As filed with the Securities and Exchange Commission on October 11, 2001
Registration No. 333-67290
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 1
To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CATAWBA VALLEY BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
NORTH CAROLINA 6712 56-2137427
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
1039 Second Street, NE
Hickory, North Carolina 28601-3843
(828) 431-2300
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
R. Steve Aaron
President and Chief Executive Officer
CATAWBA VALLEY BANCSHARES, INC.
1039 Second Street, NE
Hickory, North Carolina 28601-3843
(828) 431-2300
(Name, address, including zip code, and telephone number, including area code
of agent for service)
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With Copies To:
Anthony Gaeta, Jr., Esq.
Erik Gerhard, Esq.
Gaeta & Glesener, P.A.
808 Salem Woods Drive, Suite 201
Raleigh, North Carolina 27615
(919) 845-2558
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Approximate date of commencement of the proposed sale to the public: The
date of mailing of the enclosed Joint Proxy Statement-Prospectus to the
shareholders of Catawba Valley Bancshares, Inc. and First Gaston Bank of North
Carolina.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 464(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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JOINT PROXY STATEMENT-PROSPECTUS
CATAWBA VALLEY BANCSHARES, INC.
FIRST GASTON BANK OF NORTH CAROLINA
ACQUISITION PROPOSED
YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Catawba Valley Bancshares, Inc. and First Gaston
Bank of North Carolina have agreed that Catawba Valley Bancshares will become
the holding company of First Gaston by exchanging all the outstanding common
stock of First Gaston for shares of common stock of Catawba Valley Bancshares.
Before this transaction can be completed, First Gaston's and Catawba Valley
Bancshares' shareholders must vote to approve it. We are sending you this Joint
Proxy Statement-Prospectus to ask you to vote in favor of the transaction.
First Gaston shareholders would receive 0.8934 shares of common stock of
Catawba Valley Bancshares for each share of First Gaston that they own just
before the transaction. On May 31, 2001, Catawba Valley Bancshares' stock
closed at $14.50 per share, making the value of 0.8934 shares of Catawba Valley
Bancshares' common stock equal to $12.95 on that date. First Gaston stock
closed at $11.05 per share on the same date.
You should obtain current market quotations for both Catawba Valley
Bancshares and First Gaston which are listed on the OTC Bulletin Board under
the symbols "CTVB" and "FGBN".
Catawba Valley Bancshares' shareholders are separately being asked to
approve (i) the renaming of Catawba Valley Bancshares to "United Community
Bancorp" and (ii) the changing of the bylaws of Catawba Valley Bancshares
reducing the minimum number of directors from nine (9) to eight (8) as
prerequisites to the completion of the share exchange.
Whether or not you plan to attend the shareholders' meetings, please take
the time to vote by completing and mailing the enclosed proxy card. If you
sign, date and mail your proxy card without indicating how you want to vote, we
will vote your proxy in favor of the renaming of Catawba Valley Bancshares to
"United Community Bancorp", in favor of the bylaw change reducing the minimum
number of directors from nine (9) to eight (8), and in favor of the share
exchange between First Gaston and Catawba Valley Bancshares. By signing the
proxy, you also authorize us to vote in our discretion for any procedural
motions, such as a motion for adjournment, that may come up at the meetings.
The date, time and place of the Catawba Valley Bancshares shareholders'
meeting is:
Tuesday, November 27, 2001, 10:00 a.m. at The Gateway Conference Center, 909
Highway 70 SW, Hickory, North Carolina
The date, time and place of the First Gaston meeting is:
Tuesday, November 27, 2001, 3:00 p.m., at the Schiele Museum at 1500 East
Garrison Boulevard, Gastonia, North Carolina
This Joint Proxy Statement-Prospectus provides you with detailed information
about the share exchange between Catawba Valley Bancshares and First Gaston and
the name and bylaw changes for Catawba Valley Bancshares. We encourage you to
read this entire document carefully.
The Boards of Directors of Catawba Valley Bancshares and First Gaston
unanimously recommend a vote "FOR" the proposals described in this document.
R. Steve Aaron W. Alex Hall
President and Chief Executive Officer President and Chief Executive Officer
Catawba Valley Bancshares, Inc. First Gaston Bank of North Carolina
Hickory, North Carolina Gastonia, North Carolina
These securities are not deposits or savings accounts and are not
obligations of or guaranteed by First Gaston, Catawba Valley Bank, or Catawba
Valley Bancshares. These securities are not insured by the FDIC or any other
governmental agency and are subject to investment risk including loss of
principal.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of this Joint Proxy Statement-Prospectus. Any representation to the
contrary is a criminal offense. These securities are not savings or deposit
accounts or other obligations of any bank or non-bank subsidiary of any of the
parties, and they are not insured by the Federal Deposit Insurance Corporation,
the Bank Insurance Fund or any other governmental agency.
An investment in Catawba Valley Bancshares stock will involve certain risks,
including a possible loss of investment. See "Risk Factors" on page 7.
This Joint Proxy Statement-Prospectus is dated and is first being mailed to
shareholders on October 19, 2001.
CATAWBA VALLEY BANCSHARES, INC.
1039 SECOND STREET, NE
HICKORY, NORTH CAROLINA 28601-3843
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, NOVEMBER 27, 2001
To the Shareholders of Catawba Valley Bancshares, Inc.:
Catawba Valley Bancshares, Inc. will hold a special meeting of shareholders
at The Gateway Conference Center, 909 Highway 70 SW, Hickory, North Carolina,
at 10:00 a.m. on Tuesday, November 27, 2001 to vote on the following proposals:
1. To authorize the Board of Directors to issue shares of Catawba Valley
Bancshares common stock in exchange for all outstanding shares of First
Gaston Bank of North Carolina common stock at a ratio of 0.8934 shares
of Catawba Valley Bancshares common stock for each share of First Gaston
common stock.
2. To approve the renaming of Catawba Valley Bancshares to "United
Community Bancorp".
3. To approve an amendment to the bylaws of Catawba Valley Bancshares
reducing the minimum number of directors from nine (9) to eight (8).
4. Any other matters that properly come before the special meeting or any
adjournments or postponements thereof.
Record holders of Catawba Valley Bancshares' common stock at the close of
business on October 5, 2001 will receive notice of and may vote at the special
meeting including any adjournments or postponements. Your Board of Directors
cordially invites you to attend the special meeting.
Please mark, sign, date, and return your proxy promptly whether or not you
plan to attend the special meeting. Your board of directors unanimously
recommends that you vote for approval of the proposals that you will vote on at
the special meeting.
By Order of the Board of Directors
Carole F. Teague
Secretary
Hickory, North Carolina
October 19, 2001
FIRST GASTON BANK OF NORTH CAROLINA
804 SOUTH NEW HOPE ROAD
GASTONIA, NORTH CAROLINA 28054
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, NOVEMBER 27, 2001
To the Shareholders of First Gaston Bank of North Carolina:
First Gaston Bank of North Carolina will hold a special meeting of
shareholders at the Schiele Museum at 1500 East Garrison Boulevard, Gastonia,
North Carolina, at 3:00 p.m. on Tuesday, November 27, 2001 to vote on the
following proposals:
1. To approve the Agreement and Plan of Share Exchange between First Gaston
Bank of North Carolina and Catawba Valley Bancshares, Inc. and the
transactions contemplated by the Agreement including the exchange of all
outstanding shares of First Gaston common stock for shares of Catawba
Valley Bancshares common stock at a ratio of 0.8934 shares of Catawba
Valley Bancshares common stock for each share of First Gaston common
stock.
2. Any other matters that properly come before the special meeting or any
adjournments or postponements thereof.
Record holders of First Gaston's common stock at the close of business on
October 5, 2001 will receive notice of and may vote at the special meeting
including any adjournments or postponements. The Agreement and Plan of Share
Exchange requires approval by a majority of the shares of First Gaston's common
stock outstanding on October 5, 2001. Holders of First Gaston's common stock
may exercise dissenters' rights under Article 13 of the North Carolina Business
Corporation Act. We have attached a copy of that law as an appendix to the
accompanying Joint Proxy Statement-Prospectus.
Please mark, sign, date, and return your proxy promptly whether or not you
plan to attend the special meeting. Your board of directors unanimously
recommends that you vote for approval of the proposal that you will vote on at
the special meeting.
By Order of the Board of Directors
Barbara D. Myers
Secretary
Gastonia, North Carolina
October 19, 2001
TABLE OF CONTENTS
Page
----
Summary.................................................................. 2
Risk Factors............................................................. 7
Market Prices and Dividend Policies...................................... 9
Selected Historical Financial Data....................................... 11
Catawba Valley Bancshares and First Gaston Unaudited Pro Forma Combined
Condensed Financial Information......................................... 15
General Information...................................................... 25
Proposal 1: Catawba Valley Bancshares' Share Exchange with First Gaston.. 28
General................................................................ 28
Background of and Reasons for the Share Exchange....................... 28
Recommendation of First Gaston Board................................... 30
Recommendation of Catawba Valley Bancshares' Board..................... 30
Opinion of First Gaston's Financial Advisor............................ 31
Opinion of Catawba Valley Bank's and Catawba Valley Bancshares'
Financial Advisor..................................................... 38
Effective Time of the Share Exchange................................... 40
Distribution of Consideration.......................................... 40
Conditions to Consummation of the Share Exchange....................... 41
Regulatory Approval.................................................... 41
Waiver, Amendment, and Termination..................................... 42
Management and Operations After the Share Exchange..................... 43
Effect on Certain Benefit Plans........................................ 43
Federal Income Tax Consequences of the Share Exchange.................. 43
Accounting Treatment................................................... 45
Expenses and Fees...................................................... 45
Resales of Catawba Valley Bancshares' Common Stock..................... 45
Dissenters' Rights....................................................... 46
Description of Catawba Valley Bancshares' Capital Stock.................. 48
Comparison of the Rights of Shareholders................................. 51
Information About Catawba Valley Bank and Catawba Valley Bancshares...... 55
Information About First Gaston........................................... 68
Regulation and Supervision............................................... 75
Proposal 2: Renaming Catawba Valley Bancshares........................... 83
Proposal 3: Reducing the Minimum Number of Directors..................... 84
Legal Matters............................................................ 85
Experts.................................................................. 85
Forward Looking Statements............................................... 85
Other Matters............................................................ 85
Where You Can Get More Information....................................... 86
Information Incorporated by Reference.................................... 86
Appendix I: Agreement and Plan of Share Exchange, as amended
Appendix II: Opinion of Smith Capital, Inc.
Appendix III: Opinion of The Orr Group
Appendix IV: Article 13 of the North Carolina Business Corporation Act
regarding Dissenters' Rights
Appendix V: Amendment to Article I of the Catawba Valley Bancshares
Articles of Incorporation
Appendix VI: Amendment to Article III of the Catawba Valley Bancshares
Bylaws
Addendum: Historical Financial Data for Catawba Valley Bancshares, Inc. and
First Gaston Bank of North Carolina (separately bound)
i
QUESTIONS AND ANSWERS
ABOUT VOTING PROCEDURES FOR THE SPECIAL MEETINGS
Q:What should I do?
A: After you have carefully read this document, mail your signed and dated
proxy card in the enclosed envelope. The instructions on the accompanying
proxy card will give you more information on how to vote by mail. This will
enable your shares to be represented at the Catawba Valley Bancshares
special meeting or the First Gaston special meeting, as applicable.
Q:If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will not be able to vote your shares without instructions from
you. You should instruct your broker to vote your shares following the
directions your broker provides. Your failure to instruct your broker to
vote your shares will result in your shares not being voted. If you fail to
return a proxy card or abstain from voting, the effect will be a vote
against the share exchange.
Q:Can I change my vote after I have submitted my proxy with voting
instructions?
A: Yes. There are three ways you can change your vote. First, you may send a
written notice to the person to whom you submitted your proxy stating that
you would like to revoke your proxy. Second, you may complete and submit a
later dated proxy with new voting instructions. The latest vote actually
received by Catawba Valley Bancshares or First Gaston prior to the
shareholders' meetings will be your vote. Any earlier votes will be revoked.
Third, you may attend the Catawba Valley Bancshares special meeting or the
First Gaston special meeting, as applicable, and vote in person. Any earlier
votes will be revoked. Simply attending the meeting without voting, however,
will not revoke your proxy. If you have instructed a broker to vote your
shares, you must follow directions you will receive from your broker to
change or revoke your proxy.
Q:Should I send in my stock certificates?
A: No. You should not send in your stock certificates at this time.
Catawba Valley Bancshares shareholders will not exchange their certificates
in the share exchange. The certificates currently representing the shares
of Catawba Valley Bancshares common stock will represent an equal number of
shares of Catawba Valley Bancshares common stock after the share exchange.
First Gaston shareholders will exchange their First Gaston common stock
certificates for Catawba Valley Bancshares common stock certificates after
we complete the transaction. Instructions for exchanging First Gaston
common stock certificates will be sent to you promptly after the
transaction is completed.
Q:Whom should shareholders call with questions?
A: First Gaston shareholders should call W. Alex Hall, President of First
Gaston at (704) 865-4202 with any questions about the transaction and
related issues.
Catawba Valley Bancshares shareholders should call R. Steve Aaron,
President of Catawba Valley Bancshares at (828) 431-2300.
SUMMARY
This Summary highlights the material terms of the share exchange between
Catawba Valley Bancshares, Inc. and First Gaston Bank of North Carolina. For a
more complete description of the terms of this transaction, and the parties to
it, you should carefully read this entire document, the documents that
accompany this document, and the documents to which we refer you. See Where You
Can Get More Information. (Page 86)
The Share Exchange
Catawba Valley Bancshares will become the holding company for First Gaston
through a share exchange. If the share exchange is completed, shareholders of
First Gaston will receive 0.8934 shares of Catawba Valley Bancshares common
stock for each share of First Gaston common stock that they own. On May 30,
2001, the closing price of Catawba Valley Bancshares common stock was $14.50
making the value of 0.8934 shares of First Gaston common stock equal to $12.95.
Because the market price of Catawba Valley Bancshares' stock fluctuates, you
will not know when you vote what the shares will be worth when issued in the
share exchange. After the share exchange, the former First Gaston shareholders
will own about 40% of the total number of shares of Catawba Valley Bancshares'
common stock that will be outstanding.
The table below illustrates how many shares Catawba Valley Bancshares will
issue in the share exchange to shareholders of First Gaston assuming a First
Gaston shareholder currently owns the number of shares in the left column.
Shares
of
First Shares of
Gaston Catawba Valley Bancshares
Owned to be Received
------ -------------------------
100 89
500 446
1,000 893
10,000 8,934
Federal Income Tax Consequences (Page 43)
We have structured the transaction so that neither Catawba Valley Bancshares
nor First Gaston shareholders will recognize any gain or loss for federal
income tax purposes. Catawba Valley Bancshares and First Gaston need not
complete the share exchange unless they receive an opinion from the accounting
firm of Dixon Odom PLLC that the First Gaston shareholders will not recognize
any gain or loss for federal income tax purposes as a result of the share
exchange. This opinion is not binding on the Internal Revenue Service.
Since tax matters can be complicated, and tax results may vary among
shareholders, we urge you to contact your own tax advisor to understand fully
how the transactions will affect you.
Catawba Valley Bancshares Dividend Policy Following the Share Exchange (Page
48)
Although Catawba Valley Bancshares has paid dividends in prior years, it may
not pay any in the future. The Board of Catawba Valley Bancshares may decide
from time to time whether to pay dividends after evaluating business and
financial results and other factors, such as legal restrictions.
Boards Recommend Shareholder Approval (Page 30)
The Boards of Directors of both Catawba Valley Bancshares and First Gaston
believe that the share exchange is in the best interests of their respective
shareholders and unanimously recommend that the shareholders vote "FOR"
approval of the transaction.
2
The First Gaston Board believes that shareholders of both companies will
have a stake in a larger, better capitalized community bank holding company
with the ability to serve depositors in a wider area of Western North Carolina,
including Catawba and Gaston Counties. This transaction should allow the
enlarged company to increase market share and geographic reach.
The Boards of Directors of Catawba Valley Bancshares and First Gaston
believe that the share exchange will help fulfill their long-term goals of (i)
enhancing shareholder value; (ii) adding financial products and services; (iii)
diversifying credit risk; (iv) generating growth in assets and deposits; and
(v) reducing operating costs through consolidating some administrative and
management functions such as back room operations, accounting, and human
resource services.
Fairness Opinions on Exchange Ratio (Pages 31, 38)
In deciding to approve the share exchange between Catawba Valley Bancshares
and First Gaston, our Boards considered opinions from our respective financial
advisors as to the fairness of the exchange ratio from a financial point of
view. First Gaston received an opinion from Smith Capital, Inc., Charlotte,
North Carolina and Catawba Valley Bancshares received an opinion from The Orr
Group, Winston-Salem, North Carolina. These opinions are attached as Appendices
II and III to this Joint Proxy Statement-Prospectus.
In connection with delivering these opinions, our financial advisors
performed a variety of analyses. The analyses included:
. comparing First Gaston and Catawba Valley Bancshares historical stock
prices and other financial information to each other and to those of
other selected companies,
. comparing the financial terms of the share exchange to those of other
publicly announced transactions, and
. estimating the relative values and contributions of First Gaston and
Catawba Valley Bancshares based on past and estimated future
performances and anticipated benefits of the share exchange.
Catawba Valley Bancshares Special Meeting (Page 25)
Catawba Valley Bancshares will hold its special meeting of shareholders at
10:00 a.m. on Tuesday, November 27, 2001 at The Gateway Conference Center, 909
Highway 70 SW, Hickory, North Carolina. The purposes of the meeting are to vote
on (i) the authority of Catawba Valley Bancshares to issue shares to the
shareholders of First Gaston through the proposed share exchange, (ii) the
renaming of Catawba Valley Bancshares to "United Community Bancorp", and (iii)
changing the bylaws to reduce the minimum number of directors from nine to
eight.
First Gaston Special Meeting (Page 26)
First Gaston will hold its special meeting of shareholders at 3:00 p.m. on
Tuesday, November 27, 2001 at the Schiele Museum at 1500 East Garrison
Boulevard, Gastonia, North Carolina. The purpose of the First Gaston special
meeting is to vote on the share exchange with Catawba Valley Bancshares.
The Companies (Pages 55, 68)
Catawba Valley Bancshares, Inc.
Catawba Valley Bank
1039 Second Street, NE
Hickory, North Carolina 28601-3843
(828) 431-2300
3
Catawba Valley Bancshares is a bank holding company organized under the laws
of the State of North Carolina. Catawba Valley Bancshares was formed in 1999 to
become the owner of all outstanding shares of Catawba Valley Bank.
Catawba Valley Bank is a state-chartered commercial bank organized under the
laws of the state of North Carolina in 1995. Its main office is in Hickory,
North Carolina at the address above. In addition to its main office, Catawba
Valley Bank has three branch offices, a mortgage center, and an operations
center. It also has a subsidiary corporation, Valley Financial Services, Inc.
that provides for various insurance and other financial products through third
party affiliations.
First Gaston Bank of North Carolina
804 South New Hope Road
Gastonia, North Carolina 28054-4814
(704) 865-4202
First Gaston is a state-chartered commercial bank organized under the laws
of the State of North Carolina. Its main office and operations center is in
Gastonia, North Carolina and it has a branch office in Belmont and Mt. Holly,
North Carolina.
Agreement Governing the Share Exchange is Attached
We have attached the Agreement and Plan of Share Exchange as Appendix I at
the back of this Joint Proxy Statement-Prospectus. We encourage you to read the
agreement as it is the legal document that governs the transaction.
Majority Vote Required to Approve the Share Exchange (Pages 25, 26)
Approval of the share exchange requires the affirmative vote of the holders
of at least a majority of First Gaston's outstanding shares of common stock. A
shareholder's failure to vote will have the effect of a vote against approval
of the transaction. As required by Nasdaq Stock Market rules, Catawba Valley
Bancshares' shareholders are also voting on whether to permit Catawba Valley
Bancshares to issue its shares to the First Gaston shareholders in the share
exchange. Only a majority of Catawba Valley Bancshares common stock present and
voting at the meeting is required to approve the issuance of shares to First
Gaston shareholders.
Directors and executive officers of Catawba Valley Bancshares own about
26.98% of the shares that may be cast at the meeting, and we expect them to
vote in favor of permitting the issuance of shares. Directors and executive
officers of First Gaston together own about 10.36% of the shares that may be
cast at the meeting, and we also expect them to vote in favor of the share
exchange. After the share exchange, the combined directors and officers of
Catawba Valley Bancshares and First Gaston will own about 23.18% of the total
number of shares to be issued and outstanding.
Brokers who hold shares as nominees, or in "street name," will not have the
authority to vote such shares in the share exchange unless they receive
instructions from the shareholder whose account they hold.
If we receive shareholder approvals, we currently expect to complete the
share exchange on December 31, 2001, depending upon regulatory approvals. We
have filed all applications for regulatory approval and anticipate approval
prior to the special meetings.
Record Dates For Meetings are October 5, 2001
If you owned shares of Catawba Valley Bancshares at the close of business on
October 5, 2001, or of First Gaston at the close of business on October 5,
2001, you may vote on the matters to be considered at your shareholders'
meeting.
4
On October 5, 2001, there were 1,645,886 shares of Catawba Valley
Bancshares' common stock outstanding. On October 5, 2001, there were 1,262,319
shares of First Gaston's common stock outstanding. Each Catawba Valley
Bancshares' and First Gaston shareholder will have one vote at its respective
meeting for each share of stock it owns on such dates.
Conditions to the Share Exchange (Page 41)
The completion of the share exchange depends upon meeting a number of
conditions, including the following:
. receipt of all regulatory approvals;
. the approval by Catawba Valley Bancshares' shareholders of the renaming
of Catawba Valley Bancshares to "United Community Bancorp";
. the approval by Catawba Valley Bancshares' shareholders amending the
bylaws to reduce the minimum number of directors from nine (9) to eight
(8);
. the approval by Catawba Valley Bancshares and First Gaston shareholders
of the share exchange;
. receipt of fairness opinions by both Catawba Valley Bancshares and First
Gaston from their respective financial advisors; and
. receipt of a favorable tax opinion regarding the tax free nature of the
share exchange.
We Must Obtain Regulatory Approvals to Complete the Share Exchange (Page 41)
We cannot complete the share exchange unless the Federal Reserve Board
approves it. We have filed the required application and notices with the
Federal Reserve Board. Once the share exchange is approved, we will have to
wait from 15 to 30 days before we can complete it. During that time, the U.S.
Department of Justice, or DOJ, can challenge the share exchange.
As of the date of this document, we have not yet received the required
approval. Although we do not know of any reason why we would not be able to
obtain the necessary approval in a timely manner, we cannot be certain when or
if we will get them.
Termination of the Agreement and Plan of Share Exchange (Page 42)
Either party may terminate the agreement upon written notice to the other
party.
Pooling of Interests Accounting Treatment to be Used (Page 45)
We expect the share exchange to qualify as a pooling of interests which
means that after the transaction we will treat First Gaston as if it had always
been a subsidiary of Catawba Valley Bancshares for accounting and financial
reporting purposes. We expect the pooling of interests method of accounting to
more positively impact, though not in any material or significant manner, our
financial condition over time than would use of the alternative method,
purchase accounting.
Dissenters' Rights (Page 46)
Shareholders of First Gaston Bank common stock who vote against or abstain
from voting and properly exercise their dissenters' rights prior to the special
shareholders' meetings have the right to receive a cash payment for the fair
value of their stock. In order to exercise these rights, shareholders must
comply with Article 13 of the North Carolina Business Corporation Act, which is
attached as Appendix IV to this Joint Proxy Statement-Prospectus. If you wish
to dissent, please read this information carefully as you must take affirmative
steps to preserve your rights.
5
Comparative Per Share Market Price Information (Pages 9)
Shares of Catawba Valley Bancshares common stock are listed on the OTC
Bulletin Board under the symbol "CTVB", and shares of First Gaston common stock
are listed on the OTC Bulletin Board under the symbol "FGBN". On May 30, 2001,
the last full trading day prior to the public announcement of the proposed
exchange, Catawba Valley Bancshares stock closed at $14.50 per share and First
Gaston stock closed at $11.50 per share. On October 3, 2001 Catawba Valley
Bancshares stock closed at $13.50 per share and First Gaston stock closed at
$11.50 per share.
Listing of Catawba Valley Bancshares' Common Stock
Catawba Valley Bancshares whose name after completion of the transaction
will be United Community Bancorp will apply to list its shares, including those
to be issued in connection with the share exchange, on the Nasdaq SmallCap
Market under the symbol "UCBB". Nasdaq will first have to approve our
application for this listing.
Operations After the Share Exchange (Page 43)
Following the completion of the transaction, Catawba Valley Bank and First
Gaston will operate as separate subsidiary banks of the newly renamed United
Community Bancorp and will continue to use their own names.
Exchange of Share Certificates (Page 40)
Certificates representing shares of First Gaston stock will not
automatically represent shares of the newly renamed United Community Bancorp
stock. Shareholders will need to exchange their First Gaston stock certificates
for United Community Bancorp stock certificates after the transaction is
completed. We will mail you information following the date on which we complete
the transaction.
However, certificates representing Catawba Valley Bancshares stock will
automatically represent shares of United Community Bancorp stock. Shareholders
of Catawba Valley Bancshares need not exchange their stock certificates for
United Community Bancorp certificates. These certificates will be exchanged as
they trade, or if you specifically request, they will be exchanged for new
certificates representing shares of United Community Bancorp.
6
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Joint Proxy Statement-Prospectus, you should consider the following
material risk factors carefully before deciding how to vote at the Catawba
Valley Bancshares and First Gaston special meetings. If any of the events
described below occur, our business, financial condition, or results of
operations could be materially and adversely affected. In that event, the
trading price of Catawba Valley Bancshares common stock may decline, in which
case the value of your investment may decline as well. Please see page 85 under
"Forward Looking Statements" for additional information to bear in mind before
casting your vote.
It is Possible That The Transaction May Not Produce the Results We Expect
The exchange involves numerous risks, including:
. the fact that focusing on the combination may divert our attention from
other business concerns;
. inability to achieve economies of scale and cost savings by combining
certain administrative and management functions; and
. inability of the Board of Directors of United Community Bancorp, four
(4) of whom will be selected from Catawba Valley Bancshares and four (4)
of whom will be selected from First Gaston, to agree on an ongoing basis
to a strategic plan.
Catawba Valley Bancshares' Depends Heavily on its President and CEO, R. Steve
Aaron
Catawba Valley Bancshares currently depends heavily on the services of its
President and Chief Executive Officer, R. Steve Aaron, and a number of other
key management personnel. The loss of his services or of other key personnel
could affect Catawba Valley Bancshares in a material and adverse way. Catawba
Valley Bancshares success will also depend in part on its ability to attract
and retain additional qualified management personnel who have experience both
in sophisticated banking matters and in operating a small to mid-size bank and
bank holding company. Competition for such personnel is strong in the banking
industry and Catawba Valley Bancshares may not be successful in attracting or
retaining the personnel it requires. Catawba Valley Bancshares attempts to
effectively compete in this area by offering financial packages that include
incentive-based compensation and the opportunity to join in the rewarding work
of building a community based financial institution.
First Gaston Depends Heavily on its President and CEO, W. Alex Hall
First Gaston currently depends heavily on the services of its President and
Chief Executive Officer, W. Alex Hall, and a number of other key management
personnel. The loss of his services or of other key personnel could affect
First Gaston in a material and adverse way. First Gaston's success will also
depend in part on its ability to attract and retain additional qualified
management personnel who have experience both in sophisticated banking matters
and in operating a small to mid-size bank. Competition for such personnel is
strong in the banking industry and First Gaston may not be successful in
attracting or retaining the personnel it requires. First Gaston attempts to
effectively compete in this area by offering financial packages that include
incentive-based compensation and the opportunity to join in the rewarding work
of building a community based financial institution.
Recent Events May Adversely Effect Our Industry
Recent domestic and international terrorist events have created greater
uncertainty in the national and global economies. Therefore, the consequences
of these events on the banking and financial services industries are unknown.
Any impact on the national or global economies, which has an effect on the
local economies where First Gaston and Catawba Valley Bank conduct their
business, will also affect us. Depending on the developments resulting from
such events, there could be a negative impact on our profitability, earnings,
business development and stock prices.
We Operate in a Highly Regulated Industry
Current and future legislation and the policies established by federal and
state regulatory authorities will affect Catawba Valley Bancshares' operations.
Catawba Valley Bancshares is subject to supervision and
7
periodic examination by the Federal Reserve Board and the North Carolina State
Banking Commission. First Gaston and Catawba Valley Bank, as state chartered
commercial banks, also receive regulatory scrutiny from the North Carolina
State Banking Commission and FDIC. Banking regulations, designed primarily for
the protection of depositors, may limit our growth and the return to you, our
investors, by restricting our activities, such as:
. the payment of dividends to our shareholders if our capital falls below
acceptable regulatory levels;
. the prior approval of a bank's regulators to effect mergers with or
acquisitions of other institutions;
. the permissability of certain investments;
. the prior regulatory approval to effect the expansion of our branch
offices; and
. the prior regulatory approval for permission to provide securities or
trust services.
Catawba Valley Bancshares may be able to overcome some of these regulatory
hurdles as a bank holding company, but will have to comply with other federal
laws and regulations and could face enforcement actions by regulatory agencies.
Catawba Valley Bancshares cannot predict what changes, if any, will be made to
existing federal and state legislation and regulations or the effect that such
changes may have on its business. The cost of compliance with regulatory
requirements may adversely affect Catawba Valley Bancshares' ability to operate
profitably. (See page 75)
Anti-Takeover Provisions in Our Articles of Incorporation Could Reduce the
Likelihood That You Will Receive a Takeover Premium
Certain provisions of state and federal law and Catawba Valley Bancshares'
articles of incorporation and by-laws will make it more difficult for anyone to
acquire control of us without our board of directors' approval. In many cases,
shareholders receive a premium for their shares in a change in control, and
these provisions could make it somewhat less likely that a change in control
will occur or that you will receive a premium for your shares if a change in
control does occur.
Our Trading Volume Has Been Low Compared With Larger Bank Holding Companies
The trading volume in Catawba Valley Bancshares' stock on the OTC Bulletin
Board has been comparable to other similarly-sized bank holding companies since
trading began in July 1999. Nevertheless, this trading is relatively low when
compared with more seasoned companies listed on the OTC Bulletin Board or other
stock exchanges. Thus, the market in Catawba Valley Bancshares stock is limited
in scope relative to other companies. In addition, we cannot say with any
certainty that a more active and liquid trading market for our stock will
develop after the transaction.
We Compete With Much Larger Companies for Some of the Same Business
The banking and financial services business in Catawba Valley Bancshares'
and First Gaston's market areas is highly competitive and is becoming more
competitive as a result primarily of:
. changes in regulation;
. changes in technology and product delivery systems; and
. the accelerating pace of consolidation among financial services
providers.
Catawba Valley Bank and First Gaston may not be able to compete effectively
in their markets, and their combined results of operations could be adversely
affected by the nature or pace of change in competition. Catawba Valley Bank
and First Gaston will compete for loans, deposits and customers with various
bank and nonbank financial services providers, many of which are much larger in
total assets and capitalization, have greater access to capital markets and
offer a broader array of financial services. (See pages 55, 68)
8
MARKET PRICES AND DIVIDEND POLICIES
Catawba Valley Bancshares
Catawba Valley Bancshares' common stock has traded publicly on the OTC
Bulletin Board since July 1999 shortly after it became the holding company for
Catawba Valley Bank. Prior thereto the prices are that of Catawba Valley Bank
common stock. The prices shown below do not include commissions or other
expenses charged by brokers. The following table sets forth the high and low
sale price information of Catawba Valley Bancshares' common stock for the
periods indicated:
High Low Dividend
------ ------ --------
Year Ended December 31, 1999
First Quarter......................................... $20.67 $18.00 $--
Second Quarter........................................ 20.87 18.92 --
Third Quarter......................................... 19.23 13.92 --
Fourth Quarter........................................ 15.75 13.50 --
Year Ended December 31, 2000
First Quarter......................................... $14.63 $12.60 $--
Second Quarter........................................ 15.30 12.60 .06
Third Quarter......................................... 14.40 12.72 --
Fourth Quarter........................................ 13.50 8.33 .06
Year Ended December 31, 2001
First Quarter......................................... $15.00 $ 9.08 $--
Second Quarter........................................ 15.50 12.25 .06
Third Quarter ........................................ 14.50 11.50 --
Fourth Quarter (through October 3, 2001).............. 13.50 12.50 --
The above prices have been adjusted to reflect a 10% stock dividend paid on
February 28, 2001 and a 10% stock dividend paid November 1, 1999.
After the exchange, the only funds available to Catawba Valley Bancshares
for use in paying dividends would be dividends received from Catawba Valley
Bank and First Gaston.
In addition, North Carolina corporate law precludes any distribution to
shareholders, including the payment of a dividend, if, after giving effect to
the distribution, Catawba Valley Bancshares:
. would not be able to pay its debts as they become due in the usual
course of business; or
. its total assets would be less than the sum of its total liabilities.
Future dividends will be determined by Catawba Valley Bancshares' Board of
Directors in light of circumstances existing from time to time, including
Catawba Valley Bancshares:
. growth;
. financial condition and results of operations;
. the continued existence of the restrictions described above; and
. other factors that the Board of Directors considers relevant.
9
First Gaston
First Gaston's common stock trades publicly on the OTC Bulletin Board. The
following table presents quarterly information on the price range of First
Gaston stock for the calendar periods indicated. The prices shown below do not
include commissions or other expenses charged by brokers.
High Low
------ ------
Year Ended December 31, 1999
First Quarter................................................. $13.98 $12.43
Second Quarter................................................ 14.55 12.73
Third Quarter................................................. 12.05 12.05
Fourth Quarter................................................ 12.05 12.05
Year Ended December 31, 2000
First Quarter................................................. $12.27 $12.27
Second Quarter................................................ 12.27 12.27
Third Quarter................................................. 12.05 11.36
Fourth Quarter................................................ 12.05 10.40
Year Ended December 31, 2001
First Quarter................................................. $12.50 $11.00
Second Quarter................................................ 13.50 11.25
Third Quarter................................................. 13.50 11.50
Fourth Quarter (through October 3, 2001)...................... 11.50 11.50
The above prices have been adjusted to reflect a 10% stock dividend paid on
March 23, 2001. To date, First Gaston has not paid any cash dividends.
10
SELECTED HISTORICAL FINANCIAL DATA
This section presents selected historical financial data of Catawba Valley
Bancshares and First Gaston. You should read carefully the financial statements
that accompany this Joint Proxy Statement-Prospectus, including the notes to
the financial statements. The selected data in this section is not intended to
replace the financial statements. We expect that we will incur integration
expenses as a result of combining our companies. We also anticipate that the
combination will provide the combined company with financial benefits that
include enhanced opportunities to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, does not reflect these financial expenses
or benefits and, accordingly, does not attempt to predict or suggest future
results. The information in the following tables is based on historical
financial information that Catawba Valley Bancshares has presented in its prior
filings with the SEC and First Gaston has presented in its prior filings with
the FDIC. You should read all of the summary financial information included in
the SEC and FDIC filings that we provide in the following tables together with
this historical financial information and with the more detailed pro forma
financial information we provide in this document, which you can find beginning
at page 14. The historical financial information is also incorporated into this
document by reference. See "Where You Can Find More Information" on page 86.
11
CATAWBA VALLEY BANCSHARES, INC
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Six Months
Ended June 30, Years Ended December 31,
---------------------- ----------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
Statement of Income Data
Net interest income..... $ 2,790 $ 2,546 $ 5,327 $ 3,943 $ 2,758 $ 1,943 $ 967
Provision for loan
losses................. 225 222 682 394 471 349 362
Noninterest income,
excluding securities
transactions........... 967 405 1,062 876 738 443 150
Securities
transactions........... 0 0 (43) 0 0 0 0
Noninterest income...... 967 405 1,019 876 738 443 150
Noninterest expenses.... 2,169 1,642 3,332 2,812 1,830 1,429 842
Net income (loss)....... 907 706 1,540 1,021 740 518 (87)
Net income (loss)
applicable to common
shareholders........... 907 706 1,540 1,021 740 518 (87)
Balance Sheet Data
(Period End)
Total assets............ $ 171,442 $ 139,757 $ 155,652 $ 118,238 $ 89,668 $ 64,883 $ 37,367
Investments(1).......... 36,335 25,887 32,511 17,677 11,656 6,275 5,996
Loans................... 120,710 98,298 112,720 86,082 60,607 42,998 24,991
Allowance for loan
losses................. 1,824 1,509 1,654 1,341 1,050 683 408
Nonperforming assets.... 252 33 194 754 304 34 0
Total earning assets.... 165,775 134,115 150,064 111,102 85,361 61,726 35,527
Total deposits.......... 141,024 115,834 130,143 97,981 74,821 57,107 29,825
Borrowed funds.......... 12,000 8,000 8,000 5,000 0 0 0
Shareholders' equity.... 18,083 15,668 16,980 15,021 14,317 7,721 7,197
Per Share Data
Net income per common
share(2):
Basic.................. $ 0.55 $ 0.43 $ 0.94 $ 0.62 $ 0.56 $ 0.41 $ (0.07)
Diluted................ 0.53 0.41 0.90 0.59 0.52 0.39 (0.07)
Cash dividends
declared............... 0.06 0.06 0.12 0.00 0.00 0.00 0.00
Book value per common
share (period end)(2).. 10.99 9.53 10.32 9.13 8.75 6.07 5.66
Common shares
outstanding(2):
Weighted average--
basic................. 1,644,886 1,644,886 1,644,886 1,642,176 1,332,671 1,270,935 1,270,935
Weighted average--
diluted............... 1,705,701 1,725,367 1,712,531 1,743,892 1,419,073 1,335,946 1,270,935
Period end............. 1,644,886 1,644,886 1,644,886 1,644,886 1,635,811 1,271,843 1,270,935
Financial Ratios
Return on average
assets................. 1.11% 1.09% 1.12% 0.98% 0.96% 1.01% (0.35)%
Return on average
equity................. 10.35 9.20 9.62 6.96 6.72 6.95 (1.21)
Net yield on interest
earning assets......... 3.37 3.80 4.13 4.13 3.75 4.06 4.08
--------
(1) Investments consist of investment securities and stock in the Federal Home
Loan Bank.
(2) Adjusted to reflect the dilutive effect of a 10% stock dividend effective
in the first quarter of 2001.
12
FIRST GASTON BANK OF NORTH CAROLINA
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Six Months Ended June
30, Years Ended December 31,
---------------------- -------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- -------- --------
(Unaudited)
Statement of Income Data
Net interest income..... $ 2,136 $ 2,110 $ 4,447 $ 3,436 $ 2,786 $ 1,918 $ 984
Provision for loan
losses................. 122 280 436 419 438 314 223
Noninterest income,
excluding securities
transactions........... 685 330 745 524 445 281 147
Securities
transactions........... 0 0 0 0 167 0 0
Noninterest income...... 685 330 745 524 612 281 147
Noninterest expenses.... 1,999 1,637 3,481 2,865 2,503 2,167 1,841
Net income (loss)....... 488 523 1,140 676 457 (282) (933)
Net income (loss)
applicable to common
shareholders........... 488 523 1,140 676 457 (282) (933)
Balance Sheet Data
(Period End)
Total assets............ $ 124,626 $ 97,775 $ 111,986 $ 86,726 $ 70,221 $ 54,495 $ 35,810
Investments(1).......... 21,794 14,902 18,352 10,993 8,698 7,486 5,842
Loans................... 90,249 74,898 84,273 62,331 52,672 39,906 22,935
Allowance for loan
losses................. 1,341 1,170 1,284 990 947 556 254
Nonperforming assets.... 95 270 113 453 435 2 0
Total earning assets.... 116,803 91,337 104,245 78,111 65,648 49,503 30,087
Total deposits.......... 101,149 81,975 92,621 73,101 61,964 47,066 28,892
Borrowed funds(2)....... 10,307 4,603 6,937 2,913 1,266 918 256
Shareholders' equity.... 12,314 10,790 11,636 10,320 6,701 6,226 6,514
Per Share Data
Net income (loss) per
common share(3):
Basic.................. $ 0.39 $ 0.42 $ 0.90 $ 0.65 $ 0.46 $ (0.28) $ (0.94)
Diluted................ 0.39 0.41 0.88 0.64 0.45 (0.28) (0.94)
Cash dividends
declared............... 0 0 0 0 0 0 0
Book value per common
share (period end)(3).. $ 9.76 $ 8.55 $ 9.22 $ 8.19 $ 6.75 $ 6.35 $ 6.57
Common shares
outstanding(3):
Weighted average--
basic................. 1,262,319 1,260,150 1,261,592 1,051,147 991,830 991,681 991,681
Weighted average--
diluted............... 1,262,319 1,266,549 1,266,175 1,062,385 1,014,489 991,681 991,681
Period end............. 1,262,319 1,261,822 1,262,350 1,260,080 992,348 991,681 991,681
Financial Ratios
Return on average
assets................. 0.82% 1.13% 1.17% 0.85% 0.74% (0.63)% (3.63)%
Return on average
equity................. 8.14 9.91 10.46 8.82 7.01 (4.49) (13.49)
Net yield on interest
earning assets......... 3.66 4.62 4.85 4.64 4.91 4.82 4.52
--------
(1) Investments consist of investment securities and stock in the Federal Home
Loan Bank.
(2) Borrowed funds consist of federal funds purchased, securities sold under
agreements to repurchase, and Federal Home Loan Bank advances.
(3) Adjusted to reflect the dilutive effect of a 10% stock dividend effective
in the first quarter of 2001 and a six-for-five stock split in 1998.
13
The following unaudited pro forma combined selected financial data combined
Catawba Valley Bancshares' historical results with First Gaston's historical
results, in each case, as of June 30, 2001 and 2000 and for the years ended
December 31, 2000 - 1996. Income statement data gives effect to the share
exchange as if it had occurred on January 1, 1996. Balance sheet data gives
effect to the share exchange as if it had occurred on the indicated balance
sheet date. The pro forma data reflects the use of the pooling-of-interests
method of accounting for the share exchange. The information in the following
table should be read together with the historical financial information of
Catawba Valley Bancshares and First Gaston that accompanies this Joint Proxy
Statement-Prospectus and the unaudited pro forma combined condensed financial
information beginning at page 15 of this document. See "Where You Can Find More
Information" on page 86.
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
OF CATAWBA VALLEY BANCSHARES, INC. AND FIRST GASTON BANK OF NORTH CAROLINA
(Dollars in thousands, except per share data)
Six Months Ended June
30, Years Ended December 31,
---------------------- ----------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
Statement of Income Data
Net interest income..... $ 4,926 $ 4,656 $ 9,774 $ 7,379 $ 5,544 $ 3,860 $ 1,950
Provision for loan
losses................. 347 502 1,118 813 909 663 585
Noninterest income,
excluding securities
transactions........... 1,652 735 1,807 1,400 1,183 724 297
Securities
transactions........... 0 0 (43) 0 167 0 0
Noninterest income...... 1,652 735 1,764 1,400 1,350 724 297
Noninterest expenses.... 4,168 3,279 6,814 5,677 4,333 3,596 2,683
Net income.............. 1,395 1,229 2,679 1,697 1,197 236 (1,020)
Net income applicable to
common shareholders.... 1,395 1,229 2,679 1,697 1,197 236 (1,020)
Balance Sheet Data
(Period End)
Total assets............ $ 296,068 $ 237,532 $ 267,638 $ 204,964 $ 159,889 $ 119,378 $ 73,177
Investments(1).......... 58,129 40,789 50,863 28,670 20,354 13,761 11,542
Loans................... 210,959 173,196 196,993 148,413 113,279 82,904 47,926
Allowance for loan
losses................. 3,165 2,679 2,938 2,331 1,997 1,239 662
Nonperforming assets.... 347 303 307 1,207 739 36 0
Total earning assets.... 282,578 225,452 254,310 189,212 151,072 111,229 65,614
Total deposits.......... 242,173 197,809 222,764 171,082 136,785 104,173 58,717
Borrowed funds(2)....... 22,307 12,603 14,937 7,913 1,266 918 256
Shareholders' equity.... 30,197 26,258 28,416 25,141 20,818 13,747 13,511
Per Share Data
Net income (loss) per
common share(3):
Basic.................. $ 0.50 $ 0.44 $ .97 $ .66 $ .54 $ .11 $ (.47)
Diluted................ 0.49 0.43 0.94 0.63 0.51 0.11 (0.47)
Cash dividends
declared............... 0.06 0.06 0.12 0.00 0.00 0.00 0.00
Book value per common
share (period end)(3).. 10.89 9.47 10.25 9.07 8.25 6.37 6.26
Common shares
outstanding(3):
Weighted average--
basic................. 2,772,642 2,770,704 2,771,992 2,581,271 2,218,772 2,156,903 2,156,903
Weighted average--
diluted............... 2,833,457 2,856,902 2,843,732 2,693,027 2,325,417 2,221,914 2,156,903
Period end............. 2,772,642 2,772,198 2,772,669 2,770,641 2,522,375 2,157,811 2,156,903
Financial Ratios
Return on average
assets................. 0.99% 1.11% 1.14% 0.92% 0.86% 0.24% (2.29)%
Return on average
equity................. 9.46 9.49 9.97 7.60 6.83 1.72 (7.22)
Net yield on interest
earning assets......... 3.35 3.54 4.43 4.35 4.25 4.41 4.29
--------
(1) Investments consist of investment securities and stock in the Federal
Home Loan Bank.
(2) Borrowed funds consist of federal funds purchased, securities sold under
agreements to repurchase, and Federal Home Loan Bank advances.
(3) Adjusted to reflect the dilutive effect of a 10% stock dividend effective
in the first quarter of 2001.
14
CATAWBA VALLEY BANCSHARES AND FIRST GASTON UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheets as of
June 30, 2001, December 31, 2000, and December 31, 1999 and the unaudited pro
forma condensed combined statements of income for the six months ended June 30,
2001 and for each of the years in the three-year period ended December 31, 2000
give effect to the pending share exchange, accounted for as a pooling of
interests.
The unaudited pro forma condensed combined financial information as of and
for the six months ended June 30, 2001 has been derived from the unaudited
interim financial statements for both Catawba Valley Bancshares and First
Gaston, which are included in this Joint Proxy Statement-Prospectus. The
unaudited pro forma condensed combined financial information for each of the
three years in the three-year period ending December 31, 2000 is based on the
historical financial statements of Catawba Valley Bancshares and First Gaston
under the assumptions and adjustments set forth in the accompanying notes to
the unaudited pro forma condensed combined financial statements. It gives
effect to the share exchange as if it had been consummated at the beginning of
the earliest period presented. The unaudited pro forma condensed combined
financial statements do not give effect to the anticipated cost savings or
revenue enhancements in connection with the share exchange.
The unaudited pro forma condensed combined financial statements should be
read together with the historical financial statements of Catawba Valley
Bancshares and First Gaston, including the respective notes to those
statements. The pro forma information does not necessarily indicate the
combined financial position or the results of operations in the future or the
combined financial position or the results of operations that would have been
realized had the share exchange been consummated during the periods or as of
the dates for which the pro forma information is presented.
Pro forma per share amounts for the combined entity are based on the
exchange ratio of .8934 shares of Catawba Valley Bancshares stock for each
share of First Gaston stock.
15
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
At June 30, 2001
(Dollars in thousands)
Catawba First Pro Forma
Valley Gaston Adjustments Combined
-------- -------- ----------- ---------
Assets
Cash and due from banks.......... $ 1,285 $ 3,771 $-- $ 5,056
Interest-bearing bank balances... 6,745 4,760 -- 11,505
Fed funds sold and resale
agreements...................... 1,984 -- -- 1,984
Investment securities............ 36,335 21,794 -- 58,129
Loans............................ 120,710 90,249 -- 210,959
Less allowance for loan
losses........................ (1,824) (1,341) -- (3,165)
-------- -------- ---- --------
Net loans.................... 118,886 88,908 -- 207,794
Premises and equipment........... 3,818 3,596 -- 7,414
Intangible assets................ -- -- -- --
Other assets..................... 2,389 1,797 -- 4,186
-------- -------- ---- --------
Total Assets................. $171,442 $124,626 $-- $296,068
======== ======== ==== ========
Liabilities and Shareholders'
Equity
Liabilities
Deposits
Noninterest-bearing............ $ 9,493 $ 12,942 $-- $ 22,435
Interest-bearing............... 131,531 88,207 -- 219,738
-------- -------- ---- --------
Total deposits............... 141,024 101,149 -- 242,173
Borrowed funds................... 12,000 10,307 -- 22,307
Other liabilities................ 335 856 200(1) 1,391
-------- -------- ---- --------
Total liabilities............ 153,359 112,312 200 265,871
-------- -------- ---- --------
Total shareholders equity........ 18,083 12,314 (200)(1) 30,197
-------- -------- ---- --------
Total Liabilities and Shareholders'
Equity............................ $171,442 $124,626 $-- $296,068
======== ======== ==== ========
(1) See notes to the unaudited pro forma condensed combined financial
information.
16
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
At December 31, 2000
(Dollars in thousands)
Catawba First Pro Forma
Valley Gaston Adjustments Combined
-------- -------- ----------- ---------
Assets
Cash and due from banks........... $ 1,465 $ 3,962 $-- $ 5,427
Interest-bearing bank balances.... 3,122 1,620 -- 4,742
Fed funds sold and resale
agreements....................... 1,712 -- -- 1,712
Investment securities............. 32,511 18,352 -- 50,863
Loans............................. 112,720 84,273 -- 196,993
Less allowance for loan losses.. (1,654) (1,284) -- (1,938)
-------- -------- ---- --------
Net loans..................... 111,066 82,989 -- 195,055
Premises and equipment............ 3,394 3,120 -- 6,514
Intangible Assets................. -- -- -- --
Other assets...................... 2,382 1,943 -- 4,325
-------- -------- ---- --------
Total assets.................. $155,652 $111,986 $-- $268,638
======== ======== ==== ========
Liabilities and Shareholders' Equity
Liabilities........................
Deposits..........................
Noninterest-bearing............. $ 8,928 $ 9,782 $-- $ 18,710
Interest-bearing................ 121,215 82,839 -- 204,054
-------- -------- ---- --------
Total deposits................ 130,143 92,621 -- 222,764
Borrowed funds.................... 8,000 6,937 -- 14,937
Other liabilities................. 529 792 200(1) 1,521
-------- -------- ---- --------
Total liabilities............. 138,672 100,350 200 239,222
-------- -------- ---- --------
Total shareholders equity......... 16,980 11,636 200(1) 28,416
-------- -------- ---- --------
Total Liabilities and Shareholders'
Equity............................. $155,652 $111,986 $-- $267,638
======== ======== ==== ========
(1) See notes to the unaudited pro forma condensed combined financial
information.
17
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
At December 31, 1999
(Dollars in thousands)
Pro Forma
Catawba Valley First Gaston Adjustments Combined
-------------- ------------ ----------- ---------
Assets
Cash and due from banks... $ 4,673 $ 5,173 $-- $ 9,846
Interest-bearing bank
balances................. 5,845 3,457 -- 9,302
Fed funds sold and resale
agreements............... 1,497 1,330 -- 2,827
Investment securities..... 17,677 10,993 -- 28,670
Loans..................... 86,082 62,331 -- 148,413
Less allowance for loan
losses................. (1,341) (990) -- (2,331)
-------- ------- ---- --------
Net loans............. 84,741 61,341 -- 146,082
Premises and equipment.... 2,802 3,251 -- 6,053
Intangible assets......... 4 -- -- 4
Other assets.............. 999 1,181 -- 2,180
-------- ------- ---- --------
Total Assets.......... $118,238 $86,726 $-- $204,964
======== ======= ==== ========
Liabilities and
Shareholders' Equity
Liabilities................
Deposits..................
Noninterest-bearing..... $ 7,021 $ 7,623 $-- $ 14,644
Interest-bearing........ 90,960 65,478 -- 156,438
-------- ------- ---- --------
Total deposits........ 97,981 73,101 -- 171,082
Borrowed funds............ 5,000 2,913 -- 7,913
Other liabilities......... 236 392 200(1) 828
-------- ------- ---- --------
Total liabilities..... 103,217 76,406 200 179,823
-------- ------- ---- --------
Total shareholders
equity................... 15,021 10,320 200(1) 25,141
-------- ------- ---- --------
Total Liabilities and
Shareholders' Equity....... $118,238 $86,726 $-- $204,964
======== ======= ==== ========
(1) See notes to the unaudited pro forma condensed combined financial
information.
18
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
For the Six Months Ended June 30, 2001
(Dollars in thousands, except per share data)
Catawba First Pro Forma
Valley Gaston Combined
------- ------ ---------
Interest income....................................... $6,551 $4,565 $11,116
Interest expense...................................... 3,761 2,429 6,190
------ ------ -------
Net interest income................................. 2,790 2,136 4,926
Provision for loan losses............................. 225 122 347
------ ------ -------
Net interest income after provision for loan losses... 2,565 2,014 4,579
------ ------ -------
Noninterest income.................................... 967 685 1,652
Noninterest expenses.................................. 2,169 1,999 4,168
------ ------ -------
Income before income taxes.......................... 1,363 700 2,063
Income taxes.......................................... 456 212 668
------ ------ -------
Net income.......................................... $ 907 $ 488 $ 1,395
====== ====== =======
Net income per common share(2):
Basic............................................... $ 0.55 $ 0.39 $ 0.50
====== ====== =======
Diluted............................................. $ 0.53 $ 0.39 $ 0.49
====== ====== =======
(2) See notes to the unaudited pro forma condensed combined financial
information.
19
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 2000
(Dollars in thousands, except per share data)
Catawba First Pro Forma
Valley Gaston Combined
------- ------ ---------
Interest income....................................... $11,712 $8,431 $20,143
Interest expense...................................... 6,385 3,984 10,369
------- ------ -------
Net interest income................................. 5,327 4,447 9,774
Provision for loan losses............................. 682 436 1,118
------- ------ -------
Net interest income after provision for loan losses... 4,645 4,011 8,656
------- ------ -------
Noninterest income.................................... 1,019 745 1,764
Noninterest expenses.................................. 3,332 3,481 6,813
------- ------ -------
Income before income taxes.......................... 2,332 1,275 3,607
Income taxes.......................................... 792 135 927
------- ------ -------
Net income.......................................... $ 1,540 $1,140 $ 2,680
======= ====== =======
Net income per common share(2):
Basic............................................... $ 0.94 $ 0.90 $ 0.97
======= ====== =======
Diluted............................................. $ 0.90 $ 0.90 $ 0.94
======= ====== =======
(2) See notes to the unaudited pro forma condensed combined financial
information.
20
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1999
(Dollars in thousands, except per share data)
Catawba First Pro Forma
Valley Gaston Combined
------- ------ ---------
Interest income....................................... $8,022 $6,225 $14,247
Interest expense...................................... 4,079 2,789 6,868
------ ------ -------
Net interest income................................. 3,943 3,436 7,379
Provision for loan losses............................. 394 419 813
------ ------ -------
Net interest income after provision for loan losses... 3,549 3,017 6,566
------ ------ -------
Noninterest income.................................... 876 524 1,400
Noninterest expenses.................................. 2,812 2,865 5,677
------ ------ -------
Income before income taxes.......................... 1,613 676 2,289
Income taxes.......................................... 592 -- 592
------ ------ -------
Net income.......................................... $1,021 $ 676 $ 1,697
====== ====== =======
Net income per common share(2):
Basic............................................... $ 0.62 $ 0.64 $ 0.66
====== ====== =======
Diluted............................................. $ 0.59 $ 0.64 $ 0.63
====== ====== =======
(2) See notes to the unaudited pro forma combined consolidated financial
information.
21
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1998
(Dollars in thousands, except per share data)
Catawba First Pro Forma
Valley Gaston Combined
------- ------ ---------
Interest income....................................... $6,025 $5,057 $11,082
Interest expense...................................... 3,267 2,271 5,538
------ ------ -------
Net interest income................................. 2,758 2,786 5,544
Provision for loan losses............................. 471 438 909
------ ------ -------
Net interest income after provision for loan losses... 2,287 2,348 4,635
------ ------ -------
Noninterest income.................................... 738 612 1,350
Noninterest expenses.................................. 1,830 2,503 4,333
------ ------ -------
Income before income taxes.......................... 1,195 457 1,652
Income taxes.......................................... 455 -- 455
------ ------ -------
Net income.......................................... $ 740 $ 457 $ 1,197
====== ====== =======
Net income per common share(2):
Basic............................................... $ 0.56 $ 0.46 $ 0.54
====== ====== =======
Diluted............................................. $ 0.52 $ 0.45 $ 0.52
====== ====== =======
(2) See notes to the unaudited pro forma combined consolidated financial
information.
22
UNAUDITED PRO FORMA COMBINED CAPITALIZATION
At June 30, 2001
(Dollars in thousands, except share data)
Catawba First Pro Forma
Valley Gaston Adjustments Combined
------- ------- ----------- ---------
Long-Term Debt
FHLB advances....................... 7,000 1,000 -- 8,000
Shareholders' Equity
Common Stock........................ $ 1,645 $ 6,312 $(5,184)(3) $ 2,773
Additional paid in capital.......... 15,417 6,107 5,184(3) 26,708
Retained earnings (deficit)......... 506 (335) -- 171
Accumulated other comprehensive
income............................. 515 230 -- 745
------- ------- ------- -------
Total shareholders' equity.......... $18,083 $12,314 $ -- $30,397
------- ------- ------- -------
Total capitalization................ $25,083 $13,314 $ -- $38,397
======= ======= ======= =======
Adjustment represents change in par value and exchange rate for First
Gaston.
(3) See notes to the unaudited pro forma condensed combined financial
information.
23
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the share exchange been consummated at the beginning of the
periods indicated, nor is it necessarily indicative of the results of
operations in future periods or the future financial position of the combined
company. It is anticipated that the share exchange will be completed late in
the fourth quarter of 2001.
Under generally accepted accounting principles, the transaction will be
accounted for as a pooling of interests and, as such, the assets and
liabilities of First Gaston will be combined with those of Catawba Valley
Bancshares at book value. In addition, the statements of income of First Gaston
will be combined with those of Catawba Valley Bancshares as of the earliest
period presented. The unaudited pro forma condensed combined balance sheets and
statements of income give effect to the share exchange as if it had occurred at
the beginning of the earliest period presented.
Specific note references to the Unaudited Pro Forma Condensed Combined
Financial Statements are as follows:
Note 1.
The effects of certain one-time transaction charges, net of tax effects, of
$200,000 have been recorded in the Unaudited Pro Forma Condensed Combined
Balance Sheets. These charges consist of professional fees associated with the
transaction, which include fees for the services of financial advisors, legal
and accounting fees, and printing charges.
Note 2.
The weighted average number of shares outstanding on a pro forma combined
basis for the computation of net income per common share reflects the exchange
ratio of .8934 shares of Catawba Valley Bancshares common stock for each share
of First Gaston common stock, as discussed below in Note 3.
Note 3.
Each share of First Gaston common stock outstanding will be converted into
.8934 shares of Catawba Valley Bancshares common stock at the effective time of
the share exchange, subject to possible adjustments as provided in the share
exhange agreement.
At June 30, 2001, there were 1,262,319 shares of First Gaston common stock
outstanding which would be converted into 1,127,756 shares of Catawba Valley
Bancshares common stock on a pro forma basis. In order for the conversion to
reflect the $1.00 par value of Catawba Valley Bancshares common stock,
shareholders' equity is adjusted for the reclassification of $5,184,000 from
common stock to additional paid-in capital.
The number of shares of Catawba Valley Bancshares common stock to be issued
on a pro forma basis does not reflect the exercise of options to acquire shares
of First Gaston common stock. Options to acquire 229,497 shares of First Gaston
common stock were outstanding at June 30, 2001.
24
GENERAL INFORMATION
Catawba Valley Bancshares Special Meeting
General. This Joint Proxy Statement-Prospectus is being furnished to the
shareholders of Catawba Valley Bancshares in connection with the solicitation
by the Board of Directors of Catawba Valley Bancshares of proxies for use at
the Catawba Valley Bancshares' special meeting of shareholders. The purpose of
the Catawba Valley Bancshares' special meeting is (a) to consider and vote on
the approval of the issuance of shares of Catawba Valley Bancshares' common
stock to First Gaston shareholders, in connection with First Gaston's proposed
share exchange with Catawba Valley Bancshares, (b) the approval of the
renaming of Catawba Valley Bancshares to "United Community Bancorp", and (c)
the approval of the reduction in the minimum number of directors required by
the bylaws from nine (9) to eight (8).
The principal executive offices of both Catawba Valley Bancshares and
Catawba Valley Bank are located at 1039 Second Street NE, Hickory, North
Carolina 28601-3843. Their telephone number is (828) 431-2300.
This Joint Proxy Statement-Prospectus is first being mailed to shareholders
on or about Ocbober 19, 2001.
Record Date; Voting Rights. Catawba Valley Bancshares' shareholders of
record at the close of business on October 5, 2001 are entitled to vote at the
Catawba Valley Bancshares' special meeting, or at any adjournment or
postponement. As of October 5, 2001, there were 1,645,886 shares of Catawba
Valley Bancshares' common stock outstanding and entitled to vote held of
record by 1,800 persons. Each share of Catawba Valley Bancshares' common stock
entitles the holder to one vote on each matter submitted to a vote at the
meeting. Pursuant to the Bylaws of Catawba Valley Bancshares, a majority of
the votes entitled to be cast by holders of Catawba Valley Bancshares' common
stock, represented in person or by proxy, will constitute a quorum for the
transaction of business at the meeting.
The approval of the issuance of Catawba Valley Bancshares' stock to First
Gaston shareholders requires the affirmative vote of a majority of the Catawba
Valley Bancshares' shareholders present, in person or by proxy, at the Catawba
Valley Bancshares' special meeting.
The executive officers and directors of Catawba Valley Bancshares and their
affiliates beneficially owned as of October 5, 2001, an aggregate of 326,627
shares or 19.85% of Catawba Valley Bancshares' common stock (excluding 166,023
shares subject to outstanding stock options). All of such shares are expected
to be voted in favor of each of the proposals presented at the special
meeting.
Solicitation, Revocation, and Use of Proxies.
A proxy card is enclosed for your use. You are solicited on behalf of the
Board of Directors of Catawba Valley Bancshares to complete, date, sign, and
return the proxy card in the accompanying envelope, which is postage-paid if
mailed in the United States.
You have three choices on each proposal to be voted at the Catawba Valley
Bancshares' special meeting. By checking the appropriate box on the proxy card
you may:
. vote "FOR" (i) the issuance of the Catawba Valley Bancshares' stock in
the share exchange with First Gaston (ii) the renaming of Catawba Valley
Bancshares to "United Community Bancorp" and (iii) reducing the minimum
number of directors from nine (9) to eight (8);
. vote "AGAINST" (i) the issuance of the Catawba Valley Bancshares' stock
in the share exchange with First Gaston (ii) the renaming of Catawba
Valley Bancshares to "United Community Bancorp" and (iii) reducing the
minimum number of directors from nine (9) to eight (8); or
. ""ABSTAIN'' from voting altogether.
25
To approve the issuance of Catawba Valley Bancshares' stock in the First
Gaston share exchange, we need a majority of those voting, either in person or
by proxy, to vote FOR the proposal. Therefore, if you do not submit a proxy
card or vote in person, you will not be counted towards the quorum requirement.
Although, if a quorum is otherwise present at the meeting, in person or by
proxy, your failure to vote would have no outcome on the final vote. If you
abstain from voting on these proposals, it would have the effect of a vote
"AGAINST" the proposals.
You may revoke your proxy at any time before it is actually voted at the
Catawba Valley Bancshares' special meeting (a) by delivering written notice of
revocation to the Secretary of Catawba Valley Bancshares, Carole F. Teague,
1039 Second Street, NE, Hickory, North Carolina 28601-3843 (b) by submitting a
subsequently dated proxy, or (c) by attending the special meeting and
withdrawing the proxy. Each unrevoked proxy card properly executed and received
prior to the close of the special meeting will be voted as indicated. Where
specific instructions are not indicated, the proxy will be voted "FOR" the
proposals.
The expense of preparing, printing, and mailing this Joint Proxy Statement-
Prospectus will be shared equally by Catawba Valley Bancshares and First
Gaston. In addition to the use of the mails, proxies may be solicited
personally or by telephone by regular employees of Catawba Valley Bancshares
without additional compensation. Catawba Valley Bancshares will reimburse
banks, brokers and other custodians, nominees and fiduciaries for their costs
in sending the proxy materials to the beneficial owners of Catawba Valley
Bancshares' common stock.
First Gaston's Special Meeting
General. This Joint Proxy Statement-Prospectus is being furnished to
shareholders of First Gaston as of October 19, 2001, and is accompanied by a
form of proxy which is solicited by the Board of Directors of First Gaston for
use at First Gaston's special meeting to be held on November 27, 2001 and at
any adjournment or postponement thereof. At First Gaston's special meeting,
First Gaston's shareholders will be asked to vote on a proposal to approve the
Agreement and Plan of Share Exchange.
Record Date, Voting Rights. Shareholders of record at the close of business
on October 5, 2001 are entitled to vote at First Gaston's special meeting or at
any adjournment or postponement thereof. On October 5, 2001, there were
1,262,319 shares of First Gaston common stock outstanding which were held by
approximately 1,268 holders of record. Each share of First Gaston common stock
outstanding on October 5, 2001 is entitled to one vote on the proposal
regarding the share exchange. Approval of the share exchange will require the
affirmative vote of a majority of the shares of First Gaston's common stock
entitled to vote at First Gaston's special meeting. Failure of the holder of
First Gaston common stock to vote such shares, as well as abstentions and
broker nonvotes will have the same effect as a vote "AGAINST" the share
exchange. As of the October 5, 2001, the directors and executive officers of
First Gaston and their affiliates beneficially owned a total of 137,717 shares
or 10.91% of First Gaston's common stock, (excluding 95,867 shares subject to
outstanding stock options) all of which are expected to be voted in favor of
the share exchange.
Solicitation, Revocation, and Use of Proxies. A proxy card is enclosed for
your use. You are solicited on behalf of the Board of Directors of First Gaston
to complete, date, sign, and return the proxy card in the accompanying
envelope, which is postage-paid if mailed in the United States. The shares of
First Gaston common stock represented by properly executed proxies received at
or prior to First Gaston's special meeting will be voted as directed by you,
unless you revoke it as described below. If no instructions are given, your
proxy will be voted "FOR" the share exchange. Such vote will constitute a
waiver of the shareholders' right to dissent in any other matters properly
presented at First Gaston's special meeting or any adjournment or postponement
thereof, that may be properly voted on. We are not aware of any other matters
to be presented at First Gaston's special meeting. This proxy is being
solicited for First Gaston's special meeting and any adjournment or
postponement thereof and will not be used for any other meeting. Your presence
at First
26
Gaston's special meeting will not automatically revoke your proxy. You may,
however, revoke a proxy at any time prior to its exercise (a) by filing a
written notice of revocation with or by delivering a duly executed proxy
bearing a later date to Barbara D. Myers, the Secretary of First Gaston, at 804
South New Hope Road, Gastonia, North Carolina 28054 prior to First Gaston's
special meeting (b) by submitting a subsequently dated proxy, or (c) by
attending First Gaston's special meeting withdrawing your proxy and voting in
person. Your death or incapacity will not revoke your proxy unless, before the
shares are voted, notice of death or incapacity is filed with the President of
First Gaston or other person authorized to tabulate votes. Whether or not you
plan to attend First Gaston's special meeting, you are requested to complete,
date, and sign the accompanying proxy and return it promptly in the enclosed,
postage-paid envelope.
Authorization to Vote on Adjournment and Other Matters. By signing a proxy,
you authorize the proxyholder to vote in his discretion regarding any
procedural motions which may come before the special meetings. For example,
this authority could be used to adjourn the special meetings if Catawba Valley
Bancshares or First Gaston believes it is desirable to do so. Adjournment or
other procedural matters could be used to obtain more time before a vote is
taken in order to solicit additional proxies or to provide additional
information to shareholders. However, proxies voted against the proposals will
not be used to adjourn the special meetings. Neither corporation has any plans
to adjourn the meetings at this time, but intend to do so, if needed, to
promote shareholder interests.
27
PROPOSAL 1: CATAWBA VALLEY BANCSHARES' SHARE EXCHANGE
WITH FIRST GASTON
The following information describes material aspects of the proposed
transaction by which Catawba Valley Bancshares would acquire all of the stock
of First Gaston by a share exchange under the Agreement and Plan of Share
Exchange. The Agreement and Plan of Share Exchange is attached as Appendix I
and incorporated by reference to this Joint Proxy Statement-Prospectus.
General
The Agreement and Plan of Share Exchange provides for the share exchange
which, when effective, will result in the conversion of each share of First
Gaston common stock then issued and outstanding (excluding shares as to which
First Gaston shareholders have exercised dissenters' rights) into the right to
receive 0.8934 newly issued shares of Catawba Valley Bancshares' $1.00 par
value common stock, rounded up or down to the nearest whole share.
As of June 30, 2001, First Gaston had 1,262,319 shares of common stock
outstanding. Based upon the exchange ratio, upon consummation of the share
exchange, Catawba Valley Bancshares will issue approximately 1,127,755 shares
of Catawba Valley Bancshares' common stock. Accordingly, Catawba Valley
Bancshares would then have outstanding approximately 2,772,641 shares of common
stock.
Background of and Reasons for the Share Exchange
Catawba Valley Bank was formed in 1995 in Hickory, North Carolina. Its
organization came in the wake of a number of mergers of community banks which
left Hickory with no locally owned and organized financial institution. First
Gaston was formed in 1995 and its market area, including the western portion of
Mecklenburg County, which includes parts of the metropolitan area of Charlotte,
also has experienced a significant number of community bank mergers and
consolidations. The mergers and consolidations continued throughout the last
half of the 1990's. Each new merger left another North Carolina town and/or
customer base without its locally controlled bank or disrupted many long-
standing banker-customer relationships as branches were closed or consolidated
and personnel were either relocated or laid off. These events have lead to the
creation of approximately 35 new community financial institutions throughout
North Carolina since 1995. Every major metropolitan area of North Carolina and
numerous smaller towns and communities have seen the successful organization of
new community banks during this timeframe.
Surveying its growth potential beyond its present market in Hickory, North
Carolina, executive management of Catawba Valley Bancshares began having
informal discussions with a number of other community bank executives shortly
after Catawba Valley Bancshares was created in 1999 to become the bank holding
company for Catawba Valley Bank. Those discussions attempted to determine what
interest, if any, other community bank leadership might have in the creation of
a holding company that would permit some economies of scale while leaving local
automony, loan decision making and product pricing in the hands of local
executive management. Notwithstanding state-wide branching, North Carolina has
had a successful history of creating multi-bank holding companies where certain
managerial and administrative functions are centralized at the holding company
level while the individual banks retain their local identity and remain semi-
autonomous. Many community banks were founded with the desire to have the
ownership and control of a community bank centered in their local community.
Many community banks have been successful in attracting consumer and small to
mid-size business customers who prefer more personal, one-on-one service, than
that being provided by the larger financial institutions who had acquired
former independent community banks. Consequently, many community bank leaders
feel the need to retain local automony and independence as well as their local
name since, in many instances, these factors weighed prominently in the
creation of the community bank.
28
Based upon those preliminary discussions, executive management of First
Gaston and Catawba Valley Bancshares, together with a third independent
community bank in North Carolina, retained the services on March 4, 2001 of
Larrowe & Company PLC, the independent certified public accounting firm of
First Gaston. Larrowe & Company PLC studied the historical financial results of
each of the three institutions and reviewed their projections and three year
forecasts as contained in each bank's business plan. Based upon that
information, and in an attempt to effect an exchange ratio on the concept of a
"merger of equals" basis, Larrowe & Company PLC suggested an exchange ratio in
a three way exchange with equal representation from each of the institutions on
the Board of Directors of the resulting holding company. Based upon that
suggested exchange ratio, Larrowe & Company PLC calculated pro forma book value
and net income on an absolute and per share basis. Also calculated were
expected accretive/dilutive impacts on each institution's earnings per share
and book value. Neither First Gaston nor the other financial institution were
organized in the holding company format and it was suggested that to facilitate
the reorganization, the corporate structure of Catawba Valley Bancshares, as a
holding company, would be the parent corporation and its name would be changed
to a name more generically suited to all three financial institutions.
In May 2001, after careful consideration of the concept of a multi-bank
holding company on a "merger of equals" basis, the executive management of both
Catawba Valley Bancshares and First Gaston determined to proceed with
definitive discussions while executive management of the other financial
institution declined to proceed any further. Larrowe & Company PLC adjusted the
exchange ratio to effect, on as equal a basis as possible, a book value--for-
book value exchange ratio which ultimately resulted in 0.8934 shares of Catawba
Valley Bancshares common stock being exchanged for each share of common stock
of First Gaston. Likewise it was agreed that Catawba Valley Bancshares and
First Gaston would retain equal numbers on the reorganized bank holding
company's Board of Directors and that the total number of directors would be
eight (8). It was further agreed that upon consummation of the share exchange,
Catawba Valley Bancshares would change its name to "United Community Bancorp"
Catawba Valley Bancshares and First Gaston then each retained independent
financial advisors to review the exchange ratio suggested by Larrowe & Company
PLC. Each financial advisor opined to their respective Boards of Directors that
the exchange was fair, from a financial point of view, to their respective
shareholders. The opinions of those financial advisors are attached hereto as
Appendix II and III.
The share exchange will result in First Gaston Bank and Catawba Valley Bank
becoming separate bank subsidiaries under the holding company structure. The
Banks operate in distinct markets with First Gaston Bank operating in Gaston
County and southern Mecklenburg County (the City of Charlotte) and Catawba
Valley Bank serving Catawba County and the City of Hickory which is situated to
the northwest of Mecklenburg County and Charlotte. The combined entity will
have assets of approximately $300 million and shareholders equity of
approximately $30 million. It will have in excess of 2,500 shareholders and
will be operating in two separate and distinct markets. The banking functions
of each of the two subsidiary banks will remain unchanged while certain
administrative functions will be consolidated at the holding company level.
Those functions will consist of accounting and financial planning, strategic
planning and eventually branch operations and human resources. With the larger
asset, capital and shareholder base, the managements of First Gaston Bank and
Catawba Valley Bank hope for greater recognition by the investment community,
more liquidity in its stock trading and the attraction of additional market-
makers for the holding company's common stock. Additionally, it is hoped that
other community banks in and outside North Carolina would consider the benefits
of keeping independent banking operations while being associated with a larger
financial institution that can command a greater presence in the investment
community. The perceived benefits of the combination as outlined above, as
opposed to cost savings through elimination of duplicative positions and
functions which might occur if there was a merger of the banks, are the
prevailing factors in the decision making process to propose the share
exchange.
Consideration by the Parties
The terms of the share exchange, including the exchange ratio, are the
result of the deliberations set forth above. Both boards were presented with
the proposal as formulated by Larrowe & Company, PLC and each consulted with
its legal advisor regarding the terms of the transaction and with its financial
advisor regarding
29
the financial aspects of the proposed transaction and the fairness of the
exchange ratio, from a financial point of view, to their respective
shareholders. Without assigning any relative or specific weights, the boards
considered a number of factors which they both deemed material, both from a
short-term and long-term perspective, including the following:
. the information presented to the management teams of Catawba Valley
Bancshares and First Gaston concerning the business, operations,
earnings, asset quality, and financial condition of the other party,
including the composition of their respective earning assets portfolio;
. the financial terms of the share exchange, including the relationship of
the value of the consideration issuable in the share exchange to the
market value, tangible book value, and earnings per share of their
respective shares of common stock;
. the nonfinancial terms of the share exchange, including the treatment of
the share exchange as a tax-free reorganization for federal income tax
purposes and arrangements relating to the continued involvement of the
respective executive management teams;
. the likelihood of the share exchange being approved by applicable
regulatory authorities without undue conditions or delay;
. the attractiveness of the market position of Catawba Valley Bancshares
and First Gaston in their respective markets; and
. the opinion rendered by The Orr Group to Catawba Valley Bancshares and
by Smith Capital to First Gaston as to the fairness, from a financial
point of view, of the exchange ratio to their respective holders of
common stock.
The foregoing discussion is not intended to be exhaustive but includes all
of the material factors considered by the boards in determining to recommend
that shareholders approve the Agreement and Plan of Share Exchange, including
the issuance of shares of Catawba Valley Bancshares' common stock pursuant to
the Agreement and Plan of Share Exchange. The boards did not quantify or
otherwise attempt to assign relative or specific weights to the factors
considered in reaching their separate determination that the Agreement and Plan
of Share Exchange and the issuance of shares of Catawba Valley Bancshares'
common stock pursuant to the Agreement and Plan of Share Exchange are in the
best interests of shareholders of both companies.
Recommendation of the First Gaston Board
The Board of Directors of First Gaston has unanimously approved the
Agreement and Plan of Share Exchange contemplated thereby and believes that the
share exchange is fair to, and in the best interests of, First Gaston and its
shareholders. First Gaston's Board of Directors, therefore, unanimously
recommends that the holders of First Gaston Stock vote "FOR" approval of the
Agreement and Plan of Share Exchange contemplated thereby. In making its
recommendations, the Board of Directors of First Gaston has considered, among
other things, the opinion of Smith Capital, Inc. that Catawba Valley
Bancshares' proposal is fair to First Gaston's shareholders from a financial
point of view. See "Opinion of First Gaston's Financial Advisor" below.
Recommendation of Catawba Valley Bancshares' Board
The Board of Directors of Catawba Valley Bancshares has unanimously approved
the Agreement and Plan of Share Exchange and believes that the share exchange
is fair to, and in the best interests of, Catawba Valley Bancshares and its
shareholders. Catawba Valley Bancshares' Board of Directors, therefore,
unanimously recommends that the holders of Catawba Valley Bancshares' stock
vote "FOR" (i) approval of the issuance of shares under the Agreement and Plan
of Share Exchange, (ii) approval of the renaming of Catawba Valley Bancshares
to "United Community Bancorp", and (iii) approval of the bylaws amendment
reducing the minimum number of directors from nine (9) to eight (8). In making
its recommendations, the Board of Directors of Catawba Valley Bancshares has
considered, among other things, the opinion of The Orr Group that the share
exchange is fair to Catawba Valley Bancshares' shareholders from a financial
point of view. See "Opinion of Catawba Valley Bank's and Catawba Valley
Bancshares' Financial Advisor" below.
30
Opinion of First Gaston's Financial Advisor
First Gaston retained Smith Capital to deliver a fairness opinion in
connection with the proposed merger. At the meeting of the First Gaston Board
of Directors on June 25, 2001, Smith Capital gave its verbal opinion to the
First Gaston Board that, as of that date and based upon and subject to the
various considerations mentioned, the exchange ratio pursuant to the Agreement
and Plan of Share Exchange was fair from a financial point of view to First
Gaston's shareholders. Smith Capital delivered its written opinion to the Board
of Directors of First Gaston on July 24, 2001. First Gaston's Board did not
limit Smith Capital in any way in the investigations it made or the procedures
it followed in giving its opinion. We have attached as Appendix II to this
document the full text of Smith Capital's opinion. This opinion sets forth the
assumptions made, matters considered and limits on the review undertaken. We
incorporate Smith Capital's opinion in this document by reference and urge you
to read the opinion in its entirety.
Smith Capital addressed its opinion to the First Gaston Board. The opinion
addresses only the exchange ratio pursuant to the Agreement and Plan of Share
Exchange and is not a recommendation to any First Gaston shareholder as to how
that shareholder should vote with respect to the share exchange.
In arriving at its opinion Smith Capital reviewed:
. The Agreement and Plan of Share Exchange;
. Registration Statement on Form S-4 of Catawba Valley Bancshares and the
Joint Proxy Statement--Prospectus of Catawba Valley Bancshares and First
Gaston;
. Various publicly available information concerning the businesses of
First Gaston and Catawba Valley Bancshares and of several other
companies engaged in businesses comparable to those of First Gaston and
Catawba Valley Bancshares, and the reported market prices of the
securities deemed comparable;
. The terms of various merger of equals transactions involving companies
comparable to First Gaston and Catawba Valley Bancshares;
. Current and historical market prices of the common stock of First Gaston
and Catawba Valley Bancshares;
. The audited financial statements of First Gaston and Catawba Valley
Bancshares for the years ended December 31, 1998, 1999 and 2000;
. Certain internal financial analyses and forecasts prepared by First
Gaston and Catawba Valley Bancshares and their respective managements;
and
. The terms and conditions of other business combinations that Smith
Capital deemed relevant.
Smith Capital also held discussions with the executive management of First
Gaston and Catawba Valley Bancshares on numerous aspects of the share exchange,
the past and current business operations of First Gaston and Catawba Valley
Bancshares; the financial condition and future prospects and operations of
First Gaston and Catawba Valley Bancshares, the effects of the merger on the
financial condition and future prospects of First Gaston and Catawba Valley
Bancshares and other matters that Smith Capital believed necessary or
appropriate to its inquiry. In addition, Smith Capital reviewed other financial
studies and analyses and considered such other information that it deemed
appropriate for the purposes of its opinion.
Smith Capital relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that First Gaston and Catawba Valley Bancshares furnished to it. Smith Capital
is not responsible or liable for the information or its accuracy. Smith Capital
did not conduct any valuations or appraisals of any assets or liabilities, nor
were any valuations or appraisals provided to Smith Capital. In relying on
financial analyses and forecasts provided to it, Smith Capital has assumed that
they were reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by management as to the expected
future results of operations and financial conditions of First Gaston and
Catawba Valley Bancshares to which those forecast or analyses relate. Smith
Capital also assumed that, in the
31
course of obtaining regulatory and third party consents for the share exchange
and the other transactions contemplated by the share exchange agreement and
this document, no restriction will be imposed that will have a material adverse
effect on the future results or financial condition of First Gaston or Catawba
Valley Bancshares. Smith Capital also assumed that the share exchange will be
accounted for a pooling-of-interests under generally accepted accounting
principles and that it will qualify as a tax free reorganization for U.S.
federal income tax purposes.
The projections furnished to Smith Capital for First Gaston and Catawba
Valley Bancshares were prepared by the respective managements of each company.
Neither First Gaston nor Catawba Valley Bancshares publicly discloses internal
management projections of the type provided to Smith Capital in connection with
Smith Capital's analysis of the share exchange, and the projections were not
prepared with a view toward public disclosure. The projections were based on
numerous variables and assumptions that are inherently uncertain and may be
beyond the control of management, including without limitation factors related
to general economic and competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those set forth in
the projections.
As is customary in the rendering of fairness opinions, Smith Capital based
its opinion on economic, market and other conditions as in effect on, and the
information made available to Smith Capital as of the date of its opinion.
Subsequent developments may affect the opinion, and Smith Capital does not have
any obligation to update, review or reaffirm its opinion. Smith Capital
expressed no opinion as to the price at which First Gaston or Catawba Valley
Bancshares' common stock will trade at any future time.
In accordance with customary investment banking practice, Smith Capital
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses that Smith Capital
utilized in providing its opinion. We have presented some of the summaries of
financial analysis in tabular format. In order to understand the financial
analyses used by Smith Capital more fully, you should read the tables together
with the text of each summary. The tables do not alone constitute a complete
description of Smith Capital's financial analyses.
COMPARATIVE ANALYSIS OF FINANCIAL CONDITION-PEER GROUP ANALYSIS
In evaluating First Gaston and Catawba Valley Bancshares, Smith Capital
compared their respective financial conditions to a group of publicly traded
comparable banks (the "Group"). Smith Capital used these samples to compare
financial condition as well as the valuation of the respective banks shares.
The Group comprised 16 publicly traded banks with assets from $138 million to
$552 million, and an ROA for the year ended December 31, 2000 from 0.73% to
1.62%. The Group consisted of:
Company Name Ticker
------------ ------
Summit Bank Corporation SBGA
Savannah Bancorp, Inc. SAVB
Bank of North Carolina BKNC
First South Bancorp, Inc. FSBK
Southern Community Bank & Trust SCMT
Capital Bank Corporation CBKN
ECB Bancorp, Inc. ECBE
Peoples Bancorp of North Carolina, Inc. PEBK
Independent Community Bankshares, Incorporated ICBX
Summit Financial Corporation SUMM
Community Bankshares, Inc. SCB
Bank of South Carolina Corporation BKSC
Fauquier Bankshares, Inc. FBSS
Premier Community Bankshares Incorporated PREM
Central Virginia Bankshares, Inc. CVBK
Shore Financial Corporation SHBK
32
Smith Capital analyzed certain balance sheet ratios, asset quality, growth
in assets and deposits, profitability and stock price multiples. The following
table shows the various performance measures as of the dates shown:
PERFORMANCE MEASURE AT DECEMBER 31, 2000
KEY RATIOS
Catawba Valley
First Gaston Bancshares Peer Group
Average Median
% % % %
Equity/Assets................... 10.39 10.91 9.31 9.27
Loans/Deposits.................. 90.99 86.61 83.91 84.55
PERFORMANCE MEASURE AT JUNE 30, 2001
Catawba Valley
First Gaston Bancshares Peer Group
Average Median
% % % %
Equity/Assets................... 9.88 10.55 9.31 9.03
Loans/Deposits.................. 89.22 0.86 84.19 85.53
ASSET QUALITY
PERFORMANCE MEASURE AT DECEMBER 31, 2000
Catawba Valley
First Gaston Bancshares Peer Group
Average Median
% % % %
Allowance for Loan Losses to
Loans.......................... 1.52 1.47 1.36 1.39
Net Charge Offs/Average Loans... 0.19 0.38 0.12 0.10
Non Performing Assets/Total
Assets......................... 0.10 0.12 0.30 0.13
PERFORMANCE MEASURE AT JUNE 30, 2001
Catawba Valley
First Gaston Bancshares Peer Group
Average Median
% % % %
Allowance for Loan Losses to
Loans.......................... 1.49 1.51 1.33 1.32
Net Charge Offs/Average Loans... 0.14 0.09 0.24 0.10
Non Performing Assets/Total
Assets......................... 0.08 0.15 0.37 0.37
PROFITABILITY
PERFORMANCE MEASURE AT DECEMBER 31, 2000
Catawba Valley Peer Group
First Gaston Banchshares Average Median
% % % %
Return on Average Assets........ 1.17 1.12 1.14 1.14
Return on Average Equity........ 10.46 9.62 12.03 12.13
Net Yield on Interest Earning
Assets......................... 4.85 4.13 4.81 4.84
Efficiency Ratio................ 66.84 50.45 61.63 61.07
Non Interest Income to Average
Assets......................... 0.76 0.74 0.85 0.78
Non Interest Expense to Average
Assets......................... 3.56 2.43 3.32 3.24
33
PERFORMANCE MEASURE AT JUNE 30, 2001
Catawba Valley Peer Group
First Gaston Bancshares Average Median
% % % %
Return on Average Assets........ .82 1.11 1.10 1.06
Return on Average Equity........ 8.14 10.35 11.92 11.82
Net Yield on Interest Earning
Assets......................... 3.66 3.37 4.30 4.16
Efficiency Ratio................ 70.88 57.73% 64.29 64.15
Non Interest Income to Average
Assets......................... 1.16% 1.18% 0.93 0.85
Non Interest Expense to Average
Assets......................... 3.38% 2.65% 3.20 3.11
Smith Capital also compared growth rates in assets, deposits, net income and
earnings per share of First Gaston and Catawba Valley Bancshares and the Group.
Peer Group
Three Year Comparative Measures Catawba Valley
------------------------------- First Gaston Bancshares Average Median
Asset Growth
1998 vs 1997...................... 28.86 38.20 31.81 19.29
1999 vs 1998...................... 23.50 31.86 13.13 7.50
2000 vs 1999...................... 29.13 31.64 32.41 19.86
Deposit Growth Rates
1998 vs 1997...................... 31.65 31.02 31.14 18.67
1999 vs 1998...................... 17.97 30.95 12.44 10.33
2000 vs 1999...................... 26.70 32.82 34.23 18.68
Net Income Growth Rates
1998 vs 1997...................... NM 42.86 19.72 17.10
1999 vs 1998...................... 47.92 37.97 25.80 11.35
2000 vs 1999...................... 68.64 50.83 28.86 18.49
Earnings Per Share Growth Rate
1998 vs 1997...................... NM 30.00 19.75 9.09
1999 vs 1998...................... 42.22 11.54 22.63 12.65
2000 vs 1999...................... 37.5 55.17 22.10 20.90
34
COMPARISON OF THE SHARES OF FIRST GASTON AND CATAWBA VALLEY BANCSHARES TO THOSE
OF COMPARABLE PUBLICLY TRADED BANKS
The table below shows a comparison of First Gaston and Catawba Valley
Bancshares price multiples to average and median of the Group based on the
closing prices of their respective shares as of July 24, 2001.
Catawba Valley Peer Group
First Gaston Bancshares Average Median
Price to Earnings Multiple Last
twelve months..................... 11.43 13.48 14.11 13.20
Price to Book Multiple per Share... 1.23 1.25 151.50 154.67
Price to Tangible Book Multiple per
Share............................. 1.23 1.25 149.23 153.33
Price to Assets.................... 12.15% 13.19% 14.08 13.93
Dividend Yield..................... 0.00 1.00% 2.00 2.33
Price per share used (July 24,
2001)............................. $12.00 $13.75
Smith Capital also calculated a range of imputed values for a share of First
Gaston and a share of Catawba Valley Bancshares based on the ratios for the
Group. Smith Capital took a weighted average of the results, weighting values
based on earnings at 50%, and values based on book value and assets at 25%
each. The imputed value for First Gaston was $14.58 per share using average
multiples and $14.14 per share using median multiples.
The same analysis was performed for Catawba Valley Bancshares, and the
values obtained per share were $15.03 and $14.61 using average and median
multiples respectively.
DISCOUNTED CASH FLOW ANALYSIS
Smith Capital used a discounted cash flow analysis to estimate the net
present value of distributable capital that First Gaston and Catawba Valley
Bancshares could produce on a stand alone basis from 2001 through 2006.
Management's projections were through 2003 in each case, and extended by Smith
Capital. In both cases an asset growth rate of 15% was used after 2003 and the
same ROA as management projected in 2003 of 1.11% for First Gaston and 1.21%
for Catawba Valley Bancshares. In addition Smith Capital performed the same
analysis after the share exchange. Smith Capital combined projected net income
of the banks and added estimated savings or expenses after tax at 36% as
follows.
2001 Transaction Expenses..................................... $119,000
2002 Savings.................................................. 79,000
2003.......................................................... 87,000
2004.......................................................... 256,000
2005.......................................................... 441,000
2006.......................................................... 645,000
In 2004, Smith Capital estimated $250,000 pretax savings in data processing
as the banks could combine under one system. Other expense savings include
legal, supplies, insurance, audit and shareholder related items.
The discounted cash flow analysis indicated a reasonable reference range of
$17.47 to $18.25 per share for First Gaston and $20.03 to $20.82 for Catawba
Valley. On a combined basis the per share value would be $19.93 to $20.77 or an
equivalent range of $17.81 to $18.55 at the exchange ratio for First Gaston
shares. At the exchange ratio First Gaston shareholders receive a premium of
1.9% to 1.64% over the respective First Gaston discounted cash flow values.
35
ANALYSIS OF COMPARABLE MERGER-OF-EQUALS TRANSACTIONS
Using publicly available information, Smith Capital examined the following
completed bank "merger-of-equals" transactions. The transactions were completed
after October 1998, and for the most part represented transactions of smaller
banks.
BANKS CLASSIFIED AS A MERGER OF EQUALS BY
SNL DATASOURCE
Premium
Ownership Received by
Survivor(A) Non Survivor(B) A B Non Survivor(1)
----------- --------------- ----- ----- ---------------
Oneida Valley
Cortland First Finl Bancshares, Inc. 55 45 9.89%
Santa Barbara Bancorp Pacific Capital Bancorp 63.73 36.27 27.35%
South Branch Valley Potomac Valley Bank 66.4 33.6 9.14%
Harbor Bancorp Inc. Bank of the Pacific 52.5 47.5
First Capital Inc. HCB Bancorp 51.4 48.6 0.00%
BankIllinois Financial Corp. First Decatur Bancshares 53.6 46.4
First Sterling Banks Inc. Main Street Banks Inc. 36.6 63.4
Marathon Financial Corp. Rockingham Heritage Bank 44 56 (0.21)%
Shore Bancshares Inc. Talbot Bancshares Inc. 36 64 0.71%
Umpqua Holdings Corp. VRB Bancorp 55 45
Shoreline Financial
Chemical Financial Corp. Corp. 65.47 34.5
Catawba Valley Bancshares First Gaston 59.33 40.67 2.3%
Based on closing price day before announcement.
Asset Equity Net Income
Contribution Contribution Contribution
------------- -------------- -------------
Survivor(A) Non Survivor(B) A B A B A B
----------- ------------------------------ ------ ------ ------- ------ ------ ------
Cortland First Finl Oneida Valley Bancshares, Inc. 50.11% 49.89% 50.00% 50.00% 51.09% 48.91%
Santa Barbara Bancorp Pacific Capital Bancorp 66.50% 33.50% 62.70% 37.30% 67.94% 32.06%
South Branch Valley Potomac Valley Bank 74.98% 25.02% 66.44% 33.56% 66.09% 33.91%
Harbor Bancorp Inc. Bank of the Pacific 55.67% 44.33% 55.66% 44.34% 51.90% 48.10%
First Capital Inc. HCB Bancorp 58.20% 41.80% 58.82% 41.18% 49.55% 50.45%
BankIllinois Financial
Corp. First Decatur Bancshares 53.50% 53.60%
First Sterling Banks
Inc. Main Street Banks Inc. 40.89% 59.11% 36.63% 63.37% 35.05% 64.95%
Marathon Financial Corp. Rockingham Heritage Bank 51.58% 48.42% 44.90% 55.10% 48.08% 51.92%
Shore Bancshares Inc. Talbot Bancshares Inc. 38.41% 61.59% 100.00% 0.00% 33.58% 66.42%
Umpqua Holdings Corp. VRB Bancorp 54.64% 45.36% 53.32% 46.68% 49.88% 50.12%
Chemical Financial Corp. Shoreline Financial Corp. 64.70% 35.30% 75.29% 24.71% 69.15% 30.85%
Catawba Valley
Bancshares First Gaston 59.18% 40.82% 59.64% 40.36% 59.01% 40.99%
CONTRIBUTION ANALYSIS
Smith Capital reviewed and analyzed the relative contributions to be made by
First Gaston and Catawba Valley Bancshares to the combined entity. These
contributions were compared to the 40.67% continuing ownership stake that First
Gaston shareholders would have in the combined company following the share
exchange. In addition Smith Capital determined the market value contributed by
First Gaston and Catawba Valley Bancshares to the combined entity. This
analysis indicated that as of July 24, 2001, First Gaston contributed 40.67% of
the combined entity based on the price per share of $12.28 implied by the
Catawba Valley Bancshares proposed exchange ratio and 40.11% based on the
closing price of First Gaston on July 24, 2001 of $12.00.
36
Contribution Basis
Historical Performance as of December 31, 2000
Catawba
Valley
First Gaston Bancshares First Gaston Combined
(In thousands, except number of shares)
Assets........................... 41.84% $ 155,682 $ 111,986 $ 267,668
Loans............................ 42.77% $ 111,066 $ 82,989 $ 194,055
Deposits......................... 41.58% $ 130,142 $ 92,621 $ 222,763
Common Equity.................... 40.66% $ 16,980 $ 11,636 $ 28,616
Net Income....................... 42.54% $ 1,540 $ 1,140 $ 2,680
Cash Earnings.................... 45.41% $ 1,723 $ 1,433 $ 3,156
Shares........................... 40.67% 1,644,886 1,127,783 2,772,669
Est. Net Income 2001............. 36.54% $ 1,876 $ 1,080 $ 2,956
Est. Net Income 2002............. 41.77% $ 2,300 $ 1,650 $ 3,950
Est. Net Income 2003............. 43.08% $ 2,775 $ 2,100 $ 4,875
PROFORMA ANALYSIS AND FIRST GASTON EQUIVALENT VALUES
Smith Capital also calculated the pro forma book value per share, dividend
per share and last twelve month ("LTM") earnings per share for the combined
companies as of December 31, 2000 through 2006 and multiplied each result by
the exchange ratio to determine the equivalent value for First Gaston. These
values were compared to First Gaston's projected pre-transaction book value per
share, LTM earnings and dividend per share for the same periods. This analysis
showed that, based on projections after savings of expenses expected in the
transaction, the transaction would be dilutive by 10.27% in 2001 and thereafter
accretive increasing from 3.92% in 2002 to 13.9% in 2006, to Catawba Valley
Bancshares. On a pro forma equivalent basis the transaction would be accretive
to First Gaston shareholders in 2001, and thereafter dilutive by a maximum of
3.89%. Except that in 2006, the transaction would be 1.42% accretive. On a book
value per share basis, after taking into account the dividends payable to First
Gaston shareholders, and assuming a 10% dividend increase per year, the
transaction would be dilutive to Catawba Valley Bancshares by 1.05% in 2001 and
less than 1.66% thereafter; except in 2006 when it would be 0.28% accretive. On
a pro forma equivalent basis to shareholders of First Gaston, the transaction
would be 0.45% dilutive to book value in 2001 and thereafter a maximum of 4.29%
dilutive.
On a dividend basis, First Gaston shareholders would receive a cash
dividend, which they had not received before.
This summary does not purport to be a complete description of the analyses
or data presented by Smith Capital. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Smith Capital believes that one must consider its opinion,
the summary and its analyses as a whole. Selecting portions of the summary and
these analyses, without considering the analyses as a whole, would create an
incomplete view of the processes underlying the analyses and opinion.
Smith Capital based its analyses on assumptions that it deemed reasonable,
including those concerning general business and economic conditions and
industry specific factors. Smith Capital's analyses are not necessarily
indicative of actual values or actual future results that either company or the
combined entities might achieve, which values may be higher or lower than those
indicated. Analyses based on forecasts of future results are inherently
uncertain, as they are subject to numerous factors or events beyond the control
of the parties and their advisors. Therefore, none of Smith Capital, First
Gaston, Catawba Valley Bancshares or any other person assumes responsibility if
future results are materially different from those forecast. Moreover, Smith
Capital's analyses are not and do not purport to be appraisals or otherwise
reflective of the prices at which businesses could actually be bought or sold.
Smith Capital is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, estate, corporate and other
purposes.
37
Opinion of Catawba Valley Bancshares Financial Advisor:
Catawba Valley Bancshares retained The Orr Group on June 15, 2001, to render
to the Board of Directors of Catawba Valley Bancshares, a written opinion as to
the fairness, from a financial point of view, to the stockholders of Catawba
Valley Bancshares of the terms of the proposed share exchange.
The full text of The Orr Group's opinion, dated as of July 17, 2001, is
attached as Appendix III hereto and should be read in its entirety with respect
to the procedures followed, assumptions made, matters considered and
qualification and limitation on the review undertaken by The Orr Group in
connection with its opinion. Catawba Valley Bancshares's stockholders are urged
to read the opinion in its entirety.
The Orr Group's opinion to Catawba Valley Bancshares's Board of Directors is
directed only to the agreed upon exchange ratio and does not address the
fairness, from a financial point of view, of any exchange ratio that may be
agreed upon by Catawba Valley Bancshares and First Gaston pursuant to the
provisions of the share exchange that provides for possible adjustment of the
exchange ratio. The Orr Group's opinion does not constitute a recommendation to
any stockholder of Catawba Valley Bancshares as to how such stockholder should
vote at the Catawba Valley Bancshares Special Meeting.
Catawba Valley Bancshares selected The Orr Group as its investment banker on
the basis of its expertise in merger and acquisition advisory services. The Orr
Group is an investment banking firm whose principals have over 75 years of
combined banking experience and have been involved with over 40 bank related
mergers and acquisitions.
No limitations were imposed by Catawba Valley Bancshares upon The Orr Group
with respect to rendering its opinion.
In arriving at its opinion, The Orr Group reviewed, among other things: (i)
the Catawba Valley Bancshares Agreement; (ii) certain publicly available
information concerning Catawba Valley Bancshares and First Gaston, including
the respective Annual Reports on Form 10-KSB of Catawba Valley Bancshares and
First Gaston for each of the years in the three year period ended December 31,
2000, the respective Quarterly Reports on Form 10-QSB for Catawba Valley
Bancshares and First Gaston for the quarter ended March 31, 2001; (iii) certain
available financial forecasts concerning the business and operations of Catawba
Valley Bancshares and First Gaston, respectively; and (iv) certain publicly
available information with respect to other companies that The Orr Group
believes to be comparable in certain respects to Catawba Valley Bancshares and
First Gaston and the trading markets for such other companies' securities.
In The Orr Group's review and analysis, The Orr Group assumed and relied
upon the accuracy and completeness of all of the financial and other
information provided The Orr Group, or that was publicly available, and has not
attempted independently to verify nor assumed responsibility for verifying any
such information. With respect to the financial projections, The Orr Group
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of Catawba Valley Bancshares or
First Gaston, as the case may be, and The Orr Group expresses no opinion with
respect to such forecasts or the assumptions on which they are based. The Orr
Group has not made or obtained or assumed any responsibility for making or
obtaining any independent evaluations or appraisals of any of the assets
(including properties and facilities) or liabilities of Catawba Valley
Bancshares or First Gaston.
The following summary does not purport to be a complete description of the
analyses performed or the matters considered by The Orr Group in arriving at
its opinion.
In addressing the fairness, from a financial point of view, of the
consideration to be issued by Catawba Valley Bancshares to the stockholders of
First Gaston, The Orr Group addressed certain issues relating to the financial
fairness of the proposed share exchange, including: (i) how the share exchange
compares to similar bank transactions; (ii) the financial impact of the share
exchange to the current stockholders of Catawba Valley Bancshares; and (iii)
whether First Gaston's operations and capital stock are of similar value to
other banks in
38
First Gaston's peer group. To address the impact of the proposed transaction,
The Orr Group reviewed analyses of recently announced bank acquisitions,
Catawba Valley Bancshares' contribution to the new combined entity, its
analysis of stockholders' claims on the new entity, a present value analysis
of Catawba Valley Bancshares common stock on both a stand-alone and combined
basis, and First Gaston's operations and capital stock compared to its peers.
In summary, The Orr Group reached the conclusions that the proposed
transaction is comparable to similar bank transactions, the financial impact
to the current stockholders of Catawba Valley Bancshares is positive and fair,
and First Gaston's operations and capital stock are well within the range of
comparable banks in the industry.
The Orr Group employed a variety of methodologies in its analyses,
including analyses of the financial impact of the transaction based on a pro
forma contribution analysis, a shareholder's claims analysis, and a discounted
dividend analysis. The pro forma contribution analysis looked at the financial
impact of the share exchange on certain balance sheet and income statement
items. Such analysis included calculations, among others, that showed the
percentage contributions of Catawba Valley Bancshares and First Gaston to the
total equity capital of the combined entities would be 59.6% and 40.4%,
respectively; and the percent of contribution to market capitalization at
March 31, 2001 would be 62% by Catawba Valley Bancshares and 38% by First
Gaston.
Shareholder's Claims Analysis. In its shareholder's claims analysis, The
Orr Group calculated an earnings per share claims analysis, and The Orr Group
concluded that the share exchange would result in an increase of 1.4% in the
earnings per share for FYE 2001.
Discounted Dividend Analysis. The Orr Group's discounted divided model
analyzed the current value of Catawba Valley Bancshares' stock value and then
compared Catawba Valley Bancshares value with the value of its stock combined
with First Gaston including anticipated synergies. The three-year financial
projections were supplied by Catawba Valley Bancshares. The Orr Group
discounted the dividends at rates of 13%, 15%, and 17% and assumed a take out
value at the end of year five based on price-to-earnings multiples of 13, 15,
and 17. The Catawba Valley Bancshares stand-alone discounted values ranged
from a low of $14.30 per share to a high of $21.80 per share. The analysis
revealed that on a combined basis with First Gaston that the discounted values
ranged higher by a margin of $.70 to $1.00 per share.
Comparable Bank Transactions Analysis. The Orr Group reviewed 27 comparable
bank transactions involving sellers with assets between $90-$255 million
announced since September 1, 2000. The Orr Group noted the prices paid in
these mergers as a multiple of book values and earnings, and The Orr Group
reviewed other data in connection with these mergers, including the amount of
total assets, the return on average assets and the return on average earnings
of the acquired institutions. The Orr Group then compared this data to that of
Catawba Valley Bancshares and the value to be paid by Catawba Valley
Bancshares stockholders in the share exchange.
The comparable bank transactions showed a range of transaction values as
multiples of book value per share of a low of 1.1 times to a high of 3.7 times
and an average of 2.1 times. The range of transaction values as multiples of
earnings per share revealed a low of 9.4 times a high of 47.4 times and an
average of 22.7 times. The share exchange multiple of book value was 1.21
times and the multiple of earnings per share was 14.55 times.
No company or transaction used in the above analyses as a comparison is
identical to Catawba Valley Bancshares, First Gaston or the proposed
transaction. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning
differences in financial growth and operating characteristics of the companies
and other factors that could affect the public trading value of the companies
to which they are being compared. Mathematical analysis in and of itself does
not necessarily provide meaningful intercompany comparisons.
39
The Orr Group will be paid a fee in connection with the proposed transaction
which is contingent upon its consummation. Further, Catawba Valley Bancshares
has agreed to reimburse legal and other reasonable expenses and to indemnify
The Orr Group and its affiliates, directors, agents, employees and controlling
persons in connection with certain matters related to rendering its opinion,
including liabilities under securities laws.
Effective Time of the Share Exchange
Subject to the conditions to the obligations of the parties to effect the
share exchange (including, without limitation, the receipt of all required
approvals of governmental and regulatory authorities), the share exchange will
become effective when Articles of Share Exchange are filed with the North
Carolina Secretary of State.
We cannot give any assurance that the necessary shareholder and regulatory
approvals can be obtained or that other conditions precedent to the share
exchange can or will be satisfied. First Gaston, Catawba Valley Bancshares and
Catawba Valley Bank anticipate that all conditions to consummation of the share
exchange will be satisfied so that the share exchange can be consummated on
December 31, 2001.
The Board of Directors of either First Gaston or Catawba Valley Bancshares
may terminate the Agreement and Plan of Share Exchange at any time.
Distribution of Consideration
As soon as reasonably practicable, but in any event no more than 20 days
following when the share exchange becomes effective by the filing of Articles
of Share Exchange with the North Carolina Secretary of State, Catawba Valley
Bancshares will cause First-Citizens Bank & Trust Company, the exchange agent,
to mail to each former shareholder of First Gaston of record immediately prior
to the exchange effective time, written instructions and transmittal materials
(including, without limitation, a return mailing envelope addressed to the
exchange agent for use in surrendering certificates representing shares of
First Gaston common stock outstanding at the exchange effective time to the
exchange agent).
First Gaston shareholders should NOT send in their stock certificates until
they receive the transmittal letter
Upon surrender to the exchange agent of certificates for First Gaston common
stock, together with properly completed transmittal materials, you will be
issued and mailed a certificate or certificates representing the number of
shares of common stock to which you are entitled. We will not be obligated to
deliver the consideration to which you are entitled as a result of the share
exchange until you surrender your certificates representing the shares of First
Gaston common stock together with a properly completed transmittal letter. If a
dividend or other distribution is declared by United Community Bancorp on its
common stock, the record date for which is at or after the date at which the
Articles of Share Exchange are filed with the North Carolina Secretary of
State, the declaration will include dividends or other distributions on all
shares of United Community Bancorp common stock issuable pursuant to the
Agreement and Plan of Share Exchange. However, no dividend or other
distribution payable after the share exchange effective time with respect to
United Community Bancorp common stock will be paid to you until you duly
surrender your First Gaston stock certificates. Upon surrender of your First
Gaston common stock certificate, a United Community Bancorp common stock
certificate, together with all undelivered dividends or other distributions, if
any (without interest) will be delivered and paid with respect to the shares
represented by such certificate. If your First Gaston common stock certificate
has been lost, stolen, destroyed or is otherwise missing, the exchange agent
will issue, in exchange for such lost, stolen, or destroyed certificate, a
certificate representing the shares of United Community Bancorp common stock to
which you are entitled in accordance with and upon compliance with conditions
imposed by the exchange agent or Catawba Valley Bancshares pursuant to the
provisions of applicable North Carolina law (including, without limitation, a
requirement that you provide a lost instruments indemnity or surety bond in
form, substance and amount satisfactory to the exchange agent and United
Community Bancorp.)
40
At the share exchange effective time, the stock transfer books of First
Gaston will be closed to holders of First Gaston common stock. No transfer of
shares of First Gaston common stock by a holder will thereafter be made or
recognized.
Conditions to Consummation of the Share Exchange
Consummation of the share exchange is subject to various conditions,
including:
. receipt of the approval of the shareholders of First Gaston of the
Agreement and Plan of Share Exchange and receipt of regulatory approval
required for consummation of the share exchange;
. receipt of the approval of the shareholders of Catawba Valley Bancshares
of the share exchange, the renaming of the company to "United Community
Bancorp", and the reduction in the minimum number of directors from nine
(9) to eight (8);
. receipt by First Gaston of a written legal opinion from Gaeta &
Glesener, P.A. and by Catawba Valley Bancshares and Catawba Valley Bank
of a written legal opinion from Moore & Van Allen, PLLC;
. receipt by First Gaston of a written opinion of Smith Capital, Inc. and
by Catawba Valley Bancshares of a written opinion of The Orr Group as to
the fairness of the share exchange from a financial point of view to the
shareholders of First Gaston and Catawba Valley Bancshares,
respectively;
. approval of the shares of Catawba Valley Bancshares' common stock
issuable pursuant to the share exchange for listing on the Nasdaq
SmallCap Market;
. the registration statement with respect to the Catawba Valley
Bancshares' common stock being issued to First Gaston's shareholders
being declared effective under the Securities Act of 1933;
. the accuracy, as of the date of the Agreement and Plan of Share Exchange
and as of the share exchange effective time, of the representations and
warranties of First Gaston and Catawba Valley Bank and Catawba Valley
Bancshares as set forth in the Agreement and Plan of Share Exchange;
. the performance of all agreements and the compliance with all covenants
of First Gaston and Catawba Valley Bancshares as set forth in the
Agreement and Plan of Share Exchange;
. the absence of any law or order or any action taken by any court,
governmental, or regulatory authority of competent jurisdiction
prohibiting, restricting, or making illegal the consummation of the
transactions contemplated by the Agreement and Plan of Share Exchange;
. receipt by Catawba Valley Bancshares and Catawba Valley Bank of
agreements from each affiliate of First Gaston; and
. satisfaction of certain other conditions, including the receipt of
various certificates from the officers of First Gaston and Catawba
Valley Bancshares and Catawba Valley Bank.
We are unable to provide assurance as to when or if all of the conditions
precedent to the share exchange can or will be satisfied or waived by the party
permitted to do so, although as of the date of this Joint Proxy Statement-
Prospectus, we have submitted all necessary applications for regulatory
approval. The Agreement and Plan of Share Exchange may be terminated and the
share exchange abandoned by the Board of Directors of either First Gaston or
Catawba Valley Bancshares at any time.
Regulatory Approval
The share exchange may not proceed in the absence of receipt of the
requisite regulatory approval. Applications for the approval described below
have been submitted to the appropriate regulatory authorities and approval is
anticipated prior to the special meetings.
First Gaston, Catawba Valley Bancshares, and Catawba Valley Bank are not
aware of any material governmental approvals or actions that are required for
consummation of the share exchange, except as
41
described in this Joint Proxy Statement-Prospectus. Should any other approval
or action be required, it presently is contemplated that such approval or
action would be sought.
The share exchange is subject to the prior approval of the Federal Reserve
Board, pursuant to Section 3 of the Bank Holding Company Act. An application
has been submitted for approval which we anticipate being approved before the
special meetings. In evaluating the share exchange, the Federal Reserve Board
was required to consider, among other factors, the financial and managerial
resources and future prospects of the institutions and the convenience and
needs of the communities to be served. The relevant statutes prohibit the
Federal Reserve Board from approving the share exchange if--
. it would result in a monopoly or be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States; or
. its effect in any section of the country could be to substantially
lessen competition or to tend to create a monopoly, or if it would
result in a restraint of trade in any other manner, unless the Federal
Reserve Board should find that any anti-competitive effects are
outweighed clearly by the public interest and the probable effect of the
transaction in meeting the convenience and needs of the communities to
be served.
The share exchange may not be consummated until the 30th day (which the
Federal Reserve Board reduced, in accordance with applicable law, to 15 days)
following the date of the Federal Reserve Board approval, during which time the
United States Department of Justice is afforded the opportunity to challenge
the transaction on antitrust grounds. The commencement of any antitrust action
would stay the effectiveness of the approval of the Federal Reserve Board,
unless a court of competent jurisdiction should specifically order otherwise.
Any regulatory approval that imposes material changes to the Agreement and
Plan of Share Exchange or other material conditions could necessitate a
resolicitation of shareholder approval.
Waiver, Amendment, and Termination
To the extent permitted by law, the Agreement and Plan of Share Exchange may
be amended by a subsequent writing signed by each of the parties upon the
approval of the Board of Directors of each of the parties before or after
approval of the matters relating to the Agreement and Plan of Share Exchange
required to be approved by the First Gaston shareholders. However, no amendment
may be made which modifies the number of shares of Catawba Valley Bancshares'
common stock into which each share of First Gaston common stock will be
converted without the further approval of the First Gaston shareholders. In
addition, prior to or at the filing of the Articles of Share Exchange with the
North Carolina Secretary of State either First Gaston or Catawba Valley
Bancshares, or both, acting through their respective Boards of Directors, may:
. waive any default in the performance of any term of the Agreement and
Plan of Share Exchange by the other party;
. waive or extend the time for the compliance or fulfillment by the other
party of any and all of its obligations under the Agreement and Plan of
Share Exchange; and
. waive any of the conditions precedent to the obligations of such party
under the Agreement and Plan of Share Exchange,
except any condition that, if not satisfied, would result in the violation of
any applicable law or governmental regulation and provided that such waiver
would not adversely affect the interests of the waiving party or its
shareholders. No such waiver will be effective unless written and unless
executed by a duly authorized officer of First Gaston or Catawba Valley
Bancshares as the case may be.
42
The Agreement and Plan of Share Exchange may be terminated and the share
exchange abandoned at any time prior to the share exchange effective time,
notwithstanding its approval by the First Gaston shareholders:
. by the mutual consent of the Boards of Directors of First Gaston and
Catawba Valley Bancshares; or
. by the unilateral determination First Gaston Board or Catawba Valley
Bancshares Board of Directors.
If the share exchange is terminated as described above, the Agreement and
Plan of Share Exchange will become void and have no effect, except that certain
of its provisions including those relating to the obligations to maintain the
confidentiality of certain information and the return all documents obtained
from the other party, will survive.
Management and Operations After the Share Exchange
As soon as practicable following the share exchange and subject to any
necessary regulatory and shareholder approval, the Catawba Valley Bancshares
Board will take steps to have the Board of Catawba Valley Bancshares be
reconstituted and comprised of eight individuals, four of whom shall be current
members of the Board of Directors of First Gaston and four of whom shall be
current members of the Catawba Valley Bancshares' Board of Directors. R. Steve
Aaron, currently Catawba Valley Bancshares' and Catawba Valley Bank's President
and Chief Executive Officer will retain those positions after the share
exchange and will serve on the resulting holding company's Board of Directors.
W. Alex Hall, currently First Gaston's President and Chief Executive Officer
will retain those positions and serve as Executive Vice President and as a
director of the resulting holding company's Board of Directors. The current
Boards of First Gaston and Catawba Valley Bank will remain intact. For more
information regarding the directors who will serve on the reconstituted Board
please refer to pages 63 and 73. For more information on how the Board will be
reconstituted, please refer to "PROPOSAL 3: REDUCING THE NUMBER OF DIRECTORS"
on page 84.
Effect on Certain Benefit Plans
At the share exchange effective time, each First Gaston Stock Option granted
by First Gaston under the First Gaston Stock Plans (each as defined in the
Agreement and Plan of Share Exchange) that is outstanding at the share exchange
effective time, whether or not exercisable, will be converted into and become a
right with respect to Catawba Valley Bancshares' common stock, and Catawba
Valley Bancshares will assume each First Gaston Stock Option, in accordance
with the terms of the First Gaston Stock Plan and stock option agreement by
which it is evidenced. However, from and after the share exchange effective
time:
. Catawba Valley Bancshares and its Executive Committee will be
substituted for First Gaston and the committee of the First Gaston Board
(including, if applicable, the entire Board of Directors of First
Gaston) administering such First Gaston Stock Plan;
. each First Gaston Option assumed by Catawba Valley Bancshares may be
exercised solely for shares of Catawba Valley Bancshares' common stock;
. the number of shares of Catawba Valley Bancshares' common stock subject
to such First Gaston Option will be equal to the number of shares of
First Gaston common stock subject to such First Gaston Option
immediately prior to the share exchange effective time multiplied by
0.8934 and rounding to the nearest whole share; and
. the per share exercise price under each such First Gaston Option will be
adjusted by dividing the per share exercise price under each such First
Gaston Option by 0.8934 and rounding to the nearest cent.
Federal Income Tax Consequences of the Share Exchange
The share exchange is intended to qualify as a reorganization for federal
income tax purposes under Section 368(a) of the Internal Revenue Code. The
obligation of the parties to consummate the share exchange is conditioned on
the receipt of an opinion in form and substance reasonably satisfactory to
Catawba Valley
43
Bancshares and First Gaston from Dixon Odom PLLC, which serves as Catawba
Valley Bank's independent public accountant, to the effect that the share
exchange will constitute such a reorganization. A copy of such opinion has been
delivered to Catawba Valley Bancshares and First Gaston. In delivering its
opinion, Dixon Odom PLLC received and relied upon certain representations
contained in certificates of officers of First Gaston and Catawba Valley
Bancshares and certain other information, data, documentation and other
materials as it deemed necessary. Dixon Odom PLLC based tax opinion upon
customary assumptions contained therein.
Neither Catawba Valley Bancshares nor First Gaston intends to seek a ruling
from the IRS as to the federal income tax consequences of the share exchange.
First Gaston's shareholders should be aware that the opinion of Dixon Odom PLLC
will not be binding on the IRS or the courts. First Gaston's shareholders also
should be aware that some of the tax consequences of the share exchange are
governed by provisions of the Internal Revenue Code as to which there are no
final regulations and little or no judicial or administrative guidance. There
can be no assurance that future legislation, administrative rulings, or court
decisions will not adversely affect the accuracy of the statements contained
herein.
The tax opinion states that, provided the assumptions stated therein are
satisfied, the share exchange will constitute a reorganization as defined in
Section 368(a) of the Code, and the following federal income tax consequences
will result:
. No gain or loss will be recognized by the First Gaston shareholders upon
receipt of Catawba Valley Bancshares' common stock;
. The aggregate federal income tax basis of Catawba Valley Bancshares'
common stock received by each First Gaston shareholder will be the same
as the aggregate federal income tax basis of the First Gaston common
stock; and
. The holding period of the shares of the Catawba Valley Bancshares'
common stock received by each First Gaston shareholder will include the
period for which the exchanged First Gaston common stock was held as a
capital asset by each First Gaston shareholder on the date of the share
exchange.
The foregoing discussion is intended only as a summary of material federal
income tax consequences of the share exchange to the shareholders of First
Gaston and does not purport to be a complete description of all potential tax
effects of the share exchange. The discussion does not address the tax
consequences that may be relevant to a particular shareholder subject to
special treatment under certain federal income tax laws, such as:
. dealers in securities;
. banks;
. insurance companies;
. tax-exempt organizations;
. non-United States persons;
. shareholders who do not hold their shares of First Gaston common stock
as capital assets within the meaning of Section 1221 of the Internal
Revenue Code; and
. shareholders who acquired their shares of First Gaston common stock
pursuant to the exercise of options or otherwise as compensation.
In addition, the discussion does not address any consequences arising under
the laws of any state, locality or foreign jurisdiction. Moreover, the tax
consequences to holders of First Gaston options, if any, are not discussed. The
discussion is based upon the Internal Revenue Code, treasury regulations
thereunder and administrative rulings and court decisions as of the date
hereof. All of the foregoing is subject to change and any such change could
affect the continuing validity of this discussion. First Gaston shareholders
are urged to consult their own tax advisors concerning the particular federal,
state, local and foreign tax consequences of the share exchange to them.
44
Accounting Treatment
It is anticipated that the share exchange will be accounted for as a
pooling-of-interests. Under the pooling-of-interests method of accounting, the
recorded amounts of the assets and liabilities of First Gaston will be carried
forward at their previously recorded amounts, and current and prior period
financial statements will be restated for all periods as though First Gaston
had been the wholly-owned subsidiary of Catawba Valley Bancshares at the
beginning of the earliest period presented.
Expenses and Fees
The Agreement and Plan of Share Exchange provides that each of the parties
will bear and pay its own expenses in connection with the transactions
contemplated by the Agreement and Plan of Share Exchange. The chart below
provides an estimation of various expenses for the parties.
Catawba Valley Bancshares First Gaston
------------------------- ------------
Legal fees.......................... $ 70,000 $30,000
Accounting fees..................... 14,000 6,000
Financial advisory fees............. 25,000 15,000
Printing and mailing fees........... 14,500 14,500
Miscellaneous....................... 5,500 5,500
-------- -------
Total fees.......................... $129,000 $71,000
======== =======
Resales of United Community Bancorp Common Stock
United Community Bancorp common stock to be issued to shareholders of First
Gaston in connection with the share exchange will be registered under the
Securities Act of 1933, as amended. All shares of United Community Bancorp
common stock received by First Gaston shareholders will be freely transferable
upon consummation of the share exchange by those shareholders who were not
"affiliates" of First Gaston. "Affiliates" generally are defined as persons or
entities who control, are controlled by, or are under common control with First
Gaston (generally, this will include executive officers, directors, and 10% or
greater shareholders).
45
DISSENTERS' RIGHTS
Article 13 (entitled "Dissenters' Rights") of the North Carolina Business
Corporation Act sets forth the rights of the First Gaston shareholders who
object to the share exchange. The following summarizes the material terms of
the statutory procedures to be followed by a holder of First Gaston common
stock in order to dissent from the share exchange and perfect dissenters'
rights under the North Carolina Business Corporation Act. A copy of Article 13
of the North Carolina Business Corporation Act is attached as Appendix IV
hereto.
If you elect to exercise such a right to dissent and demand appraisal, you
must satisfy each of the following conditions:
(a) you must give to First Gaston and First Gaston must actually
receive, before the vote on approval or disapproval of the share exchange
is taken, written notice of your intent to demand payment for your shares
if the share exchange is effectuated (this notice must be in addition to
and separate from any proxy or vote against the share exchange; neither
voting against, abstaining from voting, nor failing to vote on the share
exchange will constitute a notice within the meaning of the North Carolina
Business Corporation Act); and
(b) you must not vote in favor of the share exchange (a failure to vote
will satisfy this requirement, but a vote in favor of the share exchange,
by proxy or in person, or the return of a signed proxy which does not
specify a vote against approval of the share exchange or direction to
abstain, will constitute a waiver of your Dissenters' Rights).
If the requirements of (a) and (b) above are not satisfied and the share
exchange becomes effective, you will not be entitled to payment for your shares
under the provisions of Article 13 of the North Carolina Business Corporation
Act.
Any notices should be addressed to First Gaston Bank of North Carolina, 804
South New Hope Road, Gastonia, North Carolina 28054, attention: Barbara D.
Myers. The notice must be executed by the holder of record of shares of First
Gaston common stock as to which Dissenters' Rights are to be exercised. A
beneficial owner may assert Dissenters' Rights only if he dissents with respect
to all First Gaston common stock of which he is the beneficial owner. With
respect to shares of First Gaston common stock which are owned of record by a
voting trust or by a nominee, the beneficial owner of such shares may exercise
Dissenters' Rights if such beneficial holder also submits to First Gaston the
record holder's written consent to such exercise not later than the time such
beneficial holder asserts the Dissenters' Rights. A record owner, such as a
broker, who holds shares of First Gaston common stock as a nominee for others,
may exercise Dissenters' Rights with respect to the shares held for all or less
than all beneficial owners of shares as to which such person is the record
owner, provided such record owner dissents with respect to all First Gaston
common stock beneficially owned by any one person. In such case, the notice
submitted by such broker as record owner must set forth the name and address of
the shareholder who is objecting to the share exchange and demanding payment
for such person's shares.
If you properly dissented and the share exchange creating Dissenter's Rights
is approved, First Gaston must mail by registered or certified mail, return
receipt requested, a written notice to you. This notice must be sent no later
than ten days after the shareholder approval of the share exchange. The notice
will state where your payment demand must be sent, and where and when
certificates for shares of First Gaston common stock must be deposited; supply
a form for demanding payment; set a date by which First Gaston must receive
your payment demand (not fewer than 30 days nor more than 60 days after the
Dissenters' notice is mailed); and include a copy of Article 13 of the North
Carolina Business Corporation Act.
If you receive a Dissenters' notice, you must demand payment and deposit
your share certificates in accordance with the terms of the Dissenters' notice.
If you demand payment and deposit your share certificates, you retain all other
rights of a shareholder until these rights are canceled or modified by the
share exchange. If you do not demand payment or deposit your share certificates
where required, each by the date set in the Dissenters' notice, you are not
entitled to payment for your shares under the North Carolina Business
Corporation Act.
46
Within 30 days after receipt of your demand for payment, First Gaston is
required to pay you the amount First Gaston estimates to be the fair value of
your shares, plus interest accrued from the effective date of the share
exchange to the date of payment. The payment must be accompanied by:
. First Gaston's most recent available balance sheet, income statement and
statement of cash flows as of the end of or for the fiscal year ending
not more than 16 months before the date of payment, and the latest
available interim financial statements, if any;
. an explanation of how First Gaston estimated the fair value of the
shares;
. an explanation of the interest calculation;
. a statement of the dissenters' right to demand payment (as described
below); and
. a copy of Article 13 of the North Carolina Business Corporation Act.
If the share exchange is not consummated within 60 days after the date set
for demanding payment and depositing share certificates, First Gaston must
return your deposited certificates. If after returning your deposited
certificates the share exchange is consummated, First Gaston must send you a
new Dissenters' notice and repeat the payment demand procedure.
Demand for Payment. You may, however, notify First Gaston in writing of your
own estimate of the fair value of your shares and amount of interest due, and
demand payment of the excess of your estimate of the fair value of your shares
over the amount previously paid by First Gaston if (a) you believe that the
amount paid is less than the fair value of First Gaston common stock or that
the interest is incorrectly calculated; (b) First Gaston fails to make payment
of its estimate of fair value to you within 30 days after receipt of a demand
for payment; or (c) the share exchange not having been consummated, First
Gaston does not return your deposited certificates within 60 days after the
date set for demanding payment. You waive the right to demand payment unless
you notify First Gaston of your demand in writing within 30 days of First
Gaston's payment of its estimate of fair value (with respect to clause (a)
above) or First Gaston's failure to perform (with respect to clauses (b) and
(c) in this paragraph). If you fail to notify First Gaston of your demand
within such 30-day period, you shall be deemed to have withdrawn your
Shareholder's dissent and demand of payment.
Appraisal Proceeding. If your demand for payment remains unsettled, you may
commence a proceeding within 60 days after the earlier of (a) the date of your
payment demand or (b) the date payment is made, by filing a complaint with the
Superior Court Division of the North Carolina General Court of Justice to
determine the fair value of the shares and accrued interest. If you do not
commence the proceeding within such 60-day period, you shall be deemed to have
withdrawn the dissent and demand for payment.
The court in such an appraisal proceeding will determine all costs of the
proceeding and assess the costs as it finds equitable. The proceeding is to be
tried as in other civil actions; however, you will not have the right to a
trial by jury. The court may also assess the fees and expenses of counsel and
expenses for the respective parties, in the amounts the court finds equitable:
(a) against First Gaston if the court finds that it did not comply with the
statutes; or (b) against First Gaston or you, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith. If the court finds that the services of counsel for you
were of substantial benefit to other dissenting shareholders, and that the fees
for those services should not be assessed against First Gaston, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenting shareholders who were benefited.
The summary set forth above does not purport to be a complete statement of
the provisions of the North Carolina Business Corporation Act relating to the
rights of dissenting shareholders and is qualified in its entirety by reference
to the applicable sections of the North Carolina Business Corporation Act,
which are included as Appendix IV to this. Joint Proxy Statement-Prospectus. If
you intend to exercise your Dissenters' Rights, you are urged to review
carefully Appendix IV and to consult with legal counsel so as to be in strict
compliance therewith.
47
DESCRIPTION OF CATAWBA VALLEY BANCSHARES' CAPITAL STOCK
The following is a summary of the material provisions of Catawba Valley
Bancshares' Articles of Incorporation and Bylaws.
General
The Articles of Incorporation of Catawba Valley Bancshares authorize the
issuance of capital stock consisting of 9,000,000 shares of common stock, $1.00
par value per share and 1,000,000 shares of no par value preferred stock. There
are 1,644,886 shares of Catawba Valley Bancshares' common stock currently
issued and outstanding. There are no shares of Catawba Valley Bancshares
preferred stock currently issued and outstanding.
After consummation of the share exchange, pursuant to which each share of
First Gaston common stock will be exchanged for 0.8934 shares of Catawba Valley
Bancshares' common stock, Catawba Valley Bancshares will have 2,772,641 shares
outstanding, subject to the exercise of Dissenters' Rights.
In the future, the authorized but unissued and unreserved shares of Catawba
Valley Bancshares' common stock will be available for issuance for general
purposes, including, but not limited to, possible issuance as stock dividends
or stock splits, future mergers or acquisitions, or future private placements
or public offerings. Except as otherwise may be required to approve a merger or
other transaction in which the additional authorized shares of Catawba Valley
Bancshares' common stock would be issued, no shareholder approval will be
required for the issuance of those shares. See page 51 for a discussion of the
rights of the holders of Catawba Valley Bancshares' common stock as compared to
the holders of First Gaston common stock.
Common Stock
General. Each share of Catawba Valley Bancshares' common stock has the same
relative rights as, and is identical in all respects to, each other share of
Catawba Valley Bancshares' common stock.
Dividend Rights. As a North Carolina corporation, Catawba Valley Bancshares
is not directly subject to the restrictions on the payment of dividends
applicable to Catawba Valley Bank or First Gaston. Holders of shares of Catawba
Valley Bancshares' common stock will be entitled to receive such cash dividends
as the Board of Directors of Catawba Valley Bancshares may declare out of funds
legally available therefor. However, the payment of dividends by Catawba Valley
Bancshares will be subject to the restrictions of North Carolina law applicable
to the declaration of dividends by a business corporation. Under such
provisions, cash dividends may not be paid if a corporation will not be able to
pay its debts as they become due in the usual course of business after making
such cash dividend distribution or the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy certain liquidation preferential rights. After the share exchange is
consummated, the ability of Catawba Valley Bancshares to pay dividends to the
holders of shares of Catawba Valley Bancshares' common stock will, at least
initially, be completely dependent upon the amount of dividends Catawba Valley
Bank and First Gaston pays to Catawba Valley Bancshares. See "Comparison of the
Rights of Shareholders--Comparison of the Rights of Holders of First Gaston
common stock and Catawba Valley Bancshares' common stock--Payment of
Dividends."
Voting Rights. Each share of Catawba Valley Bancshares' common stock will
entitle the holder thereof to one vote on all matters upon which shareholders
have the right to vote. Currently, the Board of Directors of Catawba Valley
Bancshares is classified so that approximately one-third of the directors will
be elected each year. However, upon the effective time of the share exchange
the board will be comprised of eight directors all of whom will be elected
annually. Shareholders of Catawba Valley Bancshares are not entitled to
cumulate their votes for the election of directors. See "Comparison of the
Rights of Holders of First Gaston common stock and Catawba Valley Bancshares'
common stock--Voting Rights."
48
Liquidation Rights. In the event of any liquidation, dissolution, or winding
up of Catawba Valley Bancshares, the holders of shares of Catawba Valley
Bancshares' common stock will be entitled to receive, after payment of all
debts and liabilities of Catawba Valley Bancshares, all remaining assets of
Catawba Valley Bancshares available for distribution in cash or in kind. In the
event of any liquidation, dissolution, or winding up of Catawba Valley Bank or
First Gaston, Catawba Valley Bancshares, as the holder of all shares of Catawba
Valley Bank common stock and as the holder of all shares of First Gaston common
stock upon completion of the share exchange, would be entitled to receive
payment of all debts and liabilities of Catawba Valley Bank and First Gaston
(including all deposits and accrued interest thereon) and all remaining assets
of Catawba Valley Bank and First Gaston available for distribution in cash or
in kind.
Preemptive Rights; Redemption. Holders of shares of Catawba Valley
Bancshares' common stock will not be entitled to preemptive rights with respect
to any shares that may be issued. Catawba Valley Bancshares' common stock is
not subject to call or redemption.
Certain Articles and Bylaw Provisions Having Potential Anti-Takeover Effects
General. The following is a summary of the material provisions of Catawba
Valley Bancshares' Articles of Incorporation and bylaws which address matters
of corporate governance and the rights of shareholders. Certain of these
provisions may delay or prevent takeover attempts not first approved by the
Board of Directors of Catawba Valley Bancshares (including takeovers which
certain shareholders may deem to be in their best interests). These provisions
also could delay or frustrate the removal of incumbent directors or the
assumption of control by shareholders. All references to the Articles of
Incorporation and bylaws are to the Catawba Valley Bancshares' Articles of
Incorporation and bylaws in effect as of the date of this Joint Proxy
Statement-Prospectus.
Classification of the Board of Directors. Currently, the bylaws provide that
the Board of Directors of Catawba Valley Bancshares shall be divided into three
classes, Class I, Class II and Class III, which shall be as nearly equal in
number as possible. Each director shall serve for a term ending on the date of
the third annual meeting of shareholders following the annual meeting at which
the director was elected. A director elected to fill a vacancy shall serve for
the remainder of the term of the present term of office of the class to which
he or she was elected. As a result of the current classification of the Board
of Directors of Catawba Valley Bancshares, approximately one-third of the
members of the Board of Directors of Catawba Valley Bancshares will be elected
each year, and two annual meetings will be required for Catawba Valley
Bancshares' shareholders to change a majority of the members constituting the
Board of Directors of Catawba Valley Bancshares.
However, if the shareholders of Catawba Valley Bancshares approve the
reduction in the minimum number of directors from nine to eight, the bylaws
will provide that when there are only eight directors, the terms of all eight
directors will expire annually. Therefore, after the effective time there will
be only eight directors of the newly reconstituted board of United Community
Bancorp, and their terms shall expire at the next annual meeting of
shareholders.
Removal of Directors, Filling Vacancies. Catawba Valley Bancshares' Bylaws
provide that (a) shareholders may remove one or more of the directors with or
without cause; (b) a director may be removed by the shareholders only if the
number of votes cast for the removal exceeds the number of votes cast against
the removal; and (c) a director may not be removed by the shareholders at a
meeting unless the notice of the meeting states that the purpose, or one of the
purposes, of the meeting is removal of the director. Vacancies occurring in the
Board of Directors of Catawba Valley Bancshares may be filled by the
shareholders or a majority of the remaining directors, even though less than a
quorum or by the sole remaining director.
Amendment of Bylaws. Subject to certain restrictions described below, either
a majority of the Board of Directors or the shareholders of Catawba Valley
Bancshares may amend or repeal the bylaws. A bylaw adopted, amended, or
repealed by the shareholders may not be readopted, amended or repealed by the
Board of
49
Directors of Catawba Valley Bancshares. Generally, the shareholders of Catawba
Valley Bancshares may adopt, amend, or repeal the bylaws in accordance with the
North Carolina Business Corporation Act.
Special Meetings of Shareholders. Catawba Valley Bancshares' bylaws provide
that special meetings of shareholders may be called only by the Chairman of the
Board, President, or a majority vote of the Board of Directors of Catawba
Valley Bancshares.
Transfer Agent and Registrar
The transfer agent and registrar for the Catawba Valley Bancshares' common
stock is First-Citizens Bank & Trust Company.
50
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
Comparison of the Rights of Holders of First Gaston common stock and Catawba
Valley Bancshares' common stock
General. Upon consummation of the share exchange, shareholders of First
Gaston, other than those shareholders who properly exercise Dissenters' Rights,
will become shareholders of Catawba Valley Bancshares. Certain legal
distinctions exist between owning Catawba Valley Bancshares' common stock and
First Gaston common stock. The shareholders of Catawba Valley Bancshares will
be governed by and subject to the Articles of Incorporation and bylaws of
Catawba Valley Bancshares rather than the Articles of Incorporation and bylaws
of First Gaston. Catawba Valley Bancshares is a corporation governed by the
laws of the State of North Carolina applicable to business corporations, while
First Gaston is a commercial bank governed by the commercial bank laws of North
Carolina, which incorporate the corporate laws of North Carolina only to the
extent they do not conflict with the commercial bank laws. Neither the First
Gaston common stock nor the Catawba Valley Bancshares' common stock are insured
by the FDIC or guaranteed by the issuer and are both subject to investment
risk, including the possible loss of value.
The following is only a general summary of certain differences in the rights
of holders of Catawba Valley Bancshares' common stock and those of First Gaston
common stock. 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 share exchange.
Capital Structure. First Gaston's Articles of Incorporation authorize the
issuance of up to 20,000,000 shares of common stock, par value $5.00 per share,
and there are currently 1,262,319 shares issued and outstanding. Catawba Valley
Bancshares' Articles of Incorporation authorize the issuance of up to
10,000,000 shares of capital stock consisting of 9,000,000 shares of $1.00 par
value common stock and 1,000,000 shares of no par value preferred stock, and
there are 1,644,886 shares of common stock issued and outstanding. No shares of
preferred stock are issued and outstanding. Because the exchange of shares by
virtue of the share exchange is to be effected at the rate of 0.8934 shares of
Catawba Valley Bancshares' common stock for each share of First Gaston common
stock, Catawba Valley Bancshares will have 2,772,641 shares of common stock
issued and outstanding after consummation of the share exchange (except to the
extent that any shareholders of First Gaston perfect their appraisal rights of
dissent and receive cash rather than Catawba Valley Bancshares' common stock in
connection with the share exchange).
Voting Rights. In general, each holder of First Gaston common stock and
Catawba Valley Bancshares' common stock is entitled to one vote per share on
all matters submitted to a vote of shareholders.
In the election of directors, each holder of First Gaston common stock and
of Catawba Valley Bancshares' common stock has the right to vote the number of
shares owned by him or her on the record date for as many persons as there are
directors to be elected. Cumulative voting is not available with respect to the
election of directors of First Gaston or Catawba Valley Bancshares.
Directors. The bylaws of First Gaston provide that the Board of Directors of
First Gaston shall have from seven (7) to twenty (20) members, and the Board of
Directors of First Gaston currently has thirteen (13) members. The bylaws of
Catawba Valley Bancshares provide that the Board of Directors of Catawba Valley
Bancshares shall have from nine (9) to eighteen (18) members, and the Board of
Directors of Catawba Valley Bancshares currently has nine (9) members. Subject
to shareholder approval, after the share exchange, the bylaws of Catawba Valley
Bancshares will provide that the Board of Directors shall have from eight (8)
to eighteen (18) members and will have eight (8) members. The Boards of
Directors of both First Gaston and Catawba Valley Bancshares may fill vacancies
arising in their directorships.
Currently, the bylaws of Catawba Valley Bancshares provide that the terms of
the directors shall be staggered. Catawba Valley Bancshares currently has a
staggered Board of Directors. Pursuant to the bylaws,
51
Catawba Valley Bank's directors are divided into three classes, each consisting
of approximately one-third of the total directors. Each year, one class of the
directors comes up for election resulting in director terms of three years.
However, if the shareholders approve the amendment of the bylaws reducing the
minimum number of directors from nine (9) to eight (8), and if there are only
eight (8) directors, the directors will be elected annually. First Gaston does
not have a staggered Board of Directors.
Rights to Repurchase Stock. Under the North Carolina banking law, First
Gaston may repurchase its stock only after approval by holders of two-thirds of
its outstanding common stock and by the North Carolina Banking Commission.
Under the Bank Holding Company Act, Catawba Valley Bancshares may purchase its
own stock in the open market subject to certain capital adequacy considerations
and the availability of funds therefor. See page for a description of the
restrictions on the repurchase by Catawba Valley Bancshares of its stock.
Catawba Valley Bancshares may consider repurchases of its stock in the future,
but there can be no assurance that Catawba Valley Bancshares will conduct such
repurchases.
Payment of Dividends. The ability of First Gaston to pay dividends on its
common stock is restricted by North Carolina banking law and by tax
considerations related to state-chartered banks. North Carolina law imposes
restrictions on the ability of all banks chartered under North Carolina law to
pay dividends. First Gaston can only pay dividends out of undivided profits as
determined pursuant to North Carolina General Statutes Section 53-87. In
addition, regulatory authorities may limit payment of dividends by any bank
when it is determined that such a limitation is in the public interest and is
necessary to ensure the financial soundness of the bank. Although Catawba
Valley Bancshares' ability to pay dividends will not be subject to these
restrictions, such restrictions will indirectly affect Catawba Valley
Bancshares because dividends from First Gaston and Catawba Valley Bank will be,
for the foreseeable future, the only sources of funds of Catawba Valley
Bancshares for the payment of dividends to its shareholders.
Catawba Valley Bancshares will be limited by certain restrictions imposed
generally on North Carolina corporations. Subject to certain limitations and
exceptions, cash dividends may not be paid if a corporation will not be able to
pay its debts as they become due in the usual course of business after making
such cash dividend distribution or the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy certain liquidation preferential rights.
Limitation of Liability and Indemnification of Directors, Officers and
Employees. The Articles of Incorporation of both First Gaston and Catawba
Valley Bancshares eliminate a director's personal liability for breach of duty
as a director to the fullest extent permitted by law.
The bylaws of both First Gaston and Catawba Valley Bancshares provide for
indemnification to the fullest extent permitted by law. Under the Federal
Deposit Insurance Act, both First Gaston and Catawba Valley Bancshares would be
prohibited from paying any indemnification with respect to any liability or
legal expense incurred by a director, officer, or employee as result of an
action or proceeding by a federal banking agency resulting in a civil money
penalty or certain other remedies against such person. Currently, there is no
pending or threatened litigation involving Catawba Valley Bank, Catawba Valley
Bancshares, or First Gaston for which indemnification might be sought.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Catawba Valley
Bancshares pursuant to the forgoing provisions, Catawba Valley Bancshares has
been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Limitation of liability and indemnification provisions may discourage or
deter shareholders or management from bringing a lawsuit against former
directors for breach of duty, even though such action, if successful, might
otherwise have benefited the corporation and its shareholders.
52
Change in Control Regulation. First Gaston and Catawba Valley Bancshares are
subject to the protection of the North Carolina Shareholder Protection Act and
the North Carolina Control Share Acquisition Act.
Pursuant to the North Carolina Shareholder Protection Act, no business
combination (defined to include any merger, consolidation, share exchange or
sale of all or any substantial part of the corporation's assets) involving a
corporation which has a class of securities registered under the Securities
Exchange Act of 1934, as amended, and any entity that is the beneficial owner,
directly or indirectly, of more than 20% of the corporation's voting shares may
be consummated unless the holders of 95% of the outstanding voting shares
approve the business combination. This provision does not apply if the parties
comply with certain requirements relating to the value of the consideration
paid in the business combination, the composition of the corporation's board of
directors, the disclosure to shareholders regarding the business combination
and other procedural matters. Neither First Gaston nor Catawba Valley
Bancshares has opted out of the Shareholder Protection Act.
The North Carolina Control Share Acquisition Act applies to a corporation
that is incorporated in North Carolina and that has substantial assets in North
Carolina, its principal place of business or a principal office within North
Carolina, a class of securities registered under the Exchange Act and more than
10% of its shareholders reside in North Carolina or more than 10% of its shares
held by North Carolina residents. The North Carolina Control Share Acquisition
Act restricts the voting rights of a person who acquires "control shares" in a
subject corporation. Control shares are shares that, when added to all other
shares of the subject corporation beneficially owned by a person, would entitle
that person to voting power equal to or greater than a stated percentage of all
voting power. Without shareholder approval by "disinterested shareholders," the
shares acquired by the acquiror have no voting rights. Disinterested
shareholders are shareholders other than the acquiror and the employee-
directors of the subject corporation. If the shares held by the acquiror are
accorded voting rights pursuant to the procedure described above and the
acquiror beneficially holds more than 50% of the voting power for the election
of directors, each of the corporation's other shareholders have the right to
require that the corporation redeem their shares at a price not less than the
highest price per share paid by the acquiror for any of its shares. Neither
First Gaston nor Catawba Valley Bancshares has opted out of the Control Share
Acquisition Act.
The acquisition of more than ten percent of either the outstanding Catawba
Valley Bancshares' common stock or the outstanding First Gaston common stock
may, in certain circumstances, be subject to the provisions of the Change in
Bank Control Act. The FDIC has also adopted a regulation pursuant to the Change
in Bank Control Act which generally requires persons who at any time intend to
acquire control of an FDIC-insured, state-chartered, non-member bank, either
directly or indirectly through an acquisition of control of its holding
company, to provide 60 days' prior written notice and certain financial and
other information to the FDIC. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least 25% of
any class of voting stock or the power to direct the management or policies of
the bank or the holding company. However, under FDIC regulations, control is
presumed to exist where the acquiring party has voting control of at least ten
percent (10%) of any class of voting securities if (a) the bank or holding
company has a class of voting securities which is registered under Section 12
of the Securities Exchange Act of 1934, as amended, or (b) the acquiring party
would be the largest holder of a class of voting shares of the bank or the
holding company. The statute and underlying regulations authorize the FDIC to
disapprove a proposed acquisition on certain specified grounds.
Prior approval of the Federal Reserve would be required for any acquisition
of control of First Gaston or Catawba Valley Bancshares by any bank holding
company under the Bank Holding Company Act. Control for purposes of the Bank
Holding Company Act would be based on, among other things, a twenty-five
percent (25%) voting stock test or on the ability of the holding company
otherwise to control the election of a majority of the Board of Directors of
First Gaston or Catawba Valley Bancshares. As part of such acquisition, the
acquiring company (unless already so registered) would be required to register
as a bank holding company under the Bank Holding Company Act.
53
The Securities Exchange Act of 1934, as amended, requires that a purchaser
of any class of a corporation's securities registered under the Exchange Act
notify the SEC and such corporation within ten days after its purchases exceed
5% of the outstanding shares of that class of securities. This notice must
disclose the background and identity of the purchaser, the source and amount of
funds used for the purchase, the number of shares owned and, if the purpose of
the transaction is to acquire control of the corporation, any plans to alter
materially the corporation's business or corporate structure. In addition, any
tender offer to acquire a corporation's securities is subject to the
limitations and disclosure requirements of the Exchange Act.
Constituency Clause. Catawba Valley Bancshares' Articles of Incorporation
provide that in determining what is in the best interests of Catawba Valley
Bancshares, the Board of Directors of Catawba Valley Bancshares may consider,
among other things, the social and economic effects of the matter to be
considered (including a change of control) on Catawba Valley Bancshares and its
employees, customers, creditors and the community in which Catawba Valley
Bancshares operates. First Gaston's Articles of Incorporation contain no such
provision.
Bylaws. Certain differences exist between the bylaws of First Gaston and the
bylaws of Catawba Valley Bancshares. Upon request, First Gaston will provide
its shareholders with copies of the bylaws of both First Gaston and Catawba
Valley Bancshares free of charge. Requests should be made to W. Alex Hall, at
(704) 865-4202 or mailed to First Gaston's main office, located at 804 South
New Hope Road, Gastonia, North Carolina 28054, Attention W. Alex Hall.
54
INFORMATION ABOUT CATAWBA VALLEY BANK AND
CATAWBA VALLEY BANCSHARES
Catawba Valley Bancshares
General. Catawba Valley Bancshares is a business corporation incorporated
under the laws of the State of North Carolina on March 8, 1999. The only office
of Catawba Valley Bancshares, and its principal place of business, is located
at 1039 Second Street, NE, Hickory, North Carolina 28601. Catawba Valley
Bancshares' telephone number is (828) 431-2300.
Catawba Valley Bancshares was organized for the purpose of becoming the
holding company of Catawba Valley Bank and became the bank holding company for
Catawba Valley Bank at the close of business on June 30, 1999.
Property. Catawba Valley Bancshares neither owns nor leases any real or
personal property but utilizes the premises and property of Catawba Valley Bank
without the payment of any rental fees to Catawba Valley Bank.
Competition. The primary business of Catawba Valley Bancshares is the
ongoing business of Catawba Valley Bank. Therefore, the competitive conditions
to be faced by Catawba Valley Bancshares will be the same as those faced by
Catawba Valley Bank. In addition, many banks and financial institutions have
formed, or are in the process of forming holding companies. It is likely that
these holding companies will attempt to acquire banks, thrift institutions or
companies engaged in bank-related activities. Thus, Catawba Valley Bancshares
faces competition in undertaking any such acquisitions and in operating
subsequent to any such acquisitions.
Employees. Catawba Valley Bancshares does not have any employees other than
its management. See "Management of Catawba Valley Bancshares." It utilizes the
support staff of Catawba Valley Bank from time to time without the payment of
any fees to Catawba Valley Bank. Upon consummation of the share exchange, it is
the intention of management that certain managerial and administrative
functions being performed at both First Gaston and Catawba Valley Bank to be
consolidated and performed at the holding company level. This consolidation of
functions may result in Catawba Valley Bancshares adding several more non-
executive employees.
Catawba Valley Bank
General.
Catawba Valley Bank engages in general banking business in the City of
Hickory and portions of the four counties called the Unifour area (Catawba,
Burke, Caldwell and Alexander counties, North Carolina). Its operations are
primarily retail-oriented and aimed at individuals and small- to medium-sized
businesses located in its market area. Catawba Valley Bank 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. Catawba Valley Bank's lending activities include making
commercial loans to individuals and small- to medium-sized businesses located
primarily in its market area for various business purposes and various
consumer-type loans to individuals, including installment loans, equity lines
of credit, overdraft checking credit and credit cards. Also, Catawba Valley
Bank makes residential mortgage loans to its customers, which Catawba Valley
Bank then sells to another mortgage lender. Catawba Valley Bank issues ATM
cards which allow its customers to access their deposit accounts at the
automated teller machines of other banks who are linked to the STAR system.
Catawba Valley Bank also issues debit cards which allows its customer to have
point of sale. transactions at various merchants. Catawba Valley Bank does
provide Internet and electronic banking services for its customers. Catawba
Valley Bank does not provide trust services and leasing services, except
through a correspondent bank.
55
Catawba Valley Bank operates four offices, each of which are full-service
offices. Catawba Valley Bank's main office is located at 1039 Second Street
N.E., in Hickory and Catawba Valley Bank's West Hickory branch is located at
1445 Second Avenue, NW. Catawba Valley Bank also has a Newton branch office
located at 2675 Northwest Boulevard, Newton, North Carolina. Catawba Valley
Bank's fourth full service office opened in March of 2001 and is located at
2444 Springs Road in Hickory. Catawba Valley Bank does operate a mortgage loan
office located at 1125 Second Street NE, Hickory. Catawba Valley Bank has a
subsidiary called Valley Financial Services, Inc. that provides for various
insurance and other financial products through third party affiliations.
Commercial banking in Catawba County, and in North Carolina as a whole is
extremely competitive with state laws permitting statewide branching. Catawba
Valley Bank competes directly for deposits in its market area with other
commercial banks, credit unions, brokerage firms and all other organizations
and institutions engaged in money market transactions. In its lending
activities, Catawba Valley Bank competes with all other financial institutions,
as well as consumer finance companies, mortgage companies and other lenders
engaged in the business of extending credit. In Catawba Valley Bank's market
are, eleven commercial banks operate with multiple offices. Catawba Valley
Bank's predominant competitors are Branch Bank and Trust Bank of Granite and
People's Bank. These three institutions control approximately 61% of the
market's deposits.
Interest rates, both on loans and deposits, and prices of services are
significant competitive factors among financial institutions. Office locations,
office hours, customer service, community reputation and continuity of
personnel are also important competitive factors. Catawba Valley Bank's
predominant competitors have greater resources, broader geographic markets and
higher lending limits. They can offer more products, and can better afford and
make more effective use of media advertising, support services and electronic
technology than Catawba Valley Bank. Catawba Valley Bank depends on its
reputation as a community bank in its local market, direct customer contact,
its ability to make credit and other business decisions locally, and
personalized service to counter these competitive disadvantages.
The 2000 Annual Report to Shareholders of Catawba Valley Bancshares and its
10-QSB for the quarter ended June 30, 2001 accompany this Joint Proxy
Statement-Prospectus and is incorporated herein by reference. Contained in the
2000 Annual Report is Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"). Contained in the MD&A are certain
disclosures regarding the assets, liabilities and capital of Catawba Valley
Bancshares and Catawba Valley Bank. Additional information regarding Catawba
Valley Bancshares and Catawba Valley Bank is presented below and is contained
in the Form 10-KSB annual report for the year ended December 31, 2000 filed
with the SEC. This information, together with the information in the MD&A,
should be read for a fuller understanding of the operations of Catawba Valley
Bancshares and Catawba Valley Bank.
56
CATAWBA VALLEY BANCSHARES AND CATAWBA VALLEY BANK
INTEREST INCOME AND AVERAGE BALANCES
(Dollars in thousands)
2000 1999
------------------------ ------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
-------- -------- ------ -------- -------- ------
Interest-earning assets:
Interest-bearing deposits
in banks(1).............. $ 4,483 $ 280 6.25% $ 7,978 $ 315 3.95%
Investment securities(2).. 25,094 1,684 6.71% 14,635 873 5.97%
Federal funds sold........ 1,605 82 5.13% 2,004 117 5.86%
Net loans(3).............. 97,903 9,666 9.87% 70,937 6,717 9.47%
-------- ------- ---- -------- ------ ----
Total interest earning
assets..................... 129,085 11,712 95,554 8,022
-------- ------- -------- ------
Yield on average interest-
earning assets............. 9.07% 8.40%
==== ====
Noninterest-earning assets:
Cash and due from banks... 3,069 3,062
Premises and equipment.... 3,098 2,376
Other..................... 1,693 2,961
-------- --------
Total noninterest-earning
assets..................... 7,860 8,399
-------- --------
Total assets................ $136,945 $103,953
======== ========
Interest-bearing
liabilities:
NOW accounts.............. $ 11,839 332 2.80% $ 8,357 226 2.70%
Money market and savings.. 24,602 1,311 5.33% 19,928 859 4.31%
Time certificates and
IRAs..................... 69,646 4,277 6.14% 52,471 2,939 5.60%
Other S-T borrowings...... 6,500 465 7.15% 2,500 55 2.20%
-------- ------- ---- -------- ------ ----
Total interest-bearing
liabilities: 112,587 6,385 83,256 4,079
Cost on average interest-
bearing liabilities: 5.67% 4.90%
==== ====
Noninterest-bearing
liabilities:
Demand deposits........... 7,975 5,645
Other liabilities......... 383 383
-------- --------
Total noninterest-bearing
liabilities................ 8,358 6,028
-------- --------
Total liabilities........... 120,945 89,284
Shareholders' equity........ 16,000 14,669
-------- --------
Total liabilities and
shareholders' equity....... $136,945 $103,953
======== ========
Net interest income......... $ 5,327 $3,943
======= ======
Net yield on interest-
earning assets............. 4.13% 4.13%
==== ====
--------
(1) Interest-bearing deposits in banks include FHLB overnight and time
deposits with other institutions.
(2) Investment securities includes stock in federal home loan bank.
(3) Nonaccruing loans are included in the average loans balance. Income on
nonaccruing loans is recognized on a cash basis.
57
CATAWBA VALLEY BANCSHARES AND CATAWBA VALLEY BANK
RATE/VOLUME VARIANCE ANALYSIS
(Dollars in thousands)
2000 Compared to 1999
Variance
Interest Attributed to
Income/Expense ---------------
Variance Rate Volume
-------------- ------ -------
Interest-Earning Assets:
Interest-Earning Deposits in Banks........... $ (35) $ 167 $ (202)
Investment Securities........................ 811 124 687
Federal Funds Sold........................... (35) (12) (23)
Loans (Net).................................. 2,949 305 2,644
------ ------ -------
Total.......................................... 3,690 584 3,106
------ ------ -------
Interest-Bearings Liabilities:
Now Accounts................................. 106 9 97
Money Market and Savings Accounts............ 452 213 239
Time Certificates and IRAs................... 1,338 302 1,036
Other S-T Borrowings......................... 410 163 247
------ ------ -------
Total.......................................... 2,306 687 1,619
------ ------ -------
Net Interest Income............................ $1,384 $ (103) $ 1,487
====== ====== =======
58
CATAWBA VALLEY BANCSHARES AND CATAWBA VALLEY BANK
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
2000 1999
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
Mortgage......................................... $ 136 8.22% $ 137 10.22%
Construction..................................... 147 8.89% 120 8.95%
Home Equity...................................... 92 5.56% 63 4.70%
Commercial....................................... 914 55.26% 734 54.74%
Installment...................................... 175 10.58% 170 12.68%
Other............................................ 29 1.75% 44 3.28%
Unallocated...................................... 161 9.73% 73 5.44%
------ ------ ------ ------
$1,654 100.00% $1,341 100.00%
====== ====== ====== ======
59
CATAWBA VALLEY BANCSHARES AND CATAWBA VALLEY BANK
DISTRIBUTION OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
2000 REPRICING SCHEDULE
(Dollars in thousands)
One Year One to Five to Over
or Less Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- --------
Interest-earning assets:
Interest-bearing
deposits with other
financial
institutions......... $ 3,023 $ 99 $ $ $ 3,122
Federal funds sold.... 1,712 1,712
Investment
securities........... 174 18,281 11,879 2,177 32,511
Loans:
Adjustable rate loans:
Mortgage............. 5,413 5,413
Construction......... 13,017 13,017
Home equity.......... 8,330 8,330
Commercial........... 36,815 36,815
Installment.......... 4,395 4,395
Other................ 1,605 1,605
Fixed rate loans:
Mortgage............. 3,280 11,214 377 59 14,930
Construction......... 941 656 74 1,671
Home equity.......... 35 70 755 860
Commercial........... 2,938 12,040 1,907 168 17,053
Installment.......... 1,483 6,370 659 25 8,537
Other................ 25 69 94
-------- ------- ------- ------- --------
Total................... $ 83,186 $48,799 $15,651 $ 2,429 $150,065
======== ======= ======= ======= ========
Interest-bearing
liabilities:
Savings, now, money
market............... $ 40,396 $ $ $ $ 40,396
Time certificate of
deposits over
$100,000............. 22,003 6,675 28,678
Time certificate of
deposits under
$100,000............. 35,712 16,428 52,140
Federal home loan bank
advances............. 8,000 8,000
-------- ------- ------- ------- --------
Total................... $106,111 $23,103 $ 0 $ 0 $129,214
======== ======= ======= ======= ========
Interest sensitivity
gap.................... $(22,925) $25,696 $15,651 $ 2,429 $ 20,851
-------- ------- ------- ------- -------- ---
Cumulative gap.......... $(22,925) $ 2,771 $18,422 $20,851 $ 20,851
======== ======= ======= ======= ======== ===
Ratio of interest-
sensitive assets to
interest-sensitive
liabilities............ 78.40% 211.22% N/A N/A 116.14%
Cumulative ratio of
interest-sensitive
assets to interest-
sensitive liabilities.. 78.40% 102.14% 114.26% 116.14% 116.14%
The company owns 5,000 shares of Federal Home Loan Bank Stock valued at
$500,000. This is included in with investment securities section above.
60
INVESTMENTS AVAILABLE FOR SALE
(Dollars in thousands)
Due One One Year Five Years
Year or Through Through Due After
Less Five Years Ten Years Ten Years Total
------- ---------- ---------- --------- -------
Investment securities:
U.S. Govt. corporations and
agencies obligations....... $174 $18,281 $11,879 $1,677 $32,011
Mortgage-backed securities.. -- -- -- 500 500
---- ------- ------- ------ -------
Total..................... $174 $18,281 $11,879 $2,177 $32,511
Weighted average yields:
U.S. govt. corporations and
agencies obligations....... 6.00% 6.18% 6.63% 6.53% 6.70%
Federal Home Loan Bank
Stock...................... -- -- -- 7.50% 7.50%
---- ------- ------- ------ -------
Total..................... 6.00% 6.18% 6.63% 6.75% 6.71%
61
FIRST GASTON TABLES
For the corresponding information of First Gaston as presented in the
preceding tables, please refer to First Gaston's 2000 Annual Report included in
the accompanying materials. The location of each table in First Gaston's 2000
Annual Report is cross-referenced below.
Page in
First Gaston's
Table Name 2000 Annual Report
---------- ------------------
Net Interest Income Analysis.............................. 30
Rate/Volume Analysis...................................... 31
Loan Composition.......................................... 24
Interest Sensitivity...................................... 28
Investment Securities--Maturity/Yield Schedule............ 26
62
Properties
The following table sets forth the location and other related information
regarding Catawba Valley Bank's offices and other properties occupied as of
June 30, 2001. Catawba Valley Bancshares utilizes the main office of Catawba
Valley Bank and does not have any separate office facilities.
Offices Location Status
------- -------- ------
Main Office 1039 Second Street NE Hickory, NC Owned
West Hickory Branch 1445 Second Avenue NW Hickory, NC Leased
Newton Branch 2675 Northwest Boulevard Newton,
NC Owned
Springs Road Branch 2444 Springs Road Hickory, NC Owned
Operations Center 1115 Second Street NE Hickory, NC Owned
Mortgage Center 1125 Second Street NE Hickory, NC Leased
Employees
At June 30, 2001, Catawba Valley Bank had 52 full-time and part-time
equivalent employees. None of its employees is represented by any collective
bargaining unit. Catawba Valley Bank considers relations with its employees to
be good. Catawba Valley Bancshares does not have any employees who are not also
officers of Catawba Valley Bank.
Management and Certain Transactions
Set forth below are the names and other information pertaining to the
directors of Catawba Valley Bancshares and Catawba Valley Bank. Those names
marked with an "*" will continue to serve as directors of Catawba Valley
Bancshares after the share exchange; all will continue to serve as directors of
Catawba Valley Bank.
Director Principal Occupation and Business Term
Name and Age Since Experience During Past 5 Years Expires
------------ -------- --------------------------------- -------
R. Steve Aaron* (54) 1995 President and Chief Executive Officer, 2002
Catawba Valley Bancshares, Inc. and Catawba
Valley Bank since January 1995.
Hal F. Huffman, Jr. (46) 1995 Owner and President, ACE Hardware, Inc., 2004
Hickory, NC
Robert P. Huntley* (63) 1995 Private Investor; Executive Vice President, 2003
Newton Transportation Company, Inc. (trucking
company) until March 1997.
W. Steve Ikerd* (61) 1995 President and Owner, Ikerd Enterprises, 2002
Hickory, NC (real estate developers).
Robert T. King (73) 1995 Private investor. 2004
Pat M. Moss (60) 1995 Alderwoman, City of Hickory; Private 2002
investor.
Cloyd Hugh Propst, Jr. (51) 1995 Co-owner, Hickory Sand Co., Inc., Hickory, NC 2003
(utility contractor).
Howard L. Pruitt* (64) 1995 Secretary, Southwood Furniture Company, 2003
Hickory, NC (furniture manufacturer).
William R. Sigmon, Jr. (40) 1995 Physician and President, Sigmon Radiation 2004
Oncology, P.A., Hickory, NC.
63
Director Compensation
Board Fees. In 2001, each director has received $500 for each Board meeting
attended and $50 for each committee meeting attended.
1998 Nonqualified Stock Option Plan for Directors. The shareholders of
Catawba Valley Bank at the 1998 annual meeting approved the 1998 Nonqualified
Stock Option Plan for Directors pursuant to which options covering 105,035
shares of Catawba Valley Bank's Common stock are available for issuance to
members of the Board of Directors and the board of any subsidiary. In 1999, in
connection with the reorganization of Catawba Valley Bank into the holding
company form of organization which resulted in the creation of Catawba Valley
Bancshares, the Nonqualified Stock Option Plan was adopted by Catawba Valley
Bancshares and options under such plan are now options of Catawba Valley
Bancshares. In April 1998, each of the eight non-employee directors was granted
8,753 options to purchase shares of Catawba Valley Bank's common stock at an
exercise price of $14.50, the fair market value of the common stock on the date
of grant. As a result of the declaration and payment of stock dividends in 1998
and 1999, the number of options and exercise price have been adjusted pursuant
to the terms of the Nonqualified Stock Option Plan. Accordingly, seven non-
officer directors currently hold options to purchase 14,443 shares, and due to
a previous exercise and disposition, one non-officer director holds options to
purchase 13,618 shares, all at an exercise price of $8.78. All options are
immediately exercisable for a ten year period from the date of grant and
terminate upon such director's resignation or completion of his term without
reelection. However, upon retirement from the Board of Directors of either
Catawba Valley Bancshares or Catawba Valley Bank or upon a director's death,
the options granted such director may be exercised within 12 months of such
event.
Executive Compensation. Executive officers of Catawba Valley Bancshares do
not receive any separate compensation for such position. All officers and
employees receive compensation only from Catawba Valley Bank. Except for R.
Steve Aaron, no current executive officer of Catawba Valley Bancshares or
Catawba Valley Bank received compensation for 1998, 1999, or 2000 which
exceeded $100,000. The compensation information for R. Steve Aaron is disclosed
below:
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation(1) AWARDS
---------------------- ------------
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options/SARS Compensation(2)
------------------ ---- ------ ---------- ------------ ---------------
R. Steve Aaron, 2000 $ 129,000 $ 11,352 -0- $11,940
President and Chief
Executive Officer 1999 $ 125,000 $ 20,080 -0- $ 9,900
1998 $ 90,000 $ 10,080 5,000 $ 7,806
--------
(1) Perquisites and personal benefits awarded to R. Steve Aaron did not exceed
10% of the total annual salary and bonus in any year reported.
(2) The amounts disclosed represent annual contributions in 2000, 1999, and
1998, of $7,740, $7,500, and $5,400, respectively, made by Catawba Valley
Bank on behalf of R. Steve Aaron to match pre-tax elective deferral
contributions (included under salary) made by R. Steve Aaron under Section
401(k) of the Internal Revenue Code of 1986, as amended, and directors'
fees paid in each of 2000, 1999, and 1998 of $4,200, $2,400, and $2,400.
Catawba Valley Bank has entered into an employment and change of control
agreement with R. Steve Aaron (dated January 1, 2000) as its President and
Chief Executive Officer to establish his duties and compensation and to provide
for his continued employment with Catawba Valley Bank. The employment agreement
provides for an initial term of three years with an automatic renewal at the
end of the initial term and on each anniversary thereafter for an additional
one year term unless notified prior thereto in accordance
64
with the employment agreement. The employment agreement provides for an annual
base salary of $125,000, and for discretionary bonuses and participation in
other pension and profit-sharing retirement plans maintained by Catawba Valley
Bank on behalf of its employees, as well as fringe benefits normally associated
with Mr. Aaron's position or made available to all other employees. The
employment agreement provides that Mr. Aaron may be terminated for "cause" as
defined in the employment agreement, and that the employment agreement may
otherwise be terminated, in some cases with certain financial consequences
incurred, by Catawba Valley Bank or by Mr. Aaron. The employment agreement
provides that should Catawba Valley Bank terminate the employment agreement
other than for cause or disability within 12 months after a "change in
control", or should Mr. Aaron terminate the agreement within such 12 months
during which his compensation or responsibilities have been reduced, or his
workplace location has been moved more than 35 miles from Hickory, North
Carolina, then he shall receive a lump sum equal to 299% of his average annual
salary and cash bonus, and be covered by on Catawba Valley Bank's medical and
disability programs throughout the remaining term of the agreement. A "Change
of Control" shall be deemed to have occurred upon (i) any person becoming the
beneficial owner or otherwise acquiring control, directly or indirectly, of
securities of Catawba Valley Bank representing twenty-five percent (25%) or
more of the voting power of Catawba Valley Bank's then outstanding securities;
(ii) the acquisition by any Person in any manner of the ability to elect, or to
control the election, of a majority of the directors of Catawba Valley Bank;
(iii) the merger of Catawba Valley Bank into another entity, the merger of any
entity into Catawba Valley Bank or the acquisition of assets by Catawba Valley
Bank, in any such case with the result that the beneficial owners of Catawba
Valley Bank's outstanding securities immediately prior to such transaction do
not beneficially own more than sixty percent (60%) of Catawba Valley Bank's
outstanding securities after the consummation of such transaction; (iv) the
sale or other transfer of more than fifty percent (50%) of the assets of
Catawba Valley Bank to any entity not controlled by the Bank; (v) the
consummation of any transaction by Catawba Valley Bank that results (A) in the
majority of the Board after the consummation of such transaction not being
composed of Incumbent Directors, or (B) the beneficial owners of Catawba Valley
Bank's outstanding securities immediately prior to the consummation of such
transaction not beneficially owning more than sixty percent (60%) of Catawba
Valley Bank's outstanding securities after such transaction; or (vi) the
occurrence of any other event or circumstance which the Board determines
affects control of Catawba Valley Bank. The term "Incumbent Director" shall
mean any director who as of the execution of the employment agreement was a
member of the Board, or any individual becoming a member of the Board
subsequent to such execution whose election by Catawba Valley Bank shareholders
was recommended by at least two-thirds (2/3) of the then incumbent Directors on
the Board. The employment agreement also contains a covenant not to compete for
one year after termination which prohibits Mr. Aaron, without the consent of
Catawba Valley Bank, from being connected with any business located in any
county where Catawba Valley Bank or its subsidiaries have offices and which
competes with Catawba Valley Bank or its subsidiaries. Such covenant shall not
apply in the event that Mr. Aaron is terminated by Catawba Valley Bank without
cause.
Mr. Aarons's contact with Catawba Valley Bank will remain in effect and
unchanged after the share exchange.
Option Grants in the 2000 Fiscal Year
The following table sets forth information with regard to stock options
granted under the 1997 Incentive Stock Option Plan of Catawba Valley
Bancshares. No options were granted during the fiscal year ended December 31,
2000.
AGGREGATED OPTION EXERCISES IN FISCAL 2000
AND FISCAL YEAR END OPTION VALUES
Number of Securities
Underlining Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
Shares End Fiscal Year End
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
R. Steve Aaron.......... -0- -0- 11,000 8,250 $9,322.50 $4,661.25
65
401(k) Savings Plan. Catawba Valley Bank has adopted a tax-qualified savings
plan which covers all current full-time employees and any new full-time
employees who have been employed by Catawba Valley Bank for six months. Under
the savings plan, a participating employee may contribute up to 16% of his or
her base salary on a tax-deferred basis through salary reduction as permitted
under Section 401(k) of the Internal Revenue Code of 1986, as amended. Catawba
Valley Bank contributes an amount equal to 100% of the first 6% of pre-tax
salary contributed by each participant and may make additional discretionary
profit sharing contributions to the savings plan on behalf of all participants.
Such discretionary profit sharing contributions may not exceed 6% of the
aggregate of the pre-tax base salaries of all participants in the savings plan
and are allocated among all participants on the basis of the participant's age
and level of compensation. Amounts deferred above the first 6% of salary are
not matched by Catawba Valley Bank. A participant's contributions and Catawba
Valley Bank's matching and profit sharing contributions under the savings plan
will be held in trust accounts for the benefit of participants. A participant
is at all times 100% vested with respect to his or her own contributions under
the savings plan, and becomes 100% vested in the account for Catawba Valley
Bank's matching and profit sharing contributions after completing five years of
service with Catawba Valley Bank. The value of a participant's accounts under
the savings plan becomes payable to him or her in full upon retirement, total
or permanent disability or termination of employment for any other reason, or
becomes payable to a designated beneficiary upon a participant's death. The
Savings Plan also will contain provisions for withdrawals in the event of
certain hardships. A participant's contributions, vested matching and profit
sharing contributions of Catawba Valley Bank, and any income accrued on such
contributions, are not subject to federal or state taxes until such time as
they are withdrawn by the participant.
Indebtedness and Transactions of Management
Catawba Valley Bank has had, and expects to have in the future, banking
transactions in the ordinary course of business with certain of its current
directors, nominees for director, executive officers and their associates. All
loans included in such transactions were made on substantially the same terms,
including interest rates, repayment terms and collateral, as those prevailing
at the time such loans were made for comparable transactions with other
persons, and do not involve more than the normal risk of collectibility or
present other unfavorable features.
Beneficial Ownership of Voting Securities of Catawba Valley Bancshares
As of June 30, 2001, the only shareholder known by Catawba Valley Bancshares
to own more than 5% of Catawba Valley Bancshares' common stock was Wade E.
Moose, Hickory, North Carolina, who owned, to the best knowledge of Catawba
Valley Bancshares, 88,627 shares of common stock (5.39% of the total shares
outstanding.)
As of June 30, 2001, the beneficial ownership of Catawba Valley Bancshares'
common stock by directors individually, and by directors and executive officers
as a group, was as follows:
Amount and Nature Percent
of Beneficial of
Name of Beneficial Owner Ownership(1)(3) Class(2)
------------------------ ----------------- --------
R. Steve Aaron.................................. 73,645(4) 4.06%
Hal F. Huffman, Jr.............................. 38,977(5) 2.15%
Robert P. Huntley............................... 42,438(6) 2.34%
W. Steve Ikerd.................................. 80,030(7) 4.42%
Robert T. King.................................. 32,322 1.78%
Pat M. Moss..................................... 26,499(8) 1.46%
Cloyd Hugh Propst, Jr........................... 48,213(9) 2.66%
Howard L. Pruitt................................ 38,998 2.15%
William R. Sigmon, Jr........................... 39,663 2.19%
All Directors and Executive Officers as a group
(11 persons)................................... 492,650 27.19%
66
--------
(1) Except as otherwise noted, to the best knowledge of Catawba Valley
Bancshares' management, the above individuals and group exercise sole
voting and investment power with respect to all shares shown as
beneficially owned.
(2) The calculation of the percentage of class beneficially owned by each
individual and the group is based on a total of 1,811,909 outstanding
shares of common stock which equal the sum of (i) 1,644,886 shares
outstanding as of June 30, 2001, plus (ii) 167,023 which is the number of
shares capable of being issued to directors and executive officers within
60 days upon the exercise of vested stock options.
(3) Included are exercisable options to purchase an aggregate of 167,023 shares
(126,188 vested options held by non-officer directors and 40,835 vested
options held by executive officers.)
(4) Includes 16,599 shares held by Mr. Aaron's spouse.
(5) Includes 2,961 shares held by Mr. Huffman's spouse.
(6) Includes 7,850 shares held by Mr. Huntley's spouse.
(7) Includes 13,726 shares held by Mr. Ikerd's spouse.
(8) Includes 3,630 shares held by Moss-Marlowe Building Company, a related
interest of Mr. Moss.
(9) Includes 1,298 shares held by Mr. Propst's spouse and 9,900 shares held by
Hickory Sand Co., Inc., a related interest of Mr. Propst.
67
INFORMATION ABOUT FIRST GASTON
At June 30, 2001, First Gaston had total assets of approximately $124.6
million, total deposits of approximately $101.1 million and total shareholders'
equity of approximately $12.3 million.
The principal office of First Gaston is located at 804 South New Hope Road,
Gastonia, North Carolina 28054. Its telephone number is (704) 865-4202.
Business
First Gaston Bank of North Carolina was incorporated on March 16, 1995, as a
North Carolina-chartered commercial bank, and opened for business on July 11,
1995. Its deposits are insured by the Bank Insurance Fund of the FDIC.
First Gaston operates for the primary purpose of serving the banking needs
of its customers in its market area, while developing a personal, home-town
association with its customers. The Bank offers a wide range of banking
services, including checking and savings accounts; certificates of deposit;
individual retirement accounts; commercial, installment, mortgage and personal
loans; safe-deposit boxes, and other associated services. Specifically, First
Gaston 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, or are unsecured; commercial business loans;
commercial real estate loans; and other loans.
First Gaston's primary sources of revenue are interest income from general
lending activities, primarily consisting of commercial loans and first mortgage
loans for residential real property located in North Carolina, and interest
income from its consumer lending activities, including home equity loans. First
Gaston 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 First Gaston are interest on deposits and borrowings and
general administrative expenses such as salaries and employee benefits, data
processing expense, office occupancy and equipment expenses.
First Gaston's market area consists of the city of Gastonia, North Carolina
and the cities of Belmont and Mount Holly and parts of Gaston County, North
Carolina. The total population of Gaston is approximately 62,000 people and the
total population of Gaston County is approximately 182,000 people.
First Gaston opened a branch office in Belmont, North Carolina in October
1995 and a branch office in Mount Holly, North Carolina in March 1996. First
Gaston operates all locations as full-service offices. There are no plans for
further branch expansion.
First Gaston constructed a new office building at its main location at 804
South New Hope Road in Gastonia during 1996. The new building was occupied on
August 12, 1996.
Commercial banking in Gaston County, and in North Carolina as a whole, is
extremely competitive with state laws permitting statewide branching. First
Gaston competes directly for deposits in its market area with other commercial
banks, credit unions, brokerage firms and all other organizations and
institutions engaged in money market transactions. In its lending activities,
First Gaston competes with all other financial institutions, as well as
consumer finance companies, mortgage companies and other lenders engaged in the
business of extending credit. In First Gaston's market area, nine commercial
banks operate with multiple offices. First Gaston's predominate competitors are
Branch Banking and Trust Company and Wachovia Bank. These two institutions
control approximately 42.6% of the market.
Interest rates, both on loans and deposits, and prices of services are
significant competitive factors among financial institutions. Office locations,
office hours, customer service, community reputation and continuity of
personnel are also important competitive factors. First Gaston's predominant
competitors have greater
68
resources, broader geographic markets and higher lending limits. They can offer
more products, and can better afford and make more effective use of media
advertising, support services and electronic technology than First Gaston.
First Gaston depends on its reputation as a community bank in its local market,
direct customer contact, its ability to make credit and other business
decisions locally, personalized service, and Saturday banking to counter these
competitive disadvantages.
The Annual Report to shareholders of First Gaston for the year ended
December 31, 2000 and its 10-QSB for the quarter ended June 30, 2001 accompany
this joint proxy statement-prospectus. Contained therein is Management's
Discussion and Analysis of Financial Condition and Results of Operations which
contains certain statistical information regarding the assets, liabilities and
capital of First Gaston. Such information is incorporated herein by reference
and you are encouraged to review that information as well as the other
financial information in the Annual Report to shareholders for a full
understanding of the business of First Gaston.
Employees
As of June 30, 2001, First Gaston employed 51 full-time employees. First
Gaston is not a party to a collective bargaining agreement, and considers its
relations with employees to be good.
Director Compensation
Board Fees. From January through September 2000, each director (other than
Mr. Hall who is a salaried officer of First Gaston) received $250 for each
Board meeting attended and $75 for each committee meeting attended. Effective
October 2000, each director received $275 for each Board meeting attended and
$100 for each committee meeting attended. The Chairman of the Board received an
additional $50 per meeting attended and committee chairmen receive an
additional $25 per meeting attended. Directors may elect to receive fees in the
form of newly issued Shares priced at the fair market value on December 31 each
year.
1995 Stock Option Plan. In 1995 the Board of Directors adopted, and the
shareholders and the North Carolina Commissioner of Banks approved, the First
Gaston Bank of North Carolina 1995 Stock Option Plan. As adjusted for the six-
for-five stock split in 1998, a total of 90,000 options were eligible to be
granted to certain officers, key employees and directors of First Gaston,
permitting them an opportunity to acquire an ownership interest in First Gaston
as an additional incentive to attract and retain such officers, key employees
and directors and to encourage them to promote First Gaston's business. All
options under the 1995 Plan have been granted to the intended recipients, were
granted at the then fair market value of the underlying shares of common stock
and are exercisable for a period of ten years after grant. Options applicable
to officers and key employees have a required five year vesting schedule prior
to the ability of the recipient to exercise options. Pursuant to the 1995 Plan,
each director was granted an option to purchase 1,140 Shares, except for two
directors who were granted 570 shares.
1999 Nonqualified Stock Option Plan for Directors. At the Annual Meeting in
June 1999, the Board of Directors proposed and the shareholders approved the
First Gaston Bank of North Carolina 1999 Nonqualified Stock Option Plan for
Directors which was approved by the Commissioner. The purpose of the
Nonqualified Plan generally is to assist First Gaston in attracting and
retaining directors whose interest are the same as those of shareholders, and
to provide an additional incentive for directors to whom nonqualified options
are granted to manage First Gaston in a manner that will enhance First Gaston's
financial performance and shareholder value. An aggregate of 45,000 shares of
common stock have been allocated for the grant of options under the
Nonqualified Plan. Grants may be made at the fair market value of the
underlying shares of common stock as of the date of grant and are eligible to
be exercised for a period of ten years after grant. To date, 42,000 options
have been granted under the Nonqualified Plan.
69
EXECUTIVE COMPENSATION
The following table sets forth certain elements of compensation for the
chief executive officer for each of the last three fiscal years. No other
current executive officers of First Gaston received compensation for the last
three years that exceeded $100,000:
Summary of Compensation
All Other Other Long Term
Name and Position Year Salary Bonus Compensation Compensation
----------------- ---- -------- ------ ------------ ---------------
W. Alex Hall 2000 $153,000 $6,273 $3,780(1) $28,000(2)
President and Chief
Executive Officer 1999 $140,578 -0- $3,628(1) $ 3,716(2)
1998 $134,569 $6,860 $4,047(1) --
--------
(1) Amount shown consists of the First Gaston matching contribution to the
401(k) savings plan on behalf of the named executive officer.
(2) Amount shown consists of the vested portion of the annual increase in Mr.
Hall's liability reserve account balance under the Supplemental Retirement
Plan implemented in 1999.
Employment Agreement
In 1998, First Gaston entered into an employment agreement with Mr. Hall as
President and Chief Executive Officer. Base compensation equaled $134,000 which
shall be reviewed annually in July of each year and shall be increased
immediately after such review by not less than 10%. The employment agreement
terminates on December 31, 2002 unless sooner terminated for "cause" or
voluntarily by Mr. Hall. The employment agreement provides for appropriate
fringe benefits of an executive officer and accelerates the vesting of any
options granted to Mr. Hall under the 1995 Plan to December 31, 2002 unless
grants are made thereunder within six months of December 31, 2002. In the later
case, such options shall be fully vested on the first day subsequent to the six
months following their dates of grant. The employment agreement provides for
the payment to Mr. Hall of an amount equal to 2.99 times the total amount of
his base salary and most recent annual bonus, if any, should there be a "change
in control" of First Gaston followed by a "termination event". For purposes of
the employment agreement, "change in control" is defined as the accumulation of
25% or more of the voting power of First Gaston's outstanding securities, the
power by any person or group to elect or control the election of a majority of
the members of the Board of Directors of First Gaston or the merger of First
Gaston into another entity whereby First Gaston's then existing shareholders do
not beneficially own more than 60% of First Gaston's outstanding securities
after consummation of the transaction, 50% of the assets of First Gaston are
sold to an entity and no longer controlled by First Gaston or a majority change
in incumbent directors.
Mr. Hall will waive any rights to the receipt of any payment under the
"change in control" provision of this contract and the contract will remain in
effect and unchanged after the share exchange.
Supplemental Retirement Plan
First Gaston had entered into a Deferred Compensation Plan for Mr. Hall to
provide him a retirement benefit upon his retirement at age 65 equal to $50,000
per year for ten years. As part of the Deferred Compensation Agreement, First
Gaston had purchased a life insurance policy on Mr. Hall which was owned by
First Gaston and designed to reimburse First Gaston for expenses associated
with the Deferred Compensation Plan. For the years ended December 31, 1997,
1998 and 1999 First Gaston accrued annual expenses of $42,208, $49,004, and
$36,954 to fund the Plan. In 1999, First Gaston terminated the Plan and
superseded it with a Supplemental Retirement Plan dated September 9, 1999 which
is an unfunded plan and non-qualified under the Employment Retirement Security
Act of 1974. The Supplemental Plan will make certain payments to Mr. Hall upon
his retirement or to his beneficiaries in the event of his death. First Gaston
purchased a life insurance policy owned by First Gaston which funds the
Supplemental Plan. Expenses of $2,800 per year for five years, paid to the
Supplemental Plan's administrator, are associated with such implementation.
70
401(k) Savings Plan
First Gaston has adopted a tax-qualified savings plan which covers all
current full-time employees and any new full-time employees who have been
employed by the Company for one year. Under the savings plan, a participating
employee may contribute up to 15% of his or her base salary on a tax-deferred
basis through salary reduction as permitted under Section 401(k) of the
Internal Revenue Code of 1986, as amended. First Gaston contributes an amount
equal to 50% of the first 6% of pre-tax salary contributed by each participant
and may make additional discretionary profit sharing contributions to the
Savings Plan on behalf of all participants. Such discretionary profit sharing
contributions may not exceed 6% of the aggregate of the pre-tax base salaries
of all participants in the Savings Plan and are allocated among all
participants on the basis of the participant's age and level of compensation.
Amounts deferred above the first 6% of salary are not matched by First Gaston.
A participant's contributions and First Gaston's matching and profit sharing
contributions under the Savings Plan will be held in trust accounts for the
benefit of participants. A participant is at all times 100% vested with respect
to his or her own contributions under the Savings Plan, and becomes 100% vested
in the account for First Gaston's matching and profit sharing contributions
after completing five years of service with First Gaston. The value of a
participant's accounts under the Savings Plan becomes payable to him or her in
full upon retirement, total or permanent disability or termination of
employment for any other reason, or becomes payable to a designated beneficiary
upon a participant's death. The Savings Plan also will contain provisions for
withdrawals in the event of certain hardships. A participant's contributions,
vested matching and profit sharing contributions of First Gaston, and any
income accrued on such contributions, are not subject to federal or state taxes
until such time as they are withdrawn by the participant.
1999 Incentive Stock Option Plan
At the 1999 annual meeting, the shareholders approved First Gaston's 1999
Incentive Stock Option Plan. The Incentive Plan was approved by the North
Carolina Commissioner of Banks and is designed to assist First Gaston in
attracting and retaining employees whose interests are the same as those of
shareholders and to provide an additional incentive for employees to whom
incentive options are granted to perform at levels that will enhance First
Gaston's financial performance and shareholder value. The Incentive Plan is
designed to grant "incentive options" pursuant to the provisions of Section 422
of the Internal Revenue Code. The Incentive Plan provides for the issuance and
sale of an aggregate of 90,000 Shares upon the exercise of incentive options.
To date, 70,614 options have been granted under the Incentive Plan.
Mr. Hall is entitled to grants of options under First Gaston's stock option
plans. The following table shows the number of Shares covered by both
exercisable and non-exercisable options as of December 31, 2000.
Stock Option Grants in 2000
Number of Securities Percent of Total
Underlying Options Granted to Exercise or Base Expiration
Name Options Granted Employees in 2000 Price Per Share Date
---- -------------------- ------------------ ---------------- ----------
W. Alex Hall 2,600 7.54% $13.50 1/31/10
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The following table shows the number of shares covered by both exercisable
and non-exercisable options as of December 31, 2000. Also reported are the
values for "in-the-money" options, which represent the positive spread between
the exercise price of any such existing options and the year-end price of First
Gaston's shares. Mr. Hall did not exercise any stock options during 2000.
2000 OPTION EXERCISES
YEAR END VALUE
Value of Unexercised
Number of Unexercised In-the-Money
Shares Acquired Value Options at 12/31/00 Options at 12/31/00
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- -------- ------------------------- -------------------------
W. Alex Hall -0- -0- 25,840/6,160 $42,888/$120
--------
(1) Closing price of First Gaston's Shares at December 31, 2000 was $11.45.
Certain Transactions
Certain First Gaston directors, officers and principal shareholders, and
their associates, are customers of, or have had transactions with, First Gaston
in the ordinary course of business during 2000. Some of the directors of First
Gaston are directors, officers, trustees or principal securities holders of
corporations or other organizations which also were customers of, or have had
transactions with, First Gaston in the ordinary course of business.
All outstanding loans and other transactions with the directors, officers
and principal shareholders of First Gaston, were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and, when made, did not involve more than the normal risk of
collectibility or present other unfavorable features. The highest aggregate
amount of extensions of credit outstanding during 2000 to any one director,
executive officer, or associate thereof, was $1,765,577, which is 15.2% of the
equity capital accounts of First Gaston. The highest aggregate amount of
extensions of credit outstanding to First Gaston's current directors, executive
officers, and associates thereof, during 2000 equaled $7,818,945, which is
67.2% of the equity capital accounts of First Gaston.
In addition to banking and financial transactions, First Gaston may have had
additional transactions with, or used products or services of, various
organizations of which directors of First Gaston are associated. The amounts
involved in such noncredit transactions have in no case been material in
relation to the business of First Gaston, or such other organizations. It is
expected that First Gaston will continue to have similar transactions in the
ordinary course of its business with such individuals and their associates in
the future.
72
Management and Certain Transactions
Set forth below are the names and other information pertaining to the
directors of First Gaston each of whom will continue to serve as such after the
share exchange. Those names marked with an "*" will also serve as directors of
the newly renamed United Community Bancorp after the share exchange:
Director Principal Occupation and Business Term
Name and Age Since Experience During Past 5 Years Expires
------------ -------- --------------------------------- -------
John D. Bridgeman (56) 1995 Mr. Bridgeman is President/CEO of the Gaston 2002
Chamber of Commerce, Gastonia, North
Carolina. Mr. Bridgeman also served as a
member of the North Carolina General Assembly
until December 2000.
William J. P. Carstarphen (36) 1995 Mr. Carstarphen is Vice President of Pharr 2002
Yarns, Inc., McAdenville, North Carolina, a
textile manufacturer.
David E. Cline* (52) 1995 Mr. Cline is President of Cline Seabrook 2002
Company, Waxhaw, North Carolina, a
development firm.
Ronald W. Digby, M. D. (55) 1995 Dr. Digby is a cardiologist with Gaston 2002
Medical Group, Gastonia, North Carolina and
past Chief of Medical Staff at Gaston
Memorial Hospital.
Loretta P. Dodgen, Ed.D.* (49) 1995 Dr. Dodgen is a management consultant and 2002
Vice President for Multiple Choice, Inc.,
Gastonia, North Carolina, a training and
organizational consulting firm.
W. Alex Hall, Jr.* (63) 1995 Mr. Hall is President and Chief Executive 2002
Officer of First Gaston Bank of North
Carolina.
Douglas R. Harris (48) 1995 Mr. Harris is President of Douglas R. Harris 2002
Jewelers, Gastonia, North Carolina, a fine
jewelry designer and gem broker.
Henry T. Howe (53) 1995 Mr. Howe is Chairman of the Board of Funtees, 2002
Inc., Concord, North Carolina, an apparel
manufacturer.
John P. Judson (58) 1995 Mr. Judson is President of Pinnix, Inc., 2002
Gastonia, North Carolina, a general
contractor.
James B. Macomson, D.D.S. (58) 1995 Dr. Macomson is an orthodontist in private 2002
practice in Gastonia, North Carolina.
H. Ray McKenney, Jr.* (46) 1995 Mr. McKenney is President of McKenney Family 2002
Dealerships, a group of automobile
dealerships in Gaston County, North Carolina
since 1981. He is a director of the board of
Holy Angels, Inc., a specialized care
facility.
Thomas C. Watson, Jr. (59) 1995 Mr. Watson is President of Watson Insurance 2002
Agency, Inc., Gastonia, North Carolina, an
independent insurance agent and broker.
Johnathan Williams, M. D. (40) 1995 Dr. Williams is a physician with Gaston 2002
Medical Group, Gastonia, North Carolina.
73
Beneficial Ownership of Voting Securities of First Gaston
As of June 30, 2001, the beneficial ownership of First Gaston's common stock
by directors individually, and by directors and executive officers as a group,
was as follows:
Amount and
Nature of Percent
Beneficial of
Name of Beneficial Owner Ownership(1)(3) Class(2)
------------------------ --------------- --------
John D. Bridgeman................................. 9,887(4) 0.73%
William J.P. Carstarphen.......................... 11,202(5) 0.82%
David E. Cline.................................... 16,040 1.18%
Ronald W. Digby, M.D.............................. 14,097(6) 1.04%
Loretta P. Dodgen, Ed.D........................... 8,078(7) 0.59%
W. Alex Hall, Jr.................................. 32,444 2.39%
Douglas R. Harris................................. 7,531(8) 0.55%
Henry T. Howe..................................... 24,917(9) 1.83%
John P. Judson.................................... 21,649(10) 1.59%
James B. Macomson, D.D.S.......................... 27,349(11) 2.01%
H. Ray McKenney, Jr............................... 30,632(12) 2.25%
Thomas C. Watson, Jr.............................. 22,856(13) 1.68%
Johnathan Williams, M.D........................... 6,896(14) 0.51%
All Directors and Executive Officers as a group
(13 persons)..................................... 233,584 17.20%
--------
(1) Except as otherwise noted, to the best knowledge of First Gaston's
management, the above individuals and group exercise sole voting and
investment power with respect to all shares shown as beneficially owned.
(2) The calculation of the percentage of class beneficially owned by each
individual and the group is based on a total of 1,358,186 outstanding
shares of common stock which equal the sum of (i) 1,262,319 shares
outstanding as of June 30, 2001, plus (ii) 95,867 which is the number of
shares capable of being issued to directors and executive officers within
60 days upon the exercise of vested stock options.
(3) Included are exercisable options to purchase an aggregate of 95,867 shares
(66,783 vested options held by non-officer directors and 29,084 vested
options held by executive officers.)
(4) Includes 3,696 shares owned jointly with Mr. Bridgeman's spouse.
(5) Includes 4,620 shares held by a corporation of which Mr. Carstarphen is a
director and president.
(6) Includes 567 shares owned jointly with Dr. Digby's spouse and minor child.
(7) Includes 436 shares owned jointly with Dr. Dodgen's spouse.
(8) Includes 660 shares owned by Mr. Harris' spouse and 594 shares held by his
children.
(9) Includes 2,200 shares held by Mr. Howe's spouse.
(10) Includes 9,222 shares held by a corporation of which Mr. Judson is a
director and president.
(11) Includes 20,636 shares held by Dr. Macomson's pension plan.
(12) Includes 5,060 shares owned by Mr. McKenney's children, 1,320 shares held
by a corporation of which Mr. McKenney is president/secretary, and 12,320
shares held by a trust of which Mr. Kenney is the beneficiary.
(13) Includes 16,478 shares held by a corporation of which Mr. Watson is a
director and president.
(14) Includes 308 shares owned jointly with Dr. Williams' spouse and 339
shares owned solely by her.
74
REGULATION AND SUPERVISION
Regulation of Catawba Valley Bancshares
Federal Regulation. Catawba Valley Bancshares is subject to examination,
regulation and periodic reporting under the Bank Holding Company Act of 1956,
as amended, as administered by the Federal Reserve Board. The Federal Reserve
Board has adopted capital adequacy guidelines for bank holding companies on a
consolidated basis.
Catawba Valley Bancshares is required to obtain the prior approval of the
Federal Reserve Board to acquire all, or substantially all, of the assets of
any bank or bank holding company. Prior Federal Reserve Board approval is
required for Catawba Valley Bancshares to acquire direct or indirect ownership
or control of any voting securities of any bank or bank holding company if,
after giving effect to such acquisition, it would, directly or indirectly, own
or control more than five percent of any class of voting shares of such bank or
bank holding company.
The merger or consolidation of Catawba Valley Bancshares with another bank
holding company, or the acquisition by Catawba Valley Bancshares of the stock
or assets of another bank, or the assumption of liability by Catawba Valley
Bancshares to pay any deposits in another bank, will require the prior written
approval of the primary federal bank regulatory agency of the acquiring or
surviving bank under the federal Bank Merger Act. The decision is based upon a
consideration of statutory factors similar to those outlined above with respect
to the Bank Holding Company Act. In addition, in certain such cases an
application to, and the prior approval of, the Federal Reserve Board under the
Bank Holding Company Act and/or the North Carolina Banking Commission may be
required.
Catawba Valley Bancshares is required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of Catawba Valley
Bancshares' consolidated net worth. The Federal Reserve Board may disapprove
such a purchase or redemption if it determines that the proposal would
constitute an unsafe and unsound practice, or would violate any law,
regulation, Federal Reserve Board order or directive, or any condition imposed
by, or written agreement with, the Federal Reserve Board. Such notice and
approval is not required for a bank holding company that would be treated as
"well capitalized" under applicable regulations of the Federal Reserve Board,
that has received a composite "1" or "2" rating at its most recent bank holding
company inspection by the Federal Reserve Board, and that is not the subject of
any unresolved supervisory issues.
The status of Catawba Valley Bancshares as a registered bank holding company
under the Bank Holding Company Act does not exempt it from certain federal and
state laws and regulations applicable to corporations generally, including,
without limitation, certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging
in, or acquiring five percent or more of any class of voting securities of any
company engaged in, non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve
Board has determined by regulation to be so closely related to banking as to be
a proper incident thereto are:
. making or servicing loans;
. performing certain data processing services;
. providing discount brokerage services;
. acting as fiduciary, investment or financial advisor;
75
. leasing personal or real property;
. making investments in corporations or projects designed primarily to
promote community welfare; and
. acquiring a savings and loan association.
In evaluating a written notice of such an acquisition, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the notifying bank holding company and the relative
public benefits and adverse effects which may be expected to result from the
performance of the activity by an affiliate of such company. The Federal
Reserve Board may apply different standards to activities proposed to be
commenced de novo and activities commenced by acquisition, in whole or in part,
of a going concern. The required notice period may be extended by the Federal
Reserve Board under certain circumstances, including a notice for acquisition
of a company engaged in activities not previously approved by regulation of the
Federal Reserve Board. If such a proposed acquisition is not disapproved or
subjected to conditions by the Federal Reserve Board within the applicable
notice period, it is deemed approved by the Federal Reserve Board.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank holding company may, among other
things, be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies:
. a leverage capital requirement expressed as a percentage of total
assets;
. a risk-based requirement expressed as a percentage of total risk-
weighted assets; and
. a Tier 1 leverage requirement expressed as a percentage of total assets.
The leverage capital requirement consists of a minimum ratio of total
capital to total assets of 6%, with an expressed expectation that banking
organizations generally should operate above such minimum level. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least one-half must be Tier 1 capital (which consists
principally of shareholders' equity). The Tier 1 leverage requirement consists
of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-
rated companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
banking organizations. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
The Federal Deposit Insurance Corporation Improvement Act of 1991 requires
the federal bank regulatory agencies biennially to review risk-based capital
standards to ensure that they adequately address interest rate risk,
concentration of credit risk and risks from non-traditional activities and,
since adoption of the Riegle Community Development and Regulatory Improvement
Act of 1994, to do so taking into account the size and activities of depository
institutions and the avoidance of undue reporting burdens. In 1995, the
agencies adopted regulations requiring as part of the assessment of an
institution's capital adequacy the consideration of (a) identified
concentrations of credit risks, (b) the exposure of the institution to a
decline in the value of its capital due to changes in interest rates and (c)
the application of revised conversion factors and netting rules on the
institution's potential future exposure from derivative transactions.
In addition, the agencies in September 1996 adopted amendments to their
respective risk-based capital standards to require banks and bank holding
companies having significant exposure to market risk arising from,
76
among other things, trading of debt instruments, (1) to measure that risk using
an internal value-at-risk model conforming to the parameters established in the
agencies' standards and (2) to maintain a commensurate amount of additional
capital to reflect such risk. The new rules were adopted effective January 1,
1997, with compliance mandatory from and after January 1, 1998.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, depository institutions are liable to the FDIC for losses suffered or
anticipated by the FDIC in connection with the default of a commonly controlled
depository institution or any assistance provided by the FDIC to such an
institution in danger of default. This law is applicable to the extent that
Catawba Valley Bancshares maintains as a separate subsidiary a depository
institution in addition to Catawba Valley Bank.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and Federal Reserve Board regulations limit the amounts of, and
establish required procedures and credit standards with respect to, loans and
other extensions of credit to officers, directors and principal shareholders of
Catawba Valley Bank, Catawba Valley Bancshares, any subsidiary of Catawba
Valley Bancshares and related interests of such persons. Moreover, subsidiaries
of bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in
connection with any extension of credit, lease or sale of property or
furnishing of services.
Any loans by a bank holding company to a subsidiary bank are subordinate in
right of payment to deposits and to certain other indebtedness of the
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank would be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would also apply
to guarantees of capital plans under the Federal Deposit Insurance Corporation
Improvement Act of 1991.
Branching. Under the Riegle Act, the Federal Reserve Board may approve bank
holding company acquisitions of banks in other states, subject to certain aging
and deposit concentration limits. As of June 1, 1997, banks in one state may
merge with banks in another state, unless the other state has chosen not to
implement this section of the Riegle Act. These mergers are also subject to
similar aging and deposit concentration limits.
North Carolina "opted-in" to the provisions of the Riegle Act. Since July 1,
1995, an out-of-state bank that did not already maintain a branch in North
Carolina was permitted to establish and maintain a de novo branch in North
Carolina, or acquire a branch in North Carolina, if the laws of the home state
of the out-of-state bank permit North Carolina banks to engage in the same
activities in that state under substantially the same terms as permitted by
North Carolina. Also, North Carolina banks may merge with out-of-state banks,
and an out-of-state bank resulting from such an interstate merger transaction
may maintain and operate the branches in North Carolina of a merged North
Carolina bank, if the laws of the home state of the out-of-state bank involved
in the interstate merger transaction permit interstate merger.
Regulation of Catawba Valley Bank and First Gaston
Catawba Valley Bank and First Gaston are extensively regulated under both
federal and state law. Generally, these laws and regulations are intended to
protect depositors and borrowers, not shareholders. To the extent that the
following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable law or regulation may have a
material effect on the business of the Catawba Valley Bancshares, Catawba
Valley Bank, or First Gaston.
77
State Law. Catawba Valley Bank and First Gaston are subject to extensive
supervision and regulation by the North Carolina Commissioner of Banks. The
Commissioner oversees state laws that set specific requirements for bank
capital and regulate deposits in, and loans and investments by, banks,
including the amounts, types, and in some cases, rates. The Commissioner
supervises and performs periodic examinations of North Carolina-chartered banks
to assure compliance with state banking statutes and regulations, and Catawba
Valley Bank and First Gaston are required to make regular reports to the
Commissioner describing in detail the resources, assets, liabilities and
financial condition of their respective bank. Among other things, the
Commissioner regulates mergers and consolidations of state-chartered banks, the
payment of dividends, loans to officers and directors, record keeping, types
and amounts of loans and investments, and the establishment of branches.
Deposit Insurance. As a member institution of the FDIC, Catawba Valley
Bank's and First Gaston's deposits are insured up to a maximum of $100,000 per
depositor through the Bank Insurance Fund, administered by the FDIC, and each
member institution is required to pay semi-annual deposit insurance premium
assessments to the FDIC. The BIF assessment rates have a range of 0 cents to 27
cents for every $100 in assessable deposits. Banks with no premium are subject
to an annual statutory minimum assessment.
Capital Requirements. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with relatively
high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which include off balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts of
Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital, includes common
equity, qualifying noncumulative perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less goodwill and
other intangibles, subject to certain exceptions. "Tier 2," or supplementary
capital, includes among other things, limited-life preferred stock, hybrid
capital instruments, mandatory convertible securities, qualifying subordinated
debt, and the allowance for loan and lease losses, subject to certain
limitations and less required deductions. The inclusion of elements of Tier 2
capital is subject to certain other requirements and limitations of the federal
banking agencies. Banks and bank holding companies subject to the risk-based
capital guidelines are required to maintain a ratio of Tier 1 capital to risk-
weighted assets of at least 4% and a ratio of total capital to risk-weighted
assets of at least 8%. The appropriate regulatory authority may set higher
capital requirements when particular circumstances warrant. As of June 30,
2001, Catawba Valley Bank was classified as "well-capitalized" with Tier 1 of
13.91% and Total Risk-Based Capital of 15.18% and First Gaston was classified
as "well capitalized" with Tier 1 of 12.6% and Total Risk--Based Capital of
13.9%.
The federal banking agencies have adopted regulations specifying that they
will include, in their evaluations of a bank's capital adequacy, an assessment
of the bank's interest rate risk exposure. The standards for measuring the
adequacy and effectiveness of a banking organization's interest rate risk
management include a measurement of board of director and senior management
oversight, and a determination of whether a banking organization's procedures
for comprehensive risk management are appropriate for the circumstances of the
specific banking organization.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority
of a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under the Federal Deposit Insurance Corporation Improvement
Act of 1991 described below, as applicable to undercapitalized institutions.
78
In addition, future changes in regulations or practices could further reduce
the amount of capital recognized for purposes of capital adequacy. Such a
change could affect the ability of Catawba Valley Bank and First Gaston to grow
and could restrict the amount of profits, if any, available for the payment of
dividends to the shareholders.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December
1991, Congress enacted Federal Deposit Insurance Corporation Improvement Act of
1991, which substantially revised the bank regulatory and funding provisions of
the Federal Deposit Insurance Act and made significant revisions to several
other federal banking statutes. The act provides for, among other things:
. publicly available annual financial condition and management reports for
certain financial institutions, including audits by independent
accountants;
. the establishment of uniform accounting standards by federal banking
agencies;
. the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with
greater scrutiny and restrictions placed on depository institutions with
lower levels of capital;
. additional grounds for the appointment of a conservator or receiver; and
. restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 also
provides for increased funding of the FDIC insurance funds and the
implementation of risk-based premiums.
A central feature of the Act is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. Pursuant to the
Act, the federal bank regulatory authorities have adopted regulations setting
forth a five-tiered system for measuring the capital adequacy of the depository
institutions that they supervise. Under these regulations, a depository
institution is classified in one of the following capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." An institution may be
deemed by the regulators to be in a capitalization category that is lower than
is indicated by its actual capital position if, among other things, it receives
an unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
Federal Deposit Insurance Corporation Improvement Act of 1991 provides the
federal banking agencies with significantly expanded powers to take enforcement
action against institutions which fail to comply with capital or other
standards. Such action may include the termination of deposit insurance by the
FDIC or the appointment of a receiver or conservator for the institution. The
Act also limits the circumstances under which the FDIC is permitted to provide
financial assistance to an insured institution before appointment of a
conservator or receiver.
Miscellaneous. The dividends that may be paid by Catawba Valley Bank and
First Gaston are subject to legal limitations. In accordance with North
Carolina banking law, dividends may not be paid unless Catawba Valley Bank's or
First Gaston's capital surplus is at least 50% of its paid-in capital.
The earnings of Catawba Valley Bank and First Gaston will be affected
significantly by the policies of the Federal Reserve Board, which is
responsible for regulating the United States money supply in order to mitigate
recessionary and inflationary pressures. Among the techniques used to implement
these objectives are open market transactions in United States government
securities, changes in the rate paid by banks on bank borrowings, and changes
in reserve requirements against bank deposits. These techniques are used in
varying combinations to influence overall growth and distribution of bank
loans, investments, and deposits, and their use may also affect interest rates
charged on loans or paid for deposits.
79
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. In view of changing conditions in
the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or the business
and earnings of Catawba Valley Bank or First Gaston.
Catawba Valley Bank and First Gaston cannot predict what legislation might
be enacted or what regulations might be adopted, or if enacted or adopted, the
effect thereof on Catawba Valley Bank's and First Gaston's operations.
Community Reinvestment Act. Catawba Valley Bank and First Gaston are subject
to the provisions of the Community Reinvestment Act of 1977, as amended (CRA).
Under the terms of the CRA, the appropriate federal bank regulatory agency is
required, in connection with the examination of a bank, to assess such bank's
record in meeting the credit needs of the community served by that bank,
including low and moderate-income neighborhoods. The regulatory agency's
assessment of Catawba Valley Bank's and First Gaston's record is made available
to the public. Such an assessment is required of any bank which has applied for
any application for a domestic deposit-taking branch, relocation of a main
office, branch or ATM, merger or consolidation with or acquisition of assets or
assumption of liabilities of a federally insured depository institution.
Under CRA regulations, banks with assets of less than $250,000,000 that are
independent or affiliated with a holding company with total banking assets of
less than $1 billion, are subject to streamlined small bank performance
standards and much less stringent data collection and reporting requirements
than larger banks. The agencies emphasize that small banks are not exempt from
CRA requirements. The streamlined performance method for small banks focuses on
the bank's loan-to-deposit ratio, adjusted for seasonal variations and as
appropriate, other lending-related activities, such as loan originations for
sale to secondary markets or community development lending or qualified
investments; the percentage of loans and, as appropriate, other lending-related
activities located in Catawba Valley Bank's and First Gaston's assessment
areas; Catawba Valley Bank's and First Gaston's record of lending to and, as
appropriate, other lending-related activities for borrowers of different income
levels and businesses and farms of different sizes; the geographic distribution
of Catawba Valley Bank's and First Gaston's loans given its assessment areas,
capacity to lend, local economic conditions, and lending opportunities; and
Catawba Valley Bank's and First Gaston's record of taking action, if warranted,
in response to written complaints about its performance in meeting the credit
needs of its assessment areas.
Regulatory agencies will assign a composite rating of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance" to the
institution using the foregoing ground rules. A bank's performance need not fit
each aspect of a particular rating profile in order for the bank to receive
that rating; exceptionally strong performance with respect to some aspects may
compensate for weak performance in others, and the bank's overall performance
must be consistent with safe and sound banking practices and generally with the
appropriate rating profile. To earn an outstanding rating, the bank first must
exceed some or all of the standards mentioned above. The agencies may assign a
"needs to improve" or "substantial noncompliance" rating depending on the
degree to which the bank has failed to meet the standards mentioned above.
The regulation further states that the agencies will take into consideration
these CRA ratings when considering any application and that a bank's record of
performance may be the basis for denying or conditioning the approval of an
application.
Change of Control
State and federal law restricts the amount of voting stock of a bank holding
company or a bank that a person may acquire without the prior approval of
banking regulators. The overall effect of such laws is to make it more
difficult to acquire a bank holding company or bank by tender offer or similar
means than it might be to acquire control of another type of corporation.
80
Pursuant to North Carolina law, no person may, directly or indirectly,
purchase or acquire voting stock of any bank holding company or bank which
would result in the change of control of that entity unless the North Carolina
Commissioner of Banks first shall have approved such proposed acquisition. A
person will be deemed to have acquired "control" of the bank holding company or
the bank if he, she or it, directly or indirectly, (i) owns, controls or has
the power to vote 10% or more of the voting stock of the bank holding company
or bank, or (ii) possesses the power to direct or cause the direction of its
management and policy.
Federal law imposes additional restrictions on acquisitions of stock in bank
holding companies and FDIC-insured banks. Under the federal Change in Bank
Control Act and the regulations thereunder, a person or group acting in concert
must give advance notice to the Federal Reserve or the FDIC before directly or
indirectly acquiring the power to direct the management or policies of, or to
vote 25% or more of any class of voting securities of, any bank holding company
or federally-insured bank. Upon receipt of such notice, the federal regulator
either may approve or disapprove the acquisition. The Change in Bank Control
Act generally creates a rebuttable presumption of a change in control if a
person or group acquires ownership or control of or the power to vote 10% or
more of any class of a bank holding company or bank's voting securities; the
bank holding company has a class of securities that are subject to registration
under the Securities Exchange Act of 1934, as amended; and, following such
transaction, no other person owns a greater percentage of that class of
securities.
Government Monetary Policy and Economic Controls
As a bank holding company whose primary asset is the ownership of the
capital stock of a commercial bank, the Catawba Valley Bancshares is directly
affected by the government monetary policy and the economy in general. The
actions and policies of the Federal Reserve Board which acts as the nation's
central bank can directly affect money supply and, in general, affect bank's
lending activities by increasing or decreasing their costs and availability of
funds. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit in order to combat recession and curb inflation
pressures. Among the instruments of monetary policy used by the Federal Reserve
Board to implement these objectives are open market operations in U.S.
Government securities, changes in the discount rate and surcharge, if any, on
member bank borrowings, and changes in reserve requirements against bank
deposits. These methods are used in varying combinations to influence overall
growth of bank loans, investments and deposits, and interest rates charged on
loans or paid for deposits. Neither Catawba Valley Bank nor First Gaston is a
member of the Federal Reserve System but they are subject to reserve
requirements imposed by the Federal Reserve Board on non-member banks. The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future.
Recent Legislative Developments
Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999, which was
signed into law on November 12, 1999, allows a bank holding company to qualify
as a "financial holding company" and, as a result, be permitted to engage in a
broader range of activities that are "financial in nature" and in activities
that are determined to be incidental or complementary to activities that are
financial in nature. The Gramm-Leach-Bliley Act amends the Bank Holding Company
Act to include a list of activities that are financial in nature, and the list
includes activities such as underwriting, dealing in and making a market in
securities, insurance underwriting and agency activities and merchant banking.
The Federal Reserve Board is authorized to determine other activities that are
financial in nature or incidental or complementary to such activities. The
Gramm-Leach-Bliley Act also authorizes banks to engage through financial
subsidiaries in certain of the activities permitted for financial holding
companies. As a bank holding company, Catawba Valley Bancshares may elect to
become a financial holding company and thereby avail itself of the financial
activities permitted under the Gramm-Leach-Bliley Act though it has no plans to
do so at this time. By expanding its services to include permitted financial
activities, Catawba Valley Bancshares could offer more services and convenience
to its customers while enhancing its revenue streams. The decision to become a
financial holding company and
81
thereby provide such additional financial services will be dependent on its
capital position, demand in its markets to provide such services, and the
availability or development of managerial expertise to profitably engage in
such additional financial services.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, was enacted which contained a comprehensive approach to
recapitalize the FDIC's Savings Association Insurance Fund and to assure
payment of the Financing Corporation obligations. All of the Bank's deposits
are insured by the FDIC's Bank Insurance Fund. Under the Growth Act, banks with
deposits that are insured under the Bank Insurance Fund are required to pay a
portion of the interest due on bonds that were issued by the Financing
Corporation to help shore up the ailing Federal Savings and Loan Insurance
Corporation in 1987. The Growth Act stipulates that the Bank Insurance Fund
assessment rate to contribute toward the Financing Corporation obligations must
be equal to one-fifth the Savings Association Insurance Fund assessment rate
through year-end 2000, or until the insurance funds are merged, whichever
occurs first. The amount of Financing Corporation debt service to be paid by
all Bank Insurance Fund-insured institutions is approximately $0.0126 per $100
of Bank Insurance Fund-insured deposits for each year from 1997 through 2000
when the obligation of BIF-insured institutions increases to approximately
$0.0240 per $100 of Bank Insurance Fund-insured deposits per year through the
year 2019, subject in all cases to adjustments by the FDIC on a quarterly
basis. The Growth Act also contained provisions protecting banks from liability
for environmental clean-up costs; prohibiting credit unions sponsored by Farm
Credit System banks; easing application requirements for most bank holding
companies when they acquire a thrift or a permissible non-bank operation;
easing Fair Credit Reporting Act restrictions between bank holding company
affiliates; and reducing the regulatory burden under the Real Estate Settlement
Procedures Act, the Truth-in-Savings Act, the Truth-in-Lending Act and the Home
Savings Mortgage Disclosure Act.
Various legislation, including proposals to substantially change the
financial institution regulatory system, expand the powers of banking
institutions and bank holding companies, and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in the U. S. Congress. This legislation may change banking statutes
and the operating environment of the combined company and its subsidiaries in
substantial and unpredictable ways. We cannot accurately predict whether this
potential legislation will ultimately be enacted, and, if enacted, the ultimate
effect that it, or implementing regulations, would have upon the financial
condition or results of operations of the combined company or any of its
subsidiaries.
82
PROPOSAL 2: RENAMING CATAWBA VALLEY BANCSHARES
In accordance with the Agreement and Plan of Share Exchange, attached as
Appendix I, and as a condition precedent to the share exchange, we are asking
the shareholders of Catawba Valley Bancshares to approve the renaming of the
company to "United Community Bancorp". The proposed amendment to the Articles
of Incorporation is attached as Appendix V.
The Boards of Directors of First Gaston and Catawba Valley Bancshares agreed
on changing the name to "United Community Bancorp" to better reflect the new
geographic and philosophical scope of the enlarged holding company. Under the
new holding company name, Catawba Valley Bank and First Gaston will continue to
operate under their current names and management.
The Board of Directors of Catawba Valley Bancshares unanimously recommends
that shareholders vote "FOR" the renaming of the company to "United Community
Bancorp".
83
PROPOSAL 3: REDUCING THE MINIMUM NUMBER OF DIRECTORS
In accordance with the Agreement and Plan of Share Exchange, attached as
Appendix I, and as a condition precedent to the share exchange, we are asking
the shareholders of Catawba Valley Bancshares to approve an amendment to the
bylaws reducing the minimum number of directors from nine (9) to eight (8). A
copy of the amendment to the bylaws is attached as Appendix VI. Further, if the
number of directors is only eight, they all shall be elected annually.
The Boards of Directors of First Gaston and Catawba Valley Bancshares have
agreed to reconstitute the Board of Directors of Catawba Valley Bancshares
after the share exchange. The new Board will consist of eight (8) directors
made up of four (4) directors from each company. To achieve this, five members
of the current Board of Catawba Valley Bancshares will resign and the remaining
four directors will appoint four members from First Gaston's Board to Catawba
Valley Bancshares Board. Since the current bylaws requires a minimum of nine
(9) directors, the bylaws must be changed to allow the Board to be
reconstituted to eight (8) directors. The terms of all eight members of the
reconstituted Board will expire at the Annual Meeting of shareholders to be
held in April 2002. Please refer to pages 63 and 73 for information regarding
those directors who will serve on the reconstituted Board.
The Board of Directors of Catawba Valley Bancshares unanimously recommends
that shareholders vote "FOR" the amendment of the bylaws reducing the minimum
number of directors to eight (8).
84
LEGAL MATTERS
The validity of the shares of Catawba Valley Bancshares' common stock
offered hereby has been passed upon for Catawba Valley Bancshares by Gaeta &
Glesener, P.A., Raleigh, North Carolina. Certain legal matters related to this
offering have been passed upon for First Gaston by Moore & Van Allen, PLLC,
Charlotte, North Carolina.
EXPERTS
The consolidated financial statements of Catawba Valley Bancshares as of
December 31, 2000 and for the period then ended have been included herein and
in the Registration Statement in reliance on the report of Dixon Odom PLLC,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The financial statements of First Gaston as of December 31, 2000 have been
included herein and in the Registration Statement in reliance on the report of
Larrowe & Company, PLC independent accountants, given on the authority of that
firm as experts in accounting and auditing.
FORWARD LOOKING STATEMENTS
We have made forward looking statements in this Joint Proxy Statement-
Prospectus about the financial condition, results of operations, and business
of Catawba Valley Bancshares following the consummation of the share exchange
that are subject to risks and uncertainties. Factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include, among other things, the following possibilities:
. deposit attrition, customer loss, or revenue loss following the share
exchange is greater than expected;
. competitive pressure in the banking industry increases significantly;
. changes in the interest rate environment reduce margins;
. general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality;
. changes occur in the regulatory environment; and
. changes occur in business conditions and the rate of inflation.
When used in this Joint Proxy Statement-Prospectus, the words "believes,"
"estimates," "plans," "expects," "should," "may," "might," "outlook," and
"anticipates," and similar expressions as they relate to Catawba Valley
Bancshares, First Gaston, or their management are intended to identify forward
looking statements.
OTHER MATTERS
The Boards of Directors know of no other business that will be brought
before the special meetings. Should other matters properly come before the
special meetings, the proxies will be authorized to vote shares represented by
each appointment of proxy in accordance with their best judgment on such
matters.
85
WHERE YOU CAN GET MORE INFORMATION
Catawba Valley Bancshares is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and as required by the
Exchange Act, we file reports, proxy statements and other information with the
SEC. Reports, proxy statements and other information filed by us may be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549
and at the SEC's regional offices located at 7 World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Our SEC filings are also available to the public on
the SEC Internet site at http://www.sec.gov.
Prior to our formation as the holding company for Catawba Valley Bank in
1999, Catawba Valley Bank was subject to the informational requirements of the
Exchange Act and filed reports, proxy statements and other information with the
FDIC. Catawba Valley Bank's filings with the FDIC may be inspected and copied,
after paying a prescribed fee, at the FDIC's public reference facilities at the
Registration, Disclosure and Securities Operations Unit, 550 17th Street, N.W.,
Room 6043, Washington, DC 20429.
First Gaston files reports under the Exchange Act with the FDIC. These
reports include Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB
and Current Reports on Form 8-K. These reports, as well as annual proxy
statements mailed to shareholders and other information are available for you
to inspect and copy, after paying a prescribed fee, at the FDIC's public
reference facilities at the Registration, Disclosure and Securities Operations
Unit, 550 17th Street, N.W., Room 6043, Washington, DC 20429. The Registration,
Disclosure and Securities Operations Unit telephone number is (202) 898-8908
and their fax number is (202) 898-3909. After the share exchange is completed,
First Gaston will no longer file these reports with the FDIC. Instead, Catawba
Valley Bancshares will begin filing such reports with the SEC under its new
name, United Community Bancorp.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to incorporate by reference information into this Joint
Proxy Statement-Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC or FDIC. The information incorporated by reference is deemed to be part
of this Joint Proxy Statement-Prospectus, except for any information superseded
by information in this Joint Proxy Statement-Prospectus. This Joint Proxy
Statement-Prospectus incorporates by reference: (i) First Gaston's and Catawba
Valley Bancshares' Annual Report for the year ended December 31, 2000, and
(ii) First Gaston's and Catawba Valley Bancshares, Quarterly Report on Form 10-
QSB for the quarter ended June 30, 2001, each of which has been filed with the
FDIC or SEC, as applicable and is included as an exhibit to the Registration
Statement of which this Joint Proxy Statement-Prospectus is a part. The market
price information in First Gaston's Annual Report has been adjusted to reflect
a 10% stock dividend paid in March 2001 and can be found on page 10 of this
Joint Proxy Statement--Prospectus.
When deciding how to cast your vote, you should rely only on the information
contained or incorporated by reference in this Joint Proxy Statement-
Prospectus. We have not authorized anyone to provide you with information that
is different from what is contained in this Joint Proxy Statement-Prospectus.
This Joint Proxy Statement-Prospectus is dated October 19, 2001. You should not
assume that the information contained in this Joint Proxy Statement-Prospectus
is accurate as of any date other than such date, and neither the mailing of the
Joint Proxy Statement-Prospectus to shareholders nor the issuance of Catawba
Valley Bancshares' common stock shall create any implication to the contrary.
86
APPENDIX I
----------
AGREEMENT AND PLAN
OF SHARE EXCHANGE
BY AND AMONG
CATAWBA VALLEY BANK,
CATAWBA VALLEY BANCSHARES, INC.
AND
FIRST GASTON BANK OF NORTH CAROLINA
June 29, 2001
TABLE OF CONTENTS
ARTICLE I - THE EXCHANGE
1.01 Names Of Exchanging Corporations
1.02 The Exchange
1.03 Exchange Of Shares
A. Closing Of First Gaston's Stock Transfer Books
B. Exchange Procedures
C. Treatment Of Fractional Shares
D. Surrender Of Certificates
E. Anti-Dilutive Adjustments
F. Dissenters
G. Lost Certificates
H. Treatment Of First Gaston's Stock Options
1.04 Closing; Articles Of Share Exchange; Effective Time
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF FIRST GASTON
2.01 Organization; Standing; Power
2.02 First Gaston's Capital Stock
2.03 Subsidiaries
2.04 Convertible Securities, Options, Etc.
2.05 Authorization And Validity Of Agreement
2.06 Validity Of Transactions; Absence Of Required Consents Or Waivers
2.07 First Gaston's Books And Records
2.08 First Gaston Reports
2.09 First Gaston Financial Statements
2.10 Tax Returns And Other Tax Matters
2.11 Absence Of Material Adverse Changes Or Certain Other Events
2.12 Absence Of Undisclosed Liabilities
2.13 Compliance With Existing Obligations
2.14 Litigation And Compliance With Law
2.15 Real Properties
2.16 Loans, Accounts, Notes And Other Receivables
2.17 Securities Portfolio And Investments
2.18 Personal Property And Other Assets
2.19 Environmental Matters
2.20 Absence Of Brokerage Or Finders Commissions
2.21 Material Contracts
2.22 Employment Matters; Employee Relations
2.23 Employment Agreements; Employee Benefit Plans
2.24 Insurance
2.25 Insurance Of Deposits
2.26 Affiliates
2.27 Obstacles To Regulatory Approval, Accounting Treatment, Or Tax Treatment
2.28 Disclosure
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF CATAWBA AND Bancshares
3.01 Organization; Standing; Power
3.02 Bancshares' Capital Stock
3.03 Subsidiaries
3.04 Convertible Securities, Options, Etc.
3.05 Authorization And Validity Of Agreement
3.06 Validity Of Transactions; Absence Of Required Consents Or Waivers
3.07 Catawba's and Bancshares' Books And Records
3.08 Reports
3.09 Financial Statements
3.10 Tax Returns And Other Tax Matters
3.11 Absence Of Material Adverse Changes Or Certain Other Events
3.12 Absence Of Undisclosed Liabilities
3.13 Compliance With Existing Obligations
3.14 Litigation And Compliance With Law
3.15 Real Properties
3.16 Loans, Accounts, Notes And Other Receivables
3.17 Securities Portfolio And Investments
3.18 Personal Property And Other Assets
3.19 Environmental Matters
3.20 Absence Of Brokerage Or Finders Commissions
3.21 Material Contracts
3.22 Employment Matters; Employee Relations
3.23 Employment Agreements; Employee Benefit Plans
3.24 Insurance
3.25 Insurance Of Deposits
3.26 Affiliates
3.27 Obstacles To Regulatory Approval, Accounting Treatment, Or Tax Treatment
3.28 Disclosure
ARTICLE IV - COVENANTS OF FIRST GASTON
4.01 Affirmative Covenants Of First Gaston
A. "Affiliates" Of First Gaston
B. Notice Of Certain Changes Or Events
C. Further Action; Instruments Of Transfer, Etc.
4.02. Negative Covenants Of First Gaston
A. Amendments To Articles Of Incorporation Or Bylaws
B. Change In Capital Stock
C. Options, Warrants, And Rights
D. Dividends
E. Employment, Benefit, Or Retirement Agreements Or Plans
F. Accounting Practices
G. Changes In Business Practices
ARTICLE V - COVENANTS OF CATAWBA AND Bancshares
5.01 Affirmative Covenants Of Catawba and Bancshares
A. "Affiliates"
B. Notice Of Certain Changes Or Events
C. Further Action; Instruments Of Transfer, Etc.
5.02. Negative Covenants Catawba and Bancshares
A. Amendments To Articles Of Incorporation Or Bylaws
B. Change In Capital Stock
C. Options, Warrants, And Rights
D. Dividends
E. Employment, Benefit, Or Retirement Agreements Or Plans
F. Accounting Practices
G. Changes In Business Practices
H. Reconstitution of Bancshares' Board of Directors
ARTICLE VI - MUTUAL AGREEMENTS
6.01 Shareholders' Approvals; Registration Statement; Proxy
Statement/Prospectus - Listing -Application
A. Meetings Of Shareholders
B. Registration Statement
C. Preparation And Distribution Of Joint Proxy Statement/Prospectus
D. Recommendation Of First Gaston's Board Of Directors
E. Information For Proxy Statement/Prospectus And Registration Statement
F. Listing Application
6.02 Regulatory Approvals
6.03 Access
6.04 Costs
6.05 Confidentiality
6.06 Reorganization For Tax Purposes
6.07 Accounting Treatment
ARTICLE VII - CONDITIONS PRECEDENT TO EXCHANGE
7.01 Conditions To All Parties' Obligations
A. Approval By Governmental Or Regulatory Authorities; No Disadvantageous
B. Effectiveness Of Registration Statement; Compliance With Securities And
Other "Blue Sky" Requirements
C. Adverse Proceedings. Injunction. Etc.
D. Approval By Boards Of Directors And Shareholders
E. Approval of Charter Amendment
F. Fairness Opinions
G. Tax Opinion
H. Listing of Bancshares' Stock
I. No Termination Or Abandonment
7.02 Additional Conditions To First Gaston's Obligations
A. Material Adverse Change
B. Compliance With Laws
C. Catawba's And Bancshares' Representations And Warranties And Performance
Of Agreements; Officers' Certificate
D. Legal Opinion Of Catawba's And Bancshares' Counsel
E. Other Documents And Information From Catawba And Bancshares
F. Acceptance By First Gaston's Counsel
G. Exercise of Dissenters' Rights
H. Accounting Treatment
I. Affiliates Agreements
7.03 Additional Conditions To Catawba's And Bancshares' Obligations
A. Material Adverse Change
B. Compliance With Laws
C. First Gaston's Representations And Warranties And Performance Of
Agreements; Officers' Certificate
D. Legal Opinion Of First Gaston's Counsel
E. Other Documents And Information From First Gaston
F. Acceptance By Catawba's And Bancshares' Counsel
G. Exercise Of Dissenters Rights
H. Accounting Treatment
I. Affiliates' Agreements
ARTICLE VIII - TERMINATION; BREACH
8.01 Mutual Termination
8.02 Unilateral Termination
ARTICLE IX - MISCELLANEOUS PROVISIONS
9.01 "Previously Disclosed" Information; "Material Adverse Effect" And "Material
Adverse Change"
9.02 Waiver
9.03 Amendment
9.04 Notices
9.05 Further Assurances
9.06 Headings And Captions
9.07 Entire Agreement
9.08 Severability Of Provisions
9.09 Assignment
9.10 Enforcement
9.11 Counterparts
9.12 Governing Law
9.13 Survival Of Representations, Warranties, And Other Agreements
AGREEMENT AND PLAN OF SHARE EXCHANGE
BY AND AMONG CATAWBA VALLEY BANK,
CATAWBA VALLEY BANCSHARES, INC.
AND FIRST GASTON BANK OF NORTH CAROLINA
THIS AGREEMENT AND PLAN OF SHARE EXCHANGE (hereinafter called
"Agreement") entered into as of the 29th day of June 2001, by and among Catawba
Valley Bank ("Catawba"), Catawba Valley Bancshares, Inc. ("Bancshares") and
First Gaston Bank of North Carolina ("First Gaston").
WHEREAS, Catawba is a North Carolina commercial bank with its principal
office and place of business located in Hickory, North Carolina; and,
WHEREAS, Bancshares is a North Carolina corporation with its principal
office and place of business located in Hickory, North Carolina and is the owner
of all the outstanding shares of common stock of Catawba; and,
WHEREAS, First Gaston is a North Carolina commercial bank with its
principal office and place of business located in Gastonia, North Carolina; and,
WHEREAS, Bancshares, Catawba and First Gaston have agreed that it is in
their mutual best interests and in the best interests of the respective
shareholders for Bancshares and First Gaston to consummate a share exchange
whereby each of the outstanding shares of First Gaston's common stock would be
exchanged for shares of Bancshares' common stock, all in the manner and upon the
terms and conditions contained in this Agreement; and,
WHEREAS, to effectuate the foregoing, Bancshares, Catawba and First
Gaston desire to adopt this Agreement as a plan of reorganization in accordance
with the provisions of Section 368(a)(1)(B) of the Internal Revenue Code of
1986, as amended (the "Code"); and,
WHEREAS, the respective Boards of Directors of each of First Gaston,
Bancshares and Catawba have determined that it is in the best interests of their
respective companies and their shareholders to consummate the transactions
provided for herein; and,
WHEREAS, the parties intend that the transactions contemplated herein
qualify for treatment as a pooling of interests pursuant to APB Opinion No. 16;
and
NOW, THEREFORE, in consideration of the premises, the mutual benefits
to be derived from this Agreement, and of the representations, warranties,
conditions, covenants, and promises herein contained, and subject to the terms
and conditions hereof, First Gaston, Bancshares and Catawba hereby adopt and
make this Agreement and mutually agree as follows:
ARTICLE I
THE EXCHANGE
1.01 NAMES OF EXCHANGING CORPORATIONS. The name of the corporation
--------------------------------
whose shares will be acquired is "First Gaston Bank of North Carolina" and the
name of the acquiring corporation is "Catawba Valley Bancshares, Inc."
1.02 THE EXCHANGE. At the "Effective Time" (as defined in Paragraph
------------
1.04 below), upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the North Carolina Business Corporation Act,
as amended (the "Act"), each share of the $5.00 par value common stock of First
Gaston ("First Gaston Stock") (other than any shares to which rights of dissent
and appraisal are properly exercised as provided below) shall be exchanged (the
"Exchange") for 0.8934 (the "Exchange Rate") newly issued shares of Bancshares'
$1.00 par value common stock, rounded to the nearest whole share ("Bancshares
Stock"). The Exchange shall have the effects set forth in Section 55-11-06 of
the Act.
1.03 EXCHANGE OF SHARES.
------------------
A. CLOSING OF FIRST GASTON'S STOCK TRANSFER BOOKS. At the
----------------------------------------------
Effective Time, and without any action by First Gaston or Bancshares, First
Gaston's stock transfer books shall be closed as to holders of First Gaston
Stock immediately prior to the Effective Time and, thereafter, no transfer of
First Gaston Stock by any such holder may be made or registered; and the holders
of shares of First Gaston Stock shall cease to be, and shall have no further
rights as, shareholders of First Gaston other than as provided herein. Following
the Effective Time, certificates representing shares of First Gaston Stock
outstanding at the Effective Time (herein sometimes referred to as "Old
Certificates") shall evidence only the right of the registered holder thereof to
receive, and may be exchanged for, (1) certificates for the number of whole
shares of Bancshares Stock to which such holders shall have become entitled on
the basis set forth above (herein sometimes referred to as "New Certificates"),
or (ii) in the case of shares as to which rights of dissent and appraisal are
properly exercised (as provided below), cash as provided in Article 13 of the
Act.
B. EXCHANGE PROCEDURES. As soon as reasonably practicable, but in
-------------------
any event no more than twenty (20) days following the Effective Time, Bancshares
shall cause First Citizens Bank and Trust Company, Raleigh, North Carolina, the
transfer agent for Bancshares Stock (the "Exchange Agent"), to mail to each
former shareholder of First Gaston of record immediately prior to the Effective
Time ("First Gaston Record Holder") written instructions and transmittal
materials (including, without limitation, a return mailing envelope addressed to
the Exchange Agent (collectively, a "Transmittal Letter") for use in
surrendering Old Certificates to the Exchange Agent. All Transmittal Letters
shall be sent by United States mail to the First Gaston Record Holders at the
addresses set forth on a certified shareholder list to be delivered by First
Gaston to Bancshares at the "Closing" (as defined in Paragraph 1.04) and shall
also be made available at the offices of the Exchange Agent. As soon as
reasonably practicable thereafter, the First Gaston Record Holders of all of the
outstanding shares of First Gaston Stock, shall deliver, or cause to be
delivered, by United States Postal Service, hand
2
delivery or any other means of delivery selected by such First Gaston Record
Holders, to the Exchange Agent, pursuant to the Transmittal Letters, the Old
Certificates, and the Exchange Agent shall take prompt action to process such
Old Certificates received by it (including the prompt return of any defective
submissions with instructions as to those actions which may be necessary to
remedy any defects). Upon the proper delivery to the Exchange Agent (in
accordance with the above instructions, and accompanied by a properly completed
Transmittal Letter) by a First Gaston Record Holder of his or her Old
Certificates, the Exchange Agent shall register in the name of such First Gaston
Record Holder the shares of Bancshares Stock and deliver New Certificates to the
First Gaston Record Holder entitled thereto upon and in exchange for the
surrender and delivery to the Exchange Agent by said individual First Gaston
Record Holder of his or her Old Certificates.
C. TREATMENT OF FRACTIONAL SHARES. No scrip or certificates
------------------------------
representing fractional shares of Bancshares Stock will be issued in connection
with the Exchange, and First Gaston's former shareholders shall have no right to
vote or receive any dividend or other distribution on, or any other right with
respect to, any fraction of a share of Bancshares Stock resulting from the
Exchange.
D. SURRENDER OF CERTIFICATES. Subject to Paragraph 1.03.F. below,
-------------------------
no certificate for any shares of Bancshares Stock shall be delivered to any
former shareholder of First Gaston unless and until such shareholder shall have
properly surrendered to the Exchange Agent the Old Certificates formerly
representing his or her shares of First Gaston Stock, together with a properly
completed Transmittal Letter in such form as shall be provided to the
shareholder by the Exchange Agent for that purpose. Further, until such Old
Certificates are so surrendered, no dividend or other distribution payable to
holders of record of Bancshares Stock as of any date subsequent to the Effective
Time shall be delivered to the holder of such Old Certificates. However, upon
the proper surrender of such Old Certificates, the Exchange Agent shall pay to
the registered holder of the shares of Bancshares Stock represented by such Old
Certificates the amount of any such cash, dividends or distributions which have
accrued but remain unpaid with respect to such shares. Neither Bancshares, First
Gaston, nor the Exchange Agent, shall have any obligation to pay any interest on
any such cash, dividends or distributions for any period prior to such payment.
Further, and notwithstanding any other provision of this Agreement, neither
Bancshares, First Gaston, nor the Exchange Agent shall be liable to a former
holder of First Gaston Stock for any amount paid or property delivered in good
faith to a public official pursuant to any applicable abandoned property,
escheat, or similar law.
E. ANTI-DILUTIVE ADJUSTMENTS. If, following the date of this
-------------------------
Agreement, Bancshares shall change the number of outstanding shares of
Bancshares Stock as a result of a dividend payable in shares of Bancshares
Stock, a stock split, a reclassification or other subdivision or combination of
outstanding shares, and if the record date of such event occurs prior to the
Effective Time, then an appropriate and proportionate adjustment shall be made
to the Exchange Rate so as to appropriately and proportionately increase or
decrease the number of shares of Bancshares Stock to be issued in exchange for
each of the shares of First Gaston Stock.
3
F. DISSENTERS.
----------
(i) Any shareholder of First Gaston who has and properly
exercises the right of dissent and appraisal with respect to the Exchange as
provided in Article 13 of the Act ("Dissenters Rights") shall be entitled to
receive cash payment of the fair value of all of his or her shares of First
Gaston Stock from the Escrow Fund (defined below) in the manner and pursuant to
the procedures provided therein, subject further to the conditions set forth in
Paragraph 7.03.G. Shares of First Gaston Stock held by persons who exercise
Dissenters Rights shall not be exchanged for Bancshares Stock as provided in
Paragraph 1.03.A. above. However, if any shareholder of First Gaston who
exercises Dissenters Rights shall fail to perfect his or her right to receive
cash payment as provided above, or effectively shall waive or lose such right,
then each of his or her shares of First Gaston Stock shall be deemed to have
been converted into the right to receive Bancshares Stock as of the Effective
Time as provided in Paragraph 1.03.A. above.
(ii) Upon its receipt of any notice of a First Gaston
shareholder's intent to assert Dissenters Rights pursuant to the Act, First
Gaston shall establish an escrow fund (the "Escrow Fund") with an independent
third party reasonably satisfactory to Bancshares (the "Escrow Agent"), from
which the Escrow Agent shall make all payments, whether before or after the
Effective Time, necessary with respect to the exercise of such Dissenters
Rights. Neither Bancshares nor Catawba shall, directly or indirectly, contribute
any funds to the Escrow Fund. First Gaston shall deposit in the Escrow Fund an
amount, subject to Catawba's and Bancshares' approval, that First Gaston
reasonably believes is sufficient to pay fully the claims of all First Gaston
shareholders asserting Dissenters Rights, and shall make additional deposits to
the Escrow Fund as First Gaston or Bancshares may reasonably determine to be
necessary to satisfy such claims. In the event funds remain in the Escrow Fund
after all claims for payment pursuant to Dissenters Rights have finally expired,
terminated, or have been finally satisfied or settled, then any balance
remaining in the Escrow Fund shall be returned to First Gaston.
G. LOST CERTIFICATES. Any First Gaston shareholder whose
-----------------
certificate evidencing shares of First Gaston Stock has been lost, destroyed,
stolen or otherwise is missing shall be entitled to receive a certificate
representing the shares of Bancshares Stock to which he or she is entitled in
accordance with and upon compliance with conditions imposed by the Exchange
Agent or Bancshares pursuant to the provisions of N.C. Gen. Stat.(S).25-8-405
and N.C. Gen. Stat.(S).25-8-104 (including without limitation a requirement that
the shareholder provide a lost instruments indemnity or surety bond in form,
substance and amount satisfactory to the Exchange Agent and Bancshares).
H. TREATMENT OF FIRST GASTON'S STOCK OPTIONS.
-----------------------------------------
(i) At the Effective Time, each option or other right to
purchase shares of First Gaston Stock pursuant to stock options ("First Gaston
Options") granted by First Gaston under its 1995 Stock Option Plan, 1999
Nonqualified Stock Option Plan, and 1999 Incentive Stock Option Plan (as
amended, collectively referred to herein as the "First Gaston Stock Plans"),
which are outstanding at the Effective Time, whether or not exercisable shall be
4
converted into and become rights with respect to Bancshares Stock, and
Bancshares shall assume each First Gaston Option, in accordance with the terms
of the First Gaston Stock Plans and stock option agreement by which it is
evidenced, except that from and after the Effective Time (A) Bancshares and its
Executive Committee shall be substituted for First Gaston and the Committee of
First Gaston's Board of Directors (including, if applicable, the entire Board of
Directors of First Gaston) administering the First Gaston Stock Plans, (B) each
First Gaston Option assumed by Bancshares may be exercised solely for shares of
Bancshares Stock, (C) the number of shares of Bancshares Stock subject to such
First Gaston Option shall be equal to the number of shares of First Gaston Stock
subject to such First Gaston Option immediately prior to the Effective Time
multiplied by the Exchange Rate and rounded to the nearest whole share, and (D)
the per share exercise price under each such First Gaston Option shall be
adjusted by dividing the per share exercise price under each such First Gaston
Option by the Exchange Rate and rounded to the nearest cent.
(ii) As soon as practicable after the Effective Time, Bancshares
shall deliver to the participants in the First Gaston Stock Plans an appropriate
notice setting forth such participant's rights pursuant thereto and the grants
pursuant to the First Gaston Stock Plans shall continue in effect on the same
terms and conditions (subject to the adjustments required by Paragraph 1.03.H(i)
after giving effect to the Exchange). At or prior to the Effective Time,
Bancshares shall take all corporate action necessary to reserve for issuance
sufficient shares of Bancshares Stock for delivery upon exercise of First Gaston
Options assumed by it in accordance with this Paragraph 1.03.H. As soon as
practicable after the Effective Time, Bancshares shall file a registration
statement on Form S-8 (or any successor or other appropriate form), with respect
to the shares of Bancshares Stock subject to such options and shall use its
reasonable efforts to maintain the effectiveness of such registration statement
(and maintain the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding.
(iii) All restrictions or limitations on transfer with respect to
First Gaston Stock awarded under the First Gaston Stock Plans or any other plan,
program, or arrangement of First Gaston, to the extent that such restrictions or
limitations shall not have already lapsed, and except as otherwise expressly
provided in such plans, program, or arrangement, shall remain in full force and
effect with respect to shares of First Gaston Stock into which such restricted
stock is converted pursuant to this Agreement.
(iv) First Gaston agrees to cooperate with Bancshares to insure
the implementation of this Paragraph 1.03.H.
1.04 CLOSING; ARTICLES OF SHARE EXCHANGE; EFFECTIVE TIME. The closing of
---------------------------------------------------
the transactions contemplated by this Agreement (the "Closing") shall take place
at the offices of Bancshares in Hickory, North Carolina, or at such other place
as Bancshares and First Gaston shall mutually designate, on a date specified by
Bancshares and First Gaston (the "Closing Date") after the expiration of any and
all required waiting periods following the effective date of required approvals
of the Exchange by governmental or regulatory authorities. At the Closing, First
Gaston, Bancshares and Catawba shall take such actions (including, without
limitation, the delivery of certain closing documents) as are required herein
and as shall
5
otherwise be required by law to consummate the Exchange and cause it to become
effective, and shall execute Articles of Share Exchange under North Carolina law
which shall contain a "Plan of Exchange" substantially in the form attached as
Exhibit A hereto.
Subject to the terms and conditions set forth herein (including,
without limitation, the receipt of all required approvals of governmental and
regulatory authorities), the Exchange shall be effective on the date and at the
time (the "Effective Time") the Articles of Share Exchange are filed with the
North Carolina Secretary of State in accordance with law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FIRST GASTON
Except as otherwise specifically provided herein or as "Previously
Disclosed" (as defined in Paragraph 9.01 below) to Catawba and Bancshares, First
Gaston hereby makes the following representations and warranties to Catawba and
Bancshares:
2.01 ORGANIZATION; STANDING; POWER. First Gaston (i) is duly organized
-----------------------------
and incorporated, validly existing, and in good standing under the laws of North
Carolina; (ii) has all requisite power and authority (corporate and other) to
own, lease, and operate its properties and to carry on its business as now being
conducted; (iii) is duly qualified to do business and is in good standing in
each other 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 First Gaston, and (iv) is not transacting business or
operating any properties owned or leased by it in violation of any provision of
federal or state law or any rule or regulation promulgated thereunder, which
violation would have a Material Adverse Effect on First Gaston.
2.02 FIRST GASTON'S CAPITAL STOCK. First Gaston's authorized capital
----------------------------
stock consists of 20,000,000 shares of common stock, $5.00 par value per share.
As of May 31, 2001, 1,262,350 shares of First Gaston Stock were issued and
outstanding, which constitute First Gaston's only issued and outstanding
securities.
Each outstanding share of First Gaston Stock (i) has been duly
authorized and is validly issued and outstanding, and is fully paid and, except
to the extent set forth in N.C.G.S. 53-42, nonassessable, (ii) has not been
issued in violation of the preemptive rights of any shareholder, and (iii) his
been issued pursuant to and in compliance with the requirement of a registration
statement or an applicable exemption from the registration requirements under
the Securities Act of 1933, as amended (the "1933 Act").
2.03 SUBSIDIARIES.
------------
A. (i) Schedule 2.03 hereto is a list of all of First Gaston's
Subsidiaries (defined below) together with the jurisdiction of organization of
each such Subsidiary, (ii) First Gaston owns, directly or indirectly, all the
issued and outstanding equity securities of each of its Subsidiaries, (iii) no
equity securities of any of its Subsidiaries are or may become required to be
6
issued (other than to it or its wholly-owned Subsidiaries) by reason of any
contractual right or obligation or otherwise, (iv) there are no contracts,
commitments, understandings or arrangements by which any of such Subsidiaries
are or may be bound to sell or otherwise transfer any equity securities of any
such Subsidiaries (other than to it or its wholly-owned Subsidiaries), (v) there
are no contracts, commitments, understandings, or arrangements relating to its
rights to vote or to dispose of such securities; (vi) all of the equity
securities of each Subsidiary held by First Gaston or its Subsidiaries are fully
paid and nonassessable, are owned by First Gaston or its Subsidiaries free and
clear of any liens, charges, encumbrances or security interests, have been duly
authorized, and are validly issued and outstanding; (vii) none of the equity
securities of any Subsidiary held by First Gaston have been issued in violation
of the preemptive rights of any shareholder, and all such securities have been
issued pursuant to a valid and effective registration statement or pursuant to
and in compliance with the requirement of an applicable exemption from the
registration requirements under the 1933 Act.
B. As used in this Agreement, "Subsidiary" shall have the
meaning as described to that term in Rule 1-02 of Regulation S-X of the
Securities and Exchange Commission ("SEC").
C. First Gaston does not own beneficially, directly or
indirectly, any equity securities or similar interests of any entity, or any
interest in a partnership or joint venture of any kind, other than its
Subsidiaries.
D. Each of First Gaston's Subsidiaries is duly organized and
is validly existing in good standing under the laws of the jurisdiction of its
organization, and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified, except where the failure to so qualify
would not have a Material Adverse Effect on First Gaston.
2.04 CONVERTIBLE SECURITIES, OPTIONS, ETC. With the exception of
------------------------------------
options to purchase an aggregate of 235,497 shares of First Gaston Stock which
have been issued and are outstanding under the First Gaston Stock Plans. First
Gaston does not have any outstanding (1) securities or other obligations
(including debentures or other debt instruments) which are convertible into
shares of First Gaston Stock or any other securities of First Gaston; (ii)
options, warrants, rights, calls, or other commitments of any nature which
entitle any person to receive or acquire any shares of First Gaston Stock or any
other securities of First Gaston; or (iii) plan, agreement or other arrangement
pursuant to which shares of First Gaston Stock or any other securities of First
Gaston, or options, warrants, rights, calls, or other commitments of any nature
pertaining thereto, have been or may be issued.
2.05 AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been
---------------------------------------
duly and validly approved by First Gaston's Board of Directors in the manner
required by law and subject only to approval of this Agreement by the
shareholders of First Gaston in the manner required by law (as contemplated by
Paragraph 6.01.A. below) and by the applicable regulatory authorities (as
contemplated by Paragraph 6.02 below), (i) First Gaston has the corporate power
and authority to execute and deliver this Agreement and to perform its
7
obligations and agreements and carry out the transactions described herein, (ii)
all corporate action required to authorize First Gaston to enter into this
Agreement and to perform its obligations and agreements and carry out the
transactions described herein has been duly and properly taken, and (iii) this
Agreement has been duly executed on behalf of First Gaston, and (assuming due
authorization, execution and delivery by Bancshares and Catawba) constitutes a
valid and binding agreement of First Gaston, 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; and (b) by 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).
2.06 VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR WAIVERS.
-----------------------------------------------------------------
Except where the same would not have a Material Adverse Effect on First Gaston,
neither the execution and delivery of this Agreement, nor the consummation of
the transactions described herein, nor compliance by First Gaston with any of
its obligations or agreements contained herein, will: (1) conflict with or
result in a breach of the terms and conditions of, or constitute a default or
violation under any provision of, First Gaston's Articles of Incorporation or
Bylaws, or any contract, agreement, lease, mortgage, note, bond, indenture,
license, or obligation or understanding (oral or written) to which First Gaston
is bound or by which it, its business, capital stock, or any properties or
assets may be affected; (ii) result in the creation or imposition of any lien,
claim, interest, charge, restriction, or encumbrance upon any of First Gaston's
properties or assets; (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; (iv)
result in the acceleration of any obligation or indebtedness of First Gaston; or
(v) interfere with or otherwise adversely affect First Gaston's ability to carry
on its business as presently conducted.
No consents, approvals, or waivers are required to be obtained from any
person or entity in connection with First Gaston'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 First Gaston's shareholders as described in Paragraph 7.01.D. below and of
governmental or regulatory authorities as described in Paragraph 7.01.A. below,
and other consents or approvals, the failure of which to obtain would not have a
Material Adverse Effect on First Gaston or its ability to consummate the
Exchange.
2.07 FIRST GASTON'S BOOKS AND RECORDS. First Gaston's books of account
--------------------------------
and business records have been maintained in material compliance with all
applicable legal and accounting requirements and in accordance with good
business practices, and such books and records are complete and reflect
accurately in all material respects First Gaston's items of income and expense
and all of its assets, liabilities, and stockholders' equity. The minute books
of First Gaston accurately reflect in all material respects the corporate
actions which its shareholders and Board of Directors, and all committees
thereof, have taken during the time periods covered by such minute books. All
such minute books have been or will be made available to Catawba, Bancshares,
and their representatives.
8
2.08 FIRST GASTON REPORTS. First Gaston 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 Federal
Deposit Insurance Corporation ("FDIC"), (ii) the North Carolina Commissioner of
Banks (the "Commissioner"), and (iii) any other governmental or regulatory
authorities having jurisdiction over First Gaston. All such reports,
registrations, and statements filed by First Gaston with the FDIC, the
Commissioner, or other such regulatory authority are collectively referred to
herein as the "Reports." As of their respective dates, each Report complied in
all material respects with all the statutes, rules, and regulations enforced or
promulgated by the regulatory authority with which it was 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; and First
Gaston has not been notified by any such governmental or regulatory authority
that any such Report was deficient in any material respect as to form or
content. Following the date of this Agreement, First Gaston shall deliver to
Bancshares, simultaneous with the filing thereof, a copy of each Report.
2.09 FIRST GASTON FINANCIAL STATEMENTS. First Gaston has delivered to
---------------------------------
Bancshares (1) a copy of its audited balance sheets as of December 31, 2000 and
1999, and its audited statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2000 and 1999, together with
notes thereto (the "First Gaston Financial Statements"), and (ii) a copy of its
unaudited balance sheet as of March 31, 2001 and its unaudited statement of
operations for the three months ended March 31, 2001 (the "First Gaston Interim
Financial Statements"). Following the date of this Agreement, First Gaston
promptly will deliver to Bancshares and Catawba all other annual or interim
financial statements prepared by or for First Gaston. The First Gaston Financial
Statements and the First Gaston Interim Financial Statements (including any
related notes and schedules thereto) (i) are in accordance with First Gaston's
books and records, and (ii) were prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods indicated and present fairly in all material respects First Gaston'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 First Gaston Financial Statements have
been audited and certified by First Gaston's independent certified public
accountants, Larrowe & Company, PLC.
2.10 TAX RETURNS AND OTHER TAX MATTERS. (i) First Gaston has timely
---------------------------------
filed or caused to be filed all federal, state, and local tax returns and
reports which are required by law to have been filed, and to the best knowledge
of management of First Gaston, all such returns and reports were true, correct,
and complete in all material respects and contained all material information
required to be contained therein; (ii) all federal, state, and local income,
profits, franchise, sales, use occupation, property, excise, and other taxes
(including interest and penalties), charges and assessments which have become
due from or been assessed or levied against First Gaston or its property have
been fully paid, and, to the best knowledge of management of First Gaston, with
respect to any such taxes to become due from First Gaston for any period or
periods through and including March 31, 2001, adequate provision has been made
9
for the payment of all such taxes and such provision is reflected in the First
Gaston Financial Statements; (iii) First Gaston has not received any indication
of the pendency of any audit or examination in connection with any tax return or
report and has no knowledge that any such return or report is subject to
adjustment; and (iv) First Gaston has not executed any waiver or extended the
statute of limitations (or been asked to execute a waiver or extend a statute of
limitation) with respect to any tax year, the audit of any tax return or report
or the assessment or collection of any tax. Any deferred taxes of First Gaston
have been provided for in the First Gaston Financial Statements in all material
respects.
2.11 ABSENCE OF MATERIAL ADVERSE CHANGES OR Certain OTHER EVENTS.
-----------------------------------------------------------
(i) Since December 31, 2000, First Gaston 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 to the best knowledge of management of First Gaston
which, with the lapse of time or otherwise, is reasonably likely to cause,
create, or result in a Material Adverse Change, in or affecting First Gaston's
financial condition or results of operations, prospects, business, assets, loan
portfolio, investments, properties, or operations.
(ii) Since December 31, 2000, and other than in the ordinary course of
its business including its normal salary review for 2001, all as Previously
Disclosed to Bancshares and Catawba, First Gaston has not incurred any material
liability or engaged in any material transaction or entered into any material
agreement, increased the salaries, compensation, or general benefits payable to
its employees, suffered any 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.
2.12 ABSENCE OF UNDISCLOSED LIABILITIES. Except as Previously
----------------------------------
Disclosed, First Gaston has no 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 First Gaston Financial Statements or the First Gaston
Interim Financial Statements, (ii) obligations or liabilities incurred in the
ordinary course of its business since March 31, 2001, or (iii) obligations or
liabilities which are not reasonably likely to, individually or in the
aggregate, cause a Material Adverse Change in First Gaston.
2.13 COMPLIANCE WITH EXISTING OBLIGATIONS. First Gaston 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
or Bylaws, and/or any contract, agreement, lease, mortgage, note, bond,
indenture, license, obligation, understanding, or other undertaking (whether
oral or written) to which First Gaston is bound or by which it, its business,
capital stock, or any of its properties or assets may be affected, which default
or violation would have a Material Adverse Effect on First Gaston.
2.14 LITIGATION AND COMPLIANCE WITH LAW.
----------------------------------
10
(i) There are no actions, suits, arbitrations, controversies, or
other proceedings or investigations (or, to the best knowledge and belief of
management of First Gaston, any facts or circumstances which reasonably could
result in such), including, without limitation, any such action by any
governmental or regulatory authority, which currently exists or is ongoing,
pending, or, to the best knowledge and belief of management of First Gaston,
threatened, contemplated, or probable of assertion, against, relating to, or
otherwise affecting First Gaston or any of its properties or assets which, if
determined adversely, could result in liability on the part of First Gaston for,
or subject it to, monetary damages, fines, or penalties, or an injunction, and
which could have a Material Adverse Effect on First Gaston's financial
condition, results of operations, prospects, business, assets, loan portfolio,
investments, properties, or operations or on the ability of First Gaston to
consummate the Exchange;
(ii) First Gaston has all licenses, permits, orders,
authorizations, or approvals ("First Gaston Permits") of any federal, state,
local, or foreign governmental or regulatory body that are material to or
necessary for the conduct of its business or to own, lease, and operate its
properties, all such First Gaston Permits are in full force and effect, except
where the failure to be in force and effect would not have a Material Adverse
Effect on First Gaston; no violations are or have been recorded in respect of
any such First Gaston Permits; and no proceeding is pending or, to the best
knowledge of management of First Gaston, threatened or probable of assertion to
suspend, cancel, revoke, or limit any First Gaston Permit;
(iii) First Gaston 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 or other
governmental authority (including, without limitation, the FDIC or the
Commissioner) relating to its financial condition, directors or officers,
operations, capital, regulatory compliance, or otherwise; there are no
judgments, orders, stipulations, injunctions, decrees, or awards against First
Gaston which in any manner limit, restrict, regulate, enjoin, or prohibit any
present or past business or practice of First Gaston; and First Gaston has not
been advised that any regulatory or other governmental authority or any court is
contemplating, threatening, or requesting the issuance of any such agreement,
order, injunction, directive, memorandum, judgment, stipulation, decree, or
award; and,
(iv) First Gaston is not in violation or default in any material
respect under, and First Gaston 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 governmental or
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 laws and regulations applicable to extensions of credit by First
Gaston) and, to the best knowledge of management of First Gaston, there is no
basis for any claim by any person or authority for compensation, reimbursement,
or damages or otherwise for any violation of any of the foregoing that would
have any Material Adverse Effect on the financial condition of First Gaston.
11
2.15 REAL PROPERTIES. First Gaston has Previously Disclosed to Catawba
---------------
and Bancshares a listing of all real property owned or leased by First Gaston
and its Subsidiaries (including, without limitation, banking facilities and all
other real estate or foreclosed properties owned by First Gaston) (the "First
Gaston Real Property") and all leases, if any, pertaining to any such First
Gaston Real Property to which First Gaston is a party (the "First Gaston Real
Property Leases"). With respect to all First Gaston Real Property owned by First
Gaston, First Gaston has good and marketable title to such First Gaston 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
affect materially and adversely affect the value of the First Gaston Real
Property and which do not and will not materially detract from, interfere with,
or restrict the present or future use of the properties subject thereto or
affected thereby. With respect to each First Gaston Real Property Lease (i) such
lease is valid and enforceable in accordance with its terms, (ii) there
currently exists no circumstance or condition which constitutes an event of
default by First Gaston or their lessor or which, with the passage of time or
the giving of required notices, will or could constitute such an event of
default, and (iii) the execution and delivery of this Agreement does not
constitute an event of default thereunder.
To the best knowledge of management of First Gaston, the First Gaston
Real Property complies in all material respects with all applicable federal,
state, and local laws, regulations, ordinances, or orders of any governmental
authority, including those relating to zoning, building and use permits, and the
First Gaston Real Property may be used under applicable zoning ordinances for
commercial banking facilities as a matter of right rather than as a conditional
or nonconforming use.
All improvements and fixtures included in or on the First Gaston Real
Property are in good condition and repair, ordinary wear and tear excepted, and
there does not exist any condition which materially interferes with First
Gaston's use or materially and adversely affects the economic value thereof.
2.16 LOANS, ACCOUNTS, NOTES AND OTHER RECEIVABLES.
--------------------------------------------
(i) All loans, accounts, notes and other receivables
reflected as assets on First Gaston's books and records (a) have resulted from
bona fide business transactions in the ordinary course of First Gaston's
operations, (b) in all material respects were made in accordance with First
Gaston's customary loan policies and procedures, and (c) are owned by First
Gaston 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.
(ii) All records of First Gaston regarding all outstanding
loans, accounts, notes, and other receivables, and all other real estate owned,
are accurate in all material respects, and, with respect to each loan which
First Gaston's loan documentation indicates is secured by any real or personal
property or property rights ("First Gaston Loan Collateral"), such loan is
12
secured by valid, perfected, and enforceable liens on all such First Gaston Loan
Collateral having the priority described in First Gaston's records of such loan.
(iii) Each loan reflected as an asset on First Gaston's
books, and each guaranty therefor, is the legal, valid, and binding obligation
of the obligor or guarantor thereon, and to the best knowledge of management of
First Gaston no defense, offset, or counterclaim has been asserted with respect
to any such loan or guaranty.
(iv) First Gaston has Previously Disclosed to Bancshares a
listing of (a) each loan, extension of credit, or other asset of First Gaston
which, as of May 31, 2001, is classified by the FDIC, the Commissioner, or by
First Gaston as "Loss", "Doubtful", "Substandard", or "Special Mention" (or
otherwise by words of similar import), or which First Gaston 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 (b) each loan or
extension of credit of First Gaston which, as of May 31, 2001, was past due
thirty (30) days or more as to the payment of principal and/or interest, or as
to which any obligor thereon (including the borrower or any guarantor) otherwise
was in default, is the subject of a proceeding in bankruptcy, or otherwise has
indicated any inability or intention not to repay such loan or extension of
credit. Each such listing is accurate and complete as of the date indicated.
(v) To the best knowledge of management of First Gaston, each
of First Gaston's loans and other extensions of credit (with the exception of
those loans and extensions of credit specified in the written listings described
in Subparagraph (iv) above) is collectible in the ordinary course of First
Gaston's business in an amount which is not less than the amount at which it is
carried on First Gaston's books and records.
2.17 SECURITIES PORTFOLIO AND INVESTMENTS. All securities owned by
------------------------------------
First Gaston (whether owned of record or beneficially) 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, which
would materially impair the ability of First Gaston to dispose freely of any
such security and/or otherwise to realize the benefits of ownership thereof at
any time (other than pledges of securities in the ordinary course of First
Gaston's business to secure public funds deposits and in connection with
repurchase agreements with customers and Federal Home Loan Bank borrowings).
There are no voting trusts or other agreements or undertakings to which First
Gaston is a party with respect to the voting of any such securities.
Except for fluctuations in the market values of United States
Treasury and agency securities, municipal securities, or other debt securities
since May 31, 2001, there has been no material deterioration or Material Adverse
Change in the quality, or any material decrease in the value, of First Gaston's
securities portfolio.
2.18 PERSONAL PROPERTY AND OTHER ASSETS. All assets of First Gaston
----------------------------------
(including, without limitation, all banking equipment, data processing
equipment, vehicles, and all other personal property located in or used in the
operation of each office of First Gaston or
13
otherwise used by First Gaston in the operation of its business) are owned by
First Gaston free and clear of all liens, leases, encumbrances, title defects,
or exceptions to title. All of First Gaston's banking and other equipment is in
good operating condition and repair, ordinary wear and tear excepted.
2.19 ENVIRONMENTAL MATTERS. First Gaston has Previously Disclosed and
---------------------
provided to Catawba and Bancshares copies of all written reports,
correspondence, notices, or other materials, if any, in its possession
pertaining to environmental reports, surveys, assessments, notices of violation,
notices of regulatory requirements, penalty assessments, claims, actions, or
proceedings, past or pending, of the First Gaston Real Property or any of its
First Gaston Loan Collateral and any improvements thereon, or to any violation
of Environmental Laws (as defined below) on, affecting or otherwise involving
the First Gaston Real Property, any First Gaston Loan Collateral, or otherwise
involving First Gaston.
To the knowledge of management of First Gaston:
(i) There has been no presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
reporting, testing, processing, emission, discharge, release, threatened
release, control, or clean-up, in a reportable or regulated quantity, of any
hazardous, toxic, or otherwise regulated materials, substances, or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants, toxic
chemicals, oil or other petroleum products or byproducts, asbestos or materials
containing (or presumed to contain) asbestos, polychlorinated biphenols, or
radioactive materials, and/or any hazardous, toxic, regulated or dangerous
waste, substance, or material defined as such by the United States Environmental
Protection Agency or any other federal, state, or local government or agency or
political subdivision thereof, or for the purpose of any Environmental Laws (as
defined herein), as may now or hereafter (through the Effective Time) be defined
or in effect ("Hazardous Substances") by any person on, from, or relating to any
parcel of the First Gaston Real Property;
(ii) First Gaston has not violated any federal, state, or
local law, rule, regulation, order, permit, or other requirement relating to
health, safety, or the environment or imposing liability, responsibility, or
standards of conduct applicable to environmental conditions (all such laws,
rules, regulations, orders, and other requirements being herein collectively
referred to as "Environmental Laws"), and, there has been no violation of any
Environmental Laws (including any violation with respect to or relating to any
First Gaston Loan Collateral) by any other person or entity for whose liability
or obligation with respect to any particular matter or violation First Gaston is
or may be responsible or liable;
(iii) First Gaston is not subject to any pending 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, or clean-up of any
Hazardous Substances on, from, or
14
relating to the First Gaston Real Property or any First Gaston Loan Collateral,
by First Gaston or any other person or entity; and;
(iv) No facts, events, or conditions relating to the First
Gaston Real Property or any First Gaston Loan Collateral, or the operations of
First Gaston at any of their respective office locations, will prevent, hinder
or limit continued compliance with Environmental Laws, or give rise to any
investigatory, remedial, or corrective actions, obligations, or liabilities
(whether accrued, absolute, contingent, unliquidated, or other-wise) pursuant to
Environmental Laws.
For purposes of this Agreement, "Environmental Laws" shall include:
(i) all federal, state, and local statutes, regulations,
ordinances, orders, decrees, and similar provisions having the force or effect
of law,
(ii) all contractual agreements, and
(iii) 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 (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 Pollutant 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) as such may now or hereafter (through the Effective
Time) be defined or in effect.
2.20 ABSENCE OF BROKERAGE OR FINDERS COMMISSIONS. All negotiations
-------------------------------------------
relative to this Agreement and the transactions described herein have been
carried on by First Gaston directly with Catawba and Bancshares; 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, First Gaston 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 the transactions described herein; and
First Gaston has not agreed to pay any brokerage fee or other commission to any
person or entity in connection with the transactions described herein.
2.21 MATERIAL CONTRACTS. Except as Previously Disclosed, First Gaston
------------------
is not a party to or bound by any agreement involving money or other property in
an amount or with a value in excess of $25,000 (i) which is material to First
Gaston and was not entered into in the ordinary course of business, (ii) which
involves hedging, options, or any similar trading activity,
15
or interest rate exchanges or swaps, (iii) which commits First Gaston 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 First Gaston's
business), (iv) which involves the purchase or sale of any assets of First
Gaston, or the purchase, sale, issuance, redemption, or transfer of any capital
stock or other securities issued by First Gaston, or (v) with any director or
officer of First Gaston (including, without limitation, any employment or
consulting agreement, but not including any agreement relating to loans or other
banking services which were made in the ordinary course of First Gaston's
business and on substantially the same terms and conditions as were prevailing
at that time for similar agreements with unrelated persons).
First Gaston 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 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 First Gaston.
2.22 EMPLOYMENT MATTERS; EMPLOYEE RELATIONS. First Gaston (i) has paid
--------------------------------------
in full to or accrued on behalf of all its directors, officers, and employees
all wages, salaries, commissions, bonuses, fees, sick pay, severance pay, all
other amounts promised to the extent required by law or when First Gaston has a
policy of making such payments and other direct compensation for all services
performed by them to the date of this Agreement and (ii) is in compliance with
all 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 First Gaston, asserted that First Gaston is liable in any
amount for any arrearages 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 First Gaston, threatened, against First
Gaston (or any of its employees), involving employment discrimination, sexual
harassment, wrongful discharge, or similar claims.
First Gaston 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 First Gaston and any of its
employees, or any pending or threatened proceeding in which it is asserted that
First Gaston has committed an unfair labor practice; and management of First
Gaston is not aware of any activity involving it or any of its employees
seeking to certify a collective bargaining unit or engaging in any other labor
organization activity.
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2.23 EMPLOYMENT AGREEMENTS; EMPLOYEE BENEFIT PLANS
---------------------------------------------
(i) Neither First Gaston nor any its Subsidiaries is a party
to or bound by any employment agreements with any of their respective directors,
officers, or employees, except for the employment agreements between First
Gaston and W. Alex Hall ("Hall"), dated November 30, 1998, Mark T. Skillestad,
dated March 15, 2000, and Susan B. Mikels, dated September 6, 2000. First Gaston
also has a deferred compensation agreement with Hall dated February 27, 1996.
(ii) First Gaston has Previously Disclosed and has delivered
or made available to Catawba and Bancshares prior to the execution of this
Agreement copies, in each case, of all pension, stock ownership, severance pay,
vacation, bonus, or other incentive plans, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health plans,
programs, arrangements or agreements, all life insurance plans, and all other
employee benefit plans or fringe benefit plans, including "employee benefit
plans" as that term is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), currently adopted, maintained by,
sponsored in whole or in part by, or contributed to by First Gaston for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
are eligible to participate (collectively, the "Benefit Plans"). Schedule 2.23
identifies each such First Gaston Benefit Plan, and further identifies each
person who receives benefits under, or is or may become eligible to receive
benefits under, each such Benefit Plan. Without limiting the foregoing, Schedule
2.23 also identifies each person for whom First Gaston has agreed to provide
"lifetime" health benefits and describes the extent of First Gaston's
obligations in that regard. Any of the First Gaston Benefit Plans which is an
"employee pension benefit plan", as that term is defined in Section 3(2) of
ERISA, is referred to herein as an "ERISA Plan". No ERISA Plan is also a
"defined benefit plan" (as defined in Section 414(j) of the Code) or is or has
been a multi-employer plan within the meaning of Section 3(37) of ERISA, except
as described on Schedule 2.23. Neither First Gaston nor any affiliate of First
Gaston has ever been required to contribute to a multi-employer plan, as defined
in Section 3(37) of ERISA.
(iii) All First Gaston Benefit Plans are in compliance in all
material respects with the applicable terms of ERISA, the Code, and any other
applicable laws, rules, or regulations, the breach or violation of which are
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on First Gaston. Each ERISA Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service, and management of First Gaston is not aware of any
circumstances likely to result in revocation of any such favorable determination
letter. To the best knowledge of management of First Gaston, First Gaston has
not engaged in a transaction with respect to any First Gaston Benefit Plan that,
assuming the taxable period of such transaction expired as of the date hereof,
would subject First Gaston to a tax imposed by either Section 4975 of the Code
or Section 502(i) of ERISA in amounts which are reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on First Gaston.
17
(iv) First Gaston has no liability for retiree health and life
benefits under any of the First Gaston Benefit Plans and there are no
restrictions on the rights of First Gaston to amend or terminate any such Plan
without incurring any liability thereunder, except as set forth on Schedule
2.23.
(v) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (a) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of First Gaston from
First Gaston under any First Gaston Benefit Plan or otherwise, (b) increase any
benefits otherwise payable under any First Gaston Benefit Plan or otherwise, or
(c) result in any acceleration of the time of payment or vesting of any such
benefit, except as set forth on Schedule 2.23.
(vi) The actuarial present values of all accrued deferred
compensation entitlements (including entitlements under any executive
compensation, supplemental retirement, or employment agreement) of employees and
former employees of First Gaston and its beneficiaries have been fully reflected
on the First Gaston Financial Statements to the extent required by and in
accordance with GAAP. Any adjustments necessary will be made prior to the
earlier of Closing and December 31, 2001.
2.24 INSURANCE. First Gaston has in effect such policies of general
---------
liability, casualty, directors and officers liability, employee fidelity, errors
and omissions, and other property and liability insurance (including without
limitation a "banker's blanket bond") as have been Previously Disclosed to
Catawba and Bancshares (the " First Gaston Policies"). The First Gaston Policies
provide coverage in such amounts and against such liabilities, casualties,
losses, or risks as is customary or reasonable for entities engaged in First
Gaston's businesses or as is required by applicable law or regulation; and, in
the reasonable opinion of management of First Gaston, the insurance coverage
provided under the First Gaston Policies is reasonable and adequate in all
respects for First Gaston. Each of the First Gaston 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 transact business in North Carolina, and First Gaston has taken all
requisite actions (including the giving of required notices) under each such
Policy in order to preserve all rights thereunder with respect to all matters.
First Gaston is not in default under the provisions of, has received notice of
cancellation or nonrenewal of or any material premium increase on, or has any
knowledge of any failure to pay any premium on or any inaccuracy in any
application for any First Gaston Policy. There are no pending claims with
respect to any First Gaston Policy (and there are no facts which would form the
basis of any such claim), and First Gaston has no knowledge of any state of
facts or of the occurrence of any event that is reasonably likely to form the
basis for any such claim.
2.25 INSURANCE OF DEPOSITS. All deposits of First Gaston are
---------------------
insured by the Bank Insurance Fund of the FDIC to the maximum extent permitted
by law, all deposit insurance premiums due from First Gaston to the FDIC have
been paid in full in a timely fashion, and no proceedings have been commenced
or, to the best knowledge of management of First Gaston, are contemplated by the
FDIC or otherwise to terminate such insurance.
18
2.26 AFFILIATES. First Gaston has Previously Disclosed to Catawba and
----------
Bancshares a listing of those persons deemed by First Gaston as of the date of
this Agreement to be "Affiliates" of First Gaston (as that term is defined in
Rule 405 promulgated under the 1933 Act), including persons, trusts, estates,
corporations, or other entities related to persons deemed to be Affiliates of
First Gaston.
2.27 OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT, OR TAX
--------------------------------------------------------------
TREATMENT. To the best knowledge of management of First Gaston, there exists no
---------
fact or condition (including First Gaston's record of compliance with the
Community Reinvestment Act) relating to First Gaston that may reasonably be
expected to (i) prevent or materially impede or delay Bancshares or First Gaston
from obtaining the regulatory approvals required in order to consummate the
transactions described herein, (ii) prevent the Exchange from qualifying to be a
reorganization under Section 368(a)(1)(B) of the Code, or (iii) prevent the
Exchange from being treated as a "pooling-of-interests" for accounting purposes;
and, if any such fact or condition becomes known to First Gaston, First Gaston
shall promptly (and in any event within three days after obtaining such
knowledge) communicate such fact or condition to Catawba and Bancshares in
writing.
2.28 DISCLOSURE. To the best knowledge of management of First Gaston,
----------
no written statement, certificate, schedule, list, or other written information
furnished by or on behalf of First Gaston to Catawba or Bancshares in connection
with this Agreement (including, without limitation, information "Previously
Disclosed" by First Gaston), when considered as a whole, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading. Each
document delivered or to be delivered by First Gaston to Catawba or Bancshares
is or will be a true and complete copy of such document, unmodified except by
another document delivered by First Gaston.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CATAWBA AND BANCSHARES
Except as otherwise specifically described herein or as "Previously
Disclosed" (as defined in Paragraph 9.01 below) to First Gaston, Catawba and
Bancshares hereby make the following representations and warranties to First
Gaston:
3.01 ORGANIZATION; STANDING; POWER. Catawba and Bancshares each (i) is
-----------------------------
duly organized and incorporated, validly existing, and in good standing under
the laws of North Carolina; (ii) has all requisite power and authority
(corporate and other) to own, lease, and operate their respective properties and
to carry on their respective business as now being conducted; (iii) is duly
qualified to do business and is in good standing in each other 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
Catawba or Bancshares, and (iv) is not transacting
19
business or operating any properties owned or leased by it in violation of any
provision of federal or state law or any rule or regulation promulgated
thereunder, which violation would have a Material Adverse Effect on Catawba or
Bancshares.
3.02 BANCSHARES' CAPITAL STOCK. Bancshares authorized capital stock
-------------------------
consists of 9,000,000 shares of common stock, $1.00 par value per share and
1,000,000 shares of preferred stock, no par value per share. As of May 31, 2001,
1,644,886 shares of Bancshares Stock were issued and outstanding, which
constitute Bancshares' only issued and outstanding securities.
Each outstanding share of Bancshares Stock (i) has been duly authorized
and is validly issued and outstanding, and is fully paid and nonassessable, (ii)
has not been issued in violation of the preemptive rights of any shareholder,
and (iii) his been issued pursuant to and in compliance with the requirement of
a registration statement or an applicable exemption from registration
requirements under the 1933 Act.
3.03 SUBSIDIARIES.
------------
A. (i) Schedule 3.03 hereto is a list of all of Catawba's and
Bancshares' Subsidiaries (defined below) together with the jurisdiction of
organization of each such Subsidiary, (ii) Catawba and Bancshares own, directly
or indirectly, all the issued and outstanding equity securities of each of their
respective Subsidiaries, (iii) no equity securities of any of their respective
Subsidiaries are or may become required to be issued (other than to Catawba,
Bancshares or their respective wholly-owned Subsidiaries) by reason of any
contractual right or obligation or otherwise, (iv) there are no contracts,
commitments, understandings or arrangements by which any of such Subsidiaries
are or may be bound to sell or otherwise transfer any equity securities of any
such Subsidiaries (other than to Catawba, Bancshares or their respective
wholly-owned Subsidiaries), (v) there are no contracts, commitments,
understandings, or arrangements relating to its rights to vote or to dispose of
such securities; (vi) all of the equity securities of each Subsidiary held by
Catawba, Bancshares, or their respective Subsidiaries are fully paid and
nonassessable (except to the extent the common stock of Catawba is assessable as
set forth in N.C.G.S. 53-42), are owned by Catawba, Bancshares, or their
respective Subsidiaries free and clear of any liens, charges, encumbrances or
security interests, have been duly authorized, and are validly issued and
outstanding; (vii) none of the equity securities of any Subsidiary held by
Catawba or Bancshares have been issued in violation of the preemptive rights of
any shareholder, and all such securities have been issued pursuant to a valid
and effective registration statement or pursuant to and in compliance with the
requirement of an applicable exemption from the registration requirements under
the 1933 Act.
B. As used in this Agreement, "Subsidiary" shall have the
meaning as described to that term in Rule 1-02 of Regulation S-X of the SEC.
C. Catawba and Bancshares do not own beneficially, directly or
indirectly, any equity securities or similar interests of any entity, or any
interest in a partnership or joint venture of any kind, other than their
respective Subsidiaries.
20
D. Each of Catawba's and Bancshares' Subsidiaries is duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business and in
good standing in the jurisdictions where its ownership or leasing of property or
the conduct of its business requires it to be so qualified, except where the
failure to so qualify would not have a Material Adverse Effect on Catawba or
Bancshares.
3.04 CONVERTIBLE SECURITIES, OPTIONS, ETC. With the exception of
------------------------------------
options to purchase an aggregate of 233,657 shares of Bancshares Stock which
have been issued and are outstanding under the 1996 Incentive Stock Option Plan
and the 1996 Nonqualified Stock Option Plan (collectively the "Bancshares Stock
Plans"), neither Catawba nor Bancshares have any outstanding (1) securities or
other obligations (including debentures or other debt instruments) which are
convertible into shares of Bancshares Stock or any other securities of Catawba
or Banchshares; (ii) options, warrants, rights, calls, or other commitments of
any nature which entitle any person to receive or acquire any shares of
Bancshares Stock or any other securities of Catawba or Bancshares; or (iii)
plan, agreement or other arrangement pursuant to which shares of Bancshares
Stock or any other securities of Catawba or Bancshares, or options, warrants,
rights, calls, or other commitments of any nature pertaining thereto, have been
or may be issued.
3.05 AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has
---------------------------------------
been duly and validly approved by Catawba's and Bancshares' Boards of Directors
in the manner required by law and subject only to approval of this Agreement by
the shareholders of Catawba and Bancshares in the manner required by law (as
contemplated by Paragraph 6.01.A. below) and by the applicable regulatory
authorities (as contemplated by Paragraph 6.02 below), (i) Catawba and
Bancshares 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 herein, (ii) all corporate action required to authorize
Catawba and Bancshares to enter into this Agreement and to perform its
obligations and agreements and carry out the transactions described herein has
been duly and properly taken, and (iii) this Agreement has been duly executed on
behalf of Catawba and Bancshares, and (assuming due authorization, execution and
delivery by Bancshares and Catawba) constitutes a valid and binding agreement of
Catawba and Bancshares, 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; and (b) by 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).
3.06 VALIDITY OF TRANSACTIONS, ABSENCE OF REQUIRED CONSENTS OR WAIVERS.
-----------------------------------------------------------------
Except where the same would not have a Material Adverse Effect on Catawba or
Bancshares, neither the execution and delivery of this Agreement, nor the
consummation of the transactions described herein, nor compliance by Catawba or
Bancshares with any of its obligations or agreements contained herein, will: (1)
conflict with or result in a breach of the terms and conditions of, or
constitute a default or violation under any provision of, Catawba's or
Bancshares' Articles of Incorporation or Bylaws, or any contract, agreement,
lease, mortgage,
21
note, bond, indenture, license, or obligation or understanding (oral or written)
to which Catawba or Bancshares is bound or by which it, its business, capital
stock, or any properties or assets may be affected; (ii) result in the creation
or imposition of any lien, claim, interest, charge, restriction, or encumbrance
upon any of Catawba's or Bancshares' properties or assets; (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; (iv) result in the acceleration of any obligation
or indebtedness of Catawba or Bancshares; or (v) interfere with or otherwise
adversely affect Catawba's or Bancshares' ability to carry on its business as
presently conducted.
No consents, approvals, or waivers are required to be obtained from any
person or entity in connection with Catawba's or Bancshares' 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 Bancshares' shareholders as described in Paragraph 7.01.D. below
and of governmental or regulatory authorities as described in Paragraph 7.01.A.
below, and other consents or approvals, the failure of which to obtain would not
have a Material Adverse Effect on Catawba or Banchshares or their respective
abilities to consummate the Exchange.
3.07 CATAWBA'S AND BANCSHARES' BOOKS AND RECORDS. Catawba's and
-------------------------------------------
Bancshares' respective books of account and business records have been
maintained in material compliance with all applicable legal and accounting
requirements and in accordance with good business practices, and such books and
records are complete and reflect accurately in all material respects Catawba's
or Bancshares' respective items of income and expense and all of its assets,
liabilities, and stockholders' equity. The minute books of Catawba and
Bancshares accurately reflect in all material respects the corporate actions
which their shareholders and Boards of Directors, and all committees thereof,
have taken during the time periods covered by such minute books. All such minute
books have been or will be made available to First Gaston and its
representatives.
3.08 REPORTS. Catawba and Bancshares 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 FDIC, (ii) the
Commissioner, (iii) the SEC, (iv) the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), and (v) any other governmental or regulatory
authorities having jurisdiction over Catawba or Bancshares. All such reports,
registrations, and statements filed by Catawba or Bancshares with the FDIC, the
Commissioner, the SEC, the Federal Reserve, or other such regulatory authority
are collectively referred to herein as the "Catawba Reports." As of their
respective dates, each Catawba Report complied in all material respects with all
the statutes, rules, and regulations enforced or promulgated by the regulatory
authority with which it was 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; and neither Catawba nor Bancshares has
been notified by any such governmental or regulatory authority that any such
Catawba Report was deficient in any material respect as to form or content.
Following the date of this Agreement, Catawba and Bancshares
22
shall deliver to First Gaston, simultaneous with the filing thereof, a copy of
each Catawba Report.
3.09 FINANCIAL STATEMENTS. Bancshares has delivered to First Gaston (1)
--------------------
a copy of its audited consolidated balance sheets as of December 31, 2000 and
1999, and its audited consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2000 and
1999, together with notes thereto (the "Catawba Financial Statements"), and (ii)
a copy of its unaudited consolidated balance sheet as of March 31, 2001 and its
unaudited statement of operations for the three months ended March 31, 2001 (the
"Catawba Interim Financial Statements"). Following the date of this Agreement,
Bancshares promptly will deliver to First Gaston all other annual or interim
financial statements prepared by or for Bancshares. The Catawba Financial
Statements and the Catawba Interim Financial Statements (including any related
notes and schedules thereto) (i) are in accordance with Bancshares' books and
records, and (ii) were prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated and present fairly in all material
respects Bancshares' consolidated financial condition, assets and liabilities,
results of operations, changes in stockholders' equities, and changes in cash
flows as of the dates indicated and for the periods specified therein. The
Catawba Financial Statements have been audited and certified by Bancshares'
independent certified public accountants, Dixon Odom PLLC.
3.10 TAX RETURNS AND OTHER TAX MATTERS. (i) Catawba and Bancshares have
---------------------------------
timely filed or caused to be filed all federal, state, and local tax returns and
reports which are required by law to have been filed, and to the best knowledge
of management of Catawba and Bancshares, all such returns and reports were true,
correct, and complete in all material respects and contained all material
information required to be contained therein; (ii) all federal, state, and local
income, profits, franchise, sales, use, occupation, property, excise, and other
taxes (including interest and penalties), charges and assessments which have
become due from or been assessed or levied against Catawba or Bancshares or
their respective property have been fully paid, and, to the best knowledge of
management of Catawba and Bancshares, with respect to any such taxes to become
due from Catawba or Bancshares for any period or periods through and including
March 31, 2001, adequate provision has been made for the payment of all such
taxes and such provision is reflected in the Catawba Financial Statements; (iii)
Catawba and Bancshares have not received any indication of the pendency of any
audit or examination in connection with any tax return or report and have no
knowledge that any such return or report is subject to adjustment; and (iv)
Catawba and Bancshares have not executed any waiver or extended the statute of
limitations (or been asked to execute a waiver or extend a statute of
limitation) with respect to any tax year, the audit of any tax return or report
or the assessment or collection of any tax. Any deferred taxes of Catawba or
Bancshares have been provided for in the Catawba Financial Statements in all
material respects.
3.11 ABSENCE OF MATERIAL ADVERSE CHANGES OR Certain OTHER EVENTS.
-----------------------------------------------------------
(i) Since December 31, 2000, Catawba and Bancshares have conducted
their 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 to the best knowledge of
management of Catawba or
23
Bancshares which, with the lapse of time or otherwise, is reasonably likely
to cause, create, or result in a Material Adverse Change, in or affecting
Bancshares' consolidated financial condition or results of operations,
prospects, business, assets, loan portfolio, investments, properties, or
operations.
(ii) Since December 31, 2000, and other than in the ordinary course of
its business including its normal salary review for 2001, all as Previously
Disclosed to First Gaston, Catawba and Bancshares have not incurred any material
liability or engaged in any material transaction or entered into any material
agreement, increased the salaries, compensation, or general benefits payable to
their employees, suffered any loss, destruction, or damage to any of their
properties or assets, or made a material acquisition or disposition of any
assets or entered into any material contract or lease.
3.12 ABSENCE OF UNDISCLOSED LIABILITIES. Except as Previously
----------------------------------
Disclosed, Catawba and First Gaston have no 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 Catawba Financial
Statements or the Catawba Interim Financial Statements, (ii) obligations or
liabilities incurred in the ordinary course of its business since March 31,
2001, or (iii) obligations or liabilities which are not reasonably likely to,
individually or in the aggregate, cause a Material Adverse Change in Catawba or
Bancshares.
3.13 COMPLIANCE WITH EXISTING OBLIGATIONS. Catawba and Bancshares have
------------------------------------
performed in all material respects all obligations required to be performed by
them under, and they are not in default in any material respect under, or in
violation in any material respect of, the terms and conditions of their Articles
of Incorporation or Bylaws, and/or any contract, agreement, lease, mortgage,
note, bond, indenture, license, obligation, understanding, or other undertaking
(whether oral or written) to which Catawba or Bancshares is bound or by which
they, their business, capital stock, or any of their properties or assets may be
affected, which default or violation would have a Material Adverse Effect on
Catawba or Bancshares.
3.14 LITIGATION AND COMPLIANCE WITH LAW.
----------------------------------
(i) There are no actions, suits, arbitrations, controversies, or
other proceedings or investigations (or, to the best knowledge and belief of
management of Catawba and Bancshares, any facts or circumstances which
reasonably could result in such), including, without limitation, any such action
by any governmental or regulatory authority, which currently exists or is
ongoing, pending, or, to the best knowledge and belief of management of Catawba
and Bancshares, threatened, contemplated, or probable of assertion, against,
relating to, or otherwise affecting Catawba or Bancshares or any of their
respective properties or assets which, if determined adversely, could result in
liability on the part of Catawba or Bancshares for, or subject it to, monetary
damages, fines, or penalties, or an injunction, and which could have a Material
Adverse Effect on Catawba's or Bancshare's financial condition, results of
operations, prospects, business, assets, loan portfolio, investments,
properties, or operations or on the ability of Bancshares to consummate the
Exchange;
(ii) Catawba and Bancshares have all licenses, permits, orders,
authorizations, or approvals ("Catawba Permits") of any federal, state, local,
or foreign governmental or
24
regulatory body that are material to or necessary for the conduct of their
business or to own, lease, and operate its properties, all such Catawba Permits
are in full force and effect, except where the failure to be in force and effect
would not have a Material Adverse Effect on Catawba or Bancshares; no violations
are or have been recorded in respect of any such Catawba Permits; and no
proceeding is pending or, to the best knowledge of management of Catawba or
Bancshares, threatened or probable of assertion to suspend, cancel, revoke, or
limit any Catawba Permit;
(iii) Catawba and Bancshares are 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 or other
governmental authority (including, without limitation, the FDIC or the
Commissioner) relating to its financial condition, directors or officers,
operations, capital, regulatory compliance, or otherwise; there are no
judgments, orders, stipulations, injunctions, decrees, or awards against Catawba
or Bancshares which in any manner limit, restrict, regulate, enjoin, or prohibit
any present or past business or practice of Catawba or Bancshares; and neither
Catawba nor Bancshares has been advised that any regulatory or other
governmental authority or any court is contemplating, threatening, or requesting
the issuance of any such agreement, order, injunction, directive, memorandum,
judgment, stipulation, decree, or award; and,
(iv) Neither Catawba nor Bancshares is in violation or default in
any material respect under, and Catawba and Bancshares 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 governmental or 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 laws and regulations applicable to
extensions of credit by Catawba or Bancshares) and, to the best knowledge of
management of Catawba and Bancshares, there is no basis for any claim by any
person or authority for compensation, reimbursement, or damages or otherwise for
any violation of any of the foregoing that would have any Material Adverse
Effect on the financial condition of Catawba or Bancshares.
3.15 REAL PROPERTIES. Catawba and Bancshares have Previously Disclosed
---------------
to First Gaston a listing of all real property owned or leased by Catawba or
Bancshares and their respective Subsidiaries (including, without limitation,
banking facilities and all other real estate or foreclosed properties owned by
Catawba or Bancshares) (the "Catawba Real Property") and all leases, if any,
pertaining to any such Catawba Real Property to which Catawba or Bancshares is a
party (the "Catawba Real Property Leases"). With respect to all Catawba Real
Property owned by Catawba or Bancshares, Catawba and Bancshares have good and
marketable title to such Catawba 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 affect materially and adversely affect the value
of the Catawba Real Property and which do not and will not materially detract
from, interfere with, or restrict the present or future use of the properties
subject thereto or affected thereby. With respect
25
to each Catawba Real Property Lease (i) such lease is valid and enforceable in
accordance with its terms, (ii) there currently exists no circumstance or
condition which constitutes an event of default by Catawba or Bancshares or
their lessor or which, with the passage of time or the giving of required
notices, will or could constitute such an event of default, and (iii) the
execution and delivery of this Agreement does not constitute an event of default
thereunder.
To the best knowledge of management of Catawba or Bancshares, the
Catawba Real Property complies in all material respects with all applicable
federal, state, and local laws, regulations, ordinances, or orders of any
governmental authority, including those relating to zoning, building and use
permits, and the Catawba Real Property may be used under applicable zoning
ordinances for commercial banking facilities as a matter of right rather than as
a conditional or nonconforming use.
All improvements and fixtures included in or on the Catawba Real
Property are in good condition and repair, ordinary wear and tear excepted, and
there does not exist any condition which materially interferes with Catawba's or
Bancshares' use or materially and adversely affects the economic value thereof.
3.16 LOANS, ACCOUNTS, NOTES AND OTHER RECEIVABLES.
--------------------------------------------
(i) All loans, accounts, notes and other receivables reflected
as assets on Catawba's or Bancshares' books and records (a) have resulted from
bona fide business transactions in the ordinary course of Catawba's or
Bancshares' operations, (b) in all material respects were made in accordance
with Catawba's or Bancshares' customary loan policies and procedures, and (c)
are owned by Catawba or Bancshares 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.
(ii) All records of Catawba and Bancshares regarding all
outstanding loans, accounts, notes, and other receivables, and all other real
estate owned, are accurate in all material respects, and, with respect to each
loan which Catawba's or Bancshares' loan documentation indicates is secured by
any real or personal property or property rights ("Catawba Loan Collateral"),
such loan is secured by valid, perfected, and enforceable liens on all such
Catawba Loan Collateral having the priority described in Catawba's or
Bancshares' records of such loan.
(iii) Each loan reflected as an asset on Catawba's and Bancshares'
books, and each guaranty therefor, is the legal, valid, and binding obligation
of the obligor or guarantor thereon, and to the best knowledge of management of
Catawba and Bancshares no defense, offset, or counterclaim has been asserted
with respect to any such loan or guaranty.
(iv) Catawba and Bancshares has Previously Disclosed to First
Gaston a listing of (a) each loan, extension of credit, or other asset of
Catawba or Bancshares which, as of May 31, 2001, is classified by the FDIC, the
Commissioner, or by Catawba or Bancshares as "Loss", "Doubtful", "Substandard",
or "Special Mention" (or otherwise by words of similar import), or which Catawba
or Bancshares has designated as a special asset or for special handling or
placed
26
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 (b) each loan or extension of credit of Catawba or Bancshares
which, as of May 31, 2001, was past due thirty (30) days or more as to the
payment of principal and/or interest, or as to which any obligor thereon
(including the borrower or any guarantor) otherwise was in default, is the
subject of a proceeding in bankruptcy, or otherwise has indicated any inability
or intention not to repay such loan or extension of credit. Each such listing is
accurate and complete as of the date indicated.
(v) To the best knowledge of management of Catawba or
Bancshares, each of Catawba's or Bancshares' loans and other extensions of
credit (with the exception of those loans and extensions of credit specified in
the written listings described in Subparagraph (iv) above) is collectible in the
ordinary course of Catawba's or Bancshares' business in an amount which is not
less than the amount at which it is carried on Catawba's or Bancshares' books
and records.
3.17 SECURITIES PORTFOLIO AND INVESTMENTS. All securities owned by
------------------------------------
Catawba and Bancshares (whether owned of record or beneficially) 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, which would materially impair the ability of Catawba or Bancshares to
dispose freely of any such security and/or otherwise to realize the benefits of
ownership thereof at any time (other than pledges of securities in the ordinary
course of Catawba's or Bancshares' business to secure public funds deposits and
in connection with repurchase agreements with customers and Federal Home Loan
Bank borrowings). There are no voting trusts or other agreements or undertakings
to which Catawba or Bancshares is a party with respect to the voting of any such
securities.
Except for fluctuations in the market values of United States Treasury
and agency securities, municipal securities, or other debt securities since May
31, 2001, there has been no material deterioration or Material Adverse Change in
the quality, or any material decrease in the value, of Catawba's or Bancshares'
securities portfolio.
3.18 PERSONAL PROPERTY AND OTHER ASSETS. All assets of Catawba and
----------------------------------
Bancshares (including, without limitation, all banking equipment, data
processing equipment, vehicles, and all other personal property located in or
used in the operation of each office of Catawba or Bancshares or otherwise used
by Catawba or Bancshares in the operation of its business) are owned by Catawba
or Bancshares free and clear of all liens, leases, encumbrances, title defects,
or exceptions to title. All of Catawba's or Bancshares' banking and other
equipment is in good operating condition and repair, ordinary wear and tear
excepted.
3.19 ENVIRONMENTAL MATTERS. Catawba and Bancshares have Previously
---------------------
Disclosed and provided to First Gaston copies of all written reports,
correspondence, notices, or other materials, if any, in its possession
pertaining to environmental reports, surveys, assessments, notices of violation,
notices of regulatory requirements, penalty assessments, claims, actions, or
proceedings, past or pending, of the Catawba Real Property or any of its Loan
Collateral and any improvements thereon, or to any violation of Environmental
Laws (as defined
27
below) on, affecting or otherwise involving the Catawba Real Property, any Loan
Collateral, or otherwise involving Catawba or Bancshares.
To the knowledge of management of Catawba and Bancshares:
(i) There has been no presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
reporting, testing, processing, emission, discharge, release, threatened
release, control, or clean-up, in a reportable or regulated quantity, of any
hazardous, toxic, or otherwise regulated materials, substances, or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants, toxic
chemicals, oil or other petroleum products or byproducts, asbestos or materials
containing (or presumed to contain) asbestos, polychlorinated biphenols, or
radioactive materials, and/or any hazardous, toxic, regulated or dangerous
waste, substance, or material defined as such by the United States Environmental
Protection Agency or any other federal, state, or local government or agency or
political subdivision thereof, or for the purpose of any Environmental Laws (as
defined herein), as may now or hereafter (through the Effective Time) be defined
or in effect ("Hazardous Substances") by any person on, from, or relating to any
parcel of the Catawba Real Property;
(ii) Catawba and Bancshares have not violated any federal, state,
or local law, rule, regulation, order, permit, or other requirement relating to
health, safety, or the environment or imposing liability, responsibility, or
standards of conduct applicable to environmental conditions (all such laws,
rules, regulations, orders, and other requirements being herein collectively
referred to as "Environmental Laws"), and, there has been no violation of any
Environmental Laws (including any violation with respect to or relating to any
Loan Collateral) by any other person or entity for whose liability or obligation
with respect to any particular matter or violation Catawba or Bancshares is or
may be responsible or liable;
(iii) Catawba and Bancshares are not subject to any pending
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, or clean-
up of any Hazardous Substances on, from, or relating to the Catawba Real
Property or any Catawba Loan Collateral, by Catawba or Bancshares or any other
person or entity; and;
(iv) No facts, events, or conditions relating to the Catawba Real
Property or any Catawba Loan Collateral, or the operations of Catawba or
Bancshares at any of their respective office locations, will prevent, hinder or
limit continued compliance with Environmental Laws, or give rise to any
investigatory, remedial, or corrective actions, obligations, or liabilities
(whether accrued, absolute, contingent, unliquidated, or otherwise) pursuant to
Environmental Laws.
For purposes of this Agreement, "Environmental Laws" shall include:
28
(i) all federal, state, and local statutes, regulations,
ordinances, orders, decrees, and similar provisions having the force or effect
of law,
(ii) all contractual agreements, and
(iii) 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 (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 Pollutant 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) as such may now or hereafter (through the Effective
Time) be defined or in effect.
3.20 ABSENCE OF BROKERAGE OR FINDERS COMMISSIONS. All negotiations
-------------------------------------------
relative to this Agreement and the transactions described herein have been
carried on by Catawba and Bancshares directly with First Gaston; 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, Catawba or
Bancshares or their 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 the transactions
described herein; and neither Catawba nor Bancshares have agreed to pay any
brokerage fee or other commission to any person or entity in connection with the
transactions described herein.
3.21 MATERIAL CONTRACTS. Except as Previously Disclosed, neither
------------------
Catawba nor Bancshares is a party to or bound by any agreement involving money
or other property in an amount or with a value in excess of $25,000 (i) which is
material to Catawba or Bancshares and was not entered into in the ordinary
course of business, (ii) which involves hedging, options, or any similar trading
activity, or interest rate exchanges or swaps, (iii) which commits Catawba or
Bancshares 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
Catawba's or Bancshares' business), (iv) which involves the purchase or sale of
any assets of Catawba or Bancshares, or the purchase, sale, issuance,
redemption, or transfer of any capital stock or other securities issued by
Catawba or Bancshares, or (v) with any director or officer of Catawba or
Bancshares (including, without limitation, any employment or consulting
agreement, but not including any agreement relating to loans or other banking
services which were made in the ordinary course of Catawba's or Bancshare's
business and on substantially the same terms and conditions as were prevailing
at that time for similar agreements with unrelated persons).
29
3.22 EMPLOYMENT MATTERS; EMPLOYEE RELATIONS. Catawba and Bancshares (i)
--------------------------------------
have paid in full to or accrued on behalf of all its directors, officers, and
employees all wages, salaries, commissions, bonuses, fees, sick pay, severance
pay, all other amounts promised to the extent required by law or when Catawba or
Bancshares have a policy of making such payments and other direct compensation
for all services performed by them to the date of this Agreement and (ii) is in
compliance with all 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 Catawba and Bancshares, asserted
that Catawba or Bancshares is liable in any amount for any arrearages 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 Catawba and Bancshares, threatened, against
Catawba or Bancshares (or any of its employees), involving employment
discrimination, sexual harassment, wrongful discharge, or similar claims.
Neither Catawba nor Bancshares is 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 Catawba or Bancshares and any
of its employees, or any pending or threatened proceeding in which it is
asserted that Catawba or Bancshares has committed an unfair labor practice; and
management of Catawba and Bancshares is not aware of any activity involving them
or any of their employees seeking to certify a collective bargaining unit or
engaging in any other labor organization activity.
3.23 EMPLOYMENT AGREEMENTS; EMPLOYEE BENEFIT PLANS.
---------------------------------------------
(i) Neither Catawba nor Bancshares is a party to or bound by any
employment agreements with any of their respective directors, officers, or
employees, except for the employment agreement between Catawba and R. Steve
Aaron ("Aaron"), dated January 1, 1999.
(ii) Catawba and Bancshares have Previously Disclosed and have
delivered or made available to First Gaston prior to the execution of this
Agreement copies, in each case, of all pension, stock ownership, severance pay,
vacation, bonus, or other incentive plans, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health plans,
programs, arrangements or agreements, all life insurance plans, and all other
employee benefit plans or fringe benefit plans, including "employee benefit
plans" as that term is defined in Section 3(3) of ERISA, currently adopted,
maintained by, sponsored in whole or in part by, or contributed to by Catawba or
Bancshares for the benefit of employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries and under which
employees, retirees, dependents, spouses, directors, independent contractors, or
other beneficiaries are eligible to participate (collectively, the "Catawba
Benefit Plans"). Schedule 3.23 identifies each such Catawba Benefit Plan, and
further identifies each person who receives benefits under, or is or may become
eligible to receive benefits under, each such Catawba Benefit
30
Plan. Without limiting the foregoing, Schedule 3.23 also identifies each person
for whom Catawba or Bancshares has agreed to provide "lifetime" health benefits
and describes the extent of Catawba's or Bancshares' obligations in that regard.
Any of the Catawba Benefit Plans which is an "employee pension benefit plan", as
that term is defined in Section 3(2) of ERISA, is referred to herein as an
"ERISA Plan." No ERISA Plan is also a "defined benefit plan" (as defined in
Section 414(j) of the Code) or is or has been a multi-employer plan within the
meaning of Section 3(37) of ERISA, except as described on Schedule 3.23. Neither
Catawba nor Bancshares has ever been required to contribute to a multi-employer
plan, as defined in Section 3(37) of ERISA.
(iii) All Catawba Benefit Plans are in compliance in all material
respects with the applicable terms of ERISA, the Code, and any other applicable
laws, rules, or regulations, the breach or violation of which are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Catawba or Bancshares. Each ERISA Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service, and management of Catawba and Bancshares is not
aware of any circumstances likely to result in revocation of any such favorable
determination letter. To the best knowledge of management of Catawba and
Bancshares, neither Catawba nor Bancshares has engaged in a transaction with
respect to any Catawba Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject Catawba or Bancshares
to a tax imposed by either Section 4975 of the Code or Section 502(i) of ERISA
in amounts which are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Catawba or Bancshares.
(iv) Neither Catawba nor Bancshares has liability for retiree
health and life benefits under any of the Catawba Benefit Plans and there are no
restrictions on the rights of Catawba or Bancshares to amend or terminate any
such Plan without incurring any liability thereunder, except as set forth on
Schedule 3.23.
(v) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (a) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of Catawba or Bancshares
from Catawba or Bancshares under any Catawba Benefit Plan or otherwise, (b)
increase any benefits otherwise payable under any Catawba Benefit Plan or
otherwise, or (c) result in any acceleration of the time of payment or vesting
of any such benefit, except as set forth on Schedule 3.23.
(vi) The actuarial present values of all accrued deferred
compensation entitlements (including entitlements under any executive
compensation, supplemental retirement, or employment agreement) of employees and
former employees of Catawba or Bancshares and its beneficiaries have been fully
reflected on the Catawba Financial Statements to the extent required by and in
accordance with GAAP. Any adjustments necessary will be made prior to the
earlier of Closing and December 31, 2001.
31
3.24 INSURANCE. Catawba and Bancshares have in effect such policies of
---------
general liability, casualty, directors and officers liability, employee
fidelity, errors and omissions, and other property and liability insurance
(including without limitation a "banker's blanket bond") as have been Previously
Disclosed to First Gaston (the "Catawba Policies"). The Catawba Policies provide
coverage in such amounts and against such liabilities, casualties, losses, or
risks as is customary or reasonable for entities engaged in Catawba's or
Bancshares' businesses or as is required by applicable law or regulation; and,
in the reasonable opinion of management of Catawba or Bancshares, the insurance
coverage provided under the Catawba Policies is reasonable and adequate in all
respects for Catawba or Bancshares. Each of the Policies is in full force and
effect and is valid and enforceable in accordance with its terms, and is
underwritten by an insurer of recognized financial responsibility and which is
qualified to transact business in North Carolina, and Catawba and Bancshares
have taken all requisite actions (including the giving of required notices)
under each such Catawba Policy in order to preserve all rights thereunder with
respect to all matters. Neither Catawba nor Bancshares is in default under the
provisions of, has received notice of cancellation or nonrenewal of or any
material premium increase on, or has any knowledge of any failure to pay any
premium on or any inaccuracy in any application for any Catawba Policy. There
are no pending claims with respect to any Catawba Policy (and there are no facts
which would form the basis of any such claim), and neither Catawba nor
Bancshares has any knowledge of any state of facts or of the occurrence of any
event that is reasonably likely to form the basis for any such claim.
3.25 INSURANCE OF DEPOSITS. All deposits of Catawba are insured by the
---------------------
Bank Insurance Fund of the FDIC to the maximum extent permitted by law, all
deposit insurance premiums due from Catawba to the FDIC have been paid in full
in a timely fashion, and no proceedings have been commenced or, to the best
knowledge of management of Catawba, are contemplated by the FDIC or otherwise to
terminate such insurance.
3.26 AFFILIATES. Catawba and Bancshares have Previously Disclosed to
----------
First Gaston a listing of those persons deemed by Catawba and Bancshares as of
the date of this Agreement to be "Affiliates" of Catawba or Bancshares (as that
term is defined in Rule 405 promulgated under the 1933 Act), including persons,
trusts, estates, corporations, or other entities related to persons deemed to be
Affiliates of Catawba or Bancshares.
3.27 OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT, OR TAX
--------------------------------------------------------------
TREATMENT. To the best knowledge of management of Catawba and Bancshares, there
---------
exists no fact or condition (including Catawba's record of compliance with the
Community Reinvestment Act) relating to Catawba or Bancshares that may
reasonably be expected to (i) prevent or materially impede or delay Catawba,
Bancshares or First Gaston from obtaining the regulatory approvals required in
order to consummate transactions described herein, (ii) prevent the Exchange
from qualifying to be a reorganization under Section 368(a)(1)(B) of the Code,
or (iii) prevent the Exchange from being treated as a "pooling-of-interests" for
accounting purposes; and, if any such fact or condition becomes known to Catawba
or Bancshares, Catawba or Bancshares shall promptly (and in any event within
three days after obtaining such knowledge) communicate such fact or condition to
First Gaston in writing.
32
3.28 DISCLOSURE. To the best knowledge of management of Catawba and
----------
Bancshares, no written statement, certificate, schedule, list, or other written
information furnished by or on behalf of Catawba or Bancshares to First Gaston
in connection with this Agreement (including, without limitation, information
"Previously Disclosed" by Catawba or Bancshares), when considered as a whole,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
herein or therein, in light of the circumstances under which they were made, not
misleading. Each document delivered or to be delivered by Catawba or Bancshares
to First Gaston is or will be a true and complete copy of such document,
unmodified except by another document delivered by Catawba or Bancshares.
ARTICLE IV
COVENANTS OF FIRST GASTON
4.01 AFFIRMATIVE COVENANTS OF FIRST GASTON. First Gaston hereby
-------------------------------------
covenants and agrees as follows with Catawba and Bancshares:
A. "AFFILIATES" OF FIRST GASTON. First Gaston will use its best
---------------------------
efforts to cause each person who is an Affiliate of First Gaston (as defined in
Paragraph 2.26 above), to execute and deliver to Catawba and Bancshares at least
five (5) days prior to the Closing a written agreement (the "Affiliates'
Agreement") relating to restrictions on shares of Bancshares Stock to be
received by such Affiliates pursuant to this Agreement and which Affiliates'
Agreement shall be in form and content reasonably satisfactory to Catawba and
Bancshares. Certificates for the shares of Bancshares Stock issued to Affiliates
of First Gaston shall bear a restrictive legend (substantially in the form as
shall be set forth in the Affiliates' Agreement) with respect to the
restrictions applicable to such shares.
B. NOTICE OF CERTAIN CHANGES OR EVENTS. Following the execution
-----------------------------------
of this Agreement and up to the Effective Time, First Gaston promptly will
notify Catawba and Bancshares in writing of and provide to them such information
as either of them shall request regarding (1) any Material Adverse Change or of
the actual or prospective occurrence of any condition or event which, with the
lapse of time or otherwise, is reasonably likely to cause, create or result in
any such Material Adverse Change, or (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
First Gaston herein, or any information that has been Previously Disclosed by
First Gaston to Catawba or Bancshares, to be or become materially inaccurate,
misleading, or incomplete, or which has resulted or may or could cause, create,
or result in the material breach or violation of any of First Gaston's covenants
or agreements contained herein or in the failure of any of the conditions
described in Paragraphs 7.01 or 7.03 below.
C. FURTHER ACTION; INSTRUMENTS OF TRANSFER, ETC. First Gaston
--------------------------------------------
covenants and agrees with Catawba and Bancshares that it (i) will use its
reasonable best
33
efforts in good faith to take or cause to be taken all action reasonably
required of it hereunder 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 Catawba and Bancshares
all documents or instruments reasonably required herein or as otherwise shall be
reasonably necessary or useful to or reasonably requested by either of them in
consummating such transactions, and, (iii) will cooperate with Catawba and
Bancshares in every reasonable way in carrying out, and will pursue diligently
the expeditious completion of, such transactions.
4.02. NEGATIVE COVENANTS OF FIRST GASTON. First Gaston hereby covenants
----------------------------------
and agrees that, between the date hereof and the Effective Time, neither First
Gaston nor any First Gaston Subsidiary will do any of the following things or
take any of the following actions without the prior written consent and
authorization of Catawba and Bancshares:
A. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS. First Gaston
-------------------------------------------------
will not amend its Articles of Incorporation or Bylaws (except as may be
required by applicable law or regulation).
B. CHANGE IN CAPITAL STOCK. First Gaston will not (1) make any
-----------------------
change in its authorized capital stock, or create any other or additional
authorized capital stock or other securities, or (ii) issue, sell, purchase,
redeem, retire, reclassify, combine, or split any shares of its capital stock or
other securities issued by First Gaston, other than the issuance of shares upon
the exercise of stock options which are outstanding as of the date of this
Agreement (including securities convertible into capital stock), or enter into
any agreement or understanding with respect to any such action.
C. OPTIONS, WARRANTS, AND RIGHTS. First Gaston 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. First Gaston will not declare or pay any dividends
---------
or make any other distributions on or in respect of any shares of its capital
stock or otherwise to its shareholders.
E. EMPLOYMENT, BENEFIT, OR RETIREMENT AGREEMENTS OR PLANS. Except
------------------------------------------------------
as required by law, First Gaston will not (i) enter into or become bound by any
contract, agreement, or commitment for the employment or compensation of any
officer, employee, or consultant which is not immediately terminable by First
Gaston without cost or other liability on no more than thirty (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), 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
34
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. ACCOUNTING PRACTICES. Neither First Gaston nor any First Gaston
--------------------
Subsidiary 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).
G. CHANGES IN BUSINESS PRACTICES. Except as may be required by the
-----------------------------
FDIC, the Commissioner, or any other governmental or other regulatory agency or
as shall be required by applicable law, regulation, or this Agreement, neither
First Gaston nor any First Gaston Subsidiary will (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 (except to the extent
required by Paragraph 4.01.C. above).
ARTICLE V
COVENANTS OF CATAWBA AND Bancshares
5.01 AFFIRMATIVE COVENANTS OF CATAWBA AND BANCSHARES. Catawba and
-----------------------------------------------
Bancshares hereby covenant and agree as follows with First Gaston:
A. "AFFILIATES". Catawba and Bancshares will use their best
----------
efforts to cause each person who is an Affiliate of Catawba or Bancshares (as
defined in Paragraph 3.26 above), to execute and deliver to Catawba or
Bancshares at least five (5) days prior to the Closing a written agreement (the
"Affiliates' Agreement") relating to restrictions on shares of Bancshares Stock
to be received by such Affiliates pursuant to this Agreement and which
Affiliates' Agreement shall be in form and content reasonably satisfactory to
First Gaston. Certificates for the shares of Bancshares Stock issued to
Affiliates of Catawba or Bancshares shall bear a restrictive legend
(substantially in the form as shall be set forth in the Affiliates' Agreement)
with respect to the restrictions applicable to such shares.
B. NOTICE OF CERTAIN CHANGES OR EVENTS. Following the execution of
-----------------------------------
this Agreement and up to the Effective Time, Catawba and Bancshares promptly
will notify First Gaston in writing of and provide to them such information as
either of them shall request regarding (1) any Material Adverse Change in
Catawba's or Bancshares' and each of their respective Subsidiary'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,
is reasonably likely to cause, create or result in any such Material Adverse
Change, or (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 Catawba or
Bancshares herein, or any information that has been Previously Disclosed by
Catawba or Bancshares to First Gaston, to be or become materially inaccurate,
misleading, or incomplete, or which has resulted or may or could cause, create,
or result in the material breach or violation of
35
any of Catawba's or Bancshares' covenants or agreements contained herein or in
the failure of any of the conditions described in Paragraphs 7.01 or 7.03 below.
C. FURTHER ACTION; INSTRUMENTS OF TRANSFER, ETC. Catawba and
--------------------------------------------
Bancshares covenant and agree with First Gaston that they (i) will use their
reasonable best efforts in good faith to take or cause to be taken all action
reasonably required of them hereunder 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 First Gaston all
documents or instruments reasonably required herein or as otherwise shall be
reasonably necessary or useful to or reasonably requested by either of them in
consummating such transactions, and, (iii) will cooperate with First Gaston in
every reasonable way in carrying out, and will pursue diligently the expeditious
completion of, such transactions.
D. RECONSTITUTION OF BANCSHARES' BOARD OF DIRECTORS. Bancshares
------------------------------------------------
agrees to cause its Board of Directors, effective immediately after the
Effective Time, to be reconstituted and to be comprised of eight (8)
individuals, four (4) of whom shall be current members of the Board of Directors
of Bancshares (with R. Steve Aaron being one of such four individuals) and four
(4) of whom shall be current members of the Board of Directors of First Gaston
(with W. Alex Hall being one of the four individuals). Bancshares shall cause
such resignations from its current Board of Directors so as to fulfill this
covenant and such remaining Directors shall appoint the four (4) First Gaston
Directors to fill the vacancies so created. Bancshares' directors and
shareholders shall take the appropriate actions to achieve the amendment of
Bancshares' bylaws to reduce the minimum number of directors from nine (9) to
eight (8).
5.02. NEGATIVE COVENANTS OF CATAWBA AND BANCSHARES. Catawba and
--------------------------------------------
Bancshares hereby covenant and agree that, between the date hereof and the
Effective Time, neither Catawba nor Bancshares will do any of the following
things or take any of the following actions without the prior written consent
and authorization of First Gaston:
A. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS. Neither
-------------------------------------------------
Catawba nor Bancshares will amend its Articles of Incorporation or Bylaws
(except as required under Paragraph 7.01.D. of this agreement or may be required
by applicable law or regulation).
B. CHANGE IN CAPITAL STOCK. Neither Catawba nor Bancshares will
-----------------------
(1) make any change in its authorized capital stock, or create any other or
additional authorized capital stock or other securities, or (ii) issue, sell,
purchase, redeem, retire, reclassify, combine, or split any shares of its
capital stock or other securities issued by Catawba or Bancshares or any Catawba
or Bancshares Subsidiary, other than the issuance of shares upon the exercise of
stock options which are outstanding as of the date of this Agreement (including
securities convertible into capital stock), or enter into any agreement or
understanding with respect to any such action.
C. OPTIONS, WARRANTS, AND RIGHTS. Neither Catawba nor Bancshares
-----------------------------
will grant or issue any options, warrants, calls, puts, or other rights of any
kind
36
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. Neither Catawba nor Bancshares will declare or pay
---------
any dividends or make any other distributions on or in respect of any shares of
its capital stock or otherwise to its shareholders other than the $0.06 per
share dividend scheduled for payment to Bancshares' shareholders in November
2001.
E. EMPLOYMENT, BENEFIT, OR RETIREMENT AGREEMENTS OR PLANS. Except
------------------------------------------------------
as required by law, neither Catawba nor Bancshares will (i) enter into or become
bound by any contract, agreement, or commitment for the employment or
compensation of any officer, employee, or consultant which is not immediately
terminable by Catawba or Bancshares without cost or other liability on no more
than thirty (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), 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. ACCOUNTING PRACTICES. Neither Catawba nor Bancshares 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).
G. CHANGES IN BUSINESS PRACTICES. Except as may be required by the
-----------------------------
FDIC, the Commissioner, the SEC, the Federal Reserve, or any other governmental
or other regulatory agency or as shall be required by applicable law,
regulation, or this Agreement, neither Catawba nor Bancshares will (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
(except to the extent required by Paragraph 5.01.C. above).
37
ARTICLE VI
MUTUAL AGREEMENTS
6.01 SHAREHOLDER APPROVALS; REGISTRATION STATEMENT; PROXY
-----------------------------------------------------
STATEMENT/PROSPECTUS; LISTING APPLICATION.
-----------------------------------------
A. MEETINGS OF SHAREHOLDERS. First Gaston shall cause a special
------------------------
meeting of its shareholders (the "First Gaston Shareholder Meeting") to be held
for the purpose of First Gaston's shareholders voting on the approval of this
Agreement and the transactions contemplated hereby. Bancshares shall cause a
special meeting of its shareholders (the "Bancshares Shareholder Meeting") to be
held for the purposes of voting on the Agreement including changing Bancshares'
name to "United Community Banks, Inc." In connection with the call and conduct
of and all other matters relating to the First Gaston Shareholder Meeting and
the Catawba Shareholder Meeting (including the solicitation of proxies), First
Gaston and Catawba shall fully comply with all provisions of applicable law and
regulations and with their respective Articles of Incorporation and Bylaws.
B. REGISTRATION STATEMENT. As soon as practicable following
----------------------
the execution of this Agreement, Catawba, Bancshares, and First Gaston shall in
consultation with each other prepare, and Bancshares shall file with the SEC, a
registration statement on Form S-4 (or on such other form as Bancshares shall
determine to be appropriate) (the "Registration Statement") covering the
Bancshares Stock to be issued to shareholders of First Gaston pursuant to this
Agreement, and will use their respective reasonable best efforts in good faith
to see that the Registration Statement is declared effective by the SEC under
the 1933 Act. Additionally, Bancshares and First Gaston shall in consultation
with each other take all such other actions, if any, as shall be required by
applicable state securities or "blue sky" laws (i) to cause the Bancshares Stock
to be issued upon consummation of the Exchange, at the time of the issuance
thereof, to be duly qualified or registered (unless exempt) under such laws,
(ii) to cause all conditions to any exemptions from qualification or
registration under such laws to have been satisfied, and (iii) to obtain any and
all required approvals or consents to the issuance of such stock.
C. PREPARATION AND DISTRIBUTION OF JOINT PROXY
-------------------------------------------
STATEMENT/PROSPECTUS. Bancshares and First Gaston jointly will prepare a "Proxy
--------------------
Statement/Prospectus" for distribution to both First Gaston's and Bancshares
shareholders as the proxy statement relating to their solicitation of proxies
for use at the First Gaston Shareholder Meeting, the Bancshares Shareholder
Meeting, and as Bancshares' prospectus relating to the offer and distribution of
Bancshares Stock as described herein. The Proxy Statement/Prospectus shall be in
such form and shall contain or be accompanied by such information regarding the
First Gaston Shareholder Meeting, the Bancshares Shareholders Meeting, and this
Agreement, the parties hereto, and the transactions described or contemplated
herein as is required by applicable law and regulations and otherwise as shall
be agreed upon by First Gaston and Bancshares. Bancshares shall include the
Proxy Statement/Prospectus as the prospectus in the Registration Statement.
First Gaston shall cause the Proxy Statement/Prospectus to be filed with the
FDIC for review; and each party hereto will cooperate with the others in good
faith and will
38
use its respective reasonable best efforts in good faith to respond to any
comments of the FDIC or the SEC thereon.
First Gaston and Bancshares will mail the Proxy
Statement/Prospectus to its shareholders as soon as practicable following the
date on which it is cleared by the FDIC and the Registration Statement is
declared effective by the SEC.
D. RECOMMENDATION OF FIRST GASTON'S AND BANCSHARES' BOARDS OF
----------------------------------------------------------
DIRECTORS. Unless, due to a material change in circumstances or for any other
---------
reason either First Gaston's or Bancshares' Board of Directors reasonably
believes, based on a written opinion of outside counsel, that such a
recommendation would violate the directors' duties or obligations as such to
First Gaston, Bancshares, or to their respective shareholders under applicable
law, including, without limitation, the Act, First Gaston's and Bancshares'
Boards of Directors will recommend to and actively encourage their respective
shareholders that they vote their shares of First Gaston Stock and Bancshares
Stock at the First Gaston Shareholder Meeting and the Bancshares Shareholders
Meeting to approve and adopt this Agreement and the Exchange, and the Proxy
Statement/Prospectus mailed to First Gaston's and Bancshares' shareholders will
so indicate and state that First Gaston's and Bancshares' Boards of Directors
considers the Exchange to be advisable and in the best interests of First
Gaston, Bancshares and their respective shareholders.
E. INFORMATION FOR PROXY STATEMENT/PROSPECTUS AND REGISTRATION
-----------------------------------------------------------
STATEMENT. Bancshares, Catawba, and First Gaston each agrees to respond
---------
promptly, and to use its reasonable best efforts to cause its directors,
officers, counsel, accountants, and affiliates to respond promptly to requests
by any other party or its counsel for information for inclusion in the various
applications for regulatory approvals and in the Proxy Statement/Prospectus and
the Registration Statement. Bancshares, Catawba, and First Gaston each hereby
covenant that none of the information provided by it for inclusion in the Proxy
Statement/Prospectus will, at the time of its mailing, 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 false or misleading; and,
at all times following such mailing up to and including the Effective Time, none
of such information contained in the Proxy Statement/Prospectus, as it may be
amended or supplemented, will contain an 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 false or misleading.
F. LISTING APPLICATION. Bancshares shall use its reasonable best
-------------------
efforts to cause the shares of Bancshares Stock to be issued pursuant to this
Agreement in the Exchange to be included in the Nasdaq SmallCap Market.
6.02 REGULATORY APPROVALS. Promptly following the date of this
--------------------
Agreement, Bancshares, Catawba, and First Gaston each shall use their respective
reasonable best efforts in good faith to (i) prepare and file, or cause to be
prepared and filed, all applications for regulatory approvals and actions as may
be required of them, respectively, by applicable law and regulations
39
with respect to the transactions described herein (including applications to the
Federal Reserve, and to any other applicable federal or state banking,
securities, or other regulatory authority as may be required), and (ii) obtain
all necessary regulatory approvals required for consummation of the transactions
described herein. The parties shall cooperate in the preparation of all
applications to regulatory authorities and, upon request, promptly shall furnish
all documents, information, financial statements, or other material that may be
required by the other party to complete any such application; and, before the
filing thereof, each party to this Agreement (and its counsel) shall have the
right to review and comment on the form and content of any such application to
be filed by the other party. Should the appearance of any of the officers,
directors, employees, or counsel of any of the parties hereto be requested by
any other party or by any governmental agency at any hearing in connection with
any such application, such party shall promptly use its best efforts to arrange
for such appearance.
6.03 ACCESS. Following the date of this Agreement and to and including
------
the Effective Time, First Gaston, Bancshares, and Catawba shall provide, and
shall cause each of its Subsidiaries to provide, to each other and their
employees, accountants, and counsel, access to all their respective books,
records, files, and other information (whether maintained electronically or
otherwise), to all their respective properties and facilities, and to all their
respective employees, accountants, counsel, and consultants, for purposes of the
conduct of such reasonable investigation and review as First Gaston, Catawba,
and Bancshares and their employees, accountants, and counsel shall, in their
sole discretion, consider to be necessary or appropriate; provided, however,
that any such review conducted by First Gaston, Bancshares, or Catawba shall be
performed in such a manner as will not interfere unreasonably with First
Gaston's, Bancshares', or Catawba's normal operations, or with First Gaston's,
Bancshares', or Catawba's relationship with its customers or employees, and
shall be conducted in accordance with procedures established by the parties
having due regard for the foregoing.
6.04 COSTS. Whether or not this Agreement shall be terminated or the
-----
Exchange shall be consummated, First Gaston, Bancshares and Catawba each shall
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, filing fees, printing costs,
travel expenses, and, in the case of First Gaston, all fees owed to Smith
Capital, Inc. for the cost of First Gaston's fairness opinion described in
Paragraph 7.01.E. below, and, in the case of Bancshares, all fees owed to The
Orr Group for the cost of Bancshares' fairness opinion described in Paragraph
7.01E. below). All costs incurred in connection with the printing and mailing of
the Proxy Statement/Prospectus shall be deemed to be incurred and shall be paid
fifty percent (50%) by First Gaston and fifty percent (50%) by Bancshares.
6.05 CONFIDENTIALITY. Catawba, Bancshares, and First Gaston each agrees
---------------
that it will treat as confidential and not disclose to any unauthorized person
any documents or other information obtained from or learned about the others
during the course of the negotiation of this Agreement and the carrying out of
the events and transactions described herein (including any information obtained
during the course of any due diligence investigation or review provided for
40
herein or otherwise) and which documents or other information relates in any way
to the business, operations, personnel, customers, or financial condition of
such other parties; and that it will not use any such documents or other
information for any purpose except for the purposes for which such documents and
information were provided to it and in furtherance of the transactions described
herein. However, the above obligations of confidentiality shall not prohibit the
disclosure of any such document or information by any party to this Agreement to
the extent (1) such document or information is then available generally to the
public or is already known to the person or entity to whom disclosure is
proposed to be made (other than through the previous actions of such party in
violation of this Paragraph 6.05), (ii) such document or information was
available to the disclosing party on a nonconfidential basis prior to the same
being obtained pursuant to this Agreement, (iii) disclosure is required by
subpoena or order of a court or regulatory authority of competent jurisdiction,
or by the SEC, FDIC or other regulatory authorities in connection with the
transactions described herein, or (iv) to the extent that, in the reasonable
opinion of legal counsel to such party, disclosure otherwise is required by law.
Catawba, Bancshares, and First Gaston shall cause their respective Subsidiaries
and affiliates, and all of their respective officers, directors, employees and
agents to comply with the provisions of this Paragraph 6.08.
In the event this Agreement is terminated for any reason, each of the
parties hereto immediately shall return to the other parties all copies of any
and all documents or other written materials or information of or relating to
such other parties which were obtained from them or their Subsidiaries or
affiliates during the course of the negotiation of this Agreement and the
carrying out of the events and transactions described herein (whether during the
course of any due diligence investigation or review provided for herein or
otherwise) and which documents or other information relates in any way to the
business, operations, personnel, customers, or financial condition of such other
parties.
The parties' obligations of confidentiality under this Paragraph 6.05
shall survive and remain in effect following any termination of this Agreement.
6.06 REORGANIZATION FOR TAX PURPOSES. Catawba, Bancshares, and First
-------------------------------
Gaston each undertakes and agrees to use its reasonable best efforts to cause
the Exchange to qualify as a "reorganization" within the meaning of Section
368(a)(1)(B) of the Code, and that it will not intentionally take any action
that would cause the Exchange to fail to so qualify.
6.07 ACCOUNTING TREATMENT. Catawba, Bancshares, and First Gaston each
--------------------
undertakes and agrees to use its reasonable best efforts to cause the Exchange
to qualify to be treated as a "pooling-of-interests" for accounting purposes and
that it will not intentionally take any action that would cause the Exchange to
fail to so qualify.
ARTICLE VII
CONDITIONS PRECEDENT TO EXCHANGE
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
41
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 GOVERNMENTAL OR REGULATORY AUTHORITIES; NO
------------------------------------------------------
DISADVANTAGEOUS CONDITIONS. (i) The Exchange and the other transactions
--------------------------
described herein shall have been approved, to the extent required by law, by the
Federal Reserve and by all other governmental or regulatory agencies or
authorities having jurisdiction over such transaction, (ii) no governmental or
regulatory agency or authority shall have withdrawn its approval of such
transactions or imposed any condition on such transactions or conditioned its
approval thereof, which condition is reasonably deemed by Catawba, Bancshares,
or First Gaston to be materially disadvantageous or burdensome or to impact so
adversely the economic or business benefits of this Agreement as to render it
inadvisable for such party to consummate the transactions contemplated herein;
(iii) all waiting periods required following necessary approvals by governmental
or regulatory agencies or authorities shall have expired, and, in the case of
any waiting period imposed by law or regulation following approval by the
Federal Reserve, or other governmental or regulatory authority, no unwithdrawn
objection to the transactions contemplated herein shall have been raised by the
U.S. Department of Justice; 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. EFFECTIVENESS OF REGISTRATION STATEMENT, COMPLIANCE WITH
--------------------------------------------------------
SECURITIES AND OTHER "BLUE SKY" REQUIREMENTS. The Registration Statement shall
--------------------------------------------
be effective under the 1933 Act and no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC. Bancshares shall
have taken all such actions, if any, as required by applicable state securities
laws (i) to cause the Bancshares Stock to be issued upon consummation of the
Exchange, at the time of the issuance thereof, to be duly qualified or
registered (unless exempt) under such laws, (ii) to cause all conditions to any
exemptions from qualification or registration under such laws to have been
satisfied, and (iii) to obtain any and all required approvals or consents with
respect to the issuance of such stock, and any such required approvals or
consents shall have been obtained and shall remain in effect.
C. 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 Exchange or any of the other
transactions described herein or any of the parties hereto from consummating any
such transaction, (ii) any pending or threatened investigation of the Exchange
or any of such other transactions contemplated herein by the U.S. Department of
Justice, or any actual or threatened litigation under federal antitrust laws
relating to the Exchange or any other such transactions, or (iii) any suit,
action, or proceeding by any person (including any governmental, administrative,
or regulatory agency), pending or threatened before any court or governmental
agency in which it is sought to restrain or prohibit First Gaston, Bancshares,
or Catawba from consummating the transactions contemplated herein 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 First Gaston,
Bancshares, or Catawba or any of their officers or directors
42
which shall reasonably be considered by First Gaston, Bancshares, or Catawba to
be materially burdensome in relation to the proposed transactions or materially
adverse in relation to the financial condition of such corporation, and which
has not been dismissed, terminated, or resolved to the satisfaction of all
parties hereto within ninety (90) days of the institution or threat thereof
D. APPROVAL BY BOARDS OF DIRECTORS AND SHAREHOLDERS. The
------------------------------------------------
Boards of Directors of First Gaston, Catawba, and Bancshares shall have duly
approved and adopted this Agreement by appropriate resolutions and the
shareholders of First Gaston and Bancshares shall have duly approved, ratified,
and confirmed this Agreement and the transactions contemplated herein, 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.
E. APPROVAL OF CHARTER AMENDMENT. Bancshares' Board of
-----------------------------
Directors and shareholders shall have approved an amendment to Bancshares'
Articles of Incorporation to authorize the name change of (i) Bancshares to
"United Community Banks, Inc.", and that amendment should have been effected
through filing of appropriate Articles of Amendment with the North Carolina
Secretary of State, and (ii) an amendment to the bylaws of Bancshares to reduce
the minimum number of directors from nine (9) to eight (8).
F. FAIRNESS OPINIONS. First Gaston shall have received from
-----------------
Smith Capital, Inc. a written opinion, in form and substance satisfactory to
First Gaston and its counsel, dated as of a date at least five (5) days prior to
the mailing of materials to First Gaston's shareholders calling for a special
meeting to vote on the Agreement, to the effect that the terms of the
transactions contemplated herein are fair, from a financial point of view, to
First Gaston and its shareholders. Bancshares shall have received from The Orr
Group a written opinion, in form and substance satisfactory to Bancshares and
counsel, dated as of a similar date to Bancshares' shareholders, to the effect
that the terms of the transactions contemplated herein are fair, from a
financial point of view, to Bancshares' shareholders.
G. TAX OPINION. The parties shall have received, in form and
-----------
substance satisfactory to Catawba, Bancshares and First Gaston, an opinion of
Dixon Odom PLLC substantially to the effect that: (1) for federal income tax,
purposes, consummation of the Exchange will constitute a "reorganization" as
defined in (S)368(a)(1)(B) of the Code; (ii) that no taxable gain will be
recognized by a shareholder of First Gaston upon such shareholder's receipt of
Bancshares Stock in exchange for his or her First Gaston Stock; (iii) that the
basis of the Bancshares Stock received by the shareholder in the Exchange will
be the same as his or her First Gaston Stock surrendered in exchange therefor;
and (iv) that, if First Gaston Stock is a capital asset in the hands of the
shareholder at the Effective Time, then the holding period of the Bancshares
Stock received by the shareholder in the Exchange will include the holding
period of First Gaston Stock surrendered in exchange therefor. In rendering its
opinion, Dixon Odom PLLC may rely on representations contained in certificates
of officers of First Gaston, Bancshares, and Catawba.
43
H. LISTING OF BANCSHARES' STOCK. Bancshares Stock shall have been
----------------------------
approved for inclusion in the Nasdaq SmallCap Market effective as of the
Effective Time.
I. NO TERMINATION OR ABANDONMENT. This Agreement shall not have
-----------------------------
been terminated by any party hereto.
7.02 ADDITIONAL CONDITIONS TO FIRST GASTON'S OBLIGATIONS.
---------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary, First
Gaston's obligations 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. MATERIAL ADVERSE CHANGE. There shall not have been any Material
-----------------------
Adverse Change in the financial condition or results of operations of Catawba or
Bancshares, 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, is reasonably likely to cause, create, or result in any such Material
Adverse Change.
B. COMPLIANCE WITH LAWS. Catawba and Bancshares shall have
--------------------
complied in all material respects with all federal and state laws and
regulations applicable to the transactions described herein and where the
violation of or failure to comply with any such law or regulation is reasonably
likely to have a Material Adverse Effect on the financial condition or results
of operations of Catawba or Bancshares.
C. CATAWBA'S AND Bancshares' REPRESENTATIONS AND WARRANTIES
--------------------------------------------------------
AND PERFORMANCE OF AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing
----------------------------------------------------
by First Gaston as provided in Paragraph 9.02 below, each of the representations
and warranties of Catawba and Bancshares contained in this Agreement shall have
been true and correct as of the date hereof and shall remain true and correct in
all material respects on and as of the Effective Time with the same force and
effect as though made on and as of such date, except (i) representations and
warranties that speak as of a specific date, (ii) for changes which are not, in
the aggregate, material and adverse to the financial condition and results of
operations of Catawba or Bancshares, and (iii) as otherwise contemplated by this
Agreement; and Catawba and Bancshares shall have performed in all material
respects all their respective obligations, covenants, and agreements hereunder
to be performed by them on or before the Closing Date.
First Gaston shall have received a certificate dated as of the
Closing Date and executed by Catawba's and Bancshares' President and Chief
Financial Officer to the foregoing effect and as to any other matter as First
Gaston may reasonably request.
D. LEGAL OPINION OF CATAWBA'S AND BANCSHARES' COUNSEL. FIRST
--------------------------------------------------
Gaston shall have received from Catawba's and Bancshares' counsel, Gaeta &
Glesener, P.A., Raleigh, North Carolina, a written opinion, dated as of the
Closing Date and in form and substance reasonably satisfactory to First Gaston.
44
E. OTHER DOCUMENTS AND INFORMATION FROM CATAWBA AND BANCSHARES.
-----------------------------------------------------------
Catawba and Bancshares shall have provided to First Gaston correct and complete
copies of their respective Bylaws, Articles of Incorporation, and board and
shareholder resolutions (all certified by their respective secretaries),
together with a certificate of the incumbency of its officers and such other
closing documents and information as may be reasonably requested by First Gaston
or its counsel.
F. ACCEPTANCE BY FIRST GASTON'S COUNSEL. The form and substance of
------------------------------------
all legal matters described herein or related to the transactions contemplated
herein shall be reasonably acceptable to First Gaston's legal counsel, Moore &
Van Allen, PLLC, Charlotte, North Carolina.
G. EXERCISE OF DISSENTERS RIGHTS. The aggregate number of shares
-----------------------------
of Bancshares Stock as to which cash is required to be paid as the result of the
exercise of any dissenters rights pursuant to the Act, when coupled with any
other shares of Bancshares Stock and First Gaston Stock deemed tainted for
"pooling-of-interest" purposes, shall not exceed 10% of the total number of
shares of Bancshares Stock outstanding at the date of this Agreement or at the
Effective Time.
H. ACCOUNTING TREATMENT. (i) First Gaston shall have received
--------------------
assurances from Larrowe & Company, in form and content satisfactory to it, to
the effect that the Exchange will qualify to be treated as a "pooling-of-
interests" for accounting purposes; (ii) if requested by First Gaston, Catawba's
and Bancshares' independent public accountants shall have delivered to First
Gaston a letter in form and content satisfactory to them to the effect that such
accountants are not aware of any fact or circumstance that might cause the
Exchange not to qualify for such treatment; (iii) it shall not have come to the
attention of management of First Gaston that any event has occurred or that any
condition or circumstance exists that makes it likely that the Exchange may not
so qualify.
I. AFFILIATES' AGREEMENTS. First Gaston shall have received
----------------------
an Affiliates Agreement executed by each person who is an Affiliate of Catawba
or Bancshares (as defined in Paragraph 3.26 above) at least five (5) days prior
to the Closing in form and content reasonably satisfactory to First Gaston.
7.03 ADDITIONAL CONDITIONS TO CATAWBA'S AND BANCSHARES' OBLIGATION.
-------------------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary, Catawba's
and Bancshares' obligation 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. 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 First Gaston, and there shall not have occurred any event or
development and there shall not exist any condition or circumstance
45
which, with the lapse of time or otherwise, is reasonably likely to cause,
create, or result in any such Material Adverse Change.
B. COMPLIANCE WITH LAWS. First Gaston shall have complied in all
--------------------
material respects with all federal and state laws and regulations applicable to
the transactions described herein and where the violation of or failure to
comply with any such law or regulation is reasonably likely to have a Material
Adverse Effect on First Gaston.
C. FIRST GASTON'S REPRESENTATIONS AND WARRANTIES AND PERFORMANCE
-------------------------------------------------------------
OF AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by Catawba or
------------------------------------
Bancshares as provided in Paragraph 9.02 below, each of the representations and
warranties of First Gaston contained in this Agreement shall have been true and
correct in all material respects as of the date hereof and shall remain true and
correct in all material respects on and as of the Effective Time with the same
force and effect as though made on and as of such date, except (i)
representations and warranties that speak as of a specific date, (ii) for
changes which do not, in the aggregate, result in a Material Adverse Effect on
First Gaston, and (iii) as otherwise contemplated by this Agreement; and First
Gaston 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.
Catawba and Bancshares shall have received a certificate dated as
of the Closing Date and executed by First Gaston's President and Chief Financial
Officer to the foregoing effect and as to such other matters as may be
reasonably requested by Catawba or Bancshares.
D. LEGAL OPINION OF FIRST GASTON'S COUNSEL. Bancshares shall have
---------------------------------------
received from First Gaston's counsel, Moore & Van Allen, PLLC, Charlotte, North
Carolina, a written opinion, dated as of the Closing Date and in the form and
substance reasonably satisfactory to Bancshares.
E. OTHER DOCUMENTS AND INFORMATION FROM FIRST GASTON. First
-------------------------------------------------
Gaston shall have provided to Catawba and Bancshares correct and complete copies
of its Articles of Incorporation, Bylaws, and board and shareholder resolutions
(all certified by First Gaston's Secretary), together with certificates of the
incumbency of First Gaston's officers and such other closing documents and
information as may be reasonably requested by Catawba, Bancshares or their
counsel.
F. ACCEPTANCE BY FIRST GASTON'S COUNSEL. The form and substance of
------------------------------------
all legal matters described herein or related to the transactions contemplated
herein shall be reasonably acceptable to Catawba's and Bancshares' legal
counsel, Gaeta & Glesener, PA, Raleigh, North Carolina.
G. EXERCISE OF DISSENTERS RIGHTS. The aggregate number of shares
-----------------------------
of First Gaston Stock as to which cash is required to be paid as the result of
the exercise of any dissenters rights pursuant to the Act, when coupled with any
other shares of Bancshares Stock and First Gaston Stock deemed tainted for
"pooling-of-interest" purposes, shall not exceed 10%
46
of the total number of shares of First Gaston Stock outstanding at the date of
this Agreement or at the Effective Time.
H. ACCOUNTING TREATMENT. (i) Catawba and Bancshares shall have
--------------------
received assurances from Dixon Odom PLLC, in form and content satisfactory to
them, to the effect that the Exchange will qualify to be treated as a "pooling-
of-interests" for accounting purposes; (ii) if requested by Catawba or
Bancshares, First Gaston's independent public accountants shall have delivered
to Catawba and Bancshares a letter in form and content satisfactory to them to
the effect that such accountants are not aware of any fact or circumstance that
might cause the Exchange not to qualify for such treatment; (iii) it shall not
have come to the attention of management of Catawba or Bancshares that any event
has occurred or that any condition or circumstance exists that makes it likely
that the Exchange may not so qualify.
I. AFFILIATES' AGREEMENTS. Catawba and Bancshares shall have
----------------------
received an Affiliates Agreement executed by each person who is an Affiliate of
First Gaston (as defined in Paragraph 2.26 above) at least five (5) days prior
to the Closing in form and content reasonably satisfactory to Catawba and
Bancshares.
ARTICLE VIII
TERMINATION; BREACH
8.01 MUTUAL TERMINATION. At any time prior to the Effective Time (and
------------------
whether before or after approval hereof by the shareholders of Catawba or First
Gaston), this Agreement may be terminated by the mutual agreement of Bancshares
and First Gaston. Upon any such mutual termination, all obligations of Catawba,
Bancshares, and First Gaston hereunder shall terminate and each party shall pay
costs and expenses as provided in Paragraph 6.04 above.
8.02 UNILATERAL TERMINATION. This Agreement may be terminated by
----------------------
either Bancshares or First Gaston (whether before or after approval hereof by
First Gaston's or Catawba's shareholders) upon written notice to the other
party.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.01 "PREVIOUSLY DISCLOSED" INFORMATION; "MATERIAL ADVERSE EFFECT"
-------------------------------------------------------------
AND "MATERIAL ADVERSE CHANGE".
------------------------------
A. "Previously Disclosed" shall mean, as to First Gaston, Catawba
or Bancshares, the disclosure of information in a letter delivered by such party
to the others prior or subsequent to the date of this Agreement and which
specifically refers to this Agreement and is arranged in paragraphs
corresponding to the Paragraphs, subparagraphs, and items of this Agreement
applicable thereto, all of which documents are incorporated herein by reference.
Information disclosed in any party's letter described above shall
be deemed to have been Previously Disclosed by such party for the purpose of any
given Paragraph,
47
subparagraph, or item of this Agreement only to the extent that information is
expressly set forth in such Party's letter described above and that, in
connection with such disclosure, a specific reference is made in the letter to
that Paragraph, subparagraph, or item,
B. Where used in this Agreement, the terms "Material Adverse
Effect" and "Material Adverse Change" shall mean an event, matter, item or
circumstance (other than as a result of (i) changes in GAAP, (ii) changes in
banking and similar laws of general application or interpretations thereof by
courts or governmental authorities, or (iii) any non-recurring unregulated
expense of any kind) that in and of itself, or when combined with all similar
events, matters, items or circumstances, reasonably would be expected to have,
now or in the future, a material adverse effect on the business, financial
condition, operations, results of operations or prospects of either party.
9.02 WAIVER. Any term or condition of this Agreement may be waived
------
(except as to matters of regulatory approvals and 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, or be construed to be a waiver of any succeeding breach of the same term
or 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 a full and complete compliance with such
terms.
9.03 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 First Gaston, by an
agreement in writing approved by a majority of the Board of Directors of
Bancshares, Catawba, and First Gaston executed in the same manner as this
Agreement; provided, however, that, except with the further approval of First
Gaston's shareholders of that change or as otherwise provided herein, following
approval of this Agreement by the shareholders of First Gaston no change may be
made in the number of shares of Bancshares Stock into which each share of First
Gaston Stock will be converted.
9.04 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 mailed by certified mail, postage prepaid, as follows:
A. If to First Gaston, to:
First Gaston Bank of North Carolina
Post Office Box 1478
Gastonia, North Carolina 28053-1478
Attention: Mr. W. Alex Hall
48
With copy to:
Brian T. Atkinson, Esq.
Moore & Van Allen, PLLC
100 North Tryon Street, Floor 47
Charlotte, North Carolina 28202
B. If to Bancshares or Catawba, to:
Catawba Valley Bank
Post Office Box 2328
Hickory, North Carolina 28603-2328
Attention: Mr. R. Steve Aaron
With copy to:
Anthony Gaeta, Jr., Esq.
Gaeta & Glesener, P.A.
808 Salem Woods Drive, Suite 201
Raleigh, North Carolina 27615
9.05 FURTHER ASSURANCES. First Gaston, Bancshares, and Catawba each
------------------
agree to furnish to the others such further assurances with respect to the
matters contemplated herein and their respective agreements, covenants,
representations, and warranties contained herein, including the opinion of legal
counsel, as such other parties may reasonably request.
9.06 HEADINGS AND CAPTIONS. Headings and captions of the articles,
---------------------
sections, and paragraphs of this Agreement have been inserted for convenience of
reference only and do not constitute a part hereof.
9.07 ENTIRE AGREEMENT. This Agreement (including all schedules and
----------------
exhibits attached hereto and all documents incorporated herein by reference)
contains the entire agreement of the parties with respect to the transactions
described herein and supersedes any and all other oral or written agreement(s)
heretofore made, and there are no representations or inducements by or to, or
any agreements between, any of the parties hereto other than those contained
herein in writing.
9.08 SEVERABILITY OF PROVISIONS. The invalidity or unenforceability of
--------------------------
any term, phrase, clause, paragraph, restriction, covenant, agreement, or other
provision hereof shall in no way affect the validity or enforceability of any
other provision or part hereof.
9.09 ASSIGNMENT. This Agreement may not be assigned by any party
----------
hereto except with the prior written consent of the other parties hereto.
49
9.10 ENFORCEMENT. The parties agree that irreparable damage would occur
-----------
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court located in the State of
North Carolina, this being in addition to any other remedy to which they are
entitled at law or in equity.
9.11 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.
9.12 GOVERNING LAW. This Agreement is made in and shall be construed
-------------
and enforced in accordance with the internal laws (and not the laws of conflict)
of the State of North Carolina.
9.13 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND OTHER AGREEMENTS.
-------------------------------------------------------------
None of the representations, warranties or agreements herein shall survive the
effectiveness of the Exchange, and no party shall have any right after the
Effective Time to recover damages or 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.
[remainder of page intentionally left blank; signatures appear on next page]
50
IN WITNESS WHEREOF, First Gaston, Catawba and Bancshares have each
caused this Agreement to be executed in its name by its duly authorized officers
as of the date first above written.
CATAWBA VALLEY BANK
BY: /s/ R. Steve Aaron
------------------
R. Steve Aaron, President and CEO
ATTEST:
/s/ Carole F. Teague
--------------------
Secretary
[CORPORATE SEAL]
CATAWBA VALLEY BANCSHARES, INC.
BY: /s/ R. Steve Aaron
------------------
R. Steve Aaron, President and CEO
ATTEST:
/s/ Carole F. Teague
--------------------
Secretary
[CORPORATE SEAL]
FIRST GASTON BANK OF NORTH CAROLINA
BY: /s/ W. Alex Hall
----------------
W. Alex Hall, President and CEO
ATTEST:
/s/ Barbara D. Myers
--------------------
Secretary
[CORPORATE SEAL]
51
EXHIBIT A
to Agreement and Plan of Share Exchange
dated June 29, 2001
PLAN OF EXCHANGE BETWEEN
CATAWBA VALLEY BANK, CATAWBA VALLEY BANCSHARES, INC. AND
FIRST GASTON BANK OF NORTH CAROLINA
A. Names of Exchange Corporations. The name of the corporation whose
------------------------------
shares will be acquired is "First Gaston Bank of North Carolina", a North
Carolina commercial bank ("First Gaston"), and the name of the acquiring
corporation is "Catawba Valley Bancshares, Inc.", a North Carolina corporation
("Bancshares").
B. Nature of Transaction. Subject to the provisions of this Plan of
---------------------
Exchange, all of the outstanding shares of First Gaston's common stock (other
than any shares held by Catawba or as to which rights of dissent and appraisal
are properly exercised) shall be exchanged for newly issued shares of Bancshares
common stock pursuant to N.C. GEN. STAT. Section 55-11-02 (the "Exchange") and
with the effect provided under N.C. GEN. STAT. Section 55-11-06.
C. Terms and Conditions of the Exchange and Manner and Basis of
------------------------------------------------------------
Exchanging Shares.
-----------------
1. The Exchange shall be effected pursuant to the terms and
conditions of this Plan of Exchange and of the Agreement and Plan Share Exchange
dated as of June 29, 2001, by and among First Gaston, Bancshares and Catawba
Valley Bank (the "Agreement").
2. Each outstanding share of First Gaston common stock ($5.00 par
value) will be exchanged for 0.8934 newly issued shares of Bancshares' $1.00 par
value common stock, rounded to the nearest whole share.
3. No fractional shares will be issued to the First Gaston
shareholders. Bancshares' shares to be issued as a result of the Exchange will
be rounded to the nearest whole share and any shareholder of First Gaston who
would otherwise be entitled to receive five-tenths (.5) or more of a share will
instead receive an additional whole share; and any shareholder who would
otherwise be entitled to receive less than five-tenths (.5) of a share will not
receive any consideration for such fractional interest.
4. Each holder of a certificate representing shares to be
exchanged in the Exchange will surrender such certificate and after the
Effective Time will be entitled to receive in exchange therefor a certificate or
certificates representing the number of shares to which he is entitled under
this Plan. Until so surrendered, each outstanding certificate that prior to the
Effective Time represented shares of First Gaston will be deemed for all
purposes to evidence ownership of the consideration to be issued for such shares
under this Plan; provided, however, that no holder of any such outstanding
certificate shall be entitled to the payment of dividends or other distributions
on the shares represented by such certificate until the surrender of such
certificate, but upon surrender of such certificate as provided in the
Agreement, Bancshares'
52
exchange agent shall pay to the registered holder of the shares of Bancshares'
stock represented by such certificate the amount of any such cash, dividends or
distributions which have accrued but remain unpaid with respect to such shares.
Neither Bancshares, its exchange agent, nor First Gaston shall have any
obligation to pay any interest on any such cash, dividends or distributions for
any period prior to such payment.
5. The outstanding shares of Bancshares will not be converted,
exchanged, or altered in any manner as a result of the Exchange and will remain
outstanding as shares of Bancshares.
D. Abandonment. This Plan of Exchange may be terminated and the Exchange
-----------
may be abandoned at any time prior to the Effective Time upon termination of the
Agreement as provided therein.
53
AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF SHARE EXCHANGE BY AND
AMONG CATAWBA VALLEY BANK, CATAWBA VALLEY BANCSHARES, INC. AND
FIRST GASTON BANK OF NORTH CAROLINA
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF SHARE EXCHANGE (this
"Amendment") is entered into as of August 10, 2001, by and among Catawba Valley
Bank ("Catawba"), Catawba Valley Bancshares, Inc. ("Bancshares"), and First
Gaston Bank of North Carolina ("First Gaston").
WHEREAS, Catawba, Bancshares, and First Gaston are parties to the Agreement
and Plan of Share Exchange, dated as of June 29, 2001 (the "Agreement"); and
WHEREAS, the transactions contemplated by the Agreement may be accounted
for on either a pooling-of-interests basis or as a purchase and the parties
hereto believe the economic impact will not be affected in any material way
irrespective of accounting treatment is utilized to account for the
transactions; and
WHEREAS, Catawba, Bancshares, and First Gaston desire to amend the
Agreement as provided herein to eliminate any reference to requiring that the
transactions contemplated by the Agreement qualify for pooling-of-interests
accounting treatment; and
WHEREAS, the Agreement sets forth as a condition precedent to the
consummation of the transactions contemplated therein that Bancshares changes
its name to United Community Banks, Inc. and the parties hereto desire to
eliminate that requirement and provide for more flexibility in renaming
Bancshares upon consummation of the transactions.
NOW, THEREFORE, in consideration of the premises and mutual benefits to be
derived from this Amendment and the Agreement, Catawba, Bancshares, and First
Gaston hereby adopt and make this Amendment and mutually agree as follows:
1. Paragraphs 7.02.G. and H and Paragraphs 7.03.G and H are hereby stricken
from the Agreement.
2. Paragraph 7.01.E is hereby amended to provide that Bancshares shall change
its name to one which is mutually agreed upon by and between First Gaston
and Bancshares and to eliminate the requirement that Bancshares change its
name to "United Community Banks, Inc."
[remainder of this page intentionally left blank;
signatures appear on next page]
54
IN WITNESS WHEREOF, First Gaston, Catawba, and Bancshares have each caused
this Amendment to be executed in its name by its duly authorized officers as of
the date first written above.
CATAWBA VALLEY BANK
BY: ___________________________
R. Steve Aaron, President and CEO
ATTEST:
----------------------------
Carole F. Teague, Secretary
[CORPORATE SEAL]
CATAWBA VALLEY BANCSHARES, INC.
BY: ____________________________
R. Steve Aaron, President and CEO
ATTEST:
----------------------------
Carole F. Teague, Secretary
[CORPORATE SEAL]
FIRST GASTON BANK OF NORTH CAROLINA
BY: ____________________________
W. Alex Hall, President and CEO
ATTEST:
----------------------------
Barbara D. Myers, Secretary
[CORPORATE SEAL]
55
Appendix II
-----------
Smith Capital, Inc.,
200 Hargett Court
Charlotte, North Carolina 28211
Tel 704 362 1563 Fax 704 364 3451
July 24, 2001
The Board of Directors
First Gaston Bank
804 South New Hope Road
Gastonia, North Carolina
Attention: W. Alex Hall
President and CEO
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of First Gaston Bank of North Carolina("First Gaston")
of the consideration proposed to be paid to them in connection with the proposed
merger (the "Merger") of First Gaston with Catawba Valley Bancshares, Inc.
Pursuant to the Agreement and Plan of Share Exchange (the Agreement") dated June
29, 2001 stockholders of First Gaston common stock will receive for each share
of Common Stock, par value $5.00 per share, held by them consideration equal to
0.8945 shares of Common Stock, par value $1.00 per share, of Catawba Valley (the
"Exchange Ratio").
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the business of First Gaston and of
certain other companies engaged in businesses comparable to those of First
Gaston, and the reported market prices for certain other companies' securities
deemed comparable; (iii) publicly available terms of certain transactions
involving companies comparable to First Gaston and the consideration received
for such companies; (iv) current and historical market prices of the common
stock of First Gaston and Catawba Valley; (v) the audited financial statements
of First Gaston and Catawba Valley for the fiscal years ended December 31, 2000,
December 31, 1999 and December 31, 1998; (vi) certain internal financial
analyses and forecasts prepared by First Gaston and Catawba Valley and their
respective managements; and (vii) the terms of other business combinations that
we deemed relevant.
In addition, we have held discussions with certain members of the management of
First Gaston and Catawba Valley with respect to certain aspects of the Merger,
and the past and current business operations of First Gaston and Catawba Valley,
the financial condition and future prospects and operations of First Gaston and
Catawba Valley, the effects of the Merger on the financial condition and future
prospects of First Gaston and Catawba Valley, and certain other matters we
believed necessary or appropriate to our inquiry. We have reviewed such other
financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by First Gaston and Catawba Valley or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. We have not conducted any valuation or appraisal of any assets or
liabilities, nor have any such valuations or appraisals been provided to us. In
relying on financial analyses and forecasts provided to us, we have assumed that
they have been reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by management as to the expected
future results of operations and financial condition of First Gaston and Catawba
Valley to which such analyses or forecasts relate. We have also assumed that the
Merger will have the tax and accounting consequences described in discussions
with, and materials furnished to us by, representatives of First Gaston, and
that the other transactions contemplated by the Agreement will be consummated as
described in the Agreement.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion. We
are expressing no opinion herein as to the price at which Catawba Valley's stock
will trade at any future time.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the Exchange Ratio in the proposed Merger is fair, from a financial
point of view, to First Gaston's stockholders.
This letter is provided to the Board of Directors of First Gaston in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any stockholder of First Gaston as to how such
stockholder should vote with respect to the Merger. This opinion may not be
disclosed, referred to, or communicated (in whole or in part) to any third party
for any purpose whatsoever except with our prior written consent in each
instance.
This opinion may be reproduced in full in any proxy or information statement
mailed to stockholders of First Gaston but may not otherwise be disclosed
publicly in any manner without our prior written approval and must be treated as
confidential.
Very truly yours,
Smith Capital, Inc.
By:
---------------------
Name: Alison J. Smith
Title: President
APPENDIX III
------------
July 17, 2001
The Board of Directors of
Catawba Valley Bancshares
1039 Second Street NE
Hickory, NC 28601
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the stockholders, ("Company Common Stock"), of
Catawba Valley Bancshares, Inc. (the "Company") of the consideration to be paid
by such stockholders in the proposed merger (the "Merger") of the Company with
First Gaston Bank ("Acquiree") pursuant to an Agreement and Plan of
Reorganization (the "Merger Agreement"), between the Company and Acquiree.
Upon the consummation of the Merger, each share of Acquiree's Stock outstanding
immediately prior to the consummation of the Merger will cease to be outstanding
and will be converted into 0.8934 shares of the Company's Stock ("Merger
Consideration").
In connection with rendering our opinion, we have reviewed and analyzed, among
other things, the following: (i) the Merger Agreement; (ii) certain publicly
available information concerning the Company and Acquiree, including the Annual
Reports on Form 10-K of the Company for each of the years in the three year
period ended December 31, 2000 and of the Acquiree for each of the years in the
three year period ended December 31, 2000, the Quarterly Reports on Form 10-Q of
the Company and Acquiree for the quarter ended March 31, 2001, (iii) certain
available financial forecasts concerning the business and operations of the
Company and Acquiree that were prepared by management of the Company and
Acquiree, respectively, and (iv) certain publicly available information with
respect to other companies that we believe to be comparable in certain respects
to the Company and Acquiree and the trading markets for such other companies'
securities. We have held discussions with certain officers and employees of the
Company and Acquiree to discuss the past and current business operations,
financial condition and prospects of the Company and Acquiree, as well as
matters we believe relevant to our inquiry. We have also considered other
information, financial studies, analyses, investigations and financial, economic
and market criteria that we deemed relevant.
In our review and analysis, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information provided us, or that
is publicly available, and have not attempted independently to verify nor
assumed responsibility for verifying any such information. With respect to the
financial projections, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
Company or Acquiree, as the case may be, and we express no opinion with respect
to such forecasts or the
assumptions on which they are based. We have not made or obtained or assumed any
responsibility for making or obtaining any independent evaluations or appraisals
of any of the assets (including loans, properties and facilities) or liabilities
of the Company or Acquiree.
In conducting our analysis and arriving at our opinion as expressed herein, we
have considered such financial and other factors that we have deemed appropriate
under the circumstances, including the following: (i) the historical and current
financial position and results of operations of the Company and Acquiree; (ii)
the historical and current market for the equity securities of the Company,
Acquiree and other companies that we believe to be comparable in certain
respects to the Company or Acquiree; (iii) the nature and terms of certain other
acquisition transactions that we believe to be relevant; and (iv) the current
and historical relationships between the trading levels of the Company Common
Stock and Acquiree Common Stock. We have taken into account our assessment of
general economic, market and financial conditions and our knowledge of the
banking industry, as well as our experience in connection with similar
transactions and securities valuation generally. Our opinion is based upon
conditions as they exist and can be evaluated on the date hereof, and we assume
no responsibility to update or revise our opinion based upon circumstance or
events occurring after the date hereof. Our opinion expressed below does not
imply any conclusion as to the likely trading range for the Company's Common
Stock following the consummation of the Merger, which may vary depending upon,
among other factors, changes in interest rates, dividend rates, market
conditions, general economic conditions and factors that generally influence the
price of securities. Our opinion does not address the Company's underlying
business decision to effect the Merger. Our opinion is directed only to the
fairness, from a financial point of view, of the Merger Consideration and does
not constitute a recommendation concerning how holders of Company Common Stock
should vote with respect to the Merger Agreement.
In rendering our opinion we have assumed that in the course of obtaining the
necessary regulatory approvals for the Merger no restrictions will be imposed
that would have a material adverse affect on the contemplated benefits of the
Merger to the Company following the Merger. We understand that the Merger will
qualify as a tax-free reorganization under the Internal Revenue Code and that,
for accounting purposes, the Merger will be accounted for as a pooling of
interests.
We will receive a fee from the Company for delivery of this fairness opinion,
the payment of which is contingent upon consummation of the Merger.
Subject to the foregoing, it is our opinion that, as of the date hereof, the
Merger Consideration to be paid to the stockholders of the Acquiree is fair to
the stockholders of the Company from a financial point of view.
Very truly yours,
The Orr Group
APPENDIX IV
DISSENTERS' RIGHTS
N.C. GEN. STAT. CHAPTER 55, ARTICLE 13
GENERAL STATUTUES OF NORTH CAROLINA
CHAPTER 55. NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13. DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
N.C. Gen. Stat. (S)55-13-01
(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 corporation
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.
N.C. Gen. Stat. (S)55-13-02
(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;
(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 in 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 dissent from, or obtain payment of the fair market 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 Security Dealers, Inc., or (ii) held by at least 2,000
record shareholders. This subsection does not apply 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 or 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 designed as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers,
Inc., or held of record 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.
N. C. Gen. Stat. (S)55-13-03
(S)55-13-03. Dissent by nominees and beneficial owners
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect
to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose
behalf he asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to
which he dissents and his other shares were registered in the names of
different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder.
N.C. Gen. Stat. (S)55-13-04
(S)55-13-04 through 55-13-19
Reserved for future codification purposes.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
N.C. Gen. Stat. (S)55-13-20
(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
longer 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.
N.C. Gen. Stat. (S)55-13-21
(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.
N.C. Gen. Stat. (S)55-13-22
(S)55-13-22 Dissenters' notice
(a) If proposed corporate action creating dissenters' rights under G. S.
55-13-02 is authorized at a shareholders' meeting, the corporation
shall mail by registered or certified mail, return receipt requested,
a written dissenters' notice to all shareholders who satisfied the
requirements of G. S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after
the approval of the board of directors, of the corporate action
creating dissenters' rights under G. S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is
received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days
after the date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
N.C. Gen. Stat. (S)55-13-23
(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 canceled or modified by the taking
of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates were required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this Article.
N.C. Gen. Stat. (S)55-13-24
(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 canceled or modified by the taking of the proposed
corporate action.
N.C. Gen. Stat. (S)55-13-25
(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 the 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 dissenters' right to demand payment under G.
S. 55-13-28; and
(5) A copy of this Article.
N.C. Gen. Stat. (S)55-13-26
(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.
N.C. Gen. Stat. (S)55-13-27
(S)55-13-27. Reserved for future codification purposes
N.C. Gen. Stat. (S)55-13-28
(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 the 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.
N.C. Gen. Stat. (S)55-13-29
(S)55-13-29. Reserved for future codification purposes.
PART 3. JUDICIAL APPRAISAL OF SHARES
N.C. Gen. Stat. (S)55-13-30
(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.
(a1) Repealed by Session Laws 1997-202, s.4, effective October 1, 1997.
(b) [Reserved for future codification purposes.]
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to
the proceeding as in an action against their shares and all parties
must be served with a copy of the complaint. Nonresidents may be
served by registered or certified mail or by publication as provided
by law.
(d) The jurisdiction of the superior court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have
the powers described in the order appointing them, or in any amendment
to it. The parties are entitled to the same discovery rights as
parties in other civil proceedings. The proceedings shall be tied 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
this shares, plus interest, exceeds the amount paid by the
corporation.
N.C. Gen. Stat. (S)55-13-31
(S)55-13-31. Court action
(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,
vexastiously, or not in good faith with respect to the rights
provided in 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.
APPENDIX V
----------
ARTICLE I
The name of the corporation is "United Community Bancorp" (herein referred to as
the "Corporation").
APPENDIX VI
-----------
ARTICLE III
Section 2. Number, Term and Qualifications: The number of directors
constituting the Board of Directors of the Corporation shall be not less than
eight (8) nor more than eighteen (18) as from time to time may be fixed or
changed within said minimum and maximum by the shareholders or by a majority of
the full Board of Directors. If there are less than nine (9) directors, they
shall be elected for terms of one (1) year. Provided there are nine (9) or more
directors, the directors shall be divided into three classes, as nearly equal in
number as possible, with the term of office of the first class to expire at the
first annual meeting of shareholders after their election, the term of office of
the second class to expire at the second annual meeting of shareholders after
their election, and the term of office of the third class to expire at the third
annual meeting of shareholders after their election. At each annual meeting of
shareholders following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
term of three years or until their successors are elected and shall qualify. In
the event of any increase or decrease in the number of directors, the additional
or eliminated directorships shall be so classified or chosen so that all classes
of directors shall remain and become equal in number, as nearly as possible. In
the event of the death, resignation, retirement, removal or disqualification of
a director, a successor shall be elected to serve only until the next meeting of
shareholders at which directors are elected.
No person shall be elected, re-elected or appointed as a director after
attaining seventy (70) years of age except for members of the initial Board of
Directors of the Corporation. In the event a director attains the age of seventy
(70) years during his term, such director shall serve until the next annual
meeting, at which time his successor shall be elected by the shareholders for
the remainder of the unexpired term.
Part II - Information Not Required in Prospectus
Item 20. Indemnification of Directors and Officers
Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was, is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (a) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (b) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above its determined by the board of
directors, a committee of directors, special legal counsel or the shareholders
in accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification
described above under the statutory scheme, Section 55-8-57 of the North
Carolina General Statutes permits a corporation to indemnify or agree to
indemnify any of its directors, officers, employees or agents against liability
and expenses (including attorney's fees) in any proceeding (including
proceedings brought by or on behalf of the corporation) arising out of their
status as such or their activities in such capacities, except for any
liabilities or expenses incurred out of their status as such or their activities
in such capacities, except for any liabilities or expenses incurred on account
of activities that were, at the time taken, known or believed by the person to
be clearly in conflict with the best interests of the corporation. The Bylaws of
Catawba Valley Bancshares provide for indemnification to the fullest extent
permitted under North Carolina law for persons who serve as directors or
officers of Catawba Valley Bancshares, or at the request of Catawba Valley
Bancshares serve as an officer, director, agent, partner, trustee, administrator
or employee for any other foreign or domestic entity, except to the extent such
activities were at the time taken known or believed by the potential indemnities
to be clearly in conflict with the best interests of Catawba Valley Bancshares.
Accordingly, Catawba Valley Bancshares may indemnify its directors, officers, or
employees in accordance with either the statutory or non-statutory standards.
Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes
require a corporation, unless its articles of incorporation provide otherwise,
to indemnify a director or officer who has been wholly successful, on the merits
or otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina General Statutes
provides that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or not
the corporation is otherwise authorized by the NCBCA to indemnify such party.
Catawba Valley Bank has purchased a standard directors' and officers' liability
policy which will, subject to certain limitations, indemnify Catawba Valley Bank
and its officers and directors for damages they become legally obligated to pay
as a result of any negligent act, error, or omission committed by directors or
officers while acting in their capacity as such. Catawba Valley Bancshares may
also purchase such a policy.
As permitted by North Carolina law, Article 5 of Catawba Valley
Bancshares Articles of Incorporation limits the personal liability of directors
for monetary damages for breaches of duty as a director arising out of any legal
action whether by or in the right of Catawba Valley Bancshares or otherwise,
provided that such limitation will not apply to (i) acts or omissions that the
director at the time of such breach knew or believed were clearly in conflict
with the best interests of Catawba Valley Bancshares, (ii) any liability under
Section 55-8-33 of the General Statutes of North Carolina, or (iii) any
transaction from which the director derived an improper personal benefit (which
does not include a director's reasonable compensation or other reasonable
incidental benefit for or on account of his service as a director, officer,
employee, independent contractor, attorney, or consultant of Catawba Valley
Bancshares).
Item 21. Exhibits and Financial Statement Schedules
The following documents are filed herewith and made a part of this
Registration Statement.
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Agreement and Plan of Share Exchange By and Among Catawba Valley Bank,
Catawba Valley Bancshares, Inc. and First Gaston Bank of North
Carolina dated as of June 29, 2001 (included as Appendix I to the
Joint Proxy Statement-Prospectus)
2.2 Amendment No. 1 to Agreement and Plan of Share Exchange by and Among
Catawba Valley Bank, Catawba Valley Bancshares, Inc. and First Gaston
Bank of North Carolina (included as Appendix I to the Joint Proxy
Statement-Prospectus)
3.1 Articles of Incorporation of Registrant (incorporated by reference to
Registrant's Form S-4 filed on
Exhibit
Number Description of Exhibit
------ ----------------------
March 25, 1999 with the SEC)
3.2 Bylaws of Registrant (incorporated by reference to Registrant's Form
S-4 filed on March 25, 1999 with the SEC)
4.1 Form of Stock Certificate of Registrant (incorporated by reference
to Registrant's Form S-4 filed on March 25, 1999 with the SEC )
5.1* Opinion of Gaeta & Glesener, P.A. regarding the legality of
securities being registered
8.1 Tax Opinion of Dixon Odom PLLC (filed herewith)
10.1 Employment Agreement, dated January 1, 1999, between Catawba Valley
Bank and R. Steve Aaron (incorporated by reference to Registrant's
Form S-4 filed on March 25, 1999)
10.2 Employment Agreement, dated November 30, 1998, between First Gaston
Bank of North Carolina and W. Alex Hall (incorporated by reference
to Exhibit 10(I) of First Gaston's Form 10-KSB filed on March 29,
2000 with the FDIC)
13.1 Registrant's 2000 Annual Report (incorporated by reference to
Registrant's Schedule 14A filed on March 14, 2001 with the SEC)
13.2 Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2001 (incorporated by reference to Registrant's Form 10-QSB
filed on July 19, 2001 with the SEC)
13.3* First Gaston Bank of North Carolina's 2000 Annual Report
13.4* First Gaston Bank of North Carolina's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 2001
21.1* Subsidiaries of the Registrant
23.1 Consent of Dixon Odom PLLC (filed herewith)
23.2* Consent of Gaeta & Glesener, P.A
23.3 Consent of Smith Capital, Inc. (filed herewith)
23.4 Consent of The Orr Group (filed herewith)
23.5 Consent of Larrowe & Company PLC (filed herewith)
24.1* Power of Attorney
99.1 Form of Proxy of Catawba Valley Bancshares, Inc. (filed herewith)
99.2 Form of Proxy of First Gaston Bank of North Carolina (filed
herewith)
* Previously Filed
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers and sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of the prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities and Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form and that every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof. The undersigned registrant hereby undertakes to
respond to requests for information that are incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request. The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and Catawba Valley
Bancshares being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hickory, State of North Carolina, on October 11,
2001.
CATAWBA VALLEY BANCSHARES, INC.
By: /s/ R. Steve Aaron*
-------------------------------------
R. Steve Aaron
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on October 11,
2001 in the capacities indicated.
SIGNATURE CAPACITY
--------- --------
/s/ R. Steve Aaron* President and Chief Executive Officer
-----------------------------------
R. Steve Aaron
/s/ G. Marvin Lowder* Treasurer (Chief Financial Officer)
-----------------------------------
G. Marvin Lowder
/s/ Hal F. Huffman, Jr.* Director
-----------------------------------
Hal F. Huffman, Jr.
/s/ Robert P. Huntley* Director
-----------------------------------
Robert P. Huntley
/s/ W. Steve Ikerd* Chairman of its Board of Directors
-----------------------------------
W. Steve Ikerd
/s/ Robert T. King* Director
-----------------------------------
Robert T. King
/s/ Pat M. Moss* Director
-----------------------------------
Pat M. Moss
/s/ Cloyd Hugh Propst, Jr.* Director
-----------------------------------
Cloyd Hugh Propst, Jr.
/s/ Howard L. Pruitt* Director
-----------------------------------
Howard L. Pruitt
/s/ William R. Sigmon, Jr.* Director
-----------------------------------
William R. Sigmon, Jr.
* By: /s/ R. Steve Aaron, Attorney-in-fact
Exhibit Index
Exhibit
Number Description of Exhibit
------- ----------------------
2.1 Agreement and Plan of Share Exchange By and Among Catawba Valley Bank, Catawba Valley Bancshares,
Inc. and First Gaston Bank of North Carolina dated as of June 29, 2001 (included as Appendix I to
the Joint Proxy Statement-Prospectus)
2.2 Amendment No. 1 to Agreement and Plan of Share Exchange by and among Catawba Valley Bank, Catawba Valley
Bancshares, Inc. and First Gaston Bank of North Carolina dated August 10, 2001 (included as Appendix I to the
Joint Proxy Statement-Prospectus)
3.1 Articles of Incorporation of Registrant (incorporated by reference to Registrant's Form S-4 filed
on March 25, 1999 with the SEC)
3.2 Bylaws of Registrant (incorporated by reference to Registrant's Form S-4 filed on March 25, 1999 with the SEC)
4.1 Form of Stock Certificate of Registrant (incorpoated by reference to Registrant's Form S-4 filed
on March 25, 1999 with the SEC)
5.1* Opinion of Gaeta & Glesener, P.A. regarding the legality of securities being registered
8.1 Tax Opinion of Dixon Odom PLLC (filed herewith)
10.1 Employment Agreement, dated January 1, 1999, between Catawba Valley Bank and R. Steve Aaron
(incorporated by reference to Registrant's Form S-4 filed on March 25, 1999)
10.2 Employment Agreement, dated November 30, 1998, between First
Gaston Bank of North Carolina and W. Alex Hall (incorporated
by reference to Exhibit 10(I) of First Gaston's Form 10-KSB
filed on March 29, 2000 with the FDIC)
13.1 Registrant's 2000 Annual Report (incorporated by reference to Registrant's Schedule 14A filed on
March 14, 2001 with the SEC)
13.2 Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 (incorporated by
reference to Registrant's Form 10-QSB filed on July 19, 2001 with the SEC)
13.3* First Gaston Bank of North Carolina's 2000 Annual Report
13.4* First Gaston Bank of North Carolina's Quarterly Report on Form 10-QSB for the quarter ended June
30, 2001
21.1* Subsidiaries of the Registrant
23.1 Consent of Dixon Odom PLLC (filed herewith)
23.2* Consent of Gaeta & Glesener, P.A
23.3 Consent of Smith Capital, Inc. (filed herewith)
23.4 Consent of The Orr Group (filed herewith)
23.5 Consent of Larrowe & Company PLC (filed herewith)
24.1* Power of Attorney
99.1 Form of Proxy of Catawba Valley Bancshares, Inc. (filed herewith)
99.2 Form of Proxy of First Gaston Bank of North Carolina (filed herewith)
* Previously Filed