers, employees and directors of Davie,
without additional compensation.
Revocation of Appointments of Proxy. If you execute an appointment of
proxy, you can revoke it at any time before the voting takes place at the Davie
Special Meeting by filing with Davie's Secretary either a written instrument
revoking it or an executed appointment of proxy dated as of a later date, or by
attending the Davie Special Meeting and announcing an intention to vote in
person.
14
Record Date. The close of business on _________, 2001, is the record date
(the "Davie Record Date") for determining which shareholders are entitled to
receive notice of and to vote at the Davie Special Meeting. You must have been
a record holder of Davie Stock on the Davie Record Date in order to be eligible
to vote at the Davie Special Meeting.
Voting Securities. Davie's voting securities are the outstanding shares of
Davie Stock. There were 893,100 outstanding shares of Davie Stock on the Davie
Record Date. At the Davie Special Meeting, you may cast one vote for each share
you held of record on the Davie Record Date on each matter to be voted on by
shareholders.
On the Davie Record Date, the directors and executive officers of Davie and
their affiliates beneficially owned and were entitled to vote an aggregate of
167,307 shares, or approximately 18.73%, of the outstanding shares of Davie
Stock. The directors and executive officers of Davie are expected to vote their
shares for approval of the Merger Agreement, Merger and Bank Merger. Additional
information regarding the beneficial ownership of Davie Stock by Davie's
directors, executive officers and principal shareholders is included in this
Joint Proxy Statement/Offering Circular under the caption "Bank of Davie --
Beneficial Ownership of Securities" on page _____.
Votes Required for Approval. Under North Carolina law, the affirmative
vote of the holders of at least two-thirds of the total outstanding shares of
Davie Stock is required to approve the Merger Agreement, Merger and Bank Merger.
Broker non-votes and abstentions will have the same effect as votes against the
Merger Agreement, Merger and Bank Merger.
15
THE MERGER
The following is a summary of information about the Merger and Bank Merger
and certain of the important terms and conditions of the Merger Agreement. This
summary is not intended to be a complete description of all facts regarding the
Merger. You should carefully read the Merger Agreement and all the other
documents attached to this Joint Proxy Statement/Offering Circular for more
information.
General
At the BOC Special Meeting and the Davie Special Meeting, proposals will be
introduced for BOC's shareholders and Davie's shareholders to approve the Merger
Agreement. The Merger Agreement provides for BOC and Carolinas each to be
merged into Davie and for Davie to change its name and operate as "Bank of the
Carolinas."
The Merger
When the transactions described in the Merger Agreement become effective
(the "Effective Time"), (i) BOC will be merged into and its existence will be
combined with that of Davie (the "Merger"), and BOC will cease to exist as a
separate company, (ii) as further described below, each outstanding share of BOC
Stock held by BOC's shareholders (other than shareholders who "dissent" as
further described below) will be converted into the right to receive 0.92 shares
of Davie Stock, and (iii) Carolinas will become a wholly-owned subsidiary of
Davie. Immediately following the Effective Time, Carolinas also will be merged
into Davie (the "Bank Merger"). Davie will be the surviving corporation in each
of the Merger and the Bank Merger and will continue its and Carolinas' business
at their existing offices, all under the supervision and regulation of the North
Carolina Commissioner of Banks (the "Commissioner") and the Federal Deposit
Insurance Corporation (the "FDIC"). As part of the Bank Merger, Davie will
change its name to "Bank of the Carolinas." (See "-- Conversion of BOC Stock"
below, and "Rights of Dissenting Shareholders" on page _____.) Carolinas'
deposit accounts will become deposit accounts of Davie and will continue to be
insured by the FDIC to the maximum amount permitted by law. (See "Bank of
Davie" on page _____.)
Conversion of BOC Stock
At the Effective Time, each outstanding share of BOC Stock held of record
by a BOC shareholder (other than a shareholder who "dissents") automatically
will be converted into the right to receive 0.92 shares of Davie Stock. (See
"Rights of Dissenting Shareholders" on page _____.)
If there is a change in the number of outstanding shares of BOC Stock or
Davie Stock prior to the Effective Time as a result of a stock dividend, stock
split, reclassification or other subdivision or combination of outstanding
shares, then an appropriate and proportionate adjustment will be made in the
number of shares of Davie Stock into which each share of BOC Stock will be
converted. Management of BOC and Davie currently are not aware of any change
(completed or proposed) in the outstanding shares of BOC Stock or Davie Stock
which would result in an adjustment.
Surrender and Exchange of Certificates
Following the Effective Time, all certificates formerly evidencing shares
of BOC Stock held by BOC's shareholders ("Old Certificates") will evidence only
the right to receive certificates ("New Certificates") evidencing the shares of
Davie Stock into which the shares of BOC Stock have been converted. BOC's stock
transfer books will be closed and no further transfer of BOC Stock or of Old
Certificates will be recognized or registered. As soon as possible following
the Effective Time, Davie will send transmittal forms to BOC's former
shareholders with instructions for forwarding their Old Certificates for
surrender to Davie or to an agent designated by Davie to act as its exchange
agent. Upon
16
proper surrender to Davie or its agent by former BOC shareholders of their Old
Certificates (together with properly completed transmittal forms), they will
receive the New Certificates evidencing the Davie Stock into which their BOC
Stock has been converted, together with a check for any fractional share to
which they otherwise would be entitled. In the case of BOC shareholders who
properly exercise their dissenters' rights, the process for submitting Old
Certificates and receiving cash for the "fair value" of their shares is
described in this Joint Proxy Statement/Offering Circular under the caption
"Rights of Dissenting Shareholders" on page _____.
Until surrendered to Davie or its exchange agent, Old Certificates will be
considered for all purposes to evidence only the right of former BOC
shareholders to receive the New Certificates evidencing the Davie Stock into
which their BOC Stock has been converted. However, after the Effective Time,
and regardless of whether they have surrendered their Old Certificates, former
BOC shareholders will be entitled to vote and to receive any dividends or other
distributions (for which the record date is after the Effective Time) on the
number of whole shares of Davie Stock into which their BOC Stock has been
converted, but no dividends or other distributions actually will be paid to them
unless and until their Old Certificates are physically surrendered to Davie or
its exchange agent. Upon surrender and exchange of Old Certificates, Davie will
pay the amount, without interest, of any dividends and other distributions which
became payable on the shares of Davie Stock represented by those Old
Certificates after the Effective Time but which had not been paid. However,
Davie currently is not permitted to pay cash dividends, and it is not likely
that Davie will pay any dividends for some time following the Effective Time.
(See "Market and Dividend Information -- Davie's Capital Stock" on page _____.)
If a BOC's shareholder's Old Certificates have been lost, stolen or
destroyed, that shareholder will be required to furnish to Davie evidence
satisfactory to it of ownership of the BOC Stock evidenced by those Old
Certificates and of the loss, theft or destruction of those certificates. Davie
also may require the shareholder to furnish appropriate and customary
indemnification (which may include an indemnity bond issued by a surety) in
order to receive the New Certificates to which the shareholder is entitled.
BOC shareholders should not forward their Old Certificates to Davie or its
exchange agent until they receive instructions to do so.
Treatment of Fractional Shares
No fraction of a share of Davie Stock, or any scrip or certificate
representing any fractional share, will be issued to any BOC shareholder in
connection with the Merger, and no right to vote or to receive any dividend or
other distribution will attach to any fractional share. If former BOC
shareholders otherwise would be entitled to receive a fraction of a share, then,
following the Effective Time, and upon the surrender and exchange of their Old
Certificates, and in the place of that fractional share, they will receive cash
(without interest) from Davie in an amount equal to that fraction multiplied by
the market value of a share of Davie Stock at the Effective Time as determined
by Davie.
Recommendation
BOC's Board of Directors. BOC's Board of Directors has approved the Merger
Agreement and believes the Merger is in the best interests of BOC, Carolinas and
BOC's shareholders. The Board of Directors recommends that BOC's shareholders
vote to approve the Merger Agreement and the Merger.
Davie's Board of Directors. Davie's Board of Directors has approved the
Merger Agreement and believes the Merger and the Bank Merger are in the best
interests of Davie and its shareholders. The Board of Directors recommends that
Davie's shareholders vote to approve the Merger Agreement, Merger and Bank
Merger.
17
Background of and Reasons for the Merger
BOC. Carolinas's predecessor, Landis Savings Bank, SSB, was a mutual
savings bank that was converted into a commercial bank in 1998. In that
conversion, BOC was formed as the holding company of Carolinas. BOC sold shares
of BOC Stock to the members of Landis Savings Bank, SSB, who consisted of its
depositors and borrowers, and also made available shares of BOC Stock to be
purchased by the general public in a public offering. Since its conversion to a
commercial bank, management of Carolinas has endeavored to broaden its lending
focus from one-to-four family residential mortgage loans to include other loans
to consumers and small-to-medium size businesses. Additionally, Carolinas has
attempted to begin implementing additional deposit products and has studied the
costs and benefits of bringing its banking services, in both the loan and
deposit areas, to be more in line with a commercial bank and to be more
competitive. Due to competition and the costs associated with it, Carolinas'
management has found that transition to be slower than anticipated.
Primarily because of their strong capital position, BOC and Carolinas have
attracted the attention of other commercial banks in and around their market
area and, since 2000, three informal inquiries have been made of the management
of BOC as to whether they would be interested in an affiliation with another
commercial bank. None of those discussions, which were conducted on a purely
informal basis, led to serious deliberations or an offer to BOC's Board of
Directors. However, those informal inquiries led the Board to consider the
merits of affiliating with an existing commercial bank that had established
commercial bank deposit and loan products and services, including the technology
and capability to bring more modern banking services to Carolinas' customers as
opposed to attempting to develop the products and services and infrastructure on
its own.
On May 22, 2001, Davie's executive management made informal inquiry of
BOC's executive management which led to informal discussions regarding the
possibility of combining BOC, Carolinas and Davie. After two of those
discussions in which social issues regarding the board of directors and
management of a combined entity were discussed, BOC retained the services of
Sterne, Agee & Leach, Inc. as its financial advisor, and Davie retained the
services of Scott & Stringfellow as its financial advisor. Numerous discussions
were held between the financial advisors which led to an agreement on the
exchange ratio of 0.92 shares of Davie Stock for each share of BOC Stock.
Additional negotiations between the financial advisors and legal counsel for BOC
and Davie were initiated to discuss and agree upon the resolution of issues
relating to BOC's and Carolinas' various employee and director benefit plans,
such as their stock options, the directors retirement plan, the ESOP and
management recognition plan. While these discussions and negotiations were being
conducted, each party conducted a due diligence review of the other party's
books and records. BOC retained the services of Credit Risk Management, Inc. to
perform a representative review of Davie's loan portfolio. Upon receiving a
satisfactory recommendation regarding all due diligence matters, the Merger
Agreement was adopted by BOC's, Carolinas' and Davie's boards of directors and
was executed and delivered on July 20, 2001.
Davie. Davie originally was organized as a commercial bank and first began
operating on December 7, 1998, with one banking office in Mocksville, North
Carolina. Since then it has grown at a faster rate than its organizers
originally projected. During February 2000, Davie opened its second Davie
County banking office in Advance, North Carolina, and, in November 2000, it
purchased the existing office of another bank in Carthage, North Carolina. The
deposits gained from that transaction enabled Davie to continue to fund its loan
growth, but its rapid growth has reduced Davie's capital ratios to a level at
which it must supplement its capital in order to continue to grow.
Davie's management determined that, as an alternative to increasing its
capital through some other means (such as selling additional common stock), a
combination with BOC and Carolinas would serve two purposes for Davie by
strengthening its capital position and, at the same time, expanding its banking
market into a contiguous county without incurring the start-up costs associated
with a de novo branch office.
18
Opinion of BOC's Financial Advisor
General. BOC's Board of Directors retained Sterne, Agee & Leach, Inc.
("Sterne Agee") during May 2001 to act as BOC's financial advisor in connection
with the Board's evaluation of BOC's strategic alternatives and any resulting
acquisition of BOC. The Board of Directors selected Sterne Agee to serve as its
financial advisor because Sterne Agee is a recognized regional investment
banking firm with expertise in financial institutions. As part of its
investment banking business, Sterne Agee is regularly involved in the valuation
of financial institutions and their securities. On July 20, 2001, Sterne Agee
rendered its oral opinion to the Board of Directors of BOC that, as of such
date, subject to certain assumptions, factors and limitations, the consideration
proposed to be received by BOC pursuant to the Merger Agreement was fair, from a
financial point of view, to the shareholders of BOC. Sterne Agee confirmed its
oral opinion by delivering a written opinion to BOC's Board of Directors dated
September 20, 2001.
A copy of Sterne Agee's opinion letter is included in this document as
Appendix C and is incorporated herein by reference. The description of the
opinion set forth herein is qualified in its entirety by reference to Appendix
C. Sterne Agee's opinion is provided exclusively for the information and
benefit of BOC's Board of Directors.
In rendering its opinion, Sterne Agee reviewed, analyzed and relied upon
certain materials relating to the financial and operating condition of Davie and
BOC including, among other things, the following:
. the Merger Agreement dated July 20, 2001, and certain related documents;
. annual reports to shareholders and annual reports on Form 10-KSB of Davie
and BOC for the three years ended December 31, 2000 (except for the 1998
Form 10-KSB of Davie which was not required to be filed);
. certain interim reports to shareholders of Davie and BOC, including
quarterly reports on Form 10-QSB and certain other communications;
. other financial information concerning the businesses and operations of
Davie and BOC furnished to Sterne Agee by the respective companies for the
purposes of Sterne Agee's analysis, including certain internal financial
analyses and forecasts for Davie and BOC prepared by the senior managements
of the respective companies;
. certain publicly available information concerning the historical price,
price/earnings and price/book ratios as well as the trading activity for
the common stocks of Davie and BOC;
. certain publicly available information with respect to banking companies
and the types and terms of other transactions that Sterne Agee considered
relevant to its analysis; and
. certain deposit data available as of June 30, 2000, published by the FDIC
with regard to the deposits and market shares held by Davie and Bank of the
Carolinas.
Sterne Agee also held discussions with the senior managements of Davie and
BOC regarding their past, current and prospective operations, financial
condition, regulatory examinations, audits and other matters and considered such
other financial factors as Sterne Agee deemed appropriate under the
circumstances including general economic, market and financial conditions, its
knowledge of similar transactions and its experience in securities valuation of
financial institutions. Sterne Agee's opinion was based upon conditions, as
they existed on the date of the opinion and the information made available up to
such date.
19
In conducting its review and arriving at its opinion, Sterne Agee relied
upon and assumed, without independent verification, the accuracy and
completeness of all of the financial and other information provided to it or
publicly available. Sterne Agee relied upon the managements of Davie and BOC as
to the reasonableness and achievability of the financial and operating budgets
and forecasts (and the related assumptions and bases underlying such forecasts)
provided to Sterne Agee, and assumed that such budgets and forecasts reflected
the best available estimates and judgments of such management and that such
budgets and forecasts will be realized in the amounts and in the time periods
estimated by such management. Sterne Agee also assumed, without independent
verification, that the aggregate allowances for loan losses for Davie and BOC
are adequate to cover such losses. Sterne Agee did not make or obtain any
evaluations or appraisals of the property of Davie or BOC, nor did Sterne Agee
examine any loan credit files. Sterne Agee was informed by Davie and assumed in
rendering its opinion that the merger would be accounted for as a purchase under
generally accepted accounting principles.
The preparation of a fairness opinion involves various determinations of
the most appropriate and relevant methods of financial analysis and the
application of those methods to particular circumstances, and, therefore, such
an opinion is not readily susceptible to summary description. In arriving at
their fairness opinion, Sterne Agee did not attribute any particular weight to
any analysis or factor considered by them, but rather made qualitative judgments
about the significance and relevancy of each analysis and factor. None of the
analyses performed by Sterne Agee was assigned a greater significance by Sterne
Agee than any other and therefore you should not attribute any greater
importance upon one analysis versus another as a result of the order in which
they are discussed herein. Accordingly, Sterne Agee believes that its analyses
must be considered as a whole and that a review of selected portions of such
analyses and the factors considered therein, without considering all analyses
and factors, could create a misleading or incomplete view of the processes
underlying their opinion. In their analyses, Sterne Agee made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond Davie's control. Any
estimates contained in Sterne Agee's analyses are not indicative of actual
values or predictive of future results or values that may be significantly more
or less favorable than such estimates. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies or
their securities actually may be sold.
The following is a brief summary of the material financial analyses
performed by Sterne Agee in connection with its opinion; it does not purport to
be a complete description of all analyses performed.
Financial Performance Overview. Sterne Agee reviewed financial performance
ratios, stock trading history, income statement and balance sheet information,
per share financial results and other information for both Davie and BOC and the
combined company before and after acquisition adjustments, cost savings and
revenue enhancements.
Valuation Multiples. Sterne Agee calculated the merger consideration to be
received pursuant to the exchange ratio of shares of Davie common stock per
share of BOC common stock as a multiple of BOC's stock price on July 19, 2001,
the last trading day before Sterne Agee rendered its oral opinion to BOC's Board
of Directors; as a multiple of latest twelve months earnings per share as of
June 30, 2001; as a multiple of book value as of June 30, 2001; as a multiple of
normalized book value, defined as merger consideration less excess equity
(equity in excess of 8% of total assets), as a multiple of normalized book value
(equity equal to 8% of total assets), as of June 30, 2001; as a percentage of
total assets as of June 30, 2001; and as a premium on core deposits, defined as
deal value less tangible equity as a percentage of core deposits, as of June 30,
2001. Assuming a price per share of Davie common stock of $13.05 and of BOC
common stock of $6.35 (the closing prices per share, respectively, on July 19,
2001) and an exchange ratio of 0.92 shares of common stock of Davie for each
share of BOC common stock, or $12.01 for each share of BOC common stock held,
such amount would represent:
. 189.1% of BOC's stock price on July 19, 2001;
20
. 92.4x trailing twelve months earnings per share as of June 30, 2001;
. 1.18x book value as of June 30, 2001;
. 1.45x normalized book value as of June 30, 2001;
. 23.5% of assets on June 30, 2001;
. 6.3% premium on core deposits on June 30, 2001.
Similar Actual Transactions. Sterne Agee analyzed certain financial data
related to 19 acquisitions of banks or thrifts in the United States with assets
of less than $100 million, where the equity to assets ratio was greater than or
equal to 20.0%, the return on equity was between -3% and 6% and the transaction
was announced from January 1, 1998 through April 30, 2001 (the "National
Acquisitions").
Sterne Agee calculated average valuation multiples for the National
Acquisitions as follows:
. 37.6x trailing twelve months earnings per share;
. 1.18x quarter-end book value;
. 1.50x normalized quarter-end book value;
. 31.0% of quarter-end assets;
. 10.1% premium on quarter-end core deposits.
In calculating the average valuation multiples, Sterne Agee made certain
statistical adjustments to make the averages more meaningful for comparison
purposes.
Contribution Analysis. Sterne Agee analyzed the relative contribution of
BOC and Davie to certain balance sheet items, including assets, deposits, and
common equity, as of June 30, 2001. Sterne Agee then compared the relative
contribution of such balance sheet items with the pro forma ownership of 43.4%
for BOC shareholders based on an exchange ratio of 0.92 shares of Davie common
stock for each share of BOC common stock. The contribution analysis showed that
BOC would contribute approximately 30.5% of the combined assets, 27.4% of the
combined deposits, and 53.4% of the combined common equity. A relative
contribution analysis of trailing twelve months net income is not meaningful, as
Davie posted a net loss of $40,000 compared to BOC's net income of $91,000.
Financial Impact Analysis. Sterne Agee reviewed pro forma income statement
and balance sheet and certain pro forma financial information contained in
analyses prepared by the managements of Davie and BOC. Such pro forma financial
information was discussed with the managements of both Davie and BOC. The
actual results achieved by the combined company after the merger may vary from
the projected results and the variations may be material.
Sterne Agee calculated the pro forma effects of the merger on BOC's
earnings per share estimates for 2002 and 2003 based on earnings estimates for
Davie and BOC as supplied by the managements of each of the companies. Such pro
forma effects included after-tax benefits from cost savings and revenue
enhancements. Sterne Agee calculated that 2002 pro forma fully diluted earnings
per share would be $0.31, an accretion of $0.30 per share to BOC's estimated
earnings per share. Sterne Agee calculated that 2003 pro forma fully diluted
earnings per share would be $0.74, an accretion of $0.56 per share to BOC's
estimated earnings per share.
21
Sterne Agee also reviewed BOC's equivalent pro forma book value per share
for June 30, 2001, of $8.57, which compares with the actual June 30, 2001, book
value of $10.18, representing per share dilution of 15.8%.
Selected Peer Group Analysis. Sterne Agee compared the financial
performance and market performance of Davie based on selected measures of
profitability, asset quality, capital adequacy, liquidity, efficiency, and
various measures of market performance, including price to earnings ratios and
price to book ratios to those of a group of comparable banks. For the purposes
of the analysis, the financial data used by Sterne Agee were as of or for the
six months ended June 30, 2001, and the market data were as of September 18,
2001. The peer group banks were publicly traded banks in the Southeast
established between June 1, 1998, and July 31, 1999, and included the following
companies: Alamance National Bank; Albemarle First Bank; American Community
Bancshares, Inc.; Bank of the James; Bank of Wilmington; Cherokee Banking
Company; CNB Holdings, Inc.; Community Capital Bancshares, Inc.; Crescent
Financial Corporation; First Capital Bank; First Trust Bank; Gateway Bank &
Trust Co.; High Country Bank; Jacksonville Bancorp, Inc.; James Monroe Bancorp,
Inc.; New Commerce BanCorp; Southcoast Financial Corporation; Tarpon Coast
Bancorp, Inc.; TowneBank; and Virginia National Bank.
Sterne Agee's analysis showed the following concerning Davie's performance:
. that its return on average equity of - 2.72% compared with an average of
1.99% for the peer group;
. that its return on average assets of - 0.22% compared with an average of
0.21% for the peer group;
. that its net interest margin of 3.16% compared with an average of 3.91% for
the peer group;
. that its net charge-offs to average loans were 0.06% compared with an
average of 0.06% for the peer group;
. that its ratio of loan loss reserve to total loans was 1.40% compared with
an average of 1.27% for the peer group;
. that its ratio of nonperforming assets to total loans and other real estate
owned was 0.00% compared with an average of 0.28% for the peer group;
. that its ratio of equity to assets of 7.65% compared with an average of
10.75% for the peer group;
. that its ratio of loans to deposits of 87.92% compared with an average of
80.24% for the peer group; and
. that its ratio of noninterest expense to operating revenue of 94.54%
compared with an average of 87.34% for the peer group.
Sterne Agee's analysis further showed the following regarding Davie's
market performance:
. that its price to earnings multiple based on the latest twelve months
earnings was not meaningful due to a net loss, compared to an average of
52.9 times for the peer group; and
. that its price to book ratio based on June 30, 2001, was 1.75 times,
compared to an average of 1.20 times for the peer group.
22
Net Present Value Analysis. Sterne Agee performed a discounted cash flow
analysis to determine a range of net present values per share of BOC. In its
calculations, Sterne Agee used projected net income and dividend figures,
terminal price to earnings multiples from 17.0 to 19.0 times, and discount rates
ranging from 14.0% to 16.0%. This analysis produced net present values of BOC's
share price that ranged from $7.07 to $8.50.
In connection with its written opinion as of the date of this Joint Proxy
Statement/Offering Circular, Sterne Agee confirmed the appropriateness of its
reliance on the analyses used to render its July 20, 2001, oral opinion to the
board of directors of BOC by performing procedures to update certain of its
analyses and by reviewing the assumptions on which the analyses were based and
the factors considered in connection with them.
Sterne Agee's opinion in Appendix C, dated as of September 20, 2001, is
based solely upon the information available to Sterne Agee and the economic,
market and other circumstances as they existed as of such date. Events
occurring after that date could materially affect the assumptions and
conclusions contained in Sterne Agee's opinion. Sterne Agee has not undertaken
to reaffirm or revise its opinion or otherwise comment on any events occurring
after the date of its opinion.
Sterne Agee was retained by the board of directors of BOC to act as its
financial advisor with respect to the Merger. BOC and Sterne Agee entered into
a letter agreement dated May 4, 2001, relating to the services to be provided by
Sterne Agee in connection with the Merger. BOC paid Sterne Agee a nonrefundable
fee of $10,000 at the time of entering into the letter agreement and an
additional nonrefundable fee of $15,000 at the time of execution of the Merger
Agreement. BOC has agreed to pay Sterne Agee an additional nonrefundable fee of
$25,000 at the time of any public dissemination of any proxy statement or press
release containing a fairness opinion and an additional fee of $75,000
contingent on and payable upon the closing of the Merger. In addition, BOC
agreed to reimburse Sterne Agee for out-of-pocket expenses incurred in
connection with its engagement and to indemnify Sterne Agee against certain
liabilities, including liabilities under the federal securities laws.
In the ordinary course of business, Sterne Agee trades the equity
securities of Davie and BOC for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Sterne Agee and its officers, employees, consultants and
agents may have long or short positions in the securities of Davie and BOC.
Opinion of Davie's Financial Advisor
General. By letter agreement dated as of April 30, 2001, Davie's Board of
Directors retained Scott & Stringfellow as an independent financial advisor in
connection with the Board's consideration of a possible business combination
with BOC. Scott & Stringfellow is a nationally recognized investment banking
firm whose principal business specialty is financial institutions. In the
ordinary course of its investment banking business, Scott & Stringfellow is
regularly engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions.
Scott & Stringfellow acted as financial advisor to Davie in connection with
the proposed Merger and participated in certain of the negotiations leading to
the Merger Agreement. At the request of Davie's Board, representatives of Scott
& Stringfellow attended a July 19, 2001 Board meeting at which the Board
considered the Merger Agreement. At that meeting, Scott & Stringfellow
delivered to Davie's Board its oral opinion that, as of that date, the Merger
consideration was fair to Davie's shareholders from a financial point of view.
Scott & Stringfellow confirmed its opinion in writing as of July 20, 2001, the
date of the Merger Agreement. The written opinion outlines the procedures
followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Scott & Stringfellow, in rendering its
opinion.
23
A copy of Scott & Stringfellow's opinion is attached as Appendix D to this
Joint Proxy Statement/Offering Circular and is incorporated by reference into
this description, and this description is qualified in its entirety by reference
to the opinion. Davie's shareholders are urged to read the opinion carefully in
connection with their consideration of the Merger. Scott & Stringfellow's
opinion was directed to Davie's Board of Directors and was provided to the Board
for its information in considering the Merger Agreement. The opinion is
directed only to the fairness of the Merger consideration to Davie's
shareholders from a financial point of view. It does not address the underlying
business decision of Davie's Board to engage in the Merger or any other aspect
of the Merger and is not a recommendation to any Davie shareholder as to how
that shareholder should vote at the Davie Special Meeting with respect to the
the Merger or any other matter.
In rendering its July 20, 2001 opinion, Scott & Stringfellow performed a
variety of financial analyses. The following is a summary of the material
analyses performed by Scott & Stringfellow, but it is not a complete description
of all the analyses underlying Scott & Stringfellow's opinion. The preparation
of a fairness opinion is a complex process involving subjective judgments as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore, the
process is not necessarily susceptible to a partial analysis or summary
description. Scott & Stringfellow believes that its analyses must be considered
as a whole and that selecting portions of the factors and analyses considered
without considering all factors and analyses, or attempting to ascribe relative
weights to some or all factors and analyses, could create an incomplete view of
the evaluation process underlying its opinion. Also, no transaction presented
in Scott & Stringfellow's comparative transaction analysis described below is
identical to the Merger. Accordingly, an analysis of comparable transactions
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the merger transaction values.
The earnings projections for Davie and BOC relied upon by Scott &
Stringfellow in its analyses were reviewed with management and were based upon
the internal projections of Davie and BOC for the years ending December 31, 2002
and 2003. The earnings projections furnished to Scott & Stringfellow were
prepared by senior management of Davie and BOC for internal purposes only and
not with a view towards public disclosure. Those projections were based upon
numerous variables and assumptions which are inherently uncertain and,
accordingly, actual results could vary materially from those set forth in the
projections. In performing it analyses, Scott & Stringfellow also made numerous
assumptions with respect to industry performance, business and economic
conditions and various other matters, many of which cannot be predicted and are
beyond the control of Davie, BOC or Scott & Stringfellow. The analyses
performed by Scott & Stringfellow are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by the analyses.
Scott & Stringfellow prepared its analyses solely for purposes of rendering
its opinion and provided the analyses to Davie's Board at the July 19, 2001
Board meeting. Estimates of the values of companies do not purport to be
appraisals or necessarily to reflect the prices at which companies or their
securities may actually be sold. Such estimates are inherently subject to
uncertainty and actual values may be materially different. Accordingly, Scott &
Stringfellow's analyses do not necessarily reflect the value of Davie Stock or
BOC Stock or the prices at which Davie Stock or BOC Stock may be sold at any
time.
Summary of Proposal. Scott & Stringfellow reviewed the financial terms of
the proposed transaction. Based upon an exchange ratio of 0.92 shares of Davie
Stock to be exchanged for each outstanding share of BOC Stock upon completion of
the Merger and Davie's then current market value of $13.05 per share, Scott &
Stringfellow calculated an implied transaction value per share of BOC Stock of
$12.00 and an implied aggregate transaction value of $9.4 million, based upon
approximately 744,105 actual shares of BOC Stock outstanding after taking into
account the retirement of unallocated shares in connection with terminating
BOC's Employee Stock Ownership Plan and 85,603 options outstanding with a
weighted average strike price of $6.50 per share.
24
Analysis of Selected Merger Transactions. Scott & Stringfellow reviewed
certain other similar transactions announced since June 30, 2000 involving
acquisitions of thrifts by commercial banks and with equity transaction values
less than $50 million. Scott & Stringfellow reviewed 17 transactions nationwide
and, based on the consideration being offered to the acquired company's
shareholders in each comparable transaction, calculated the multiple of:
. implied transaction value to the stated book value of the acquired company;
. implied transaction value to the tangible book value of the acquired
company;
. implied transaction value to the last twelve months' earnings of the
acquired company;
. implied transaction value to the total assets of the acquired company;
. implied transaction value to the total deposits of the acquired company;
and
. tangible book premium to the core deposits of the acquired company.
Then, for each of the above measurements, it calculated the average multiple for
the comparable transactions (after excluding the highest and lowest multiple for
each measurement). In comparing BOC's recent financial performance to the
financial performance of the selling thrifts used in the comparable merger
transaction analysis, Scott & Stringfellow noted that BOC was significantly
smaller than the average company being acquired, had the highest equity to
assets ratio of any company being acquired, and had a higher than average core
return on average assets ratio and a significantly lower non-performing assets
to assets ratio than the other companies being acquired.
Scott & Stringfellow then compared the implied value of the consideration
offered by Davie to BOC's shareholders to the average multiples for the
comparable transactions, with the results shown in the following table.
Davie/BOC Average multiple in
transaction comparable
multiple transactions
------------- -------------------
Implied transaction value to stated book value............... 1.08 x 1.29 x
Implied transaction value to tangible book value............. 1.08 x 1.29 x
Implied transaction value to last twelve months' EPS......... 50.00 x 18.90 x
Implied transaction value to total assets.................... 23.30% 15.00%
Implied transaction value to total deposits.................. 30.90% 22.00%
Tangible book premium to core deposits....................... 2.80% 6.40%
Pro Forma Merger Analysis. Scott & Stringfellow also analyzed certain pro
forma effects of the Merger, based upon:
. an exchange ratio of 0.92 shares of Davie Stock to be exchanged for each
share of BOC Stock, assuming an assumption by Davie of outstanding BOC
stock options, and
. Davie's and BOC's current and projected income statements and balance
sheets, and assumptions regarding the economic environment, accounting and
tax treatment of the Merger, charges associated with the Merger, operating
efficiencies and other adjustments discussed with Davie's senior
management.
25
As illustrated in the following table, this analysis indicated that in the
first full year following the Merger, the Merger would be accretive to Davie's
GAAP earnings per share and meaningfully accretive to its tangible book value
per share. It should be noted that the actual results achieved by the combined
bank may vary from projected results and the variations may be material.
Bank of Davie
Year Ending December 31, 2002
-------------------------------
Pro forma
Davie alone combined
---------------- -------------
Projected GAAP earnings per share......... $ 0.50 $ 0.51
Projected tangible book value (1)......... $ 7.30 $ 9.37
Projected tangible capital ratio (1)...... 7.10% 11.30%
_______________________
(1) Calculated using June 30, 2001 balance sheet information.
In connection with rendering its July 20, 2001 opinion, Scott &
Stringfellow reviewed, among other things:
. the Merger Agreement and related Plans of Merger;
. certain publicly available financial statements and other historical
financial information provided by Davie that Scott & Stringfellow deemed
relevant;
. certain publicly available consolidated financial statements and other
historical consolidated financial information provided by BOC that Scott &
Stringfellow deemed relevant;
. the operating budget of Davie for the year ending December 31, 2001,
prepared by and reviewed with management of Davie, and the views of senior
management of Davie, based on limited discussions with certain members of
senior management, regarding Davie' business, financial condition, results
of operations and future prospects;
. the operating budget of BOC for the year ending December 31, 2001 prepared
by and reviewed with management of BOC, and the views of senior management
of BOC, based on limited discussions with certain members of senior
management, regarding BOC's business, financial condition, results of
operations and future prospects;
. the pro forma impact of the Merger on Davie;
. the financial terms of recent business combinations in the commercial
banking and thrift industries, to the extent publicly available;
. the current market environment generally and the banking environment in
particular; and
. such other information, financial studies, analyses and investigations and
financial, economic and market criteria as it considered relevant.
In performing its reviews and analyses, Scott & Stringfellow relied upon
the accuracy and completeness of all the financial information, analyses and
other information that was publicly available or otherwise furnished to,
reviewed by or discussed with it. Scott & Stringfellow was not asked to and did
not undertake an independent verification of the accuracy or completeness of any
of that information
26
and they do not assume any responsibility or liability for the accuracy or
completeness of any of that information.
Scott & Stringfellow did not make an independent evaluation or appraisal of
the assets, the collateral securing assets, or the liabilities, contingent or
otherwise, of Davie or BOC or any of their respective subsidiaries, or the
collectibility of any of those assets, nor was it furnished with any such
evaluations or appraisals. Scott & Stringfellow is not an expert in the
evaluation of allowances for loan losses and it has not made an independent
evaluation of the adequacy of Davie's or BOC's allowance for loan losses, nor
has it reviewed any individual credit files relating to Davie or BOC. With
Davie's consent, Scott & Stringfellow has assumed that the respective allowance
for loan losses for both Davie and BOC are adequate to cover such losses, taking
into account specific mutually agreed upon adjustments to BOC's loan loss
reserve prior to closing, and will be adequate on a pro forma basis for the
combined bank. In addition, Scott & Stringfellow has not conducted any physical
inspection of the properties or facilities of Davie or BOC. Scott & Stringfellow
is not an accounting firm and they have relied, with Davie's consent, on the
reports of the independent accountants of Davie and BOC for the accuracy and
completeness of the audited financial statements furnished to them. With respect
to all financial projections prepared by or reviewed with each company's
management and used by Scott & Stringfellow in its analyses, Scott &
Stringfellow assumed that those projections reflected the best currently
available estimates and judgments of the respective managements of the
respective future financial performance of Davie and BOC and that such
performances will be achieved. Scott & Stringfellow expressed no opinion as to
those financial projections or the assumptions on which they were based.
Scott & Stringfellow's opinion was necessarily based upon market, economic
and other conditions as they existed on, and as they could be evaluated as of,
the date of its opinion. Scott & Stringfellow assumed, in all respects material
to its analysis, that all of the representations and warranties contained in the
MergerAagreement and all related agreements are true and correct, that each
party to those agreements will perform all of the covenants required to be
performed by that party under those agreements, and that the conditions
precedent in the Merger Agreement will not be waived. Scott & Stringfellow also
assumed, with Davie's consent, that (i) there has been no material change in
Davie's or BOC's assets, financial condition, results of operations, business or
prospects since the date of the last publicly filed financial statements
available to Scott & Stringfellow, (ii) Davie and BOC will remain as going
concerns for all periods relevant to its analyses, and (iii) the Merger will be
accounted for using the purchase method of accounting and will not be a taxable
transaction at the corporate level for federal income tax purposes.
Scott & Stringfellow is expected to update and confirm its written opinion
as of a date immediately prior to the Effective Time of the Merger. As a part of
that confirmation, it will confirm the appropriateness of its reliance on the
analyses used to render its July 20, 2001 opinion by performing procedures to
update certain of its analyses and by reviewing the assumptions upon which its
analyses were based and the other factors considered in rendering its opinion.
Davie has agreed to pay Scott & Stringfellow a transaction fee of $60,000
in connection with the Merger, of which $35,000 has been paid with the balance
contingent and payable upon completion of the Merger. Davie has also agreed to
reimburse Scott & Stringfellow for its reasonable out-of-pocket expenses
incurred in connection with its engagement and to indemnify Scott & Stringfellow
and its affiliates and their respective directors, officers, employees, agents,
and controlling persons against certain expenses and liabilities, including
liabilities under securities laws. Scott & Stringfellow has in the past provided
and currently provides certain other investment banking services to Davie and
has received and will receive compensation for those services. In the ordinary
course of its business as a broker-dealer, Scott & Stringfellow may also
purchase securities from and sell securities to Davie and BOC and may actively
trade the equity securities of Davie and BOC for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in those securities.
27
Effect of Merger on Outstanding Davie Stock
The shares of Davie Stock that are held by its shareholders at the
Effective Time will remain outstanding and not be changed by the Merger. The
Merger will not affect any rights of Davie's current shareholders. However,
because Davie is expected to issue a total of approximately [740,600] new shares
of Davie Stock to BOC's shareholders, the Merger will dilute the relative
percentage interests of Davie's current shareholders. It is expected that
Davie's current shareholders will hold approximately 56.6% of Davie's
outstanding shares following the Merger, while BOC's former shareholders will
hold approximately 43.4% of Davie's outstanding shares.
Required Shareholder Approvals
BOC's Shareholders. Under North Carolina law, the Merger Agreement and the
Merger must be approved by the holders of at least a majority of the total
outstanding shares of BOC Stock.
Davie's Shareholders. Under North Carolina law, the Merger Agreement,
Merger and the Bank Merger must be approved by the holders of at least two-
thirds of the total outstanding shares of Davie Stock.
Required Regulatory Approvals
The Merger and Bank Merger are subject to approval by the North Carolina
Commissioner of Banks, the North Carolina Banking Commission and the FDIC. The
Merger Agreement provides that BOC's and Davie's respective obligations to
consummate the Merger are conditioned on receipt of all required regulatory
approvals of the transactions described in the Merger Agreement. An application
for each required regulatory approval has been filed and is pending. Management
of BOC and Davie currently are not aware of any reason, condition or
circumstance that might lead to a denial of any of their applications.
Conduct of Business Pending the Merger
The Merger Agreement provides that, during the period from the date of the
Agreement to the Effective Time, and except as otherwise permitted by the Merger
Agreement or consented to by Davie, BOC and Carolinas, each will, among various
other things:
. conduct its business only in the usual manner;
. preserve its organization intact, keep available the services of its
present officers, employees and agents, and preserve the goodwill of its
customers and others having business relations with it;
. maintain its properties and assets in customary repair, order and
condition;
. maintain books of account and records in the usual, regular and ordinary
manner;
. use its best efforts to comply with all laws, ordinances, regulations and
standards applicable to its business;
. promptly advise the other parties to the Merger Agreement of any material
change in its financial condition, business or affairs; and
. periodically provide the other parties to the Merger Agreement with various
information regarding its business and operations.
28
The Merger Agreement provides that, between the date of the Merger
Agreement and the Effective Time, neither Davie, BOC nor Carolinas will, among
various other things (and with certain exceptions):
. amend its Articles of Incorporation or Bylaws, make any changes in its
capital stock, issue any additional capital stock or other securities, or
purchase or redeem any of its outstanding shares;
. make any changes in its accounting methods, practices or procedures, or in
the nature of its business; or
. acquire or merge with, or acquire substantially all the assets of, any
other company.
Additionally, neither BOC nor Carolinas will, among various other things:
. agree to buy or sell any real property or, above certain amounts, any
personal property, or mortgage, pledge or otherwise subject to a lien any
of its tangible assets, or incur any indebtedness, except in the ordinary
course of business;
. waive or compromise any rights in its favor of any substantial value,
except for money or money's worth, or waive or compromise any rights in its
favor with respect to its officers, directors, shareholders or members of
their families;
. except in accordance with its customary salary administration and review
procedures, increase the compensation of, or pay any bonuses or additional
compensation to, its officers, directors, employees or consultants; or
. enter into certain types of contracts described in the Merger Agreement,
including without limitation employment or consulting contracts not
immediately terminable without cost or other liability on no more than 30
days' notice, compensation or employee benefit plans or agreements, single
contracts calling for expenditures in excess of $5,000, or any other
contracts other than in the ordinary course of business.
Dividends
The Merger Agreement provides that, following the date of the Merger
Agreement, BOC may declare and pay one cash dividend during the third quarter of
2001 in an amount not to exceed $0.05 per share. That dividend was paid on
August 31, 2001. Otherwise, neither BOC nor Davie may declare or pay any other
cash dividends or make any other distributions to its shareholders.
Prohibition on Solicitation
The Merger Agreement provides that, except under certain circumstances, BOC
and Carolinas may not:
. encourage, solicit or attempt to initiate discussions, negotiations or
offers with or from any other person relating to a merger or other
acquisition of BOC or Carolinas or the purchase or acquisition of any BOC
Stock or all or any significant part of BOC's or Carolinas' assets, or
provide assistance to any person in connection with such an offer;
. except to the extent required by law, disclose to any person or entity any
information not customarily disclosed to the public concerning BOC or
Carolinas or their business, or give any other person access to BOC's or
Carolinas' properties, facilities, books or records; or
29
. enter into or become bound by any contract, agreement, commitment or letter
of intent relating to, or otherwise take or agree to take any action in
furtherance of, any such transaction.
Accounting Treatment
The Merger will be treated as a "purchase" under generally accepted
accounting principles. Under the purchase method of accounting, at the Effective
Time BOC's assets and liabilities will be recorded at their respective fair
values and added to those of Davie. The excess of the cost over the fair value
of the assets acquired will be recorded as goodwill on Davie's books. Davie's
financial statements after the Effective Time will reflect the assets and
liabilities of BOC, but Davie's financial statements will not be restated
retroactively to reflect BOC's historical financial position or results of
operations.
All unaudited pro forma financial information contained in this Joint Proxy
Statement/Offering Circular has been prepared using the purchase method to
account for the Merger. The final allocation of the purchase price will be
determined after the Merger is completed and after completion of an analysis to
determine the fair values of BOC's tangible and identifiable intangible assets
and liabilities. In addition, estimates related to restructuring and Merger-
related charges are subject to final decisions related to combining BOC and
Davie. Accordingly, the final purchase accounting adjustments, restructuring and
Merger-related charges may be materially different from the unaudited pro forma
adjustments presented in this document. Any decrease in the net fair value of
the assets and liabilities of BOC as compared to the information shown in this
document will have the effect of increasing the amount of the purchase price
allocable to goodwill.
Certain Income Tax Consequences
Consummation of the Merger is conditioned on receipt by Davie and BOC of a
written opinion (the "Tax Opinion") of Davie's legal counsel, Ward and Smith,
P.A., to the effect that the Merger will constitute a tax-free reorganization
under Section 368 of the Code. The following discussion summarizes Davie's and
BOC's current understanding of the material federal income tax consequences of
the Merger as described in the Tax Opinion that generally will apply to holders
of BOC Stock.
The Tax Opinion and this summary do not cover all aspects of federal income
taxation that may apply to BOC's shareholders, and they do not cover the tax
consequences of the Merger under state, local or other tax laws, or special tax
consequences to BOC's shareholders who may be affected by special individual
circumstances. Further, the Tax Opinion and this summary do not address the tax
consequences of the Merger in the case of the holders of outstanding options to
purchase BOC Stock. Your individual circumstances may affect the tax
consequences of the Merger to you, and you should consult your own tax advisor
in order to make an individual evaluation of the federal, state or local tax
consequences of the Merger in your particular circumstances and, among other
things, the tax return reporting requirements, application and effect of
federal, foreign, state, local and other tax laws on you, and the implications
of any proposed changes in the tax laws.
You should be aware that the Tax Opinion is not binding on the Internal
Revenue Service (the "IRS"), and there is no assurance that the IRS will not in
the future disagree with or take a position contrary to that set forth in the
Tax Opinion on any particular aspect of the tax consequences of the Merger. If
the IRS were to take a position contrary to that set forth in the Tax Opinion,
that could result in adverse tax consequences to you. Also, the Tax Opinion and
this summary are based on currently existing provisions of the Internal Revenue
Code (the "Code"), existing and proposed Treasury Regulations under the Code,
and current administrative rulings and court decisions, all of which are subject
to change. Any such change may be retroactive and cause the tax consequences of
the Merger to Davie, BOC or BOC's shareholders to be different from those
described.
30
Subject to the limitations and qualifications referred to in this summary
Davie and BOC expect the following to be included in the Tax Opinion regarding
the federal income tax consequences of the Merger:
. The Merger of BOC into Davie, and the issuance of Davie Stock in exchange
for BOC Stock in connection with the Merger as described in the Merger
Agreement, will constitute a tax-free reorganization under Section 368(a)
of the Code;
. BOC's shareholders who receive Davie Stock in exchange for their BOC Stock
in the Merger and do not exercise dissenters' rights will not recognize any
gain or loss on the receipt of Davie Stock (except to the extent that they
receive cash in lieu of fractional shares);
. The basis of the Davie Stock received by BOC's shareholders who receive
Davie Stock in the Merger will be the same as the basis of the shares of
their BOC Stock surrendered in exchange for the Davie Stock (excluding
fractional shares for which cash is received);
. The holding period of the Davie Stock received by BOC's shareholder in the
Merger will include the period for which the BOC Stock surrendered in
exchange for the Davie Stock was considered to be held, provided that the
BOC Stock is held as a capital asset at the Effective Time;
. The merger of Carolinas into Davie following the Effective Time will
constitute a tax-free liquidation under Section 332 of the Code; and,
. Neither Davie nor BOC will recognize a gain solely as a result of the
Merger, except that gain or loss may be recognized on the recapture of tax
attributes, including but not limited to the recapture of bad debt
reserves.
In general, cash received by BOC's shareholders who exercise dissenter's
rights under North Carolina law or in exchange for fractional shares of Davie
Stock will be treated as amounts distributed in redemption of their shares, the
federal income tax consequences of which will be governed by Section 302 of the
Code. However, it is possible that Section 302 of the Code will not apply, in
which case such distribution could be treated as a dividend pursuant to Section
301 of the Code. The tax consequences of the distribution, whether it is
treated as a dividend or as received in exchange for stock, will vary depending
upon the circumstances of the individual shareholder.
You are urged to consult your own tax advisor regarding the specific tax
consequences to you of the Merger and the exchange of your BOC Stock for Davie
Stock.
Conditions to the Merger
Consummation of the Merger is subject to various conditions described in
the Merger Agreement, including:
. approval of the Merger Agreement by BOC's and Davie's shareholders;
. receipt of all required regulatory approvals, and BOC's and Davie's
approval of and compliance with any conditions or requirements imposed by
any regulatory agency as a condition to its approval;
. receipt of the Tax Opinion;
. receipt of the BOC Fairness Opinion and the Davie Fairness Opinion and,
prior to consummation of the Merger, receipt of confirmations that the BOC
Fairness Opinion and the Davie Fairness Opinion remain in effect; and
31
. approval by BOC's and Davie's respective legal counsel of the form and
substance of all legal matters related to the Merger and the Bank Merger.
Additionally, under the Merger Agreement, BOC's and Davie's separate
obligations are subject to various other conditions, including:
. performance by the other party of its various covenants, agreements and
conditions under the Merger Agreement;
. absence of any breach of any of the other party's representations or
warranties contained in the Merger Agreement;
. compliance by the other party with all laws and regulations that apply to
the transactions described in the Merger Agreement; and
. receipt of a written opinion of the other party's legal counsel as to
various matters.
Waiver; Amendment of Merger Agreement
Any term or condition of the Merger Agreement (except as to matters of
shareholder and regulatory approvals and other approvals required by law) may be
waived in writing, either in whole or in part, by BOC, Carolinas or Davie if its
Board of Directors determines that the waiver would not adversely affect its
interests or the interests of its shareholders.
The Merger Agreement may be amended, modified or supplemented at any time
or from time to time prior to the Effective Time, and either before or after its
approval by BOC's and Davie's shareholders, by an agreement in writing approved
by a majority of the Boards of Directors of BOC, Carolinas and Davie. However,
following approval of the Merger Agreement by BOC's and Davie's shareholders, no
change may be made in the number of shares of Davie Stock into which each share
of BOC Stock will be converted at the Effective Time unless that change also is
approved by their shareholders.
Termination of the Merger Agreement
Prior to the Effective Time, the Merger Agreement may be terminated by the
mutual agreement of BOC and Davie. The Merger Agreement also may be terminated
by either BOC or Davie by action of its Board of Directors if, among other
things:
. any of the conditions to its obligations have not been satisfied in all
material respects or effectively waived by it in writing by December 31,
2001;
. the other party has violated or failed to fully perform any of its
obligations, covenants or agreements under the Merger Agreement in any
material respect;
. any of the other party's representations or warranties were false or
misleading in any material respect when made, or there occurs any event or
development or there exists any condition or circumstance which has caused
or, with the lapse of time or otherwise, might cause any of the other
party's representations or warranties to become false or misleading in any
material respect;
. BOC's shareholders do not approve the Merger Agreement at the BOC Special
Meeting, or Davie's shareholders do not approve the Merger Agreement at the
Davie Special Meeting; or
. the Merger does not become effective on or before March 31, 2002, or by a
later date agreed upon in writing by BOC and Davie.
32
Closing Date and Effective Time
After all conditions described in the Merger Agreement have been satisfied,
the closing of the Merger and the Bank Merger will be held on a date (the
"Closing Date") agreed upon by BOC and Davie after the expiration of the waiting
periods required by federal regulatory authorities following receipt of their
approvals. The Effective Time of the Merger will be the date and time specified
in Articles of Merger filed by Davie with the North Carolina Secretary of State
(or, if a time is not specified, then at the time the Articles of Merger are
filed). The Bank Merger will become effective as soon as practicable following
the Effective Time of the Merger. Although there is no assurance as to whether
or when the Merger and the Bank Merger will occur, it currently is expected that
they will become effective during the fourth quarter of 2001.
Interests of Certain Persons With Respect to the Merger
As further described below, members of BOC's and Carolinas' management and
Boards of Directors have certain interests in the Merger that are in addition to
their interests as shareholders of BOC generally.
Election of BOC's Directors as Directors of Davie. Davie has agreed that,
so long as they remain directors of BOC at the Effective Time, BOC's directors
(not to exceed five persons) will be appointed to serve as directors of Davie,
and that BOC's current Chairman, Stephen R. Talbert, will serve as Chairman of
Davie's Board of Directors. BOC's directors will be compensated for their
services as directors of Davie on the same basis as Davie's other directors.
Davie's non-employee directors currently receive $200 per month for their
services as directors and attendance at Board meetings, and a fee of $50 for
attendance at each meeting of a committee on which they serve. BOC currently
pays each of its directors an annual retainer of $600 and fees of $300 for each
Board meeting attended and $100 for attendance at each meeting of a committee of
the Board. (See "Bank of Davie -- Directors' Compensation" on page _____, and
"BOC Financial Corp -- Directors' Compensation" on page _____.) After their
initial appointment, the continued service of BOC's directors will be subject to
Davie's normal director nomination and election processes.
Change in Control Payment. Stephen R. Talbert, BOC's President and Chief
Executive Officer, currently is employed by Carolinas under an employment
agreement that provides for a term that is extended by one additional year on
each anniversary of the execution of the agreement, unless proper written notice
is received. Mr. Talbert's salary for 2001 under the agreement is $99,000. The
agreement also provides for participation in employee benefit programs and
compensation plans offered by Carolinas for all employees, as well as fringe
benefits normally associated with Mr. Talbert's position. Upon the occurrence of
a "termination event" within twenty-four months of a "change in control," Mr.
Talbert may terminate the employment agreement and receive, among other things,
an amount equal to 299% of his "base amount" as defined in Section 280G(b)(3) of
the Code. As defined in the employment agreement, a "termination event" will
occur if: (i) Mr. Talbert is assigned any duties or responsibilities that are
inconsistent with his position, duties, responsibilities or status at the time
of the change in control, or if there is a change in his reporting
responsibilities or title with Carolinas in effect at the time of the change in
control; (ii) his base salary rate is reduced below the annual amount in effect
as of the change in control; (iii) his life insurance, medical or
hospitalization insurance, disability insurance, stock option plans, stock
purchase plans, deferred compensation plans, management retention plans,
retirement plans or similar plans or benefits being provided by Carolinas as of
the date of the change in control are reduced in their level, scope or coverage,
or any such insurance, plans or benefits are eliminated, unless that reduction
or elimination applies proportionately to all Carolinas' salaried employees who
participate in those benefits prior to the change in control; or (iv) he is
transferred to a location outside of Rowan County, North Carolina, without his
express written consent.
33
Under Mr. Talbert's employment agreement, the Merger will be a "change in
control" and his proposed new duties and position with Davie following the
Merger will result in a "termination event." Accordingly, immediately prior to
completion of the Merger, Carolinas will make a "change in control" payment to
Mr. Talbert under the employment agreement which it currently estimates will
amount to $____________. (See "BOC Financial Corp -- Executive Compensation" on
page ____.)
Employment of BOC's President. In order to assure itself of his assistance
and continued services following the Effective Time, Davie has agreed that it
will enter into a new employment agreement with Mr. Talbert in the place of his
existing agreement with Carolinas. The proposed new agreement would provide for
Mr. Talbert to be employed by Davie as an Executive Vice President for a three-
year term of employment and at an initial base salary of $105,000. For each of
2003 and 2004, Mr. Talbert would be entitled to receive, as a cash bonus, a
percentage of his base salary equal to the average of the percentages used in
calculating cash bonuses, if any, paid to Davie's other executive officers, and
Davie would provide him with certain other benefits received by other executive
officers, including the use of a bank-owned automobile and the payment of
monthly club dues. The proposed employment agreement contains a covenant which
would prohibit Mr. Talbert from competing against Davie in Rowan or Davie
Counties, or in any other county in which Davie maintains a business office, for
a period of one year following a termination of the agreement prior to the end
of his term of employment.
Outstanding BOC Stock Options. BOC previously has granted options to
certain of its officers and directors to purchase shares of BOC Stock. The
Merger Agreement provides that, at the Effective Time, each outstanding option
will be assumed by Davie and converted into an option to purchase Davie Stock.
The conversion will be made such that, following the Effective Time, each option
will provide for the purchase of 0.92 shares of Davie Stock for each share of
BOC Stock previously covered by the option, and the exercise price of the option
will be appropriately adjusted. As a condition to completion of the Merger, BOC
and Carolinas have agreed to obtain from each holder of an option, and will
deliver to Davie, a written agreement in a form specified by Davie confirming
and agreeing to the conversion of that person's option as described above. (See
"BOC Financial Corp -- Directors' Compensation" on page ____ and "-- Executive
Compensation" on page ____.)
BOC Management Recognition Plan. BOC previously has granted awards,
consisting of restricted shares of BOC Stock, to certain of its officers and
directors under its 1999 Management Recognition Plan (the "MRP"). Each award
becomes vested as to 20% of the restricted shares it covers each year following
its date of grant. Until they become vested, the awarded shares are held by
trustees and may not be sold or transferred, but each award holder receives any
dividends attributable to the shares covered by his award. As the shares
covered by each award become vested, they are released to the award holder free
of any restrictions. As of September 24, 2001, each outstanding award under the
MRP had become vested as to 40% of the shares it covers. The Merger Agreement
provides that the MRP will be amended immediately prior to the Effective Time to
provide that (i) awards granted prior to the date of the Merger Agreement that
remain outstanding, to the extent they have not previously become vested, will
immediately become vested in full, but that (ii) shares of BOC Stock covered by
those awards will continue to be held by the trustees, and one-half of the
shares will become payable and deliverable to the award holders on the January 1
next following the Effective Time, and the remaining one-half of the shares will
be released on the next succeeding January 1. As a condition to completion of
the Merger, BOC and Carolinas have agreed to obtain from each MRP award holder,
and will deliver to Davie at the Closing, a written agreement in a form
specified by Davie to the effect that the award holder consents to the above
amendment of the MRP and modification of the terms of his or her award. (See
"BOC Financial Corp -- Directors' Compensation" on page ____.)
BOC Employee Stock Ownership Plan. BOC currently maintains an employee
stock ownership plan (the "ESOP") which, during 1998, purchased an aggregate of
74,059 shares of BOC Stock with funds borrowed by the ESOP from BOC (the "ESOP
Debt"). The shares of BOC Stock held by the ESOP are pledged to secure the ESOP
Debt. BOC and Carolinas make cash contributions each quarter to
34
the ESOP in amounts equal to the quarterly payments owed on the ESOP Debt. As
those payments are made, shares of BOC Stock are released from the pledge and
are allocated to the accounts of plan participants based on their relative
annual compensation levels.
The Merger Agreement provides that the ESOP will be terminated as of a date
immediately prior to the Effective Time (the "Termination Date") and unallocated
assets held by the ESOP on the Termination Date will be applied (through pro
rata transfer to BOC of unallocated shares of BOC Stock for cancellation and
transfer to BOC of unallocated cash) in satisfaction of the outstanding balance
of principal and interest owed on the ESOP Debt. For purposes of their
application against the ESOP Debt, unallocated shares of BOC Stock will be
valued as of the Termination Date in a manner mutually agreed upon by BOC and
Davie which is consistent with the terms of the ESOP and applicable laws and
regulations, and unallocated shares will be applied against the ESOP Debt pro
rata with unallocated cash. Following completion of the termination of the ESOP
and receipt of a final determination letter from the Internal Revenue Service
with respect to the qualified status of the plan, the net assets of the ESOP, if
any, following repayment of the ESOP Debt will be distributed to plan
participants in the manner provided by its terms and applicable laws and
regulations.
Prior to the Termination Date, the ESOP will make all payments required
with respect to the ESOP Debt, and BOC and/or Carolinas will contribute to the
ESOP cash sufficient to enable the ESOP to make those payments. If the
Termination Date is other than the last day of a calendar quarter, then, in
connection with the payment due on the ESOP Debt at the end of that quarter, the
contribution of BOC and Carolinas to the ESOP for that calendar quarter will be
limited to an amount equal to interest on the unpaid principal balance of the
ESOP Debt accrued for that calendar quarter through the Termination Date, plus a
pro-rata portion of the principal payment on the ESOP Debt due at the end of
that calendar quarter. Any cash dividends paid by BOC prior to the Termination
Date which are received by the ESOP with respect to unallocated shares will be
used to make required payments on the ESOP Debt and, thus, will reduce BOC's and
Carolinas' required contributions to the ESOP. Unallocated assets held by the
ESOP which, as of the Termination Date, have been released from the pledge
securing the ESOP Debt as a result of payments made as provided above will be
allocated to participants' accounts in the manner provided by the terms of the
ESOP and applicable law and regulations.
Directors Retirement Plan. Carolinas maintains a Directors' Retirement
Plan (the "DRP") under which persons who have served as directors of Carolinas
for a period of ten years may become entitled to receive retirement benefits of
up to $12,000 per year for a period of ten years after attaining age 70 or
following their death or disability while serving as a director. Benefits
become vested at the rate of 10% of the total potential benefit for each year of
a director's service after the initial ten years of service. In the case of
directors who were at least 65 years of age at the time the DRP was adopted, the
benefits vest at the rate of 20% per year.
The Merger Agreement provides that, at the Effective Time, Davie will
assume Carolinas' obligations under the DRP with respect to those directors of
Carolinas (or, in the case of a deceased director, his designated beneficiary)
whose benefits under the DRP were vested as of the date of the Merger Agreement.
In the case of directors of Carolinas whose benefits under the DRP were unvested
as of the date of the Merger Agreement, Carolinas intends to provide for the
payment of benefits called for by the DRP through the purchase, in the name and
for the benefit of each such director, of an annuity contract or policy of life
insurance with the effect that each such annuity contract or insurance policy
will provide the equivalent benefit to the director for whom it is purchased as
he or she would be entitled to receive under the terms of the DRP if the Merger
were not effected and the director's benefits under the DRP became vested.
However, BOC and Carolinas have agreed with Davie that the aggregate amount paid
for all those annuity contracts or policies of life insurance will not exceed
$65,000, and, as a condition to completion of the Merger, BOC and Carolinas have
agreed to obtain from each director for whom an annuity contract or insurance
policy is purchased, and will deliver to Davie, a written agreement in a form
specified by Davie releasing Carolinas, BOC and Davie from any obligation or
35
liability for benefits under the DRP. (See "BOC Financial Corp -- Directors'
Compensation" on page ____.)
Other Employees. Provided they remain employed by BOC and Carolinas at the
Effective Time, Davie will attempt in good faith to locate suitable positions
with Davie for which employment may be offered to all other employees of BOC and
Carolinas. Davie currently expects to employ all of BOC's and Carolinas'
employees who desire employment with it following the Merger. However, Davie
will have no obligation to employ or provide employment to any employee of BOC
or Carolinas, and any employment offered to an employee of BOC or Carolinas will
be in a position, at a location within Davie's branch system, and for a rate of
compensation, as Davie will determine in its sole discretion. The employment of
each BOC or Carolinas employee by Davie will be on an "at-will" basis.
Employee Benefits. BOC's and Carolinas' employees who become employees of
Davie at the Effective Time will be entitled to receive all employee benefits
and to participate in all benefit plans provided by Davie on the same basis and
subject to the same eligibility and vesting requirements, and to the same
conditions, restrictions and limitations, as generally are in effect and
applicable to other newly hired employees of Davie. However, BOC's and
Carolinas' employees will be given credit for their years of service with BOC
and Carolinas for all purposes under Davie's employee benefit plans.
Directors' and Officers' Liability Insurance. BOC and Davie have agreed
that, to the extent it can be purchased at a cost to which they both agree,
immediately prior to the Effective Time BOC will purchase "tail" coverage,
effective at the Effective Time, under and in the same amount of coverage as is
provided by its then current directors' and officers' liability insurance
policy.
Expenses
The Merger Agreement provides that BOC, Carolinas and Davie each will pay
its own legal, accounting and financial advisory fees and all its other costs
and expenses (including all filing fees, printing and mailing costs and travel
expenses) incurred or to be incurred in connection with the performance of its
obligations under the Merger Agreement or otherwise in connection with the
Merger. The costs of preparing, printing and distributing this Joint Proxy
Statement/Offering Circular will be divided equally between BOC and Davie.
RIGHTS OF DISSENTING SHAREHOLDERS
Under Article 13 of the North Carolina Business Corporation Act ("Article
13"), if you object to the Merger Agreement and Merger you may "dissent" and
become entitled to be paid the fair value of your shares of BOC Stock (if you
are a BOC shareholder), or of Davie Stock (if you are a Davie Shareholder) if
the Merger is completed. The following is only a summary of the rights of a
dissenting shareholder. If you intend to exercise your right to dissent (your
"Dissenters' Rights"), you should carefully review the following summary and
comply with all requirements of Article 13. A copy of Article 13 is attached as
Appendix B to this document and is incorporated into this discussion by
reference. You also should consult with your attorney. NO FURTHER NOTICE OF
THE EVENTS GIVING RISE TO DISSENTERS' RIGHTS WILL BE FURNISHED BY BOC OR DAVIE
TO YOU.
If you intend to exercise Dissenters' Rights, you should be aware that cash
paid to you likely will result in your receipt of taxable income. (See "Federal
Income Tax Consequences" on page __.)
Article 13 provides in detail the procedure which you must follow if you
wish to exercise Dissenters' Rights. In summary, to exercise Dissenters'
Rights:
. you must give to BOC (if you are a BOC shareholder), or to Davie (if you
are a Davie shareholder), and BOC or Davie must actually receive, before
the vote on the Merger is taken at
36
the BOC Special Meeting or at the Davie Special Meeting, written notice of
your intent to demand payment for your shares if the Merger is completed (a
"Notice of Intent"), and
. you must not vote your shares in favor of the Merger at the BOC Special
Meeting or at the Davie Special Meeting.
Your failure to satisfy these requirements will result in your not being
entitled to exercise Dissenters' Rights and receive payment for your shares
under Article 13. If you vote against the Merger (either in person or by
appointment of proxy), you still have to send the required Notice of Intent in
order to exercise Dissenters' Rights. If you return a signed appointment of
proxy but fail to provide instructions as to the manner in which your shares are
to be voted, you will be considered to have voted in favor of the Merger and you
will not be able to assert Dissenters' Rights. If you do not return a proxy
card or otherwise vote at all, you will not be treated as waiving your
Dissenters' Rights.
Notices of Intent from BOC's shareholders may be mailed or delivered to
BOC's President, Stephen R. Talbert, at BOC's corporate office at 107 South
Central Avenue (Post Office Drawer 8187) in Landis, North Carolina 28088, or
they may be hand delivered to the President of BOC at the BOC Special Meeting
(before voting begins). Notices of Intent from Davie's shareholders may be
mailed or delivered to Davie's President, Robert E. Marziano, at Davie's main
office at 135 Boxwood Village Drive (Post Office Box 129) in Mocksville, North
Carolina 27028, or they may be hand delivered to the President of Davie at the
Davie Special Meeting (before voting begins). In order for a Notice of Intent
sent by mail to be effective, it must actually be received by BOC or Davie at
its address prior to the BOC Special Meeting or Davie Special Meeting. A Notice
of Intent which is hand delivered must be received prior to the vote on the
Merger at the BOC Special Meeting and the Davie Special Meeting.
If you deliver a Notice of Intent and the Merger is approved by BOC's and
Davie's shareholders at the special meetings (or at any adjournment), then,
within ten days following that approval, if you are a BOC shareholder, BOC will
send you a written notice (a "Dissenters' Notice"), or, if you are a Davie
shareholders, Davie will send you a Dissenters' Notice, in either case by
registered or certified mail, return receipt requested, so long as you have
satisfied the requirements to exercise Dissenters' Rights. The Dissenters'
Notice will:
. state where your payment demand must be sent, and where and when your share
certificates must be deposited;
. supply a form you can use for demanding payment, and be accompanied by a
copy of Article 13;and
. specify a date by which BOC or Davie must receive your payment demand
(which may not be fewer than 30 nor more than 60 days after the date the
Dissenters' Notice is mailed).
After receipt of the Dissenters' Notice, you must deliver to BOC (if you
are a BOC shareholder) or to Davie (if you are a Davie shareholder) a written
demand for payment (a "Payment Demand") and deposit your share certificates with
BOC or Davie by the date set forth in and in accordance with the terms and
conditions of the Dissenters' Notice. Otherwise, you will not be entitled to
payment for your shares under Article 13. If you deliver a Payment Demand and
deposit your share certificates as required by the Dissenters' Notice, you will
retain all other rights as a shareholder until those rights are canceled or
modified by consummation of the Merger.
As soon as the Merger is consummated, or within 30 days after receipt of
your Payment Demand (whichever is later), Davie will pay you (provided that you
have satisfied all requirements to exercise Dissenters' Rights) the amount Davie
estimates to be the fair value of your shares, plus interest accrued to the date
of payment. Davie's payment will be accompanied by:
37
. certain of BOC's or Davie's most recent available financial statements;
. an explanation of how Davie estimated the fair value of your shares and how
the interest was calculated;
. a statement of your rights if you are dissatisfied with Davie's payment;
and
. a copy of Article 13.
If the Merger is not completed within 60 days after the date set for you to
demand payment and deposit your share certificates, BOC or Davie must return
your deposited certificates, and if the Merger is completed later, BOC or Davie
must send you a new Dissenters' Notice and repeat the Payment Demand procedure
described above.
If you believe that the amount paid by Davie as described above is less
than the fair value of your shares of BOC Stock or Davie Stock or that the
interest due is incorrectly calculated, or if Davie fails to make payment to you
within 30 days after receipt of your Payment Demand, or if the Merger is not
completed and BOC or Davie does not return your deposited certificates within 60
days after the date set for demanding payment, then you may notify Davie, or BOC
if the Merger has not been completed, in writing of your own estimate of the
fair value of your shares of BOC Stock or Davie Stock and the amount of interest
due and may demand payment of your estimate (a "Further Payment Demand"). In
any such event, if you fail to take any such action within the 30 days after
Davie makes payment for your shares or fails to perform timely, you will be
deemed to have waived your rights under Article 13 and to have withdrawn your
dissent and demand for payment.
If you have taken all required actions and your demand for payment remains
unsettled, you may file a complaint with the Superior Court Division of the
General Court of Justice within 60 days after the earlier of the date of Davie's
payment or the date of your Further Payment Demand (where the shareholder is
dissatisfied with Davie's payment or Davie has failed to make payment or BOC has
failed to return your stock certificates). If you take no action within that
60-day period, you will be deemed to have withdrawn your dissent and demand for
payment. In the court proceeding described above, the court may appoint one or
more persons as appraisers to receive evidence and recommend a decision on the
question of fair value, and it has discretion to make all dissenters whose
demands remain unsettled parties to the proceeding. Each dissenter made a party
to the proceeding must be served with a copy of the complaint and will be
entitled to judgment for the amount, if any, by which the court finds the fair
value of his shares, plus interest, to exceed the amount paid by Davie. Court
costs, appraisal, and counsel fees may be assessed by the court as it deems
equitable.
Article 13 contains certain additional provisions with respect to dissent
by nominees who hold shares for others, and by beneficial owners whose shares
are held in the name of other persons, and reference is made to Appendix B for a
more complete description thereof.
38
MARKET AND DIVIDEND INFORMATION
BOC's Capital Stock
BOC first issued BOC Stock during 1998 in connection with its organization
as Carolinas' parent holding company. BOC Stock was listed on the OTC Bulletin
Board (under the trading symbol "BOCF") during the second quarter of 1998.
However, there is not an active public trading market for BOC Stock. Prior to
its listing on the OTC Bulletin Board, there was no established trading market
and BOC Stock traded only in private transactions between individuals. On June
30, 2001, there were approximately 300 record holders of BOC Stock.
The following table lists high and low published prices of BOC Stock (as
reported on the OTC Bulletin Board), and cash dividends declared, for each
calendar quarter since December 31, 1998.
Price
--------------
Cash dividend
Year Quarterly period High Low declared per share
-------- ---------------------------- ------ ------ -------------------
1999 First quarter............... $ 9.88 $ 9.00 $ -
Second quarter.............. 9.75 9.00 0.05
Third quarter............... 9.63 8.75 0.05
Fourth quarter.............. 8.75 5.25 0.05
2000 First quarter............... 5.25 4.50 0.05
Second quarter.............. 5.25 4.06 0.05
Third quarter............... 4.75 4.50 0.05
Fourth quarter.............. 5.12 4.56 0.05
2001 First quarter............... 6.00 4.94 0.05
Second quarter.............. 6.50 6.00 0.05
Third (through ___, 2001)... 0.05
BOC's principal source of funds with which to pay dividends to its
shareholders is the dividends it receives from Carolinas. There are statutory
and regulatory limitations on the payment of dividends by Carolinas to BOC, as
well as by BOC to its shareholders. (See "Supervision and Regulation - Payment
of Dividends" on page __, and "Capital Stock of Davie and BOC - Differences in
Capital Stock" on page __.)
Davie's Capital Stock
Davie first issued Davie Stock during 1998 in connection with its initial
incorporation and the commencement of its banking operations. Davie Stock was
listed on the OTC Bulletin Board (under the trading symbol "BADN") during the
third quarter of 1999. However, there is not an active public trading market for
Davie Stock. Prior to its listing on the OTC Bulletin Board, there was no
established trading market and Davie Stock traded only in private transactions
between individuals. On June 30, 2001, there were approximately 882 record
holders of Davie Stock.
The following table lists high and low published prices of Davie Stock (as
reported on the OTC Bulletin Board) for each calendar quarter since the stock
first became traded on the OTC Bulletin Board during 1999. All prices prior to
the fourth quarter of 2000 have been restated to reflect the effect of the six-
for-five stock split that Davie effected in the form of a 20% stock dividend on
December 21, 2000.
39
Price (1)
--------------
Year Quarterly period High Low
-------- ------------------------------- ------ ------
1999 Third quarter.................. $10.21 $10.21
Fourth quarter................. 12.71 10.83
2000 First quarter.................. 11.88 11.25
Second quarter................. 12.08 11.67
Third quarter.................. 12.08 11.46
Fourth quarter................. 13.00 11.46
2001 First quarter.................. 14.75 10.00
Second quarter................. 14.50 12.50
Third (through ______, 2001)...
The Commissioner's approval of Davie's organization during 1998 was
conditioned on the requirement that, for a period of three years following the
time it began banking operations, it not pay any cash dividend without the
Commissioner's prior approval. Therefore, Davie has not paid any cash dividends
to date. That prohibition expires on December 8, 2001. However, without regard
to the Commissioner's approval, under North Carolina law Davie may only pay cash
dividends from its undivided profits, and on June 30, 2001, Davie had an
accumulated deficit of approximately $798,000. So, on that date Davie had no
funds legally available for the payment of dividends, and it will not be
permitted to pay any cash dividends until that deficit has been recovered
through future profits. Management of Davie expects that, for the foreseeable
future, any profits resulting from Davie's operations will be retained as
additional capital to support its operations and growth and that it will not pay
any cash dividends.
In the future, any declaration and payment of cash dividends will be
subject to Davie's Board of Directors' evaluation of its operating results,
financial condition, future growth plans, general business and economic
conditions, and tax and other relevant considerations. Also, the payment of cash
dividends by Davie in the future will be subject to certain other legal and
regulatory limitations (including the requirement that Davie's capital be
maintained at certain minimum levels) and will be subject to ongoing review by
banking regulators. There is no assurance that, in the future, Davie will have
funds available to pay cash dividends, or, even if funds are available, that it
will pay dividends in any particular amount or at any particular times, or that
it will pay dividends at all. See "Supervision and Regulation - Payment of
Dividends" on page __, and "Capital Stock of Davie and BOC - Differences in
Capital Stock" on page ___.)
40
CAPITALIZATION
The following table sets forth:
. Davie's unaudited historical capitalization on June 30, 2001,
. BOC's unaudited historical consolidated capitalization on June 30, 2001,
and
. Davie's unaudited pro forma capitalization as of June 30, 2001, assuming
the Merger had been completed on that date (with no shareholder of BOC or
Davie exercising Dissenters' Rights).
This unaudited financial information is based on and should be read in
conjunction with Davie's and BOC's audited financial statements and unaudited
interim financial statements which are included in this Joint Proxy
Statement/Offering Circular under the captions "Financial Statements of Bank of
Davie" on page F-1 and "Financial Statements of BOC Financial Corp" on page F-
31.
At June 30, 2001 (unaudited)
--------------------------------
Davie BOC Pro forma
(actual) (actual) combined (1)
-------- -------- ------------
(Dollars in thousands)
Shareholders' equity:
Preferred stock................. $ - $ - $ -
Common stock.................... 4,465 805 7,888
Surplus......................... 3,311 4,274 7,418
Unearned compensation........... - (1,429) -
Retained earnings............... (798) 4,535 (798)
Accumulated other
comprehensive income.......... 178 7 178
------- ------- --------
Total shareholders' equity... $ 7,156 $ 8,192 $ 14,686
======= ======= ========
_______________________
(1) Numbers in the column headed "Pro forma combined" have been calculated
assuming that the Merger became effective on June 30, 2001.
41
BANK OF DAVIE
General
Business. Davie is a North Carolina chartered bank that was organized in
1998. Its deposits are insured by the Bank Insurance Fund of the FDIC to the
maximum amount permitted by law. Davie is focused on community-oriented banking
through localized lending, core deposit funding, conservative balance sheet
management, and stable growth.
Davie's operations are primarily retail oriented and directed toward
individuals and small- and medium-sized businesses located in its banking
market. While its deposits and loans are derived primarily from customers in
its banking market, it also makes loans and has deposit relationships with
individual and business customers in areas surrounding its immediate banking
market, and it also solicits certificates of deposit on the internet through
Express Data Corporation's Quick-Rate CD Clearinghouse. Davie provides most
traditional commercial and consumer banking services, but its principal
activities are the taking of demand and time deposits and the making of consumer
and commercial loans. Davie's primary source of revenue is interest income it
derives from its lending activities. On June 30, 2001, Davie's unaudited
interim financial statements reflected total assets of approximately $93.6
million, total loans of approximately $71.7, total deposits of approximately
$81.5 million, and total shareholders' equity of approximately $7.2 million.
Davie's principal executive offices are located at 135 Boxwood Village
Drive, Mocksville, North Carolina 27028, and its telephone number is (336) 751-
5755.
Business Offices. Davie operates three full-service banking offices,
including its main office located in Mocksville, North Carolina, and its two
branch offices located in Advance, North Carolina, and Carthage, North Carolina.
Banking Market. Davie's current banking market consists of Davie County,
North Carolina, and Moore County, North Carolina (the "Davie Market"). Davie
County lies in the western Piedmont section of North Carolina and is bounded on
the north by Yadkin County, on the northeast by Forsyth County, on the south by
Iredell County, and on the east and south by the Yadkin and South Yadkin Rivers.
Moore County lies in the "Sandhills" section of North Carolina approximately 91
miles southeast of Mocksville.
Competition. Davie competes for deposits in the Davie Market with other
commercial banks, savings banks and other thrift institutions, credit unions,
agencies issuing United States government securities and all other organizations
and institutions engaged in money market transactions. In its lending
activities, Davie competes with all other financial institutions as well as
consumer finance companies, mortgage companies and other lenders. Commercial
banking in the Davie Market and in North Carolina as a whole is extremely
competitive. North Carolina is the home of three of the largest commercial
banks in the Southeast, each of which has branches located in Davie's banking
market, and four other commercial banks, thrift institutions and credit unions
also are represented in the Davie Market.
Interest rates, both on loans and deposits, and prices of fee-based
services, are significant competitive factors among financial institutions
generally. Other important competitive factors include office location, office
hours, the quality of customer service, community reputation, continuity of
personnel and services, and, in the case of larger commercial customers,
relative lending limits and the ability to offer sophisticated cash management
and other commercial banking services. Many of Davie's competitors have greater
resources, broader geographic markets and higher lending limits than Davie, and
they can offer more products and services and can better afford and make more
effective use of media advertising, support services and electronic technology
than can Davie. To counter these competitive disadvantages, Davie depends on
its reputation as a community bank in its local market, its
42
direct customer contact, its ability to make credit and other business decisions
locally, and its personalized service.
In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial
institutions, but also with out-of-state financial institutions which may
acquire North Carolina institutions, establish or acquire branch offices in
North Carolina, or otherwise offer financial services across state lines,
thereby adding to the competitive atmosphere of the industry in general. In
terms of assets, Davie is one of the smaller commercial banks in North Carolina,
and there is no assurance that Davie will be or continue to be an effective
competitor in the current financial services environment.
To counter its competitive disadvantages, Davie attempts to differentiate
itself from its larger competitors with its focus on relationship banking,
personalized service, direct customer contact, and its ability to make credit
and other business decisions locally. Davie also depends on its reputation as a
community bank in its banking markets and its involvement in the community it
serves.
Employees. On June 30, 2001, Davie had 30 full-time and five part-time
employees. Davie and its employees are not parties to any collective bargaining
agreement, and Davie considers its relations with its employees to be good.
Legal Proceedings. From time to time, Davie may become involved in legal
proceedings occurring in the ordinary course of its business. However, subject
to the uncertainties inherent in any litigation, management of Davie believes
there currently are no pending or threatened proceedings that are reasonably
likely to result in a material adverse change in Davie's financial condition or
operations.
Properties. Davie's banking offices are located in facilities which are
owned by Davie. On June 30, 2001, Davie's consolidated investment in fixed
assets, including its properties, was an aggregate of approximately $3.7
million.
Davie Financial Statements; Additional Information
Davie's audited financial statements at December 31, 2000 and 1999, and for
the years ended December 31, 2000 and 1999, together with its unaudited interim
balance sheets, statements of operations, and statements of cash flows, as of
and for the six-month periods ended June 30, 2001 and 2000, are included in this
Joint Proxy Statement/Offering Circular under the caption "Financial Statements
of Bank of Davie."
Davie Stock is registered under the Securities Exchange Act of 1934, and
Davie is subject to the informational requirements of, and it files periodic
reports and other information with, the FDIC under Sections 13 and 15(d) of that
Act. You may read and copy any reports, proxy and information statements and
other material filed by Davie with the FDIC under the Securities Exchange Act of
1934 Act at the FDIC's Registration, Disclosure and Securities Operations Unit
located at 550 17/th/ Street, N.W., Room F-6043, Washington, D.C. 20429. You
also may obtain copies of those reports and other documents by contacting the
FDIC by telephone at (202) 898-8913 or by facimile at (202) 898-3909.
43
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Davie. This analysis should be read in conjunction with Davie's
audited and unaudited financial statements and accompanying notes which appear
elsewhere in this Joint Proxy Statement/Offering Circular. (See "Financial
Statements of Bank of Davie" on page F-1.)
Description of Business and Primary Market Area. Davie is a state-
chartered banking corporation which opened for business on December 7, 1998.
Davie operates three full service banking offices in Davie county, North
Carolina, and one office in the City of Carthage, North Carolina. A full range
of banking services are offered at these locations to individuals and small to
medium size businesses. These services include checking, savings, and time
deposit accounts; commercial, installment, mortgage and personal loans; and
other related services. Davie's primary source of revenue is net interest
income from its lending, and to a lesser degree, its investment activity. Davie
also earns fees from mortgage lending and deposit accounts. The major non-
interest expenses of Davie are salaries, occupancy and related expenses.
Davie's primary market areas are Davie County and the City of Carthage in Moore
County.
Net Interest Income. Net interest income, or the difference between income
generated by earning assets (primarily loans, investment securities, and
interest-bearing balances) and the expense incurred on interest bearing
liabilities (primarily deposits and borrowed funds used to fund earning assets),
are Davie's principal source of earnings.
Net interest income for the six months ended June 30, 2001 was $1.3
million, an increase of 35% compared to the first six months of 2000. Interest
income increased 57% while interest expense increased 75%.
Davie's net interest income for the year 2000 was $2.2 million, compared to
$1.1 million in 1999. The substantial increase from year to year is due to
increasing volumes of earning assets during Davie's start-up years.
The loan portfolio provided the largest component of interest income as
loans grew from $32.5 million at year end 1999 to $58.5 million in 2000. Other
income is derived from U.S. Government securities and overnight investments.
Interest margin (the net yield on interest earning assets) declined from
4.35% in 1999 to 3.80% in 2000 due to Davie's reliance on higher interest
bearing time deposits to fund earning asset growth.
See Tables 1 and 2 on pages _____ and _____ for more detail.
Provision Expense and Allowance for Loan Losses. The amount of expense
charged to provision for possible loan losses is based on management's judgment
as to the appropriate amount required to maintain an adequate level of reserves
for potential losses. The level of the allowance for loan losses is dependent
upon the volume of new loans, collectability of past due and non-performing
loans, economic conditions, and the results of Davie's internal risk grading
system.
Provision for loan losses decreased slightly from $200,000 at June 30, 2000
to $190,000 at June 30, 2001. Loan loss reserves represented 1.4% of total
loans at June 30, 2001. Management believes the reserve is adequate.
During 2000, $370,000 was added to the allowance for loan losses compared
to $431,000 in 1999. Loan loss reserves were $831,000 and $495,000 at December
31/st/ for the years 2000 and 1999
44
respectively. The ratio of charged off loans to average loans in 2000 was 0.08%
and allowance for loan losses was 1800% of non-performing loans at December
31st. There were no non-performing loans or charged off loans in 1999. See
tables 7 and 8 on pages _____ and _____.
Non-Interest Income. Non-interest income is derived from service fees on
deposit accounts, mortgage loan origination fees, and other fees and services.
Non-interest income was $99,000 more at June 30, 2001 than at June 30,
2000. Service charges on deposits increased $36,000 as a result of deposit
growth. Other income also increased from $35,000 for the six months ended June
30, 2000 to $71,000 for the six months ended June 30, 2001.
Service charges and fees on deposit accounts were $84,000 in 2000 compared
to $28,000 in 1999. Mortgage loan fees represented $34,000 of revenue in 2000
and $16,000 in 1999. Other fees increased from $5,000 in 1999 to $13,000 for
the year 2000.
Non-Interest Expense. Non-interest expense is the overhead associated with
the operation of Davie.
For the six months ended June 30, 2001, non-interest expense was $1,386,000
compared to $936,000 for the six months ended June 30, 2000. Increased salaries
and benefits represented most of the difference.
Non-interest expense totaled $2,028,000 in 2000, compared to $1,250,000 in
1999. Salaries and benefits increased to $1,227,000 in 2000 from $766,000 in
1999. This represents 60.5% of all non-interest expense in 2000, and 61.3% in
1999. The large increase is due to staffing levels necessitated by growth in
assets and the addition of two full-service offices. For the same reason,
occupancy and equipment expense increased 119% from $113,000 in 1999 to $248,000
in 2000. Other non-interest expense totaled $553,000 for 2000 compared to
$371,000 in 1999. This category includes advertising expenses, professional
fees, data processing and insurance cost among other miscellaneous items.
Income Taxes. Davie incurred no income tax expense or benefit for the six
months ended June 30, 2001 or 2000 because of net operating losses.
Davie incurred no income tax expense or benefit for the year ended December
31, 2000 or 1999 because of net operating losses.
Capital Adequacy. Davie is subject to capital requirements of the FDIC.
Federal regulation requires all banks to maintain Tier 1 capital (common
stockholders' equity less intangible assets) to risk-weighted assets of 4
percent and Total capital (Tier 1 capital plus allowance for loan losses up to
1.25 percent of risk-weighted assets) to risk-weighted assets of 8 percent.
Risk-weighted assets refer to the on-and-off balance sheet exposures of Davie
adjusted for their relative risk levels using formulas set forth by FDIC
regulation. Davie is also subject to a leverage ratio requirement by the FDIC,
which generally requires a Tier 1 capital to quarterly average total assets
ratio of 3 percent.
There have been no cash or stock dividends declared in 2001. Davie is
restricted from paying cash dividends by North Carolina law for three years from
inception and until undivided profits are replenished.
At years ended 2000 and 1999, and six months ended June 30, 2001, Davie was
in compliance with all the aforementioned capital requirements.
Liquidity and Interest Rate Sensitivity. The asset and liability
management policy of Davie is administered to assure liquidity. Davie's
interest rate sensitivity position is maintained to avoid wide fluctuations in
net interest income because of interest rate movements. Liquidity management
involves
45
the ability to meet demands for withdrawals of deposits, satisfy lending
obligations and fulfill other needs for funds. Liquidity is provided from
deposit growth, maturities of investment securities or borrowed funds, with
deposit growth being the primary source of liquidity to date. Davie has borrowed
$2.7 million from the Federal Home Loan Bank and has matched the maturity of the
borrowing with a specific group of fixed rate loans. The FHLB borrowing line is
not only a source of liquidity but also a mechanism for interest rate
sensitivity management. Davie also maintains other lines of credit, which may be
used as a source of liquidity. Davie's goal is to maintain a neutral position on
interest rate sensitivity whereby little or no change in interest income would
occur as interest rates change. Theoretically, Davie's net interest margin will
improve if market interest rates rise or narrow if market interest rates fall.
As stated earlier, Davie's goal is to maintain a neutral interest rate sensitive
position. However, the re-pricing characteristics of assets are different from
the re-pricing characteristics of funding sources. Therefore, net interest
income can be impacted by changes in interest rates even if the re-pricing
opportunities of assets and liabilities are perfectly matched.
Management is aware that Davie is asset sensitive on a noncumulative basis
for the first six months of 2001 because of a significant 200 basis points
reduction in the prime-lending rate.
For the year ended December 31, 2000, Davie was slightly asset sensitive,
which means that interest-earning assets could re-price more quickly than
interest bearing liabilities. See Table 6 on page _____.
Impact of Inflation. The financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Because the
assets and liabilities of a bank are primarily monetary in nature (payable in
fixed, determinable amounts), the performance of a bank is affected more by
changes in interest rates than by inflation. Interest rates generally increase
as the rate of inflation increases, but the magnitude of the change in rates may
not be the same. While the effect of inflation on banks is normally not as
significant as is its effect on those businesses that have investments in plant
and inventories, inflation does have an effect on banks. During periods of high
inflation, there normally are corresponding increases in the money supply and
banks normally experience above average growth in assets, loans and deposits.
Also, general increases in the prices of goods and services will result in
increased operating expenses.
Statistical Information. The tables on the following pages represent
certain additional statistical information regarding Davie. This information
should be read in conjunction with Davie's audited and unaudited financial
statements which appear elsewhere in this Joint Proxy Statement/Offering
Circular. (See "Financial Statements of Bank of Davie" on page F-1.)
46
Table 1. Net Interest Income and Average Balances (dollars in thousands)
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, and (ii) the relative amounts of interest-earning
assets and interest-bearing liabilities. The following table details Davie's
average balances for assets and liabilities for December 31, 2000 and December
31, 1999, respectively. The table reflects the average yield on interest-
earning assets and the average cost of interest-bearing liabilities.
Year ended Year ended
December 31, 2000 December 31, 1999
---------------------------------- --------------------------------------------
Average Interest Yield/ Average Interest Yield/
balance income/expenses cost balance income/expense cost
-------- --------------- ------- -------- -------------- ------------------
Interest earning assets:
Taxable investment securities.............. $ 8,038 $ 543 6.76% $ 2,206 $ 134 6.07%
Federal Funds sold and interest-
bearing bank balances.................... 6,337 412 6.50%
Loans...................................... 44,531 4,321 9.70% 17,538 1,571 8.96%
------- ------ ---- ------- ------ ----
Total interest earning assets.......... 58,906 5,276 8.96% 25,305 1,982 7.83%
Other assets............................... 4,067 827
Total assets........................... $62,973 $26,132
======= =======
Interest-bearing liabilities:
Demand deposits.......................... $ 1,447 $ 30 2.07% $ 276 12 4.35%
Savings deposits......................... 11,852 535 4.51% 4,604 182 3.95%
Time deposits............................ 36,435 2,324 6.37% 12,058 678 5.62%
Other Borrowings......................... 2,272 149 6.56% 132 9 6.81%
------- ------ ---- ------- ------ ----
Total interest bearing liabilities..... 52,006 3,038 5.84% 17,070 881 5.16%
Demand deposits............................ 3,720 1,651
Other liabilities.......................... 215 45
Stockholders' equity....................... 7,032 7,366
------- -------
Total liabilities and
stockholder's equity.................. $62,973 $26,132
======= =======
Net income and interest rate spread........ $2,238 3.12% $1,101 2.67%
====== ==== ====== ====
Net yield on average interest-
earning assets............................ 3.80% 4.35%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................. 113% 148%
==== ====
47
Table 2. Volume/Rate Variance Analysis (dollars in thousands)
The following table analyzes the dollar amount of change in interest income
and interest expense for the major components of interest-earning assets and
liabilities. The table also displays changes in interest income and expense
attributable to volume changes and interest rate changes. The change
attributable to both rate and volume has been allocated to changes in rate.
Year ended December 31, 2000 vs 1999
-------------------------------------
Increase (decrease) due to
-------------------------------------
Volume Rate Total
----------- ----------- -----------
Interest-earning assets:
Federal funds sold and
interest-bearing bank balances........ $ 39 $ 96 $ 135
Investment securities................... 354 55 409
Loans................................... 2,419 331 2,750
------ ---- ------
Total interest income..... 2,812 482 3,294
------ ---- ------
Interest-bearing liabilities:
Deposits................................ 1,875 142 2,017
Other borrowings........................ 146 (6) 140
------ ---- ------
Net interest income....... $ 791 $346 $1,137
====== ==== ======
Table 3. Investment Activities (dollars in thousands)
The following table sets forth the carrying value of Davie's securities at
the dates indicated. FHLB stock is recorded at cost in the "other assets"
category on Davie's balance sheet.
At December 31,
----------------
2000 1999
------- ------
U.S. Government and agency securities available for sale... $11,044 $3,940
Mortgage-backed securities................................. 1,433 -
Political subdivision notes................................ - -
FHLB Stock................................................. 185 75
------- ------
Total................................................. $12,662 $4,015
======= ======
48
Table 4. Investment Securities (dollars in thousands)
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for
Davie's investment securities portfolio at December 31, 2000. The table does
not take into consideration the effects of possible scheduled repayments.
At December 31, 2000
-----------------------------------------------------------------------------------------------------------
Less than 1 year 1 to 5 years Over 5 to 10 years Over 10 years Total securities
----------------- ----------------- ------------------ ----------------- ----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Value Value Value Value Value Value Value Value Value Value
-------- ------- -------- ------- --------- ------- -------- ------- -------- -------- --------
U.S. Gov't agencies
SEC. AFS......... $ 500 6.30% $ 9,474 6.95% $ 1,014 7.00% - - $ 10,988 6.93% $ 11,044
U.S. Gov't........... - - - - - - - - - - -
securities
Political
subdivision notes.. - - - - - - - - - - -
FHLB stock (1)....... - - - - - - - - 185 7.75% 185
------ ---- ------- ---- ------- ---- -------- ------- -------- ---- --------
Total.......... $ 500 6.95% $ 9,474 6.95% $ 1,014 7.00% - - $ 11,173 6.94% $ 11,299
====== ==== ======= ==== ======= ==== ======== ======= ======== ==== ========
__________________________
(1) Recorded at cost in Other Assets on Balance Sheet
Table 5. Analysis of Loan Portfolio (dollars in thousands)
The following table contains selected data relating to the composition of
Davie's loan portfolio by type of loan and type of security on the dates
indicated.
December 31,
-----------------------------------------
2000 1999
------------------ -------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Real estate loans:
Residential, 1-4 family.......................... $ 3,249 5.55% $ - -
Commercial....................................... 30,213 51.64% 15,569 47.90%
Construction..................................... 4,293 7.34% 4,040 12.43%
Home Equity..................................... 5,900 10.08% 2,767 8.51%
Commercial business loans............................. 15,304 26.16% 10,733 33.02%
Consumer loans:
Installment....................................... 2,237 3.82% 1,081 3.33%
Other............................................. 642 1.10% 425 1.31%
-------- ------ -------- ------
Total loans................................... $ 61,838 105.69% $ 34,615 106.50%
======== ====== ======== ======
Less:
Loans in process.................................. $ (2,548) - 4.35% $ (1,632) - 5.02%
Deferred loan origination fees and costs.......... 49 0.08% 15 0.05%
Allowance for loan losses......................... (831) - 1.42% (495) - 1.52%
-------- ------ -------- ------
Total loans, net.............................. $ 58,508 100.00% $ 32,503 100.01%
======== ====== ======== ======
49
Table 6. Interest Rate Sensitivity (dollars in thousands)
The following table lists Davie's interest sensitive assets and interest
sensitive liabilities outstanding at December 31, 1999. Each category of assets
and liabilities is shown with projected repricing and maturity dates. Except as
stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. NOW
accounts, savings accounts, and money market accounts are assumed to be subject
to immediate repricing and depositor availability. Prepayment assumptions on
mortgage loans and decay rates on deposit accounts have not been included in
this analysis. In addition, the table does not reflect scheduled principal
repayments which will be received on loans. The interest rate sensitivity of
Davie's assets and liabilities as illustrated in the following table may vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
December 31, 2000
-----------------------------------------------------
1-3 4-12 13-60 OVER 60
months months months months Total
-------- --------- -------- -------- --------
Earning assets:
Residential mortgage........... $ 1,403 $ 339 $ 3,864 $ 4,759 $ 10,365
All other loans................ 33,302 2,066 11,642 1,963 48,973
Federal funds sold............. 4,040 - - - 4,040
Investment securities.......... - 500 9,528 2,449 12,477
Other.......................... 1,617 - - - 1,617
------- -------- -------- -------- --------
Total........................ $40,362 $ 2,905 $ 25,034 $ 9,171 $ 77,472
======= ======== ======== ======== ========
Interest-bearing deposits:
NOW accounts................... 3,147 - - - 3,147
Money market................... 6,557 - - - 6,557
Savings........................ 7,367 - - - 7,367
Time deposits.................. 10,586 26,482 14,716 - 51,784
Other borrowings............... - - 1,500 1,200 2,700
------- -------- -------- -------- --------
Total........................ $27,657 $ 26,482 $ 16,216 $ 1,200 $ 71,555
======= ======== ======== ======== ========
Interest sensitivity gap........... $12,705 $(23,577) $ 8,818 $ 7,971 $ 5,917
Cumulative sensitivity gap......... $12,705 $(10,872) $ (2,054) $ 5,917 $ 5,917
Cumulative gap as a %
of interest-earning assets........ 31.48% - 25.13% - 3.01% 7.64% 7.64%
Cumulative ratio of sensitive
assets to sensitive liabilities... 145.94% 79.92% 97.08% 108.27% 108.27%
50
Table 7. Problem Assets (dollars in thousands)
The following table sets forth information regarding non-accrual loans,
other real estate owned, and certain other repossessed assets and loans. As of
the dates indicated, Davie had no loans categorized as troubled debt
restructuring within the meaning of SFAS 15.
At December 31,
-------------------------
2000 1999
--------- ---------
Loans accounted for on a nonaccrual basis:
Real estate loans:
Commercial....................................................... $ - $ -
Construction..................................................... - -
Home Equity...................................................... - -
Commercial business and consumers.................................... 44 -
-------- --------
Total nonaccrual loans........................................... 44 -
Accruing loans which are contractually past due 90 days or more...... 2 -
--------
Total nonperforming loans........................................ 46 -
Other real estate owned.............................................. - -
Total nonperforming assets........................................... $ 46 -
======== ========
Nonaccrual and 90 days past due as a percentage of net loans......... 0.079% NA
Nonaccrual and 90 days past due as a percentage of total assets...... 0.055% NA
Total nonperforming assets as a percentage of total assets........... 0.055% NA
Table 8. Summary of Loan Loss Experience (dollars in thousands)
The following table contains an analysis of Davie's allowance for loan
losses on the indicated dates.
At December 31,
-------------------------
2000 1999
--------- ---------
Balance at beginning of period....................................... $ 495 $ 64
Provision for loan losses............................................ 370 431
Charge-offs.......................................................... (34) -
Recoveries........................................................... - -
-------- --------
Balance at end of period............................................. $ 831 $ 495
======== ========
Ratio of charge-offs during the period to
average loans outstanding during the period.......................... 0.075% 0.0%
Ratio of allowance for loan lossses to nonperforming
loans at end of period............................................... 18:1 NA
Ratio of allowance for loan losses to total
nonperforming assets at end of period................................ 18:1 NA
Ratio of allowance for loan losses to loans
receivable at end of period.......................................... 1.40% 1.50%
51
Table 9. Large time deposit maturities (dollars in thousands)
The following table contains an analysis of Davie's time deposits of
$100,000 or more at December 31, 2000.
December 31, 2000
-----------------
Remaining maturity of three months or less............... $ 5,278
Remaining maturity over three through twelve months...... 5,706
Remaining maturity over twelve months.................... 3,638
-------
Total time deposits of $100,000 or more.............. $14,622
=======
Beneficial Ownership of Securities
The following table describes the beneficial ownership of Davie Stock as of
_________, 2001, by Davie's current directors and Chief Executive Officer,
individually, and by all current directors and executive officers as a group. On
__________, 2001, William A. Burnette (who is included in the table) was the
only person known to management of Davie to beneficially own more than 5% of the
outstanding shares of Davie Stock.
Name of Amount and nature of Percentage of
beneficial owner beneficial ownership (1) class (2)
------------------------------------ ------------------------ --------------
Jerry W. Anderson.................... 23,160 2.56%
Alan M. Bailey....................... 29,280 3.24%
William A. Burnette.................. 48,140 5.33%
Thomas G. Fleming.................... 23,280 2.57%
John W. Googe........................ 11,200 1.25%
Michael D. Larrowe................... 18,600 2.06%
Steven G. Laymon..................... 23,560 2.61%
Robert E. Marziano................... 40,606 4.48%
Grady L. McClamrock, Jr.............. 14,400 1.61%
Francis W. Slate..................... 23,160 2.56%
All current directors and executive
officers as a group (13 people).... 280,846 27.90%
__________________
(1) Except as otherwise noted, to the best of Davie's knowledge, the
individuals named and included in the group exercise sole voting and
investment power with respect to all listed shares. Individuals named and
included in the group exercise shared voting and investment power with
respect to certain of the listed shares as follows: Mr. Anderson - 4,560
shares; Mr. Larrowe -4,320; and all individuals included in the group -
20,880 shares. The listed shares include the following numbers of shares
which could be purchased pursuant to currently exercisable stock options
granted under Davie's stock option plans and with respect to which shares
the individuals named and included in the group may be deemed to exercise
sole investment power only: Mr. Marziano - 14,286 shares; Mr. Burnette -
10,920 shares; Messrs. Anderson, Bailey, Fleming, Larrowe, Laymon and
Slate - 11,160 shares each; and all persons included in the group - 113,539
shares.
(2) Percentages are calculated based on 893,100 total outstanding shares plus,
in the case of each named individual and the group, the number of
additional shares (if any) that could be purchased by that individual or by
persons included in the group pursuant to currently exercisable stock
options.
52
Board of Directors
Davie's Bylaws provide that its Board of Directors will consist of not less
than five nor more than 15 members and authorize the Board of Directors to set
and change the actual number of Davie's directors from time to time within those
limits. The Board of Directors is divided into three classes and directors are
elected to staggered three-year terms. The terms of directors in one class
expire each year and directors in that class are elected for new three-year
terms. The ten current members of the Board of Directors are listed in the table
below.
Year first
Position(s) elected/current Principal occupation
Name and age with Davie term expires (1) and business experience
------------------------- ---------- --------------- -----------------------------------------------
Jerry W. Anderson Director 1998 / 2002 Managing member of Anderson Aggregates, LLC,
(62) (grading and hauling) since 2000; former
President, Anderson Chip & Pulpwood, Inc. (land
clearing contractor)
Alan M. Bailey Director 1998 / 2004 Private investor; former owner and operator, 801
(61) Shell Service (gasoline station)
William A. Burnette Director 1998 / 2003 President and owner, Associated Supply
(61) International, Ltd. (leaf tobacco merchant),
Associated Golf Courses, Ltd., and James Way,
Ltd. (land development); Managing Partner of The
Hillsdale Group (land development)
Thomas G. Fleming Director 1998 / 2003 President and owner, Mocksville Builders Supply,
(53) Inc., (building supplies) and Town & Country
Hardware (retail hardware store)
John W. Googe Director 2001 / 2002 President, Southeastern Employee Benefit
(76)] Services (benefit plan administrator)
Michael D. Larrowe Director 1998 / 2002 Senior member, Larrowe & Company, PLC
(46) (certified public accountants)
Steven G. Laymon Director 1998 / 2003 Steven G. Laymon, O.D., P.A. (optometrist)
(41)
Robert E. Marziano Chairman, 1998 / 2002 Executive officer and director of Davie
(53) President, and
Chief Executive
Officer
Grady L. McClamrock, Jr. Director 2001 / 2004 Grady L. McClamrock, Jr., J.D., P.A. (attorney)
(49)
Francis W. Slate Vice Chairman 1998 / 2004 Retired; former General Surgeon, Mocksville
(79) Surgical Associates, P.A.
__________________
(1) "Year first elected" refers to the year in which each individual first took
office as a director of Davie. With the exception of Mr. McClamrock and Mr.
Googe, each nominee was a member of Davie's organizational board prior to
its incorporation and was first elected as a director at the time Davie was
incorporated and commenced banking operations. Mr. McClamrock was elected
as a director at Davie's 2001 Annual Meeting, and Mr. Googe was appointed
as a director by the Board of Directors during June 2001
53
Directors' Compensation
Director Fees. For their services as directors and attendance at Board
meetings, Davie's non-employee directors currently receive $200 per month and a
fee of $50 for attendance at each meeting of a committee on which they serve.
Director Stock Options. Each of Davie's remaining seven original, non-
employee directors holds an option to purchase 11,160 shares of Davie Stock at
an exercise price of $9.17 per share, with the exception of Mr. Burnette who
holds an option to purchase 10,920 shares at an exercise price of $9.17 per
share. Mr. Burnette exercised his option during 2000 with respect to 240 shares.
Each option currently is exercisable as to all covered shares and expires ten
years following the date of grant (or earlier upon certain events described in
the plan). The number of shares and exercise price called for by each option has
been adjusted to reflect the six-for-five stock split that Davie effected in the
form of a 20% stock dividend on December 21, 2000.
Executive Officers
Davie's current executive officers are listed below.
Robert E. Marziano, age 53, serves as Chairman, President and Chief
Executive Officer of Davie. He joined Davie's organizing group during June 1998
and became President and Chief Executive Officer at the time Davie was
incorporated and commenced operations in December 1998. He was elected Chairman
during April 2001. Previously, he was one of the organizers of Old North State
Bank, Winston-Salem, North Carolina, where he served as President and Chief
Executive Officer from 1989 until it was acquired by another financial
institution in August 1997. Prior to 1989, he was employed for 13 years by
First-Citizens Bank & Trust Company as Senior Vice President with
responsibilities in the areas of branch management, lending and bank operations.
More recently, from August 1997 until June 1998, Mr. Marziano served as Senior
Vice President of First Bank with supervisory responsibilities over that bank's
branch banking operations in Guildford, Randolph and Davidson Counties.
Edwin M. Cassidy, age 51, was elected to serve as Executive Vice President
of Davie during January 2001. He previously had served as Senior Vice President
of Davie since September 1998. Prior to his employment with Davie, he served as
Senior Vice President of Triad Bank, Winston-Salem, North Carolina, from April
1993 until its acquisition by United Carolina Bank in April 1996, and as Vice
President of United Carolina Bank until June 1997. From July 1997 until he was
employed by Davie, he engaged in real estate investment and development
activities.
Harry E. Hill, age 55, was elected to serve as Executive Vice President of
Davie during January 2001. He previously had served as Senior Vice President of
Davie since August 1998. Prior to his employment with Davie, he served as Vice
President of Southern National Bank and its successor, Branch Banking & Trust
Company, Welcome, North Carolina, from March 1994 to August 1998, and as
Business Development Officer of Davidson Savings Bank from March 1992 to March
1994.
Robin H. Smith, age 42, was elected to serve as Senior Vice President of
Davie during January 2001. She previously had served as Vice President of Davie
since August 1998. Prior to her employment with Davie, she served as Assistant
Vice President of Community Bank, Pilot Mountain, North Carolina, from January
1998 to August 1998, and as Vice President of Old North State Bank, Rural Hall,
North Carolina, from November 1990 to December 1997 following its merger with
another bank.
54
Executive Compensation
Cash Compensation. The following table shows cash and certain other
compensation paid to or deferred by Davie's Chief Executive Officer for the
years indicated.
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------
Annual compensation Long term compensation
--------------------------------------- ------------------------
Restricted Securities
Name and Other annual stock underlying All other
principal position(s) Year Salary (1) Bonus compensation (2) awards options (3) compensation
------------------------ ---- ---------- ------- ---------------- ---------- ----------- ---------------
Robert E. Marziano 2000 $ 135,800 $20,000 $-0- -0- -0- $ 4,075 (4)
President and Chief
Executive Officer 1999 102,500 15,000 -0- -0- -0- -0-
1998 56,000 15,000 -0- -0- 35,750 -0-
__________________
(1) Davie was incorporated during December 1998. For 1998, the table includes
compensation paid by Davie to Mr. Marziano after the date of incorporation
as well as compensation paid to him during Davie's organizational period
prior to that date. Includes amounts of salary deferred by Mr. Marziano
under Davie's Section 401(k) plan.
(2) In addition to compensation paid in cash, Davie's executive officers
receive certain personal benefits. The value of non-cash benefits received
each year by Mr. Marziano did not exceed 10% of his cash compensation for
that year.
(3) As adjusted to reflect the six-for-five stock split that Davie effected in
the form of a 20% stock dividend on December 21, 2000. See "Stock Options"
below.
(4) Consists of the amount paid by Davie as a contribution to its Section
401(k) plan for Mr. Marziano's account.
Stock Options. The following table contains information regarding all
options to purchase Davie Stock held by Davie's Chief Executive Officer on
December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
-------------------------------------------------------------------------------------------------------------------------
Number of securities Value of unexercised
underlying unexercised in-the-money options
options at 12/31/00 at 12/31/00
---------------------- -----------------------------------
Shares
acquired Value Exercisable Unexercisable
Name on exercise realized (#)(2) (#)(2) Exercisable (3) Unexercisable (3)
------------------------ ----------- -------- ----------- ------------- --------------- -----------------
Robert E. Marziano (1) N/A 14,299 21,451 $36,891 $55,344
__________________
(1) No options were exercised during 2000.
(2) As adjusted to reflect the effect of the six-for-five stock split effected
by Davie in the form of a 20% stock dividend on December 21, 2000.
(3) Reflects the amount by which the fair market value on December 31, 2000, of
shares underlying unexercised options held on that date (based on the then
current last known sales price per share of $11.75 for Davie Stock)
exceeded the aggregate exercise price of the options (at $9.17 per share,
as adjusted for the 20% stock dividend). On _________, 2001, the value of
the exercisable and unexercisable options were $_______ and $________,
respectively, based on the then current last known sales price per share of
Davie Stock.
Transactions with Related Parties
Davie has had, and expects to have in the future, banking transactions in
the ordinary course of business with certain of its directors, nominees for
director, executive officers, and their associates. Loans included in those
transactions during 2000 were made on substantially the same terms, including
interest rates, repayment terms and collateral, as those prevailing at the time
for comparable transactions with other persons, and those loans did not involve
more than the normal risk of collectibility or present other unfavorable
features.
55
The highest aggregate outstanding balance of loans to Davie's current
directors, nominees for election as directors, executive officers, and their
associates, as a group, since January 1, 2000, was $2,438,037 on August 31,
2001, which represented approximately 33.7% of Davie's then current equity
capital accounts. Of those loans, one of Davie's current directors, William A.
Burnette, and his associates had aggregate outstanding loans which exceeded 10%
of Davie's equity capital accounts. Mr. Burnette's highest aggregate outstanding
loan balance since January 1, 2000, was $1,186,937 on August 31, 2001, which
represented approximately 16.4% of Davie's then current equity capital accounts.
During 2000, Larrowe & Company, PLC (certified public accountants),
provided certain consulting and other advisory services to Davie in connection
with various financial, accounting, and other non-audit matters. Michael D.
Larrowe, who currently serves as a director of Davie, is the senior member of
that firm.
Grady L. McClamrock, Jr., another current director of Davie, is an attorney
and provided legal services to Davie during 2000. Each of those business
relationships is expected to continue during 2001.
Davie has entered into contracts with two companies which provide Section
401(k) plan administration services and payroll processing services to Davie.
Those companies are owned by John W. Googe who serves as a director of Davie.
56
BOC FINANCIAL CORP
General
Business. BOC is a North Carolina business corporation that was
incorporated on December 12, 1997, at the direction of the Board of Directors of
Carolinas' predecessor, Landis Savings Bank, SSB (the "Savings Bank"), for the
purpose of serving as the bank holding company of Carolinas. Pursuant to a Plan
of Conversion dated September 29, 1997, which was approved by the Savings Bank's
members on March 17, 1998, the Savings Bank converted from a mutual savings bank
to a stock savings bank and issued all of its capital stock to BOC in exchange
for 50% of the aggregate net proceeds from BOC's sale of BOC Stock to the
public. Simultaneous with its becoming the wholly-owned subsidiary of BOC, the
Savings Bank was converted into a North Carolina commercial bank and changed its
name to "Bank of the Carolinas."
BOC's only function is the ownership of all of the issued and outstanding
stock of Carolinas, and it does not engage in any separate lines of business.
Its sole source of revenue is dividends it receives from Carolinas. On June 30,
2001, BOC's unaudited interim consolidated financial statements reflected total
assets of approximately $41.1 million, total loans of approximately $35.2, total
deposits of approximately $30.7 million, and total shareholders' equity of
approximately $8.2 million.
Carolinas is a North Carolina chartered commercial bank which was formed
through the 1998 conversion of the charter of its predecessor, the Savings Bank,
from a state chartered savings bank to a commercial bank. Its deposits are
insured by the Bank Insurance Fund of the FDIC to the maximum amount permitted
by law. Carolinas is a community-oriented financial institution which offers a
variety of financial services to meet the needs of the communities it serves.
Since Carolinas originally was chartered as a savings and loan association,
its loan portfolio and primary lending function is concentrated in one-to-four
family residential home mortgages. Its operations are primarily retail oriented
and directed to individuals and small- to medium-sized businesses located in its
market area. While its deposits and loans are derived primarily from customers
in its banking market, it also makes loans and has deposit relationships with
individual and business customers in areas surrounding its immediate banking
market. Carolinas provides most traditional commercial and consumer banking
services, including personal and commercial checking and savings accounts, money
market accounts, certificates of deposit, individual retirement accounts and
related business and individual banking services. Its lending activities are
concentrated in residential lending, but it also makes commercial loans to
small-to-medium sized businesses located primarily in its market area for
various purposes, and it makes various consumer-type loans to individuals,
including installment loans and equity lines of credit. Carolinas provides its
customers with access to a financial services company that provides investment
advice and agency services regarding mutual funds, fixed and variable annuities,
and several forms of insurance products (life, health, home, auto). Carolinas'
primary source of revenue is interest income it derives from its lending
activities.
BOC's and Carolinas' principal executive offices are located at 107 South
Central Avenue, Landis, North Carolina 28088, and their telephone number is 704
857-7277.
Business Offices. Carolinas maintains one banking office located at 107
South Central Avenue, Landis, North Carolina, and it operates a loan production
office located at 2367 Concord Lake Road, Concord, North Carolina.
Banking Market. Carolinas' current banking market consists of the area
immediately surrounding its banking office which includes portions of southern
Iredell and Rowan Counties and northern Cabarrus County (the "BOC Market"). The
BOC Market is centered between Interstate Highways 77 and 85 approximately 25
miles north of Charlotte, North Carolina.
57
Competition. Carolinas competes for deposits in its banking market with
other commercial banks, savings banks and other thrift institutions, credit
unions, agencies issuing United States government securities and all other
organizations and institutions engaged in money market transactions. In its
lending activities, Carolinas competes with all other financial institutions as
well as consumer finance companies, mortgage companies and other lenders.
Commercial banking in the BOC Market and in North Carolina as a whole is
extremely competitive. North Carolina is the home of three of the largest
commercial banks in the Southeast, each of which has branches located in the BOC
Market, and eight other commercial banks, thrift institutions and credit unions
also are represented in the BOC Market.
Interest rates, both on loans and deposits, and prices of fee-based
services, are significant competitive factors among financial institutions
generally. Other important competitive factors include office location, office
hours, the quality of customer service, community reputation, continuity of
personnel and services, and, in the case of larger commercial customers,
relative lending limits and the ability to offer sophisticated cash management
and other commercial banking services. Many of Carolinas' competitors have
greater resources, broader geographic markets and higher lending limits than
Carolinas, and they can offer more products and services and can better afford
and make more effective use of media advertising, support services and
electronic technology than can Carolinas. To counter these competitive
disadvantages, Carolinas depends on its reputation as a community bank in its
local market, its direct customer contact, its ability to make credit and other
business decisions locally, and its personalized service.
In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial
institutions, but also with out-of-state financial institutions which may
acquire North Carolina institutions, establish or acquire branch offices in
North Carolina, or otherwise offer financial services across state lines,
thereby adding to the competitive atmosphere of the industry in general. In
terms of assets, Carolinas is one of the smaller commercial banks in North
Carolina, and there is no assurance that Carolinas will be or continue to be an
effective competitor in the current financial services environment.
To counter its competitive disadvantages, Carolinas attempts to
differentiate itself from its larger competitors with its focus on relationship
banking, personalized service, direct customer contact, and its ability to make
credit and other business decisions locally. Carolinas also depends on its
reputation as a community bank in its banking markets and its involvement in the
community it serves.
Employees. On June 30, 2001, Carolinas had nine full-time employees and one
part-time employee. BOC does not have any separate employees. Carolinas and its
employees are not parties to any collective bargaining agreement, and Carolinas
considers its relations with its employees to be good.
Legal Proceedings. From time to time, Carolinas may become involved in
legal proceedings occurring in the ordinary course of its business. However,
subject to the uncertainties inherent in any litigation, management of BOC and
Carolinas believe there currently are no pending or threatened proceedings that
are reasonably likely to result in a material adverse change in BOC's
consolidated financial condition or operations.
Properties. Carolinas' banking office is located in a facility owned by
Carolinas, and its Concord, North Carolina loan production office is in a leased
facility. BOC's offices are located in the facility housing Carolinas' main
banking office, and it does not own any separate properties. On June 30, 2001,
BOC's consolidated investment in fixed assets, including Carolinas' properties,
was an aggregate of approximately $1.1 million.
58
BOC Financial Statements; Other Available Information
BOC's audited consolidated financial statements as of and for the years
ended December 31, 2000 and 1999, and its unaudited interim consolidated
statements of financial condition, statements of operations, and statements of
cash flows, as of and for the six-month periods ended June 30, 2001 and 2000,
are included in this Joint Proxy Statement/Offering Circular under the caption
"Financial Statements of BOC Financial Corp."
BOC Stock is registered under the Securities Exchange Act of 1934, and BOC
is subject to the informational requirements of, and it files periodic reports
and other information with, the Securities and Exchange Commission (the "SEC")
under, Sections 13 and 15(d) of that Act. You may read and copy any reports,
proxy and information statements and other materials filed by BOC with the SEC
under the Securities Exchange Act of 1934 at the SEC's Public Reference Room
located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
800 SEC-0330. The SEC also maintains an internet site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of BOC and Carolinas. It should be read in conjunction with the
audited and unaudited consolidated financial statements and accompanying notes
included in this Joint Proxy Statement/Offering Circular and the supplemental
financial data appearing throughout this discussion and analysis.
Description of Business
BOC was incorporated under the laws of the State of North Carolina for the
purpose of becoming the bank holding company of Carolinas in connection with the
conversion of the Savings Bank from a state-chartered mutual savings bank to a
state-chartered stock commercial bank (the "Conversion"), pursuant to its Plan
of Conversion. BOC was organized to acquire all of the common stock of Carolinas
upon its conversion to stock form. A subscription and community offering (the
"Offering") of BOC's common stock closed on April 28, 1998, at which time BOC
acquired all of the outstanding common stock of Carolinas and commenced
operations. BOC and Carolinas are collectively referred to in this discussion as
"BOC."
In accordance with the Plan of Conversion, BOC issued common stock with a
value of $9.3 million in the Offering and received proceeds of $8.8 million, net
of Conversion costs. From the net proceeds, BOC paid $5.0 million to Carolinas
in exchange for the common stock of Carolinas issued in the Conversion, and
retained the balance of the net Conversion proceeds. The transaction was
recorded as an "as-if" pooling with assets and liabilities recorded at
historical cost. On October 8, 1999, BOC paid a special $3.50 per share return
of capital dividend, returning to shareholders approximately $2.8 million.
BOC operates for the primary purpose of serving the banking and mortgage
needs of its customers in its market area, while developing a personal, home-
town association with its customers. BOC offers a wide range of banking and
mortgage services, including all types of savings accounts and certificates of
deposit, IRAs, money market deposit accounts, individual and commercial checking
accounts, and NOW accounts, mortgage and consumer loans, credit cards and other
associated services. Specifically, BOC makes mortgage loans collateralized by
residential real estate, home equity loans which predominately are second
mortgage loans collateralized by the equity in a home, consumer loans, which are
collateralized by consumer products, such as automobiles, commercial real estate
loans, and other loans. BOC's principal sources of revenue are interest income
from its real estate lending activities, primarily consisting of making first
mortgage loans for the purchase and refinancing of residential real property
located in North Carolina, and interest income from its consumer lending
activities, primarily consisting of home equity loans. BOC
59
also earns revenues from interest on other loans, interest and dividend income
from investments, and fees from lending and deposit activities. The major
expenses of BOC are interest on deposits and non-interest expenses such as
salaries, employee benefits, office occupancy and related expenses. BOC has an
agreement with Walnut Street Securities whereby an agent of the brokerage firm
is present on a regularly scheduled basis in the home office of Carolinas to
provide annuity and other investment products to BOC's customers.
Asset/Liability and Interest Rate Risk Management
BOC'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
BOC's control, such as market interest rates and competition, may also have an
impact on BOC's interest income and interest expense.
In the absence of other factors, the yield or return associated with BOC'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.
Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, BOC calculates an interest rate "gap." Interest rate "gap" analysis is a
common, though imperfect, measure of interest rate risk, which measures the
relative dollar amounts of interest-earning assets and interest-bearing
liabilities which reprice within a specific time period, either through maturity
or rate adjustment. The "gap" is the difference between the amounts of such
assets and liabilities that are subject to repricing. A "negative" gap for a
given period means that the amount of interest-bearing liabilities maturing or
otherwise repricing within that period exceeds the amount of interest-earning
assets maturing 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 decrease 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."
BOC's one-year interest sensitivity gap as a percentage of total interest-
earning assets at December 31, 2000 was a negative 20.24%. At December 31, 2000,
BOC's three-year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were a negative 22.34% and a
negative 15.55%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2000 which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts and money market deposit 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 prepayment rates and deposit decay rates have been used
for any 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 BOC's assets
and liabilities illustrated in the following
60
table would vary substantially if different assumptions were used or if actual
experience differs from that indicated by such assumptions.
Terms to Repricing at December 31, 2000
------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 years Total
--------- --------- ---------- --------- --------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable:
Real estate loans:
1-4 Family residential:
Fixed...................................... $ 3 $ 291 $ 284 $ 9,150 $ 9,728
Adjustable................................. 5,882 - - - 5,882
Other real estate loans:
Fixed...................................... - 59 178 2,463 2,700
Adjustable................................. 6,814 - - - 6,814
Other loans.................................... 456 11 48 38 553
Interest-earning balances in other banks......... 446 - - - 446
Federal funds sold............................... 1,894 - - - 1,894
Investments...................................... - 3,299 1,749 - 5,048
FHLB common stock (1)............................ - - - 182 182
--------- --------- ---------- --------- ---------
Total interest-earning assets............ $ 15,495 $ 3,660 $ 2,259 $ 11,833 $ 33,247
========= ========= ========== ========= =========
INTEREST-BEARING LIABILITIES:
Deposit accounts:
Regular passbook............................... $ 2,493 $ - $ - $ - $ 2,493
Money market and other......................... 5,185 - - - 5,185
Certificate accounts........................... 14,547 4,359 - - 18,906
--------- --------- ---------- --------- ---------
Total interest-bearing liabilities....... $ 22,225 $ 4,359 $ - $ - $ 26,584
========= ========= ========== ========= =========
INTEREST SENSITIVITY GAP
PER PERIOD....................................... $ (6,730) $ (699) $ 2,259 $ 11,833 $ 6,663
CUMULATIVE INTEREST
SENSITIVITY GAP.................................. $ (6,730) $ (7,429) $ (5,170) $ 6,663 $ 6,663
CUMULATIVE GAP AS A
PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS.......................... (20.24%) (22.34%) (15.55%) 20.04% 20.04%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
INTEREST-BEARING LIABILITIES..................... 69.72% 72.05% 80.55% 125.06% 125.06%
______________________
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 5 years.
61
In addition to the traditional gap analysis, BOC also uses a computer based
interest rate risk simulation model. This comprehensive model includes rate
sensitivity gap analysis, rate shock net interest margin analysis, and
asset/liability term and rate analysis. BOC uses this model to monitor interest
rate risk on a quarterly basis and to detect trends that may affect overall
interest income. As a result, this analysis more accurately predicts the risk to
net interest income over the upcoming twelve month period. BOC has a policy
establishing the maximum allowable risk to net interest income caused by changes
in interest rates. The modeling results indicate that BOC is within the
established parameters of the interest rate risk policy.
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 BOC's assets and liabilities for the years ended December
31, 2000 and 1999. 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). Nonaccruing loans were included
in the computation of average balances.
Year Ended December 31, 2000 Year Ended December 31, 1999
---------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
------------- ------------- ----------- ------------- ------------- -----------
(Dollars in thousands)
Interest-earning assets:
Interest-earning balances................. $ 1,917 $ 118 6.16% $ 8,129 $ 406 4.99%
Investments............................... 5,231 336 6.42% 4,329 266 6.14%
Loans..................................... 23,894 2,040 8.54% 18,621 1,444 7.75%
------- ------ ---- ------- ------ ----
Total interest-earning assets.......... 31,042 2,494 8.03% 31,079 2,116 6.81%
------ ---- ------ ----
Other assets................................ 1,885 1,477
------- -------
Total assets........................... $32,927 $32,556
======= =======
Interest-bearing liabilities:
Deposits.................................. $23,976 1,302 5.43% $21,080 1,020 4.84%
Borrowings................................ 646 41 6.35% 438 33 7.53%
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities..... 24,622 1,343 5.45% 21,518 1,053 4.89%
------ ---- ------ ----
Other liabilities........................... 200 205
Stockholders' equity........................ 8,105 10,833
------- -------
Total liabilities and stockholders'
equity................................. $32,927 $32,556
======= =======
Net interest income and interest rate
spread..................................... $1,151 2.58% $1,063 1.92%
====== ==== ====== ====
Net yield on average interest-earning
assets..................................... 3.71% 3.42%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 126.07% 144.43%
======= ======
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
62
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.
Year Ended December 31, 2000 vs. 1999
Increase (Decrease) Due To
---------------------------------------
Volume Rate Total
------------- ----------- -----------
Interest income: (Dollars in thousands)
Interest-earning balances.......... $(347) $ 59 $(288)
Investments........................ 57 13 70
Loans.............................. 428 168 596
----- ---- -----
Total interest income.... 138 240 378
----- ---- -----
Interest expense:
Deposits........................... 149 133 282
Borrowings......................... 14 (6) 8
----- ---- -----
Total interest expense... 163 127 290
----- ---- -----
Net interest income (loss).............. $ (25) $113 $ 88
===== ==== =====
Comparison of Financial Condition
at December 31, 2000 and 1999
During the year ended December 31, 2000, total assets increased by $2.7
million, or 8.3%, from $32.3 million at December 31, 1999 to $35.0 million at
year-end. Loans receivable grew $4.5 million to $25.6 million, representing a
21.5% increase for the year. BOC generated significant growth in commercial,
construction and home improvement loans, which increased by $1.4 million, $1.5
million and $585,000, respectively, consistent with BOC's intention to expand
the concentrations of its lending products beyond its traditional one-to-four
family permanent residential loans. The increase in loans outstanding was
principally funded through increased customer deposit accounts.
Customer deposit accounts increased by $4.4 million, or 20.0%, from $22.1
million at the beginning of the year to $26.6 million at year-end. Certificate
of deposit accounts increased by $8.2 million while demand accounts decreased by
$3.8 million. In order to take advantage of rising interest rates during the
year, many of BOC's bank customers moved deposits out of demand accounts and
into certificates. In early January, $1.9 million of interest-bearing balances
in other banks were used to repay borrowings of that amount that had been
outstanding as of December 31, 1999.
Comparison of Results of Operations
for the Years Ended December 31, 2000 and 1999
Net Income. Net income for 2000 was $156,000, or $.22 per share, as
compared with net income of $109,000, or $.14 per share, for 1999, an increase
of $47,000 or $.08 per share. Increases of $88,000 and $59,000, respectively,
in net interest income and non-interest income more than offset increases of
$9,000 in the provision for loan losses and $57,000 in non-interest expenses.
The increase in non-interest income was primarily attributable to an increase of
$54,000 in income from mortgage operations.
Net Interest Income. Net interest income increased by $88,000 principally
as a result of a larger concentration of interest-earning assets in higher
yielding loans during 2000 as compared with 1999.
63
Average total interest-earning assets declined by $37,000 in 2000 as compared
with 1999, but the average balance of loans outstanding increased by $5.3
million, with a corresponding decrease in the average balance of interest-
earning liquid assets and investments. As a result, and despite the trend of
rising interest rates during 2000, BOC's net interest margin increased to 2.58%
for the year as compared with 1.92% for 1999.
Non-Interest Expenses. Total non-interest expenses were $999,000 for the
year ended December 31, 2000, an increase of $57,000 from the 1999 total of
$942,000. Increases of $124,000 and $34,000, respectively, in personnel and
occupancy costs were offset in large measure by a decrease of $100,000 in other
non-interest expenses. Personnel costs increased as a result of (1) additional
costs of $53,000 recognized in connection with BOC's MRP, (2) an increase of
$19,000 in group insurance, reflecting the broad trend in health care costs, and
(3) an increase of $10,000 in ESOP expense. Occupancy costs increased by
$24,000 as a result of depreciation and other costs relating to computer and
equipment additions during the year. An additional element of the increases in
personnel and occupancy costs relates to BOC's loan origination office in
Concord that was open throughout 2000 as compared with eight months in 1999.
Asset Quality
Non-performing assets include non-accrual loans, accruing loans
contractually past due 90 days or more, restructured loans, other real estate
and other real estate under contract for sale. Loans are placed on non-accrual
when management has concerns relating to the ability to collect the loan
principal and interest, and generally when such loans are 90 days or more past
due. While non-performing assets represent potential losses to BOC, management
does not anticipate any aggregate material losses since most loans are believed
to be adequately secured. Management believes the allowance for loan losses is
sufficient to absorb known risks in the portfolio. No assurance can be given
that economic conditions will not adversely affect borrowers and result in
increased losses. BOC had no non-performing assets at December 31, 2000 and
1999. Additionally, management is aware of no loans that (i) represent or result
from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources or (ii)
represent material credits about which management has information that causes
them to have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.
Liquidity and Capital Resources
During 2000 and 1999, BOC paid regular cash dividends of $.20 and $.15 per
share, respectively. Although BOC anticipates that it will continue to declare
cash dividends on a regular basis, the Board of Directors will review its policy
on the payment of dividends on an ongoing basis, and such payment will be
subject to future earnings, cash flows, capital needs, and regulatory
restrictions.
After thoroughly assessing BOC's capital needs, BOC's Board of Directors
also authorized a special non-recurring return of capital dividend of $3.50 per
share that was paid during 1999. The Board of Directors does not contemplate
payment of additional special dividends in the foreseeable future.
Maintaining adequate liquidity while managing interest rate risk is the
primary goal of BOC's asset and liability management strategy. Liquidity is the
ability to fund the needs of Carolinas' borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. Carolinas' primary uses of
liquidity are to fund loans and to make investments. As of December 31, 2000,
liquid assets (cash, interest-earning deposits, federal funds sold, and
marketable investment securities) were approximately $7.9 million, which
represents 22.5% of total assets.
At December 31, 2000, outstanding loan commitments were $3.8 million, the
undisbursed portion of construction loans was $2.2 million and outstanding lines
of credit aggregated $3.6 million. Funding for these commitments is expected to
be provided from available liquidity, growth in deposits, loan principal
64
repayments, maturing investments and income generated from operations. If
needed, BOC can also fund lending through borrowings from the Federal Home Loan
Bank of Atlanta under a line of credit of $3.5 million at December 31, 2000.
Under federal capital regulations, BOC and Carolinas must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. Failure
to meet such requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on Carolinas' financial statements. At December 31,
2000 and 1999, BOC and Carolinas exceeded all such requirements.
A significant source of BOC's funds are interest income and dividends
received from Carolinas. These funds should be adequate to cover BOC's needs.
Accounting and Regulatory Matters
Management is not aware of any known trends, events, uncertainties or
current recommendations by regulatory authorities that will have, or that are
reasonably likely to have, a material effect on BOC's liquidity, capital
resources, or other operations.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering 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 BOC's operations. Unlike most industrial
companies, nearly all BOC's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on BOC'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.
Comparison of Financial Condition
at June 30, 2001 and December 31, 2000
During the six months ended June 30, 2001, total assets increased by $6.1
million or 17.5%, from $35.0 million to $41.1 million. This increase occurred
principally as a result of strong loan growth, as net loans rose sharply to
$35.2 million, representing an increase of $9.6 million or 37.4% from the
December 31, 2000 balance of $25.6 million. Commercial loans grew by $6.0
million, accounting for 61.9% of the overall increase in loans. Increases of
$4.2 million in customer deposits and $2.0 million in borrowings, combined with
a decrease in liquid assets of $3.6 million, provided funding for the growth in
loans.
Comparison of Results of Operations
for the Three Months Ended June 30, 2001 and 2000
For the three months ended June 30, 2001, BOC incurred a net loss of
$44,000 or $.06 per share as compared with net income of $36,000 or $.05 per
share for the quarter ended June 30, 2000.
The provision for loan losses during the current quarter was $147,000 as
compared with $3,000 for the second quarter of 2000, an increase of $144,000.
While BOC's loan portfolio continues to perform well, with no nonperforming
loans at quarter-end, a substantial portion of the increase in loans has
consisted of commercial loans. Such loans generally yield higher rates of
interest than the residential mortgage loans that have historically comprised
the overwhelming majority of BOC's outstanding loans, but with higher risk
characteristics. Management has made this significant increase in the provision
for loan losses in response to that higher level of risk, but with the
expectation that the higher yields on commercial loans will contribute to
improved future profitability. Management will continue to make additions to
BOC's
65
allowance for loan losses based upon growth in loans and upon the other risk
characteristics. Absent the development of significant identifiable loan
problems, however, it is not expected that additions to the loan loss allowance
over the balance of 2001 will approach the magnitude of the provision made
during the quarter just ended.
Net interest income for the current quarter was $304,000, only $9,000 more
than for the quarter ended June 30, 2000. The potential positive impact of an
increase in the volume of both interest-earning assets and interest-bearing
liabilities was largely offset by the trend in interest rates that resulted in a
narrowing of BOC's net interest margin.
Non-interest income increased by $55,000. Substantially all of this
increase related to the origination and sale of mortgage loans in the secondary,
which generated income of $45,000 in the current quarter as compared with $7,000
in the second quarter of 2000. As a result, BOC's loan origination office in
Concord, which previously had been a source of losses, broke even for the
quarter ended June 30, 2001. Non-interest expenses increased from $237,000 for
the quarter ended June 30, 2000 to $278,000 for the quarter ended June 30, 2001,
essentially because personnel costs increased by $44,000. The rise in personnel
costs represents a combination of normal inflationary increases and additional
costs incurred to generate the improved performance of BOC's Concord loan
origination office.
Comparison of Results of Operations
for the Six Months Ended June 30, 2001 and 2000
Net income for the six months ended June 30, 2001 was $5,000 or $.01 per
share as compared with net income of $70,000 or $.10 per share for the six
months ended June 30, 2000, a decrease of $65,000 or $.09 per share. This
decrease is principally attributable to the significant addition to BOC's
allowance for loan losses during the second quarter of 2001, as discussed under
the caption "Comparison of Results of Operations for the Three Months Ended June
30, 2001 and 2000."
Net interest income for the current six months was $594,000, only $16,000
more than for the six months ended June 30, 2000. The potential positive impact
of an increase in the volume of both interest-earning assets and interest-
bearing liabilities was largely offset by the trend in interest rates that
resulted in a narrowing of BOC's net interest margin.
Non-interest income increased by $100,000. Substantially all of this
increase related to the origination and sale of mortgage loans in the secondary,
which generated income of $90,000 in the current six month period as compared
with $13,000 in the six months ended June 30, 2000. As a result, BOC's loan
origination office in Concord, which previously had been a source of losses,
broke even for the six months ended June 30, 2001. Non-interest expenses
increased from $480,000 for the six months ended June 30, 2000 to $544,000 for
the six months ended June 30, 2001, essentially because personnel costs
increased by $68,000. The rise in personnel costs represents a combination of
normal inflationary increases and additional costs incurred to generate the
improved performance of BOC's Concord loan origination office.
Liquidity and Capital Resources
The objective of BOC'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 Carolinas' 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 primary sources of internally generated funds are principal and
interest payments on loans receivable and cash flows generated from operations.
External sources of funds include increases in deposits and advances from the
FHLB of Atlanta.
66
At June 30, 2001, liquid assets comprise 10.5% of total assets. Management
believes that it will have sufficient funds available to meet its anticipated
future loan commitments as well as other liquidity needs.
At June 30, 2001, both BOC and Carolinas substantially exceed all
applicable regulatory capital requirements.
Beneficial Ownership of Securities
The following table describes the beneficial ownership of BOC Stock as of
____________________, 2001, by BOC's current directors and Chief Executive
Officer, individually, and by all current directors and executive officers as a
group. On __________, 2001, John A. Drye and Henry H. Land (who are included in
the table) were the only persons known to management of BOC to beneficially own
more than 5% of the outstanding shares of BOC Stock.
Name and address Amount and nature of Percentage of
of beneficial owner beneficial ownership (1) class (3)
--------------------------------- ------------------------ --------------
John A. Drye............................ 99,311 (2) 12.16%
Henry H. Land........................... 99,811 (2) 12.22%
Susan Linn Norvell...................... 21,252 2.60%
Lynne Scott Safrit...................... 25,251 3.09%
Stephen R. Talbert...................... 24,001 2.96%
All directors and executive officers
as a group (five persons)............. 195,567 22.84%
________________________
(1) Except as otherwise noted, to the best of BOC's knowledge, the individuals
named and included in the group exercise sole voting and investment power
with respect to all listed shares. Individuals named and included in the
group exercise shared voting and investment power with respect to certain
of the listed shares as follows: Ms. Safrit - 6,000 shares; Mr. Talbert -
3,200 shares. The listed shares include the following numbers of shares
which could be purchased pursuant to currently exercisable stock options
and with respect to which shares the individuals named and included in the
group may be deemed to exercise sole investment power only: Mr. Drye -
11,572; Mr. Land - 11,572 shares; Ms. Norvell - 11,572 shares; Ms. Safrit -
11,571 shares; and Mr. Talbert -4,887 shares. The listed shares also
include the following numbers of unvested shares held in trust under BOC's
Management Recognition Plan and with respect to which shares the
individuals named and included in the group exercise sole voting power
only: Mr. Drye - 3,840; Mr. Land - 3,840 shares; Ms. Norvell - 3,840
shares; Ms. Safrit - 3,840 shares; and Mr. Talbert - 6,557 shares.
(2) Includes 74,059 shares held jointly by Messrs. Land and Mr. Drye as
trustees of BOC's Employee Stock Ownership Plan (the "ESOP"), the voting of
which may be directed by Messrs. Land and Drye. Unallocated shares under
the ESOP are voted by the trustees or their substitutes in the same
proportion as the participant-directed voting of allocated shares., unless
voting in that manner would, in the trustees' judgment, violate fiduciary
obligations under the Employee Retirement Income Securities Act of 1974.
(3) Percentages are calculated based on 805,000 total outstanding shares plus,
in the case of each named individual and the group, the number of
additional shares (if any) that could be purchased by that individual or by
persons included in the group pursuant to currently exercisable stock
options.
67
Board of Directors
BOC's Bylaws provide that its Board of Directors will consist of not less
than five nor more than 18 members elected to one-year terms and authorize the
Board of Directors to set and change the actual number of BOC's directors from
time to time within those limits. The five current members of the Board of
Directors are listed in the table below.
Position(s) with Year first Principal occupation and
Name and age BOC and Carolinas elected (1) business experience
------------------ -------------------------- ----------- -------------------------------------------------
John A. Drye Director 1993 Partner, Central Carolina Insurance Agency, Inc.
(37)
Henry H. Land Director 1986 Certified Public Accountant and partner, McClary,
(59) Stocks, Smith & Land (accounting firm)
Susan Linn Norvell Director 1994 Homemaker
(47)
Lynne Scott Safrit Director 1995 President, North American Commercial
(43) Operations, Castle & Cooke, Inc. (property
management and development firm)
Stephen R. Talbert Chairman, President and 1986 Executive officer of BOC and Carolinas
(56) Chief Executive Officer
_________________________
(1) "Year first elected" refers to the year in which each individual first took
office as a director of BOC or, if before the organization of BOC as
Carolinas' holding company, the year in which each individual first took
office as a director of Carolinas or its predecessor, the Savings Bank.
Directors' Compensation
Director Fees. For their services as directors and attendance at Board
meetings, BOC's non-employee directors currently receive an annual retainer of
$600 and fees of $300 for each Board of Directors meeting attended and $100 for
attendance at each meeting of a Board committee.
Director Stock Options. The following table lists options to purchase BOC
Stock which have been granted by BOC to its four current non-employee directors
pursuant to BOC's Non-Statutory Stock Option Plan.
Name of Director Number of Shares Per Share Exercise Price
------------------------ ---------------- ------------------------
John A. Drye 9,500 $6.625
2,072 5.375
Henry H. Land 9,500 6.625
2,072 5.375
Susan Linn Norvell 9,500 6.625
2,072 5.375
Lynne Scott Safrit 9,500 6.625
2,071 5.375
Each option currently is exercisable as to all covered shares and expires
ten years following the date of grant (or earlier upon certain events described
in the plan). (See "The Merger -- Interests of Certain Persons with Respect to
the Merger" on page ____.)
68
Restricted Stock Awards. Each of BOC's four non-employee directors holds an
award consisting of 6,400 restricted shares of BOC Stock which was granted by
BOC during 1999 pursuant to BOC's Management Recognition Plan (the "MRP"). Mr.
Talbert holds an award consisting of 10,929 restricted shares which also was
granted during 1999 pursuant to the MRP. The shares covered by each award become
vested and are released to the individual director at the rate of 20% per year
and, as of September 24, 2001, were 40% vested. Prior to vesting, the directors
may vote and receive all dividends and other distributions on the shares of BOC
Stock covered by their awards. (See "The Merger -- Interests of Certain Persons
with Respect to the Merger" on page ____.)
Directors' Retirement Plan. Each of BOC's directors is a participant in
Carolinas' Directors' Retirement Plan (the "DRP") under which persons who have
served as directors of Carolinas for a period of ten years may become entitled
to receive retirement benefits of up to $12,000 per year for a period of ten
years after attaining age 70 or following their death or disability while
serving as a director. Benefits become vested at the rate of 10% of the total
potential benefit for each year of a director's service after the initial ten
years of service. In the case of directors who were at least 65 years of age at
the time the DRP was adopted, the benefits vest at the rate of 20% per year.
(See "The Merger -- Interests of Certain Persons with Respect to the Merger" on
page ____.)
Executive Officers
BOC's and Carolinas' only current executive officer is Stephen R. Talbert,
age 55, who serves as Chairman, President and Chief Executive Officer of both
BOC and Carolinas. He has served as an officer of BOC since its organization
during 1998 as Carolinas' bank holding company. Previously, he had served as an
executive officer of Carolinas or its predecessor since 1971.
Executive Compensation
Cash Compensation. The following table shows cash and certain other
compensation paid to or deferred by BOC's Chief Executive Officer for the years
indicated. BOC's officers also serve and are compensated as officers and
employees of Carolinas, and they do not receive any additional compensation for
their service as officers of BOC.
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------
Annual compensation Long term compensation
----------------------------------- --------------------------
Restricted Securities
Name and Other annual stock underlying All other
principal position(s) Year Salary (1) Bonus compensation (2) awards options compensation
--------------------- ---- ---------- ----- ---------------- ---------- ---------- ------------
Stephen R. Talbert (3) 2000 $95,940 $-0- $-0- -0- 5,922 $19,422 (3)
President and Chief
Executive Officer 1999 93,000 -0- -0- 10,929 18,515 18,471
1998 88,200 -0- -0- -0- -0- 17,139
_______________________
(1) Includes amounts of salary deferred at Mr. Talbert's election under
Carolinas' Section 401(k) plan.
(2) In addition to compensation paid in cash, Mr. Talbert receives certain
personal benefits. The value of non-cash benefits received each year by Mr.
Talbert did not exceed 10% of his cash compensation for that year.
(3) Consists of $13,592 contributed by Carolinas to its Section 401(k) plan for
Mr. Talbert's account, and $5,830 allocated to the ESOP for Mr. Talbert's
account.
Employment Agreement; Change-in-Control Arrangement. Stephen R. Talbert is
employed as President and Chief Executive Officer of Carolinas pursuant to an
employment agreement entered into during 1998 which provides for an initial term
of three years. Absent notice from either party, the term is extended by one
additional year on each anniversary date of the agreement. Mr. Talbert's initial
annual base salary under the agreement was $88,200, and his salary is reviewed
at least annually. His base salary under
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the agreement for 2001 is $99,000. The agreement also provides for participation
in employee benefit programs and compensation plans offered by Carolinas for all
employees and fringe benefits normally associated with Mr. Talbert's position.
Mr. Talbert's employment may be terminated by Carolinas for "cause" (as defined
in the agreement). Upon the occurrence of a "termination event" within twenty-
four months following a "change in control" of Carolinas (as those terms are
defined below), Mr. Talbert may terminate the employment agreement and become
entitled to receive, among other things, payment in cash of an amount equal to
299% of his then current "base amount" as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended.
As defined in the employment agreement, a "termination event" will occur if:
(i) Mr. Talbert is assigned any duties or responsibilities that are inconsistent
with his position, duties, responsibilities or status at the time of the change
in control or if there is a change in his reporting responsibilities or title
with Carolinas in effect at the time of the change in control; (ii) his base
salary rate is reduced below the annual amount in effect as of the change in
control; (iii) his life insurance, medical or hospitalization insurance,
disability insurance, stock option plans, stock purchase plans, deferred
compensation plans, management retention plans, retirement plans or similar
plans or benefits being provided by Carolinas as of the date of the change in
control are reduced in their level, scope or coverage, or any such insurance,
plans or benefits are eliminated, unless that reduction or elimination applies
proportionately to all Carolinas' salaried employees who participate in those
benefits prior to the change in control; or (iv) he is transferred to a location
outside of Rowan County, North Carolina, without his express written consent.
A "change in control" will occur if (i) any person, other than BOC 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 Carolinas' or BOC's voting securities,
or in any manner acquires control of the election of a majority of Carolinas' or
BOC's directors; (ii) Carolinas or BOC consolidates or merges with or into
another corporation, association or entity, or is otherwise reorganized, where
Carolinas or BOC is not the surviving corporation in the transaction; (iii) all
or substantially all of the assets of Carolinas or BOC are sold or otherwise
transferred to or are acquired by any other corporation, association, or other
person, entity, or group; or (iv) when, during any consecutive two-year period,
directors of Carolinas or BOC at the beginning of that period cease to
constitute a majority of the Board of Directors of Carolinas or BOC, unless the
election of replacement directors was approved by a majority vote of the initial
directors then in office.
The Merger will result in a "change in control" of Carolinas as defined in
the employment agreement. (See "The Merger -- Interests of Certain Persons with
Respect to the Merger" on page __.)
Stock Options. The following table contains information regarding options to
purchase BOC Stock that were granted during 2000 to BOC's Chief Executive
Officer, Stephen R. Talbert, under BOC's Incentive Option Plan which was
approved by BOC's shareholders during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------
Potential realizable value at
assumed annual rates of stock
price appreciation
Individual grants for option term
--------------------------------------------------------------------------------------- --------------------
No. of securities % of total
underlying options granted Exercise or
options to employees in base price Expiration
Name granted (#) (1) fiscal year ($/share) date 5% ($) 10% ($)
------------------ ----------------- --------------- ----------- ---------- ------- -------
Stephen R. Talbert 5,922 85.0% $5.375 2010 $20,018 $50,730
______________________
(1) The options were granted on February 15, 2000, and become exercisable as to
20% of the covered shares on February 15 of each year, beginning in 2001,
and they expire ten years following the date of grant.
70
The following table contains information regarding all options to purchase
BOC Stock held by BOC's Chief Executive Officer on December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
--------------------------------------------------------------------------
VALUES
------
Number of securities underlying Value of unexercised
unexercised in-the-money options
options at December 31, 2000 at December 31, 2000
---------------------------- ----------------------------------
Shares
acquired Value Exercisable Unexercisable
Name on exercise realized (#) (#) Exercisable (2) Unexercisable (2)
------------------ ----------- -------- ----------- ------------- --------------- -----------------
Stephen R. Talbert (1) -- 3,703 20,734 $-0- $-0-
__________________
(1) No options were exercised during 2000.
(2) Reflects the amount by which the fair market value on December 31, 2000, of
shares underlying unexercised options held on that date (based on the then
current last known sales price per share of $5.00 for BOC Stock) exceeded
the aggregate exercise price of the options (at $5.375 per share). On
_________, 2001, the value of the exercisable and unexercisable options were
$_______ and $________, respectively, based on the then current last known
sales price per share of BOC Stock.
Transactions with Related Parties
Carolinas has had, and expects to have in the future, banking transactions
in the ordinary course of its business with certain of its and BOC's current
directors, executive officers and principal shareholders, and their associates.
All loans included in those transactions were made on substantially the same
terms, including interest rates, repayment terms and collateral, as those
prevailing at the time the loans were made for comparable transactions with
other persons, and those loans do not involve more than the normal risk of
collectibility or present other unfavorable features.
SUPERVISION AND REGULATION
The business and operations of Davie, BOC, and Carolinas are subject to
extensive federal and state governmental regulation and supervision. The
following is a summary of some of the basic statutes and regulations that apply
to Davie, BOC, and Carolinas, but it is not a complete discussion of all the
laws that affect our businesses.
Regulation of BOC
BOC is a bank holding company registered with the Federal Reserve Board
(the"FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA").
It is subject to supervision and examination by, and the regulations and
reporting requirements of, the FRB. Under the BHCA, BOC's activities are
limited to banking, managing or controlling banks, or engaging in any other
activity which the FRB determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits BOC from acquiring direct or indirect control of more
than 5.0% of the outstanding voting stock or substantially all of the assets of
any financial institution, or merging or consolidating with another bank holding
company or savings bank holding company, without prior approval of the FRB.
Additionally, the BHCA prohibits BOC from engaging in, or acquiring ownership or
control of more than 5.0% of the outstanding voting stock of any company engaged
in, a nonbanking activity unless that activity is determined by the FRB to be
closely related and a proper incident to banking. In approving an application
by BOC to engage in a nonbanking activity, the FRB must consider whether that
activity can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.
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There are a number of obligations and restrictions imposed by law on a bank
holding company and its insured depository institution subsidiaries that are
designed to minimize potential loss to depositors and the FDIC insurance funds.
For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the terms
of any capital restoration plan filed with its federal banking agency. Also, a
bank holding company is required to serve as a source of financial strength to
its depository institution subsidiaries and to commit resources to support those
institutions in circumstances where it otherwise might not do so, absent such
policy. Under the BHCA, the FRB has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary if the FRB determines that the activity or control constitutes a
serious risk to the financial soundness and stability of a depository
institution subsidiary of the bank holding company.
Regulation of Davie and Carolinas
Davie and Carolinas each is an insured, North Carolina-chartered bank that
is not a member of the Federal Reserve System. Their deposits are insured by the
FDIC's Bank Insurance Fund, and they are subject to supervision and examination
by, and the regulations and reporting requirements of, the FDIC and the
Commissioner, which are their primary federal and state banking regulators.
As insured institutions, Davie and Carolinas are prohibited from engaging as
a principal in activities that are not permitted for national banks unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund and (ii) the bank is, and continues to be, in
compliance with all applicable capital standards. Insured institutions also are
prohibited from directly acquiring or retaining any equity investment of a type
or in an amount not permitted for national banks.
The FDIC and the Commissioner have broad powers to enforce laws and
regulations that apply to Davie and Carolinas and to require corrective action
of conditions that affect their safety and soundness. Among others, these powers
include issuing cease and desist orders, imposing civil penalties, and removing
officers and directors.
Though neither are members of the Federal Reserve System, the business of
both Davie and Carolinas is influenced by prevailing economic conditions and
governmental policies, both foreign and domestic, and by the monetary and fiscal
policies of the FRB. The actions and policy directives of the FRB determine to
a significant degree the cost and the availability of funds obtained from money
market sources for lending and investing and also influence, directly and
indirectly, the rates of interest paid by commercial banks on their time and
savings deposits. The nature and impact on Davie and Carolinas of future
changes in economic conditions and monetary and fiscal policies are not
predictable.
Davie, as the surviving bank in the Merger and the Bank Merger, will
continue to be an insured, North Carolina-chartered non-member bank, subject to
the same supervision, examination and reporting requirements as currently apply
to both it and Carolinas. Davie will not be a bank holding company under the
BHCA.
Gramm-Leach-Bliley Act
The federal Gramm-Leach-Bliley Act enacted in 1999 (the "GLB Act") was
adopted by Congress during 1999 and dramatically changed various federal laws
governing the banking, securities and insurance industries. The GLB Act has
expanded opportunities for banks and bank holding companies to provide services
and engage in other revenue-generating activities that previously were
prohibited to them.
With respect to bank holding companies, the GLB Act in general (i) expands
opportunities to affiliate with securities firms and insurance companies; (ii)
overrides certain state laws that would prohibit certain banking and insurance
affiliations; (iii) expands the activities in which banks and bank holding
companies
72
may participate; (iv) requires that banks and bank holding companies engage in
some activities only through affiliates owned and/or managed in accordance with
certain requirements; (v) reorganizes responsibility among various federal
regulators for oversight of certain securities activities conducted by banks and
bank holding companies; and (vi) requires banks to adopt and implement policies
and procedures for the protection of the financial privacy of their customers,
including procedures that allow the customer to elect that certain financial
information not be disclosed to certain persons.
The economic effects of the GLB Act on the banking industry may be profound,
and regulations issued pursuant to the GLB Act may have an operational effect on
us in the future. The GLB Act has expanded opportunities for BOC, Carolinas and
Davie to provide other services and obtain other revenues in the future but, at
present, it has not had a significant effect on our operations as they are
presently conducted. However, this expanded authority also may present each of
us with new challenges as our larger competitors are able to expand their
services and products into areas that are not feasible for smaller, community
oriented financial institutions. The economic effects of the GLB Act on the
banking industry, and on competitive conditions in the financial services
industry generally, may be profound.
Payment of Dividends
Under federal law, Davie and Carolinas, as insured banks, each is prohibited
from making any capital distributions, including paying a cash dividend, if it
is, or after making the distribution it would become, "undercapitalized" as that
term is defined in the Federal Deposit Insurance Act (the "FDIA"). Additionally,
if in the opinion of the FDIC an insured bank under its jurisdiction is engaged
in or is about to engage in an unsafe or unsound practice (which, depending on
the financial condition of the bank, could include the payment of dividends),
the FDIC may require, after notice and hearing, that the bank cease and desist
from that practice. The federal banking agencies have indicated that paying
dividends that deplete a bank's capital base to an inadequate level would be an
unsafe and unsound banking practice. (See "Prompt Corrective Action" below.) The
federal agencies have issued policy statements which provide that insured banks
generally should only pay dividends out of current operating earnings, and under
the FDIA no dividend may be paid by an insured bank while it is in default on
any assessment due the FDIC. The payment of dividends by Davie and Carolinas
also may be affected or limited by other factors, such as requirements that
their regulators have authority to impose on them to maintain their capital
above regulatory guidelines.
BOC's principal source of cash flow to pay dividends to its shareholders is
the dividends it receives from Carolinas. There are statutory and regulatory
limitations on the payment of dividends by Carolinas to BOC, as well as by BOC
to its shareholders.
Capital Adequacy
BOC, Carolinas and Davie each is required to comply with the capital
adequacy standards established by the FRB in the case of BOC, and by the FDIC in
the case of Davie and Carolinas. The FRB and the FDIC have promulgated risk-
based capital and leverage capital guidelines for determining the adequacy of
the capital of a bank holding company or a bank, and all applicable capital
standards must be satisfied for a bank holding company or a bank to be
considered in compliance with these capital requirements.
Under the risk-based capital measure, the minimum ratio ("Total Capital
Ratio") of an entity's total capital ("Total Capital") to its risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) is 8.0%. At least half of Total Capital must be composed of common
equity, undivided profits, minority interests in the equity accounts of
consolidated subsidiaries, qualifying noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder ("Tier 2
Capital") may consist of certain subordinated debt, certain hybrid capital
instruments and other qualifying preferred stock,
73
and a limited amount of loan loss reserves. On June 30, 2001, BOC's, Carolinas'
and Davie's Total Capital Ratios were 28.63%, 28.01% and 8.68%, respectively,
and their ratios of Tier 1 Capital to risk-weighted assets ("Tier 1 Capital
Ratio") were 27.98%, 27.36% and 7.48%, respectively, which were above the FRB's
and the FDIC's minimum risk-based capital guidelines.
Under the leverage capital measure, the minimum ratio (the "Leverage Capital
Ratio") of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets, is 3.0% for entities that meet certain specified criteria,
including having the highest regulatory rating. All others generally are
required to maintain an additional cushion of 100 to 200 basis points above the
stated minimum. The FDIC's guidelines also provide that banks experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum levels without significant
reliance on intangible assets, and the FDIC has indicated that it will consider
a bank's "Tangible Leverage Ratio" (deducting all intangibles) and other indicia
of capital strength in evaluating proposals for expansion or new activities. On
June 30, 2001, BOC's, Carolinas' and Davie's Leverage Capital Ratios were
20.35%, 20.14% and 6.76%, respectively, which were above the Federal Reserve's
and the FDIC's minimum leverage capital guidelines.
Failure to meet capital guidelines could subject a bank holding company or a
bank to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
the taking of brokered deposits, and certain other restrictions on its business.
As described below, substantial additional restrictions can be imposed upon
FDIC-insured depository institutions that fail to meet applicable capital
requirements. (See "-- Prompt Corrective Action" below.)
The FRB and the FDIC also consider interest rate risk (when the interest
rate sensitivity of an institution's assets does not match the sensitivity of
its liabilities or its off-balance-sheet position) in the evaluation of an
entity's capital adequacy. The bank regulatory agencies' methodology for
evaluating interest rate risk requires banks with excessive interest rate risk
exposure to hold additional amounts of capital against their exposure to losses
resulting from that risk.
Prompt Corrective Action
Current federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under this system, the
federal banking regulators have established five capital categories ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized"). The regulators are
required to take certain mandatory supervisory actions, and they are authorized
to take other discretionary actions, with respect to institutions in the three
undercapitalized categories. The severity of any actions taken will depend upon
the capital category in which an institution is placed. Generally, subject to a
narrow exception, current federal law requires the banking regulators to appoint
a receiver or conservator for an institution that is critically
undercapitalized.
Under the final agency rules implementing the prompt corrective action
provisions, an institution is deemed to be "well capitalized" if it (i) has a
Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or
greater, and a Leverage Ratio of 5.0% or greater, and (ii) is not subject to any
written agreement, order, capital directive, or prompt corrective action
directive issued by the appropriate federal banking agency. An institution is
considered to be "adequately capitalized" if it has a Total Capital Ratio of
8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio
of 4.0% or greater. A depository institution that has a Total Capital Ratio of
less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of
less than 4.0%, is considered to be "undercapitalized." A depository
institution that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital
Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered to
be "significantly undercapitalized," and an institution that has a tangible
equity capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." For purposes of the regulation, the term
"tangible equity" includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards, plus the amount of outstanding
cumulative perpetual preferred stock (including related surplus), minus all
intangible assets with certain exceptions. A depository institution may be
deemed to be in a capitalization category that is lower than is indicated by its
actual
74
capital position if it receives an unsatisfactory examination rating.
An institution that is categorized as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
An "undercapitalized" institution also is generally prohibited from increasing
its average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
"undercapitalized" depository institution to take any of the actions it is
required to or may take with respect to a "significantly undercapitalized"
institution as described above if it determines that those actions are necessary
to carry out the purpose of the law. On June 30, 2001, BOC and Carolinas each
had the requisite capital levels to qualify as "well capitalized." On that
date, Davie's Tier 1 Capital Ratio (at 7.48%) and Leverage Ratio (at 6.76%) were
above the "well capitalized" level, but Davie was classified as "adequately
capitalized" since its Total Capital Ratio (at 8.68%) was below the 10.0% "well
capitalized" level.
Reserve Requirements
Pursuant to regulations of the FRB, all FDIC-insured depository institutions
must maintain average daily reserves against their transaction accounts. No
reserves are required to be maintained on the first $4.7 million of transaction
accounts, but reserves equal to 3.0% must be maintained on the aggregate
balances of those accounts between $4.7 million and $47.8 million, and reserves
equal to 10.0% must be maintained on aggregate balances in excess of $47.8
million. These percentages are subject to adjustment by the FRB. Because
required reserves must be maintained in the form of vault cash or in a non-
interest-bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 2001, Davie and Carolinas each met its reserve
requirements.
FDIC Insurance Assessments
The FDIC currently uses a risk-based assessment system that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities for purposes of calculating deposit insurance assessments
to be paid by insured depository institutions. The risk-based assessment system
categorizes institutions as "well capitalized," "adequately capitalized" or
"undercapitalized." These three categories are substantially similar to the
prompt corrective action categories described above, with the "undercapitalized"
category including institutions that are "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized" for prompt corrective action
purposes. Institutions also are assigned by the FDIC to one of three
supervisory subgroups within each capital group, with the particular supervisory
subgroup to which an institution is assigned being based on a supervisory
evaluation provided to the FDIC by the institution's primary federal banking
regulator and information which the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). A different insurance assessment rate (ranging
from zero to 31 basis points) applies to each of the nine assessment risk
classifications (i.e., combinations of capital groups and supervisory
subgroups). An institution's assessment rate is determined based on the capital
category and supervisory subgroup to which it is assigned.
A bank's deposit insurance may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by regulations
of the federal bank regulatory agencies, an insured institution has a continuing
and affirmative obligation, consistent with its safe and sound operation, to
help meet the credit needs of its entire community, including low and
75
moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the federal bank regulatory agencies, in connection with their
examination of insured institutions, to assess the institutions' records of
meeting the credit needs of their communities, using the ratings of
"outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance," and to take that record into account in its evaluation of
certain applications by those institutions. All institutions are required to
make public disclosure of their CRA performance ratings. Davie and Carolinas
each received a "satisfactory" rating in its most recent CRA examination.
CAPITAL STOCK OF DAVIE AND BOC
Capital Stock of Davie
Authorized Capital. Davie's authorized capital stock consists of 5,000,000
shares of $5.00 par value common stock, of which 893,100 shares were issued and
outstanding on June 30, 2001.
Voting Rights. Holders of Davie Stock are entitled to one vote per share
held of record on all matters submitted to a vote of shareholders.
The North Carolina Control Share Acquisition Act, in general, provides that
shares of voting stock of a corporation (to which that Act applies) acquired in
a "control share acquisition" ("Control Shares") will have no voting rights
unless those rights are granted by resolution adopted by the holders of at least
a majority of the outstanding shares of the corporation entitled to vote in the
election of directors, excluding shares held by the person who has acquired or
proposes to acquire the Control Shares and excluding shares held by any officer
or director who is also an employee of the corporation. "Control Shares" are
defined as shares of a corporation acquired by any person which, when added to
the shares already owned by that person, would entitle the person (except for
the application of the Act) to voting power in the election of directors equal
to or greater than (i) one-fifth of all voting power, (ii) one-third of all
voting power, or (iii) a majority of all voting power. "Control share
acquisition" means the acquisition by any person of beneficial ownership of
Control Shares with certain exceptions, including an acquisition pursuant to
certain agreements of merger or consolidation to which the corporation is a
party, and purchases of shares directly from the corporation.
Charter Amendments. Subject to certain conditions, and with certain
exceptions, an amendment to Davie's charter, including an amendment to increase
or change Davie's authorized capital stock, may be effected if the amendment is
recommended to Davie's shareholders by the Board of Directors and if the votes
cast by shareholders in favor of the amendment exceed the votes cast opposing
the amendment.
Merger, Share Exchange, Sale of Assets and Dissolution. In general, North
Carolina law requires that any merger, share exchange, voluntary liquidation or
transfer of substantially all the assets (other than in the ordinary course of
business) of Davie be recommended to its shareholders by its board of directors
and be approved by the affirmative vote of the holders of at least two-thirds of
the outstanding shares of its voting stock.
However, under the North Carolina Shareholder Protection Act, the
affirmative vote of the holders of 95% of Davie's outstanding voting shares
(voting as a single class, but excluding shares owned by an "interested
shareholder") is required to approve certain business combinations between Davie
and an entity which owns more than 10% of Davie's voting shares.
Dividends. Holders of Davie Stock are entitled to dividends if and when
declared by Davie's Board of Directors from funds legally available, whether in
cash or in stock. (See "-- Differences in Capital Stock" below.)
76
Liquidation. Holders of Davie Stock are entitled, upon a liquidation,
dissolution or winding up of Davie, to participate ratably in the distribution
of assets legally available for distribution to holders of common stock.
Assessability. Shares of Davie Stock generally are not assessable. However,
under North Carolina laws that apply to banks, if Davie's capital becomes
impaired due to losses or any other cause, and if its surplus and undivided
profits are not sufficient to make good that impairment, the Commissioner may
require Davie's Board of Directors to assess the holders of Davie Stock for the
amount of the impairment. A shareholder's failure to pay such an assessment
could result in a forced sale of the shareholder's stock with the proceeds being
applied first to payment of the assessment.
Miscellaneous. Holders of Davie Stock do not have preemptive rights to
acquire other or additional shares which might be issued by Davie in the future
or any redemption or sinking fund rights. First-Citizens Bank & Trust Company
currently serves as the registrar and transfer agent for Davie Stock.
Differences in Capital Stock
General. Upon consummation of the Merger, BOC's shareholders will receive
Davie Stock for their BOC Stock and will become shareholders of Davie. Certain
legal distinctions exist between owning Davie Stock and owning BOC Stock.
Davie is a North Carolina banking corporation, and the rights of the holders
of Davie Stock are governed by its Articles of Incorporation, Chapter 53 of the
North Carolina General Statutes which is applicable to banks ("Chapter 53"),
and, to the extent not inconsistent with Chapter 53, by Chapter 55 of the North
Carolina General Statutes which is applicable to business corporations ("Chapter
55"). BOC is a North Carolina business corporation, and the rights of the
holders of its capital stock are governed solely by its Articles of
Incorporation and Chapter 55. There are differences in Chapter 53 and Chapter
55. Therefore, in some ways, the rights of Davie's shareholders are different
from those of BOC's shareholders. While it is not practicable to describe all
differences, those basic differences which BOC's and Davie's managements believe
will have the most significant affect on the rights of BOC's shareholders when
they become Davie shareholders are discussed below.
The following is only a general summary of certain differences in the rights
of holders of BOC Stock and those of holders of Davie Stock. BOC's shareholders
should consult with their own legal counsel with respect to specific differences
and changes in their rights as shareholders which will result from the Merger.
Dividends. Pursuant to Chapter 55, BOC is authorized to pay dividends such
as are declared by its Board of Directors, provided that no such distribution
results in its insolvency on a going concern or balance sheet basis. BOC's
principal asset is its ownership of all of the outstanding capital stock of
Carolinas, and its sole source of funds for the payment of dividends on BOC
Stock is dividends it receives (as Carolinas' sole shareholder) from Carolinas
on the Carolinas capital stock it holds. Therefore, BOC's ability to pay
dividends is subject to Carolinas' ability to pay dividends.
Davie's shareholders are entitled to dividends if and when declared by
Davie's Board of Directors, subject to the restrictions described below.
Pursuant to Chapter 53, Davie may pay dividends only out of its undivided
profits. Should at any time its surplus be less than 50% of its paid-in capital
stock, Davie may not declare a cash dividend until it has transferred from
undivided profits to surplus 25% of its undivided profits or any lesser
percentage that may be required to restore its surplus to an amount equal to 50%
of its paid-in capital stock. However, no cash dividends may be paid at any time
by a bank when it is insolvent or when payment of a dividend would render it
insolvent or be contrary to its Articles of Incorporation. Additionally, there
are statutory provisions regarding the calculation of undivided profits from
which dividends may be paid, and banking regulators may restrict or prohibit the
payment of dividends by banks
77
which have been found to have inadequate capital. (See "Supervision and
Regulation -- Payment of Dividends" on page _____.)
The Commissioner's approval of Davie's organization during 1998 was
conditioned on the requirement that, for a period of three years following the
time it began banking operations, it not pay any cash dividend without the
Commissioner's prior approval. Therefore, Davie has not paid any cash dividends
to date. That express prohibition expires on December 8, 2001. However, without
regard to the Commissioner's approval, on June 30, 2001, Davie had an
accumulated deficit of approximately $798,000. So, on that date Davie had no
undivided profits and, therefore, had no funds legally available for the payment
of dividends. Davie will not be permitted to pay any cash dividends until that
deficit has been recovered through future profits. Management of Davie expects
that, for the foreseeable future, any profits resulting from Davie's operations
will be retained as additional capital to support its operations and growth and
that it will not pay any cash dividends.
In the future, any declaration and payment of cash dividends on Davie Stock
will be subject to Davie's Board of Directors' evaluation of its operating
results, financial condition, future growth plans, general business and economic
conditions, and tax and other relevant considerations. Also, the payment of cash
dividends by Davie in the future will be subject to certain other legal and
regulatory limitations (including the requirement that Davie's capital be
maintained at certain minimum levels) and will be subject to ongoing review by
banking regulators. There is no assurance that, in the future, Davie will have
funds available to pay cash dividends, or, even if funds are available, that it
will pay dividends in any particular amount or at any particular times, or that
it will pay dividends at all. See "Market and Dividend Information Davie's
Capital Stock" on page _____.)
Merger, Share Exchange, Sale of Assets or Dissolution. Pursuant to Chapter
55, the merger of BOC with, or a sale of substantially all of BOC's assets to,
any other entity, or a dissolution of BOC, requires the prior approval of the
holders of only a majority of the votes entitled to be cast by the holders of
BOC's voting stock.
Pursuant to Chapter 53, Davie may not merge or consolidate with, or sell
substantially all of its assets to, any other entity, or be dissolved, without
the prior approval of the holders of at least two-thirds of its outstanding
shares. Therefore, approval of a merger or other business combination involving
Davie, even if it is the surviving company in the transaction, will require the
vote of a higher percentage of its shareholders than currently is required to
approve that type of transaction involving BOC.
In addition, Chapter 55 provides that no prior approval of BOC's
shareholders is required to effect a merger of another entity into Carolinas,
provided that BOC remains in control of its subsidiary following consummation of
that transaction. Assuming that a sufficient number of shares of capital stock
have been authorized in BOC's Articles of Incorporation, it can make
acquisitions of other companies through the merger of a third party bank or
other entity with or into Carolinas or another subsidiary of BOC, including
acquisitions involving the issuance of BOC Stock, without the approval of BOC's
shareholders. Since, after the Merger, Davie will not be organized in a holding
company structure, it will not be able to acquire another bank or other company
by merger without the approval of its shareholders.
Repurchase of Capital Stock. Under Chapter 53, Davie must obtain the prior
approval of the holders of two-thirds of its outstanding shares, as well as the
prior approval of the Commissioner and the FDIC, before it can repurchase any of
its shares of capital stock.
Under Chapter 55, BOC may repurchase its capital stock by action of its
Board of Directors without the prior approval of its shareholders. However, as a
bank holding company, BOC is required to give the Federal Reserve at least 45
days prior written notice of the purchase or redemption of any shares of its
outstanding equity securities if the gross consideration to be paid for such
purchase or redemption, when aggregated with the net consideration paid by BOC
for all purchases or redemptions of its equity securities during the 12 months
preceding the date of notification, equals or exceeds 10% of BOC's consolidated
net
78
worth as of the date of such notice. The FRB may permit a purchase or redemption
to be accomplished prior to expiration of the 45-day notice period if it
determines that the repurchase or redemption would not constitute an unsafe or
unsound practice and that it would not violate any applicable law, rule,
regulation or order, or any condition imposed by, or written agreement with, the
Federal Reserve.
Assessability. Shares of Davie Stock generally are not assessable except in
the limited circumstance described above in which Davie's capital stock has
become impaired. Under Chapter 53, the Commissioner may require Davie's Board of
Directors to assess the holders of Davie Stock for the amount by which Davie's
capital stock has become impaired, and the shares of a shareholder who fails to
pay the assessment may be sold. Under Chapter 55, shares of BOC Stock are not
assessable.
Regulation of Transferability. The capital stock of Davie, unlike that of
BOC, is exempt from the registration requirements of the federal Securities Act
of 1933 Act (the "1933 Act") and the North Carolina Securities Act. The effect
of that exemption is to allow Davie to sell shares of Davie Stock without
registration under those laws. In contrast, the public sale by BOC of its stock,
and resales of its stock by certain persons who are at the time of resale
"affiliates" of BOC, are required to be registered under the 1933 Act and the
North Carolina Securities Act or meet certain statutory and regulatory
requirements to qualify for other exemptions from registration.
INDEMNIFICATION
General
Permissible Indemnification. Chapter 55 allows a corporation, by charter,
bylaw, contract, or resolution, to indemnify or agree to indemnify its officers,
directors, employees, and agents and any person who is or was serving at the
corporation's request as a director, officer, employee, or agent of another
entity or enterprise or as a trustee or administrator under an employee benefit
plan, against liability and expenses, including reasonable attorneys' fees, in
any proceeding (including without limitation a proceeding brought by or on
behalf of the corporation itself) arising out of their status as such or their
activities in any of the foregoing capacities as summarized herein. Any
provision in a corporation's charter or bylaws or in a contract or resolution
may include provisions for recovery from the corporation of reasonable costs,
expenses and attorneys' fees in connection with the enforcement of rights to
indemnification granted therein and may further include provisions establishing
reasonable procedures for determining and enforcing such rights.
The corporation may indemnify such person against liability expenses
incurred only where such person conducted himself or herself in good faith and
reasonably believed (i) in the case of conduct in his or her official corporate
capacity, that his or her conduct was in the corporation's best interests, and
(ii) in all other cases, that his or her conduct was at least not opposed to the
corporation's best interests; and, in the case of a criminal proceeding, he or
she had no reasonable cause to believe his or her conduct was unlawful. However,
a corporation may not indemnify such person either in connection with a
proceeding by or in the right of the corporation in which such person was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to such person (whether or not involving
action in an official capacity) in which such person was adjudged liable on the
basis that personal benefit was improperly received.
Mandatory Indemnification. Unless limited by the corporation's charter,
Chapter 55 requires a corporation to indemnify a director or officer of the
corporation who is wholly successful, on the merits or otherwise, in the defense
of any proceeding to which such person was a party because he or she is or was a
director or officer of the corporation against reasonable expenses incurred in
connection with the proceeding.
79
Advance for Expenses. Expenses incurred by a director, officer, employee, or
agent of the corporation in defending a proceeding may be paid by the
corporation in advance of the final disposition of the proceeding as authorized
by the board of directors in the specific case, or as authorized by the charter
or bylaws or by any applicable resolution or contract, upon receipt of an
undertaking by or on behalf of such person to repay amounts advanced, unless it
ultimately is determined that such person is entitled to be indemnified by the
corporation against such expenses.
Court-Ordered Indemnification. Unless otherwise provided in the
corporation's charter, a director or officer of the corporation who is a party
to a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court deems necessary, may
order indemnification if it determines either (i) that the director or officer
is entitled to mandatory indemnification as described above, in which case the
court also will order the corporation to pay the reasonable expenses incurred to
obtain the court-ordered indemnification, or (ii) that the director or officer
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not such person met the requisite standard of conduct
or was adjudged liable to the corporation in connection with a proceeding by or
in the right of the corporation or on the basis that personal benefit was
improperly received in connection with any other proceeding so charging (but if
adjudged so liable, indemnification is limited to reasonable expenses incurred).
Parties Entitled to Indemnification. Chapter 55 defines "director" to
include former directors and the estate or personal representative of a
director. Unless its charter provides otherwise, a corporation may indemnify and
advance expenses to an officer, employee or agent of the corporation to the same
extent as to a director and also may indemnify and advance expenses to an
officer, employee or agent who is not a director to the extent, consistent with
public policy, as may be provided in its charter or bylaws, by general or
specific action of its board of directors, or by contract.
Indemnification by Davie and BOC
The Bylaws of Davie and BOC provide for indemnification of their respective
directors and officers to the fullest extent permitted by North Carolina law and
require the Board of Directors to take all actions necessary and appropriate to
authorize such indemnification.
Under North Carolina law, a corporation also may purchase insurance on
behalf of any person who is or was a director or officer against any liability
arising out of his status as such. Davie and BOC each currently maintain a
directors' and officers' liability insurance policy and its coverage is
applicable to all their respective directors and officers.
INDEPENDENT ACCOUNTANTS
The financial statements of Davie as of December 31, 2000 and 1999, and for
the years then ended, which are included in this Joint Proxy Statement/Offering
Circular, have been audited by Crisp Hughes Evans LLP, independent accountants,
as indicated in their report which is included herein. Representatives of Crisp
Hughes Evans LLP, are not expected to attend the Davie Special Meeting, to make
a statement at the meeting, or to be available to answer questions.
The consolidated financial statements of BOC as of December 31, 2000 and
1999, and for the years then ended, which are included in this Joint Proxy
Statement/Offering Circular, have been audited by Dixon Odom PLLC, independent
accountants, as indicated in their report which is included herein.
Representatives of Dixon Odom PLLC are not expected to attend the BOC Special
Meeting, to make a statement at the meeting, or to be available to answer
questions.
80
PROPOSALS FOR ANNUAL MEETINGS OF SHAREHOLDERS
Davie currently expects that its 2002 annual meeting of shareholders will be
held during April 2002. Any proposal of a Davie shareholder which is intended to
be presented for action at that annual meeting must be received by Davie in
writing at its main office in Mocksville, North Carolina, no later than November
16, 2001, to be considered timely received for inclusion in the proxy statement
and form of appointment of proxy distributed by Davie in connection with that
meeting.
If the Merger is completed, then BOC will not have a 2002 annual meeting of
shareholders. However, in the event that the Merger is not completed, BOC
currently expects that its next annual meeting of shareholders would be held
during April 2002. Any proposal of a BOC shareholder intended to be presented
for action at that annual meeting would have to be received by BOC in writing at
its main office in Landis, North Carolina, no later than November 15, 2001, to
be considered timely received for inclusion in the proxy statement and form of
appointment of proxy distributed by BOC in connection with that meeting.
In order for a proposal to be included in Davie's or BOC's proxy materials
for a particular meeting, the person submitting the proposal must own,
beneficially or of record, at least 1% or $2,000 in market value of shares of
Davie Stock or BOC Stock, respectively, entitled to be voted on that proposal at
their respective annual meetings and must have held those shares for a period of
at least one year and continue to hold them through the date of the meeting.
Also, the proposal and the shareholder submitting it must comply with certain
other eligibility and procedural requirements contained in rules of the SEC.
Written notice of a shareholder proposal intended to be presented at Davie's
annual meeting but which is not intended to be included in its proxy statement
and form of appointment of proxy must be received by Davie at its main office in
Mocksville, North Carolina, no later than January 30, 2002, in order for that
proposal to be considered timely received for purposes of the discretionary
authority of the proxies at that meeting to vote on other matters presented for
action by shareholders at the meeting.
If BOC has a 2002 annual meeting, then written notice of a shareholder
proposal intended to be presented at that meeting but which is not intended to
be included in BOC's proxy statement and form of appointment of proxy must be
received by BOC at its main office in Landis, North Carolina, no later than
February 15, 2002, in order for that proposal to be considered timely received
for purposes of the discretionary authority of the proxies at that meeting to
vote on other matters presented for action by shareholders at the meeting.
81
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82
FINANCIAL STATEMENTS OF
BANK OF DAVIE
Index to Financial Statements
Page
----
Audited Financial Statements
Report of Independent Accountants................................................... F-2
Balance Sheets -- December 31, 2000 and 1999........................................ F-3
Statements of Operations -- For the years ended
December 31, 2000 and 1999........................................................ F-4
Statements of Changes in Stockholders' Equity -- For the years ended
December 31, 2000 and 1999........................................................ F-5
Statements of Cash Flows -- For the years ended December 31, 2000 and 1999.......... F-6
Notes to Financial Statements -- December 31, 2000 and 1999......................... F-8
Unaudited Interim Financial Statements
Balance Sheets (Unaudited) -- June 30, 2001 and 2000................................ F-25
Statements of Operations (Unaudited) -- For the six months ended
June 30, 2001 and 2000............................................................ F-26
Statements of Cash Flows (Unaudited) -- For the six months ended
June 30, 2001 and 2000............................................................ F-27
Notes to Financial Statements (Unaudited) -- June 30, 2001.......................... F-28
F-1
[LOGO] Crisp Hughes Evans LLP
---------------------------------------------------------------------------
- Independent Auditors' Report -
----------------------------
Board of Directors and Stockholders
Bank of Davie
Mocksville, North Carolina
We have audited the accompanying balance sheets of the Bank of Davie (the
"Bank") as of December 31, 2000 and 1999, and the related statements of
operations, changes in stockholders' 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 in these financial
statememts based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe the 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 the Bank at December 31, 2000
and 1999, and the results of its operations and its cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principals.
/s/ Crisp Hughes Evans LLP
Asheville, North Carolina
January 24, 2001
F-2
================================================================================
Bank of Davie
Balance Sheets
--------------------------------------------------------------------------------
December 31, 2000 and 1999
Assets 2000 1999
------ ---- ----
Cash and due from banks $ 1,823,800 $ 704,864
Interest-bearing deposits in banks 1,616,906 1,973,835
----------- -----------
Cash and cash equivalents 3,440,706 2,678,699
Federal funds sold 4,040,000 3,790,000
Securities available for sale 12,477,687 3,939,844
Loans receivable, net 58,507,096 32,502,973
Office properties and equipment, net 3,677,188 1,461,229
Accrued interest receivable 607,744 272,650
Other assets 267,180 118,794
Core deposit intangible, net 766,608 -
----------- -----------
Total assets $ 83,784,209 $ 44,764,189
=========== ===========
Liabilities and Stockholders' Equity
-------------------------------------
Liabilities:
Deposits:
Non-interest-bearing $ 4,885,968 $ 2,783,647
Interest-bearing 68,855,211 33,322,510
----------- -----------
Total deposits 73,741,179 36,106,157
Federal Home Loan Bank advances 2,700,000 1,500,000
Accrued interest payable and other liabilities 210,384 99,145
----------- -----------
Total liabilities 76,651,563 37,705,302
----------- -----------
Stockholders' equity:
Common stock, ($5 par value, 5,000,000 shares
authorized;
893,100 and 744,054 shares issued and
outstanding,
respectively) 4,465,500 3,720,270
Additional paid-in-capital 3,311,377 4,054,463
Accumulated deficit (700,576) (656,225)
Accumulated other comprehensive income 56,345 (59,621)
----------- -----------
Total stockholders' equity 7,132,646 7,058,887
----------- -----------
Total liabilities and stockholders' equity $ 83,784,209 $ 44,764,189
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
================================================================================
Bank of Davie
Statements of Operations
--------------------------------------------------------------------------------
For the Years Ended December 31, 2000 and 1999
2000 1999
---- ----
Interest income:
Interest, including fees $ 4,320,959 $ 1,570,161
Debt securities, taxable 543,536 133,569
Other 411,706 277,028
---------- ----------
Total interest and dividend income 5,276,201 1,980,758
---------- ----------
Interest expense:
Deposits 2,889,139 871,738
Federal Home Loan Bank advances 148,590 8,943
---------- ----------
Total interest expense 3,037,729 880,681
---------- ----------
Net interest income 2,238,472 1,100,077
Provision for loan losses 370,040 431,219
---------- ----------
Net interest income after provision for loan losses 1,868,432 668,858
---------- ----------
Non-interest income:
Customer service fees 117,648 44,195
Net loss on available for sale securities (15,000) -
Other 12,806 4,930
---------- ----------
Total non-interest income 115,454 49,125
---------- ----------
Non-interest expenses:
Salaries and employee benefits 1,227,303 765,785
Net occupancy expense 248,237 112,900
Data processing 52,152 31,011
Other 500,545 340,098
---------- ----------
Total non-interest expenses 2,028,237 1,249,794
---------- ----------
Loss before income taxes (44,351) (531,811)
Income tax expense - -
---------- ----------
Net loss $ (44,351) $ (531,811)
========== ==========
Net loss per share:
Basic $ (0.05) $ (0.60)
Diluted (0.05) (0.60)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
================================================================================
Bank of Davie
Statements of Changes in Stockholders' Equity
--------------------------------------------------------------------------------
For the Years Ended December 31, 2000 and 1999
Accumulated
Additional Other Total
Common Stock Paid-In Accumulated Comprehensive Stockholders'
------------------------
Shares Amount Capital Deficit Income Equity
------ ------ ------- ------- ------ ------
Balance, December 31, 1998 744,054 $ 3,720,270 $ 4,054,463 $ (124,414) $ - $ 7,650,319
Comprehensive income:
Net loss - - - (531,811) - (531,811)
Change in accumulated
comprehensive income - - - - (59,621) (59,621)
----------
Total comprehensive
loss - - - - - (591,432)
------- ----------- ----------- ----------- ------------- ----------
Balance, December 31, 1999 744,054 3,720,270 4,054,463 (656,225) (59,621) 7,058,887
Stock split, six for five 148,846 744,230 (744,230) - - -
Issuance of common stock 200 1,000 1,144 - - 2,144
Comprehensive income:
Net loss - - - (44,351) - (44,351)
Change in accumulated
comprehensive income - - - - 115,966 115,966
----------
Total comprehensive
income - - - - - 71,615
------- ----------- ----------- ----------- ------------- ----------
Balance, December 31, 2000 893,100 $ 4,465,500 $ 3,311,377 $ (700,576) $ 56,345 $ 7,132,646
======= =========== =========== =========== ============= ==========
The accompanying notes are an integral part of these financial statements.
F-5
================================================================================
Bank of Davie
Statement of Cash Flows
--------------------------------------------------------------------------------
For the Year Ended December 31, 2000 and 1999
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (44,351) $ (531,811)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 125,028 59,087
Provision for loan losses 370,040 431,219
Accretion of discounts on securities (3,466) -
Loss on sale of securities 15,000 -
Net changes in:
Accrued interest receivable (335,094) (258,122)
Other assets (38,386) (38,491)
Deferred loan costs, net (33,854) (14,887)
Accrued expenses and other liabilities 111,239 86,677
------------ ------------
Net cash provided by (used in) operating
activities 166,156 (266,328)
------------ ------------
Cash flows from investing activities:
Net change in federal funds sold (250,000) 2,360,000
Activity in available for sale securities:
Purchases (10,424,709) (3,999,465)
Principal payments received 6,298 -
Proceeds from sale 1,985,000 -
Net loan (originations) and principal payments (24,018,556) (28,733,791)
Purchase of Federal Home Loan Bank Stock (110,000) (75,000)
Purchase of property and equipment (2,114,545) (1,081,178)
Cash acquired in branch acquisition, net of
premium paid 11,860,315 -
------------ ------------
Net cash used in investing activities (23,066,197) (31,529,434)
------------ ------------
(continued)
F-6
================================================================================
Bank of Davie
Statement of Cash Flows, Continued
--------------------------------------------------------------------------------
For the Year Ended December 31, 2000 and 1999
2000 1999
---- ----
Cash flows from financing activities:
Net increase in deposits $ 22,459,904 $ 32,694,590
Proceeds from FHLB advances 2,200,000 1,500,000
Repayment of FHLB advances (1,000,000) -
Proceeds from issuance of common stock 2,144 -
----------- -----------
Net cash provided by financing activities 23,662,048 $ 34,194,590
----------- -----------
Net increase in cash and cash equivalents 762,007 2,398,333
Cash and cash equivalents at beginning of year $ 2,678,699 $ 280,366
----------- -----------
Cash and cash equivalents at end of year $ 3,440,706 $ 2,678,699
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,944,530 $ 792,877
=========== ===========
Non-cash investing and financing activities:
Deposit liabilities assumed in branch acquisition $ 15,175,118 $ -
Assets acquired in branch acquisition other
than cash and cash equivalents 3,314,803 -
Unrealized gains (losses) on securities available for sale 115,966 (59,621)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
================================================================================
Bank of Davie
Notes of Financial Statements
--------------------------------------------------------------------------------
December 31, 2000 and 1999
1. Summary of Significant Accounting Policies
------------------------------------------
Organization - The Bank of Davie (the "Bank") is a state-chartered commercial
------------
bank subject to regulation by the State of North Carolina Banking Commission
and the Federal Deposit Insurance Corporation. The Bank is headquartered in
Mocksville, North Carolina, and provides retail banking services primarily in
Davie and Moore Counties.
On October 24, 2000, the Bank declared a six for five stock split that was
effected in the form of a 20 percent stock dividend as of December 21, 2000,
to stockholders on record as of December 7, 2000. All per-share data has been
adjusted to include the effect of the stock split. Certain amounts within
these statements and the related notes have been reclassified to conform to
the current year presentation. Such reclassifications had no effect on net
loss or on total stockholders' equity.
The accounting and reporting policies of the Bank follow U.S. generally
accepted accounting principles and general practices within the financial
services industry. The following is a summary of the more significant
accounting policies.
Business - The Bank provides a variety of financial services to individuals
--------
and small businesses through its retail offices. Its primary deposit products
are savings and time certificate accounts and its primary lending products
are consumer and commercial mortgage loans. The Bank does not have
significant concentrations to any one industry or customer.
Use of Estimates - The preparation of financial statements in conformity with
----------------
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Cash and cash equivalents are defined as those
-------------------------
amounts included in the balance sheet captions "cash and due from banks" and
"interest-bearing deposits in banks."
Securities - Securities available for sale are carried at fair value. The
----------
Bank has identified its holdings in debt securities as available for sale.
The unrealized holding gains or losses on securities available for sale are
reported, net of related income tax effects, as accumulated other
comprehensive income unless a valuation reserve has been established. Changes
in unrealized holding gains or losses are included as a component of other
comprehensive income until realized. Gains or losses on sales of securities
available for sale are based on the specific identification method.
F-8
================================================================================
Bank of Davie
Notes of Financial Statements
--------------------------------------------------------------------------------
Loans - The Bank grants mortgage, commercial and consumer loans to customers.
-----
A substantial portion of the loan portfolio is represented by loans in Davie
County and surrounding counties. The ability of the Bank's debtors to honor
its contracts is dependent upon the real estate and general economic
conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for the allowance for loan
losses, loans in process, and any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination costs, are deferred and recognized as
an adjustment of the related loan using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and
in process of collection. All interest accrued but not collected for loans
that are placed on non-accrual or charged off is reversed against interest
income. The interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance Loan Losses - The allowance for loan losses is established as
---------------------
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
F-9
================================================================================
Bank of Davie
Notes of Financial Statements
--------------------------------------------------------------------------------
A loan is considered impaired when, based on current information and events,
it is probable that the Bank will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the
loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
for commercial loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
Office Properties and Equipment - Land is carried at cost. Buildings and
-------------------------------
equipment are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. The cost of maintenance and repairs are
charged to operations as incurred while expenditures that materially increase
property lives are capitalized.
Federal Home Loan Bank Stock - Investment in stock of the Federal Home Loan
----------------------------
Bank is required by law of every member. The investment is carried at cost
since redemptions of this stock have been historically at par. No ready
market exists for the stock, and it has no quoted market value. The stock is
presented in other assets.
Core Deposit Intangible - The core deposit intangible is being amortized over
-----------------------
ten years which approximates the estimated life of the purchased deposits.
The carrying value of the core deposit intangible is periodically evaluated
to estimate the remaining periods of benefit. If these periods of benefits
are determined to be less than the remaining amortizable life, an adjustment
to reflect such shorter life may be necessary.
F-10
================================================================================
Bank of Davie
Notes of Financial Statements
--------------------------------------------------------------------------------
Income Taxes - The Bank utilizes the liability method of computing income
------------
taxes. Under the liability method, deferred tax liabilities and assets are
established for future tax return effects of the temporary differences
between the stated value of assets and liabilities for financial reporting
purposes and their tax bases. The focus is on accruing the appropriate
balance sheet deferred tax amount, with the statement of operations effect
being the result of the changes in the balance sheet amounts from period to
period. Current income tax expense is provided based upon the actual tax
liability incurred for tax return purposes.
An evaluation of the probability of being able to realize the future benefits
of deferred tax assets is made. A valuation allowance is provided for the
portion of the deferred tax asset when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
The Bank has provided such a valuation reserve for all net deferred tax
assets.
Earnings Per Share - Basic earnings per share represents income available to
------------------
common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Bank relate solely to outstanding stock options, and are determined using the
treasury stock method. The earnings per share calculation for December 31,
1999, has been adjusted for a six for five stock split that was effected in
the form of a 20 percent stock dividend declared on October 24, 2000.
Earnings per share have been computed based on the following:
Years Ended December 31,
---------------------------------------------
2000 1999
--------- ----------
Net loss applicable to common stock $ (44,351) $ (531,811)
========= ==========
Average number of common shares outstanding 893,100 892,900
Effect of dilutive options - -
--------- ----------
Average number of common shares outstanding
used to calculate diluted earnings per share $ 893,100 $ 892,900
========= ==========
F-11
================================================================================
Bank of Davie
Notes of Financial Statements
--------------------------------------------------------------------------------
Stock Compensation Plans - Statement of Financial Accounting Standards (SFAS)
------------------------
No. 123, "Accounting for Stock-Based Compensation," encourages all entities
to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. Stock options issued under the Bank's
stock option plan have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. The Bank has
elected to continue with the accounting methodology in Opinion No. 25 and, as
a result, has provided pro forma disclosures of net loss and loss per share
and other disclosures, as if the fair value based method of accounting had
been applied. The pro forma disclosures include the effects of all awards
granted on or after January 1, 1995. (See Note 12.)
Comprehensive Income - Accounting principles generally require that
--------------------
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains
and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
--------------------------------------------
2000 1999
---------- ----------
Unrealized holding gains (losses) on
available-for-sale securities $ 100,966 $ (59,621)
Reclassification adjustment for losses
realized in income 15,000 -
---------- ----------
Net unrealized gains (losses) 115,966 (59,621)
Tax effect, net of valuation allowance - -
---------- ----------
Net-of-tax amount $ 115,966 $ (59,621)
========== ==========
Branch Acquisitions - On November 17, 2000, the Bank consummated the purchase
-------------------
of deposits, loans, building, and equipment of a branch in Moore County. As a
result of this transaction, deposits increased $15.2 million, loans increased
$2.3 million, property and equipment increased $0.3 million, core deposit
intangible increased $.7 million and cash increased $11.9 million.
Approximately $6,500 of the core deposit intangible was amortized in 2000.
F-12
================================================================================
Bank of Davie
Notes of Financial Statements
--------------------------------------------------------------------------------
2. Investment Securities
---------------------
The amortized cost and estimated fair values of investments are summarized as
follows:
December 31, 2000
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------- ------------------ ------------------ ------------------
Debt securities:
U.S. Agency $ 10,988,189 $ 71,659 $ 15,314 $ 11,044,534
Mortgage-backed 1,433,153 - - 1,433,153
-------------- ---------- ----------- -------------
$ 12,421,342 $ 71,659 $ 15,314 $ 12,477,687
============== ========== =========== ============
December 31, 1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ------------------ ------------------ ------------------
Debt securities:
U.S. Agency $ 3,999,465 $ - $ 59,621 $ 3,939,844
============== ========== =========== ============
The Bank had investment securities with a carrying value of approximately
$5,500,000 and $1,850,000 pledged against deposits at December 31, 2000 and
1999, respectively.
The amortized cost and fair value of debt securities by contractual maturity
at December 31, 2000 is as follows:
Available for Sale
--------------------------------------------
Estimated
Amortized Fair
Cost Value
-------------------- --------------------
Over 1 year through 5 years $ 9,988,189 $10,030,002
Over 5 years through 10 years 1,000,000 1,014,532
----------- -----------
10,988,189 11,044,534
Mortgage backed securities 1,433,153 1,433,153
----------- -----------
$12,421,342 $12,477,687
=========== ===========
For the year ended December 31, 2000, proceeds from sale of securities
available for sale of $1,985,000. Gross realized losses amounted to $15,000.
No sales of securities occurred in 1999.
F-13
===============================================================================
Bank of Davie
Notes to Financial Statements
-------------------------------------------------------------------------------
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
December 31,
-----------------------------------------
2000 1999
------ ------
Mortgage loans on real estate:
Residential, 1-4 family $ 3,248,662 $ -
Commercial 30,213,319 15,568,551
Construction 4,292,830 4,040,350
Home equity 5,899,983 2,766,702
------------------ -----------------
43,654,794 22,375,603
------------------ -----------------
Commercial loans 15,303,876 10,733,294
Consumer installment loans:
Installment 2,236,885 1,080,622
Other 642,633 425,490
------------------ -----------------
2,879,518 1,506,112
------------------ -----------------
Subtotal 61,838,188 34,615,009
Less:
Unamortized loan costs 48,741 14,887
Undisbursed portion of loans in process (2,548,463) (1,631,954)
Allowance for loan losses (831,370) (494,969)
------------------ -----------------
Loans, net $ 58,507,096 $ 32,502,973
================== =================
F-14
===============================================================================
Bank Of Davie
Notes to Financial Statements
-------------------------------------------------------------------------------
The changes in the allowance for loan losses are summarized as follows:
For the Year Ended
December 31,
----------------------------------------
2000 1999
------ ------
Beginning balance $ 494,969 $ 63,750
Provision for loan losses 370,040 431,219
Chargeoffs (33,639) -
----------- --------------
Ending balance $ 831,370 $ 494,969
=========== ==============
Directors and officers of the Bank and companies with which they are
affiliated are customers of and borrowers from the Bank in the ordinary
course of business.
Aggregate loan transactions with related parties are as follows:
2000 1999
------ ----
Beginning balance $ 1,952,548 $ 1,673,385
New loans 267,000 675,511
Repayments 97,578 396,348
------------- --------------
Ending balance $ 2,121,970 $ 1,952,548
============= ==============
4. Office Properties and Equipment
-------------------------------
Office properties and equipment are summarized as follows:
December 31,
--------------------------------------
2000 1999
------ ------
Land $ 530,017 $ 489,342
Buildings 2,632,273 -
Leasehold improvements 35,120 35,120
Furniture, fixtures and equipment 680,691 329,741
Construction in progress - 689,353
------------ -----------
3,878,101 1,543,556
Less accumulated depreciation 200,913 82,327
------------ -----------
$ 3,677,188 $ 1,461,229
============ ===========
F-15
===============================================================================
Bank of Davie
Notes to Financial Statements
-------------------------------------------------------------------------------
5. Deposits
--------
The aggregate amount of time deposits with a minimum denomination of $100,000
is approximately $14.6 million and $8.1 million at December 31, 2000 and
1999, respectively.
Contractual maturities of time deposits are summarized as follows:
December 31,
----------------------------------------
2000 1999
----- ----
12 months or less $ 37,069,837 $ 17,048,587
1-2 years 14,489,905 6,043,508
Thereafter 224,646 634,492
------------------ ----------------
$ 51,784,388 $ 23,726,587
================== ================
6. Federal Home Loan Bank Advances
-------------------------------
The Bank has a total credit availability through the Federal Home Loan Bank
(FHLB) of 10% of assets. The Bank had advances outstanding, at December 31,
2000, of $2.7 million at an average interest rate of 6.9%. The advances
mature through March 2005. The Bank pledges as collateral for these
borrowings its FHLB stock and approximately $3.4 million of mortgage loans.
F-16
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
7. Income Taxes
------------
The Bank has operating loss carryforwards of approximately $513,000 for
federal and state purposes that may be used to offset future taxable income.
The carryforwards expire through 2020 and 2015, respectively. The Bank also
has remaining unamortized pre-opening expenses, which have been capitalized
for tax purposes, of approximately $244,000 that may be used to offset future
taxable income during the amortization period.
The differences between actual income tax benefit and the amount computed by
applying the federal statutory income tax rate of 34% are reconciled as
follows:
2000 1999
--------- ---------
Computed income tax benefit $ (15,000) $(181,000)
Changes resulting from:
Valuation allowance (1,000) 186,000
Other 16,000 (5,000)
--------- ---------
Actual income tax benefit $ - $ -
========= =========
The components of deferred income taxes are as follows:
December 31,
--------------------------------
2000 1999
--------- ---------
Deferred tax liabilities:
Accrual to cash adjustments $ 145,000 $ 66,000
Depreciation 24,000 12,000
Securities 14,000 -
--------- ---------
183,000 78,000
--------- ---------
Deferred tax assets:
Net operating loss carryforwards 155,000 139,000
Pre-opening expenses 74,000 100,000
Allowance for loan losses 251,000 151,000
Securities - 14,000
Valuation allowance (297,000) (326,000)
--------- ---------
183,000 78,000
--------- ---------
Net deferred taxes $ - $ -
========= =========
F-17
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
8. Regulatory Matters
------------------
The Bank, as a North Carolina banking corporation, may pay dividends only out
of retained earnings as determined pursuant to North Carolina General
Statutes Section 53-87. However, regulatory authorities may limit payment of
dividends by any bank when it is determined that such a limitation is in the
public interest and is necessary to ensure financial soundness of the bank.
Additionally, dividends for the first three years of operations of new banks
are explicitly prohibited by the State of North Carolina Banking Commission
and the Federal Deposit Insurance Corporation unless special exceptions are
made.
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances based on average daily deposits. At December
31, 2000, the Bank met the regulatory cash requirements.
The Bank is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2000 and
1999, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2000, the Bank met the criteria to be considered well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Bank must maintain the minimum
capital ratios as set forth in the table below.
F-18
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
-------------------------------------------------------------------------------
The Bank's actual capital amounts (in thousands) and ratios are set forth in
the table:
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------- ------------ ------------- ------------ --------------
As of December 31,
2000:
Total Capital (to Risk
Weighted Assets) $7,095 11% $5,027 *8% $6,283 *10%
Tier I Capital (to Risk
Weighted Assets) $6,309 10% $2,513 *4% $3,770 *6%
Tier I Capital (to
Average Assets) $6,309 8% $3,167 *4% $3,958 *5%
As of December 31,
1999:
Total Capital (to Risk
Weighted Assets) $7,557 22% $2,806 *8% $3,507 *10%
Tier I Capital (to Risk
Weighted Assets) $7,118 20% $1,403 *4% $2,104 *6%
Tier I Capital (to
Average Assets) $7,118 19% $1,522 *4% $1,903 *5%
9. Operating Leases
----------------
The Bank has entered into non-cancelable operating lease agreements for
rental of Bank office space. The actual lease expense for the years ended
December 31, 2000 and 1999, was approximately $31,000. Approximate minimum
future lease payments are as follows:
2001 $22,000
2000 13,000
-------
$35,000
=======
------------
* -greater than or equal to
F-19
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
10. Employee Benefit Plan
---------------------
The Bank created a 401(k) Plan in the current year to benefit employees.
Employees that meet certain age and service requirements may participate in
the Plan. Employees may contribute up to 20 percent of their compensation
subject to certain limits based on federal tax laws. The Bank may make
contributions to the Plan as determined by the Bank's Board of Director's.
For the year ended December 31, 2000, expense attributable to the Plan
amounted to approximately $20,000.
11. Commitments and Contingencies
-----------------------------
To accommodate the financial needs of its customers, the Bank makes
commitments under various terms to lend funds. These commitments include
revolving credit agreements, term loan commitments and short-term borrowing
agreements. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness. The amount of
collateral obtained, if it is deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held includes first and second mortgages on one-to-four family
dwellings, accounts receivable, inventory, and commercial real estate.
Certain lines of credit are unsecured.
The following summarizes the Bank's approximate commitments to fund lines of
credit at December 31, 2000 (in thousands):
Commitment
----------
Commercial $ 1,518
Consumer and other lines 8,636
----------
$ 10,154
==========
F-20
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
12. Stock Incentive Plans
---------------------
In accordance with the Bank's Employee Stock Option Plan, the Corporation
may grant options to its directors, officers and employees for up to 223,063
(amended in December 2000 for a six for five stock split) shares of common
stock. Both incentive stock options and non-qualified stock options may be
granted under the Plan. The exercise price of each option equals the market
price of the Corporation's stock on the date of grant and an option's
maximum term is ten years.
The Bank applies APB Opinion 25 and related Interpretations in accounting
for the stock option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Bank's stock option plan been
determined based on the fair value at the grant dates for awards under the
plan consistent with the method prescribed by FASB Statement No. 123, the
Bank's net loss (in thousands) and loss per share (as adjusted for a six for
five stock split) would have been adjusted to the proforma amounts indicated
below:
Years Ended December 31,
---------------------------------------------
2000 1999
---- ----
Net loss:
As reported $ (45) $ (532)
Proforma (82) (574)
Earnings per share--basic:
As reported (.05) (.60)
Proforma (.09) (.64)
Earnings per share--diluted:
As reported (.05) (.60)
Proforma (.09) (.64)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Years Ended December 31,
--------------------------------------------
2000 1999
---- ----
Dividend yield N/A 0.0%
Expected life N/A 5 years
Expected volatility N/A 13.00%
Risk free interest rate N/A 5.25%
F-21
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
A summary of the status of the Bank's stock option plan is presented below as
adjusted for a six for five stock split:
2000 1999
--------------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of period 177,194 $ 9.33 160,994 $ 9.17
Granted - - 22,200 10.42
Exercised (240) 9.17 - -
Forfeited (9,600) 10.42 (6,000) 9.17
--------- -------- --------- --------
Outstanding at end of period 167,354 $ 9.26 177,194 $ 9.33
========= ======== ========= ========
Options exercisable 117,846 $ 9.20 102,422 $ 9.17
========= ======== ========= ========
Weighted average fair value of options
granted during the period $ - $ 4.34
========= =========
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted Weighted
Weighted Average Average
Range of Number Average Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ------------ ---- ----- ----------- -----
$9.17 - $10.42 167,354 7.5 years $ 9.26 117,846 $ 9.20
F-22
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
13. Financial Instruments
---------------------
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Bank's various
financial instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented may
not necessarily represent the underlying fair value of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and short-term
-------------------------
instruments approximate fair values.
Federal Funds Sold - The carrying amounts of federal funds sold approximate
------------------
fair values.
Investment Securities - Fair values for securities are based on quoted
---------------------
market prices.
Loans Receivable - For variable-rate loans that reprice frequently and with
----------------
no significant change in credit risk, fair values are based on carrying
values. Fair values for other loans (e.g., commercial real estate and
investment property mortgage loans, commercial and industrial loans) are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Fair values for non-performing loans, as applicable, are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Other Assets - Other assets include interest receivable and Federal Home
------------
Loan Bank stock. The carrying amount of accrued interest receivable
approximates fair value. The carrying value of Federal Home Loan Bank stock
approximates fair value based on the redemption provisions of the Federal
Home Loan Bank.
Deposit Liabilities - The fair values disclosed for demand deposits (e.g.,
-------------------
interest and non-interest checking, statement savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable-rate, fixed-term money market accounts and certificates
of deposit approximate their fair values at the reporting date. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
F-23
--------------------------------------------------------------------------------
Bank of Davie
Notes to Financial Statements
--------------------------------------------------------------------------------
Federal Home Loan Bank Advances - The fair values of the Bank's advances are
-------------------------------
estimated using discounted cash flow analyses based on the Corporation's
current incremental borrowing rates for similar types of borrowing
arrangements.
Other Liabilities - Other liabilities include accrued interest payable. The
-----------------
carrying amounts of accrued interest payable approximate fair value.
Off-Balance-Sheet Instruments - Fair values for off-balance-sheet, credit-
-----------------------------
related financial instruments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The approximate stated and estimated fair value of financial instruments are
summarized below (in thousands of dollars):
December 31, December 31,
2000 1999
---------------------------------- ----------------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash and cash equivalents $ 3,441 $ 3,441 $ 2,679 $ 2,679
Federal funds sold 4,040 4,040 3,970 3,970
Investment securities 12,478 12,478 3,940 3,940
Loans receivable, net 58,507 57,623 32,503 32,455
Other assets 793 793 348 348
Financial liabilities:
Deposits:
Demand 21,957 21,957 12,380 12,380
Time 51,784 51,913 23,726 23,687
FHLB advances 2,700 2,700 1,500 1,500
Other liabilities 185 185 99 99
Off-balance sheet credit
related financial
instruments:
Commitments to extend credit 10,154 10,154 7,512 7,512
F-24
--------------------------------------------------------------------------------
Bank of Davie
Balance Sheets
--------------------------------------------------------------------------------
June 30 December 31
(unaudited)
2001 2000
----------- -----------
Assets
Cash and due from banks $ 1,425 $ 1,824
Interest bearing deposits in other banks 1,559 1,617
---------- ----------
Cash and cash equivalents 2,984 3,441
Federal funds sold 2,964 4,040
Securities available for sale 11,652 12,477
Loans 71,662 59,338
Less: Allowance for loan losses (1,002) (831)
---------- ----------
Total loans, net 70,660 58,507
Premises and equipment 3,685 3,676
Accrued interest receivable 585 608
Other assets 1,031 1,034
---------- ----------
Total assets $ 93,561 $ 83,783
========== ==========
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing demand deposits $ 5,986 $ 4,886
Interest bearing demand deposits 9,210 9,704
Savings deposits 6,907 7,367
Large denomination time deposits 15,933 14,622
Other time deposits 43,471 37,162
---------- ----------
Total deposits 81,507 73,741
---------- ----------
Other borrowings:
FHLB advances 4,700 2,700
Accrued interest payable 174 185
Other liabilities 24 25
---------- ----------
Total liabilities 86,405 76,651
---------- ----------
Common stock
$5 par value, 5,000,000 shares authorized; issued
and outstanding 893,100 at June 30, 2001 and
at December 31, 2000 4,465 4,465
Surplus 3,311 3,311
Accumulated deficit (798) (700)
Accumulated other comprehensive income 178 56
---------- ----------
Total stockholders' equity 7,156 7,132
---------- ----------
Total liabilities and stockholders' equity $ 93,561 $ 83,783
========== ==========
(See accompanying notes.)
F-25
--------------------------------------------------------------------------------
Bank of Davie
Statements of Operations
-------------------------------------------------------------------------------
Three Month Period Six Month Period
June 30, June 30,
2001 2000 2001 2000
-------- ------- ------- -------
Interest Income
Interest and fees on loans $ 1,480 $ 1,009 $ 2,956 $ 1,823
Interest on Federal Funds sold 33 51 62 106
Interest on securities - taxable 198 142 398 227
Other 34 40 81 68
-------- ------- ------ ------
Total interest income 1,745 1,242 3,497 2,224
-------- ------- ------ ------
Interest Expense
Interest on large denomination
certificates of deposits 228 196 459 331
Interest on other deposits 796 474 1,586 845
Interest on borrowed funds 73 35 119 60
-------- ------- ------ ------
Total interest expense 1,097 705 2,164 1,236
-------- ------- ------ ------
Net interest income 648 537 1,333 988
Provision for loan losses 105 120 190 200
-------- ------- ------ ------
Net interest income after provision
for loan losses 543 417 1,143 788
-------- ------- ------ ------
Noninterest income:
Service charges on deposit accounts 39 19 62 26
Other 39 16 71 35
Securities gains (losses) 9 (15) 12 (15)
-------- ------- ------ ------
Total noninterest income 87 20 145 46
Noninterest expense:
Salaries and benefits 386 298 790 577
Occupancy and equipment 98 58 195 105
Other 202 129 401 254
-------- ------- ------ ------
Total noninterest expense 686 485 1,386 936
Net loss before taxes (56) (48) (98) (102)
Income tax expense - - - -
-------- ------- ------ ------
Net loss $ (56) $ (48) $ (98) $ (102)
======== ======= ====== ======
Basic and diluted loss per share $ (0.06) $( 0.05) $(0.11) $(0.11)
======== ======= ====== ======
Weighted Avg. Shares Outstanding 893 893 893 893
======== ======= ====== ======
(See accompanying notes.)
F-26
--------------------------------------------------------------------------------
Bank of Davie
Statement of Cash Flows
--------------------------------------------------------------------------------
Six month period Six month period
June 30, 2001 June 30, 2000
-------------- --------------
Cash Flows from Operating Activities:
Net loss $ (98) $ (102)
----------- ----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for loan losses 190 200
Depreciation and amortization 132 50
Gain on sale of securities 12 -
Accretion of discounts on securities (30) -
(Increase)decrease in operating assets 37 (186)
Increase (decrease) operating liabilities (12) 63
----------- ----------
Net cash provided by operating activities 231 25
----------- ----------
Cash Flows from Investing Activities:
Decrease in federal funds sold 1,076 1,430
Purchases of premises and equipment (102) (1,146)
Purchases of securities available-for-sale (4,487) (4,488)
Proceeds from sales, calls, maturities and principal
repayments of securities available-for-sale 5,452 -
Purchase of investment CD at other bank - (1,000)
Purchase of FHLB stock (50) (60)
Increase in loans (12,343) (13,339)
----------- ----------
Net cash used in investing activities (10,454) (18,603)
----------- ----------
Cash Flows from Financing Activities:
Increase in deposits 7,766 18,187
Increase in other borrowings 2,000 1,200
Net proceeds from issuance of common stock - 3
----------- ----------
Net cash provided by financing activities 9,766 19,390
----------- ----------
Net increase (decrease) in cash and cash equivalents (457) 812
Cash and cash equivalents at beginning of period 3,441 2,679
----------- ----------
Cash and cash equivalents at end of period $ 2,984 $ 3,491
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,175 $ 1,179
=========== ==========
Cash paid during the period for taxes - -
=========== ==========
Increase (decrease) in fair value of securities
available for sale $ 122 $ (32)
=========== ==========
(See accompanying notes.)
F-27
________________________________________________________________________________
Bank of Davie
Notes to Financial Statements
________________________________________________________________________________
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-QSB and therefore, do not include all disclosures
necessary for a complete presentation of the balance sheets, statements of
operations, and statements of cash flows in conformity with generally accepted
accounting principles. However, all adjustments, which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. All such adjustments are of a normal recurring
nature. The statement of operations for the three and six month periods ended
June 30, 2001 are not necessarily indicative of the results which may be
expected for the entire year or any other future interim period.
It is suggested that these consolidated financial statements be read in
conjunction with the audited financial statements and notes thereto for the Bank
of Davie for the year ended December 31, 2000 which are included in the annual
report to shareholders' and in the Form 10-KSB by reference.
NOTE 2. PENDING MERGER
The Boards of Directors of Bank of Davie, Mocksville, North Carolina and BOC
Financial Corp., Landis, North Carolina announced on July 20, 2001 that they
have entered into a definitive agreement whereby BOC Financial Corp. and its
wholly owned subsidiary, Bank of the Carolinas, would be acquired by Bank of
Davie in a stock exchange. Shareholders of BOC Financial Corp. are to receive
0.92 shares of Bank of Davie common stock for each share of BOC Financial Corp.
common stock. The merger transaction is subject to the approval of the
shareholders of Bank of Davie and BOC Financial as well as state and federal
bank regulatory authorities. It is expected that the shareholders will be
called to vote on the merger during the fourth quarter of this year with an
anticipated closing date of December 31, 2001. The combined institution will be
headquartered in Mocksville, North Carolina and will operate under the name
"Bank of the Carolinas" with Robert E. Marziano as President and Chief Executive
Officer and Stephen R. Talbert as Chairman of the Board of Directors.
NOTE 3. EARNINGS PER SHARE
Basic earnings per common share ("EPS") for all periods presented is computed by
dividing net loss by the weighted average number of common share outstanding.
Diluted earnings per common share is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
and dilutive potential common shares, which include stock options. Dilutive
potential common shares are calculated using the treasury stock method. Options
to purchase shares of the Bank of Davie's common stock were outstanding during
the three and six months ending June 30, 2001, but were not included in the
computation of diluted EPS because their effect would be anti-dilutive.
F-28
________________________________________________________________________________
Bank of Davie
Notes to Financial Statements
________________________________________________________________________________
NOTE 4. COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component in the equity section of the
balance sheet. Such items, along with net income, are considered components of
comprehensive income. The accounting principles do not require per share
amounts of comprehensive income to be disclosed. The information that follows
reconciles net loss to comprehensive income (loss).
3-Months Ended 6-Months Ended
June 30, June 30,
2001 2000 2001 2000
----- ----- ----- -----
Net loss $ (56) $ (48) $ (98) $ (102)
Net unrealized gain (loss) on AFS
securities, net of taxes and 12 (23) 134 (47)
valuation allowance
Reclassification adjustments (9) 15 (12) 15
----------- ---------- --------- ------------
Net comprehensive income (loss) $ (53) $ (56) $ 24 $ (134)
=========== ========== ========= ============
F-29
[This page intentionally left blank.]
F-30
FINANCIAL STATEMENTS OF
BOC FINANCIAL CORP
Index to Consolidated Financial Statements
Page
----
Audited Consolidated Financial Statements
Report of Independent Accountants.................................................... F-32
Consolidated Statements of Financial Condition -- December 31, 2000 and 1999......... F-33
Consolidated Statements of Operations -- Years ended
December 31, 2000 and 1999........................................................ F-34
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 2000 and 1999........................................................ F-35
Consolidated Statements of Cash Flows -- Years ended
December 31, 2000 and 1999........................................................ F-36
Notes to Consolidated Financial Statements -- December 31, 2000 and 1999............. F-38
Unaudited Interim Consolidated Financial Statements
Consolidated Statements of Financial Condition (Unaudited) -- June 30, 2001.......... F-57
Consolidated Statements of Operations (Unaudited) -- Three and six months ended
June 30, 2001 and 2000............................................................ F-58
Consolidated Statements of Cash Flows (Unaudited) -- Six months ended
June 30, 2001 and 2000............................................................ F-59
Notes to Consolidated Financial Statements (Unaudited) -- June 30, 2001.............. F-60
F-31
[LOGO] DIXON ODOM PLLC
Certified Public Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
BOC Financial Corp.
Landis, North Carolina
We have audited the accompanying consolidated statements of financial condition
of BOC Financial Corp. and Subsidiary as of December 31, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BOC Financial Corp.
and Subsidiary at December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Dixon Odom PLLC
Sanford, North Carolina
February 1, 2001
F-32
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
--------------------------------------------------------------------------------
ASSETS 2000 1999
--------------- ----------------
Cash on hand and in banks $ 483,414 $ 569,011
Interest-earning balances in other banks 445,661 2,556,250
Federal funds sold 1,894,480 1,267,719
Investment securities available for sale, at
fair value (Note B) 5,048,173 5,366,430
Loans receivable, net (Note C) 25,638,241 21,100,257
Accrued interest receivable 105,809 74,918
Premises and equipment, net (Note D) 1,073,385 969,125
Stock in the Federal Home Loan Bank, at cost 182,200 175,100
Other assets 126,319 231,404
--------------- ----------------
TOTAL ASSETS $ 34,997,682 $ 32,310,214
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts (Note G) $ 26,583,825 $ 22,146,897
Borrowings (Note F) - 1,900,000
Advance payments from borrowers for property
taxes and insurance 11,481 36,825
Accrued expenses and other liabilities 194,552 182,940
--------------- ----------------
TOTAL LIABILITIES 26,789,858 24,266,662
--------------- ----------------
Commitments and contingencies (Notes C and K)
Stockholders' Equity (Note J):
Preferred stock, no par value, 1,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $1 par value, 9,000,000 shares
authorized; 805,000 shares issued and outstanding 805,000 805,000
Additional paid in capital 4,280,715 4,296,805
Unearned compensation (Note H) (1,480,316) (1,584,205)
Retained earnings, substantially restricted 4,603,595 4,595,368
Accumulated other comprehensive income (loss) (1,170) (69,416)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 8,207,824 8,043,552
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,997,682 $ 32,310,214
=============== ================
See accompanying notes.
F-33
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
--------------- ----------------
INTEREST INCOME
Loans $ 2,039,879 $ 1,444,131
Investments 336,453 265,654
Interest-earning balances in other banks and
federal funds sold 117,716 406,294
--------------- ----------------
TOTAL INTEREST INCOME 2,494,048 2,116,079
--------------- ----------------
INTEREST EXPENSE
Deposit accounts 1,301,726 1,019,836
Borrowings 41,582 33,501
--------------- ----------------
TOTAL INTEREST EXPENSE 1,343,308 1,053,337
--------------- ----------------
NET INTEREST INCOME 1,150,740 1,062,742
PROVISION FOR LOAN LOSSES 9,000 -
--------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,141,740 1,062,742
--------------- ----------------
NON-INTEREST INCOME
Mortgage operations 61,842 7,354
Loss on sale of investments (12,656) -
Other 23,958 6,331
--------------- ----------------
TOTAL NON-INTEREST INCOME 73,144 13,685
--------------- ----------------
NON-INTEREST EXPENSES
Personnel costs 600,075 476,188
Occupancy 107,070 72,580
Data processing and outside service fees 54,546 48,895
Deposit insurance premiums 4,674 11,765
Other 232,150 332,377
--------------- ----------------
TOTAL NON-INTEREST EXPENSES 998,515 941,805
--------------- ----------------
INCOME BEFORE INCOME TAXES 216,369 134,622
INCOME TAX EXPENSE (NOTE I) 60,725 26,000
--------------- ----------------
NET INCOME $ 155,644 $ 108,622
=============== ================
NET INCOME PER COMMON SHARE
Basic and diluted $ .22 $ .14
=============== ===============
Weighted average shares outstanding 704,152 754,969
=============== ================
F-34
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000 and 1999
--------------------------------------------------------------------------------
Accumulated
other
$1 Par value Additional comprehensive Total
common stock paid-in Unearned Retained income stockholders'
---------------------
Shares Amount capital compensation earnings (loss) equity
-------- ---------- ------------ -------------- ------------ --------------- ---------------
Balance at December 31,
1998 879,741 $ 879,741 $ 7,490,173 $ (1,019,027) $ 4,617,125 $ 8,848 $ 11,976,860
Comprehensive income:
Net income - - - - 108,622 - 108,622
Net unrealized loss on
investment securities
available for sale - - - - - (78,264) (78,264)
---------------
Total comprehensive
income 30,358
---------------
Purchase and award of
37,029 common shares
by MRP - - 1,277 (356,400) - - (355,123)
Repurchase of common
stock (74,741) (74,741) (636,352) - (17,644) - (728,737)
MRP shares earned - - - 17,820 - - 17,820
Release of ESOP shares - - - 32,609 - - 32,609
Cash dividends of $.15
per share - - - - (112,735) - (112,735)
Special cash dividend of
$3.50 per share - - (2,558,293) (259,207) - - (2,817,500)
-------- ---------- ------------ -------------- ------------ -------------- ---------------
Balance at December 31,
1999 805,000 805,000 4,296,805 (1,584,205) 4,595,368 (69,416) 8,043,552
Comprehensive income:
Net income - - - - 155,644 - 155,644
Net unrealized gain on
investment securities
available for sale - - - - - 68,246 68,246
---------------
Total comprehensive
income 223,890
---------------
MRP shares earned - - - 71,280 - - 71,280
Release of ESOP shares - - (16,090) 32,609 - - 16,519
Cash dividends of $0.20
per share - - - - (147,417) - (147,417)
-------- ---------- ------------ -------------- ------------ -------------- ---------------
Balance at December 31,
2000 805,000 $ 805,000 $ 4,280,715 $ (1,480,316) $ 4,603,595 $ (1,170) $ 8,207,824
======== ========== ============ ============== ============ ============== ===============
F-35
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 155,644 $ 108,622
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 35,876 25,477
Amortization, net (154) 140
Loss on sale of investments 12,656 -
Provision for loan losses 9,000 -
Deferred income taxes (5,275) (6,300)
Release of ESOP shares 16,519 32,609
Amortization of MRP shares 71,280 17,820
Deferred compensation 16,728 20,788
Changes in assets and liabilities:
Increase in accrued interest receivable (30,891) (20,933)
(Increase) decrease in other assets 72,017 (112,795)
Decrease in accrued expenses and
other liabilities (5,116) (57,339)
--------------- ----------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 348,284 8,089
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-earning balances
in other banks 2,110,589 4,868,724
Net (increase) decrease in federal funds sold (626,761) 17,304
Purchases of available for sale investment securities (1,050,000) (4,000,000)
Proceeds from maturities of available for sale investment
securities 725,000 2,250,000
Proceeds from sales of available for sale investment
securities 737,344 -
Purchase of Federal Home Loan Bank stock (7,100) -
Redemption of Federal Home Loan Bank stock - 12,100
Net increase in loans (4,546,984) (2,967,204)
Purchase of premises and equipment (140,136) (726,620)
--------------- ----------------
NET CASH USED BY
INVESTING ACTIVITIES (2,798,048) (545,696)
--------------- ----------------
See accompanying notes.
F-36
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts $ (3,754,668) $ 2,153,409
Net increase in certificates of deposit 8,191,596 611,512
Proceeds from (repayment of) borrowings (1,900,000) 1,900,000
Net increase (decrease) in advance payments from borrower
for taxes and insurance (25,344) 29,876
Repurchase of common stock - (1,083,860)
Cash dividends paid (147,417) (2,930,235)
-------------- --------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,364,167 680,702
-------------- --------------
NET INCREASE (DECREASE ) IN
CASH ON HAND AND IN BANKS (85,597) 143,095
CASH ON HAND AND IN BANKS, BEGINNING 569,011 425,916
-------------- --------------
CASH ON HAND AND IN BANKS, ENDING $ 483,414 $ 569,011
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,343,308 $ 1,019,836
============== ==============
Income taxes $ 37,200 $ 203,965
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Unrealized holding gains (losses) on available for sale
investment securities, net of deferred income taxes $ 68,246 $ (78,264)
============== ==============
See accompanying notes.
F-37
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
---------------------------
On April 28, 1998, pursuant to a Plan of Conversion which was approved by its
members and regulators, Landis Savings Bank, SSB ("Landis" or the "Bank")
converted from a state-chartered mutual savings bank to a state-chartered stock
commercial bank (the "Conversion"), changed its name to Bank of the Carolinas
(the "Bank") and became a wholly-owned subsidiary of BOC Financial Corp. ("BOC"
or "Parent"). BOC was formed to acquire all of the common stock of the Bank upon
its conversion to stock form. BOC has no operations and conducts no business on
its own other than owning the Bank, investing its portion of the net proceeds
received in the Conversion and lending funds to the Employee Stock Ownership
Plan (the "ESOP") which was formed in connection with the Conversion.
Nature of Business
------------------
Bank of the Carolinas maintains its banking office and conducts its primary
business in Landis, North Carolina. The Bank is primarily engaged in the
business of attracting deposits from the general public and using such deposits
to make mortgage loans secured by one-to-four family residential real estate
located in its primary market area. The Bank also makes home equity line of
credit loans, multi-family residential loans, commercial loans, construction
loans and loans secured by deposit accounts. The Bank operates a loan
origination office in Concord, North Carolina. Bank of the Carolinas has been,
and intends to continue to be, a community-oriented financial institution
offering a variety of financial services to meet the needs of the community it
serves.
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of BOC
and the Bank, together referred to as the "Company." All significant
intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for losses on loans.
F-38
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities
---------------------
The Bank classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading or held to
maturity securities at December 31, 2000 or 1999. All securities are classified
as available for sale.
Available for sale securities consist of investment securities not classified as
trading securities or held to maturity securities and are recorded at fair
value. Unrealized holding gains and losses, net of the related tax effect, on
securities available for sale are excluded from earnings and are reported as a
net amount in other comprehensive income. Transfers of securities between
categories are recorded at fair value at the date of transfer. Unrealized
holding gains or losses associated with transfers of securities from held to
maturity to available for sale are recorded as a component of other
comprehensive income or loss included in stockholders' equity.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses are included
in earnings. The costs of securities sold are derived using the specific
identification method.
Loans Receivable
----------------
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees. Loan origination and commitment fees, as well
as certain direct origination costs, are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest method.
Amortization of deferred loan fees is discontinued when a loan is placed on
nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired. Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is recognized only to the extent of interest
payments received.
A loan is impaired when, based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan agreement
will not be collected. Impaired loans are measured based on the present value of
expected future cash flows, discounted at the loan's effective interest rate or
at the loan's observable market price, or the fair value of the collateral of
the loan if the loan is collateral dependent. Interest income from impaired
loans is recognized using the cash basis method of accounting during the time
within that period in which the loans were impaired.
F-39
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
-------------------------
The Bank provides for loan losses on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
Premises and Equipment
----------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded using straight-line and
accelerated methods over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
Investment in Federal Home Loan Bank Stock
------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Real Estate Acquired In Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent write-downs are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
F-40
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Bank's assets and liabilities result in
deferred tax assets, applicable accounting standards require an evaluation of
the probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
Stock Compensation Plans
------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date and, under
Opinion No. 25, no compensation cost is recognized for them. The Company has
elected to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting had been applied.
Employee Stock Ownership Plan
-----------------------------
The Bank has an ESOP which covers substantially all of its employees. Minimum
contributions to the ESOP are based upon the amortization requirements of the
ESOP's debt to the Parent. Contributions are determined by the Board of
Directors based upon compensation limitations and are expensed in accordance
with the AICPA's Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans.
F-41
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Profit Sharing Plan
-------------------
The Bank has a profit sharing plan that covers substantially all of the Bank's
employees and qualifies under the provisions of (S)401(a) of the Internal
Revenue Code. The Board of Directors determines discretionary contributions on
an annual basis. The Bank also has a non-contributory director's retirement plan
that covers all eligible directors. The expense for the plan is accrued monthly
assuming a 6% discount rate and 100% vesting of benefits. Payment of benefits is
based on age and vesting requirements outlined in the plan.
Earnings Per Common Share
-------------------------
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options and are determined using the treasury stock method. Outstanding
options and unearned shares in the management recognition plan had no dilutive
effect for the years ended December 31, 2000 and 1999.
Recent Accounting Pronouncements
--------------------------------
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. The Bank adopted this Statement on January 1, 2001. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the statement of financial condition and measure them at fair
value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. This Statement
generally provides for matching the timing of the recognition of the gain or
loss on derivatives designated as hedging instruments with the recognition of
the changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in fair
value will be recognized in net income in the period of change. The adoption of
this Statement on January 1, 2001 did not materially affect the Bank's financial
statements.
F-42
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140
is a replacement of SFAS No. 125, although SFAS No. 140 carried forward most of
the provisions of SFAS No. 125 without change. SFAS No. 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitizations, retained interests, and collateral received and pledged in
reverse repurchase agreements for fiscal years ending after December 15, 2000.
The new statement eliminates the prior requirement to record collateral received
under certain securities financing transactions and requires reclassifications
in the balance sheet of assets pledged under certain conditions. The adoption of
SFAS No. 140 is not expected to have a significant impact on the Bank's
financial statements.
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
December 31, 2000
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- -------------- -------------
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 5,050,000 $ 9,188 $ 11,015 $ 5,048,173
------------- -------------- -------------- -------------
$ 5,050,000 $ 9,188 $ 11,015 $ 5,048,173
============= ============== ============== =============
December 31, 1999
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- -------------- -------------
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 5,249,729 $ 272 $ 108,671 $ 5,141,330
Municipal bonds 225,117 - 17 225,100
------------- -------------- -------------- -------------
$ 5,474,846 $ 272 $ 108,688 $ 5,366,430
============= ============== ============== =============
The amortized cost and fair values of securities available for sale at December
31, 2000 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale
-----------------------------------
Amortized Fair
Cost Value
--------------- ----------------
Due within one year $ - $ -
Due after one year through three years 3,300,000 3,298,876
Due after three years through five years 1,750,000 1,749,297
--------------- ----------------
$ 5,050,000 $ 5,048,173
=============== ================
F-43
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
Proceeds from maturities of investment securities available for sale during the
year ended December 31, 2000 were $725,000. Proceeds from maturities of
investment securities available for sale during the year ended December 31, 1999
were $2,250,000. Proceeds from sale of investment securities available for sale
during the year ended December 31, 2000 were $737,344. Losses of $12,656 were
realized from those sales. There were no sales of investment securities in 1999.
Securities with a carrying value of $250,000 at December 31, 2000 were pledged
to secure public monies on deposit as required by law.
The following tables set forth certain information regarding the carrying
values, weighted average yields and contractual maturities of the Company's
investment portfolio and other interest-earning assets at December 31, 2000.
FHLB stock, a nonmarketable equity security, substantially all of which is
required to be maintained, is assumed to mature in periods greater than five
years.
Carrying value
--------------------------------------------------------------------------
After one After three
One year year through years through After five
or less three years five years years Total
------------ -------------- --------------- ------------ -------------
(Dollars in thousands)
Securities available for sale:
U. S. government and agency securities $ - $ 3,299 $ 1,749 $ - $ 5,048
Other:
Interest-earning balances in other banks 446 - - - 446
Federal funds sold 1,894 - - - 1,894
Federal Home Loan Bank Stock - - - 182 182
------------ -------------- --------------- ------------ -------------
Total $ 2,340 $ 3,299 $ 1,749 $ 182 $ 7,570
============ ============== =============== ============ =============
Average Yield
--------------------------------------------------------------------------
After one After three
One year year through years through After five
or less three years five years years Total
------------ -------------- --------------- ------------ -------------
Securities available for sale:
U. S. government and agency securities -% 6.20% 6.79% -% 6.41%
Other:
Interest-earning balances in other banks 6.05% -% -% -% 6.05%
Federal funds sold 6.33% -% -% -% 6.33%
Federal Home Loan Bank Stock -% -% -% 7.75% 7.75%
Weighted average 6.28% 6.20% 6.79% 7.75% 6.40%
F-44
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
2000 1999
-------------------------------- --------------------------------
Percentage Percentage
Amount of total Amount of total
------------ -------------- ------------ --------------
Type of loan:
Real estate loans:
One-to-four family residential
Fixed $ 9,797,078 38.21 $ 9,922,829 47.02%
Adjustable 5,917,001 23.08 5,235,129 24.80
Multi-family residential
Adjustable 1,223,933 4.77 977,005 4.63
Commercial
Fixed 1,558,248 6.08 56,482 .27
Adjustable 1,660,875 6.48 1,803,690 8.55
Construction
Fixed - - - -
Adjustable 4,611,851 17.99 3,059,100 14.50
Home equity lines of credit
Adjustable 1,549,078 6.04 1,441,316 6.83
Home improvement loans
Fixed 1,142,320 4.46 556,588 2.64
------------ ------------ ------------- ------------
Total real estate loans 27,460,384 107.11 23,052,139 109.24
Other loans:
Secured by automobiles 40,378 0.16 38,494 .18
Secured by deposits 33,044 0.13 47,839 .23
Other secured 57,002 0.22 - -
Unsecured 421,500 1.64 - -
------------ ------------ ------------- ------------
Total loans 28,012,308 109.26 23,138,472 109.65
Less:
Construction loans in process (2,231,262) (8.70) (1,899,771) (9.00)
Allowance for loan losses (39,000) (0.15) (30,000) (.14)
Deferred loan origination fees, net of costs (103,805) (0.41) (108,444) (.51)
------------ ------------ ------------- ------------
$ 25,638,241 100.00% $ 21,100,257 100.00%
============ ============ ============= ============
At December 31, 2000 and 1999, and for the years then ended, the Bank had no
nonaccrual loans or restructured loans. The Bank has had no loan charge-offs or
recoveries for the years ended December 31, 2000 and 1999. No provision for loan
losses was made in 1999, while a provision of $9,000 in 2000 increased the
Bank's allowance for loan losses from $30,000 to $39,000.
F-45
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
At December 31, 2000, the Bank had mortgage and consumer loan commitments
outstanding of $3,811,250 and pre-approved but unused lines of credit totaling
$3,586,653. In management's opinion, these commitments, and undisbursed proceeds
on construction loans in process reflected above, represent no more than normal
lending risk to the Bank and will be funded from normal sources of liquidity.
The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and on substantially the
same terms and collateral as those for comparable transactions prevailing at the
time and did not involve more than the normal risk of collectibility or present
other unfavorable features. A summary of related party loan transactions is as
follows:
2000 1999
----------- -----------
Balance at beginning of year $ 240,675 $ 498,334
Additional borrowings 75,582 20,349
Loan repayments (67,125) (278,008)
----------- -----------
Balance at end of year $ 249,132 $ 240,675
=========== ===========
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
2000 1999
----------- -----------
Land $ 655,570 $ 655,570
Building and improvements 527,816 439,970
Furniture and equipment 258,057 205,768
----------- -----------
1,441,443 1,301,308
Accumulated depreciation (368,058) (332,183)
----------- -----------
$ 1,073,385 $ 969,125
=========== ===========
Included in land is a commercial property in Concord, North Carolina that was
acquired in 1999 as a future branch site at a cost of approximately $640,000.
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
F-46
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank has a $3,500,000 line of credit from the Federal Home Loan Bank which
is secured by a blanket floating lien on the Bank's one-to-four family
residential mortgage loans. As of December 31, 2000, there were no advances on
this line of credit.
Borrowings at December 31, 1999 consisted of a note payable to another bank for
$1,900,000, bearing interest at 7.25%. This note was repaid on January 13, 2000.
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at December 31, 2000 and 1999 follows:
2000 1999
------------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------------- ------------- --------------- -----------
Demand accounts:
Regular passbook $ 2,492,318 3.05% $ 2,980,384 3.05%
Money market and other 5,185,388 4.66% 8,451,990 4.64%
--------------- ---------------
7,677,706 4.14% 11,432,374 4.23%
Certificates of deposit 18,906,119 6.58% 10,714,523 5.41%
--------------- ---------------
Total deposit accounts $ 26,583,825 5.87% $ 22,146,897 4.80%
=============== ===============
A summary of certificate accounts by maturity as of December 31, 2000 follows:
Less than $100,000
$100,000 or More Total
--------------- --------------- -------------
Three months or less $ 4,644,034 $ 706,748 $ 5,350,782
Over three months through twelve months 7,125,052 2,071,393 9,196,445
Over one year through three years 2,660,020 1,698,872 4,358,892
--------------- --------------- -------------
Total certificate accounts $ 14,429,106 $ 4,477,013 $ 18,906,119
=============== =============== =============
Interest expense on deposits for the years ended December 31, 2000 and 1999 is
summarized as follows:
2000 1999
-------------- ----------------
Regular passbook savings $ 81,172 $ 97,209
Money market savings 303,871 307,773
Certificates of deposit 916,683 614,854
-------------- ----------------
$ 1,301,726 $ 1,019,836
============== ================
F-47
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Management Recognition Plan
---------------------------
At the annual meeting which was held on April 8, 1999, the Company's
stockholders approved the Management Recognition Plan (the "MRP"). The MRP
provides for the award of up to 37,029 shares of the Company's common stock to
directors, officers and employees of the Bank. The Company elected to fund the
plan by purchasing shares in the open market. During September of 1999, 37,029
common shares were awarded under the MRP at a value of $9.63 per share at the
date of grant. Personnel costs for the years ended December 31, 2000 and 1999
include $71,280 and $17,280, respectively, which represent the value of MRP
shares earned in each year.
Stock Option Plan
-----------------
On April 8, 1999, the stockholders approved the BOC Financial Corp. Stock Option
Plan (the "SOP"). The SOP provides for the issuance to directors, officers, and
employees of the Bank options to purchase up to 175,948 shares of the Company's
common stock. Options granted to directors were fully vested on the date of
grant. Options granted to executive officers and employees vest 20% annually.
All options will expire if not exercised within ten years from the date of
grant.
A summary of the Company's stock option activity and related information for the
years ended December 31, 2000 and 1999 are as follows:
Outstanding Options Exercisable Options
------------------------------ -----------------------------
Shares Weighted Weighted
Available Average Average
for Future Number Exercise Number Exercise
Grants Outstanding Price Outstanding Price
-------------- ------------- ------------ ------------- -------------
At adoption of Plan 175,948 - $ - - $ -
Options granted (77,316) 77,316 6.63 38,000 6.63
-------------- ------------- ------------ ------------- -------------
At December 31, 1999 98,632 77,316 6.63 38,000 6.63
Options granted (8,287) 8,287 5.38 6,971 5.38
Options vesting - - - 7,863 6.63
-------------- ------------- ------------ ------------- -------------
At December 31, 2000 90,345 85,603 $ 6.50 52,834 $ 6.46
============== ============= ============ ============= =============
F-48
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
As permitted by SFAS No. 123, the Company has applied APB Opinion No. 25 for
measurement of stock-based compensation in the accompanying financial
statements. If the Company had used the fair value based method of accounting
for stock-based compensations, operating results for the years ended December
31, 2000 and 1999 would have been affected as set forth below:
As Reported Pro Forma
----------- ---------
For 2000:
Net income $ 155,644 $ 135,983
Net income per share, basic and diluted .22 .19
For 1999:
Net income 108,622 49,227
Net income per share, basic and diluted .14 .07
In determining the pro forma disclosures above, the fair value of options
granted was estimated as of the grant date under the Black-Scholes Option
Pricing Model using the following assumptions: a risk-free interest rate of
5.5%, a dividend yield of 3.72% in 2000 and 3.02% in 1999, an expected life of 7
years, and expected volatility of 16% in 2000 and 20% in 1999. The effects of
applying SFAS No. 123 in the above pro forma disclosure are not indicative of
future amounts.
Profit Sharing Plan
-------------------
On June 26, 1996, the Bank adopted a profit sharing plan under the provisions of
ss.401(a) of the Internal Revenue Code. The directors of the Bank authorize the
contribution of a discretionary amount to the plan at the end of each plan year.
Participation in the plan is available to any employee of the Bank who has at
least one year of service of 1,000 hours or more with the Bank. Also, a
participant's share of the employer contributions begins vesting at a rate of
20% per year after three years of service and is considered fully vested after 7
years of service. Plan benefits are paid out at retirement age (65) or other
times as described in the plan. For years ended December 31, 2000 and 1999, the
Bank incurred expense in the form of contributions to the plan of $27,500 and
$30,000, respectively.
Directors' Retirement Plan
--------------------------
A directors' retirement plan, effective June 1, 1997, was adopted for the
purpose of providing retirement benefits to members of the Board of Directors
who provide expertise in direction of the Bank's growth and to ensure that the
Bank will have their continued assistance in the future. All directors are
eligible to participate in the plan. Retirement benefits, to the extent earned,
will be payable to a participant who has attained the age of 70 years and has
retired from service on the Board. For participants who have attained the age of
65 as of June 1, 1997, benefits are earned over a five-year period beginning on
the first anniversary of the plan at a rate of 20% per year. For all other
participants, benefits are at a rate of 10% per year commencing on the first
anniversary following the participant's tenth year of service as a member of the
Board of Directors. Full retirement benefits are provided in the event of death
or permanent disability. Expenses for this plan were $17,000 and $21,000,
respectively, for the years ended December 31, 2000 and 1999.
F-49
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employee Stock Ownership Plan
-----------------------------
In the mutual to stock conversion, the Bank of the Carolinas Employee Stock
Ownership Plan (the "ESOP") purchased 74,059 shares of the common stock of BOC
Financial Corp. sold in the public offering at a total cost of $1,043,484. The
ESOP executed a note payable to BOC for the full price of the shares purchased.
The note is to be repaid over 32 years in quarterly installments of principal
and interest. Interest is based upon the prime rate and will be adjusted
quarterly. The note may be prepaid without penalty. The unallocated shares of
stock held by the ESOP are pledged as collateral for the note. The ESOP is
funded by contributions made by the Bank in amounts sufficient to retire the
debt. At December 31, 2000 and 1999, the outstanding balance of the note was
$953,810 and $986,419, respectively, and is included in unearned compensation as
a reduction of stockholders' equity.
Dividends on unallocated shares may be used by the ESOP to repay the loan to BOC
and are not reported as dividends in the financial statements. Dividends on
allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements. Special
return of capital dividends on unallocated ESOP shares totaling $259,207 are
recorded as unearned compensation and reported as a reduction of stockholders'
equity. These funds are expected to be used by the ESOP to purchase additional
shares of BOC's common stock which may result in the ESOP owning a larger
percentage of the outstanding common stock than was originally anticipated at
the time of the Conversion.
Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among active participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after five years of credited
service. ___ Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.
Expenses of $16,519 and $32,609 have been incurred in connection with the ESOP
during the years ended December 31, 2000 and 1999, respectively. At December 31,
2000, 9,664 shares held by the ESOP have been released or committed to be
released to the plan's participants for purposes of computing earnings per
share. The fair value of the unallocated shares amounted to approximately
$322,000 at December 31, 2000.
NOTE I - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 2000 and 1999:
2000 1999
--------- --------
Current tax expense $ 66,000 $ 32,300
Net deferred expense (benefit) included in operations (5,275) (6,300)
--------- --------
$ 60,725 $ 26,000
========= ========
F-50
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE I - INCOME TAXES (Continued)
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended December 31, 2000 and 1999:
2000 1999
-------- --------
Income tax at federal statutory rate $ 73,565 $ 45,771
State income tax, net of federal tax benefit (400) 2,311
Effect of graduated rate brackets (6,014) (10,349)
Tax exempt interest income (300) (3,347)
Other (6,126) (8,386)
-------- --------
$ 60,725 $ 26,000
======== ========
Deferred tax assets and liabilities arising from temporary differences at
December 31, 2000 and 1999 are summarized as follows:
2000 1999
-------- --------
Deferred tax assets relating to:
Allowance for loan losses $ 15,008 $ 11,454
Deferred compensation 55,771 44,657
Loan fees and costs 39,947 45,434
Unrealized losses on investment securities
available for sale 657 39,000
-------- --------
Total deferred tax assets 111,383 140,545
-------- --------
Deferred tax liabilities relating to:
FHLB stock dividends (24,701) (24,895)
Depreciation (11,073) (6,316)
-------- --------
Total deferred tax liabilities (35,774) (31,211)
-------- --------
Net deferred tax assets $ 75,609 $109,334
======== ========
Retained earnings at December 31, 2000 include approximately $748,000 for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.
F-51
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE J - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to adjusted assets (as defined) and of tangible capital to adjusted
assets. Management believes, as of December 31, 2000, that the Bank meets all
capital adequacy requirements to which it is subject. The Bank's regulatory
capital amounts and ratios are presented below.
To be well
For capital capitalized under prompt
Actual adequacy purposes corrective action provisions
--------------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------- ------------
(Dollars in thousands)
As of December 31, 2000:
Total Capital
(to Risk Weighted
Assets) $ 8,008 39.4% * $ 1,628 * 8.0% * $ 2,034 * 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 7,969 39.2% * 814 * 4.0% * 1,221 * 6.0%
Tier 1 Capital
(to Adjusted Assets) 7,969 23.1% * 814 * 4.0% * 1,017 * 5.0%
As of December 31, 1999:
Total Capital
(to Risk Weighted
Assets) 9,779 61.1% * 1,280 * 8.0% * 1,600 * 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 9,749 60.9% * 640 * 4.0% * 960 * 6.0%
Tier 1 Capital
(to Adjusted Assets) 9,749 29.9% * 980 * 3.0% * 1,633 * 5.0%
NOTE K - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Landis, North Carolina. The Bank's underwriting policies require
such loans to be made at no greater than 80% loan-to-value based upon appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties.
* denotes greater than or equal to sign
F-52
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE K - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK (Continued)
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit on mortgage loans and
equity lines of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
statements of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of December 31, 2000 is as follows:
Commitments to extend credit, mortgage and consumer loans $ 3,811,250
Undisbursed construction loans 2,231,262
Undisbursed lines of credit 3,586,653
NOTE L - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments include cash, interest-earning balances, federal funds
sold, investment securities, loans, and stock in the Federal Home Loan Bank of
Atlanta, deposit accounts, and commitments. Fair value estimates are made at a
specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no active market readily
exists for a portion of the Bank's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash on hand and in banks, interest-earning balances in other banks,
and federal funds sold
The carrying amounts for these approximate fair value because of the
short maturities of those instruments.
Investment Securities
Fair value for investment securities equals quoted market price if
such information is available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
F-53
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE L - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Stock in Federal Home Loan Bank of Atlanta
The fair value for FHLB stock is its carrying value, since this is
the amount for which it could be redeemed. There is no active market
for this stock and the Bank is required to maintain a minimum balance
based on the unpaid principal of home mortgage loans.
Deposit Liabilities
The fair value of savings deposits is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of
deposit is estimated using rates currently offered for deposits of
similar remaining maturities.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk
discussed in Note K, it is not practicable to estimate the fair value
of future financing commitments.
The carrying amounts and estimated fair values of the Bank's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 2000:
Carrying Estimated
Amount Fair Value
----------- -----------
Financial assets:
Cash, interest bearing balances and
federal funds sold $ 2,823,555 $ 2,823,555
Investment securities 5,048,173 5,048,173
Loans 25,638,241 25,777,000
Stock in Federal Home Loan Bank of Atlanta 182,200 182,200
Financial liabilities:
Deposits 26,583,825 26,319,000
F-54
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE M - PARENT COMPANY FINANCIAL DATA
Following are condensed financial statements of BOC Financial Corp. as of and
for the years ended December 31, 2000 and 1999:
Condensed Statements of Financial Condition
2000 1999
--------------- -----------------
Assets:
Cash $ 271,012 $ 40,483
Note receivable from Bank of the Carolinas - 229,380
Investment in Bank of the Carolinas 7,967,582 9,679,849
Other assets - 29,936
--------------- -----------------
$ 8,238,594 $ 9,979,648
=============== =================
Liabilities and Stockholders' Equity:
Liabilities:
Borrowings $ - $ 1,900,000
Accrued expenses and other liabilities 30,770 36,096
--------------- -----------------
Total liabilities 30,770 1,936,096
--------------- -----------------
Stockholders' Equity:
Common stock 805,000 805,000
Additional paid-in capital 4,280,715 4,296,805
Unearned compensation (1,480,316) (1,584,205)
Retained earnings 4,603,595 4,595,368
Accumulated other comprehensive income (loss) (1,170) (69,416)
--------------- -----------------
Total stockholders' equity 8,207,824 8,043,552
--------------- -----------------
$ 8,238,594 $ 9,979,648
=============== =================
Condensed Statements of Operations
2000 1999
--------------- -----------------
Equity in earnings of subsidiary $ 134,623 $ 71,365
Interest income 90,205 148,385
Operating expenses (68,184) (100,128)
Income taxes (1,000) (11,000)
--------------- -----------------
Net income $ 155,644 $ 108,622
=============== =================
F-55
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
--------------------------------------------------------------------------------
NOTE N - PLAN OF CONVERSION
On September 29, 1997, the Board of Directors of the Bank adopted a Plan of
Holding Company Conversion whereby the Bank converted from a state-chartered
mutual savings bank to a state-chartered stock commercial bank and became a
wholly owned subsidiary of BOC (the "Company" or "Holding Company") a holding
company formed in connection with the conversion. On April 28, 1998, the Bank
completed its conversion. The conversion occurred through the sale of 925,741
shares of common stock ($1.00 par value) of BOC. Total proceeds of $9.3 million
were reduced by conversion expenses of $450,000. BOC paid $5.0 million to the
Bank in exchange for the common stock of the Bank issued in the conversion, and
retained the balance of the net conversion proceeds. The transaction was
recorded as an "as-if" pooling with assets and liabilities recorded at
historical cost.
At the time of conversion, the Bank established 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 sub account 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.
F-56
BOC FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2001 and December 31, 2000
-------------------------------------------------------------------------------
June 30, 2001 December 31,
(Unaudited) 2000*
--------------- ----------------
(In Thousands)
ASSETS
Cash on hand and in banks $ 513 $ 483
Interest-bearing balances in other banks 748 446
Federal funds sold 1,749 1,895
Investment securities available for sale, at fair value 1,311 5,048
Loans receivable, net 35,224 25,638
Accrued interest receivable 96 106
Premises and equipment, net 1,083 1,073
Stock in the Federal Home Loan Bank, at cost 204 182
Other assets 194 127
------------- --------------
TOTAL ASSETS $ 41,122 $ 34,998
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 30,743 $ 26,584
Borrowings 2,000 -
Advance payments from borrowers for
property taxes and insurance 28 11
Accrued expenses and other liabilities 159 195
------------- --------------
TOTAL LIABILITIES 32,930 26,790
------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $1 par value, 9,000,000 shares
authorized, 805,000 shares issued and outstanding 805 805
Additional paid-in capital 4,274 4,281
Unearned compensation (1,429) (1,481)
Accumulated other comprehensive income (loss) 7 (1)
Retained earnings, substantially restricted 4,535 4,604
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 8,192 8,208
------------- --------------
$ 41,122 $ 34,998
============= ==============
*Derived from audited financial statements.
See accompanying notes.
F-57
BOC FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Six Months Ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------- ------------- -------------
(In Thousands, except per share data)
INTEREST INCOME
Loans $ 677 $ 503 $ 1,282 $ 956
Investments 41 84 113 170
Deposits in other banks and
federal funds sold 28 14 61 41
------------ ------------- ------------- --------------
TOTAL INTEREST INCOME 746 601 1,456 1,167
------------ ------------- ------------- --------------
INTEREST EXPENSE
Deposits 421 292 832 570
Borrowings 21 14 30 19
------------ ------------- ------------- --------------
TOTAL INTEREST EXPENSE 442 306 862 589
------------ ------------- ------------- --------------
NET INTEREST INCOME 304 295 594 578
PROVISION FOR LOAN LOSSES 147 3 150 3
------------ ------------- ------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 157 292 444 575
------------ ------------- ------------- --------------
NON-INTEREST INCOME (LOSS) 52 (3) 105 5
------------ ------------- ------------- --------------
NON-INTEREST EXPENSES
Personnel costs 183 139 364 296
Occupancy 25 24 48 51
Data processing and outside service fees 14 14 30 27
Other 56 60 102 106
------------ ------------- ------------- --------------
TOTAL NON-INTEREST EXPENSES 278 237 544 480
------------ ------------- ------------- --------------
INCOME (LOSS) BEFORE
INCOME TAXES (69) 52 5 100
PROVISION FOR INCOME TAXES (25) 16 - 30
------------ ------------- ------------- --------------
NET INCOME (LOSS) $ (44) $ 36 $ 5 $ 70
============ ============= ============= ===============
INCOME (LOSS) PER COMMON SHARE
Basic and diluted $ (0.06) $ 0.05 $ 0.01 $ 0.10
============ ============= ============= ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING 742,305 738,812 741,930 738,380
============ ============= ============= ==============
CASH DIVIDEND PER SHARE $ 0.05 $ 0.05 $ 0.10 $ 0.10
============ ============= ============= ==============
See accompanying notes.
F-58
BOC FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------------
2001 2000
------------- -------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18 14
Loss on sale of assets, net - 13
Provision for loan losses 150 3
Amortization of unearned compensation 45 52
Deferred compensation 9 8
Deferred tax benefit (52) -
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable 10 (24)
(Increase) decrease in other assets (20) 37
Decrease in accrued expenses and other liabilities (45) (29)
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 120 144
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing balances in other banks (302) 2,345
Net (increase) decrease in federal funds sold 146 (114)
Purchases of available for sale investment securities - (550)
Proceeds from maturities and sale of available for sale securities 3,750 1,462
(Purchase) redemption of Federal Home Loan Bank Stock (22) (7)
Net increase in loans (9,736) (3,427)
Purchases of premises and equipment (28) (26)
------------- -------------
NET CASH USED BY
INVESTING ACTIVITIES (6,192) (317)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts 915 (2,879)
Net increase in certificates of deposit 3,244 4,468
Net increase (decrease) in borrowings 2,000 (900)
Net increase in advance payments from borrowers
for taxes and insurance 17 5
Cash dividends paid (74) (77)
------------- -------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 6,102 617
------------- -------------
NET INCREASE IN CASH
ON HAND AND IN BANKS 30 444
CASH ON HAND AND IN BANKS, BEGINNING 483 569
------------- -------------
CASH ON HAND AND IN BANKS, ENDING $ 513 $ 1,013
============= =============
See accompanying notes.
F-59
BOC FINANCIAL CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
June 30, 2001
--------------------------------------------------------------------------------
NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three and
six month periods ended June 30, 2001 and 2000, in conformity with generally
accepted accounting principles. The financial statements include the accounts of
BOC Financial Corp. (the "Company") and its wholly-owned subsidiary, Bank of the
Carolinas (the "Bank"). Operating results for the three and six month periods
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2001.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the financial
statements filed as part of BOC Financial Corp.'s annual report on Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
NOTE B - PENDING MERGER
The Boards of Directors of Bank of Davie, Mocksville, North Carolina and BOC
Financial Corp., Landis, North Carolina announced on July 20, 2001 that they had
entered into a definitive agreement whereby BOC Financial Corp. and its wholly
owned subsidiary, Bank of the Carolinas, would be acquired by Bank of Davie in a
stock exchange. Shareholders of BOC Financial Corp. are to receive 0.92 shares
of Bank of Davie common stock for each share of BOC Financial Corp. common
stock. The merger transaction is subject to the approval of the shareholders of
Bank of Davie and BOC Financial as well as state and federal bank regulatory
authorities. It is expected the shareholders will be called to vote on the
merger during the fourth quarter of this year with an anticipated closing date
of December 31, 2001. The combined institution will be headquartered in
Mocksville, North Carolina and will operate under the name "Bank of the
Carolinas" with Stephen R. Talbert as Chairman of the Board of Directors and
Robert E. Marziano as President and Chief Executive Officer.
F-60
PRO FORMA FINANCIAL STATEMENTS
BANK OF DAVIE AND BOC FINANCIAL CORP
Index to Pro Forma Financial Statements
Page
----
Pro forma Combined Condensed Balance Sheet (Unaudited) -- June 30, 2001................. F-62
Pro forma Combined Condensed Income Statement -- For the six months
ended June 30, 2001................................................................... F-63
Pro forma Combined Condensed Income Statements -- For the year
ended December 31, 2000............................................................... F-64
F-61
--------------------------------------------------------------------------------
Bank of Davie and BOC Financial Corporation
Proforma Combined Condensed Balance Sheet
--------------------------------------------------------------------------------
June 30, 2001 (in thousands - unaudited)
BOC Financial
Bank of Corporation & Proforma
Davie Subsidiary Adjustments Combined
------------- ------------- ------------- -------------
Assets
------
Cash and cash equivalents $ 2,984 $ 1,261 $ - $ 4,245
Investment securities 11,652 1,515 - 13,167
Federal funds sold 2,964 1,749 - 4,713
Loans receivable, net 70,660 35,224 - 105,884
Office properties and equipment, net 3,685 1,083 - 4,768
Other assets 1,616 290 677 /3/ 1,921
(662)/2/
------------- ------------- ------------- -------------
Total assets $ 93,561 $ 41,122 $ 15 $ 134,698
============= ============= ============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 81,507 $ 30,743 $ - $ 112,250
Borrowings 4,700 2,000 - 6,700
Other liabilities 198 187 677 /3/ 1,062
------------- ------------- ------------- -------------
Total liabilities 86,405 32,930 677 120,012
------------- ------------- ------------- -------------
Stockholders' equity:
Common stock, $5, par value, 2,000,000
shares authorized, proforma 1,572,171
shares issued 4,465 805 3,423 /2/ 7,888
(805)/2/
Surplus 3,311 4,274 4,107 /2/ 7,418
(4,274)/2/
Unearned compensation - (1,429) 1,429 /1/ -
Retained earnings (accumulated deficit) (798) 4,535 (1,429)/1/ (798)
(3,106)/2/
Accumulated other comprehensive income 178 7 (7)/2/ 178
------------- ------------- ------------- -------------
Total stockholders' equity 7,156 8,192 (662) 14,686
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 93,561 $ 41,122 $ 15 $ 134,698
============= ============= ============= =============
/1/ To reflect the charge to retained earnings for the balance of the unearned
compensation amount.
/2/ To record the elimination of BOC equity and issuance of 684,555 ((805,000
less 60,918) x .92) shares of BOD stock @ $11 per share in the exchange and
adjust goodwill for the difference.
/3/ To reflect the estimated costs net of taxes.
F-62
--------------------------------------------------------------------------------
Bank of Davie and BOC Financial Corporation
Proforma Combined Condensed Income Statements
--------------------------------------------------------------------------------
For the six months ended June 30, 2001 (in thousands - unaudited)
BOC Financial
Bank of Corporation & Proforma
Davie Subsidiary Adjustments Combined
------------- ------------- ------------- -------------
Interest income
Loans and fees on loans $ 2,956 $ 1,282 $ - $ 4,238
Investment securities 398 113 - 511
Federal funds sold 143 61 - 204
------------- ------------- ------------- -------------
Total interest income 3,497 1,456 - 4,953
------------- ------------- ------------- -------------
Interest expense
Deposits 2,045 832 - 2,877
Short-term debt 119 30 - 149
------------- ------------- ------------- -------------
Total interest expense 2,164 862 - 3,026
------------- ------------- ------------- -------------
Net interest income 1,333 594 - 1,927
Provision for loan losses 190 150 - 340
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 1,143 444 - 1,587
------------- ------------- ------------- -------------
Other income
Service charges on deposit accounts 62 - - 62
Security gains (losses) 12 - - 12
Other 71 105 - 176
------------- ------------- ------------- -------------
Total other income 145 105 - 250
------------- ------------- ------------- -------------
Other expenses
Salaries 790 364 - 1,154
Occupancy 195 48 - 243
Equipment 26 30 - 56
Other 375 102 5 /1/ 482
------------- ------------- ------------- -------------
Total other expense 1,386 544 5 1,935
------------- ------------- ------------- -------------
Income before income taxes (98) 5 (5) (98)
Income taxes (benefit) - - - -
------------- ------------- ------------- -------------
Net income $ (98) $ 5 $ (5) $ (98)
============= ============= ============= =============
Net income per share $ (0.11) $ 0.01 $ (0.06)
============= ============= =============
/1/ To amortize goodwill.
F-63
--------------------------------------------------------------------------------
Bank of Davie and BOC Financial Corporation
Proforma Combined Condensed Income Statements
--------------------------------------------------------------------------------
For the year ended December 31, 2000 (in thousands - unaudited)
BOC Financial
Bank of Corporation & Proforma
Davie Subsidiary Adjustments Combined
-------- ---------- ----------- --------
Interest income
Loans and fees on loans $ 4,321 $ 2,040 $ - $ 6,361
Investment securities 543 336 - 879
Federal funds sold 412 118 - 530
-------- ------- ----------- --------
Total interest income 5,276 2,494 - 7,770
-------- ------- ----------- --------
Interest expense
Deposits 2,889 1,302 - 4,191
Short-term debt 149 41 - 190
-------- ------- ----------- --------
Total interest expense 3,038 1,343 - 4,381
-------- ------- ----------- --------
Net interest income 2,238 1,151 - 3,389
Provision for loan losses 370 9 - 379
-------- ------- ----------- --------
Net interest income after provision
for loan losses 1,868 1,142 - 3,010
-------- ------- ----------- --------
Other income
Service charges on deposit accounts 118 24 - 142
Security gains (losses) (15) (13) - (28)
Other 13 62 - 75
-------- ------- ----------- --------
Total other income 116 73 - 189
-------- ------- ----------- --------
Other expenses
Salaries 1,227 600 - 1,827
Occupancy 248 107 - 355
Equipment 52 54 - 106
Other 501 237 11 /1/ 749
-------- ------- ----------- --------
Total other expense 2,028 998 11 3,037
-------- ------- ----------- --------
Income before income taxes (44) 217 (11) 162
Income taxes (benefit) - 61 (61)/2/ -
-------- ------- ----------- --------
Net income $ (44) $ 156 $ 50 $ 162
======== ======= =========== ========
Net income per share $ 0.05 $ 0.22 $ 0.10
======== ======= ========
/1/ To amortize goodwill.
/2/ To record tax benefit of Bank of Davie's loss.
F-64
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
By and Between
BANK OF DAVIE,
BANK OF THE CAROLINAS
and
BOC FINANCIAL CORP.
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement")
is entered into as of the 20th day of July 2001, by and between BANK OF DAVIE
("Davie"), BANK OF THE CAROLINAS ("Carolinas") and BOC FINANCIAL CORP. ("BOC").
WHEREAS, Davie is a North Carolina banking corporation with its
principal office and place of business located in Mocksville, North Carolina;
and,
WHEREAS, Carolinas is a North Carolina banking corporation with its
principal office and place of business located in Landis, North Carolina; and,
WHEREAS, BOC is a North Carolina business corporation with its
principal office and place of business located in Landis, North Carolina, and by
virtue of its being the owner of all the issued and outstanding shares of common
stock of Carolinas is a bank holding company registered as such with the Board
of Governors of the Federal Reserve System; and,
WHEREAS, Davie, Carolinas and BOC have agreed that it is in their
mutual best interests and in the best interests of their respective shareholders
for BOC and Carolinas to be merged with and into Davie in the manner and upon
the terms and conditions contained in this Agreement; and,
WHEREAS, to effectuate the foregoing, Davie, Carolinas and BOC desire
to adopt this Agreement as a plan of reorganization in accordance with the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended;
and,
WHEREAS, Davie's Board of Directors has approved this Agreement and
will recommend to Davie's shareholders that they approve this Agreement and the
transactions described herein; and,
WHEREAS, Carolinas' and BOC's respective Boards of Directors have each
approved this Agreement and BOC's Board of Directors, by virtue of the fact that
it is the sole shareholder of Carolinas, desires to approve this Agreement as
sole shareholder by authorizing the execution hereof, and BOC's Board of
Directors will recommend to BOC's shareholders that they approve this Agreement
and the transactions described herein.
NOW, THEREFORE, in consideration of the premises, the mutual benefits
to be derived from this Agreement, and the representations, warranties,
conditions, covenants and promises herein contained, and subject to the terms
and conditions hereof, Davie, Carolinas and BOC hereby adopt and make this
Agreement and mutually agree as follows:
A-1
ARTICLE I
THE MERGER
1.01. Names of Merging Corporations. The names of the corporations
-----------------------------
proposed to be merged are Bank of Davie ("Davie") and BOC Financial Corp.
("BOC").
1.02. Nature of Transaction; Plan of Merger. Subject to the provisions of
-------------------------------------
this Agreement, at the "Effective Time" (as defined in Paragraph 1.07 below),
BOC will be merged into and with Davie (the "Merger") as provided in the plan of
merger (the "Plan of Merger") attached as Exhibit A to this Agreement.
---------
1.03. Effect of Merger; Surviving Corporation. At the Effective Time, and
---------------------------------------
by reason of the Merger, the separate corporate existence of BOC shall cease
while the corporate existence of Davie as the surviving corporation in the
Merger shall continue with all of its purposes, objects, rights, privileges,
powers and franchises, all of which shall be unaffected and unimpaired by the
Merger. Following the Merger, Davie shall continue to operate as a North
Carolina banking corporation and will conduct its business at the then legally
established branch and main offices of Davie. The duration of the corporate
existence of Davie, as the surviving corporation, shall be perpetual and
unlimited.
1.04. Assets and Liabilities of BOC. At the Effective Time, and by reason
-----------------------------
of the Merger, and in accordance with applicable law, all of the property,
assets and rights of every kind and character of BOC (including without
limitation all real, personal or mixed property, all debts due on whatever
account, all other chooses in action and every other interest of or belonging to
or due to BOC, whether tangible or intangible) shall be transferred to and vest
in Davie, and Davie shall succeed to all the rights, privileges, immunities,
powers, purposes and franchises of a public or private nature of BOC (including
all trust and other fiduciary properties, powers and rights), all without any
conveyance, assignment or further act or deed; and, Davie shall become
responsible for all of the liabilities, duties and obligations of every kind,
nature and description of BOC (including duties as trustee or fiduciary) as of
the Effective Time. By virtue of the Merger, BOC's interest in and ownership of
the outstanding shares of $5.00 par value common stock of its wholly-owned
subsidiary, Bank of the Carolinas ("Carolinas"), shall be transferred to and
vest in Davie, and Carolinas shall become a wholly-owned subsidiary of Davie.
1.05. Conversion and Exchange of Stock.
--------------------------------
(a) Conversion of BOC Stock. Except as otherwise provided in this
-----------------------
Agreement, at the Effective Time all rights of BOC's shareholders with respect
to all outstanding shares of BOC's $1.00 par value common stock (the "BOC
Stock") shall cease to exist and, as consideration for and to effect the Merger,
each such outstanding share shall be converted, without any action by Davie, BOC
or any BOC shareholder, into the right to receive 0.92 shares of $5.00 par value
common stock issued by Davie ("Davie Stock").
At the Effective Time, and without any action by Davie, BOC or any
BOC shareholder, BOC's stock transfer books shall be closed and there shall be
no further transfers of BOC Stock on its stock transfer books or the
registration of any transfer of a certificate evidencing BOC Stock (a "BOC
Certificate") by any holder thereof, and the holders of BOC Certificates shall
cease to be, and shall have no further rights as, stockholders of BOC other than
as provided in this Agreement. Following the Effective Time, BOC Certificates
shall evidence only the right of the registered holder thereof to receive shares
of Davie Stock as provided in this Paragraph 1.05(a), or in the case of BOC
Stock held by shareholders who properly shall have exercised "Dissenters Rights"
(as defined in Paragraph 1.05(d)), cash as provided in Article 13 of the North
Carolina Business Corporation Act.
(b) Exchange and Payment Procedures; Surrender of Certificates. As
----------------------------------------------------------
promptly as practicable, but not more than five business days following the
Effective Time, Davie shall send or cause to be sent to each former BOC
shareholder of record immediately prior to the Effective Time written
instructions and transmittal materials (a "Transmittal Letter") for use in
surrendering BOC Certificates to Davie or to an exchange agent appointed by
Davie. Upon the proper surrender and delivery to Davie or its agent (in
accordance with its instructions, and accompanied by a properly completed
Transmittal Letter) by a former shareholder of BOC of his or her BOC
Certificate(s), and in exchange therefor, Davie shall as soon as
A-2
practicable issue and deliver to the shareholder a certificate evidencing the
Davie Stock into which the shareholder's BOC Stock has been converted.
Subject to Paragraph 1.05(e), no certificate evidencing Davie Stock
shall be issued or delivered to any former BOC shareholder unless and until such
shareholder shall have properly surrendered to Davie or its agent the BOC
Certificate(s) formerly representing his or her shares of BOC Stock, together
with a properly completed Transmittal Letter. Further, until a former BOC
shareholder's BOC Certificates are so surrendered and certificates for the Davie
Stock into which his or her BOC Stock was converted at the Effective Time
actually are issued to him or her, no dividend or other distribution payable by
Davie with respect to that Davie Stock as of any date subsequent to the
Effective Time shall be paid or delivered to the former BOC shareholder.
However, upon the proper surrender of the shareholder's BOC Certificate, Davie
shall pay to the shareholder the amount of any such dividends or other
distributions which have accrued but remain unpaid with respect to that Davie
Stock.
(c) Antidilutive Adjustments. If, prior to the Effective Time, BOC or
------------------------
Davie shall declare any dividend payable in shares of BOC Stock or Davie Stock
or shall subdivide, split, reclassify or combine the presently outstanding
shares of BOC Stock or Davie Stock, then an appropriate and proportionate
adjustment shall be made in the number of shares of Davie Stock to be issued in
exchange for each of the shares of BOC Stock.
(d) Dissenters. Any shareholder of BOC who properly exercises the
----------
right of dissent and appraisal with respect to the Merger as provided in Section
55-13-02 of the North Carolina General Statutes ("Dissenter's Rights") shall be
entitled to receive payment of the fair value of his or her shares of BOC Stock
in the manner and pursuant to the procedures provided therein. Shares of BOC
Stock held by persons who exercise Dissenter's Rights shall not be converted as
described in Paragraph 1.05(a). However, if any shareholder of BOC who exercises
Dissenter's Rights shall fail to perfect those rights, or effectively shall
waive or lose such rights, then each of his or her shares of BOC Stock, at
Davie's sole option, shall be deemed to have been converted into the right to
receive Davie Stock as of the Effective Time as provided in Paragraph 1.05(a)
hereof.
(e) Lost Certificates. Shareholders of BOC whose BOC Certificates
-----------------
have been lost, destroyed, stolen or otherwise are missing shall be entitled to
receive the certificates evidencing Davie Stock to which they are entitled in
accordance with and upon compliance with reasonable conditions imposed by Davie,
including without limitation a requirement that those shareholders provide lost
instruments indemnities or surety bonds in form, substance and amounts
satisfactory to Davie.
1.06. Bank Merger. As soon as practicable following the Effective Time,
-----------
Carolinas will be merged into and with Davie (the "Bank Merger") as provided in
the plan of merger (the "Plan of Bank Merger") attached as Exhibit B to this
---------
Agreement, at which time Davie's corporate name shall be changed to "Bank of the
Carolinas."
1.07 Articles of Incorporation, Bylaws and Management. The Articles of
------------------------------------------------
Incorporation and Bylaws of Davie in effect at the Effective Time shall be the
Articles of Incorporation and Bylaws of Davie as the surviving corporation in
each of the Merger and the Bank Merger, provided, however, that, in connection
with the Bank Merger, the name of Davie shall be changed to "Bank of the
Carolinas." The directors of BOC and Carolinas in office at the Effective Time
shall be appointed to the Board of Directors of Davie and the chairman of the
Board of Directors of BOC in office at the Effective Time shall be named
chairman of the Board of Directors of Davie, each to hold such office until
removed as provided by law or until the election or appointment of their
respective successors. The directors and officers of Davie in office at the
Effective Time shall continue to hold such offices until removed as provided by
law or until the election or appointment of their respective successors. The
officers of BOC and Carolinas in office at the effective time shall be named to
positions with Davie as indicated in Exhibit C, attached hereto and hereby
---------
incorporated by reference.
A-3
1.08. Closing; Effective Time. The closing of the Merger, the Bank
-----------------------
Merger, and other transactions contemplated by this Agreement (the "Closing")
shall take place at the offices of Davie, in Mocksville, North Carolina, or at
such other place as Davie shall designate, on a date mutually agreeable to Davie
and BOC (the "Closing Date") after the expiration of any and all required
waiting periods following the effective date of required approvals of the Merger
and the Bank Merger by governmental or regulatory authorities (but in no event
more than sixty (60) days following the expiration of all such required waiting
periods). At the Closing, Davie, BOC and Carolinas shall take such actions
(including without limitation the delivery of certain closing documents and the
execution of Articles of Merger under North Carolina law) as are required in
this Agreement and as otherwise shall be required by law to consummate the
Merger and the Bank Merger and cause each to become effective.
Subject to the terms and conditions set forth in this Agreement, the Merger
shall become effective on the date and at the time (the "Effective Time")
specified in Articles of Merger, containing the appropriate certificate of
approval of the North Carolina Commissioner of Banks, executed by Davie, and
filed by it with the North Carolina Secretary of State in accordance with
applicable law; provided, however, that the Effective Time shall in no event be
more than ten (10) days following the Closing Date. The Bank Merger shall
become effective on the date and at the time specified in the Articles of Merger
executed by Davie and filed by it with the North Carolina Secretary of State in
accordance with applicable law, provided, however, that Davie shall use its best
efforts to cause the Bank Merger to become effective as soon as practicable
following the Effective Time.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
BOC AND CAROLINAS
Except as otherwise specifically described in this Agreement or as
"Previously Disclosed" (as defined in Paragraph 10.13) by BOC and Carolinas to
Davie, BOC and Carolinas hereby make the following representations and
warranties to Davie.
2.01. Organization; Standing; Power. BOC and Carolinas each (i) is duly
-----------------------------
organized and incorporated, validly existing and in good standing as a
corporation under the laws of the State of North Carolina; (ii) has all
requisite power and authority (corporate and other) to own, lease and operate
its properties and to carry on its business as it now is being conducted; (iii)
is duly qualified to do business and is in good standing in each jurisdiction in
which the character of the properties owned, leased or operated by it therein,
or in which the transaction of its business, makes such qualification necessary,
except where failure so to qualify would not have a material adverse effect on
BOC and Carolinas considered as one enterprise; and (iv) is not transacting
business or operating any properties owned or leased by it in violation of any
provision of federal, state or local law or any rule or regulation promulgated
thereunder, except where such violation would not have a material adverse effect
on BOC and Carolinas considered as one enterprise.
2.02. Capital Stock.
-------------
(a) BOC's authorized capital stock consists of 9,000,000 shares of
common stock, $1.00 par value, one vote per share (the "BOC Stock") and
1,000,000 shares of preferred stock, no par value. At the Effective Time, there
will be not more than 805,000 shares of common stock issued and outstanding, and
no shares of preferred stock issued or outstanding.
Each outstanding share of the BOC Stock (i) has been duly authorized
and is validly issued and outstanding, and is fully paid and nonassessable, and
(ii) has not been issued in violation of the preemptive rights of any
shareholder. The BOC Stock has been registered with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and BOC is subject to the registration and reporting
requirements of the 1934 Act.
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(b) Carolinas' authorized capital stock consists of 1,000,000 shares
of common stock, $5.00 par value, one vote per share (the "Carolinas Stock").
At the Effective Time, there will be 100,000 shares of the Carolinas Stock
issued and outstanding.
Each outstanding share of Carolinas Stock (i) has been duly authorized
and is validly issued and outstanding, and is fully paid and nonassessable
(except to the extent provided in N.C. Gen. Stat. (S) 53-42), and (ii) has not
been issued in violation of the preemptive rights of any shareholder.
2.03. Principal Shareholders. BOC owns 100% of the outstanding stock of
----------------------
Carolinas. Except as Previously Disclosed, no person or entity is known to
management of BOC to beneficially own, directly or indirectly, more than 5% of
the outstanding shares of BOC Stock.
2.04. Subsidiaries. Carolinas has no subsidiaries, direct or indirect, and,
------------
except for equity securities included in its investment portfolio at December
31, 2000, does not own any stock or other equity interest in any other
corporation, service corporation, joint venture, partnership or other entity.
Carolinas is the only subsidiary of BOC.
2.05. Convertible Securities, Options, Etc. Except as Previously
------------------------------------
Disclosed, BOC does not have any outstanding (i) securities or other obligations
(including debentures or other debt instruments) which are convertible into
shares of BOC Stock or any other securities of BOC; (ii) options, warrants,
rights, calls or other commitments of any nature which entitle any person to
receive or acquire any shares of BOC Stock or any other securities of BOC; or
(iii) plans, agreements or other arrangements pursuant to which shares of BOC
Stock or any other securities of BOC, or options, warrants, rights, calls or
other commitments of any nature pertaining to any securities of BOC, have been
or may be issued.
2.06. Authorization and Validity of Agreement. This Agreement has been
---------------------------------------
duly and validly approved by the respective Boards of Directors of BOC and
Carolinas. Subject only to approval of the shareholders of BOC in the manner
required by law and receipt of all required approvals of governmental or
regulatory authorities having jurisdiction over Davie, BOC or Carolinas
(collectively, the "Regulatory Authorities") of the transactions described
herein, (i) BOC and Carolinas each have the corporate power and authority to
execute and deliver this Agreement and to perform its obligations and agreements
and carry out the transactions described in this Agreement, (ii) all corporate
proceedings and approvals required to authorize BOC and Carolinas to enter into
this Agreement and to perform their obligations and agreements and carry out the
transactions described herein have been duly and properly completed or obtained,
and (iii) this Agreement constitutes the valid and binding agreement of BOC and
Carolinas enforceable in accordance with its terms (except to the extent
enforceability may be limited by (A) applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect which
affect creditors' rights generally, (B) legal and equitable limitations on the
availability of injunctive relief, specific performance and other equitable
remedies, and (C) general principles of equity and applicable laws or court
decisions limiting the enforceability of indemnification provisions).
2.07. Validity of Transactions; Absence of Required Consents or Waivers.
-----------------------------------------------------------------
Subject to the receipt of required approvals of Regulatory Authorities, neither
the execution and delivery of this Agreement, nor the consummation of the
transactions described herein, nor compliance by BOC or Carolinas with any of
the obligations or agreements contained herein, nor any action or inaction by
BOC or Carolinas required herein, will: (i) conflict with or result in a breach
of the terms and conditions of, or constitute a default or violation under any
provision of, the Articles of Incorporation or Bylaws of BOC or Carolinas, or
any material contract, agreement, lease, mortgage, note, bond, indenture,
license, or obligation or understanding (oral or written) to which BOC or
Carolinas is bound or by which they or their business, capital stock or any of
its properties or assets may be affected; (ii) result in the creation or
imposition of any material lien, claim, interest, charge, restriction or
encumbrance upon any of the properties or assets of BOC or Carolinas; (iii)
violate any applicable federal or state statute, law, rule or regulation, or any
judgment, order, writ, injunction or decree of any court, administrative or
regulatory agency or governmental body, which violation will or may have a
material adverse
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effect on BOC or Carolinas, their financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties or
operations, or on BOC's or Carolinas' ability to consummate the transactions
described herein or to carry on the business of BOC or Carolinas as presently
conducted; (iv) result in the acceleration of any material obligation or
indebtedness of BOC or Carolinas; or (v) interfere with or otherwise adversely
affect BOC's or Carolinas' respective abilities to carry on their respective
businesses as presently conducted.
No consents, approvals or waivers are required to be obtained from
any person or entity in connection with BOC's or Carolinas' execution and
delivery of this Agreement, or the performance of their obligations or
agreements or the consummation of the transactions described herein, except for
required approvals of Regulatory Authorities.
2.08. Books and Records of BOC and Carolinas. BOC's and Carolinas' books
--------------------------------------
of account and business records have been maintained in all material respects in
compliance with all applicable legal and accounting requirements, and such books
and records are complete and reflect accurately in all material respects BOC's
and Carolinas' items of income and expense and all of their assets, liabilities
and stockholders' equity. The minute books of BOC and Carolinas are complete and
accurately reflect in all material respects all corporate actions which their
shareholders and boards of directors, and all committees thereof, have taken
during the time periods covered by such minute books, and, all such minute books
have been or will be made available to Davie and its representatives.
2.09. Reports of BOC and Carolinas. To the "Best Knowledge" (as defined
----------------------------
in Paragraph 10.14 hereof) of management of BOC and Carolinas, BOC and Carolinas
have filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with (i) the North Carolina Commissioner of Banks (the "Commissioner"),
(ii) the Federal Deposit Insurance Corporation (the "FDIC"), (iii) the
Securities and Exchange Commission (the "SEC"), or (iv) any other Regulatory
Authorities. All such reports, registrations and statements filed by BOC and
Carolinas with the Commissioner, the FDIC, the SEC or any other Regulatory
Authorities are collectively referred to in this Agreement as the "BOC Reports."
To the Best Knowledge of management of BOC and Carolinas, the BOC Reports
complied in all material respects with all the statutes, rules and regulations
enforced or promulgated by the Regulatory Authorities with which they were filed
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. BOC and Carolinas have not been notified that any such BOC Reports
were deficient in any material respect as to form or content.
2.10. BOC Financial Statements. BOC and Carolinas have Previously
------------------------
Disclosed to Davie a copy of BOC's consolidated audited statements of financial
condition as of December 31, 1999 and 2000, and its consolidated audited
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1999 and 2000, together with notes thereto (collectively, the "BOC
Audited Financial Statements"), together with copies of BOC's consolidated,
unaudited statements of financial condition as of March 31, 2001, and
consolidated unaudited statements of income and cash flows for the three-months
ended March 31, 2000 and 2001 (collectively, the "BOC Interim Financial
Statements"). Following the date of this Agreement, BOC promptly will deliver to
Davie all other annual or interim financial statements prepared by or for BOC.
The BOC Audited Financial Statements and the BOC Interim Financial Statements
(i) were prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods indicated, (ii)
are in accordance with BOC's books and records and (iii) present fairly BOC's
consolidated financial condition, assets and liabilities, results of operations,
changes in stockholders' equity and changes in cash flows as of the dates
indicated and for the periods specified therein. The BOC Audited Financial
Statements have been audited by Dixon Odom PLLC, which currently serves as BOC's
independent certified public accountants.
2.11. Tax Returns and Other Tax Matters. (i) BOC and Carolinas have
---------------------------------
timely filed or caused to be filed all federal, state and local income tax
returns and reports which are required by law to have been filed,
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and, to the Best Knowledge of management of BOC and Carolinas, all such returns
and reports were true, correct and complete and contained all material
information required to be contained therein; (ii) all federal, state and local
income, profits, franchise, sales, use, occupation, property, excise,
withholding, employment and other taxes (including interest and penalties),
charges and assessments which have become due from or been assessed or levied
against BOC and Carolinas or its respective properties have been fully paid or,
if not yet due, a reserve or accrual, which is adequate in all material respects
for the payment of all such taxes to be paid and the obligation for such unpaid
taxes, is reflected on the BOC Interim Financial Statements; (iii) the income,
profits, franchise, sales, use, occupation, property, excise, withholding,
employment and other tax returns and reports of BOC and Carolinas have not been
subjected to audit by the Internal Revenue Service (the "IRS") or the North
Carolina Department Revenue in the last ten years and BOC and Carolinas have not
received any indication of the pendency of any audit or examination in
connection with any such tax return or report and, to the Best Knowledge of
management of BOC and Carolinas, no such return or report is subject to
adjustment; and (iv) BOC and Carolinas have not executed any waiver or extended
the statute of limitations (or been asked to execute a waiver or extend a
statute of limitations) with respect to any tax year, the audit of any such tax
return or report, or the assessment or collection of any tax.
2.12. Absence of Material Adverse Changes or Certain Other Events.
-----------------------------------------------------------
(a) Since December 31, 2000, BOC and Carolinas each has conducted
its business only in the ordinary course, and there has been no material adverse
change, and there has occurred no event or development, and there currently
exists no condition or circumstance, which, with the lapse of time or otherwise,
may or could cause, create or result in a material adverse change in or
affecting the financial condition of BOC or Carolinas or the respective results
of operations, prospects, business, assets, loan portfolio, investments,
properties or operations of BOC or Carolinas, as applicable.
(b) Since December 31, 2000, and other than in the ordinary course
of its business, BOC and Carolinas have not incurred any material liability,
engaged in any material transaction, entered into any material agreement,
increased the salaries, compensation or general benefits payable or provided to
its employees, suffered any material loss, destruction or damage to any of its
properties or assets, or made a material acquisition or disposition of any
assets or entered into any material contract or lease.
2.13. Absence of Undisclosed Liabilities. BOC and Carolinas do not have
----------------------------------
any material liabilities or obligations, whether known or unknown, matured or
unmatured, accrued, absolute, contingent or otherwise, whether due or to become
due (including without limitation tax liabilities or unfunded liabilities under
employee benefit plans or arrangements), other than (i) those reflected in the
BOC Financial Statements or BOC Interim Financial Statements, (ii) increases in
deposit accounts in the ordinary course of business since March 31, 2001, or
(iii) loan commitments permitted under this Agreement since June 30, 2001, and
which do not exceed $100,000 in the case of any individual loan or $1,000,000 in
the case of all loans.
2.14. Compliance with Existing Obligations. BOC and Carolinas each has
------------------------------------
performed in all material respects all obligations required to be performed
under, and are not in default in any material respect under, or in violation in
any material respect of, the terms and conditions of their respective Articles
of Incorporation, Bylaws, material contracts, agreements, leases, mortgages,
notes, bonds, indentures, licenses, obligations, understandings or other
undertakings (whether oral or written) to which they are bound or by which their
business, operations, capital stock or any property or assets may be affected.
2.15. Litigation and Compliance with Law.
----------------------------------
(a) Except as Previously Disclosed, there are no actions, suits,
arbitrations, controversies or other proceedings or investigations (or, to the
Best Knowledge of management of BOC and Carolinas, any facts or circumstances
which reasonably could result in such), including without limitation any such
action by any Regulatory Authority, which currently exist or are ongoing,
pending or, to the Best Knowledge of
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management of BOC and Carolinas, are threatened, contemplated or probable of
assertion, against, relating to or otherwise affecting BOC or Carolinas or any
of their properties, assets or employees.
(b) BOC and Carolinas have all licenses, permits, orders,
authorizations or approvals ("Permits") of all federal, state, local or foreign
governmental or regulatory agencies that are material to or necessary for the
conduct of their business or to own, lease and operate their properties; all
such Permits are in full force and effect; no violations have occurred with
respect to any such Permits; and no proceeding is pending or, to the Best
Knowledge of management of BOC and Carolinas, threatened or probable of
assertion to suspend, cancel, revoke or limit any Permit.
(c) Neither BOC nor Carolinas is subject to any supervisory
agreement, enforcement order, writ, injunction, capital directive, supervisory
directive, memorandum of understanding or other similar agreement, order,
directive, memorandum or consent of, with or issued by any Regulatory Authority
(including without limitation the Commissioner or the FDIC) relating to
financial condition, directors or officers, employees, operations, capital,
regulatory compliance or any other matter; there are no judgments, orders,
stipulations, injunctions, decrees or awards against BOC or Carolinas which
limit, restrict, regulate, enjoin or prohibit in any material respect any
present or past business or practice of BOC or Carolinas; and, BOC and Carolinas
have not been advised and have no reason to believe that any Regulatory
Authority or any court is contemplating, threatening or requesting the issuance
of any such agreement, order, writ, injunction, directive, memorandum, judgment,
stipulation, decree or award.
(d) To the Best Knowledge of management of BOC and Carolinas, BOC
and Carolinas are not in violation or default in any material respect under, and
have complied in all material respects with, all laws, statutes, ordinances,
rules, regulations, orders, writs, injunctions or decrees of any court or
federal, state, municipal or other Regulatory Authority having jurisdiction or
authority over it or its business operations, properties or assets (including
without limitation all provisions of North Carolina law relating to usury, the
Consumer Credit Protection Act, and all other federal and state laws and
regulations applicable to extensions of credit by BOC or Carolinas). To the Best
Knowledge of management of BOC and Carolinas, there is no basis for any claim by
any person or authority for compensation, reimbursement, damages or other
penalties or relief for any violations described in this subparagraph (d).
2.16. Real Properties. BOC and Carolinas have Previously Disclosed to
---------------
Davie a listing of all real property owned by BOC or Carolinas (including
Carolinas' banking facilities and all other real estate or foreclosed
properties, including improvements thereon, owned by BOC or Carolinas)
(collectively, the "BOC Real Property"). With respect to each parcel of the BOC
Real Property, BOC and Carolinas have good and marketable fee simple title to
the BOC Real Property and own the same free and clear of all mortgages, liens,
leases, encumbrances, title defects and exceptions to title other than (i) the
lien of current taxes not yet due and payable, and (ii) such imperfections of
title and restrictions, covenants and easements (including utility easements)
which do not materially affect the value of the BOC Real Property or which do
not and will not materially detract from, interfere with or restrict the present
or future use of the BOC Real Property.
The BOC Real Property complies in all material respects with all
applicable federal, state and local laws, regulations, ordinances or orders of
any governmental or regulatory authority, including those relating to zoning,
building and use permits, and the parcels of the BOC Real Property upon which
BOC's offices or Carolinas' banking or other offices are situated, or which are
used by BOC or Carolinas in conjunction with their banking or other offices or
for other purposes, may, under applicable zoning ordinances, be used for the
purposes for which they currently are used as a matter of right rather than as a
conditional or nonconforming use.
All improvements and fixtures included in or on the BOC Real
Property are in good condition and repair, ordinary wear and tear excepted, and
there does not exist any condition which in any material respect interferes with
BOC's or Carolinas' respective use (or will interfere with Davie's use after the
Merger) or affects the economic value thereof.
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Neither BOC nor Carolinas is party (whether as lessee or lessor) to
any lease or rental agreement with respect to any real property.
2.17. Loans, Accounts, Notes and Other Receivables.
--------------------------------------------
(a) All loans, accounts, notes and other receivables reflected as
assets on BOC's and Carolinas' books and records (i) have resulted from bona
fide business transactions in the ordinary course of operations, (ii) in all
material respects were made in accordance with BOC's or Carolinas' standard
practices and procedures, and (iii) are owned by BOC or Carolinas free and clear
of all liens, encumbrances, assignments, participation or repurchase agreements
or other exceptions to title or to the ownership or collection rights of any
other person or entity.
(b) All records of BOC or Carolinas regarding all outstanding
loans, accounts, notes and other receivables, and all other real estate owned,
are accurate in all material respects, and, each loan which Carolinas' loan
documentation indicates is secured by any real or personal property or property
rights ("Loan Collateral") is secured by valid, perfected and enforceable liens
on all such Loan Collateral having the priority described in Carolinas' records
of such loan.
(c) To the Best Knowledge of management of BOC and Carolinas, each
loan reflected as an asset on BOC's or Carolinas' books, and each guaranty
therefor, is the legal, valid and binding obligation of the obligor or guarantor
thereon, and no defense, offset or counterclaim has been asserted with respect
to any such loan or guaranty.
(d) BOC and Carolinas have Previously Disclosed to Davie (i) a
written listing of each loan, extension of credit or other asset of BOC or
Carolinas which, as of June 30, 2001, was classified by the Commissioner or the
FDIC or by BOC or Carolinas as "Loss," "Doubtful," "Substandard" or "Special
Mention" (or otherwise by words of similar import), or which BOC or Carolinas
otherwise has designated as a special asset or for special handling or placed on
any "watch list" because of concerns regarding the ultimate collectibility or
deteriorating condition of such asset or any obligor or Loan Collateral
therefor, and (ii) a written listing of each loan or extension of credit of BOC
or Carolinas which, as of June 30, 2001, was past due more than 30 days as to
the payment of principal or interest, or as to which any obligor thereon
(including the borrower or any guarantor) otherwise was in default, was the
subject of a proceeding in bankruptcy or has indicated any inability or
intention not to repay such loan or extension of credit.
(e) To the Best Knowledge of management of BOC and Carolinas, each
of the loans and other extensions of credit of BOC or Carolinas (with the
exception of those loans and extensions of credit specified in the written
listings described in Paragraph 2.17(d) above) is collectible in the ordinary
course of business in an amount which is not less than the amount at which it is
carried on their books and records.
(f) Except as Previously Disclosed, Carolinas' reserve for possible
loan losses (the "Loan Loss Reserve") has been established in conformity with
GAAP, sound banking practices and all applicable requirements, rules and
policies of the Commissioner and the FDIC and, in the best judgment of
management of Carolinas, is reasonable in view of the size and character of
Carolinas' loan portfolio, current economic conditions and other relevant
factors, and is adequate to provide for losses relating to or the risk of loss
inherent in Carolinas' loan portfolios and other real estate owned.
2.18. Securities Portfolio and Investments. BOC and Carolinas have
------------------------------------
Previously Disclosed to Davie a listing of all securities owned, of record or
beneficially, by BOC and Carolinas as of June 30, 2001. All securities owned,
of record or beneficially, by BOC and Carolinas are held free and clear of all
mortgages, liens, pledges, encumbrances or any other restriction or rights of
any other person or entity, whether contractual or statutory (other than
customary pledges in the ordinary course of their business to secure public
funds deposits), which would materially impair the ability of BOC or Carolinas
to dispose freely of any such security or otherwise to realize the benefits of
ownership thereof at any time. There are no voting trusts or other
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agreements or undertakings to which BOC or Carolinas is a party with respect to
the voting of any such securities. With respect to all "repurchase agreements"
under which BOC or Carolinas has "purchased" securities under agreement to
resell, BOC or Carolinas has a valid, perfected first lien or security interest
in the government securities or other collateral securing the repurchase
agreement, and the value of the collateral securing each such repurchase
agreement equals or exceeds the amount of the debt owed to BOC or Carolinas
which is secured by such collateral.
Since March 31, 2001, there has been no material deterioration or
adverse change in the quality, or any material decrease in the value, of the
securities portfolio of BOC or that or Carolinas as a whole.
2.19. Personal Property and Other Assets. All banking equipment, data
----------------------------------
processing equipment, vehicles, and other personal property used by BOC or
Carolinas and material to the operation of the business of either are owned by
BOC or Carolinas free and clear of all liens, encumbrances, leases, title
defects or exceptions to title. To the Best Knowledge of management of BOC and
Carolinas, all personal property of BOC and Carolinas material to their business
is in good operating condition and repair, ordinary wear and tear excepted.
2.20. Patents and Trademarks. To the Best Knowledge of management of BOC
----------------------
and Carolinas, BOC and Carolinas each owns, possesses or has the right to use
any and all patents, licenses, trademarks, trade names, copyrights, trade
secrets and proprietary and other confidential information necessary to conduct
its business as now conducted. BOC and Carolinas each has not violated, and
currently is not in conflict with, any patent, license, trademark, trade name,
copyright or proprietary right of any other person or entity.
2.21. Environmental Matters.
---------------------
(a) As used in this Agreement, "Environmental Laws" shall mean,
without limitation:
(i) all federal, state and local statutes, regulations,
ordinances, orders, decrees, and similar provisions having the force or effect
of law (including without limitation the Comprehensive Environmental Response,
Compensation and Liability Act; the Superfund Amendment and Reauthorization Act;
the Federal Insecticide, Fungicide and Rodenticide Act; the Hazardous Materials
Transportation Act; the Resource Conservation and Recovery Act; the Clean Water
Act; the Clean Air Act; the Toxic Substances Control Act; the Oil Pollution Act;
the Coastal Zone Management Act; any "Superfund" or "Superlien" law; the North
Carolina Oil Pollution and Hazardous Substances Control Act; the North Carolina
Water and Air Resources Act; and the North Carolina Occupational Safety and
Health Act, including any amendments thereto from time to time), and,
(ii) all common law concerning public health and safety,
worker health and safety, and pollution or protection of the environment,
including without limitation all standards of conduct and bases of obligations
relating to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, reporting, testing,
processing, discharge, release, threatened release, control, or clean-up of any
"Hazardous Substances" (as defined below).
"Hazardous Substance" shall mean any materials, substances, wastes,
chemical substances, or mixtures presently listed, defined, designated, or
classified as hazardous, toxic, or dangerous, or otherwise regulated, under any
Environmental Laws, whether by type, quantity or concentration, including
without limitation pesticides, pollutants, contaminants, toxic chemicals, oil,
or other petroleum products, byproducts or additives, asbestos or materials
containing (or presumed to contain) asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, lead, radon, methyl tertiary butyl ether ("MTBE")
or radioactive material.
(b) BOC and Carolinas have Previously Disclosed to Davie copies of
all written reports, correspondence, notices or other information or materials,
if any, in its possession pertaining to environmental surveys or assessments of
the BOC Real Property, and any improvements thereon, or pertaining to any
violation
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or alleged violation of Environmental Laws on, affecting or otherwise involving
the BOC Real Property or involving BOC or Carolinas.
(c) There has been no presence, use, production, generation, handling,
transportation, treatment, storage, disposal, emission, discharge, release, or
threatened release of any Hazardous Substances by any person on, from or
relating to the BOC Real Property which constitutes a violation of any
Environmental Laws, or any removal, clean-up or remediation of any Hazardous
Substances from, on or relating to the BOC Real Property.
(d) Neither BOC nor Carolinas has violated any Environmental Laws, and
there has been no violation of any Environmental Laws by any other person or
entity for whose liability or obligation with respect to any particular matter
or violation BOC or Carolinas is or may be responsible or liable.
(e) Neither BOC nor Carolinas is subject to any claims, demands,
causes of action, suits, proceedings, losses, damages, penalties, liabilities,
obligations, costs or expenses of any kind and nature which arise out of, under
or in connection with, or which result from or are based upon the presence, use,
production, generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, emission, discharge,
release, threatened release, control, removal, clean-up or remediation of any
Hazardous Substances on, from or relating to the BOC Real Property or by any
person or entity.
(f) No facts, events or conditions relating to the BOC Real Property
or the operations of BOC or Carolinas at any of its office locations, will
prevent, hinder or limit continued compliance with Environmental Laws, or give
rise to any investigatory, emergency removal, remedial or corrective actions,
obligations or liabilities (whether accrued, absolute, contingent, unliquidated
or otherwise) pursuant to Environmental Laws.
(g) To the Best Knowledge of management of BOC and Carolinas (it being
understood by Davie that, for purposes of this representation, management of BOC
and Carolinas has not undertaken a review of each of BOC's or Carolinas' loan
files with respect to all Loan Collateral), (i) there has been no violation of
any Environmental Laws by any person or entity (including any violation with
respect to any Loan Collateral) for whose liability or obligation with respect
to any particular matter or violation BOC or Carolinas is or may be responsible
or liable, (ii) BOC and Carolinas are not subject to any claims, demands, causes
of action, suits, proceedings, losses, damages, penalties, liabilities,
obligations, costs or expenses of any kind and nature which arise out of, under
or in connection with, or which result from or are based upon, the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, reporting, testing, processing, emission,
discharge, release, threatened release, control, removal, clean-up or
remediation of any Hazardous Substances on, from or relating to any Loan
Collateral, by any person or entity, and (iii) there are no facts, events or
conditions relating to any Loan Collateral that will give rise to any
investigatory, emergency removal, remedial or corrective actions, obligations or
liabilities pursuant to Environmental Laws.
2.22. Absence of Brokerage or Finder's Commissions. Except for the
--------------------------------------------
engagement of Sterne, Agee & Leach, Inc., Raleigh, North Carolina by BOC (i) no
person or firm has been retained by or has acted on behalf of, pursuant to any
agreement, arrangement or understanding with, or under the authority of, BOC or
Carolinas or their respective Boards of Directors, as a broker, finder or agent
or has performed similar functions or otherwise is or may be entitled to receive
or claim a brokerage fee or other commission in connection with or as a result
of the transactions described herein; and, (ii) neither BOC nor Carolinas has
agreed, or has any obligation, to pay any brokerage fee or other commission to
any person or entity in connection with or as a result of the transactions
described herein.
2.23. Material Contracts. Other than a benefit plan or employment
------------------
agreement Previously Disclosed to Davie pursuant to Paragraph 2.25, neither BOC
nor Carolinas is party to or bound by any agreement (i) involving money or other
property in an amount or with a value in excess of $25,000, (ii) which is not to
be
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performed in full prior to December 31, 2001, (iii) which calls for the
provision of goods or services to BOC or Carolinas and cannot be terminated
without material penalty upon written notice to the other party thereto, (iv)
which is material to BOC or Carolinas and was not entered into in the ordinary
course of business, (v) which involves hedging, options or any similar trading
activity, or interest rate exchanges or swaps, (vi) which commits BOC or
Carolinas to extend any loan or credit (with the exception of letters of credit,
lines of credit and loan commitments extended in the ordinary course of
Carolinas' business), (vii) which involves the sale of any assets of BOC or
Carolinas which are used in and material to the operation of their business,
(viii) which involves any purchase of real property, or which involves the
purchase of any other assets in the amount of $10,000 in the case of any single
transaction or $25,000 in the case of all such transactions, (ix) which involves
the purchase, sale, issuance, redemption or transfer of any capital stock or
other securities of BOC or Carolinas, or (x) with any director, officer or
principal shareholder of BOC or Carolinas (including without limitation any
consulting agreement, but not including any agreements relating to loans or
other banking services which were made in the ordinary course of Carolinas'
business and on substantially the same terms and conditions as were prevailing
at that time for similar agreements with unrelated persons).
Neither BOC nor Carolinas is in default in any material respect, and
there has not occurred any event which with the lapse of time or giving of
notice or both would constitute such a default, under any contract, lease,
insurance policy, commitment or arrangement to which either BOC or Carolinas is
a party or by which either BOC or Carolinas or property of BOC or Carolinas is
or may be bound or affected or under which either BOC or Carolinas or property
of BOC or Carolinas receives benefits, where the consequences of such default
would have a material adverse effect on the financial condition, results of
operations, prospects, business, assets, loan portfolio, investments, properties
or operations of BOC or Carolinas.
2.24. Employment Matters; Employee Relations. BOC and Carolinas have
--------------------------------------
Previously Disclosed to Davie a listing of the names, years of credited service
and current base salary or wage rates of all of their employees as of June 30,
2001. BOC and Carolinas (i) each have in all material respects paid in full to
or accrued on behalf of all their respective directors, officers and employees
all wages, salaries, commissions, bonuses, fees and other direct compensation
for all labor or services performed by them to the date of this Agreement, and
all vacation pay, sick pay, severance pay, overtime pay and other amounts for
which it is obligated under applicable law or BOC's or Carolinas' existing
agreements, benefit plans, policies or practices, and (ii) are each in
compliance with all applicable federal, state and local laws, statutes, rules
and regulations with regard to employment and employment practices, terms and
conditions, and wages and hours and other compensation matters; and, no person
has, to the Best Knowledge of management of BOC and Carolinas, asserted that BOC
or Carolinas is liable in any amount for any arrearage in wages or employment
taxes or for any penalties for failure to comply with any of the foregoing.
There is no action, suit or proceeding by any person pending or, to
the Best Knowledge of management of BOC or Carolinas, threatened, against BOC or
Carolinas (or any employees of BOC or Carolinas), involving employment
discrimination, sexual harassment, wrongful discharge or similar claims.
Neither BOC nor Carolinas is party to or bound by any collective
bargaining agreement with any of its employees, any labor union or any other
collective bargaining unit or organization. There is no pending or threatened
labor dispute, work stoppage or strike involving BOC or Carolinas and any of
their employees, or any pending or threatened proceeding in which it is asserted
that BOC or Carolinas has committed an unfair labor practice; and, to the Best
Knowledge of management of BOC and Carolinas, there is no activity involving
BOC, Carolinas, or any of their employees seeking to certify a collective
bargaining unit or engaging in any other labor organization activity.
2.25. Employment Agreements; Employee Benefit Plans.
---------------------------------------------
(a) BOC and Carolinas have Previously Disclosed to Davie a true and
complete list of all bonus, deferred compensation, pension, retirement, profit-
sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase,
restricted stock and stock option plans; all employment and severance contracts;
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all medical, dental, health, and life insurance plans; all vacation, sickness
and other leave plans, disability and death benefit plans; and all other
employee benefit plans, contracts, or arrangements maintained or contributed to
by BOC or Carolinas for the benefit of any employees, former employees,
directors, former directors or any of their beneficiaries (collectively, the
"BOC Plans"). True and complete copies of all BOC Plans, including, but not
limited to, any trust instruments or insurance contracts, if any, forming a part
thereof or applicable to the administration of any such BOC Plans or the assets
thereof, and all amendments thereto, previously have been supplied to Davie.
Except as Previously Disclosed, BOC and Carolinas do not maintain, sponsor,
contribute to or otherwise participate in any "Employee Benefit Plan" within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), any "Multi-employer Plan" within the meaning of Section
3(37) of ERISA, or any "Multiple Employer Welfare Arrangement" within the
meaning of Section 3(40) of ERISA. Each BOC Plan which is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA and which is intended
to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code") has received or applied for a favorable determination
letter from the IRS to the effect that they are so qualified, and neither BOC
nor Carolinas is aware of any circumstances reasonably likely to result in the
revocation or denial of any such favorable determination letter. All reports
and returns with respect to the BOC Plans (and any BOC Plans previously
maintained by BOC or Carolinas) required to be filed with any governmental
department, agency, service or other authority, including without limitation
Internal Revenue Service Form 5500 (Annual Report), have been properly and
timely filed.
(b) All "Employee Benefit Plans" maintained by or otherwise covering
employees or former employees of BOC or Carolinas, to the extent each is subject
to ERISA, currently are, and at all times have been, in compliance with all
material provisions and requirements of ERISA. There is no pending or
threatened litigation relating to any BOC Plan or any employee benefit plan,
contract or arrangement previously maintained by BOC or Carolinas. Neither BOC
nor Carolinas have engaged in a transaction with respect to any BOC Plan that
could subject BOC or Carolinas to a tax or penalty imposed by either Section
4975 of the Code or Section 502(i) of ERISA.
(c) BOC and Carolinas have delivered to Davie a true, correct and
complete copy (including copies of all amendments thereto) of each retirement
plan maintained by it which is intended to be a plan qualified under Section
401(a) of the Code (collectively, the "BOC Retirement Plans"), together with
true, correct and complete copies of the summary plan descriptions relating to
the BOC Retirement Plans, the most recent determination letters received from
the IRS regarding the BOC Retirement Plans, and the most recent Annual Reports
(Form 5500 series) and related schedules, if any, for the BOC Retirement Plans.
The BOC Retirement Plans are qualified under the provisions of
Section 401(a) of the Code, the trusts under the BOC Retirement Plans are exempt
trusts under Section 501(a) of the Code, and determination letters have been
issued or applied for with respect to the BOC Retirement Plans to said effect,
including determination letters covering the current terms and provisions of the
BOC Retirement Plans. There are no issues relating to said qualification or
exemption of the BOC Retirement Plans currently pending before the IRS, the
United States Department of Labor, the Pension Benefit Guaranty Corporation or
any court. The BOC Retirement Plans and the administration thereof meet (and
have met since the establishment of the BOC Retirement Plans) in all material
respects all of the applicable requirements of ERISA, the Code and all other
laws, rules and regulations applicable to the BOC Retirement Plans and do not
violate (and since the establishment of the BOC Retirement Plans have not
violated) in any material respect any of the applicable provisions of ERISA, the
Code and such other laws, rules and regulations. Without limiting the generality
of the foregoing, all reports and returns with respect to the BOC Retirement
Plans required to be filed with any governmental department, agency, service or
other authority have been properly and timely filed. There are no issues or
disputes with respect to the BOC Retirement Plans or the administration thereof
currently existing between BOC, Carolinas, or any trustee or other fiduciary
thereunder, and any governmental agency, any current or former employee of
Carolinas or beneficiary of any such employee, or any other person or entity. No
"reportable event" within the meaning of Section 4043 of ERISA has occurred at
any time with respect to the BOC Retirement Plans.
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(d) No liability under subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by BOC or Carolinas with respect to the BOC
Retirement Plans or with respect to any other ongoing, frozen or terminated
defined benefit pension plan currently or formerly maintained by BOC or
Carolinas. BOC and Carolinas do not presently contribute to a "Multiemployer
Plan." All contributions required to be made pursuant to the terms of each of
the BOC Plans (including without limitation the BOC Retirement Plans and any
other "pension plan" (as defined in Section 3(2) of ERISA, provided such plan is
intended to qualify under the provisions of Section 401(a) of the Code)
maintained by BOC or Carolinas have been timely made. Neither the BOC
Retirement Plans nor any other "pension plan" maintained by BOC or Carolinas
have an "accumulated funding deficiency" (whether or not waived) within the
meaning of Section 412 of the Code or Section 302 of ERISA. BOC and Carolinas
have not provided, and are not required to provide, security to any "pension
plan" or to any "Single Employer Plan" pursuant to Section 401(a)(29) of the
Code. Under the BOC Retirement Plans and any other "pension plan" maintained by
BOC or Carolinas as of the last day of the most recent plan year ended prior to
the date hereof, the actuarially determined present value of all "benefit
liabilities," within the meaning of Section 4001(a)(16) of ERISA (as determined
on the basis of the actuarial assumptions contained in the plan's most recent
actuarial valuation) did not exceed the then current value of the assets of such
plan, and there has been no material change in the financial condition of any
such plan since the last day of the most recent plan year.
(e) Except as provided in the terms of the BOC Retirement Plans
themselves, there are no restrictions on the rights of BOC or Carolinas to amend
or terminate any BOC Retirement Plan without incurring any liability thereunder.
Neither the execution and delivery of this Agreement nor the consummation of the
transactions described herein will, except as otherwise specifically provided in
this Agreement, (i) result in any payment to any person (including without
limitation any severance compensation or payment, unemployment compensation,
"golden parachute" or "change in control" payment, or otherwise) becoming due
under any plan or agreement to any director, officer, employee or consultant,
(ii) increase any benefits otherwise payable under any plan or agreement, or
(iii) result in any acceleration of the time of payment or vesting of any such
benefit.
2.26. Insurance. BOC and Carolinas have Previously Disclosed to Davie a
---------
listing of each blanket bond, liability insurance, life insurance or other
insurance policy in effect on June 30, 2001, and in which it was an insured
party or beneficiary (each a "BOC Policy" and collectively the "BOC Policies").
The BOC Policies provide coverage in such amounts and against such liabilities,
casualties, losses or risks as is customary or reasonable for entities engaged
in the businesses of BOC and Carolinas or as is required by applicable law or
regulation; and, in the reasonable opinion of management of BOC and Carolinas,
the insurance coverage provided under the BOC Policies is reasonable and
adequate in all respects for BOC and Carolinas. Each of the BOC Policies is in
full force and effect and is valid and enforceable in accordance with its terms,
and is underwritten by an insurer of recognized financial responsibility and
which is qualified to issue those policies in North Carolina; and, BOC and
Carolinas have complied in all material respects with requirements (including
the giving of required notices) under each such BOC Policy in order to preserve
all rights thereunder with respect to all matters. BOC and Carolinas are not in
default under the provisions of, have not received notice of cancellation or
nonrenewal of or any premium increase on, and have not failed to pay any premium
on, any BOC Policy, and, to the Best Knowledge of management of BOC and
Carolinas, there has not been any inaccuracy in any application for any BOC
Policy. There are no pending claims with respect to any BOC Policy, and, to the
Best Knowledge of management of BOC and Carolinas, there currently are no
conditions, and there has occurred no event, that is reasonably likely to form
the basis for any such claim.
2.27. Insurance of Deposits. All deposits of Carolinas are insured by the
---------------------
Bank Insurance Fund of the FDIC to the maximum extent permitted by law, all
deposit insurance premiums due from Carolinas to the FDIC have been paid in full
in a timely fashion, and, to the Best Knowledge of management of Carolinas, no
proceedings have been commenced or are contemplated by the FDIC or otherwise to
terminate such insurance.
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2.28. Obstacles to Regulatory Approval. To the Best Knowledge of
--------------------------------
management of BOC and Carolinas, there exists no fact or condition (including
Carolinas' record of compliance with the Community Reinvestment Act) relating to
BOC or Carolinas that may reasonably be expected to prevent or materially impede
or delay Davie, BOC or Carolinas from obtaining the regulatory approvals
required in order to consummate the transactions described in this Agreement;
and, if any such fact or condition becomes known to BOC or Carolinas, BOC or
Carolinas shall promptly (and in any event within three days after obtaining
such Knowledge) give notice of such fact or condition to Davie in the manner
provided herein.
2.29. Disclosure. To the Best Knowledge of management of BOC and
----------
Carolinas, no written statement, certificate, schedule, list or other written
information furnished by or on behalf of BOC or Carolinas to Davie in connection
with this Agreement and the transactions described herein, when considered as a
whole, contains or has contained any untrue statement of a material fact or
omits or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
2.30. Shareholder Approval. By its execution of this Agreement, BOC also
--------------------
approves the Merger in BOC's capacity as Carolinas' sole shareholder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DAVIE
Except as otherwise specifically provided in this Agreement or as
"Previously Disclosed" (as defined in Paragraph 10.13) by Davie to BOC and
Carolinas, Davie hereby makes the following representations and warranties to
BOC and Carolinas.
3.01. Organization; Standing; Power. Davie (i) is duly organized and
-----------------------------
incorporated, validly existing and in good standing as a banking corporation
under the laws of the State of North Carolina; (ii) has all requisite power and
authority (corporate and other) to own, lease and operate its properties and to
carry on its business as it now is being conducted; (iii) is duly qualified to
do business and is in good standing in each jurisdiction in which the character
of the properties owned, leased or operated by it therein, or in which the
transaction of its business, makes such qualification necessary, except where
failure so to qualify would not have a material adverse effect on Davie; and
(iv) is not transacting business or operating any properties owned or leased by
it in violation of any provision of federal, state or local law or any rule or
regulation promulgated thereunder, except where such violation would not have a
material adverse effect on Davie.
3.02. Capital Stock. At the Effective Time, Davie's authorized capital
-------------
stock will consist of 5,000,000 shares of common stock, $5.00 par value (the
"Davie Stock"), of which no more than 893,100 shares, plus such number of
additional shares, if any, as shall have been issued by Davie after the date of
this Agreement as provided in Paragraph 5.02(b) below, will be issued and
outstanding and constitute Davie's only outstanding securities.
Each outstanding share of Davie Stock (i) has been duly authorized
and is validly issued and outstanding, and is fully paid and nonassessable
(except to the extent provided in N.C. Gen. Stat. (S) 53-42), and (ii) has not
been issued in violation of the preemptive rights of any shareholder. The Davie
Stock has been registered with the FDIC under the 1934 Act and Davie is subject
to the registration and reporting requirements of the 1934 Act.
3.03. Principal Shareholders. Except as Previously Disclosed, no person
----------------------
or entity is known to management of Davie to beneficially own, directly or
indirectly, more than 5% of the outstanding shares of Davie Stock.
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3.04. Subsidiaries. Davie has no subsidiaries, direct or indirect, and,
------------
except for equity securities included in its investment portfolio at December
31, 2000, does not own any stock or other equity interest in any other
corporation, service corporation, joint venture, partnership or other entity.
3.05. Convertible Securities, Options, Etc. Except as Previously
------------------------------------
Disclosed, Davie does not have any outstanding (i) securities or other
obligations (including debentures or other debt instruments) which are
convertible into shares of Davie Stock or any other securities of Davie; (ii)
options, warrants, rights, calls or other commitments of any nature which
entitle any person to receive or acquire any shares of Davie Stock or any other
securities of Davie; or (iii) plan, agreement or other arrangement pursuant to
which shares of Davie Stock or any other securities of Davie, or options,
warrants, rights, calls or other commitments of any nature pertaining to any
securities of Davie, have been or may be issued.
3.06. Authorization and Validity of Agreement. This Agreement has been
---------------------------------------
duly and validly approved by Davie's Board of Directors. Subject only to
approval of this Agreement by the shareholders of Davie in the manner required
by law and required approvals of Regulatory Authorities (as defined in Paragraph
2.06 hereof) of the transactions described herein, (i) Davie has the corporate
power and authority to execute and deliver this Agreement and to perform its
obligations and agreements and carry out the transactions described in this
Agreement, (ii) all corporate proceedings and approvals required to authorize
Davie to enter into this Agreement and to perform its obligations and agreements
and carry out the transactions described herein have been duly and properly
completed or obtained, and (iii) this Agreement constitutes the valid and
binding agreement of Davie enforceable in accordance with its terms (except to
the extent enforceability may be limited by (A) applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect which affect creditors' rights generally, (B) legal and equitable
limitations on the availability of injunctive relief, specific performance and
other equitable remedies, and (C) general principles of equity and applicable
laws or court decisions limiting the enforceability of indemnification
provisions).
3.07. Validity of Transactions; Absence of Required Consents or Waivers.
-----------------------------------------------------------------
Subject to approval of this Agreement by the shareholders of Davie in the manner
required by law and receipt of required approvals of Regulatory Authorities,
neither the execution and delivery of this Agreement, nor the consummation of
the transactions described herein, nor compliance by Davie with any of its
obligations or agreements contained herein, nor any action or inaction by Davie
required herein, will: (i) conflict with or result in a breach of the terms and
conditions of, or constitute a default or violation under any provision of, the
Articles of Incorporation or Bylaws of Davie, or any material contract,
agreement, lease, mortgage, note, bond, indenture, license, or obligation or
understanding (oral or written) to which Davie is bound or by which it or its
business, capital stock or any of its properties or assets may be affected; (ii)
result in the creation or imposition of any material lien, claim, interest,
charge, restriction or encumbrance upon any of the properties or assets of
Davie; (iii) violate any applicable federal or state statute, law, rule or
regulation, or any judgment, order, writ, injunction or decree of any court,
administrative or regulatory agency or governmental body, which violation will
or may have a material adverse effect on Davie, its financial condition, results
of operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations, or on Davie's ability to consummate the transactions
described herein or to carry on the business of Davie as presently conducted; or
(iv) result in the acceleration of any material obligation or indebtedness of
Davie.
No consents, approvals or waivers are required to be obtained from
any person or entity in connection with Davie's execution and delivery of this
Agreement, or the performance of its obligations or agreements or the
consummation of the transactions described herein, except for required approvals
of Davie's shareholders and of Regulatory Authorities.
3.08. Davie Books and Records. Davie's books of account and business
-----------------------
records have been maintained in all material respects in compliance with all
applicable legal and accounting requirements, and such books and records are
complete and reflect accurately in all material respects Davie's items of income
and expense and all of its assets, liabilities and stockholders' equity. The
minute books of Davie are complete and accurately reflect in all material
respects all corporate actions which its shareholders and board of directors,
and
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all committees thereof, have taken during the time periods covered by such
minute books, and, all such minute books have been or will be made available to
BOC and its representatives.
3.09. Davie Reports. To the "Best Knowledge" (as defined in Paragraph
-------------
10.14 hereof) of management of Davie, Davie has filed all reports, registrations
and statements, together with any amendments required to be made with respect
thereto, that were required to be filed with (i) the Commissioner, (ii) the
FDIC, or (iii) any other Regulatory Authorities. All such reports,
registrations and statements filed by Davie with the Commissioner, the FDIC or
any other Regulatory Authorities are collectively referred to in this Agreement
as the "Davie Reports." To the Best Knowledge of management of Davie, the Davie
Reports complied in all material respects with all the statutes, rules and
regulations enforced or promulgated by the Regulatory Authorities with which
they were filed and did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Davie has not been notified that any such Davie Reports
were deficient in any material respect as to form or content.
3.10. Davie Financial Statements. Davie has Previously Disclosed to BOC a
--------------------------
copy of its audited statements of financial condition as of December 31, 1999
and 2000, and its audited statements of income, stockholders' equity and cash
flows for the years ended December 31, 1999 and 2000, together with notes
thereto (collectively, the "Davie Audited Financial Statements"), together with
copies of Davie's unaudited statements of financial condition as of March 31,
2001, and unaudited statements of income and cash flows for the three-months
ended March 31, 2000 and 2001 (collectively, the "Davie Interim Financial
Statements"). Following the date of this Agreement, Davie promptly will deliver
to BOC all other annual or interim financial statements prepared by or for
Davie. The Davie Audited Financial Statements and the Davie Interim Financial
Statements (i) were prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated, (ii) are in accordance with Davie's
books and records and (iii) fairly present Davie's financial condition, assets
and liabilities, results of operations, changes in stockholders' equity and
changes in cash flows as of the dates indicated and for the periods specified
therein. The Davie Audited Financial Statements for have been audited by Crisp,
Hughes, Evans LLP, which currently serves as Davie's independent certified
public accountants.
3.11. Tax Returns and Other Tax Matters. (i) Davie has timely filed or
---------------------------------
caused to be filed all federal, state and local income tax returns and reports
which are required by law to have been filed, and, to the Best Knowledge of
management of Davie, all such returns and reports were true, correct and
complete and contained all material information required to be contained
therein; (ii) all federal, state and local income, profits, franchise, sales,
use, occupation, property, excise, withholding, employment and other taxes
(including interest and penalties), charges and assessments which have become
due from or been assessed or levied against Davie or its respective properties
have been fully paid or, if not yet due, a reserve or accrual, which is adequate
in all material respects for the payment of all such taxes to be paid and the
obligation for such unpaid taxes, is reflected on the Davie Interim Financial
Statements; (iii) the income, profits, franchise, sales, use, occupation,
property, excise, withholding, employment and other tax returns and reports of
Davie have not been subjected to audit by the IRS or the North Carolina
Department Revenue and Davie has not received any indication of the pendency of
any audit or examination in connection with any such tax return or report and,
to the Best Knowledge of management of Davie, no such return or report is
subject to adjustment; and (iv) Davie has not executed any waiver or extended
the statute of limitations (or been asked to execute a waiver or extend a
statute of limitations) with respect to any tax year, the audit of any such tax
return or report, or the assessment or collection of any tax.
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3.12. Absence of Material Adverse Changes or Certain Other Events.
-----------------------------------------------------------
(a) Since December 31, 2000, Davie has conducted its businesses only
in the ordinary course, and there has been no material adverse change, and there
has occurred no event or development, and there currently exists no condition or
circumstance, which, with the lapse of time or otherwise, may or could cause,
create or result in a material adverse change in or affecting the financial
condition of Davie or its results of operations, prospects, business, assets,
loan portfolio, investments, properties or operations.
(b) Since December 31, 2000, and other than in the ordinary course
of its business, Davie has not incurred any material liability, engaged in any
material transaction, entered into any material agreement, increased the
salaries, compensation or general benefits payable or provided to its employees,
suffered any material loss, destruction or damage to any of its properties or
assets, or made a material acquisition or disposition of any assets or entered
into any material contract or lease.
3.13. Absence of Undisclosed Liabilities. Davie does not have any
----------------------------------
material liabilities or obligations, whether known or unknown, matured or
unmatured, accrued, absolute, contingent or otherwise, whether due or to become
due (including without limitation tax liabilities or unfunded liabilities under
employee benefit plans or arrangements), other than (i) those reflected in the
Davie Financial Statements or Davie Interim Financial Statements, (ii) increases
in deposit accounts in the ordinary course of business since March 31, 2001, or
(iii) loan commitments in the ordinary course of business since March 31, 2001.
3.14. Compliance with Existing Obligations. Davie has performed in all
------------------------------------
material respects all obligations required to be performed by it under, and it
is not in default in any material respect under, or in violation in any material
respect of, the terms and conditions of its Articles of Incorporation, Bylaws,
material contracts, agreements, leases, mortgages, notes, bonds, indentures,
licenses, obligations, understandings or other undertakings (whether oral or
written) to which it is bound or by which its business, operations, capital
stock or any property or asset may be affected.
3.15. Litigation and Compliance with Law.
----------------------------------
(a) There are no actions, suits, arbitrations, controversies or
other proceedings or investigations (or, to the Best Knowledge of management of
Davie, any facts or circumstances which reasonably could result in such),
including without limitation any such action by any Regulatory Authority, which
currently exist or are ongoing, pending or, to the Best Knowledge of management
of Davie, are threatened, contemplated or probable of assertion, against,
relating to or otherwise affecting Davie or any of its properties, assets or
employees.
(b) Davie has all Permits (as defined in Paragraph 2.15(b) hereof)
of all federal, state, local or foreign governmental or regulatory agencies that
are material to or necessary for the conduct of its business or to own, lease
and operate its properties; all such Permits are in full force and effect; no
violations have occurred with respect to any such Permits; and no proceeding is
pending or, to the Best Knowledge of management of Davie, threatened or probable
of assertion to suspend, cancel, revoke or limit any Permit.
(c) Davie is not subject to any supervisory agreement, enforcement
order, writ, injunction, capital directive, supervisory directive, memorandum of
understanding or other similar agreement, order, directive, memorandum or
consent of, with or issued by any Regulatory Authority (including without
limitation the Commissioner or the FDIC) relating to its financial condition,
directors or officers, employees, operations, capital, regulatory compliance or
any other matter; there are no judgments, orders, stipulations, injunctions,
decrees or awards against Davie which limit, restrict, regulate, enjoin or
prohibit in any material respect any present or past business or practice of
Davie; and, Davie has not been advised nor has any reason to believe that any
Regulatory Authority or any court is contemplating, threatening or requesting
the issuance of any such agreement, order, writ, injunction, directive,
memorandum, judgment, stipulation, decree or award.
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(d) To the Best Knowledge of management of Davie, Davie is not in
violation or default in any material respect under, and it has complied in all
material respects with, all laws, statutes, ordinances, rules, regulations,
orders, writs, injunctions or decrees of any court or federal, state, municipal
or other Regulatory Authority having jurisdiction or authority over it or its
business operations, properties or assets (including without limitation all
provisions of North Carolina law relating to usury, the Consumer Credit
Protection Act, and all other federal and state laws and regulations applicable
to extensions of credit by Davie). To the Best Knowledge of management of Davie,
there is no basis for any claim by any person or authority for compensation,
reimbursement, damages or other penalties or relief for any violations described
in this subparagraph (d).
3.16. Real Properties. Davie has Previously Disclosed to BOC a listing of
---------------
all real property owned by Davie (including Davie's banking facilities and all
other real estate or foreclosed properties, including improvements thereon,
owned by Davie) (collectively, the "Davie Real Property"). With respect to each
parcel of the Davie Real Property, Davie has good and marketable fee simple
title to the Davie Real Property and owns the same free and clear of all
mortgages, liens, leases, encumbrances, title defects and exceptions to title
other than (i) the lien of current taxes not yet due and payable, and (ii) such
imperfections of title and restrictions, covenants and easements (including
utility easements) which do not materially affect the value of the Davie Real
Property and which do not and will not materially detract from, interfere with
or restrict the present or future use of the Davie Real Property.
The Davie Real Property complies in all material respects with all
applicable federal, state and local laws, regulations, ordinances or orders of
any governmental or regulatory authority, including those relating to zoning,
building and use permits, and the parcels of the Davie Real Property upon which
Davie's banking or other offices are situated, or which are used by Davie in
conjunction with its banking or other offices or for other purposes, may, under
applicable zoning ordinances, be used for the purposes for which they currently
are used as a matter of right rather than as a conditional or nonconforming use.
All improvements and fixtures included in or on the Davie Real
Property are in good condition and repair, ordinary wear and tear excepted, and
there does not exist any condition which in any material respect interferes with
Davie's use (or will interfere with Davie's use after the Merger) or affects the
economic value thereof.
Davie is not a party (whether as lessee or lessor) to any lease or
rental agreement with respect to any real property.
3.17. Loans, Accounts, Notes and Other Receivables.
--------------------------------------------
(a) All loans, accounts, notes and other receivables reflected as
assets on Davie's books and records (i) have resulted from bona fide business
transactions in the ordinary course of Davie's operations; (ii) in all material
respects were made in accordance with Davie's standard practices and procedures;
and (iii) are owned by Davie free and clear of all liens, encumbrances,
assignments, participation or repurchase agreements or other exceptions to title
or to the ownership or collection rights of any other person or entity.
(b) All records of Davie regarding all outstanding loans, accounts,
notes and other receivables, and all other real estate owned, are accurate in
all material respects, and, each loan which Davie's loan documentation indicates
is secured by any Loan Collateral (as defined in Paragraph 2.17(b) hereof) is
secured by valid, perfected and enforceable liens on all such Loan Collateral
having the priority described in Davie's records of such loan.
(c) To the Best Knowledge of management of Davie, each loan
reflected as an asset on Davie's books, and each guaranty therefor, is the
legal, valid and binding obligation of the obligor or guarantor thereon, and no
defense, offset or counterclaim has been asserted with respect to any such loan
or guaranty.
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(d) Davie has Previously Disclosed to BOC (i) a written listing of
each loan, extension of credit or other asset of Davie which, as of June 30,
2001, was classified by the Commissioner or the FDIC or by Davie as "Loss,"
"Doubtful," "Substandard" or "Special Mention" (or otherwise by words of similar
import), or which Davie otherwise has designated as a special asset or for
special handling or placed on any "watch list" because of concerns regarding the
ultimate collectibility or deteriorating condition of such asset or any obligor
or Loan Collateral therefor, and (ii) a written listing of each loan or
extension of credit of Davie which, as of June 30, 2001, was past due more than
30 days as to the payment of principal or interest, or as to which any obligor
thereon (including the borrower or any guarantor) otherwise was in default, was
the subject of a proceeding in bankruptcy or has indicated any inability or
intention not to repay such loan or extension of credit.
(e) To the Best Knowledge of management of Davie, each of the
loans and other extensions of credit of Davie (with the exception of those loans
and extensions of credit specified in the written listings described in
Paragraph 3.17(d) above) is collectible in the ordinary course of Davie's
business in an amount which is not less than the amount at which it is carried
on Davie's books and records.
(f) Davie's Loan Loss Reserve (as defined in Paragraph 2.17(f)
hereof) has been established in conformity with GAAP, sound banking practices
and all applicable requirements, rules and policies of the Commissioner and the
FDIC and, in the best judgment of management of Davie, is reasonable in view of
the size and character of Davie's loan portfolio, current economic conditions
and other relevant factors, and is adequate to provide for losses relating to or
the risk of loss inherent in Davie's loan portfolios and other real estate
owned.
3.18. Securities Portfolio and Investments. Davie has Previously
------------------------------------
Disclosed to BOC a listing of all securities owned, of record or beneficially,
by Davie as of June 30, 2001. All securities owned, of record or beneficially,
by Davie are held free and clear of all mortgages, liens, pledges, encumbrances
or any other restriction or rights of any other person or entity, whether
contractual or statutory (other than customary pledges in the ordinary course of
Davie's business to secure public funds deposits), which would materially impair
the ability of Davie to dispose freely of any such security or otherwise to
realize the benefits of ownership thereof at any time. There are no voting
trusts or other agreements or undertakings to which Davie is a party with
respect to the voting of any such securities. With respect to all "repurchase
agreements" under which Davie has "purchased" securities under agreement to
resell, Davie has a valid, perfected first lien or security interest in the
government securities or other collateral securing the repurchase agreement, and
the value of the collateral securing each such repurchase agreement equals or
exceeds the amount of the debt owed to Davie which is secured by such
collateral.
Since March 31, 2001, there has been no material deterioration or
adverse change in the quality, or any material decrease in the value, of Davie's
securities portfolio as a whole.
3.19. Personal Property and Other Assets. All banking equipment, data
----------------------------------
processing equipment, vehicles, and other personal property used by Davie and
material to the operation of its business are owned by Davie free and clear of
all liens, encumbrances, leases, title defects or exceptions to title. To the
Best Knowledge of management of Davie, all of Davie's personal property material
to its business is in good operating condition and repair, ordinary wear and
tear excepted.
3.20. Patents and Trademarks. To the Best Knowledge of management of
----------------------
Davie, Davie owns, possesses or has the right to use any and all patents,
licenses, trademarks, trade names, copyrights, trade secrets and proprietary and
other confidential information necessary to conduct its business as now
conducted. Davie has not violated, and currently is not in conflict with, any
patent, license, trademark, trade name, copyright or proprietary right of any
other person or entity.
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3.21. Environmental Matters.
---------------------
(a) Davie has Previously Disclosed to BOC copies of all written
reports, correspondence, notices or other information or materials, if any, in
its possession pertaining to environmental surveys or assessments of the Davie
Real Property, and any improvements thereon, or pertaining to any violation or
alleged violation of Environmental Laws (as defined in Paragraph 2.21(a) hereof)
on, affecting or otherwise involving the Real Property or involving Davie.
(b) There has been no presence, use, production, generation,
handling, transportation, treatment, storage, disposal, emission, discharge,
release, or threatened release of any Hazardous Substances (as defined in
Paragraph 2.21(a) hereof) by any person on, from or relating to the Davie Real
Property which constitutes a violation of any Environmental Laws, or any
removal, clean-up or remediation of any Hazardous Substances from, on or
relating to the Davie Real Property.
(c) Davie has not violated any Environmental Laws, and there has
been no violation of any Environmental Laws by any other person or entity for
whose liability or obligation with respect to any particular matter or violation
Davie is or may be responsible or liable.
(d) Davie is not subject to any claims, demands, causes of action,
suits, proceedings, losses, damages, penalties, liabilities, obligations, costs
or expenses of any kind and nature which arise out of, under or in connection
with, or which result from or are based upon the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, emission, discharge,
release, threatened release, control, removal, clean-up or remediation of any
Hazardous Substances on, from or relating to the Davie Real Property or by any
person or entity.
(e) No facts, events or conditions relating to the Davie Real
Property or the operations of Davie at any of its office locations, will
prevent, hinder or limit continued compliance with Environmental Laws, or give
rise to any investigatory, emergency removal, remedial or corrective actions,
obligations or liabilities (whether accrued, absolute, contingent, unliquidated
or otherwise) pursuant to Environmental Laws.
(f) To the Best Knowledge of management of Davie (it being
understood by BOC and Carolinas that, for purposes of this representation,
management of Davie has not undertaken a review of each of Davie's loan files
with respect to all Loan Collateral), (i) there has been no violation of any
Environmental Laws by any person or entity (including any violation with respect
to any Loan Collateral) for whose liability or obligation with respect to any
particular matter or violation Davie is or may be responsible or liable, (ii)
Davie is not subject to any claims, demands, causes of action, suits,
proceedings, losses, damages, penalties, liabilities, obligations, costs or
expenses of any kind and nature which arise out of, under or in connection with,
or which result from or are based upon, the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, emission, discharge,
release, threatened release, control, removal, clean-up or remediation of any
Hazardous Substances on, from or relating to any Loan Collateral, by any person
or entity, and (iii) there are no facts, events or conditions relating to any
Loan Collateral that will give rise to any investigatory, emergency removal,
remedial or corrective actions, obligations or liabilities pursuant to
Environmental Laws.
3.22. Absence of Brokerage or Finders Commissions. Except for the
-------------------------------------------
engagement of Scott & Stringfellow, Inc. by Davie (i) no person or firm has been
retained by or has acted on behalf of, pursuant to any agreement, arrangement or
understanding with, or under the authority of, Davie or its Board of Directors,
as a broker, finder or agent or has performed similar functions or otherwise is
or may be entitled to receive or claim a brokerage fee or other commission in
connection with or as a result of the transactions described herein; and, (ii)
Davie has not agreed, and has no obligation, to pay any brokerage fee or other
commission to any person or entity in connection with or as a result of the
transactions described herein.
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3.23. Material Contracts. Other than a benefit plan or employment agreement,
------------------
Davie is not a party to or bound by any agreement (i) involving money or other
property in an amount or with a value in excess of $25,000, (ii) which is not to
be performed in full prior to December 31, 2001, (iii) which is material to
Davie and was not entered into in the ordinary course of business, (iv) which
involves hedging, options or any similar trading activity, or interest rate
exchanges or swaps, (v) which involves the sale of any assets of Davie which are
used in and material to the operation of its business, (vi) which involves the
purchase, sale, issuance, redemption or transfer of any capital stock or other
securities of Davie, or (vii) with any director, officer or principal
shareholder of Davie (including without limitation any consulting agreement, but
not including any agreements relating to loans or other banking services which
were made in the ordinary course of Davie's business and on substantially the
same terms and conditions as were prevailing at that time for similar agreements
with unrelated persons).
Davie is not in default in any material respect, and there has not
occurred any event which with the lapse of time or giving of notice or both
would constitute such a default, under any contract, lease, insurance policy,
commitment or arrangement to which it is a party or by which it or its property
is or may be bound or affected or under which it or its property receives
benefits, where the consequences of such default would have a material adverse
effect on the financial condition, results of operations, prospects, business,
assets, loan portfolio, investments, properties or operations of Davie.
3.24. Employment Matters; Employee Relations. Davie (i) has in all material
--------------------------------------
respects paid in full to or accrued on behalf of all its respective directors,
officers and employees all wages, salaries, commissions, bonuses, fees and other
direct compensation for all labor or services performed by them to the date of
this Agreement, and all vacation pay, sick pay, severance pay, overtime pay and
other amounts for which it is obligated under applicable law or Davie's existing
agreements, benefit plans, policies or practices, and (ii) is in compliance with
all applicable federal, state and local laws, statutes, rules and regulations
with regard to employment and employment practices, terms and conditions, and
wages and hours and other compensation matters; and, no person has, to the Best
Knowledge of management of Davie, asserted that Davie is liable in any amount
for any arrearage in wages or employment taxes or for any penalties for failure
to comply with any of the foregoing.
There is no action, suit or proceeding by any person pending or, to
the Best Knowledge of management of Davie, threatened, against Davie (or any of
its employees), involving employment discrimination, sexual harassment, wrongful
discharge or similar claims.
Davie is not a party to or bound by any collective bargaining
agreement with any of its employees, any labor union or any other collective
bargaining unit or organization. There is no pending or threatened labor
dispute, work stoppage or strike involving Davie and any of its employees, or
any pending or threatened proceeding in which it is asserted that Davie has
committed an unfair labor practice; and, to the Best Knowledge of management of
Davie, there is no activity involving it or any of its employees seeking to
certify a collective bargaining unit or engaging in any other labor organization
activity.
3.25. Insurance. Davie currently maintains a blanket bond and policies of
---------
liability insurance and other insurance (the "Davie Policies"), which provide
coverage in such amounts and against such liabilities, casualties, losses or
risks as is customary or reasonable for entities engaged in the businesses of
Davie or as is required by applicable law or regulation; and, in the reasonable
opinion of management of Davie, the insurance coverage provided under the Davie
Policies is reasonable and adequate in all respects for Davie. Each of the Davie
Policies is in full force and effect and is valid and enforceable in accordance
with its terms, and is underwritten by an insurer of recognized financial
responsibility and which is qualified to issue those policies in North Carolina;
and, Davie has complied in all material respects with requirements (including
the giving of required notices) under each such Davie Policy in order to
preserve all rights thereunder with respect to all matters. Davie is not in
default under the provisions of, has not received notice of cancellation or
nonrenewal of or any premium increase on, and has not failed to pay any premium
on, any Davie Policy, and, to the Best Knowledge of management of Davie, there
has not been any inaccuracy in any application for any Davie Policy.
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There are no pending claims with respect to any Davie Policy, and, to the Best
Knowledge of management of Davie, there currently are no conditions, and there
has occurred no event, that is reasonably likely to form the basis for any such
claim.
3.26. Insurance of Deposits. All deposits of Davie are insured by the Bank
---------------------
Insurance Fund of the FDIC to the maximum extent permitted by law, all deposit
insurance premiums due from Davie to the FDIC have been paid in full in a timely
fashion, and, to the Best Knowledge of management of Davie, no proceedings have
been commenced or are contemplated, by the FDIC or otherwise, to terminate such
insurance.
3.27. Obstacles to Regulatory Approval. To the Best Knowledge of management
--------------------------------
of Davie, there exists no fact or condition (including Davie's record of
compliance with the Community Reinvestment Act) relating to Davie that may
reasonably be expected to prevent or materially impede or delay BOC, Carolinas
or Davie from obtaining the regulatory approvals required in order to consummate
the transactions described in this Agreement; and, if any such fact or condition
becomes known to Davie, Davie shall promptly (and in any event within three days
after obtaining such Knowledge) give notice of such fact or condition to BOC in
the manner provided herein.
3.28. Disclosure. To the Best Knowledge of management of Davie, no written
----------
statement, certificate, schedule, list or other written information furnished by
or on behalf of Davie to BOC or Carolinas in connection with this Agreement and
the transactions described herein, when considered as a whole, contains or has
contained any untrue statement of a material fact or omits or omitted to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE IV
COVENANTS OF BOC AND CAROLINAS
4.01. Affirmative Covenants of BOC and Carolinas. BOC and Carolinas hereby
------------------------------------------
covenant and agree as follows with Davie:
(a) BOC Shareholders' Meeting. BOC agrees to cause a meeting of its
-------------------------
shareholders (the "BOC Shareholders' Meeting") to be duly called and held as
soon as practicable after the date of this Agreement for the purpose of voting
by BOC's shareholders on the approval of the Merger and the ratification and
adoption of this Agreement. In connection with the call and conduct of, and all
other matters relating to the BOC Shareholders' Meeting (including the
solicitation of proxies), BOC will comply in all material respects with all
provisions of applicable law and regulations and with its Articles of
Incorporation and Bylaws.
Unless, due to a material change in circumstances after the date
hereof, BOC's Board of Directors reasonably believes in good faith, based on the
written opinion of its legal counsel, that such a recommendation would violate
the directors' duties or obligations as such to BOC or to its shareholders, BOC
covenants that its Board of Directors will recommend to and actively encourage
BOC's shareholders that they vote their shares of BOC Stock at the BOC
Shareholders Meeting in favor of ratification and approval of this Agreement and
the Merger, and the Proxy Statement will so indicate and state that BOC's Board
of Directors considers the Merger to be advisable and in the best interests of
BOC and its shareholders.
(b) Conduct of Business Prior to Effective Time. While the parties
-------------------------------------------
recognize that the operation of BOC until the Effective Time is the
responsibility of BOC's Board of Directors and officers and that the operation
of Carolinas until the Effective Time is the responsibility of Carolinas' Board
of Directors and officers, BOC and Carolinas agree that, between the date of
this Agreement and the Effective Time, and except as otherwise provided herein
or expressly agreed to in writing by Davie's President, BOC and Carolinas will
carry on their business in and only in the regular and usual course in
substantially the same manner as such business heretofore was conducted, and, to
the extent consistent with such business and within its ability to do so, BOC
and Carolinas each agrees that it will:
A-23
(i) preserve intact its present business organization, keep
available its present officers and employees, and preserve its relationships
with customers, depositors, creditors, correspondents, suppliers, and others
having business relationships with it;
(ii) maintain all of its properties and equipment in customary
repair, order and condition, ordinary wear and tear excepted;
(iii) maintain its books of account and records in the usual,
regular and ordinary manner in accordance with sound business practices applied
on a consistent basis;
(iv) comply in all material respects with all laws, rules and
regulations applicable to it, its properties, assets or employees and to the
conduct of its business;
(v) not change its policies or procedures, including existing
loan underwriting guidelines, in any material respect except as may be required
by law;
(vi) continue to maintain in force insurance such as is
described in Paragraph 2.26; not modify any bonds or policies of insurance in
effect as of the date hereof unless the same, as modified, provides
substantially equivalent coverage; and, not cancel, allow to be terminated or,
to the extent available, fail to renew, any such bond or policy of insurance
unless the same is replaced with a bond or policy providing substantially
equivalent coverage; and,
(vii) promptly provide to Davie such information about its
financial condition, results of operations, prospects, businesses, assets, loan
portfolio, investments, properties, employees or operations, as Davie reasonably
shall request.
(c) Periodic Financial and Other Information. Following the date of
----------------------------------------
this Agreement and until the Effective Time, BOC and Carolinas will promptly
deliver to Davie:
(i) an income statement and a statement of condition within
five days after each month end;
(ii) a copy of all interim financial statements within 15 days
after each quarter end;
(iii) a copy of each report, registration, statement, or other
communication or regulatory filing made with or to any Regulatory Authority
simultaneous with the filing or making thereof;
(iv) information regarding each new extension of credit in
excess of $100,000 (other than a loan secured by a first lien on a one-to-four
family principal residence which is being made for the purchase or refinancing
of that residence) within three days after issuance of a commitment on such
loan;
(v) an analysis of the Loan Loss Reserve and management's
assessment of the adequacy of the Loan Loss Reserve, which analysis and
assessment shall include a list of all classified or "watch list" loans, along
with the outstanding balance and amount specifically allocated to the Loan Loss
Reserve for each such classified or "watch list" Loan, all within five days
after each calendar month end; and,
(vi) the following information with respect to loans and other
extensions of credit (such assets being referred to in this Agreement as
"Loans") as of, and within five days following each calendar month end:
(A) a list of Loans past due for 30 days or more as to
principal or interest;
(B) a list of Loans in nonaccrual status;
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(C) a list of all Loans without principal reduction for a period
of longer than one year;
(D) a list of all foreclosed real property or other real estate
owned and all repossessed personal property;
(E) a list of each reworked or restructured Loan still
outstanding, including original terms, restructured terms and status; and
(F) a list of any actual or threatened litigation by or against
BOC or Carolinas pertaining to any Loan or credit, which list shall contain a
description of circumstances surrounding such litigation, its present status and
management's evaluation of such litigation.
(d) Notice of Certain Changes or Events. Following the execution of
-----------------------------------
this Agreement and up to the Effective Time, BOC or Carolinas promptly will
notify Davie in writing of and provide to it such information as it shall
request regarding (i) any material adverse change in BOC's or Carolinas'
financial condition, results of operations, prospects, business, assets, loan
portfolio, investments, properties or operations, or of the actual or
prospective occurrence of any condition or event which, with the lapse of time
or otherwise, may or could cause, create or result in any such material adverse
change, or of (ii) the actual or prospective existence or occurrence of any
condition or event which, with the lapse of time or otherwise, has caused or may
or could cause any statement, representation or warranty of BOC or Carolinas
herein to be or become inaccurate, misleading or incomplete in any material
respect, or which has resulted or may or could cause, create or result in the
breach or violation in any material respect of any of BOC's or Carolinas'
covenants or agreements contained herein or in the failure of any of the
conditions described in Paragraphs 7.01 or 7.02.
(e) Accruals for Loan Loss Reserve and Expenses. BOC and Carolinas
-------------------------------------------
will cooperate with Davie and will make such appropriate accounting entries in
their books and records and take such other actions as BOC and Carolinas shall,
in their sole discretion, deem to be necessary or desirable in anticipation of
the Merger, including without limitation additional provisions to Carolinas'
Loan Loss Reserve or accruals or the creation of reserves for employee benefit
and Merger-related expenses; provided, however, that notwithstanding any
provision of this Agreement to the contrary, and except as otherwise agreed to
by BOC and Davie, BOC and Carolinas shall not be required to make any such
accounting entries until immediately prior to the Closing.
(f) Access. BOC and Carolinas agree that, following the date of this
------
Agreement and to and including the Effective Time, it will provide Davie and its
respective employees, accountants, legal counsel, environmental consultants or
other representatives access to all its books, records, files and other
information (whether maintained electronically or otherwise), to all its
properties and facilities, and to all its employees, accountants, legal counsel
and consultants, as Davie shall, in its sole discretion, consider to be
necessary or appropriate; provided, however, that any investigation or reviews
conducted by or on behalf of Davie shall be performed in such a manner as will
not interfere unreasonably with BOC's or Carolinas' normal operations or with
their relationships with their customers or employees, and shall be conducted in
accordance with procedures established by the parties.
(g) Deposit Liabilities. Following the date of this Agreement and up
-------------------
to the Effective Time, Carolinas will make pricing decisions with respect to its
deposit accounts in a manner consistent with its past practices based on
competition and prevailing market rates in its banking markets.
(h) Further Action; Instruments of Transfer. BOC and Carolinas each
---------------------------------------
covenants and agrees with Davie that it (i) will use its best efforts in good
faith to take or cause to be taken all action required of it under this
Agreement as promptly as practicable so as to permit the consummation of the
transactions described herein at the earliest possible date, (ii) shall perform
all acts and execute and deliver to Davie all
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documents or instruments required herein, or as otherwise shall be reasonably
necessary or useful to or requested by Davie, in consummating such transactions,
and, (iii) will cooperate with Davie in every way in carrying out, and will
pursue diligently the expeditious completion of, such transactions.
4.02. Negative Covenants of BOC and Carolinas. BOC and Carolinas hereby
---------------------------------------
covenant and agree that, between the date hereof and the Effective Time, neither
will do any of the following things or take any of the following actions without
the prior written consent and authorization of Davie's President.
(a) Amendments to Articles of Incorporation or Bylaws. Neither BOC
-------------------------------------------------
nor Carolinas will amend their respective Articles of Incorporation or Bylaws.
(b) Change in Capital Stock. Neither BOC nor Carolinas will (i) make
-----------------------
any change in its authorized capital stock, or create any other or additional
authorized capital stock or other securities, or (ii) issue (including any
issuance of shares pursuant to a stock dividend or any issuance of any
securities convertible into capital stock), sell, purchase, redeem, retire,
reclassify, combine or split any shares of its capital stock or other
securities, or enter into any agreement or understanding with respect to any
such action.
(c) Options, Warrants and Rights. BOC will not grant or issue any
----------------------------
options, warrants, calls, puts or other rights of any kind relating to the
purchase, redemption or conversion of shares of its capital stock or any other
securities (including securities convertible into capital stock) or enter into
any agreement or understanding with respect to any such action.
(d) Dividends. BOC will not declare or pay any dividends on its
---------
outstanding shares of capital stock or make any other distributions on or in
respect of any shares of its capital stock or otherwise to its shareholders.
However, notwithstanding anything contained herein to the contrary, during the
third calendar quarter of 2001, BOC may declare and pay a cash dividend on its
outstanding shares of BOC Stock in an amount not to exceed $0.05 per share.
(e) Employment, Benefit or Retirement Agreements or Plans. Except as
-----------------------------------------------------
required by law, neither BOC nor Carolinas will (i) enter into or become bound
by any oral or written contract, agreement or commitment for the employment or
compensation of any director, officer, employee or consultant which is not
immediately terminable by BOC or Carolinas without cost or other liability on no
more than 30 days' notice; (ii) adopt, enter into or become bound by any new or
additional profit-sharing, bonus, incentive, change in control or "golden
parachute," stock option, stock purchase, pension, retirement, insurance
(hospitalization, life or other), paid leave (sick leave, vacation leave or
other) or similar contract, agreement, commitment, understanding, plan or
arrangement (whether formal or informal) with respect to or which provides for
benefits for any of its current or former directors, officers, employees or
consultants; or (iii) enter into or become bound by any contract with or
commitment to any labor or trade union or association or any collective
bargaining group.
(f) Increase in Compensation; Bonuses. Neither BOC nor Carolinas will
---------------------------------
increase the compensation or benefits of, or pay any bonus or other special or
additional compensation to, any of its directors, officers, employees or
consultants. However, notwithstanding anything contained herein to the contrary,
prior to the Effective Time BOC and Carolinas may make routine increases in the
salaries of their employees at such times and in such amounts as shall be
consistent with their customary salary administration and review policies and
procedures.
(g) Accounting Practices. Neither BOC nor Carolinas will make any
--------------------
changes in its accounting methods, practices or procedures or in depreciation or
amortization policies, schedules or rates heretofore applied (except as required
by GAAP or governmental regulations).
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(h) Acquisitions; Additional Branch Offices. Neither BOC nor
---------------------------------------
Carolinas will directly or indirectly (i) acquire or merge with, or acquire any
branch or all or any significant part of the assets of, any other person or
entity, (ii) open any new branch office, or (iii) enter into or become bound by
any contract, agreement, commitment or letter of intent relating to, or
otherwise take or agree to take any action in furtherance of, any such
transaction or the opening of a new branch office.
(i) Changes in Business Practices. Except as may be required by the
-----------------------------
Commissioner, the FDIC, the Federal Reserve Board (the "FRB") or any other
governmental or regulatory agency, or as shall be required by applicable law,
regulation or this Agreement, BOC and Carolinas will not (i) change in any
material respect the nature of its business or the manner in which it conducts
its business, (ii) discontinue any material portion or line of its business, or
(iii) change in any material respect its lending, investment, asset-liability
management or other material banking or business policies.
(j) Exclusive Merger Agreement. Unless, due to a material change in
--------------------------
circumstances after the date hereof, BOC's Board of Directors reasonably
believes in good faith, based on the written opinion of its legal counsel, that
any such action or inaction would violate the directors' duties or obligations
as such to BOC or to its shareholders, BOC will not, directly, or indirectly
through any person, (i) encourage, solicit or attempt to initiate or procure
discussions, negotiations or offers with or from any person or entity (other
than Davie) relating to a merger or other acquisition of BOC or Carolinas or the
purchase or acquisition of any stock of BOC or Carolinas, any branch office of
Carolinas or all or any significant part of BOC's or Carolinas' assets, or
provide assistance to any person in connection with any such offer; (ii) except
to the extent required by law, disclose to any person or entity any information
not customarily disclosed to the public concerning BOC or its business or
Carolinas or its business, or afford to any other person or entity access to its
properties, facilities, books or records; (iii) sell or transfer any branch
office of Carolinas or all or any significant part of BOC's or Carolinas' assets
to any other person or entity; or (iv) enter into or become bound by any
contract, agreement, commitment or letter of intent relating to, or otherwise
take or agree to take any action in furtherance of, any such transaction.
(k) Acquisition or Disposition of Assets. Neither BOC nor Carolinas
------------------------------------
will:
(i) Sell or lease (as lessor), or enter into or become bound by
any contract, agreement, option or commitment relating to the sale, lease (as
lessor) or other disposition of, any real estate in any amount;
(ii) Sell or lease (as lessor), or enter into or become bound by
any contract, agreement, option or commitment relating to the sale, lease (as
lessor) or other disposition of, any equipment or any other fixed or capital
asset (other than real estate) having a book value or a fair market value,
whichever is greater, of more than $10,000 for any individual item or asset, or
more than $25,000 in the aggregate for all such items or assets;
(iii) Purchase or lease (as lessee), or enter into or become
bound by any contract, agreement, option or commitment relating to the purchase,
lease (as lessee) or other acquisition of, any real property in any amount;
(iv) Purchase or lease (as lessee), or enter into or become
bound by any contract, agreement, option or commitment relating to the purchase,
lease (as lessee) or other acquisition of, any equipment or any other fixed
asset (other than real estate) having a purchase price, or involving aggregate
lease payments, in excess of $10,000 for any individual item or asset, or more
than $25,000 in the aggregate for all such items or assets;
(v) Enter into any purchase or other commitment or contract for
supplies or services which obligates BOC or Carolinas for a period longer than
30 days;
A-27
(vi) Except in the ordinary course of its business consistent
with its past practices, sell, purchase or repurchase, or enter into or become
bound by any contract, agreement, option or commitment to sell, purchase or
repurchase, any loan or other receivable or any participation in any loan or
other receivable; or
(vii) Sell or dispose of, or enter into or become bound by any
contract, agreement, option or commitment relating to the sale or other
disposition of, any other asset (whether tangible or intangible, and including
without limitation any trade name, trademark, copyright, service mark or
intellectual property right or license); or assign its right to or otherwise
give any other person its permission or consent to use or do business under the
corporate name of BOC or Carolinas or any name similar thereto; or release,
transfer or waive any license or right granted to it by any other person to use
any trademark, trade name, copyright, service mark or intellectual property
right.
(l) Debt; Liabilities. Except in the ordinary course of their
-----------------
business consistent with their past practices, neither BOC nor Carolinas will
(i) enter into or become bound by any promissory note, loan agreement or other
agreement or arrangement pertaining to the borrowing of money, (ii) assume,
guarantee, endorse or otherwise become responsible or liable for any obligation
of any other person or entity, or (iii) incur any other liability or obligation
(absolute or contingent).
(m) Liens; Encumbrances. Neither BOC nor Carolinas will mortgage,
-------------------
pledge or subject any of its assets to, or permit any of its assets to become
or, except for those liens or encumbrances Previously Disclosed to Davie, remain
subject to, any lien or any other encumbrance (other than in the ordinary course
of business consistent with its past practices in connection with securing
public funds deposits or repurchase agreements).
(n) Waiver of Rights. Neither BOC nor Carolinas will waive, release
----------------
or compromise any rights in its favor against or with respect to any of its
officers, directors or shareholders or members of families of officers,
directors or shareholders, nor will BOC or Carolinas waive, release or
compromise any material rights against or with respect to any other person or
entity except in the ordinary course of business and in good faith for fair
value in money or money's worth.
(o) Other Contracts. Neither BOC nor Carolinas will enter into or
---------------
become bound by any contracts, agreements, commitments or understandings (other
than those permitted elsewhere in this Paragraph 4.02) (i) for or with respect
to any charitable contributions; (ii) with any governmental or regulatory agency
or authority; (iii) pursuant to which BOC or Carolinas would assume, guarantee,
endorse or otherwise become liable for the debt, liability or obligation of any
other person or entity; (iv) which is entered into other than in the ordinary
course of its business; or (v) which, in the case of any one contract,
agreement, commitment or understanding, and whether or not in the ordinary
course of its business, would obligate or commit BOC or Carolinas to make
expenditures over any period of time of more than $5,000 (other than contracts,
agreements, commitments or understandings entered into in the ordinary course of
Carolinas' lending operations).
(p) Deposit Liabilities. Carolinas will not make any material change
-------------------
in its current deposit policies and procedures or take any actions designed to
materially increase or decrease the aggregate level of its deposits as of the
date of this Agreement.
(q) Foreclosures. In connection with any foreclosure of a mortgage or
------------
deed of trust securing a loan, neither BOC nor Carolinas will bid for or
purchase any real property which is covered by that mortgage or deed of trust or
which is the subject of that foreclosure.
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ARTICLE V
COVENANTS OF DAVIE
5.01. Affirmative Covenants of Davie. Davie hereby covenants and agrees as
------------------------------
follows with BOC and Carolinas:
(a) Davie Shareholders' Meeting. Davie agrees to cause a meeting of
---------------------------
its shareholders (the "Davie Shareholders' Meeting") to be duly called and held
as soon as practicable after the date of this Agreement for the purpose of
voting by Davie's shareholders on the approval of the Merger and the
ratification and adoption of this Agreement. In connection with the call and
conduct of, and all other matters relating to the Davie Shareholders' Meeting
(including the solicitation of proxies), Davie will comply in all material
respects with all provisions of applicable law and regulations and with its
Articles of Incorporation and Bylaws.
Unless, due to a material change in circumstances after the date
hereof, Davie's Board of Directors reasonably believes in good faith, based on
the written opinion of its legal counsel, that such a recommendation would
violate the directors' duties or obligations as such to Davie or to its
shareholders, Davie covenants that its Board of Directors will recommend to and
actively encourage Davie's shareholders that they vote their shares of Davie
Stock at the Davie Shareholders Meeting in favor of ratification and approval of
this Agreement and the Merger, and the Proxy Statement will so indicate and
state that Davie's Board of Directors considers the Merger to be advisable and
in the best interests of Davie and its shareholders.
(b) Conduct of Business Prior to Effective Time. While the parties
-------------------------------------------
recognize that the operation of Davie until the Effective Time is the
responsibility of Davie's Board of Directors and officers, Davie agrees that,
between the date of this Agreement and the Effective Time, and except as
otherwise provided herein or expressly agreed to in writing by BOC's President,
Davie will carry on its business in and only in the regular and usual course in
substantially the same manner as such business heretofore was conducted, and, to
the extent consistent with such business and within its ability to do so, Davie
agrees that it will:
(i) preserve intact its present business organization, keep
available its present officers and employees, and preserve its relationships
with customers, depositors, creditors, correspondents, suppliers, and others
having business relationships with it;
(ii) maintain all of its properties and equipment in customary
repair, order and condition, ordinary wear and tear excepted;
(iii) maintain its books of account and records in the usual,
regular and ordinary manner in accordance with sound business practices applied
on a consistent basis;
(iv) comply in all material respects with all laws, rules and
regulations applicable to it, its properties, assets or employees and to the
conduct of its business;
(v) continue to maintain in force insurance such as is
described in Paragraph 3.25; not modify any bonds or policies of insurance in
effect as of the date hereof unless the same, as modified, provides
substantially equivalent coverage; and, not cancel, allow to be terminated or,
to the extent available, fail to renew, any such bond or policy of insurance
unless the same is replaced with a bond or policy providing substantially
equivalent coverage; and,
(vi) promptly provide to BOC such information about its
financial condition, results of operations, prospects, businesses, assets, loan
portfolio, investments, properties, employees or operations, as BOC reasonably
shall request.
A-29
(c) Periodic Financial and Other Information. Following the date of
----------------------------------------
this Agreement and until the Effective Time, Davie promptly will deliver to BOC
a copy of each report, registration, statement, or other communication or
regulatory filing made with or to any Regulatory Authority simultaneous with the
filing or making thereof.
(d) Notice of Certain Changes or Events. Following the execution of
-----------------------------------
this Agreement and up to the Effective Time, Davie promptly will notify BOC in
writing of and provide to it such information as it shall request regarding (i)
any material adverse change in Davie's financial condition, results of
operations, prospects, business, assets, loan portfolio, investments, properties
or operations, or of the actual or prospective occurrence of any condition or
event which, with the lapse of time or otherwise, may or could cause, create or
result in any such material adverse change, or of (ii) the actual or prospective
existence or occurrence of any condition or event which, with the lapse of time
or otherwise, has caused or may or could cause any statement, representation or
warranty of Davie herein to be or become inaccurate, misleading or incomplete in
any material respect, or which has resulted or may or could cause, create or
result in the breach or violation in any material respect of any of Davie's
covenants or agreements contained herein or in the failure of any of the
conditions precedent described in Paragraphs 7.01 and 7.03 hereof.
(e) Access. Davie agrees that, following the date of this Agreement
------
and to and including the Effective Time, it will provide BOC and Carolinas and
their respective employees, accountants, legal counsel, environmental
consultants or other representatives access to all its books, records, files and
other information (whether maintained electronically or otherwise), to all its
properties and facilities, and to all its employees, accountants, legal counsel
and consultants, as BOC or Carolinas shall, in their respective sole discretion,
consider to be necessary or appropriate; provided, however, that any
investigation or reviews conducted by or on behalf of BOC or Carolinas shall be
performed in such a manner as will not interfere unreasonably with Davie's
normal operations or with its relationship with its customers or employees, and
shall be conducted in accordance with procedures established by the parties;
and, provided further, that neither BOC nor Carolinas shall have any right of
access to Davie's personnel files and records.
(f) Deposit Liabilities. Following the date of this Agreement, Davie
-------------------
will make pricing decisions with respect to its deposit accounts in a manner
consistent with its past practices based on competition and prevailing market
rates in its banking markets.
(g) Further Action; Instruments of Transfer. Davie covenants and
---------------------------------------
agrees with BOC and Carolinas that it (i) will use its best efforts in good
faith to take or cause to be taken all action required of it under this
Agreement as promptly as practicable so as to permit the consummation of the
transactions described herein at the earliest possible date, (ii) shall perform
all acts and execute and deliver to BOC and Carolinas all documents or
instruments required herein, or as otherwise shall be reasonably necessary or
useful to or requested by BOC or Carolinas, in consummating such transactions,
and, (iii) will cooperate with BOC and Carolinas in every way in carrying out,
and will pursue diligently the expeditious completion of, such transactions.
(h) Employment Agreement. Provided Stephen R. Talbert ("Talbert")
--------------------
remains an employee of BOC and Carolinas at the Effective Time, and upon
termination of and in substitution for his current agreement with Carolinas
dated April 28, 1998 (the "Talbert Agreement"), at the Effective Time Davie will
(i) enter into an employment agreement with Talbert in substantially the form of
Exhibit D to this Agreement (the "Employment Agreement"); and (ii) not object to
---------
the payment by Carolinas to Talbert of a lump sum equal to the aggregate amount
of compensation called for under Paragraph 8(c) of the Talbert Agreement.
Notwithstanding anything contained herein to the contrary, BOC and Carolinas
agree that, in the event that Davie reasonably believes, based on the written
opinion of legal counsel or independent accountants, that any portion of the
above payment to Talbert, together with the aggregate of all other payments or
benefits made or provided to or for the benefit of Talbert in connection with
the Merger or otherwise which are deemed to be "parachute payments" as defined
in Section 280G(b)(2) of the Internal Revenue Code (the "Code"), will result in
the imposition of an excise tax on Talbert under Section 4999 of the Code, or
the disallowance of a tax
A-30
deduction to BOC or Carolinas (or to Davie after the Merger) under Section 280G
of the Code, then BOC and Carolinas will reduce such payment to an amount that
will avoid such treatment under the Code. As a condition to any payment to
Talbert as provided above, BOC and Carolinas will obtain from Talbert, and will
deliver to Davie at the Closing, a written agreement in a form specified by
Davie to the effect that if, following the Merger, the Internal Revenue Service
imposes an excise tax on Talbert under Section 4999, or disallows a tax
deduction to BOC, Carolinas or Davie related to such payment, then Talbert will
reimburse Davie for that portion of the payment made to him necessary to avoid
imposition of the excise tax or the disallowance of the tax deduction to BOC,
Carolinas or Davie.
(i) Employment of Other Davie Employees. In the case of employees of
-----------------------------------
BOC and Carolinas other than Talbert, and provided they remain employed by BOC
or Carolinas at the Effective Time, Davie will attempt in good faith to locate
positions with Davie for which employment may be offered, and Davie will offer
employment to as many of those employees as Davie, in its discretion, considers
to be feasible. However, notwithstanding anything contained in this Agreement to
the contrary, Davie shall not have any obligation to employ or provide
employment to any employee of BOC or Carolinas or to any particular number of
such employees. Any employment so offered to an employee of BOC or Carolinas
shall be in such a position, at such location within Davie's branch system, and
for such rate of compensation, as Davie shall determine in its sole discretion.
Each such person's employment shall be on an "at-will" basis, and nothing in
this Agreement shall be deemed to constitute an employment agreement with any
such person or to obligate Davie to employ any such person for any specific
period of time or in any specific position or to restrict Davie's right to
terminate the employment of any such person at any time and for any reason
satisfactory to it.
(j) Employee Benefits. Except as otherwise provided in this
-----------------
Agreement, any employee of BOC or Carolinas who becomes an employee of Davie at
the Effective Time (a "New Employee") shall be entitled to receive all employee
benefits and to participate in all benefit plans provided by Davie on the same
basis (including cost) and subject to the same eligibility and vesting
requirements, and to the same conditions, restrictions and limitations, as
generally are in effect and applicable to other newly hired employees of Davie.
Each New Employee shall be given credit for his or her full years of service
with BOC or Carolinas for purposes of (i) eligibility for participation and
vesting in Davie's Section 401(k) savings plan, and (ii) for all purposes under
Davie's other benefit plans (including entitlement to vacation and sick leave).
For purposes of Davie's health insurance coverage, a New Employee's
participation will be without regard to pre-existing condition requirements
under Davie's health insurance plan, provided that any such pre-existing
condition at the Effective Time was covered under BOC's or Carolinas' health
insurance plan(s) at the Effective Time and the New Employee provides evidence
of such previous coverage in a form satisfactory to Davie's health insurance
carrier.
Any employee of BOC or Carolinas who is not offered employment by
Davie at the Effective Time will be permitted to obtain continued coverage
through the exercise of his or her COBRA rights.
For the calendar year during which the Effective Time occurs,
Davie will grant to each New Employee a number of days of sick leave and
vacation leave, respectively, equal, in each case, to (i) the full number of
such days to which the New Employee would be entitled for that year, based on
his or her credited years of service and in accordance with Davie's standard
leave policies, less (ii) the number of days of sick leave and vacation leave
used by the New Employee as an employee of BOC or Carolinas during that calendar
year.
(k) Directors. In accordance with the provisions of Paragraph 1.07
---------
hereof, at the Effective Time Davie will cause each director of BOC and
Carolinas in office at the Effective Time (but in no event more than a total of
five persons) to be appointed a director of Davie. Each director's continued
service as a director of Davie will be subject to the normal nomination and
election processes.
A-31
(l) "Blue Sky" Approvals. Davie shall use its best efforts to take
--------------------
all actions, if any, required by applicable state securities or "blue sky" laws
(i) to cause the Common Stock issued at the Effective Time, at the time of the
issuance thereof, to be duly qualified or registered (unless exempt) under such
laws, or to cause all conditions to any exemptions from qualification or
registration thereof under such laws to have been satisfied, and (ii) to obtain
any and all other approvals or consents to the issuance of the Common Stock that
are required under state or federal law.
5.02. Negative Covenants of Davie. Davie hereby covenants and agrees that,
---------------------------
between the date hereof and the Effective Time, it will not do any of the
following things or take any of the following actions without the prior written
consent and authorization of BOC's President.
(a) Amendments to Articles of Incorporation or Bylaws. Davie will not
-------------------------------------------------
amend its Articles of Incorporation or Bylaws.
(b) Change in Capital Stock. Davie will not (i) make any change in
-----------------------
its authorized capital stock, or create any other or additional authorized
capital stock or other securities, or (ii) issue (including any issuance of
shares pursuant to a stock dividend or any issuance of any securities
convertible into capital stock), sell, purchase, redeem, retire, reclassify,
combine or split any shares of its capital stock or other securities, or enter
into any agreement or understanding with respect to any such action. However,
notwithstanding anything contained herein to the contrary, following the date of
this Agreement Davie may issue additional shares of Davie Stock upon the
exercise of options granted pursuant to its employee and/or director stock
option plans or otherwise in connection with the issuance and sale of shares of
Davie Stock for consideration which is considered by Davie's Board of Directors
to be fair value for those additional shares.
(c) Options, Warrants and Rights. Davie will not grant or issue any
----------------------------
options, warrants, calls, puts or other rights of any kind relating to the
purchase, redemption or conversion of shares of its capital stock or any other
securities (including securities convertible into capital stock) or enter into
any agreement or understanding with respect to any such action. However,
notwithstanding anything contained herein to the contrary, following the date of
this Agreement Davie may grant additional options to purchase shares of Davie
Stock pursuant to its existing employee and/or director stock option plans.
(d) Dividends. Davie will not declare or pay any dividends on its
---------
outstanding shares of capital stock or make any other distributions on or in
respect of any shares of its capital stock or otherwise to its shareholders.
(e) Accounting Practices. Davie will not make any changes in its
--------------------
accounting methods, practices or procedures or in depreciation or amortization
policies, schedules or rates heretofore applied (except as required by GAAP or
governmental regulations). However, notwithstanding anything contained herein to
the contrary, following the date of this Agreement Davie may change from the
cash to the accrual method of accounting for income tax purposes.
(f) Acquisitions; Additional Branch Offices. Davie will not directly
---------------------------------------
or indirectly (i) acquire or merge with, or acquire substantially all of the
assets of, any other person or entity or (ii) enter into or become bound by any
contract, agreement, commitment or letter of intent relating to, or otherwise
take or agree to take any action in furtherance of, any such transaction.
(g) Changes in Business Practices. Except as may be required by the
-----------------------------
Commissioner, the FDIC or any other governmental or regulatory agency, or as
shall be required by applicable law, regulation or this Agreement, Davie will
not (i) change in any material respect the nature of its business, (ii)
discontinue any material portion or line of its business, or (iii) change in any
material respect its lending, investment, asset-liability management or other
material banking or business policies.
A-32
(h) Exclusive Merger Agreement. Unless, due to a material change in
--------------------------
circumstances after the date hereof, Davie's Board of Directors reasonably
believes in good faith, based on the written opinion of its legal counsel, that
any such action or inaction would violate the directors' duties or obligations
as such to Davie or to its shareholders, Davie will not, directly, or indirectly
through any person, (i) encourage, solicit or attempt to initiate or procure
discussions, negotiations or offers with or from any person or entity (other
than BOC or Carolinas) relating to a merger or other acquisition of Davie or the
purchase or acquisition of any Davie Stock (except as provided in Paragraph
5.02(b) above), or substantially all of Davie's assets, or provide assistance to
any person in connection with any such offer; (ii) except to the extent required
by law, disclose to any person or entity any information not customarily
disclosed to the public concerning Davie or its business, or afford to any other
person or entity access to its properties, facilities, books or records; (iii)
sell or transfer all or substantially all of Davie's assets to any other person
or entity; or (iv) enter into or become bound by any contract, agreement,
commitment or letter of intent relating to, or otherwise take or agree to take
any action in furtherance of, any such transaction.
(i) Deposit Liabilities. Davie will not make any material change in
-------------------
its current deposit policies and procedures or take any actions designed to
materially increase or decrease the aggregate level of its deposits as of the
date of this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01. Preparation and Distribution of Proxy Statement/Offering Circular.
-----------------------------------------------------------------
Davie and BOC jointly will prepare a joint proxy statement/offering circular
(the "Proxy Statement/Offering Circular") for distribution to Davie's and BOC's
shareholders as Davie's proxy statement relating to Davie's solicitation of
proxies for use at the Davie Shareholders' Meeting, BOC's proxy statement
relating to BOC's solicitation of proxies for use at the BOC Shareholders'
Meeting, and as Davie's offering circular relating to its offer and distribution
of Common Stock to BOC's shareholders as described in this Agreement. The Proxy
Statement/Offering Circular shall, in all material respects, be prepared in such
form and contain or be accompanied by such information regarding the Davie
Shareholders Meeting, the BOC Shareholders' Meeting, this Agreement, the parties
hereto, and the Merger and other transactions described herein as is required by
regulations of the Securities and Exchange Commission (the "SEC") applicable to
Davie and BOC or otherwise as shall be agreed upon by Davie and BOC.
Davie and BOC will mail the Proxy Statement/Offering Circular to their
shareholders on a date mutually agreed upon by Davie and BOC not less than 20
days prior to the scheduled date of the Davie Shareholders' Meeting and the date
of the BOC Shareholders' Meeting, whichever is earlier; provided, however, that
no such materials shall be mailed to Davie's shareholders or BOC's shareholders
unless and until Davie shall have received the authorization of the FDIC, BOC
shall have received the authorization of the SEC, and BOC and Davie shall have
agreed on the form and content of such materials.
6.02. Regulatory Approvals. Davie, Carolinas and BOC each agrees with the
--------------------
others that, as soon as practicable following the date of this Agreement, it
will prepare and file, or cause to be prepared and filed, all applications
required to be filed by it under applicable law and regulations for approvals by
Regulatory Authorities of the Merger or other transactions described in this
Agreement, including without limitation any required applications for the
approval of the Commissioner, the FDIC, the FRB and the North Carolina Banking
Commission (the "Commission"). Davie, Carolinas and BOC each agrees (i) to use
its best efforts in good faith to obtain all necessary approvals of Regulatory
Authorities required for consummation of the Merger and other transactions
described herein, and (ii) before the filing of any such application required to
be filed, to give each other party an opportunity to review and comment on the
form and content of such application. Should the appearance of any of the
officers, directors, employees, financial advisors or counsel of Davie,
Carolinas or BOC be requested by each other or by any Regulatory Authority at
any hearing in connection with any such application, it will use its best
efforts to arrange for such appearance.
A-33
6.03. Information for Proxy Statement/Offering Circular and Applications
------------------------------------------------------------------
for Regulatory Approvals. Davie, Carolinas and BOC each covenants with the other
------------------------
that (i) it will cooperate with the other parties in the preparation of the
Proxy Statement/Offering Circular, and applications for required approvals of
Regulatory Authorities, and it will promptly respond to requests by the other
parties and their legal counsel for information, and will provide all
information, documents, financial statements or other material, that is required
for, or that may be reasonably requested by any other party for inclusion in,
any such document; (ii) none of the information provided by it for inclusion in
any of such documents, at the time of the mailing of those materials to BOC's
and Davie's shareholders, or at the time of receipt of any such required
approval of a Regulatory Authority, as the case may be, will contain any untrue
statement of a material fact or omit any material fact required to be stated
therein or necessary in order to make the statements contained therein, in light
of the circumstances under which they were made, not misleading.
6.04. Expenses. Subject to the provisions of Paragraph 8.03, and whether
--------
or not this Agreement shall be terminated or the Merger shall be consummated,
Davie, Carolinas and BOC each agrees to pay its own legal, accounting and
financial advisory fees and all its other costs and expenses incurred or to be
incurred in connection with the execution and performance of its obligations
under this Agreement, or otherwise in connection with this Agreement and the
transactions described herein (including without limitation all accounting fees,
legal fees, consulting or advisory fees, filing fees, printing and mailing
costs, and travel expenses). For purposes of this Agreement, expenses
associated with the printing and mailing of the Proxy Statement/Offering
Circular described in Paragraph 6.01, and with the Tax Opinion described in
Paragraph 6.10, shall be deemed to have been incurred by Davie and BOC equally.
Expenses owed to Sterne, Agee & Leach, Inc., including its fees for rendering
the "BOC Fairness Opinion" described in Paragraph 7.01(d)(ii), shall be deemed
to have been incurred solely by BOC. Expenses owed to Scott & Stringfellow, Inc.
including its fees for rendering the "Davie Fairness Opinion" described in
Paragraph 7.01(d)(i) shall be deemed to have been incurred solely by Davie.
6.05. Announcements. Davie, Carolinas and BOC each agrees that no persons
-------------
other than the parties to this Agreement are authorized to make any public
announcements or statements about this Agreement or any of the transactions
described herein, and that, without the prior review and consent of the other
parties (which consent shall not unreasonably be denied or delayed), it will not
make any public announcement, statement or disclosure as to the terms and
conditions of this Agreement or the transactions described herein, except for
such disclosures as may be required incidental to obtaining the required
approval of any Regulatory Authority to the consummation of the transactions
described herein. However, notwithstanding anything contained herein to the
contrary, neither Davie, Carolinas nor BOC shall be required to obtain the prior
consent of the other parties for any such disclosure which it, in good faith and
upon the advice of its legal counsel, believes is required by law.
6.06. Real Property Matters.
---------------------
(a) Davie, at its own option or expense, may cause to be conducted
(i) a title examination, physical survey, zoning compliance review, and
structural inspection of the BOC Real Property and improvements thereon (the
"Property Examination") and (ii) site inspections, historic reviews, regulatory
analyses, and Phase 1 environmental assessments of the BOC Real Property,
together with such other studies, testing and intrusive sampling and analyses as
Davie shall deem necessary or desirable (the "Environmental Survey").
(b) If, in the course of the Property Examination or Environmental
Survey, Davie discovers a "Material Defect" (as defined below) with respect to
the BOC Real Property, Davie will give prompt written notice thereof to BOC
describing the facts or conditions constituting the Material Defect, and Davie
shall have the option exercisable upon written notice to BOC to (i) waive the
Material Defect, or (ii) terminate this Agreement.
A-34
(c) For purposes of this Agreement, a "Material Defect" shall
include:
(i) the existence of any lien (other than the lien of real
property taxes not yet due and payable), encumbrance, zoning restriction,
easement, covenant, or other restriction, title imperfection or title
irregularity, or the existence of any facts or conditions that constitute a
breach of BOC's or Carolinas' representations and warranties contained in
Paragraph 2.16 or 2.21, in either such case that Davie reasonably believes will
affect its use of any parcel of the BOC Real Property for the purpose for which
it currently is used or the value or marketability of any parcel of the BOC Real
Property, or as to which Davie otherwise objects; or
(ii) the existence of any structural defects or conditions of
disrepair in the improvements on the BOC Real Property (including any equipment,
fixtures or other components related thereto) that Davie reasonably believes
would cost an aggregate of $50,000 or more to repair, remove or correct as to
all such BOC Real Property
(iii) the existence of facts or circumstances relating to any of
the BOC Real Property reflecting that (A) there likely has been a discharge,
disposal, release, threatened release, or emission by any person of any
Hazardous Substance on, from, under, at, or relating to the BOC Real Property,
or (B) any action has been taken or not taken, or a condition or event likely
has occurred or exists, with respect to the BOC Real Property which constitutes
or would constitute a violation of any Environmental Laws or any contract or
other agreement between BOC or Carolinas and any other person or entity, as to
which, in either such case, Davie reasonably believes, based on the advice of
legal counsel or other consultants, that BOC or Carolinas could become
responsible or liable, or that BOC or Carolinas could become responsible or
liable following the Effective Time, for assessment, removal, remediation,
monetary damages, or civil, criminal or administrative penalties or other
corrective action and in connection with which the amount of expense or
liability which BOC or Carolinas could incur, or for which BOC or Carolinas
could become responsible or liable, following consummation of the Merger at any
time or over any period of time could equal or exceed an aggregate of $50,000 or
more as to all such BOC Real Property
6.07. Treatment of Stock Options. Davie and BOC agree that, as of the
--------------------------
Effective Time, all outstanding options to purchase shares of BOC Stock
referenced in Paragraph 2.05 (each a "BOC Option" and collectively the "BOC
Options") shall be assumed by Davie on their then current terms and conditions
and be converted into options to purchase shares of Davie Stock, such conversion
to be made such that following the Effective Time each BOC Option will represent
an option to purchase 0.92 shares of Davie Stock for every one (1) share of BOC
stock covered by such BOC Option prior to the Effective Time. BOC and Carolinas
will obtain from each person who holds a BOC Option, and will deliver to Davie
at the Closing, a written agreement in a form specified by Davie confirming and
agreeing to the conversion of such person's BOC Option as described above with
an appropriate adjustment of the exercise price of the option.
6.08. Treatment of 401(k) Plan. As may be agreed upon mutually by both
------------------------
BOC and Davie, BOC's Section 401(k) plan will either be:
(i) terminated, in which case each participant in BOC's plan on
the termination date may elect, upon completion of the termination and the final
liquidation of the plan, to receive a distribution of the assets credited to his
or her plan account at that time or, if the participant has become a participant
in Davie's Section 401(k) plan, to have those assets credited as a "roll-over"
to the participant's plan account under Davie' plan; or,
(ii) merged into Davie's Section 401(k) plan.
BOC and Carolinas agree that, prior to the Effective Time, they will take
or cause to be taken such actions as Davie shall reasonably consider to be
necessary or desirable in connection with or to effect or facilitate any such
plan termination or merger. Davie agrees that it will assume, as of the
Effective Time, any
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and all administrative and fiduciary duties of BOC with respect to the day-to-
day operation of BOC's plan, including duties relating to filings with the
Internal Revenue Service relating to the plan.
6.09. Directors' and Officers' Liability Insurance. Davie and BOC agree
--------------------------------------------
that, to the extent the same can be purchased at a cost to which they both
agree, then immediately prior to the Effective Time BOC shall purchase "tail"
coverage, effective at the Effective Time, under and in the same amount of
coverage as is provided by its then current directors' and officers' liability
insurance policy.
6.10. Tax Opinion. Davie and BOC agree to use their best efforts to cause
-----------
the Merger, and the conversion of outstanding shares of BOC Stock into shares of
Davie Common Stock, on the terms contained in this Agreement, to be treated as a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code and to obtain from Ward and Smith, P.A. a written opinion (the "Tax
Opinion"), addressed jointly to the Boards of Directors of Davie and BOC, to the
foregoing effect.
6.11 ESOP of BOC. Davie and BOC agree that BOC's employee stock ownership
------------
plan (the "ESOP") shall be terminated as of a date immediately prior to the
Effective Time (the "Termination Date") and unallocated assets held by the ESOP
on the Termination Date shall be applied (through pro-rata transfer to BOC of
unallocated shares of BOC Stock for cancellation and transfer to BOC of
unallocated cash) in satisfaction of the outstanding balance of principal and
interest of the indebtedness owed to BOC which heretofore was incurred by the
ESOP in connection with its purchase of BOC Stock (the "ESOP Debt"). For
purposes of their application against the ESOP Debt, unallocated shares of BOC
Stock shall be valued as of the Termination Date in a manner mutually agreed
upon by BOC and Davie which is consistent with the terms of the ESOP and
applicable laws and regulations, and unallocated shares shall be applied against
the ESOP Debt pro rata with unallocated cash.
BOC and Carolinas agree that, prior to the Effective Time, they will
administer the ESOP in accordance with its terms and will take or cause to be
taken such actions as shall be required by applicable law and the termination
provisions contained in the documents evidencing the plan itself, or otherwise
as Davie shall reasonably consider to be necessary or desirable, in connection
with or otherwise to effect such termination. Davie agrees that it will assume,
as of the Effective Time, any and all administrative duties of BOC or Carolinas
with respect to day-to-day operation of the ESOP and with respect to completion
of termination of the ESOP and liquidation and distribution of its assets.
Following completion of the termination of the ESOP and receipt of a final
determination letter from the Internal Revenue Service with respect to the
qualified status of the plan, the net assets of the ESOP following repayment of
the ESOP Debt shall be distributed to plan participants in the manner provided
by its terms and applicable law and regulations.
Prior to the Termination Date, the ESOP will make all payments required
with respect to the ESOP Debt, and BOC and/or Carolinas will contribute to the
ESOP cash sufficient to enable the ESOP to make those payments. If the
Termination Date is other than the last day of a calendar quarter, then, in
connection with payment due on the ESOP Debt at the end of that quarter, the
contribution of BOC and Carolinas to the ESOP will be limited to an amount equal
to interest on the unpaid principal balance of the ESOP Debt accrued for that
calendar quarter through the Termination Date plus a pro-rata portion of the
principal payment on the ESOP Debt due at the end of that calendar quarter.
Notwithstanding anything contained herein to the contrary, BOC's and Carolinas'
contributions to the ESOP shall be reduced by the aggregate amounts of any cash
dividends paid by BOC prior to the Termination Date which are received by the
ESOP with respect to unallocated shares of BOC Stock, and any such cash
dividends shall be used to make required payments on the ESOP Debt. Unallocated
assets held by the ESOP which, as of the Termination Date, have been released
from the pledge securing the ESOP Debt as a result of payments made as provided
above, will be allocated to ESOP participants' accounts for the Plan Year
through the Termination Date as provided by the terms of the ESOP and applicable
law and regulations.
6.12 Directors' Retirement Plan of Carolinas. At the Effective Time,
---------------------------------------
Davie will assume Carolinas' obligations under its Directors' Retirement
Plan (the "DRP") with respect to those directors of Carolinas (or, in the case
of a deceased director, his or her designated beneficiary) whose benefits under
the DRP are vested
A-36
as of the date of this Agreement. In the case of directors of Carolinas whose
benefits under the DRP are unvested as of the date of this Agreement, Carolinas
may, at its option, prior to the Effective Time, provide for the payment of
benefits called for by the DRP to those directors through the purchase, in the
name and for the benefit of each such director, of an annuity contract or policy
of life insurance with the effect that each such annuity contract or insurance
policy shall provide the equivalent benefit to such director for whom it is
purchased as he or she would be entitled to receive under the terms of the DRP
if the Merger were not effected and such director's benefits under the DRP
became vested. Notwithstanding anything contained herein to the contrary, BOC
and Carolinas agree that the aggregate amount paid by BOC or Carolinas for all
such annuity contracts or policies of life insurance for all such directors
shall not exceed $65,000, and BOC and Carolinas will obtain from each such
director, and will deliver to Davie at the Closing, a written agreement in a
form specified by Davie releasing Carolinas, BOC and Davie from any obligation
or liability for benefits under the DRP.
6.13. MRP Awards. Davie and BOC agree that BOC's 1999 Management
----------
Recognition Plan (the "MRP") will be amended immediately prior to the Effective
Time to provide that (i) awards granted thereunder prior to the date of this
Agreement that remain outstanding, to the extent they shall not previously have
become vested, shall immediately become vested in full, but that (ii) shares of
BOC Stock covered by those awards shall continue to be held by the Trustees of
the MRP and one-half of those shares shall become payable and deliverable to the
holders of those respective awards on the January 1 next following the Effective
Time, and the remaining one-half of those shares on the next succeeding January
1. BOC and Carolinas will obtain from each holder of an award under the MRP, and
will deliver to Davie at the Closing, a written agreement in a form specified by
Davie to the effect that such holder consents to the above amendment of the MRP
and modification of the terms of his or her award.
ARTICLE VII
CONDITIONS PRECEDENT TO MERGER
7.01. Conditions to all Parties' Obligations. Notwithstanding any other
--------------------------------------
provision of this Agreement to the contrary, the obligations of each of the
parties to this Agreement to consummate the transactions described herein shall
be conditioned upon the satisfaction of each of the following conditions
precedent on or prior to the Closing Date:
(a) Approval by Regulatory Authorities; Disadvantageous Conditions.
--------------------------------------------------------------
(i) The Merger, the Bank Merger and other transactions described in this
Agreement shall have been approved, to the extent required by law, by the FDIC,
the FRB, the Commissioner, the Commission, and by all other Regulatory
Authorities having jurisdiction over such transactions; (ii) no Regulatory
Authority shall have objected to or withdrawn its approval of such transactions
or imposed any condition on such transactions or its approval thereof, which
condition is reasonably deemed by BOC or Davie to so adversely impact the
economic or business benefits of this Agreement to BOC, Carolinas or Davie as to
render it inadvisable for BOC, Carolinas or Davie to consummate the Merger or
the Bank Merger; (iii) the 15-day or 30-day waiting period, as applicable,
required following necessary approvals by the FDIC and the FRB for review of the
transactions described herein by the United States Department of Justice shall
have expired, and, in connection with any such review, no objection to the
Merger or the Bank Merger shall have been raised; and (iv) all other consents,
approvals and permissions, and the satisfaction of all of the requirements
prescribed by law or regulation, necessary to the carrying out of the
transactions contemplated herein shall have been procured.
(b) Adverse Proceedings, Injunction, Etc. There shall not be (i)
-------------------------------------
any order, decree or injunction of any court or agency of competent jurisdiction
which enjoins or prohibits the Merger, the Bank Merger or any of the other
transactions described in this Agreement or any of the parties hereto from
consummating any such transaction, (ii) any pending or threatened investigation
of the Merger, the Bank Merger or any of such other transactions by the United
States Department of Justice, or any actual or threatened litigation under
federal antitrust laws relating to the Merger, the Bank Merger or any other such
transaction, (iii) any suit, action or proceeding by any person (including any
governmental, administrative or regulatory
A-37
agency), pending or threatened before any court or governmental agency in which
it is sought to restrain or prohibit Davie, Carolinas or BOC from consummating
the Merger or the Bank Merger or carrying out any of the terms or provisions of
this Agreement, or (iv) any other suit, claim, action or proceeding pending or
threatened against Davie, Carolinas or BOC or any of their respective officers
or directors which shall reasonably be considered by Davie, Carolinas or BOC to
be materially burdensome in relation to the proposed Merger or Bank Merger or
materially adverse in relation to the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of any party hereto, and which has not been dismissed,
terminated or resolved to the satisfaction of all parties hereto within 90 days
of the institution or threat thereof.
(c) Approval by Boards of Directors and Shareholders. The respective
------------------------------------------------
Boards of Directors of Davie, Carolinas and BOC shall have duly approved,
adopted and ratified this Agreement by appropriate resolutions, the shareholders
of Davie shall have duly approved, ratified and adopted this Agreement at the
Davie Shareholders' Meeting, and the shareholders of BOC shall have duly
approved, ratified and adopted this Agreement at the BOC Shareholders' Meeting,
all to the extent required by and in accordance with the provisions of this
Agreement, applicable law, and applicable provisions of their respective
Articles of Incorporation and Bylaws.
(d) Fairness Opinions.
-----------------
(i) Davie shall have received from Scott & Stringfellow a
written opinion (the "Davie Fairness Opinion") to the effect that the Merger is
fair, from a financial point of view, to Davie and its shareholders; and, Scott
& Stringfellow, Inc. shall have delivered a letter to Davie, dated as of a date
within five business days preceding the Closing Date, to the effect that it
remains its opinion that the terms of the Merger are fair, from a financial
point of view, to Davie and its shareholders.
(ii) BOC shall have received from Sterne, Agee & Leach, Inc., a
written opinion (the "BOC Fairness Opinion") to the effect that the
consideration received by BOC's shareholders is fair, from a financial point of
view, to BOC and its shareholders; and, Sterne, Agee & Leach, Inc. shall have
delivered a letter to BOC, dated as of a date within five business days
preceding the Closing Date, to the effect that it remains its opinion that the
terms of the Merger are fair, from a financial point of view, to BOC and its
shareholders.
(e) Tax Opinion. Davie and BOC shall have received the Tax Opinion
-----------
from Ward and Smith, P.A. in form satisfactory to each of them.
(f) Employment Agreement. The Employment Agreement shall have been
--------------------
executed and delivered by Davie and Talbert.
(g) No Termination or Abandonment. This Agreement shall not have
-----------------------------
been terminated or abandoned by any party hereto.
(h) Articles of Merger; Other Actions. The Articles of Merger
---------------------------------
described in Paragraph 1.08 pertaining to the Merger and the Bank Merger shall
have been duly executed by Davie and filed with the North Carolina Secretary of
State as provided in that Paragraph.
7.02. Additional Conditions to Davie's Obligations. Notwithstanding any
--------------------------------------------
other provision of this Agreement to the contrary, Davie's separate obligation
to consummate the transactions described herein shall be conditioned upon the
satisfaction of each of the following conditions precedent on or before the
Closing Date:
(a) Material Adverse Change. There shall not have occurred any
-----------------------
material adverse change in the consolidated financial condition or results of
operations of BOC, and there shall not have occurred
A-38
any event or development, and there shall not exist any condition or
circumstance which, with the lapse of time or otherwise, may or could cause,
create or result in any such material adverse change.
(b) Compliance with Laws. BOC and Carolinas shall have complied in
--------------------
all material respects with all federal and state laws and regulations applicable
to them in connection with the transactions described in this Agreement where
the violation of or failure to comply with any such law or regulation could or
may have a material adverse effect on the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of BOC or Carolinas, or of Davie after the Effective
Time, or on BOC's or Carolinas' ability to consummate the Merger or the Bank
Merger.
(c) BOC's and Carolinas' Representations and Warranties and
-------------------------------------------------------
Performance of Agreements; Officers' Certificate. Unless waived in writing by
------------------------------------------------
Davie as provided in Paragraph 10.02, each of the representations and warranties
of BOC and Carolinas contained in this Agreement shall have been true and
correct in all material respects as of the date hereof, and they shall remain
true and correct on and as of the Closing Date with the same force and effect as
though made on and as of such date, except (i) for changes which are not, in the
aggregate, material and adverse to the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of BOC or Carolinas or to BOC's or Carolinas' ability
to consummate the Merger, the Bank Merger and other transactions described
herein, and (ii) as otherwise contemplated by this Agreement; and BOC and
Carolinas each shall have performed in all material respects all of its
obligations, covenants and agreements hereunder to be performed by it on or
before the Closing Date.
Davie shall have received a certificate dated as of the Closing
Date and executed by the President and CEO and the Chief Financial Officer of
BOC and Carolinas to the effect that the conditions of this subparagraph have
been met and as to such other matters as may be reasonably requested by Davie.
(d) Legal Opinion of Davie's Counsel. Davie shall have received the
--------------------------------
written legal opinion of Gaeta & Glesener, P.A., counsel for BOC and Carolinas,
dated as of the Closing Date and in form and substance reasonably satisfactory
to Davie.
(e) Other Documents and Information. BOC and Carolinas shall have
-------------------------------
provided to Davie correct and complete copies (certified by their respective
Secretaries) of resolutions of their respective Boards of Directors and
shareholders pertaining to approval of this Agreement and the Merger and other
transactions contemplated herein, together with a certificate of the incumbency
of their officers who executed this Agreement or any other documents delivered
to Davie in connection with the Closing.
(f) Acceptance by Davie's Counsel. The form and substance of all
-----------------------------
legal matters described in this Agreement or related to the transactions
contemplated herein shall be reasonably acceptable to Davie's legal counsel.
(g) Benefit Plan Matters.
--------------------
(i) BOC shall have effected the termination of the ESOP in the
manner described in Paragraph 6.11 above and the amendment to the MRP in the
manner described in Paragraph 6.13 above;
(ii) BOC and Carolinas shall have delivered to Davie the
written agreements of Talbert and the individual holders of the BOC Options,
unvested awards under the DRP, and awards under the MRP, as required by
Paragraphs 5.01(h), 6.07, 6.12 and 6.13 above; and,
(iii) the aggregate cost of annuity contracts and/or life
insurance policies purchased by BOC and Carolinas as described in Paragraph 6.12
above shall not exceed the amount specified in that Paragraph.
A-39
7.03. Additional Conditions to BOC's and Carolinas' Obligations.
---------------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary, BOC's and
Carolinas' separate obligations to consummate the transactions described herein
shall be conditioned upon the satisfaction of each of the following conditions
precedent on or before the Closing Date:
(a) Material Adverse Change. There shall not have occurred any
-----------------------
material adverse change in the financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties or
operations of Davie, and there shall not have occurred any event or development,
and there shall not exist any condition or circumstance which, with the lapse of
time or otherwise, may or could cause, create or result in any such material
adverse change.
(b) Compliance with Laws. Davie shall have complied in all material
--------------------
respects with all federal and state laws and regulations applicable to it in
connection with the transactions described in this Agreement and where the
violation of or failure to comply with any such law or regulation could or may
have a material adverse effect on the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of Davie after the Effective Time, or on Davie's
ability to consummate the Merger or the Bank Merger.
(c) Davie's Representations and Warranties and Performance of
---------------------------------------------------------
Agreements; Officers' Certificate. Unless waived in writing by BOC or Carolinas
---------------------------------
as provided in Paragraph 10.02, each of the representations and warranties of
Davie contained in this Agreement shall have been true and correct in all
material respects as of the date hereof, and they shall remain true and correct
at and as of the Closing Date with the same force and effect as though made on
and as of such date, except (i) for changes which are not, in the aggregate,
material and adverse to the financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties or
operations of Davie or to Davie's ability to consummate the Merger, the Bank
Merger and other transactions described herein, and (ii) as otherwise
contemplated by this Agreement; and, Davie shall have performed in all material
respects all its obligations, covenants and agreements hereunder to be performed
by it on or before the Closing Date.
BOC shall have received a certificate dated as of the Closing Date and
executed by Davie's President and CEO and Chief Financial Officer to the effect
that the conditions of this subparagraph have been met and as to such other
matters as may be reasonably requested by BOC.
(d) Legal Opinion of BOC's Counsel. BOC shall have received the
------------------------------
written legal opinion of Ward and Smith, P.A., counsel to Davie, dated as of the
Closing Date and in form and substance reasonably satisfactory to BOC.
(e) Other Documents and Information. Davie shall have provided to
-------------------------------
BOC correct and complete copies (all certified by Davie's Secretary) of Davie's
Articles of Incorporation and Bylaws, and resolutions of its Board of Directors
and shareholders pertaining to approval of this Agreement and the Merger and
other transactions contemplated herein, together with a certificate as to the
incumbency of Davie's officers who executed this Agreement or any other
documents delivered to BOC or Carolinas in connection with the Closing.
(f) Acceptance by BOC's Counsel. The form and substance of all
---------------------------
legal matters described in this Agreement or related to the transactions
contemplated herein shall be reasonably acceptable to BOC's legal counsel.
A-40
ARTICLE VIII
TERMINATION; BREACH; REMEDIES
8.01. Mutual Termination. At any time prior to the Effective Time (and
------------------
whether before or after approval hereof by the shareholders of Davie or BOC),
this Agreement may be terminated by the mutual agreement of BOC and Davie. Upon
any such mutual termination, all obligations of Davie, Carolinas and BOC
hereunder shall terminate and each party shall pay its own costs and expenses as
provided in Paragraph 6.04.
8.02. Unilateral Termination. Prior to the Effective Time, this Agreement
----------------------
may be terminated by either BOC or Davie (whether before or after approval
hereof by Davie's shareholders or BOC's shareholders) upon written notice to the
other parties in the manner provided herein and under the circumstances
described below.
(a) Termination by BOC and Carolinas. This Agreement may be
--------------------------------
terminated by BOC by action of its Board of Directors:
(i) if any of the conditions to the obligations of BOC or
Carolinas set forth in Paragraph 7.01 and 7.03 shall not have been satisfied in
all material respects or effectively waived in writing by BOC by December 31,
2001 (except to the extent that the failure of such condition to be satisfied
has been caused by the failure of BOC or Carolinas to satisfy any of its
obligations, covenants or agreements contained herein);
(ii) if Davie shall have violated or failed to fully perform
any of its obligations, covenants or agreements contained in Article V or VI
herein in any material respect;
(iii) if BOC or Carolinas determines at any time that any of
Davie's representations or warranties contained in Article III hereof or in any
other certificate or writing delivered pursuant to this Agreement shall have
been false or misleading in any material respect when made or would have been
false or misleading in any material respect except for the fact that the
representation or warranty was limited to or qualified based on the Best
Knowledge of any person, or that there has occurred any event or development or
that there exists any condition or circumstance which has caused or, with the
lapse of time or otherwise, may or could cause any such representations or
warranties to become false or misleading in any material respect or that would
cause any such representation or warranty to become false or misleading in any
material respect except for the fact that the representation or warranty was
limited to or qualified based on the Best Knowledge of any person;
(iv) if, notwithstanding BOC's and Carolinas' satisfaction of
their respective obligations under Paragraphs 6.01 and 6.03, BOC's shareholders
do not ratify and approve this Agreement and the Merger at the BOC Shareholders'
Meeting, or if the Davie Shareholders' Meeting is not held by December 31, 2001;
(v) if the Merger shall not have become effective on or
before March 31, 2002, or such later date as shall be mutually agreed upon in
writing by BOC and Davie; or,
(vi) if shareholders of BOC and/or Davie exercise their right
of dissent and appraisal under Article 13 of the North Carolina Business
Corporation Act with respect to an aggregate number of shares of BOC Stock
and/or Davie Stock such as would result in a reduction of 5% or more in the
aggregate number of shares of Davie Stock that otherwise would be outstanding
following the Effective Time.
However, before BOC may terminate this Agreement for any of the
reasons specified above in (i), (ii) or (iii) of this Paragraph 8.02(a), it
shall give written notice to Davie in the manner provided herein stating its
intent to terminate and a description of the specific breach, default, violation
or other condition giving rise to its right to so terminate, and, such
termination by BOC shall not become effective if, within 30 days following the
giving of such notice, Davie shall cure such breach, default or violation or
satisfy such condition to the reasonable satisfaction of BOC.
A-41
In the event Davie cannot or does not cure such breach, default or violation or
satisfy such condition to the reasonable satisfaction of BOC within such notice
period, termination of this Agreement by BOC thereafter shall be effective upon
its giving of written notice thereof to Davie in the manner provided herein.
(b) Termination by Davie. Prior to the Effective Time, this Agreement
--------------------
may be terminated by Davie:
(i) if any of the conditions to the obligations of Davie set
forth in Paragraph 7.01 and 7.02 shall not have been satisfied in all material
respects or effectively waived in writing by Davie by December 31, 2001 (except
to the extent that the failure of such condition to be satisfied has been caused
by the failure of Davie to satisfy any of its obligations, covenants or
agreements contained herein);
(ii) if BOC or Carolinas shall have violated or failed to fully
perform any of their respective obligations, covenants or agreements contained
in Article IV or VI herein in any material respect;
(iii) if Davie determines that any of BOC's or Carolinas'
respective representations and warranties contained in Article II hereof or in
any other certificate or writing delivered pursuant to this Agreement shall have
been false or misleading in any material respect when made or would have been
false or misleading in any material respect except for the fact that the
representation or warranty was limited to or qualified based on the Best
Knowledge of any person, or that there has occurred any event or development or
that there exists any condition or circumstance which has caused or, with the
lapse of time or otherwise, may or could cause any such representations or
warranties to become false or misleading in any material respect or that would
cause any such representation or warranty to become false or misleading in any
material respect except for the fact that the representation or warranty was
limited to or qualified based on the Best Knowledge of any person;
(iv) if, notwithstanding Davie's satisfaction of its
obligations contained in Paragraphs 6.01 and 6.03, its shareholders do not
ratify and approve this Agreement and approve the Merger at the Davie
Shareholders' Meeting, or the BOC shareholders' Meeting is not held by December
31, 2001;
(v) if the Merger shall not have become effective on or before
March 31, 2002, or such later date as shall be mutually agreed upon in writing
by BOC and Davie;
(vi) if shareholders of BOC and/or Davie exercise their right
of dissent and appraisal under Article 13 of the North Carolina Business
Corporation Act with respect to an aggregate number of shares of BOC Stock
and/or Davie Stock such as would result in a reduction of 5% or more in the
aggregate number of shares of Davie Stock that otherwise would be outstanding
following the Effective Time; or
(vii) if shareholders of BOC and/or Davie exercise their right
of dissent and appraisal under Article 13 of the North Carolina Business
Corporation Act with respect to an aggregate number of shares of BOC Stock
and/or Davie Stock such as would result in a reduction of 5% or more in the
aggregate number of shares of Davie Stock that otherwise would be outstanding
following the Effective Time.
However, before Davie may terminate this Agreement for any of the
reasons specified above in clause (i), (ii) or (iii) of this Paragraph 8.02(b),
it shall give written notice to BOC in the manner provided herein stating its
intent to terminate and a description of the specific breach, default, violation
or other condition giving rise to its right to so terminate, and, such
termination by Davie shall not become effective if, within 30 days following the
giving of such notice, BOC or Carolinas shall cure such breach, default or
violation or satisfy such condition to the reasonable satisfaction of Davie. In
the event BOC or Carolinas cannot or does not cure such breach, default or
violation or satisfy such condition to the reasonable satisfaction of Davie
within such notice period, termination of this Agreement by Davie thereafter
shall be effective upon its giving of written notice thereof to BOC in the
manner provided herein.
A-42
8.03. Breach; Remedies. Except as otherwise provided below, (i) in the
----------------
event of a breach by Davie of any of its representations or warranties contained
in Article III of this Agreement or in any other certificate or writing
delivered pursuant to this Agreement, or in the event of its failure to perform
or violation of any of its obligations, agreements or covenants contained in
Articles V or VI of this Agreement, then BOC's and Carolinas' sole right and
remedy shall be to terminate this Agreement prior to the Effective Time as
provided in Paragraph 8.02(a) or, in the case of a failure to perform or
violation of any obligations, agreements or covenants, to seek specific
performance thereof; and (ii) in the event of any such termination of this
Agreement by BOC or Carolinas due to a failure by Davie to perform any of its
obligations, agreements or covenants contained in Articles V or VI of this
Agreement, then Davie shall be obligated to reimburse BOC and Carolinas for up
to (but not more than) $150,000 in expenses described in Paragraph 6.04 which
actually have been incurred by BOC and Carolinas.
Likewise, and except as otherwise provided below, (i) in the event
of a breach by BOC or Carolinas of any of its representations or warranties
contained in Article II of this Agreement, or in the event of its failure to
perform or violation of any of its obligations, agreements or covenants
contained in Articles IV or VI of this Agreement, then Davie's sole right and
remedy shall be to terminate this Agreement prior to the Effective Time as
provided in Paragraph 8.02(b), or, in the case of a failure to perform or
violation of any obligations, agreements or covenants, to seek specific
performance thereof; and (ii) in the event of any such termination of this
Agreement by Davie due to a failure by BOC or Carolinas to perform any of its
obligations, agreements or covenants contained in Articles IV or VI of this
Agreement, then BOC or Carolinas shall be obligated to reimburse Davie for up to
(but not more than) $150,000 in expenses described in Paragraph 6.04 which
actually have been incurred by Davie.
Notwithstanding any provision of this Agreement to the contrary, if
any party to this Agreement breaches this Agreement by willfully or
intentionally failing to perform or violating any of its obligations, agreements
or covenants contained in Articles IV, V or VI of this Agreement, such party
shall be obligated to pay all expenses of the other parties described in
Paragraph 6.04, together with other damages recoverable at law or in equity.
ARTICLE IX
INDEMNIFICATION
9.01. Indemnification Following Termination of Agreement.
--------------------------------------------------
(a) By Davie. Davie agrees that, in the event this Agreement is
--------
terminated for any reason and the Merger is not consummated, it will indemnify,
hold harmless and defend BOC and Carolinas and their respective officers,
directors, attorneys and financial advisors from and against any and all claims,
disputes, demands, causes of action, suits or proceedings of any third party
(including any Regulatory Authority), together with all losses, damages,
liabilities, obligations, costs and expenses of every kind and nature in
connection therewith (including without limitation reasonable attorneys' fees
and legal costs and expenses in connection therewith), whether known or unknown,
and whether now existing or hereafter arising, which may be threatened against,
incurred, undertaken, received or paid by BOC or Carolinas:
(i) in connection with or which arise out of, result from, or
are based upon (A) Davie's operations or business transactions or its
relationship with any of its employees, or (B) Davie's failure to comply with
any statute or regulation of any federal, state or local government or agency
(or any political subdivision thereof) in connection with the transactions
described in this Agreement;
(ii) in connection with or which arise out of, result from, or
are based upon any fact, condition or circumstance that constitutes a breach by
Davie of, or any inaccuracy, incompleteness or inadequacy in, any of its
representations or warranties under or in connection with this Agreement, or any
failure of Davie to perform any of its covenants, agreements or obligations
under or in connection with this Agreement; or,
A-43
(iii) in connection with or which arise out of, result from,
or are based upon any information provided by Davie which is included in the
Proxy Statement/Offering Circular and which information causes the Proxy
Statement/Offering Circular, at the time of its mailing to Davie's shareholders
and BOC's shareholders, to contain any untrue statement of a material fact or to
omit any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
they were made, not false or misleading.
(b) By BOC and Carolinas. BOC and Carolinas agree that, in the
--------------------
event this Agreement is terminated for any reason and the Merger is not
consummated, it will indemnify, hold harmless and defend Davie and its officers,
directors, attorneys and financial advisors from and against any and all claims,
disputes, demands, causes of action, suits, proceedings of any third party
(including any Regulatory Authority), together with all losses, damages,
liabilities, obligations, costs and expenses of every kind and nature in
connection therewith (including without limitation reasonable attorneys' fees
and legal costs and expenses in connection therewith), whether known or unknown,
and whether now existing or hereafter arising, which may be threatened against,
incurred, undertaken, received or paid by Davie:
(i) in connection with or which arise out of, result from, or
are based upon (A) BOC's or Carolinas' operations or business transactions or
its relationship with any of its employees, or (B) BOC's or Carolinas' failure
to comply with any statute or regulation of any federal, state or local
government or agency (or any political subdivision thereof) in connection with
the transactions described in this Agreement;
(ii) in connection with or which arise out of, result from, or
are based upon any fact, condition or circumstance that constitutes a breach by
BOC or Carolinas of, or any inaccuracy, incompleteness or inadequacy in, any of
its representations or warranties under or in connection with this Agreement, or
any failure of BOC or Carolinas to perform any of its covenants, agreements or
obligations under or in connection with this Agreement; or,
(iii) in connection with or which arise out of, result from, or
are based upon any information provided by BOC or Carolinas which is included in
the Proxy Statement/Offering Circular and which information causes the Proxy
Statement/Offering Circular, at the time of its mailing to Davie's shareholders
and BOC's shareholders, to contain any untrue statement of a material fact or to
omit any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
they were made, not false or misleading.
9.02. Procedure for Claiming Indemnification. If any matter subject to
--------------------------------------
indemnification under this Article IX arises in the form of a claim (herein
referred to as a "Third Party Claim") against BOC, Carolinas or Davie, or their
respective successors and assigns, or any of their respective subsidiary
corporations, officers, directors, attorneys or financial advisors
(collectively, "Indemnitees"), the Indemnitee promptly shall give notice and
details thereof, including copies of all pleadings and pertinent documents, to
the party obligated for indemnification hereunder (the "Indemnitor"). Within 15
days of such notice, the Indemnitor either (i) shall pay the Third Party Claim
either in full or upon agreed compromise, or (ii) shall notify the applicable
Indemnitee that the Indemnitor disputes the Third Party Claim and intends to
defend against it, and thereafter shall so defend and pay any adverse final
judgment or award in regard thereto. Such defense shall be controlled by the
Indemnitor and the cost of such defense shall be borne by it, except that the
Indemnitee shall have the right to participate in such defense at its own
expense and provided that the Indemnitor shall have no right in connection with
any such defense or the resolution of any such Third Party Claim to impose any
cost, restriction, limitation or condition of any kind that compromises the
Indemnitee hereunder. In the case of an Indemnitee that is an officer,
director, financial advisor or attorney of a party to this Agreement, then that
party agrees that it shall cooperate in all reasonable respects in the defense
of any such Third Party Claim, including making personnel, books and records
relevant to the Third Party Claim available to the Indemnitor without charge
therefor except for out-of-pocket expenses. If the Indemnitor fails to take
action within 15 days as hereinabove provided or, having taken such action,
thereafter fails diligently to defend and resolve the Third
A-44
Party Claim, the Indemnitee shall have the right to pay, compromise or defend
the Third Party Claim and to assert the indemnification provisions hereof. The
Indemnitee also shall have the right, exercisable in good faith, to take such
action as may be necessary to avoid a default prior to the assumption of the
defense of the Third Party Claim by the Indemnitor.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.01. Survival of Representations, Warranties, Indemnification and
------------------------------------------------------------
Other Agreements.
----------------
(a) Representations, Warranties and Other Agreements. None of the
------------------------------------------------
representations, warranties or agreements contained in this Agreement shall
survive the effectiveness of the Merger, and no party shall have any right after
the Effective Time to recover damages or any other relief from any other party
to this Agreement by reason of any breach of representation or warranty, any
nonfulfillment or nonperformance of any agreement contained herein, or
otherwise.
(b) Indemnification. The parties' indemnification agreements and
---------------
obligations pursuant to Paragraph 9.01 shall become effective only in the event
this Agreement is terminated and shall survive any such termination, and neither
of the parties shall have any obligations under Paragraph 9.01 in the event of
or following consummation of the Merger.
10.02. Waiver. Any term or condition of this Agreement may be waived
------
(except as to matters of regulatory approvals and other approvals required by
law), either in whole or in part, at any time by the party which is, and whose
shareholders are, entitled to the benefits thereof; provided, however, that any
such waiver shall be effective only upon a determination by the waiving party
(through action of its Board of Directors) that such waiver would not adversely
affect the interests of the waiving party or its shareholders; and, provided
further, that no waiver of any term or condition of this Agreement by any party
shall be effective unless such waiver is in writing and signed by the waiving
party, nor shall any such waiver be construed to be a waiver of any succeeding
breach of the same term or condition or a waiver of any other or different term
of condition. No failure or delay of any party to exercise any power, or to
insist upon a strict compliance by any other party of any obligation, and no
custom or practice at variance with any terms hereof, shall constitute a waiver
of the right of any party to demand full and complete compliance with such
terms.
10.03. Amendment. This Agreement may be amended, modified or supplemented
---------
at any time or from time to time prior to the Effective Time, and either before
or after its approval by the shareholders of Davie or the shareholders of BOC,
by an agreement in writing approved by the Boards of Directors of BOC, Carolinas
and Davie executed in the same manner as this Agreement; provided however, that,
except with the further approval of Davie's shareholders and BOC's shareholders
of that change or as otherwise provided herein, following approval of this
Agreement by Davie's shareholders and BOC's shareholders no change may be made
in the amount of consideration into which each share of BOC Stock will be
converted.
10.04. Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed to have been duly given if delivered personally
or by courier, or by U.S. mail, first class postage prepaid, and addressed as
follows:
If to Davie: With copy to:
Bank of Davie William R. Lathan, Jr.
135 Boxwood Village Drive Ward and Smith, P.A.
Mocksville, NC 27028 1001 College Court
Attn: Robert E. Marziano, President & CEO New Bern, NC 28562
A-45
If to BOC or Carolinas: With copy to:
BOC Financial Corp. Anthony Gaeta, Jr.
107 South Central Avenue Gaeta & Glesener, P.A.
Landis, NC 28088-1402 808 Salem Woods Drive, Suite 201
Attn: Stephen R. Talbert, President & CEO Raleigh, NC 27615
10.05. Further Assurance. Davie, Carolinas and BOC each agrees to
-----------------
furnish to each other party such further assurances with respect to the matters
contemplated in this Agreement and their respective agreements, covenants,
representations and warranties contained herein, including the opinion of legal
counsel, as such other party may reasonably request.
10.06. Headings and Captions. Headings and captions of the Paragraphs of
---------------------
this Agreement have been inserted for convenience of reference only and do not
constitute a part hereof.
10.07. Gender and Number. As used herein, the masculine gender shall
-----------------
include the feminine and neuter, the singular number, the plural, and vice
versa, whenever such meanings are appropriate.
10.08. Entire Agreement. This Agreement (including all schedules and
----------------
exhibits attached hereto and all documents incorporated herein by reference)
contains the entire agreement of the parties with respect to the transactions
described herein and supersedes any and all other oral or written agreement(s)
heretofore made, and there are no representations or inducements by or to, or
any agreements between, any of the parties hereto other than those contained
herein in writing.
10.09. Severability of Provisions. The invalidity or unenforceability of
--------------------------
any term, phrase, clause, paragraph, restriction, covenant, agreement or other
provision hereof shall in no way affect the validity or enforceability of any
other provision or part hereof.
10.10. Assignment. This Agreement may not be assigned by any party hereto
----------
except with the prior written consent of the other parties hereto.
10.11. Counterparts. Any number of counterparts of this Agreement may be
------------
signed and delivered, each of which shall be considered an original and which
together shall constitute one agreement.
10.12. Governing Law. This Agreement is made in and shall be construed
-------------
and enforced in accordance with the laws of the State of North Carolina.
10.13. Previously Disclosed Information. As used in this Agreement,
--------------------------------
"Previously Disclosed" shall mean the disclosure of information by Davie to BOC
and Carolinas, or by BOC and Carolinas to Davie, in a letter delivered by the
disclosing party or parties to the other parties prior to the date hereof,
specifically referring to this Agreement, and arranged in paragraphs
corresponding to the Paragraphs, Subparagraphs and items of this Agreement
applicable thereto. Information shall be deemed Previously Disclosed for the
purpose of a given Paragraph, Subparagraph or item of this Agreement only to the
extent that a specific reference thereto is made in connection with disclosure
of such information at the time of such delivery.
10.14 Best Knowledge. The terms "Best Knowledge" and "Knowledge" as used
--------------
in this Agreement with reference to certain facts or information shall be deemed
to refer to facts or information of which officers of Davie, or officers of BOC
or Carolinas, as the case may be, are consciously aware or of which they should
have become consciously aware in the ordinary course of business and the
performance of their management duties.
A-46
10.15 Inspection.
----------
(a) Any right of BOC or Carolinas under this Agreement to
investigate or inspect the assets, books, records, files and other information
of Davie in no way shall establish any presumption that BOC or Carolinas should
have conducted any investigation or that such right has been exercised by BOC or
Carolinas, their respective agents, representatives or others. Any
investigations or inspections actually made by BOC or Carolinas or their
respective agents, representatives or others prior to the date of this Agreement
or otherwise prior to the Effective Time shall not be deemed in any way in
derogation or limitation of the covenants, representations and warranties made
by or on behalf of Davie in this Agreement.
(b) Any right of Davie under this Agreement to investigate or
inspect the assets, books, records, files and other information of BOC or
Carolinas in no way shall establish any presumption that Davie should have
conducted any investigation or that such right has been exercised by Davie, its
respective agents, representatives or others. Any investigations or inspections
actually made by Davie or its respective agents, representatives or others prior
to the date of this Agreement or otherwise prior to the Effective Time shall not
be deemed in any way in derogation or limitation of the covenants,
representations and warranties made by or on behalf of BOC or Carolinas in this
Agreement.
A-47
IN WITNESS WHEREOF, Davie, Carolinas and BOC each has caused this Agreement
to be executed in its name by its duly authorized officers and its corporate
seal to be affixed hereto as of the date first above written.
BANK OF DAVIE
[CORPORATE SEAL]
By:/s/ Robert E. Marziano
-----------------------------
Chairman, CEO and President
ATTEST:
/s/ Brenda B. Smith
--------------------
Secretary
BOC FINANCIAL CORP.
[CORPORATE SEAL]
By:/s/ Stephen R. Talbert
-----------------------------
Chairman, CEO and President
ATTEST:
/s/ Henry H. Land
--------------------
Secretary
BANK OF THE CAROLINAS
[CORPORATE SEAL]
By:/s/ Stephen R. Talbert
-----------------------------
Chairman, CEO and President
ATTEST:
/s/ Henry H. Land
--------------------
Secretary
A-48
INDEX OF EXHIBITS
Document Exhibit
-------- -------
Plan of Merger A
Plan of Bank Merger B
Bank of Davie Titles for Officers of BOC C
Employment Agreement by and between Stephen R. D
Talbert & Bank of Davie
A-49
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A-50
Exhibit A
PLAN OF MERGER
By and Between
BANK OF DAVIE
and
BOC FINANCIAL CORP.
1.01. Names of Merging Corporations. The names of the corporations
-----------------------------
proposed to be merged are Bank of Davie ("Davie") and BOC Financial Corp.
("BOC").
1.02. Nature of Transaction; Plan of Merger. At the "Effective Time"
-------------------------------------
specified in the Articles of Merger filed with the North Carolina Secretary of
State, BOC will be merged into and with Davie (the "Merger") as provided in this
Plan of Merger.
1.03. Effect of Merger; Surviving Corporation. At the Effective Time, and
---------------------------------------
by reason of the Merger, the separate corporate existence of BOC shall cease
while the corporate existence of Davie as the surviving corporation in the
Merger shall continue with all of its purposes, objects, rights, privileges,
powers and franchises, all of which shall be unaffected and unimpaired by the
Merger. Following the Merger, Davie shall continue to operate as a North
Carolina banking corporation and will conduct its business at its then legally
established branch and main offices. The duration of the corporate existence of
Davie, as the surviving corporation, shall be perpetual and unlimited.
1.04. Assets and Liabilities of BOC. At the Effective Time, and by reason
-----------------------------
of the Merger, and in accordance with applicable law, all of the property,
assets and rights of every kind and character of BOC (including without
limitation all real, personal or mixed property, all debts due on whatever
account, all other choses in action and every other interest of or belonging to
or due to BOC, whether tangible or intangible) shall be transferred to and vest
in Davie, and Davie shall succeed to all the rights, privileges, immunities,
powers, purposes and franchises of a public or private nature of BOC (including
all trust and other fiduciary properties, powers and rights), all without any
conveyance, assignment or further act or deed; and, Davie shall become
responsible for all of the liabilities, duties and obligations of every kind,
nature and description of BOC (including duties as trustee or fiduciary) as of
the Effective Time. By virtue of the Merger, BOC's interest in and ownership of
the outstanding shares of $5.00 par value common stock of its wholly-owned
subsidiary, Bank of the Carolinas ("Carolinas") shall be transferred to and vest
in Davie, and Carolinas shall become a wholly-owned subsidiary of Davie.
1.05. Conversion and Exchange of Stock.
--------------------------------
(a) Conversion of BOC Stock. Except as otherwise provided in this
-----------------------
Plan of Merger, at the Effective Time all rights of BOC's shareholders with
respect to all outstanding shares of BOC's $1.00 par value common stock (the
"BOC Stock") shall cease to exist and, as consideration for and to effect the
Merger, each such outstanding share shall be converted, without any action by
Davie, BOC or any BOC shareholder, into the right to receive 0.92 shares of
$5.00 par value common stock of Davie (the "Davie Stock").
At the Effective Time, and without any action by Davie, BOC or any
BOC shareholder, BOC's stock transfer books shall be closed and there shall be
no further transfers of BOC Stock on its stock transfer books or the
registration of any transfer of a certificate evidencing BOC Stock (a "BOC
Certificate") by any holder thereof, and the holders of BOC Certificates shall
cease to be, and shall have no further rights as, stockholders of BOC other than
as provided in this Agreement. Following the Effective Time, BOC Certificates
shall evidence only the right of the registered holder thereof to receive
certificates evidencing shares of Davie Stock, or in the case of BOC Stock held
by shareholders who properly shall have exercised "Dissenters Rights"
A-51
(as defined in Paragraph 1.05(e)), cash as provided in Article 13 of the North
Carolina Business Corporation Act.
(b) Exchange and Payment Procedures; Surrender of Certificates. As
----------------------------------------------------------
promptly as practicable, but not more than five business days following the
Effective Time, Davie shall send or cause to be sent to each former BOC
shareholder of record immediately prior to the Effective Time written
instructions and transmittal materials (a "Transmittal Letter") for use in
surrendering BOC Certificates to Davie or to an exchange agent appointed by
Davie. Upon the proper surrender and delivery to Davie or its agent (in
accordance with its instructions, and accompanied by a properly completed
Transmittal Letter) by a former shareholder of BOC of his or her BOC
Certificate(s), and in exchange therefor, Davie shall as soon as practicable
issue and deliver to the shareholder certificates representing the Davie Stock
into which the shareholder's BOC Stock has been converted.
Subject to Paragraph 1.05(e), no Davie Stock shall be issued or
delivered to any former BOC shareholder unless and until such shareholder shall
have properly surrendered to Davie or its agent the BOC Certificate(s) formerly
representing his or her shares of BOC Stock, together with a properly completed
Transmittal Letter. Further, until a former BOC shareholder's BOC Certificates
are so surrendered and certificates for the Davie Stock into which his or her
BOC Stock was converted at the Effective Time actually are issued to him or her,
no dividend or other distribution payable by Davie with respect to that Davie
Stock as of any date subsequent to the Effective Time shall be paid or delivered
to the former BOC shareholder. However, upon the proper surrender of the
shareholder's BOC Certificate, Davie shall pay to the shareholder the amount of
any such dividends or other distributions that have accrued but remain unpaid
with respect to that Davie Stock.
(c) Antidilutive Adjustments. If, prior to the Effective Time, BOC
------------------------
or Davie shall declare any dividend payable in shares of BOC Stock or Davie
Stock or shall subdivide, split, reclassify or combine the presently outstanding
shares of BOC Stock or Davie Stock, then an appropriate and proportionate
adjustment shall be made in the number of shares of Davie Stock to be issued in
exchange for each of the shares of BOC Stock.
(d) Dissenters. Any shareholder of BOC who properly exercises the
----------
right of dissent and appraisal with respect to the Merger as provided in Section
55-13-02 of the North Carolina General Statutes ("Dissenter's Rights") shall be
entitled to receive payment of the fair value of his or her shares of BOC Stock
in the manner and pursuant to the procedures provided therein. Shares of BOC
Stock held by persons who exercise Dissenter's Rights shall not be converted as
described in Paragraph 1.05(a). However, if any shareholder of BOC who
exercises Dissenter's Rights shall fail to perfect those rights, or effectively
shall waive or lose such rights, then each of his or her shares of BOC Stock, at
Davie's sole option, shall be deemed to have been converted into the right to
receive Davie Stock as of the Effective Time as provided in Paragraph 1.05(a)
hereof.
(e) Lost Certificates. Shareholders of BOC whose BOC Certificates
-----------------
have been lost, destroyed, stolen or otherwise are missing shall be entitled to
receive the certificates evidencing Davie Stock to which they are entitled in
accordance with and upon compliance with reasonable conditions imposed by Davie,
including without limitation a requirement that those shareholders provide lost
instruments indemnities or surety bonds in form, substance and amounts
satisfactory to Davie.
1.06. Articles of Incorporation, Bylaws and Management. The Articles of
------------------------------------------------
Incorporation and Bylaws of Davie in effect at the Effective Time shall be the
Articles of Incorporation and Bylaws of Davie as the surviving corporation in
the Merger. The directors of BOC in office at the Effective Time shall be
appointed to the Board of Directors of Davie and the chairman of the Board of
Directors of BOC in office at the Effective Time shall be named chairman of the
Board of Directors of Davie, each to hold such office until removed as provided
by law or until the election or appointment of their respective successors. The
directors of Davie in office at the Effective Time shall continue to hold such
offices until removed as provided by law
A-52
or until the election or appointment of their respective successors. The
officers of BOC in office at the effective time shall be named to positions with
Davie as agreed upon by Davie and BOC
1.07. Closing; Effective Time. The closing of the Merger and other
-----------------------
transactions contemplated by this Plan of Merger (the "Closing") shall take
place at the offices of Davie, in Mocksville, North Carolina, or at such other
place as Davie shall designate, on a date mutually agreeable to Davie and BOC
(the "Closing Date") after the expiration of any and all required waiting
periods following the effective date of required approvals of the Merger by
governmental or regulatory authorities (but in no event more than sixty (60)
days following the expiration of all such required waiting periods).
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Exhibit B
PLAN OF BANK MERGER
By and Between
BANK OF DAVIE
and
BANK OF THE CAROLINAS
1.01. Names of Merging Corporations. The names of the banking
-----------------------------
corporations proposed to be merged are Bank of Davie ("Davie") and Bank of the
Carolinas ("Carolinas"). Davie, as parent corporation of Carolinas, is the
owner of all of the issued and outstanding shares of capital stock of Carolinas.
1.02. Nature of Transaction; Plan of Bank Merger. Subject to the
------------------------------------------
provisions of this Plan of Merger, at the "Effective Time" specified in the
Articles of Merger filed with the North Carolina Secretary of State, Carolinas
will be merged into and with Davie (the "Bank Merger"), and the corporate name
of Davie will be changed to "Bank of the Carolinas."
1.03. Effect of Bank Merger; Surviving Corporation. At the Effective
--------------------------------------------
Time, and by reason of the Bank Merger, the separate corporate existence of
Carolinas shall cease while the corporate existence of Davie as the surviving
corporation in the Bank Merger shall continue with all of its purposes, objects,
rights, privileges, powers and franchises, all of which shall be unaffected and
unimpaired by the Bank Merger. Following the Bank Merger, Davie shall continue
to operate as a North Carolina banking corporation and will conduct its business
at the then legally established branch and main offices of Carolinas and Davie
under the name "Bank of the Carolinas." The duration of the corporate existence
of Davie, as the surviving corporation, shall be perpetual and unlimited.
1.04. Assets and Liabilities of Carolinas. At the Effective Time, and by
-----------------------------------
reason of the Bank Merger, and in accordance with applicable law, all of the
property, assets and rights of every kind and character of Carolinas (including
without limitation all real, personal or mixed property, all debts due on
whatever account, all other choses in action and every other interest of or
belonging to or due to Carolinas, whether tangible or intangible) shall be
transferred to and vest in Davie, and Davie shall succeed to all the rights,
privileges, immunities, powers, purposes and franchises of a public or private
nature of Carolinas (including all trust and other fiduciary properties, powers
and rights), all without any conveyance, assignment or further act or deed; and,
Davie shall become responsible for all of the liabilities, duties and
obligations of every kind, nature and description of Carolinas (including duties
as trustee or fiduciary) as of the Effective Time.
1.05. Cancellation of Carolinas Stock. At the Effective Time, all rights
-------------------------------
of Davie as sole shareholder of all of Carolinas' issued and outstanding shares
of $5.00 par value common stock shall cease to exist and Davie shall receive no
consideration for such shares of Carolinas, with such shares and all rights
related thereto being cancelled, terminated and extinguished.
1.06. Articles of Incorporation, Bylaws and Management. The Articles of
------------------------------------------------
Incorporation and Bylaws of Davie in effect at the Effective Time shall be the
Articles of Incorporation and Bylaws of Davie as the surviving corporation in
the Bank Merger, provided, however, that the Articles of Incorporation of Davie
shall be amended to change the name of the surviving corporation to "Bank of the
Carolinas."
1.07. Closing; Effective Time. The closing of the Bank Merger and other
-----------------------
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Davie, in Mocksville, North Carolina, or at such other place as
Davie shall designate, on a date mutually agreeable to Davie and Carolinas (the
"Closing Date") after the expiration of any and all required waiting periods
following the effective date of required approvals of the Bank Merger by
governmental or regulatory authorities (but in no event more than sixty (60)
days following the expiration of all such required waiting periods).
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A-56
Exhibit C
As of the Effective Time, the following employees of BOC and Carolinas
shall have the title or titles with Davie indicated below:
Stephen R. Talbert Chairman of the Board and Executive Vice President
Lisa Ashley Vice President and Controller
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A-58
Exhibit D
STATE OF NORTH CAROLINA
COUNTY OF ROWAN
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the
____day of ___________, 2001 (the "Effective Date"), by and between BANK OF THE
CAROLINAS, formerly Bank of Davie (the "Bank") and STEPHEN R. TALBERT
("Employee").
W I T N E S S E T H:
WHEREAS, Employee heretofore has been employed as Chairman and Chief
Executive Officer of the entity formerly known as "Bank of the Carolinas"
("BOC") pursuant to an employment agreement between him and BOC, and in such
position he has provided leadership and guidance in the growth and development
of BOC's business; and,
WHEREAS, as of the Effective Date, BOC has been merged into the Bank; and,
WHEREAS, Employee's experience and knowledge of BOC's operations, customers
and affairs, and his knowledge of and standing and reputation in BOC's market
area, would be of benefit to the Bank in its continuation of BOC's business;
and, for that reason, the Bank desires to retain Employee's services as an
employee of the Bank for the Term of Employment specified below, and Employee
desires to become an employee of the Bank, all subject to the terms and
conditions provided herein; and,
WHEREAS, the Bank and Employee desire to terminate Employee's existing
employment agreement with BOC and to set forth the terms and conditions of
Employee's employment with the Bank in a new written agreement which will
supercede and replace the existing employment agreement and, for that purpose,
the Bank and Employee have agreed and desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises,
covenants and conditions hereinafter set forth, and for other good and valuable
considerations, the receipt and sufficiency of which hereby are acknowledged,
the Bank and Employee hereby agree as follows:
1. Employment. The Bank agrees to employ Employee, and Employee accepts
----------
employment with the Bank, all upon the terms and conditions stated herein. As
an employee of the Bank, Employee will (i) serve as an Executive Vice President
of the Bank, (ii) provide such assistance and advice to the Bank as it may
request from time to time regarding matters involving BOC's former customers and
employees, loan quality control and review, product conversion and other tasks
relating to BOC's former operations and the transition of control over such
operations to the Bank, (iii) promote the Bank and its business and engage in
business development activities on the Bank's behalf, and (iv) have such other
functional managerial duties and responsibilities as shall be assigned to him by
the Bank from time to time.
In performing his duties under this Agreement, Employee will report
directly to the Bank's Chief Executive Officer and may maintain his principal
office in Landis, North Carolina.
2. Term. Unless sooner terminated as provided in this Agreement, and
----
subject to the right of either Employee or the Bank to terminate Employee's
employment at any time as provided herein, the term of Employee's employment
with the Bank under this Agreement (the "Term of Employment") shall be for a
period of three years commencing on the Effective Date and terminating at the
close of the Bank's business on [_________], [200___] (the "Expiration Date").
However, notwithstanding anything contained herein to the contrary, on
[__________], [200___], and on [_________] of each year thereafter during the
Term of
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Employment (in each case, an "Extension Date"), the Expiration Date
automatically shall be extended by one additional year unless either Employee or
the Bank shall have given the other written notice at least [_____] days prior
to any such Extension Date that the Expiration Date will no longer be extended.
Following the giving of any such written notice, the Term of Employment shall
become fixed and shall expire on its then current Expiration Date as it may
previously have been extended.
3. Cash Compensation.
-----------------
(a) Base Salary. For all services rendered by Employee to the Bank
-----------
under this Agreement, during the Term of Employment the Bank shall pay Employee
base salary at an annual rate of One Hundred Five Thousand Dollars ($105,000)
plus an amount equal to Employee's projected annual out-of-pocket expense for
premiums for insurance benefits under the Bank's group employee insurance
program based on the then current portion of those premiums being paid by the
Bank on the Effective Date ("Base Salary"). Employee's Base Salary may be
increased from time to time during the Term of Employment at the discretion of
the Bank's Board of Directors. Base Salary paid under this Agreement shall be
payable not less frequently than monthly in accordance with the Bank's payroll
policies and procedures.
(b) Incentive Compensation. For each of [200__] and [200__], the Bank
----------------------
shall pay to Employee, as a cash bonus, a percentage of his Base Salary for
those years, respectively, equal to the average of the percentages used in
calculating the cash bonuses, if any, paid to the Bank's other executive
officers under its management incentive plan. For each year thereafter during
the Term of Employment, Employee shall be eligible to participate in the plan in
accordance with its terms applicable to the Bank's other executive officers. Any
cash bonus payable to Employee shall be payable at times and in a manner as
shall be in accordance with the Bank's bonus policies and procedures.
4. Employee Benefit Plans; Fringe Benefits; Income Taxes.
-----------------------------------------------------
(a) Automobile. During the Term of Employment, the Bank will provide
----------
Employee with the use of an automobile selected by the Bank.
(b) Club Dues. During the Term of Employment, the Bank will pay
---------
monthly dues associated with Employee's membership at Kannapolis Country Club in
Kannapolis, North Carolina. Additional charges associated with the use of
facilities at that club will be the responsibility of Employee, and Employee
will be responsible for any special assessments associated with his membership.
(c) Other Benefits. During the Term of Employment, Employee shall be
--------------
eligible to participate in any and all employee benefit programs maintained by
or for the Bank that are generally available to and which cover all the Bank's
officers at Employee's job level or classification, subject to the rules
applicable to such plans or programs prevailing from time to time. Except as
otherwise specifically provided herein, Employee's participation in such plans
and programs shall be subject to and in accordance with the terms and conditions
(including eligibility requirements) of such plans and programs, resolutions of
the Bank's Board of Directors establishing such programs and plans, and the
Bank's normal practices and established policies regarding such plans and
programs.
Employee shall receive credit for past full years of service with BOC
prior to the Effective Date for purposes of (i) participation and vesting in the
Bank's Section 401(k) savings plan (the "Savings Plan"), and (ii) except as
described below, for all purposes under all the Bank's other benefit plans
(including coverage under the Bank's health insurance plan and entitlement to
vacation and sick leave). For purposes of the Bank's health insurance plan,
Employee's participation will be without regard to pre-existing condition
requirements under that plan, provided that any such pre-existing condition at
the Effective Date would have been covered under BOC's health insurance plan and
Employee provides evidence of such previous coverage in a form satisfactory to
the Bank's health insurance carrier.
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Notwithstanding anything contained in this Agreement to the contrary,
if the Bank shall believe in good faith that the granting of any such past
service credit would not be permissible under the terms and requirements of the
Employee Retirement Income Security Act of 1974, as amended, the Internal
Revenue Code of 1986, as amended, any governmental rules, regulations and
policies thereunder, or any other law or regulation applicable to the operation
of any such plan or program, or otherwise would expose any such plan or program
or the Bank to any penalty, then the Bank shall not be required to give Employee
any such credit for past service with BOC.
Employee acknowledges that the terms and provisions of the Bank's
employee benefit plans and programs may be determined only by reading the actual
plan documents under which the Bank or the plan administrator, as applicable,
may make certain administrative determinations with discretion, and that the
Bank reserves the right to modify or terminate each plan or program and any
benefits provided thereunder.
(d) Income Taxes. All cash or other compensation payable or provided
------------
to Employee under this Agreement shall be subject to customary withholding of
taxes and such other deductions or withholdings as are required by law or
customary for the Bank's employees. Employee shall be solely responsible for
any income taxes owed on account of his receipt from the Bank of any employee or
fringe benefits under this Agreement and, to the extent that the Bank reasonably
believes itself obligated to do so, the Bank may withhold any such taxes from
cash compensation payable to Employee.
5. Standards of Performance and Conduct. During the Term of Employment,
------------------------------------
Employee faithfully and diligently shall discharge his obligations under this
Agreement, and shall perform the duties associated with his position with the
Bank, in a manner which is competent and reasonably satisfactory to the Bank,
and Employee shall comply with and use his best efforts to implement the Bank's
policies and procedures currently in effect or as are established from time to
time by the Bank.
In the execution of his employment duties under this Agreement,
Employee shall, at all times and in all material respects, comply with the
Bank's Code of Conduct, as the same is in effect as of the Effective Date and as
it may be amended or supplemented from time to time subsequent thereto (the
"Code of Conduct"), and with all federal and state statutes, and all rules,
regulations, administrative orders, statements of policy and other
pronouncements or standards promulgated thereunder, which are applicable to the
Bank and its business and operations.
6. Termination of Previous Employment Agreement. Employee and the Bank
--------------------------------------------
specifically agree that this Agreement supersedes that certain Employment
Agreement dated April 28, 1998 between Employee and BOC (the "BOC Agreement").
As additional consideration for the Bank's agreements and obligations under this
Agreement, Employee hereby waives any and all rights, and releases BOC and the
Bank from any and all obligations, under the BOC Agreement (including all rights
and obligations under Paragraph 8 thereof pertaining to "changes in control")
and agrees that the BOC Agreement hereby is terminated in its entirety and shall
be of no further force or effect.
7. Noncompetition; Confidentiality.
-------------------------------
(a) General. Employee hereby acknowledges and agrees that (i) BOC has
-------
made a significant investment in the development of its business in the
geographic area identified below as the "Relevant Market" and that, by virtue of
the Bank's acquisition of BOC, the Bank has acquired a valuable economic
interest in BOC's business in the Relevant Market which it is entitled to
protect; (ii) in the course of his past service on behalf of BOC and future
service as an employee of the Bank, he has gained and will continue to gain
substantial knowledge of and familiarity with BOC's and the Bank's customers and
their dealings with them, and other information concerning BOC's and the Bank's
businesses, all of which constitute valuable assets and privileged information;
and, (iii) in order to protect the Bank's interest in and to assure it the
benefit of its succession to BOC's business, it is reasonable and necessary to
place certain restrictions on Employee's ability to compete against the Bank and
on his disclosure of information about the Bank's and BOC's
A-61
business and customers. For that purpose, and in consideration of the Bank's
agreements contained herein, Employee covenants and agrees as provided below.
(b) Covenant Not to Compete. During the "Restriction Period" (as
-----------------------
defined below), Employee shall not "Compete" (as defined below), directly or
indirectly, with the Bank in the "Relevant Market" (as defined below).
For purposes of this Paragraph 7, the following terms shall have the
meanings set forth below:
Compete. The term "Compete" means: (i) soliciting any Person who was
-------
a Customer of BOC at the time of its acquisition by the Bank, or who was a
Customer of the Bank on the date of termination of Employee's employment with
the Bank, to become a depositor in or a borrower from any other Financial
Institution, to obtain any other service or product from any other Financial
Institution, or to change any depository, loan and/or other banking relationship
of the Customer from BOC or the Bank to another Financial Institution; (ii)
acting as a consultant, officer, director, advisory director, independent
contractor, or employee of any Financial Institution that has its main or
principal office in the Relevant Market, or, in acting in any such capacity with
any other Financial Institution, to maintain an office or be employed at or
assigned to or to have any direct involvement in the management, supervision,
business, marketing activities, solicitation of business for or operation of any
office of such Financial Institution located in the Relevant Market; or (iii)
communicating to any Financial Institution the names or addresses or any
financial information concerning any Person who was a Customer of BOC at the
time of its acquisition by the Bank, or who was a Customer of the Bank at the
date of termination of Employee's employment with the Bank.
Customer. The term "Customer of BOC" means any Person with whom BOC
--------
has a depository or loan relationship, and/or to whom BOC provides any other
service or product, and the term "Customer of the Bank" means any Person with
whom the Bank has a depository or loan relationship, and/or to whom the Bank
provides any other service or product.
Financial Institution. The term "Financial Institution" means (i) any
---------------------
federal or state chartered bank, savings bank, savings and loan association or
credit union (a "Depository Institution"), (ii) any holding company for, or
corporation that owns or controls, any Depository Institution (a "Holding
Company"), (iii) any subsidiary or service corporation of any Depository
Institution or Holding Company, or any entity controlled in any way by any
Depository Institution or Holding Company, or (iv) any other Person engaged in
the business of making loans of any type, soliciting or taking deposits, or
providing any other service or product that is provided by the Bank or one of
its affiliated corporations.
Person. The term "Person" means any natural person or any
------
corporation, partnership, proprietorship, joint venture, limited liability
company, trust, estate, governmental agency or instrumentality, fiduciary,
unincorporated association or other entity.
Relevant Market. The term "Relevant Market" means the geographic area
---------------
consisting of (i) Rowan County, North Carolina, and any county contiguous
thereto, (ii) Davie County, North Carolina, and (iii) any other county in which
the Bank maintains a business office on the date of any termination of
Employee's employment with the Bank.
Restriction Period. The term "Restriction Period" means the one-year
------------------
period commencing on the effective date of termination of Employee's employment
with the Bank for any reason, whether before or after the Expiration Date;
provided however that, in the case of an involuntary termination of Employee's
employment by the Bank prior to the Expiration Date without "Cause" as provided
in Paragraph 8(c) below, the Restriction Period shall be the then current
unexpired Term of Employment during which the Bank is obligated to continue to
pay Base Salary to Employee, but, in such case, the Restriction Period shall
immediately expire upon a default by the Bank in making the payments for which
it is obligated under Paragraph 8(c).
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Notwithstanding anything contained herein to the contrary, in the event any
payment required under Paragraph 8(c) is not made by the Bank by the due date
for that payment, the Bank shall not be considered to be in default with respect
to that payment for purposes of this Paragraph 7(b) unless it shall fail to make
that payment within ten days after its receipt of written notice from Employee
that the payment has not been made.
(c) Confidentiality Covenant. Employee covenants and agrees that any
------------------------
and all data, figures, projections, estimates, lists, files, records, documents,
manuals or other such materials or information (whether financial or otherwise,
and including any files, data or information maintained electronically, on
microfiche or otherwise) relating to BOC or the Bank and their respective
lending and deposit operations and related businesses, regulatory examinations,
financing sources, financial results and condition, Customers (including lists
of Customers and former customers and information regarding their accounts and
business dealings with BOC or the Bank), prospective customers, contemplated
acquisitions (whether of business or assets), ideas, methods, marketing
investigations, surveys, research, policies and procedures, computer systems and
software, shareholders, employees, officers and directors (herein referred to as
"Confidential Information") are confidential and proprietary to the Bank and are
valuable, special and unique assets of the Bank's business which are not
directly reproducible from any other source and to which Employee has had access
as an officer and employee of BOC and will have access during his employment
with the Bank. Employee agrees that (i) all such Confidential Information shall
be considered and kept as the confidential, private and privileged records and
information of the Bank, and (ii) during the Term of Employment and at all times
following the termination of this Agreement or his employment for any reason,
and except as shall be required in the course of the performance by Employee of
his duties on behalf of the Bank or otherwise pursuant to the direct, written
authorization of the Bank, Employee will not: divulge any such Confidential
Information to any other Person; remove any such Confidential Information in
written or other recorded form from the Bank's premises; or make any use of any
Confidential Information for his own purposes or for the benefit of any Person
other than the Bank. However, following the termination of Employee's
employment with the Bank, this Paragraph 7(c) shall not apply to any
Confidential Information which then is in the public domain (provided that
Employee was not responsible, directly or indirectly, for permitting such
Confidential Information to enter the public domain without the Bank's consent),
or which is obtained by Employee from a third party which or who is not
obligated under an agreement of confidentiality with respect to such information
and who did not acquire such Confidential Information in a manner which
constituted a violation of the covenants contained in this Paragraph 7(c) or
which otherwise breached any duty of confidentiality. Further, the above
obligations of confidentiality shall not prohibit the disclosure of any such
Confidential Information by Employee to the extent such disclosure is required
by subpoena or order of a court or regulatory authority of competent
jurisdiction or to the extent that, in the reasonable opinion of legal counsel
to Employee, disclosure otherwise is required by law.
(d) Reasonableness of Restrictions. If any of the restrictions set
------------------------------
forth in this Paragraph 7 shall be declared invalid for any reason whatsoever by
a court of competent jurisdiction, the validity and enforceability of the
remainder of such restrictions shall not thereby be adversely affected.
Employee acknowledges that BOC has had a substantial business presence in the
Relevant Market, that the Bank, through its acquisition of BOC, has acquired the
legitimate economic interest of BOC in those geographic areas which this
Paragraph 7 specifically is intended to protect, and that the Relevant Market
and Restriction Period are limited in scope to the geographic territory and
period of time reasonably necessary to protect the Bank's economic interest and
otherwise are reasonable and proper. In the event the Restriction Period or any
other such time limitation is deemed to be unreasonable by a court of competent
jurisdiction, Employee hereby agrees to submit to such reduction of the
Restriction Period as the court shall deem reasonable. In the event the
Relevant Market is deemed by a court of competent jurisdiction to be
unreasonable, Employee hereby agrees that the Relevant Market shall be reduced
by excluding any separately identifiable and geographically severable area
necessary to make the remaining geographic restriction reasonable, but this
Paragraph 7 shall be enforced as to all other areas included in the Relevant
Market which are not so excluded.
(e) Remedies for Breach. Employee understands and acknowledges that a
-------------------
breach or violation by him of any of the covenants contained in Paragraphs 7(b)
and 7(c) shall be deemed a material breach of this Agreement and will cause
substantial, immediate and irreparable injury to the Bank, and that the Bank
will have no adequate remedy at law for such breach or violation. In the event
of Employee's actual or
A-63
threatened breach or violation of the covenants contained in either such
Paragraph, the Bank shall be entitled to bring a civil action seeking, and shall
be entitled to, an injunction restraining Employee from violating or continuing
to violate such covenant or from any threatened violation thereof, or for any
other legal or equitable relief relating to the breach or violation of such
covenant. Employee agrees that, if the Bank institutes any action or proceeding
against Employee seeking to enforce any of such covenants or to recover other
relief relating to an actual or threatened breach or violation of any of such
covenants, Employee shall be deemed to have waived the claim or defense that the
Bank has an adequate remedy at law and shall not urge in any such action or
proceeding the claim or defense that such a remedy at law exists. However, the
exercise by the Bank of any such right, remedy, power or privilege shall not
preclude the Bank or its successors or assigns from pursuing any other remedy or
exercising any other right, power or privilege available to it for any such
breach or violation, whether at law or in equity, including the recovery of
damages, all of which shall be cumulative and in addition to all other rights,
remedies, powers or privileges of the Bank.
Notwithstanding anything contained herein to the contrary, Employee
agrees that the provisions of Paragraphs 7(b) and 7(c) above and the remedies
provided in this Paragraph 7(e) for a breach by Employee shall be in addition
to, and shall not be deemed to supersede or to otherwise restrict, limit or
impair the rights of the Bank under any state or federal law or regulation
dealing with or providing a remedy for the wrongful disclosure, misuse or
misappropriation of trade secrets or other proprietary or confidential
information.
(f) Survival of Covenants. Employee's covenants and agreements and the
---------------------
Bank's rights and remedies provided for in this Paragraph 7 shall survive and
remain fully in effect following the Expiration Date and/or any actual
termination of Employee's employment with the Bank during the Term of
Employment.
8. Termination and Termination Pay.
-------------------------------
(a) By Employee. The Term of Employment and Employee's employment under
-----------
this Agreement may be terminated at any time by Employee upon ninety (90) days'
written notice to the Bank. Upon such termination, Employee shall be entitled to
receive compensation through the effective date of such termination.
(b) Death or Retirement. The Term of Employment and Employee's employment
-------------------
under this Agreement automatically shall be terminated upon his death during the
Term of Employment or upon the effective date of Employee's "Retirement." Upon
any such termination, Employee (or, in the case of Employee's death, his estate)
shall be entitled to receive any compensation Employee shall have earned prior
to the date of termination but which remains unpaid. For purposes of this
Agreement, "Retirement" shall mean any termination of Employee's employment with
the Bank that Employee and the Bank mutually agree in writing to treat as a
Retirement.
(c) By the Bank. The Bank may terminate the Term of Employment and
-----------
Employee's employment under this Agreement at any time for "Cause" (as defined
below) or without Cause. Upon any such termination by the Bank under this
Paragraph 8(c) without Cause, the Bank shall be obligated to pay Base Salary to
Employee at his then current Base Salary rate for the unexpired Term of
Employment hereunder (which payments shall be made on the same schedule as
Employee's Base Salary was paid by the Bank during the Term of Employment), but
shall have no further obligations hereunder. Upon any such termination with
Cause, Employee shall have no further rights under this Agreement.
For purposes of this Paragraph 8(c), the Bank shall have "Cause" to
terminate Employee's employment upon:
(i) A determination by the Bank, in good faith, that Employee (A)
has breached in any material respect any of the terms or conditions of this
Agreement or of the Code of Conduct, (B) has failed in any material respect to
perform or discharge his duties or responsibilities of employment in the manner
provided herein, or (C) is engaging or has engaged in willful misconduct or
conduct which is
A-64
detrimental in any material respect to the business or business prospects of the
Bank or which has had or likely will have an adverse effect on the Bank's
business or reputation;
(ii) The violation by Employee of any applicable federal or
state law, or any applicable rule, regulation, order or statement of policy
promulgated by any governmental agency or authority having jurisdiction over the
Bank (a "Regulatory Authority"), including but not limited to the Federal
Deposit Insurance Corporation, the North Carolina Banking Commissioner, the
North Carolina State Banking Commission, the Federal Reserve Board or any other
banking regulator, which results from Employee's negligence, willful misconduct
or intentional disregard of such law, rule, regulation, order or policy
statement and results in any substantial damage, monetary or otherwise, to the
Bank or to the Bank's reputation;
(iii) The commission in the course of Employee's employment with
the Bank of an act of fraud, embezzlement, theft or proven personal dishonesty
(whether or not such act or charge results in criminal indictment, charges,
prosecution or conviction);
(iv) The conviction of Employee of any felony or any criminal
offense involving dishonesty or breach of trust, or the occurrence of any event
described in Section 19 of the Federal Deposit Insurance Act or any other event
or circumstance which disqualifies Employee from serving as an employee or
executive officer of, or a party affiliated with, the Bank; or, in the event
Employee becomes unacceptable to, or is removed, suspended or prohibited from
participating in the conduct of the Bank's affairs (or if proceedings for that
purpose are commenced), by any Regulatory Authority; or,
(v) The exclusion of Employee by the carrier or underwriter
from coverage under the Bank's then current "blanket bond" or other fidelity
bond or insurance policy covering its directors, officers or employees, or the
occurrence of any event which the Bank believes, in good faith, will result in
Employee being excluded from such coverage, or having coverage limited as to
Employee as compared to other covered officers or employees, pursuant to the
terms and conditions of such "blanket bond" or other fidelity bond or insurance
policy.
(d) Except as otherwise provided below, upon the earlier of the
Expiration Date of the Term of Employment or the effective date of any actual
termination of Employee's employment with the Bank under this Agreement for any
reason, the provisions of this Agreement, with the exception of Paragraph 7
above and the Bank's obligations, is any, for continued payments of Base Salary
under Paragraph 8(c) above, likewise shall terminate and be of no further force
or effect. Employee's covenants contained in Paragraph 7 above, and the Bank's
obligations, if any, for continued payments of Base Salary under Paragraph 8(c)
above, shall survive and remain in effect in accordance with their terms
following the Expiration Date and following any actual termination of Employee's
employment (whether such termination occurs before or after the Expiration
Date).
9. Additional Regulatory Requirements. Notwithstanding anything
----------------------------------
contained in this Agreement to the contrary, it is understood and agreed that
the Bank (or any of its successors in interest) shall not be required to make
any payment or take any action under this Agreement if:
(a) the Bank is declared by any Regulatory Authority to be insolvent,
in default or operating in an unsafe or unsound manner; or,
(b) in the opinion of counsel to the Bank such payment or action (i)
would be prohibited by or would violate any provision of state or federal law
applicable to the Bank, including without limitation the Federal Deposit
Insurance Act as now in effect or hereafter amended, (ii) would be prohibited by
or would violate any applicable rules, regulations, orders or statements of
policy, whether now existing or hereafter promulgated, of any Regulatory
Authority, or (iii) otherwise would be prohibited by any Regulatory Authority.
A-65
10. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by conversion, merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Bank.
(b) the Bank is contracting for the unique and personal skills of
Employee. Therefore, Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent of
the Bank.
11. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the parties hereto. No waiver by either
party hereto, at any time, of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party, shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
12. Applicable Law. The parties hereto agree that without regard to
--------------
principles of conflicts of laws, the internal laws of the State of North
Carolina shall govern and control the validity, interpretation, performance and
enforcement of this Agreement and that any suit or action relating to this
Agreement shall be instituted and prosecuted only in the Courts of Davie
County,North Carolina, and each party hereto hereby does waive any right or
defense relating to such jurisdiction and venue, except to the extent that
federal law shall be deemed to apply.
13. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Headings. The section and paragraph headings contained in this
--------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
15. Notices. Except as otherwise may be provided herein, all notices,
-------
claims, certificates, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given when hand delivered or
sent by facsimile transmission by one party to the other, or when deposited by
one party with the United States Postal Service, postage prepaid, and addressed
to the other party as follows:
If to the Bank: If to Employee:
Bank of the Carolinas Stephen R. Talbert
135 Boxwood Village 107 South Central Avenue
Mocksville, N.C. 27028 Landis, N.C. 28088
Attention: Robert E. Marziano
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, and each such counterpart hereof shall be deemed an original
instrument, but all such counterparts together shall constitute but one
agreement.
17. Entire Agreement. This Agreement contains the entire understanding
----------------
and agreement of the parties, and there are no agreements, promises, warranties,
covenants or undertakings other than those expressly set forth or referred to
herein.
A-66
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
by its duly authorized officer in pursuance of authority duly given by its Board
of Directors, and Employee has set hereunto his hand and adopted as his seal the
typewritten word "SEAL" appearing beside his name, all as of the day and year
first above written.
BANK OF THE CAROLINAS
By: ________________________________________
Robert E. Marziano
Chairman and Chief Executive Officer
________________________________________(SEAL)
Stephen R. Talbert
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A-68
APPENDIX B
ARTICLE 13.
Dissenters' Rights.
Part 1. Right to Dissent and Obtain Payment for Shares.
(S) 55-13-01. Definitions.
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under G.S. 55-13-02 and who exercises that right when and in the manner
required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at a rate that is fair and equitable under all the
circumstances, giving due consideration to the rate currently paid by the
corporation on its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
(1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c.
751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-02. Right to dissent.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger whose shares are not affected under G.S.
55-11-04) is a party unless (i) approval by the shareholders of that corporation
is not required under G.S. 55-11-03(g) or (ii) such shares are then redeemable
by the corporation at a price not greater than the cash to be received in
exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, unless such shares
are then redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than as permitted by G.S. 55-12-01,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed in cash to the shareholders within one
year after the date of sale;
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(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates, alters, or
abolishes a right in respect of redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the shares; (iii) alters or
abolishes a preemptive right of the holder of the shares to acquire shares or
other securities; (iv) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes; (v) reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share so created is to be
acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under
this Article may not challenge the corporate action creating his entitlement,
including without limitation a merger solely or partly in exchange for cash or
other property, unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no right
of shareholders to dissent from, or obtain payment of the fair value of the
shares in the event of, the corporate actions set forth in subdivisions (1),
(2), or (3) of subsection (a) of this section if the affected shares are any
class or series which, at the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting at which the plan of
merger or share exchange or the sale or exchange of property is to be acted on,
were (i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealer, Inc., or (ii) held by at least 2,000 record
shareholders. This subsection does not apply in cases in which either:
(1) The articles of incorporation, bylaws, or a resolution of the
board of directors of the corporation issuing the shares provide otherwise; or
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange to
accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of
the surviving or acquiring corporation, or of any other corporation which, at
the record date fixed to determine the shareholders entitled to receive notice
of and vote at the meeting at which the plan of merger or share exchange is to
be acted on, were either listed subject to notice of issuance on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held by at least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in sub-
subdivisions a. and b. of this subdivision. (1925, c. 77, s. 1; c. 235; 1929, c.
269; 1939, c. 279; 1943, c. 270; G.S., ss. 55-26, 55-167; 1955, c. 1371, s. 1;
1959, c. 1316, ss. 30, 31; 1969, c. 751, ss. 36, 39; 1973, c. 469, ss. 36, 37;
c. 476, s. 193; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.18;
1991, c. 645, s. 12; 1997-202, s. 1.)
(S) 55-13-03. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
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(b) A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167;
1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c.
265, s. 1.)
(S)(S) 55-13-04 to 55-13-19. Reserved for future codification purposes.
Part 2. Procedure for Exercise of Dissenters' Rights.
(S) 55-13-20. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02
is submitted to a vote at a shareholders' meeting, the meeting notice must state
that shareholders are or may be entitled to assert dissenters' rights under this
Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is taken
without a vote of shareholders, the corporation shall no later than 10 days
thereafter notify in writing all shareholders entitled to assert dissenters'
rights that the action was taken and send them the dissenters' notice described
in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section, such
failure shall not invalidate any corporate action taken; but any shareholder may
recover from the corporation any damage which he suffered from such failure in a
civil action brought in his own name within three years after the taking of the
corporate action creating dissenters' rights under G.S. 55-13-02 unless he voted
for such corporate action. (1925, c. 77, s. 1, c. 235; 1929, c. 269; 1939, c. 5,
c. 279; 1943, c. 270; G.S., ss. 55-26, 55-165, 55-167; 1955, c. 1371, s. 1;
1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265. s. 1.)
(S) 55-13-21. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02
is submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand payment
for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is not
entitled to payment for his shares under this Article. (1925, c. 77, s. 1; 1943,
c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469,
ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-22. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02
is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after shareholder
approval, or if no shareholder approval is required, after the approval of the
board of directors, of the corporate action creating dissenters' rights under
G.S. 55-13-02, and must:
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(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the date
the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article. (1925, c. 77, s. 1;
1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973,
c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-485, s. 4.)
(S) 55-13-23. Duty to demand payment.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share certificates
where required, each by the date set in the dissenters' notice, is not entitled
to payment for his shares under this Article. (1925, c. 77, s. 1; 1943, c. 270;
G.S., s. 55- 167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss.
36, 37; 1989, c. 265, s. 1.)
(S) 55-13-24. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action. (1925, c.
77, s. 1;1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s.
39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-25. Payment.
(a) As soon as the proposed corporate action is taken, or within 30 days after
receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of payment,
an income statement for that year, a statement of cash flows for that year, and
the latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
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(5) A copy of this Article. (1925, c. 77, s. 1; 1943, c. 270; G.S.,
s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37;
1989, c. 265, s. 1; c. 770, s. 69; 1997-202, s. 2.)
(S) 55-13-26. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
(1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c.
751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
(S) 55-13-27. Reserved for future codification purposes.
(S) 55-13-28. Procedure if shareholder dissatisfied with corporation's payment
or failure to perform.
(a) A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of the
amount in excess of the payment by the corporation under G.S. 55-13-25 for the
fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25
is less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for demanding
payment.
(b) A dissenter waives his right to demand payment under this section unless he
notifies the corporation of his demand in writing (i) under subdivision (a)(1)
within 30 days after the corporation made payment for his shares or (ii) under
subdivisions (a)(2) and (a)(3) within 30 days after the corporation has failed
to perform timely. A dissenter who fails to notify the corporation of his demand
under subsection (a) within such 30-day period shall be deemed to have withdrawn
his dissent and demand for payment. (1925, c. 77, s. 1; 1943, c. 270; G.S., s.
55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37;
1989, c. 265, s. 1; 1997-202, s. 3.)
(S) 55-13-29. Reserved for future codification purposes.
Part 3. Judicial Appraisal of Shares.
(S) 55-13-30. Court action.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the dissenter
may commence a proceeding within 60 days after the earlier of (i) the date
payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's payment
demand under G.S. 55-13-28 by filing a complaint with the Superior Court
Division of the General Court of Justice to determine the fair value of the
shares and accrued interest. A dissenter who takes no action within the 60-day
period shall be deemed to have withdrawn his dissent and demand for payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or not
residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be
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served with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is commenced
under subsection (a) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The parties are entitled to the same discovery
rights as parties in other civil proceedings. The proceeding shall be tried as
in other civil actions. However, in a proceeding by a dissenter in a corporation
that was a public corporation immediately prior to consummation of the corporate
action giving rise to the right of dissent under G.S. 55-13-02, there is no
right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his shares, plus
interest, exceeds the amount paid by the corporation. (1925, c. 77, s. 1; 1943,
c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469,
ss. 36, 37; 1989, c. 265, s. 1; 1997-202, s. 4; 1997-485, ss. 5, 5.1.)
(S) 55-13-31. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court, and shall assess the costs as it
finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either
or any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-
167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989,
c. 265, s. 1.)
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APPENDIX C
FAIRNESS OPINION OF STERNE, AGEE & LEACH, INC.
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APPENDIX D
FAIRNESS OPINION OF SCOTT & STRINGFELLOW
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* FORM OF PROXY *
[LOGO]
APPOINTMENT OF PROXY SOLICITED BY THE BOARD OF DIRECTORS
To insure that a quorum is present at the BOC Special Meeting, please send
in your appointment of proxy whether or not you plan to attend. As explained
below, you will still be able to vote in person at the BOC Special Meeting if
you desire to do so.
The undersigned hereby appoints Stephen R. Talbert, John A. Drye and Henry
H. Land, or any of them, as attorneys and proxies (the "Proxies"), with full
power of substitution, to vote all shares of the common stock of BOC Financial
Corp ("BOC") held of record by the undersigned on _________, 2001, at the
Special Meeting of Shareholders of BOC (the "BOC Special Meeting") to be held at
BOC's headquarters located at 107 South Central Avenue in Landis, North
Carolina, at _____ p.m. on ____________, ___________, 2001, and at any
adjournments of the meeting. The undersigned hereby directs that the shares
represented by this appointment of proxy be voted as follows on the proposals
listed below:
1. Proposal to Approve the Agreement and Merger. To consider and vote on a
proposal to approve the Agreement and Plan of Reorganization and Merger,
dated as of July 20, 2001 (the "Merger Agreement"), between BOC Financial
Corp ("BOC"), Bank of the Carolinas ("Carolinas") and Bank of Davie
("Davie") (a copy of which is attached as Appendix A to the Joint Proxy
Statement/Offering Circular which accompanies this Notice), and to approve
the transactions described in the Merger Agreement, including, without
limitation, the mergers of BOC into Davie (the "Merger") and Carolinas into
Davie (the "Bank Merger"), with the result that each outstanding share of
BOC's common stock held by each BOC shareholder will be converted into the
right to receive 0.92 shares of Davie's common stock, all as more fully
described in the Joint Proxy Statement/Offering Circular; and
[_] FOR [_] AGAINST [_] ABSTAIN
The Board of Directors recommends that shareholders vote "FOR" approval
of the Merger Agreement and Merger.
2. Other Business. On such other matters as properly may come before the BOC
Special Meeting, the persons named herein as Proxies are authorized to vote
the shares represented by this appointment of proxy in accordance with
their best judgment.
The shares represented by this appointment of proxy will be voted as
directed above. In the absence of any direction, the Proxies will vote the
shares represented by this appointment of proxy "FOR" approval of the Merger
Agreement and Merger. Should other matters properly come before the BOC Special
Meeting, the Proxies will be authorized to vote the shares represented by this
appointment of proxy in accordance with their best judgment. This appointment
of proxy may be revoked by the holder of the shares to which it relates at any
time before it is exercised by filing with BOC's Secretary a written instrument
revoking it or a duly executed appointment of proxy bearing a later date, or by
attending the BOC Special Meeting and announcing his or her intention to vote in
person.
Please sign and date this appointment of proxy below and return it to BOC
in the enclosed envelope.
Dated: ____________________2001
-------------------------------
Signature of Owner of Shares
-------------------------------
Signature of Joint Owner of
Shares (if any)
Instruction: Please sign above exactly as your name appears on this appointment
-------
of proxy. Joint owners of shares should both sign. Fiduciaries or other persons
----
signing in a representative capacity should indicate the capacity in which they
are signing.