As filed with the Securities and Exchange Commission on February 4, 1998
Registration No. 333-42517
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
SOUTHBANC SHARES, INC.
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(Exact name of registrant in its charter)
Delaware 6035 58-2361245
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(State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
907 N. MAIN STREET
ANDERSON, SOUTH CAROLINA 29621
(864) 225-0241
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(Address and telephone number of principal executive offices and place of
business)
Paul M. Aguggia, Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
(202) 737-7900
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(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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Calculation of Registration Fee
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Title of Each Class of Securities Proposed Proposed Proposed Maximum Amount of
Being Registered Maximum Offering Aggregate Offering Registration Fee
Amount Being Price(1) Price(1)
Registered(1)
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Common Stock, $0.01 Par Value 4,302,763 $20.00 $86,055,260 $26,078(3)
Participation interests 59,883 -- -- (2)
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(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold are subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) The securities of the Registrant to be purchased by the Perpetual Bank, A
Federal Savings Bank 401(k) Plan are included in the amount shown for
Common Stock. Accordingly, pursuant to Rule 457(h) of the Securities Act
of 1933, as amended, no separate fee is required for the participation
interests. Pursuant to such rule, the amount being registered has been
calculated on the basis of the number of shares of Common Stock that may be
purchased with the current assets of such Plan.
(3) Previously paid.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
1. Front of Registration Front of Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside
Cover Pages of Prospectus Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock; The
Conversion and Reorganization --
Stock Pricing, Exchange Ratio and
Number of Shares to be Issued
6. Dilution *
7. Selling Security-Holders *
8. Plan of Distribution The Conversion and Reorganization
9. Legal Proceedings Business of the Savings Bank --
Legal Proceedings
10. Directors, Executive Officers, Management of the Holding Company;
Promoters and Control Persons Management of the Savings Bank
11. Security Ownership of Certain *
Beneficial Owners and Management
12. Description of Securities Description of Capital Stock of the
Holding Company
13. Interest of Named Experts and Legal and Tax Opinions; Experts
Counsel
14. Disclosure of Commission Position Part II -- Item 17
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Business of the Savings Bank
Five Years
16. Description of Business Business of the Holding Company;
Business of the Savings Bank
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operation Analysis of Financial Condition and
Results of Operations
18. Description of Property Business of the Savings Bank --
Properties
19. Certain Relationships and Management of the Savings Bank --
Related Transactions Transactions with the Savings Bank
20. Market Price for Common Equity Outside Front Cover Page; Market for
and Related Stockholder Matters Common Stock; Dividend Policy
21. Executive Compensation Management of the Savings Bank --
Executive Compensation; and --
Benefits
22. Financial Statements Financial Statements; Pro Forma Data
23. Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
- --------------------
*Item is omitted because answer is negative or item inapplicable.
PROSPECTUS SUPPLEMENT
SOUTHBANC SHARES, INC.
PERPETUAL BANK, A FEDERAL SAVINGS BANK
401(K) PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Perpetual Bank, A Federal Savings Bank 401(k) Plan
("Plan" or "401(k) Plan") of participation interests and shares of SouthBanc
Shares, Inc. common stock, par value $.01 per share ("Common Stock"), as set
forth herein.
In connection with the proposed reorganization of Perpetual Bank, A Federal
Savings Bank ("Savings Bank" or "Employer") from the mutual holding company form
of organization to a wholly owned subsidiary of a stock savings and loan holding
company, SouthBanc Shares, Inc. ("Holding Company") has been formed. The
reorganization of the Savings Bank as a wholly-owned subsidiary of the Holding
Company, the exchange of shares of Savings Bank common stock ("Savings Bank
Common Stock") by public stockholders of the Savings Bank ("Public
Stockholders") for Common Stock and the sale of Common Stock to the public
("Conversion Offerings") are herein referred to as the "Conversion and
Reorganization." Applicable provisions of the 401(k) Plan permit the investment
of the Plan assets in Common Stock at the direction of a Plan Participant. This
Prospectus Supplement relates to the election of a Participant to direct the
purchase of Common Stock in connection with the Conversion and Reorganization.
The Prospectus, dated _________, 1998, of the Holding Company ("Prospectus"),
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion and Reorganization, the Conversion Offerings, the
Common Stock and the financial condition, results of operation and business of
the Savings Bank and the Holding Company. This Prospectus Supplement, which
provides detailed information with respect to the Plan, should be read only in
conjunction with the Prospectus. Terms not otherwise defined in this Prospectus
Supplement are defined in the Plan or the Prospectus.
A PARTICIPANT WHO ELECTS TO PURCHASE COMMON STOCK IN THE CONVERSION AND
REORGANIZATION THROUGH THE 401(K) PLAN WILL RECEIVE THE SAME SUBSCRIPTION
PRIORITY AND BE SUBJECT TO THE SAME INDIVIDUAL PURCHASE LIMITATIONS AS IF THE
PARTICIPANT HAD ELECTED TO MAKE SUCH PURCHASE USING OTHER FUNDS. SEE "THE
CONVERSION AND REORGANIZATION" AND "-- LIMITATIONS ON PURCHASES OF SHARES" IN
THE PROSPECTUS.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus Supplement is _________, 1998.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Savings Bank or the Plan since the date
hereof, or that the information herein contained or incorporated by reference is
correct as of any time subsequent to the date hereof. This Prospectus
Supplement should be read only in conjunction with the Prospectus that is
attached herein and should be retained for future reference.
TABLE OF CONTENTS
PAGE
The Offering
Securities Offered.......................................................... S-1
Election to Purchase Common Stock in the Conversion and Reorganization...... S-1
Value of Participation Interests............................................ S-1
Method of Directing Transfer................................................ S-1
Time for Directing Transfer................................................. S-2
Irrevocability of Transfer Direction........................................ S-2
Treatment of Savings Bank Common Stock Held in the Plan..................... S-2
Direction to Purchase Common Stock After the Conversion and Reorganization.. S-2
Purchase Price of Common Stock.............................................. S-3
Nature of a Participant's Interest in the Common Stock...................... S-3
Voting and Tender Rights of Common Stock.................................... S-3
Description of the Plan
Introduction................................................................ S-3
Eligibility and Participation............................................... S-4
Contributions Under the Plan................................................ S-4
Limitations on Contributions................................................ S-5
Investment of Contributions................................................. S-7
The Employer Stock Fund..................................................... S-9
Benefits Under the Plan..................................................... S-9
Withdrawals and Distributions from the Plan................................. S-9
Administration of the Plan.................................................. S-10
Reports to Plan Participants................................................ S-11
Plan Administrator.......................................................... S-11
Amendment and Termination................................................... S-11
Merger, Consolidation or Transfer........................................... S-12
Federal Income Tax Consequences............................................. S-12
Restrictions on Resale...................................................... S-15
Legal Opinions................................................................. S-15
Investment Form S-16
i
THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and
up to 59,883 shares, at the actual purchase price of $20.00 per share, of Common
Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and Reorganization and the financial condition, results of operation
and business of the Savings Bank and the Holding Company is contained in the
attached Prospectus. The address of the principal executive office of the
Savings Bank is 907 N. Main Street, Anderson, South Carolina 29621-5526. The
Savings Bank's telephone number is (864) 225-0241.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION AND REORGANIZATION
In connection with the Savings Bank's Conversion and Reorganization, each
Participant in the 401(k) Plan may direct the trustees of the Plan (the
"Trustees") to transfer up to 100% of a Participant's beneficial interest in the
assets of the Plan to the Employer Stock Fund and to use such funds to purchase
Common Stock issued in connection with the Conversion and Reorganization.
Amounts transferred may include salary deferral, Employer matching and profit
sharing contributions. The Employer Stock Fund consists of investments in the
Common Stock. Funds not transferred to the Employer Stock Fund may be invested
at the Participant's discretion in the other investment options available under
the Plan. See "DESCRIPTION OF THE PLAN -- INVESTMENT OF CONTRIBUTIONS" below.
A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE EMPLOYER STOCK FUND IN THE
CONVERSION OFFERINGS IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO
PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION OFFERINGS. FOR GENERAL
INFORMATION AS TO THE ABILITY OF THE PARTICIPANTS TO PURCHASE SHARES IN THE
CONVERSION OFFERINGS, SEE "THE CONVERSION AND REORGANIZATION-- THE SUBSCRIPTION,
DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS" IN THE ATTACHED PROSPECTUS.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
periodic basis. This value represents the market value of past contributions to
the Plan by the Savings Bank and by the Participants and earnings thereon, less
previous withdrawals, and transfers from other Plans.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion
S-1
Offerings, the Participant should indicate that decision in Part 2 of the
Investment Form. If a Participant does not wish to make such an election, he or
she does not need to take any action.
TIME FOR DIRECTING TRANSFER
THE DEADLINE FOR SUBMITTING A DIRECTION TO TRANSFER AMOUNTS TO THE EMPLOYER
STOCK FUND IN ORDER TO PURCHASE COMMON STOCK ISSUED IN CONNECTION WITH THE
CONVERSION OFFERINGS IS ___________, 1998. The Investment Form should be
returned to ___________ at the Savings Bank no later than the close of business
on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion Offerings
shall be irrevocable. Participants, however, will be able to direct the sale of
Common Stock, as explained below.
TREATMENT OF SAVINGS BANK COMMON STOCK HELD IN THE PLAN
Shares of Savings Bank Common Stock held in the Employer Stock Fund prior
to the consummation of the Conversion and Reorganization will treated in the
same manner as shares held by other Public Stockholders. Such shares will be
exchanged for shares of Common Stock pursuant to the Exchange Ratio.
Application of the Exchange Ratio will result in the holders of the outstanding
Savings Bank Common Stock owning, in the aggregate, approximately the same
percentage of the Common Stock to be outstanding upon the completion of the
Conversion and Reorganization as the percentage of Savings Bank Common Stock
owned by them, in the aggregate, immediately prior to the consummation of the
Conversion. FOR ADDITIONAL INFORMATION REGARDING THE TREATMENT OF SAVINGS BANK
COMMON STOCK, SEE "THE CONVERSION AND REORGANIZATION" IN THE PROSPECTUS.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION AND REORGANIZATION
After the Conversion and Reorganization, a Participant will be able to
direct that a certain percentage of such Participant's interests in the trust
assets ("Trust") be transferred to the Employer Stock Fund and invested in
Common Stock or to the other investment funds available under the Plan.
Alternatively, a Participant may direct that a certain percentage of such
Participant's interest in the Employer Stock Fund be transferred from the
Employer Stock Fund to other investment funds available under the Plan.
Participants will be permitted to direct that future contributions made to the
Plan by or on their behalf be invested in Common Stock. Following the initial
election, the allocation of a Participant's interest in the Employer Stock Fund
may be changed by the Participant on a periodic basis in accordance with rules
established by the Employer. Special restrictions may apply to transfers
directed by those Participants who are executive officers, directors and
principal stockholders of the Holding Company who are
S-2
subject to the provisions of Section 16(b) of the Securities and Exchange Act of
1934, as amended ("Exchange Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion Offerings.
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Holding Company Stock purchased for an account of a Participant will be
held in the Employer Stock Fund. Any earnings, losses or expenses with respect
to the Common Stock, including dividends and appreciation or depreciation in
value, will be credited or debited to the account and will not be credited to or
borne by any other accounts.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
INTRODUCTION
The Savings Bank adopted the Plan effective _____________ as an amendment
and restatement of the Savings Bank's prior retirement plan. The Plan is a cash
or deferred arrangement established in accordance with the requirement under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended ("Code").
The Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Savings
Bank will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury Regulations.
The Savings Bank has received a determination from the Internal Revenue Service
("IRS") that the Plan is qualified under Section 401(a) of the Code and that it
satisfies the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
S-3
EMPLOYEE RETIREMENT INCOME SECURITY ACT. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Title IV of ERISA nor the plan termination
insurance provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER
TERMINATION OF EMPLOYMENT.
REFERENCE TO FULL TEXT OF PLAN. THE FOLLOWING STATEMENTS ARE SUMMARIES OF
THE MATERIAL PROVISIONS OF THE PLAN. THEY ARE NOT COMPLETE AND ARE QUALIFIED IN
THEIR ENTIRETY BY THE FULL TEXT OF THE PLAN, WHICH IS FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT FILED WITH THE SEC. COPIES OF THE PLAN ARE AVAILABLE TO
ALL EMPLOYEES BY FILING A REQUEST WITH THE PLAN ADMINISTRATOR. EACH EMPLOYEE IS
URGED TO READ CAREFULLY THE FULL TEXT OF THE PLAN.
ELIGIBILITY AND PARTICIPATION
Any employee of the Savings Bank is eligible to participate and will become
a Participant in the Plan following completion of 1,000 hours of service with
the Savings Bank within a consecutive 12 month period of employment and the
attainment of age 21. The Plan fiscal year is the period October 1 to September
30 ("Plan Year"). Directors who are not employees of the Savings Bank are not
eligible to participate in the Plan.
During 1997, approximately __ employees participated in the Plan.
CONTRIBUTIONS UNDER THE PLAN
PARTICIPANT CONTRIBUTIONS. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's deferral
contributions account. For purposes of the Plan, "Compensation"
S-4
means a Participant's total amount of earnings reportable W-2 wages for federal
income tax withholding purposes plus a Participant's elective deferrals pursuant
to a salary reduction agreement under the Plan or any elective deferrals to a
Section 125 plan. Due to recent statutory changes, the annual Compensation of
each Participant taken into account under the Plan is limited to $160,000 (as
adjusted under applicable Code provisions). A Participant may elect to modify
the amount contributed to the Plan under the participant's salary reduction
agreement during the Plan Year. Deferral contributions are generally
transferred by the Savings Bank to the Trustees of the Plan on a periodic basis.
EMPLOYER CONTRIBUTIONS. The Savings Bank currently matches __% of a
Participant's monthly deferral contributions to a maximum of __% of
Compensation. However, the rate of matching contributions is discretionary and
subject to change on an annual basis. In addition, the Employer may make a
discretionary contribution in proportion to a Participant's Compensation.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted periodically under applicable Code provisions). A Participant's
"Section 415 Compensation" is a Participant's Compensation, excluding any amount
contributed to the Plan under a salary reduction agreement or any employer
contribution to the Plan or to any other plan or deferred compensation or any
distributions from a plan of deferred compensation. In addition, annual
additions are limited to the extent necessary to prevent the limitations for the
combined plans of the Savings Bank from being exceeded. To the extent that
these limitations would be exceeded by reason of excess annual additions to the
Plan with respect to a Participant, the excess must be reallocated to the
remaining Participants who are eligible for an allocation of Employer
contributions for the Plan Year.
LIMITATION ON 401(K) PLAN CONTRIBUTIONS. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $10,000 (as adjusted periodically
under applicable Code provisions). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross federal income
tax purposes in the year they are made. In addition, any such excess deferral
will again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan
S-5
in any Plan Year on behalf of Highly Compensated Employees (defined below) in
relation to the amount of deferred compensation contributed by or on behalf of
all other employees eligible to participate in the Plan. Specifically, the
actual deferral percentage for a Plan Year (i.e., the average of the ratios,
----
calculated separately for each eligible employee in each group, by dividing the
amount of salary reduction contributions credited to the salary reduction
contribution account of such eligible employee by such employee's compensation
for the Plan Year) of the Highly Compensated Employees may not exceed the
greater of (a) 125% of the actual deferred percentage of all other eligible
employees, or (b) the lesser of (i) 200% of the actual deferred percentage of
all other eligible employees, or (ii) the actual deferral percentage of all
other eligible employees plus two percentage points. In addition, the actual
contribution percentage for a Plan Year (i.e., the average of the ratios
----
calculated separately for each eligible employee in each group, by dividing the
amount of employer contributions credited to the Matching contributions account
of such eligible employee by each eligible employee's compensation for the Plan
Year) of the Highly Compensated Employees may not exceed the greater of (a) 125%
of the actual contribution percentage of all other eligible employees, or (b)
the lesser of (i) 200% of the actual contributions percentage of all other
eligible employees, or (ii) the actual contribution percentage of all other
eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
----
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combines voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted periodically under applicable
Code provisions) and, if elected by the Savings Bank, was in the top paid group
of employees for such Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Savings Bank will be subject to
a 10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Savings
Bank with respect to any excess aggregate contributions, unless such amounts,
plus any income allocable thereto, are distributed within 2 1/2 months following
the close of the Plan Year in which they arose.
TOP-HEAVY PLAN REQUIREMENTS. If, for any Plan Year, the Plan is a Top-
Heavy Plan (as defined below), then (i) the Savings Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain
S-6
additional restrictions would apply with respect to the combination of annual
additions to the Plan and projected annual benefits under any defined plan
maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees"
generally include any employee, who at any time during the Plan Year or any
other the four preceding Plan Years, if (1) an officer of the Savings Bank
having annual compensation in excess of $60,000 who is in an administrative or
policy-making capacity, (2) one of the ten employees having annual compensation
in excess of $30,000 and owing, directly or indirectly, the largest interest in
the employer, (3) a 5% owner of the employer (i.e., owns directly or indirectly
----
more than 5% of the stock of the employer, or stock possessing more than 5% of
the total combined voting power of all stock of the employer), or (4) a 1% of
owner of the employer having compensation in excess of $150,000.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustees. The Trustees are appointed by
the Savings Bank's Board of Directors. The Plan provides that a Participant may
direct the Trustees to invest all or a portion of his or her Accounts in various
managed investment portfolios, as described below. A Participant may
periodically elect to change his or her investment directions with respect to
both past contributions and for more additions to the Participant's accounts
invested in these investment alternatives.
Under the Plan, the Accounts of Participant held in the Trust will be
invested by the Trustees at the direction of the Participant in the following
investment funds:
[PLEASE PROVIDE CURRENT PLAN INVESTMENT OPTIONS]
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a periodic basis. For purposes
of such allocation, all assets of the Trust are valued at their fair market
value.
THE EMPLOYER STOCK FUND
The Employer Stock Fund consists of investments in Common Stock. In
connection with the Conversion Offerings, pursuant to the attached Investment
Form, Participants will be able to change their investments at a time other than
the normal election intervals. Any cash dividends paid on Common Stock held in
the Employer Stock Fund will be credited to a cash dividend
S-7
subaccount for each Participant investing in the Employer Stock Fund. To the
extent practicable, all amounts held in the Employer Stock Fund (except the
amounts credited to cash dividend subaccounts) will be used to purchase shares
of Common Stock. It is expected that all purchases will be made at prevailing
market prices. Pending investment in Common Stock, assets held in the Employer
Stock Fund will be placed in bank deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. A Participant's Account will be adjusted to reflect changes in the value
of shares of Common Stock resulting from stock dividends, stock splits and
similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISK FACTORS
ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE HOLDING COMPANY. FOR A
DISCUSSION OF THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
VESTING. A Participant has at all times a fully vested, nonforfeitable
interest in all of his or her deferred contributions and the earnings thereon
under the Plan. A Participant is at all times 100% vested in his or her
matching contributions account. Employer discretionary contribuions are fully
vested after five years of service.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE ASSOCIATION.
DISTRIBUTION UPON RETIREMENT, DEATH, DISABILITY OR TERMINATION OF
EMPLOYMENT. The distribution of benefits under the 401(k) Plan to a
Participant who retires may be made in the form of a lump-sum payment,
installment payments or an annuity payable over a specified period.
Distributions generally commence as soon as practicable following the
Participant's termination of employment. At the request of the Participant, the
distribution may include an in-kind distribution of Common Stock of the Holding
Company credited to the Participant's Account. Benefits payments ordinarily
must begin not later than 60 days following the end of the Plan Year in which
occurs later of the Participant's: (i) termination of employment; (ii)
S-8
attainment of age 65; or (iii) tenth anniversary of commencement of
participation in the Plan; but in no event later than April 1 following the
calendar year in which the Participant attains age 70 1/2 (if the Participant is
retired). However, if the vested portion of the Participant's Account balances
exceeds $3,500, no distribution will be made from the Plan prior to the
Participant's attaining age 65 unless the Participant consents to an earlier
distribution. Special rules may apply to the distribution of Common Stock of
the Holding Company to those Participants who are executive officers, directors
and principal shareholders of the Holding Company who are subject to the
provisions of Section 16(b) of the Exchange Act.
DISTRIBUTION UPON DEATH. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of
a married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
TRUSTEES. The Trustees with respect to Plan assets are currently
___________________________________.
Pursuant to the terms of the Plan, the Trustees receive and hold
contributions to the Plan in trust and have exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustees
have the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustees have authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustees have full power to vote any corporate securities in the Trust
in person or by proxy; provided, however, that the Participants will direct the
Trustees as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
S-9
The Trustees receive no compensation for their services. The expenses of
the Trustees are paid out of the Trust except to the extent such expenses and
compensation are paid by the Association.
The Trustees must render at least annual reports to the Association and to
the Participants in such form and containing such information that the Trustees
deem necessary.
REPORTS TO PLAN PARTICIPANTS
The administrator will furnish to each Participant a statement at least
semiannually showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
The Savings Bank currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time
to time, any amendment or amendments to the Plan which do not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
S-10
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN. THE
SUMMARY IS NECESSARILY GENERAL IN NATURE AND DOES NOT PURPORT TO BE COMPLETE.
MOREOVER, STATUTORY PROVISIONS ARE SUBJECT TO CHANGE, AS ARE THEIR
INTERPRETATIONS, AND THEIR APPLICATION MAY VARY IN INDIVIDUAL CIRCUMSTANCES.
FINALLY, THE CONSEQUENCES UNDER APPLICABLE STATE AND LOCAL INCOME TAX LAWS MAY
NOT BE THE SAME AS UNDER THE FEDERAL INCOME TAX LAWS.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will
be submitted to the IRS for a determination that the Plan, as amended, continues
to qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualified as a "Lump Sum Distribution" (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
LUMP SUM DISTRIBUTION. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance
S-11
to the credits of the Participant under the Plan and all other profit sharing
plans, if any, maintained by the Savings Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes ("total taxable
amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plans maintained by the Savings Bank which is included in such
distribution.
AVERAGING RULES. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. The special five-year averaging rule has been
repealed for distributions occurring after December 31, 1999. Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule (if available)
or the prior law ten-year averaging rule. Such individuals also may elect to
have that portion of the Lump Sum Distribution attributable to the Participant's
pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the
sale of a capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
S-12
DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN OR
TO AN IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustees transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan of to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
----
nonrecognition of net unrealized appreciation, discussed earlier.
ADDITIONAL TAX ON EARLY DISTRIBUTIONS. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
S-13
RESTRICTIONS ON RESALE
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Savings Bank or the Holding Company as the term "affiliate"
is used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Savings Bank) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Savings Bank having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Savings Bank or the Holding Company may wish to consult
with counsel before transferring any Common Stock owned by him or her. In
addition, Participants are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Savings Bank's Conversion and
Reorganization from the mutual holding company form of organization to a wholly-
owned subsidiary of the Holding Company.
S-14
Investment Form
(Employer Stock Fund)
PERPETUAL BANK, A FEDERAL SAVINGS BANK
401(K) PLAN
Name of
Participant:__________________________________
Social Security
Number:_______________________________________
1. Instructions. In connection with the proposed reorganization of
Perpetual Bank, A Federal Savings Bank ("Savings Bank") from the mutual holding
form of organization to a wholly-owned subsidiary of a savings and loan holding
company ("Conversion and Reorganization"), participants in the Perpetual Bank, A
Federal Savings Bank Employees' Savings and Profit Sharing Plan ("Plan") may
elect to direct the investment of up to 100% of their account balances into the
Employer Stock Fund ("Employer Stock Fund"). Amounts transferred at the
direction of Participants into the Employer Stock Fund will be used to purchase
shares of the common stock of SouthBanc Shares, Inc. ("Common Stock"), the
proposed holding company for the Savings Bank. A PARTICIPANT'S ELIGIBILITY TO
PURCHASE SHARES OF COMMON STOCK IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION OFFERINGS AND
THE MAXIMUM AND MINIMUM LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. SEE
THE PROSPECTUS FOR ADDITIONAL INFORMATION.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion
Offerings. To direct such a transfer to the Employer Stock Fund, you should
complete this form and return it to ________________ at the Savings Bank, NO
LATER THAN THE CLOSE OF BUSINESS ON _________________, 1998. The Savings Bank
will keep a copy of this form and return a copy to you. (If you need assistance
in completing this form, please contact ________________.)
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $10) to the Employer Stock Fund to be
applied to the purchase of Common Stock in the Conversion Offerings. Please
transfer this amount from the following investments as indicated:
________________________________________________________________________________
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion and Reorganization. I acknowledge that I have
received a copy of the Prospectus and the Prospectus Supplement.
- ----------------------------------------- ----------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- ----------------------------------------- ----------------------------------
Plan Administrator Date
S-15
[LOGO]
PROSPECTUS SOUTHBANC SHARES, INC.
(PROPOSED HOLDING COMPANY FOR PERPETUAL BANK, A FEDERAL SAVINGS BANK)
UP TO 4,301,736 SHARES OF COMMON STOCK
$20.00 PURCHASE PRICE PER SHARE
SouthBanc Shares, Inc. ("Holding Company"), a Delaware corporation, is
offering up to 3,740,640 shares (which may be increased to 4,301,736 shares
under circumstances described in footnote 4 of the table below) of its common
stock, par value $.01 per share ("Common Stock"), in connection with (i) the
Exchange Offering, described below, to effect the reorganization of Perpetual
Bank, A Federal Savings Bank ("Savings Bank") as a wholly-owned subsidiary of
the Holding Company and (ii) the Conversion Offerings, described below, to
effect the conversion of SouthBanc Shares, M.H.C. ("MHC") from a mutual holding
company to a stock holding company. The Holding Company, Savings Bank and MHC
are collectively referred to herein as the "Primary Parties." The transactions
contemplated by the Exchange Offering and the Conversion Offerings, which are
collectively referred to herein as the "Conversion and Reorganization," are
undertaken pursuant to an Amended Plan of Conversion and Agreement and Plan of
Reorganization ("Plan of Conversion") adopted by the Boards of Directors of the
Primary Parties.
THE EXCHANGE OFFERING. Pursuant to the Plan of Conversion, each share of
common stock, par value $1.00 per share, of the Savings Bank ("Savings Bank
Common Stock") held by the MHC (800,000 shares, or 53.02% of the outstanding
shares, as of the date of this Prospectus) will be canceled and each share of
Savings Bank Common Stock held by the Savings Bank's public stockholders
("Public Savings Bank Shares" and "Public Stockholders," respectively) (708,873
shares, or 46.98% of the outstanding shares, as of the date of this Prospectus)
will be exchanged for shares of Common Stock ("Exchange Shares") pursuant to a
ratio ("Exchange Ratio") that will result in the Public Stockholders' aggregate
ownership of approximately 46.98% of the outstanding shares of Common Stock
before giving effect to any (i) payment of cash in lieu of issuing fractional
Exchange Shares and (ii) Conversion Shares (as defined below) purchased by the
Public Stockholders in the Conversion Offerings, described below. As discussed
under "Independent Valuation" below, the final Exchange Ratio will be based on
the Public Stockholders' ownership interest and not on the market value of the
Public Savings Bank Shares.
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK,
CALL THE STOCK INFORMATION CENTER AT (864) ___-____.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS
ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FDIC OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER AGENCY OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
(cover continued on following page)
SANDLER, O'NEILL & PARTNERS, L.P.
The date of this Prospectus is _____________, 1998.
- ---------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase Commissions and Estimated Net
Price(1) Other Fees and Expenses(2) Proceeds
------------------------- -------------------------- -------------
Minimum Price Per Share.................. $ 20.00 $ 0.68 $ 19.32
- ---------------------------------------------------------------------------------------------------------------
Midpoint Price Per Share................. $ 20.00 $ 0.62 $ 19.38
- ---------------------------------------------------------------------------------------------------------------
Maximum Price Per Share.................. $ 20.00 $ 0.58 $ 19.42
- ---------------------------------------------------------------------------------------------------------------
Maximum Price Per Share, as adjusted(3).. $ 20.00 $ 0.54 $ 19.46
- ---------------------------------------------------------------------------------------------------------------
Minimum Total(4)......................... $29,325,000 $ 990,000 $28,335,000
- ---------------------------------------------------------------------------------------------------------------
Midpoint Total(5)........................ $34,500,000 $1,070,000 $33,430,000
- ---------------------------------------------------------------------------------------------------------------
Maximum Total(6)......................... $39,675,000 $1,150,000 $38,525,000
- ---------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(3)(7)......... $45,626,250 $1,240,000 $44,386,250
- ---------------------------------------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC., Arlington, Virginia ("RP Financial"). See "Independent
Valuation" on the cover page of this Prospectus and "THE CONVERSION AND
REORGANIZATION -- Stock Pricing, Exchange Ratio and Number of Shares to be
Issued."
(2) Consists of estimated expenses of the Primary Parties arising from the
Conversion and Reorganization, including fees payable to Sandler, O'Neill &
Partners, L.P. ("Sandler O'Neill") in connection with the Conversion
Offerings. Such fees may be deemed underwriting fees and Sandler O'Neill
may be deemed an underwriter. The Primary Parties have agreed to indemnify
Sandler O'Neill against certain liabilities, including liabilities that
might arise under the Securities Act of 1933, as amended ("Securities
Act"). See "USE OF PROCEEDS" and "THE CONVERSION AND REORGANIZATION --
Plan of Distribution and Selling Commissions."
(3) Gives effect to an increase in the number of shares that could be sold in
the Conversion Offerings resulting from an increase in the pro forma market
value of the MHC and the Savings Bank, as converted, up to 15% above the
maximum of the Estimated Valuation Range, without the resolicitation of
subscribers or any right of cancellation. See "THE CONVERSION AND
REORGANIZATION -- Stock Pricing, Exchange Ratio and Number of Shares to be
Issued."
(4) Assumes the issuance of 1,466,250 Conversion Shares at $20.00 per share.
(5) Assumes the issuance of 1,725,000 Conversion Shares at $20.00 per share.
(6) Assumes the issuance of 1,983,750 Conversion Shares at $20.00 per share.
(7) Assumes the issuance of 2,281,312 Conversion Shares at $20.00 per share.
THE CONVERSION OFFERINGS. Pursuant to the Plan of Conversion,
nontransferable rights to subscribe ("Subscription Rights") for up to 1,983,750
shares (which may be increased to 2,281,312 shares under circumstances described
in footnote 4 of the table appearing on the cover page of this Prospectus) of
Common Stock ("Conversion Shares") have been granted, in order of priority, to
(i) depositors with $50.00 or more on deposit at the Savings Bank as of the
close of business on June 30, 1996 ("Eligible Account Holders"), (ii) depositors
with $50.00 or more on deposit at the Savings Bank as of the close of business
on December 31, 1997 ("Supplemental Eligible Account Holders"), and (iii)
depositors of the Savings Bank (other than Eligible Account Holders and
Supplemental Eligible Account Holders) as of the close of business on
____________, 1998 ("Voting Record Date"), and borrowers of the Savings Bank
with loans outstanding as of the close of business on October 26, 1993 which
continue to be outstanding as of the close of business on the Voting Record Date
("Other Members"), subject to the priorities and purchase limitations set forth
in the Plan of Conversion ("Subscription Offering"). SUBSCRIPTION RIGHTS ARE
NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE TRANSFERRING THEIR RIGHTS TO
SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING OR SUBSCRIBING FOR
COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS OR OTHER
AGENCY OF THE U.S. GOVERNMENT. Concurrently, but subject to the prior rights of
Subscription Rights holders, the Holding Company is offering the Conversion
Shares for sale to members of the general public through a direct community
offering ("Direct Community Offering") with preference given first to Public
Stockholders as of the close of business on the Voting Record Date (who are not
Eligible Account Holders, Supplemental Eligible Account Holders or Other
Members) and then to natural persons and trusts of natural persons who are
permanent residents of Anderson or Oconee Counties of South Carolina ("Local
Community"). It is anticipated that any Conversion Shares not
subscribed for in the Subscription Offering or purchased in the Direct Community
Offering will be offered to eligible members of the general public on a best
efforts basis by a selling group of broker-dealers managed by Sandler O'Neill in
a syndicated community offering ("Syndicated Community Offering"). The
Subscription Offering, Direct Community Offering and the Syndicated Community
Offering are referred to collectively as the "Conversion Offerings."
THE SUBSCRIPTION OFFERING WILL EXPIRE AT NOON, EASTERN TIME, ON
____________, 1998 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE PRIMARY PARTIES
FOR UP TO ___ DAYS TO _________, 1998. SUCH EXTENSION MAY BE GRANTED WITHOUT
ADDITIONAL NOTICE TO SUBSCRIBERS. The Direct Community Offering is also
expected to terminate at Noon, Eastern Time, on ____________, 1998 or at a date
thereafter, however, in no event later than ________ __, 1998. The Holding
Company must receive a properly completed and signed stock order form ("Order
Form") and certification, along with full payment (or appropriate instructions
authorizing a withdrawal from a deposit account at the Savings Bank) of $20.00
per share ("Purchase Price") for all Conversion Shares subscribed for or
ordered. Funds so received will be placed in a segregated account created for
this purpose at the Savings Bank, and interest will be paid at the Savings
Bank's passbook rate from the date payment is received until the Conversion and
Reorganization is consummated or terminated; these funds will be otherwise
unavailable to the depositor until such time. Payments authorized by
withdrawals from deposit accounts will continue to earn interest at their
contractual rate until the Conversion and Reorganization is consummated or
terminated. ONCE TENDERED, ORDERS CANNOT BE REVOKED OR MODIFIED WITHOUT THE
CONSENT OF THE PRIMARY PARTIES. The Primary Parties are not obligated to accept
orders submitted on photocopied or telecopied Order Forms. If the Conversion
and Reorganization is not consummated within 45 days after the last day of the
Subscription Offering and Direct Community Offering (which date will be no later
than ___________, 1998) and the OTS consents to an extension of time to
consummate the Conversion and Reorganization, subscribers will be notified in
writing of the time period within which the subscriber must notify the Primary
Parties of their intention to increase, decrease or rescind their orders. Such
extensions may not go beyond ____________, 2000.
The Primary Parties have engaged Sandler O'Neill to consult with and advise
them in the sale of the Conversion Shares in the Conversion Offerings. In
addition, in the event the Conversion Shares are not fully subscribed for in the
Subscription Offering and Direct Community Offering, Sandler O'Neill will manage
the Syndicated Community Offering. Neither Sandler O'Neill nor any other
registered broker-dealer is obligated to take or purchase any Conversion Shares
in the Conversion Offerings. The Primary Parties reserve the right, in their
absolute discretion, to accept or reject, in whole or in part, any or all orders
in the Direct Community Offering or Syndicated Community Offerings either at the
time of receipt of an order or as soon as practicable following the termination
of the Conversion Offering. If an order is rejected in part, the purchaser does
not have the right to cancel the remainder of the order. See "THE CONVERSION
AND REORGANIZATION -- Plan of Distribution and Selling Commissions."
INDEPENDENT VALUATION. OTS regulations require that the offering of
Conversion Shares in the Conversion Offerings be based on an independent
valuation of the pro forma market value of the Savings Bank and the MHC, as
converted. OTS policy requires that the independent valuation be multiplied by
approximately 53.02%, which represents the MHC's percentage ownership interest
in the Savings Bank. Accordingly, RP Financial's independent appraisal as of
December 5, 1997 states that the aggregate pro forma market value of the Savings
Bank and the MHC, as converted, ranged from $55.3 million to $74.8 million, with
a midpoint of $65.1 million ("Estimated Valuation Range").
The Primary Parties' Boards of Directors determined that the Conversion
Shares would be sold at the Purchase Price ($20.00 per share), resulting in a
range of 1,466,250 to 1,983,750 shares of Conversion Shares, with a midpoint of
1,725,000 Conversion Shares. Upon consummation of the Conversion and
Reorganization, the Conversion Shares and the Exchange Shares will represent
approximately 53.02% and 46.98%, respectively, of the total outstanding shares
of Common Stock. Based upon the Estimated Valuation Range, the Exchange Ratio
is expected to range from 1.83281 to 2.47969, resulting in a range of 1,299,231
Exchange Shares to 1,757,783 Exchange Shares to be issued in the Exchange
Offering. The 3,741,533 shares of Common Stock offered hereby include up to
1,983,750 Conversion Shares (subject to adjustment up to 2,281,312 shares as
described herein) and up to 1,757,783 Exchange Shares (subject to adjustment up
to 2,021,451 shares as described herein). The Estimated
Valuation Range may be increased or decreased to reflect changes in the
financial condition or results of operations of the Savings Bank or changes in
market conditions or general financial, economic or regulatory conditions prior
to completion of the Conversion and Reorganization, and under certain
circumstances specified herein subscribers will be resolicited and given the
right to modify or cancel their orders. See "THE CONVERSION AND REORGANIZATION
- -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
PURCHASE LIMITATIONS ON CONVERSION SHARES. The Plan of Conversion provides
for the following purchase limitations: (i) no person may purchase in either the
Subscription Offering, Direct Community Offering or Syndicated Community
Offering more than 50,000 Conversion Shares, (ii) no person, together with
associates of or persons acting in concert with such person, may purchase in
either the Subscription Offering, Direct Community Offering or Syndicated
Community Offering more than 50,000 Conversion Shares, (iii) the maximum number
of Conversion Shares which may be subscribed for or purchased in all categories
in the Conversion Offerings by any person, when combined with any Exchange
Shares received, shall not exceed 50,000 shares of Common Stock to be issued in
the Conversion and Reorganization, and (iv) the maximum number of Conversion
Shares which may be subscribed for or purchased in all categories in the
Conversion Offerings by any person, together with any associate or any group of
persons acting in concert, when combined with any Exchange Shares received,
shall not exceed 50,000 shares of Common Stock to be issued in the Conversion
and Reorganization. The minimum order is 25 Conversion Shares. BECAUSE OTS
POLICY REQUIRES THAT THE MAXIMUM PURCHASE LIMITATION INCLUDES EXCHANGE SHARES TO
BE ISSUED TO PUBLIC STOCKHOLDERS IN EXCHANGE FOR THEIR PUBLIC SAVINGS BANK
SHARES, CERTAIN PUBLIC STOCKHOLDERS MAY BE LIMITED IN THEIR ABILITY TO PURCHASE
CONVERSION SHARES, OR EVEN PREVENTED FROM PURCHASING CONVERSION SHARES. See
"THE CONVERSION AND REORGANIZATION -- The Subscription, Direct Community and
Syndicated Community Offerings," "-- Procedure for Purchasing Conversion Shares
in the Subscription and Direct Community Offerings" and "-- Limitations on
Purchases of Conversion Shares."
MARKET FOR THE COMMON STOCK. The Holding Company has received preliminary
approval to list the Common Stock on the Nasdaq National Market under the symbol
"PERT." Prior to the Conversion and Reorganization, the Public Savings Bank
Shares have been listed on the Nasdaq SmallCap Market under the same trading
symbol. There can be no assurance that an active and liquid trading market for
the Common Stock will develop or, if developed, will be maintained. See "RISK
FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON
STOCK."
PERPETUAL BANK, A FEDERAL SAVINGS BANK
ANDERSON, SOUTH CAROLINA
[Map]
THE CONVERSION AND REORGANIZATION IS CONTINGENT UPON APPROVAL OF THE PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE MHC'S ELIGIBLE VOTING MEMBERS, BY THE
HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES OF SAVINGS BANK COMMON STOCK AND
BY THE HOLDERS OF A MAJORITY OF THE PUBLIC SAVINGS BANK SHARES PRESENT IN PERSON
OR BY PROXY, THE SALE OF AT LEAST 1,466,250 CONVERSION SHARES PURSUANT TO THE
PLAN OF CONVERSION, AND THE RECEIPT OF ALL APPLICABLE REGULATORY APPROVALS.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See
"RISK FACTORS."
SOUTHBANC SHARES, INC.
The Holding Company was organized on November 6, 1997 under Delaware law at
the direction of the Savings Bank to acquire the Savings Bank as a wholly-owned
subsidiary upon consummation of the Conversion and Reorganization. The Holding
Company has only engaged in organizational activities to date. The Holding
Company has received conditional OTS approval to become a savings and loan
holding company through the acquisition of 100% of the issued and outstanding
capital stock of the Savings Bank, which, along with 50% of the net proceeds of
the Conversion Offerings (see table under "PRO FORMA DATA") as permitted by the
OTS to be retained by it, and a note receivable evidencing a loan to the Savings
Bank's Employee Stock Ownership Plan ("ESOP"), will be the only significant
assets of the Holding Company. Funds retained by the Holding Company will be
used for general business activities. See "USE OF PROCEEDS." Upon consummation
of the Conversion and Reorganization, the Holding Company will be classified as
a unitary savings and loan holding company subject to OTS regulation. See
"REGULATION -- Savings and Loan Holding Company Regulations." The main office
of the Holding Company is located at 907 N. Main Street, Anderson, South
Carolina 29621, and its telephone number is (864) 225-0241.
SOUTHBANC SHARES, M.H.C.
The MHC is the federally-chartered mutual holding company of the Savings
Bank. The MHC was formed in October 1993 as a result of the reorganization of
the Savings Bank into a federally chartered mutual holding company ("MHC
Reorganization"). The members of the MHC consist of depositors of the Savings
Bank and those current borrowers of the Savings Bank who had loans outstanding
as of the consummation date of the MHC Reorganization (October 26, 1993). The
MHC's sole business activity is holding the 800,000 shares of Savings Bank
Common Stock, which represents 53.02% of the outstanding shares as of the date
of this Prospectus. The MHC's main office is located at 907 N. Main Street,
Anderson, South Carolina 29621, and its telephone number is (864) 225-0241. As
part of the Conversion and Reorganization, the MHC will convert to a federally-
chartered interim stock savings bank and simultaneously merge with and into the
Savings Bank, with the Savings Bank as the surviving entity.
PERPETUAL BANK, A FEDERAL SAVINGS BANK
The Savings Bank is a federally chartered stock savings bank headquartered
in Anderson, South Carolina. The Savings Bank was originally chartered in 1906
and operated as a mutual institution without stockholders until October 1993, at
which time it reorganized into the mutual holding company structure. The
Savings Bank's deposits are insured by the FDIC up to applicable legal limits
under the SAIF. The Savings Bank, a member of the Federal Home Loan Bank
("FHLB") system, is regulated by the OTS and the FDIC. At September 30, 1997,
the Savings Bank had total assets of $257.0 million, total deposits of $201.0
million, and total stockholders' equity of $30.6 million, on a consolidated
basis.
On October 26, 1993, the MHC Reorganization was consummated and the Savings
Bank completed its initial stock offering by issuing 1,500,000 shares of Savings
Bank Common Stock at $10.00 per share, 1,385,000 shares
(92.3%) of which were sold to the MHC. The remaining 115,000 shares (7.7%) were
issued to members of the MHC, including officers, directors and employees of the
Savings Bank.
In September 1996, the Savings Bank completed an additional offering of
Savings Bank Common Stock through the issuance of 585,000 shares at a price of
$19.25 to then existing members of the MHC ("Additional Offering"). In
connection with the closing of the Additional Offering, 585,000 shares of
Savings Bank Common Stock held by the MHC were canceled. Accordingly, upon
consummation of the Additional Offering on September 30, 1996, there were
1,504,601 shares of Savings Bank Common Stock issued and outstanding, of which
800,000 (53.2%) were held by the MHC and 704,601 shares (46.8%) were held by the
Public Stockholders. Currently, there are 708,803 shares (46.98%) held by the
Public Stockholders as a result of the exercise of stock options since the
consummation of the Additional Offering.
The Savings Bank considers Anderson and Oconee Counties in the northwestern
corner of South Carolina as its primary market area because a substantial
portion of its loan portfolio is secured by properties located in those
counties. See "RISK FACTORS -- Certain Lending Risks -- Geographic
Concentration of Credit and Investment Risk." The Savings Bank faces strong
competition within its primary market area. See "RISK FACTORS --Competition."
The Savings Bank also invests in loans secured by properties located outside of
its primary market area (predominately in Hilton Head Island, South Carolina,
and in the greater Greenville, South Carolina, area) as a result of loan
purchases from other lenders, including a mortgage banking company known as
"First Trust Mortgage Corporation of the South" in which a service corporation
subsidiary of the Savings Bank has a one-third equity interest. See "BUSINESS
OF THE SAVINGS BANK -- Lending Activities" and "-- Subsidiary Activities."
The Savings Bank is primarily engaged in the business of attracting
deposits from the general public and using those funds, along with FHLB
advances, to originate and purchase one- to- four family mortgage loans. The
Savings Bank originates and purchases commercial real estate and construction
loans, as well as consumer loans and, to a lesser extent, commercial business
loans and multi-family real estate loans. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities." Such latter type loans, which totalled $71.7 million, or
40.1%, of net loans receivable at September 30, 1997, are inherently riskier
than one- to- four-family mortgage loans. See "RISK FACTORS -- Certain Lending
Risks." As a complement to its lending activities, the Savings Bank services
mortgage loans and invests in mortgage servicing rights. See "BUSINESS OF THE
SAVINGS BANK -- Lending Activities -- Loan Purchases and, Sales and Servicing."
In addition to its lending activities, the Savings Bank, through a service
corporation subsidiary, develops residential and commercial properties located
in its primary market area. See "BUSINESS OF THE SAVINGS BANK -- Subsidiary
Activities." The Savings Bank also invests in short- and intermediate-term
mortgage-backed securities, including collateralized mortgage obligations
("CMOs"). See "BUSINESS OF THE SAVINGS BANK -- Investment Activities."
The Savings Bank's principal office is located at 907 North Main Street,
Anderson, South Carolina 29621, and the telephone number at that office is (864)
225-0241. The Savings Bank also operates five branch offices. See "BUSINESS OF
THE SAVINGS BANK -- Properties."
THE CONVERSION AND REORGANIZATION
PURPOSES OF THE CONVERSION AND REORGANIZATION. The Boards of Directors of
the Primary Parties believe that the Conversion and Reorganization is in the
best interests of the MHC and its members, the Savings Bank and its
stockholders, and the communities served by the MHC and the Savings Bank. In
their decision to pursue the Conversion and Reorganization, the Boards of
Directors considered the various regulatory uncertainties associated with the
mutual holding company structure, including the MHC's future ability to waive
any dividends from the Savings Bank and the uncertain future of the federal
thrift charter. In addition, the Boards of Directors considered the various
advantages of the stock holding company form of organization, including: (i) the
Holding Company's ability to repurchase shares of its common stock without
adverse tax consequences, unlike the Savings Bank; (ii) the
(ii)
Holding Company's greater flexibility under current law and regulations relative
to the MHC to acquire other financial institutions and diversify its operations;
(iii) the larger capital base of the Holding Company relative to the Savings
Bank that will result from the Conversion Offering; and (iv) the potential
increased liquidity in the Common Stock relative to the Public Savings Bank
Shares because of the larger number of shares of Common Stock to be outstanding
upon consummation of the Conversion and Reorganization. Currently, the Boards
of Directors of the Primary Parties have no specific plans, arrangements or
understandings, written or oral, regarding any stock repurchases, acquisitions
or diversification of operations. See "THE CONVERSION AND REORGANIZATION --
Purposes of Conversion and Reorganization."
DESCRIPTION OF THE CONVERSION AND REORGANIZATION. The Conversion and
Reorganization are being undertaken pursuant to the Plan of Conversion that was
adopted by the Boards of Directors of the Savings Bank and the MHC on September
22, 1997, and subsequently amended on December 22, 1997. Under the Plan of
Conversion, (i) the MHC will convert to an interim federal stock savings bank
("Interim A") and simultaneously merge with and into the Savings Bank, pursuant
to which the MHC will cease to exist and the outstanding shares of Savings Bank
Common Stock held by the MHC (800,000 shares, or 53.02% of the outstanding
Savings Bank Common Stock as of the date of this Prospectus) will be canceled,
and (ii) an interim federal stock savings bank ("Interim B") will be formed as a
wholly-owned subsidiary of the Holding Company and will merge with and into the
Savings Bank, resulting in the Savings Bank becoming a wholly-owned subsidiary
of the Holding Company and the outstanding Public Savings Bank Shares (708,873
shares, or 46.98% of the outstanding Savings Bank Common Stock as of the date of
this Prospectus) will be converted into the Exchange Shares pursuant to the
Exchange Ratio. The Exchange Ratio will result in the holders of the
outstanding Public Savings Bank Shares owning in the aggregate approximately the
same percentage of the Common Stock to be outstanding upon the completion of the
Conversion and Reorganization (i.e., the Conversion Shares and the Exchange
----
Shares) as the percentage of Savings Bank Common Stock owned by them in the
aggregate immediately before the consummation of the Conversion and
Reorganization, before giving effect to any (i) payment of cash in lieu of
issuing fractional Exchange Shares and (ii) Conversion Shares purchased by the
Stockholders in the Conversion Offerings.
The following diagram outlines the pre-Conversion and Reorganization
organizational structure of the Primary Parties' and their ownership interests:
------------------- -------------------
MHC Public
Stockholders
------------------- -------------------
53.02% 46.98%
-------------------
Savings Bank
-------------------
100%
-------------------
Holding Company
-------------------
100%
-------------------
Interim B
(in formation)
-------------------
(iii)
The following diagram reflects the post-Conversion and Reorganization
organizational structure of the Holding Company and the Savings Bank and their
ownership interests. The ownership interests presented assume no fractional
Exchange Shares are issued, and does not give effect to purchases of any
Conversion Shares by the Public Stockholders or the exercise of outstanding
stock options.
------------------- -------------------
Purchasers of Former Public
Conversion Shares Stockholders
------------------- -------------------
53.02% 46.98%
-------------------
Holding Company
-------------------
100%
-------------------
Savings Bank
-------------------
REQUIRED APPROVALS. The OTS has approved the Plan of Conversion subject to
(i) the approval of the holders of at least a majority of the total number of
votes eligible to be cast by the members of the MHC as of the close of business
on the Voting Record Date (___________, 1998) at a special meeting of members
called for the purpose of submitting the Plan of Conversion for approval
("Members' Special Meeting"), (ii) the approval of the holders of at least two-
thirds of the outstanding shares of Savings Bank Common Stock (including those
shares held by the MHC) as of the close of business on the Voting Record Date at
a meeting of stockholders called for the purpose of considering the Plan
("Stockholders' Meeting"), and (iii) the approval of the holders of at least a
majority of the Public Savings Bank Shares as of the close of business on the
Voting Record Date present in person or by proxy at the Stockholders' Meeting.
The MHC intends to vote its shares of Savings Bank Common Stock, which amounts
to 53.02% of the outstanding shares, in favor of the Plan of Conversion at the
Stockholders' Meeting. In addition, as of September 30, 1997, directors and
executive officers of the Primary Parties as a group (13 persons) beneficially
owned 90,711, or 6.01%, of the outstanding shares of Savings Bank Common Stock,
which they intend to vote in favor of the Plan of Conversion at the
Stockholders' Meeting.
THE CONVERSION OFFERINGS
The Conversion Offerings, which consist of the Subscription Offering, the
Direct Community Offering and the Syndicated Community Offering (if any), are
being undertaken pursuant to the Plan of Conversion. The Holding Company is
offering up to 1,983,750 Conversion Shares in the Conversion Offerings.
Conversion Shares are first being offered in the Subscription Offering through
the exercise of Subscription Rights issued, in order of priority, to (i)
Eligible Account Holders; (ii) Supplemental Eligible Account Holders; and (iii)
Other Members. In light of the anticipated additional compensation expense to
the Savings Bank that would result with the purchase of Conversion Shares, the
ESOP will not subscribe for Conversion Shares. The Subscription Offering will
expire at Noon, Eastern Time, on ____________, 1998, unless extended.
Subject to the prior rights of holders of Subscription Rights, Conversion
Shares not subscribed for in the Subscription Offering are being offered in the
Direct Community Offering to members of the general public with preference given
first to Public Stockholders as of the close of business on the Voting Record
Date (who are not Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members) and then to natural persons and trusts of natural
persons who are permanent residents of the Local Community. It is anticipated
that shares not subscribed for in the Subscription Offering and Direct Community
Offering may be offered to certain members of
(iv)
the general public in the Syndicated Community Offering. The Primary Parties
reserve the absolute right to reject or accept any orders in the Direct
Community Offering or the Syndicated Community Offering (if any), in whole or in
part, either at the time of receipt of an order or as soon as practicable
following the Expiration Date. The closing with respect to all shares sold in
the Conversion Offerings will occur simultaneously, and all Conversion Shares
will be sold at a uniform price of $20.00 per share.
The Primary Parties have retained Sandler O'Neill as their consultant and
advisor and to assist in soliciting subscriptions in the Conversion Offerings on
a best efforts basis. See "THE CONVERSION AND REORGANIZATION -- The
Subscription, Direct Community and Syndicated Community Offerings."
THE EXCHANGE OFFERING
The Exchange Offering is being undertaken pursuant to the Plan of
Conversion, which must be approved by the members of the MHC at a Special
Meeting of Members and by the stockholders of the Savings Bank at the Annual
Meeting of Stockholders, both to be held on March ___, 1998. In the Exchange
Offering, each share of Savings Bank Common Stock held by the MHC (800,000
shares, or 53.02% of the outstanding shares, as of the date of this Prospectus)
will be canceled and each Public Savings Bank Share (708,873 shares, or 46.98%
of the outstanding shares, as of the date of this Prospectus) will be exchanged
for Exchange Shares pursuant the final Exchange Ratio that will result in the
Public Stockholders' aggregate ownership of approximately 46.98% of the
outstanding shares of Common Stock before giving effect to any (i) payment of
cash in lieu of issuing fractional Exchange Shares and (ii) Conversion Shares
purchased by the Public Stockholders in the Conversion Offerings. The final
Exchange Ratio will be based on the Public Stockholders' ownership interest and
not on the market value of the Public Savings Bank Shares. See "-- Stock
Pricing and Number of Shares to be Issued in the Conversion and Reorganization."
The Exchange Offering is an integral part of the Conversion and
Reorganization. Pursuant to OTS regulations, holders of Savings Bank Common
Stock do not have dissent and appraisal rights with respect to the Conversion
and Reorganization because the Savings Bank Common Stock is listed on The Nasdaq
Stock Market. Accordingly, the exchange of each Public Savings Bank Share for
Exchange Shares is mandatory. PUBLIC STOCKHOLDERS SHOULD NOT SEND THEIR
CERTIFICATES FOR EXCHANGE AT THIS TIME. The Holding Company will mail to each
Public Stockholder to their address of record exchange instructions and a
transmittal letter after the consummation of the Conversion and Reorganization.
See "THE CONVERSION AND REORGANIZATION -- Delivery and Exchange of Stock
Certificates -- Exchange Shares."
BENEFITS OF THE CONVERSION AND REORGANIZATION TO MANAGEMENT
GENERAL. The Savings Bank has existing stock benefit plans that were
implemented in connection with the MHC Reorganization and the Additional
Offering. The Savings Bank's 1993 Stock Option Plan ("1993 Stock Option Plan")
and the ESOP were implemented in connection with the MHC Reorganization. The
Savings Bank's 1996 Management Development and Recognition Plan ("1996 MRP") and
the Savings Bank's 1996 Stock Option Plan ("1996 Stock Option Plan") were
implemented in connection with the Additional Offering. These plans will be
assumed by the Holding Company upon consummation of the Conversion and
Reorganization. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits" for a
discussion of these existing plans. The following discussion relates to new
stock benefit plans that are expected to be implemented in connection with the
Conversion and Reorganization, as well as to employment agreements that will be
entered into with certain executive officers of the Holding Company and the
Savings Bank.
MRP. The Holding Company expects to seek stockholder approval of the
SouthBanc Shares, Inc. 1998 Management Recognition Plan ("1998 MRP"). The 1998
MRP will reserve a number of shares equal to 4% of the number of Conversion
Shares issued in the Conversion Offerings. Under current OTS regulations, the
approval of a majority vote of the Holding Company's outstanding shares of
Common Stock is required prior to the implementation of the 1998 MRP within one
year of the consummation of the Conversion and Reorganization. If
(v)
stockholder approval of the 1998 MRP is obtained, it is expected that awards of
restricted stock of up to 79,350 shares of Common Stock (based on the issuance
of Conversion Shares at the maximum of the Estimated Valuation Range) will be
made to key employees of the Holding Company and the Savings Bank at no cost to
the recipient. Although no specific award determinations have been made at this
time, the Holding Company and the Savings Bank anticipate that, if stockholder
approval is obtained it would provide awards to key employees. Under current
OTS regulations, if the 1998 MRP is implemented within one year of the
consummation of the Conversion and Reorganization, (i) no officer or employee
may receive an award covering in excess of 25% of the number of shares reserved
for issuance under the 1998 MRP, (ii) no nonemployee director may receive in
excess of 5% of the number of shares reserved for issuance under the 1998 MRP,
(iii) nonemployee directors, as a group, may not receive in excess of 30% of the
number of shares reserved for issuance under the 1998 MRP, and (iv) all awards
would be subject to vesting at a maximum rate of 20% per year. See "PRO FORMA
DATA" and "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition
Plan." Assuming stockholder approval of the 1998 MRP, if the 1998 MRP is funded
with authorized but unissued shares of Common Stock contributed by the Holding
Company, rather than by acquiring shares of Common Stock in the open market, the
voting control of stockholders of the Holding Company would be diluted by 2.08%.
See "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs" and "PRO
FORMA DATA."
STOCK OPTION PLAN. The Holding Company expects to seek stockholder
approval of the SouthBanc Shares, Inc. 1998 Stock Option Plan ("1998 Stock
Option Plan"). The 1998 Stock Option Plan will reserve a number of shares equal
to 10% of the number of Conversion Shares issued in the Conversion Offerings.
Under current OTS regulations, the approval of a majority vote of the Holding
Company's outstanding shares of Common Stock is required prior to the
implementation of the 1998 Stock Option Plan within one year of the consummation
of the Conversion and Reorganization. If stockholder approval of the 1998 Stock
Option Plan is obtained, it is expected that options to acquire up to 198,375
shares of Common Stock of the Holding Company (based on the issuance of
Conversion Shares at the maximum of the Estimated Valuation Range) will be
awarded to key employees and directors of the Holding Company and the Savings
Bank. The exercise price of such options will be 100% of the fair market value
of the Common Stock on the date the option is granted. Although no specific
award determinations have been made at this time, the Holding Company and the
Savings Bank anticipate that if stockholder approval is obtained it would
provide awards to its directors, officers and employees to the extent permitted
by applicable regulations. Under current OTS regulations, if the 1998 Stock
Option Plan is implemented within one year of the consummation of the Conversion
and Reorganization, (i) no officer or employees may receive an award of options
covering in excess of 25% of the number of shares reserved for issuance under
the 1998 Stock Option Plan, (ii) no nonemployee director may receive in excess
of 5% of the number of shares reserved for issuance under the 1998 Stock Option
plan, (iii) nonemployee directors, as a group, may not receive in excess of 30%
of the number of shares reserved for issuance under the 1998 Stock Option Plan,
and (iv) all awards would be subject to vesting at a maximum rate of 20% per
year. Options are valuable only to the extent that they are exercisable and the
market price for the underlying share of Common Stock is in excess of the
exercise price. An option effectively eliminates the market risk of holding the
underlying securities since no consideration is paid for the option until it is
exercised. Therefore, the recipient may, within the limits of the term of the
option, wait to exercise the option until the market price exceeds the exercise
price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1998 Stock Option
Plan." Assuming stockholder approval of the 1998 Stock Option Plan, it is
expected that the 1998 Stock Option Plan will be funded with authorized but
unissued shares of Common Stock contributed by the Holding Company, which,
together with the 1996 Stock Option Plan, would dilute the voting interests of
stockholders of the Holding Company by 8.25%. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs" and "PRO FORMA DATA."
EMPLOYMENT AGREEMENTS. The MHC and the Savings Bank maintain employment
agreements with Robert W. Orr (President and Managing Officer of the Savings
Bank and President and Chief Executive Officer of the Holding Company), Thomas
C. Hall (Senior Vice President and Treasurer of the Savings Bank and Treasurer
and Chief Financial Officer of the Holding Company) and Barry C. Visioli (Senior
Vice President of the Savings Bank and Secretary of the Holding Company) that
were entered into in connection with the MHC Reorganization. In connection with
the Conversion and Reorganization, the Holding Company and the Savings Bank will
enter into
(vi)
three-year employment agreements with Messrs. Orr, Hall and Visioli, which have
substantially the same terms as and will replace the existing agreements. The
agreements will provide certain benefits in the event of the officers'
termination of employment following a change in control of the Holding Company
or the Savings Bank. In the event of a change in control of the Holding Company
or the Savings Bank, as defined in the agreement, each executive officer will be
entitled to a package of cash and/or benefits with a maximum value equal to 2.99
times their average annual compensation during the five-year period preceding
the change in control. Assuming a change of control occurred as of September
30, 1997, the aggregate value of the severance benefits payable to Messrs. Orr,
Hall and Visioli under the agreements would have been approximately $583,000.
See "MANAGEMENT OF THE SAVINGS BANK -- Executive Compensation -- Employment
Agreements."
For information concerning the possible voting control of officers,
directors and employees following the Conversion and Reorganization, see "RISK
FACTORS -- Anti-takeover Considerations -- Voting Control by Insiders."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING CONVERSION SHARES
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), no prospectus will be mailed any later
than five days prior to the Expiration Date or hand delivered later than two
days prior to such date. Execution of the Order Form will confirm receipt of
the Prospectus in accordance with Rule 15c2-8. Order Forms will be distributed
only with a prospectus. The Primary Parties are not obligated to accept for
processing orders not submitted on original Order Forms. Order Forms
unaccompanied by an executed certification form will not be accepted. Payment
by check, money order, bank draft, cash or debit authorization to an existing
account at the Savings Bank must accompany the order and certification forms.
No wire transfers will be accepted. The Savings Bank is prohibited from lending
funds to any person or entity for the purpose of purchasing shares of Common
Stock in the Conversion. See "THE CONVERSION AND REORGANIZATION -- Procedure
for Purchasing Shares in the Subscription and Direct Community Offerings."
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the close of business on June 30, 1996
("Eligibility Record Date"), December 31, 1997 ("Supplemental Eligibility Record
Date") or the Voting Record Date (_________, 1998) and borrowers with loans
outstanding on October 26, 1993 which continue to be outstanding as of the
Voting Record Date must list all deposit and/or loan accounts on the Order Form,
giving all names on each account and the account numbers. Failure to list all
account numbers may result in the inability of the Holding Company or the
Savings Bank to fill all or part of a subscription order. In addition,
registration of shares in a name or title different from the names or titles
listed on the account may adversely affect such subscriber's purchase priority.
See "THE CONVERSION AND REORGANIZATION -- Procedure for Purchasing Shares in the
Subscription and Direct Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the Subscription Rights issued
under the Plan of Conversion or the Conversion Shares to be issued upon their
exercise. Each person exercising Subscription Rights will be required to
certify that a purchase of Conversion Shares is solely for the purchaser's own
account and that there is no agreement or understanding regarding the sale or
transfer of such shares. THE PRIMARY PARTIES WILL PURSUE ANY AND ALL LEGAL AND
EQUITABLE REMEDIES IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF
SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
(vii)
PURCHASE LIMITATIONS
The Plan of Conversion provides for the following purchase limitations: (i)
no person may purchase in either the Subscription Offering, Direct Community
Offering or Syndicated Community Offering more than 50,000 Conversion Shares;
(ii) no person, together with associates of or persons acting in concert with
such person, may purchase in either the Subscription Offering, Direct Community
Offering or Syndicated Community Offering more than 50,000 Conversion Shares;
(iii) the maximum number of Conversion Shares which may be subscribed for or
purchased in all categories in the Conversion Offerings by any person, when
combined with any Exchange Shares received, shall not exceed 50,000 shares of
Common Stock to be issued in the Conversion and Reorganization; and (iv) the
maximum number of Conversion Shares which may be subscribed for or purchased in
all categories in the Conversion Offerings by any person, together with any
associate or any group of persons acting in concert, when combined with any
Exchange Shares received, shall not exceed 50,000 shares of Common Stock to be
issued in the Conversion and Reorganization. The minimum order is 25 Conversion
Shares. At any time during the Conversion Offerings, and without further
approval by the MHC members or the Public Stockholders, the Primary Parties, in
their sole discretion, may increase any of the purchase limitations to up to 5%
of the Conversion Shares issued in the Conversion and Reorganization. Under
certain circumstances, subscribers may be resolicited in the event of such an
increase and given the opportunity to increase, decrease or rescind their
orders. If there is an oversubscription in the Conversion Offerings, Conversion
Shares will be allocated as set forth in the Plan of Conversion. See "THE
CONVERSION AND REORGANIZATION -- The Subscription, Direct Community and
Syndicated Community Offerings," "-- Procedure for Purchasing Shares in the
Subscription and Direct Community Offerings" and "--Limitations on Purchases of
Conversion Shares." BECAUSE OTS POLICY REQUIRES THAT THE MAXIMUM PURCHASE
LIMITATION SET FORTH IN THE PLAN OF CONVERSION TAKE INTO ACCOUNT THE EXCHANGE
SHARES TO BE ISSUED TO THE PUBLIC STOCKHOLDERS FOR THEIR PUBLIC SAVINGS BANK
SHARES, CERTAIN PUBLIC STOCKHOLDERS MAY BE LIMITED IN THEIR ABILITY TO PURCHASE
CONVERSION SHARES, OR EVEN PREVENTED FROM PURCHASING CONVERSION SHARES.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND
REORGANIZATION
OTS regulations require the aggregate purchase price of the Conversion
Shares be consistent with the independent appraisal of the estimated pro forma
market value of the MHC and the Savings Bank, as converted, which was estimated
by RP Financial to range from $55.3 million to $74.8 million as of December 5,
1997, or from 2,765,481 shares to 3,741,533 shares based on the Purchase Price.
Because the Public Stockholders will continue to hold approximately the same
aggregate percentage ownership interest in the Holding Company as they held in
the Savings Bank before the Conversion and Reorganization, before giving effect
to the payment of cash in lieu of issuing fractional Exchange Shares and any
Conversion Shares purchased by the Public Stockholders in the Conversion
Offerings, the independent appraisal valuation was multiplied by 53.02% (which
represents the MHC's percentage interest in the Savings Bank to determine the
midpoint of the Estimated Valuation Range, which is $65.1 million, or 3,253,507
shares based on the Purchase Price). The full text of the independent appraisal
describes the procedures followed, the assumptions made, limitations on the
review undertaken and matters considered, which included but did not depend on
the trading market for the Savings Bank Common Stock (see "MARKET FOR COMMON
STOCK"). The appraisal will be updated or confirmed at the completion of the
Conversion Offerings. The maximum of the Estimated Valuation Range may be
increased by up to 15% and the number of Conversion Shares may be increased to
2,281,312 shares due to material changes in the financial condition or results
of operations of the Savings Bank or changes in market conditions or general
financial, economic or regulatory conditions. No resolicitation of subscribers
will be made and subscribers will not be permitted to modify or cancel their
subscriptions unless the gross proceeds from the sale of the Conversion Shares
are less than the minimum or more than 15% above the maximum of the current
Estimated Valuation Range. All Conversion Shares will be sold at the uniform
Purchase Price ($20.00 per share), which was established by the Boards of
Directors of the Primary Parties. Any increase or decrease in the number of
shares of Conversion Stock will result in a corresponding change in the number
of Exchange Shares, so that upon consummation of the Conversion and
Reorganization, the Conversion Shares and the Exchange Shares will represent
approximately 53.02% and 46.98%, respectively, of the total outstanding shares
of Common Stock. See "PRO FORMA DATA" and "THE CONVERSION AND REORGANIZATION --
Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
(viii)
THE APPRAISAL IS NOT INTENDED TO BE AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE CONVERSION OFFERINGS NOR CAN ASSURANCE BE GIVEN THAT PURCHASERS OF THE
COMMON STOCK IN THE CONVERSION OFFERINGS WILL BE ABLE TO SELL SUCH SHARES AFTER
CONSUMMATION OF THE CONVERSION AND REORGANIZATION AT A PRICE THAT IS EQUAL TO OR
ABOVE THE PURCHASE PRICE. Furthermore, the pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation. A complete copy of the appraisal is available in the
manner set forth under "ADDITIONAL INFORMATION."
Based on the 708,873 Public Savings Bank Shares outstanding at the date of
this Prospectus, and assuming a minimum of 1,466,250 and a maximum of 1,983,750
Conversion Shares are issued in the Conversion Offerings, the Exchange Ratio is
expected to range from approximately 1.83281 Exchange Shares to 2.47969 Exchange
Shares for each Public Savings Bank Share issued and outstanding immediately
prior to the consummation of the Conversion and Reorganization. The final
Exchange Ratio will be affected if any stock options to purchase shares of
Savings Bank Common Stock are exercised after the date of this Prospectus and
before the consummation of the Conversion and Reorganization. If any stock
options are outstanding immediately before the consummation of the Conversion
and Reorganization, they will be converted into options to purchase shares of
Common Stock, with the number of shares subject to the option and the exercise
price per share to be adjusted based upon the Exchange Ratio so that the
aggregate exercise price remains unchanged. The duration of the options will
also be unchanged. As of the date of this Prospectus, there were outstanding
options to purchase 63,100 shares of Savings Bank Common Stock at a weighted-
average exercise price of $24.14 per share. The Savings Bank has no plans to
grant additional stock options before the consummation of the Conversion and
Reorganization.
Conversion Shares to Exchange Stock to Shares
Be Issued(1) Be Issued(1) of Common
--------------------- ------------------- Stock to be Exchange
Amount Percent Amount Percent Outstanding(1) Ratio(1)
---------- --------- --------- -------- -------------- -----------
Minimum.... 1,466,250 53.02% 1,299,231 46.98% 2,765,481 1.83281
Midpoint... 1,725,000 53.02 1,528,507 46.98 3,253,507 2.15625
Maximum.... 1,983,750 53.02 1,757,783 46.98 3,741,533 2.47969
15% above
Maximum... 2,281,312 53.02 2,021,451 46.98 4,302,763 2.85164
- -----------------
(1) Assumes that outstanding options to purchase 63,100 shares of Savings Bank
Common Stock at September 30, 1997 are not exercised before consummation of
the Conversion and Reorganization. However, assuming exercise, the
percentages represented by the Conversion Shares and the Exchange Shares
would be 50.89% and 49.11%, respectively, and the Exchange Ratio would be
1.75924, 2.06970, 2.38015, and 2.73717, at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, respectively.
THE VALUE OF THE EXCHANGE SHARES TO BE RECEIVED FOR EACH PUBLIC SAVINGS BANK
SHARE MAY BE LESS THAN THE MARKET VALUE OF THE PUBLIC SAVINGS BANK SHARES AT THE
TIME OF EXCHANGE BASED ON THE FINAL EXCHANGE RATIO AND THE MARKET PRICE AT THE
TIME OF THE EXCHANGE.
DIFFERENCES IN STOCKHOLDER RIGHTS
The Holding Company is a Delaware corporation subject to the provisions of
the Delaware General Corporation Law ("DGCL"), and the Savings Bank is a
federally-chartered savings bank subject to federal laws and regulations. Upon
consummation of the Conversion and Reorganization, the Public Stockholders will
become stockholders of the Holding Company and their rights will be governed by
the Holding Company's Certificate of Incorporation and Bylaws and Delaware law,
rather than the Savings Bank's Federal Stock Charter and Bylaws, federal law and
OTS regulations. The rights of stockholders of the Savings Bank are materially
different in certain
(ix)
respects from the rights of stockholders of the Holding Company. See
"COMPARISON OF STOCKHOLDERS' RIGHTS" and "DESCRIPTION OF CAPITAL STOCK OF THE
HOLDING COMPANY."
USE OF PROCEEDS
The net proceeds from the sale of the Conversion Shares are estimated to
range from $28.3 million to $38.5 million, or to $44.4 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion and Reorganization. The Holding Company has
received conditional OTS approval to purchase all of the capital stock of the
Savings Bank to be issued in the Conversion and Reorganization in exchange for
50% of the net proceeds of the Conversion Offerings. This will result in the
Holding Company retaining approximately $14.2 million to $19.3 million of the
net proceeds, or up to $22.2 million if the Estimated Valuation Range is
increased by 15%, and the Savings Bank receiving an equal amount. See "PRO
FORMA DATA."
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including, initially,
lending and investment in short-term U.S. Government and agency obligations and
mortgage-backed securities.
The proceeds retained by the Holding Company initially will be invested
primarily in short-term U.S. Government and agency obligations and mortgage-
backed securities. Such proceeds will be available for additional contributions
to the Savings Bank in the form of debt or equity, to support future growth and
diversification of activities, as a source of dividends to the stockholders of
the Holding Company and for future repurchases of Common Stock (including
possible repurchases to fund the 1998 MRP), or to provide shares to be issued
upon exercise of stock options) to the extent permitted under Delaware law and
OTS regulations. The Holding Company also intends to use a portion of the net
proceeds retained by it to refinance the ESOP's third party loan, which had an
outstanding balance of $804,000 at September 30, 1997. See "PRO FORMA DATA."
The Holding Company may also consider exploring opportunities to use such
funds to expand operations through acquiring or establishing additional branch
offices and the acquisition of other financial institutions. In addition, the
Holding Company may consider exploring opportunities to expand into non-
traditional lines of business, such as securities brokerage, insurance agency
and real estate development activities, to the extent permitted by applicable
law. Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any such activities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market System under the symbol "PERT" (the current symbol for
the Public Savings Bank Shares, which are listed on the Nasdaq SmallCap Market).
Sandler O'Neill has agreed to act as a market maker for the Common Stock
following consummation of the Conversion and Reorganization. No assurance can
be given that an active and liquid trading market for the Common Stock will
develop or, if developed, will be maintained. Further, no assurance can be
given that purchasers will be able to sell their shares at or above the Purchase
Price after the Conversion and Reorganization. See "RISK FACTORS -- Absence of
Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
DIVIDEND POLICY
The Savings Bank's Board of Directors has adopted a policy of paying regular
cash dividends on the Public Savings Bank Shares. The MHC has waived receipt of
all cash dividends paid by the Savings Bank to date. See "MARKET FOR COMMON
STOCK" for additional information. The Board of Directors intends to declare
and
(x)
pay a regular cash dividend for the first calendar quarter of 1998 to holders of
Savings Bank Common Stock. The MHC does not intend to waive receipt of this
dividend, in order to avoid the expense of obtaining regulatory approval to
waive the dividend. The record date for determining the holders of Savings Bank
Common Stock entitled to receive the dividend is expected to pre-date the
consummation of the Conversion and Reorganization. Consequently, dividends, if
any, would not be paid on the Common Stock until after the consummation of the
Conversion and Reorganization, and may not occur before the first full quarter
following the consummation of the Conversion and Reorganization.
Following consummation of the Conversion and Reorganization, the Holding
Company's Board of Directors intends to declare cash dividends on the Common
Stock at an initial quarterly rate equal to $0.35 per share divided by the final
Exchange Ratio, resulting in intended economic parity with the dividends
currently paid on the Public Savings Bank Shares. The first dividend on the
Common Stock is expected during the month following the end of the quarter in
which the Conversion and Reorganization is consummated. Based upon the
Estimated Valuation Range, the Exchange Ratio is expected to be 1.83281,
2.15625, 2.47969 and 2.85164 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively, resulting in an initial
quarterly dividend rate of $0.19, $0.16, $0.14 and $0.12 per share,
respectively, following consummation of the Conversion and Reorganization.
Declarations of dividends by the Holding Company's Board of Directors will
depend upon a number of factors, including the amount of the net proceeds from
the Conversion Offerings retained by the Holding Company, investment
opportunities available to the Holding Company or the Savings Bank, capital
requirements, regulatory limitations, the Holding Company's and the Savings
Bank's financial condition and results of operations, tax considerations and
general economic conditions. Consequently, there can be no assurance that any
dividends will be paid on the Common Stock or that, if paid, such dividends will
not be reduced or eliminated in future periods. The Savings Bank intends to
continue to pay regular quarterly dividends through either the date of
consummation of the Conversion and Reorganization (on a pro rata basis) or the
end of the fiscal quarter during which the Conversion and Reorganization is
consummated. See "DIVIDEND POLICY."
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
At September 30, 1997, officers and directors of the Savings Bank (21
persons) beneficially owned 104,052 shares of Savings Bank Common Stock. See
"MANAGEMENT OF THE SAVINGS BANK -- Beneficial Ownership of Savings Bank Common
Stock by Directors and Executive Officers." Such shares of Savings Bank Common
Stock will be exchanged for Exchange Shares based on the final Exchange Ratio.
In addition to receipt of such Exchange Shares, officers and directors as a
group (21 persons) are expected to subscribe for an aggregate of approximately
51,925 Conversion Shares, or approximately 3.5% and 2.6% of the shares based on
the minimum and the maximum of the Estimated Valuation Range, respectively. See
"CONVERSION SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION
RIGHTS" for a discussion of the anticipated number Exchange Shares to be
received by directors and officers and the anticipated number of Conversion
Shares to be subscribed for by such persons.
Upon consummation of the Conversion and Reorganization, directors, officers
and employees of the Holding Company and the Savings Bank would have voting
control, on a fully diluted basis, of 22.6% and 22.1% of the Common Stock, based
on the issuance of the minimum and maximum of the Estimated Valuation Range,
respectively. These percentages include the anticipated number of Exchange
Shares to be received and the anticipated number of Conversion Shares to be
purchased by such individuals, as well as allocation to participants' accounts
of all shares of Common Stock that will be held by the ESOP, the exercise of all
options under the 1993, 1996 and 1998 Stock Option Plans, and the funding of the
1996 and 1998 MRPs with Common Stock purchased in the open market. See "RISK
FACTORS -- Anti-takeover Considerations -- Voting Control by Insiders."
RISK FACTORS
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Conversion and Reorganization that should be considered by all
prospective investors.
(xi)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Savings Bank
and its subsidiaries at the dates and for the periods indicated. This
information is qualified in its entirety by reference to the detailed
information contained in the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Prospectus.
At September 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................... $256,993 $209,827 $178,304 $171,533 $168,308
Cash and interest-bearing deposits................... 13,499 13,585 6,630 8,700 5,797
Investment in limited partnership(1)................. 5,004 -- -- -- --
Investment securities available for sale............. 11,326 2,494 800 299 --
Mortgage-backed securities available for sale........ 35,863 43,125 46,344 50,064 12,742
Mortgage-backed securities held for investment....... -- -- -- -- 45,935
Loans receivable, net................................ 178,772 140,758 116,539 104,852 97,004
Deposits............................................. 201,002 160,244 148,709 143,380 143,871
Borrowings........................................... 15,000 16,000 8,000 10,500 8,500
Stockholders' equity................................. 30,602 29,091 18,232 14,637 13,921
At September 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
SELECTED OPERATING DATA:
Interest income...................................... $ 18,396 $ 14,921 $ 13,543 $ 12,075 $ 12,034
Interest expense..................................... 9,496 7,425 8,761 5,624 6,184
-------- -------- -------- -------- --------
Net interest income.................................. 8,900 7,496 4,782 6,451 5,850
Provision for loan losses............................ 655 349 362 120 364
-------- -------- -------- -------- --------
Net interest income after provision for loan losses.. 8,245 7,147 4,420 6,331 5,486
Other income......................................... 1,855 1,927 3,231 1,565 1,613
General and administrative expenses.................. 7,446 6,894 5,540 4,749 4,414
-------- -------- -------- -------- --------
Income before income taxes, change in accounting
method, and extraordinary item...................... 2,654 2,180 2,111 3,147 2,685
Income taxes......................................... 926 756 194 1,064 947
-------- -------- -------- -------- --------
Income before change in method of
accounting for income taxes......................... 1,728 1,424 1,917 2,083 1,738
Cumulative effect of change in method of
accounting for income taxes......................... -- -- -- 350 --
-------- -------- -------- -------- --------
Net income........................................... $ 1,728 $ 1,424 $ 1,917 $ 2,433 $ 1,738
======== ======== ======== ======== ========
(footnotes on second following page)
(xii)
Year Ended September 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ------
PER SHARE DATA:
Earnings per share(2):
Before cumulative effect of change in
accounting for income taxes........... $ 1.15 $ 0.95 $ 1.27 $ 1.39 N/A
Cumulative effect of change in
accounting for income taxes........... $ -- $ -- $ -- $ .23 N/A
---------- ---------- ---------- ----------
Net income............................. $ 1.15 $ 0.95 $ 1.27 $ 1.62 N/A
========== ========== ========== ==========
Dividends per share(3)................... $ 1.35 $ 1.20 $ 1.05 $ 0.76 N/A
========== ========== ========== ==========
Weighted average shares outstanding...... 1,505,432 1,504,601 1,504,059 1,502,418 N/A
Year Ended September 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ------
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding........... 2,645 2,653 2,846 2,889 3,423
Deposit accounts........................ 31,504 26,135 21,490 16,676 16,735
Full-service offices.................... 6 5 5 4 3
(footnotes on following page)
(xiii)
KEY OPERATING RATIOS:
At or For the
Year Ended September 30,
----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Performance Ratios:
Return on average assets (net income divided by
average assets).................................. 0.72% 0.75% 0.92% 1.20%(4) 1.03%
Return on average equity (net income divided by
average equity).................................. 5.78 7.40 11.88 13.84(4) 13.36
Average equity to average assets.................. 12.54 10.16 7.77 8.61 7.75
Interest rate spread (difference between yield
on interest-earning assets and average cost of
interest-bearing liabilities for the period)(5).. 3.57 3.85 3.61 3.54 3.26
Net interest margin (net interest income as a
percentage of average interest-earning assets
for the period)(5)............................... 3.96 4.16 2.90 3.86 3.59
Dividend payout ratio(3).......................... 117.39 126.32 82.68 46.91 N/A
Non-interest expense to average assets............ 3.20 3.72 2.74 2.74 2.63
Average interest-earning assets to average
interest-bearing liabilities..................... 109.36 107.69 86.56 09.36 108.66
Asset Quality Ratios:
Allowance for loan losses to total loans
at end of period................................ 1.04 1.08 1.08 0.92 0.91
Net charge-offs to average outstanding loans
during the period................................ 0.18 0.07 0.04 0.04 0.06
Ratio of non-performing assets to total assets.... 0.20 0.38 0.33 0.73 0.82
Capital Ratios:
Average equity to average assets.................. 12.54 10.16 7.77 8.61 7.75
- ----------------------------
(1) Represents a 20.625% equity investment in a limited partnership that
invests in mortgage servicing rights. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Loan Purchases and, Sales and Servicing" and Note 3
of Notes to Consolidated Financial Statements.
(2) The Savings Bank was not a public company before fiscal 1994.
(3) Takes into account dividends waived by the MHC. All dividends to the MHC
have been waived since the first quarter of fiscal 1994. See Note 18 of
Notes to Consolidated Financial Statements. The dividend payout ratio
based only on dividends actually paid to Public Stockholders was 55.19%,
22.40%, 6.53% and 3.71% for the years ended September 30, 1997, 1996, 1995
and 1994, respectively.
(4) Excludes the effect of the one-time change in method of accounting for
income taxes in fiscal 1994. Return on assets and return on average equity
were 1.40% and 16.16%, respectively.
(5) Excludes income on mutual funds totalling approximately $1.7 million in
fiscal 1995, which was reported as gains on sale and included in other
income.
(xiv)
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Savings Bank and its
subsidiaries at the dates and for the periods indicated. Information at
December 31, 1997 and for the three months ended December 31, 1997 and 1996 are
unaudited, but, in the opinion of management, contain all adjustments (none of
which were other than normal recurring entries) necessary for a fair
presentation of the results of such periods. The selected operating data for
the three months ended December 31, 1997 are not necessarily indicative of the
results of operation for the entire fiscal year. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Prospectus.
At At
December 31, September 30,
1997 1997
------------ -------------
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................... $292,059 $256,933
Cash and interest-bearing deposits................... 10,827 13,499
Investment in limited partnership(1)................. 5,069 5,004
Investment securities available for sale............. 15,524 11,326
Mortgage-backed securities available for sale........ 57,168 35,863
Loans receivable, net................................ 189,960 178,772
Deposits............................................. 202,558 201,002
Borrowings........................................... 54,780 15,000
Stockholders' equity................................. 30,609 30,602
Three Months
Ended December 31,
-----------------------
1997 1996
-------- --------
(In Thousands)
SELECTED OPERATING DATA:
Interest income...................................... $ 5,072 $ 4,182
Interest expense..................................... 2,741 2,000
-------- --------
Net interest income.................................. 2,331 2,182
Provision for loan losses............................ 88 30
-------- --------
Net interest income after provision for loan losses.. 2,243 2,152
Other income......................................... 719 511
General and administrative expenses.................. 2,000 1,798
-------- --------
Income before income taxes........................... 962 865
Income taxes......................................... 327 294
-------- --------
Net income........................................... $ 635 $ 571
======== ========
(xv)
Three Months
Ended December 31,
-------------------
1997 1996
------------------- -----------
PER SHARE DATA:
Net income per share - basic...................... $ 0.42 $ 0.38
Dividends per share............................... $ 0.35 $ 0.30
Weighted average shares outstanding............... 1,508,873 1,504,601
At or For the
Three Months
Ended December 31,
- --------------------------------------------------
1997 1996
---------- ----------
KEY FINANCIAL RATIOS(2):
Performance Ratios:
Return on average assets (net income
divided by average assets)....................... 0.95% 1.08%
Return on average equity (net income
- --------------------------------------------------
divided by average equity)....................... 8.26 7.68
Interest rate spread (difference between yield
on interest-earning assets and average cost
of interest bearing liabilities for the period).. 3.39 3.77
Net interest margin (net interest income as a
percentage of average interest-earning assets
for the period).................................. 3.73 4.27
Dividend payout ratio(3).......................... 83.14 79.10
Non-interest expense to average assets............ 2.99 3.41
Average interest-earning assets to average
interest-bearing liabilities..................... 107.77 112.57
Asset Quality Ratios:
Allowance for losses to total loans
at end of period................................. 1.02 1.02
Net charge-offs to average outstanding
loans during the period.......................... 0.01 0.01
Ratio of non-performing assets to total assets.... 0.30 0.24
Capital Ratios:
Average equity to average assets.................. 11.51 14.07
- ---------------------
(1) Represents a 20.625% equity investment in a limited partnership that
invests in mortgage servicing rights. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Loan Purchases and, Sales and Servicing" and Note 3
of Notes to Consolidated Financial Statements.
(2) Annualized where appropriate.
(3) Takes into account dividends waived by the MHC. All dividends to the MHC
have been waived since the first quarter of fiscal 1994. See Note 18 of
Notes to Consolidated Financial Statements. The dividend payout ratio
based only on dividends actually paid to Public Stockholders was 39.06% and
37.04% for the three months ended December 31, 1997 and 1996,
respectively.
(xvi)
REGULATORY CAPITAL
The table below sets forth the Savings Bank's capital position relative to its
OTS capital requirements at the date indicated. The definitions of the terms
used in the table are those provided in the capital regulations issued by the
OTS. See "REGULATION -- Federal Regulation of the Savings Bank -- Capital
Requirements."
At December 31, 1997
-------------------------------
Percent of Adjusted
Amount Total Assets(1)
------------- ---------------
(In Thousands)
Tangible capital................ $27,246 9.44%
Tangible capital requirement.... 4,332 1.50
------- -----
Excess.......................... $22,914 7.94%
======= =====
Core capital.................... $27,246 9.44%
Core capital requirement(2)..... 8,663 3.00
------- -----
Excess.......................... $18,583 6.44%
======= =====
Risk-based capital(3)........... $26,980 15.57%
Risk-based capital requirement.. 13,865 8.00
------- -----
Excess.......................... $13,115 7.57%
======= =====
- -----------------------
(1) Based on total tangible assets of $288.8 million for purposes of the
tangible capital requirement, on total adjusted assets of $288.8 million
for purposes of the core capital requirement, and on risk-weighted assets
of $173.3 million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements that
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
NON-PERFORMING ASSETS AND DELINQUENCIES
At December 31, 1997, the Savings Bank had $742,000 of loans accounted for on
a non-accrual basis ($398,000 in one- to- four family mortgage loans (consisting
of 10 loans), $268,000 in commercial business loans (consisting of four loans)
and $76,000 in consumer loans (consisting of 12 loans)) compared to $403,000 at
September 30, 1997. At December 31, 1997, the Savings Bank had $662,000 of
accruing loans contractually past due 90 days or more ($330,000 in commercial
real estate loans (consisting of one loan), $248,000 in one- to- four family
mortgage loans (consisting of five loans), $80,000 in construction loans
(consisting of two loans) and $4,000 in consumer loans (consisting of one loan))
compared to $479,000 at September 30, 1997. At December 31, 1997, the Savings
Bank had $140,000 of real estate owned, net, compared to $163,000 at September
30, 1997. At December 31, 1997 and September 30, 1997, the Savings Bank had no
restructured loans. Although no assurances can be given regarding future asset
quality, based on management's evaluation of the loan portfolio, the Savings
Bank believes that the increase in non-accrual loans and in accruing loans
contractually past due 90 days or more resulted from normal variances and is not
indicative of a material adverse trend in asset quality.
The allowance for loan losses was $2.0 million at December 31, 1997. Charge-
offs for the three months ended December 31, 1997 were $20,000, compared to
$17,000 for the comparative period in 1996. Recoveries for the three months
ended December 31, 1997 were $4,000, compared to $1,000 for the three months
ended December 31, 1996.
(xvii)
The following table sets forth the breakdown of the allowance for loan
losses by category at December 31, 1997.
As a Percent Percent of
of Outstanding Loans in Each
Loans in Category to
Amount Category Total Loans
------ --------------- --------------
(in thousands)
Real estate mortgage............................... $ 766 0.52% 71.0%
Commercial real estate and
commercial business............................... 781 2.41 19.0
Consumer........................................... 411 2.10 10.0
------ ------
Total allowance for loan losses.................. $1,958 1.02% 100.00%
====== ======
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
Total assets increased 13.6% from $257.0 million at September 30, 1997
to $292.0 million at December 31, 1997, primarily as a result of increases in
investment securities available-for-sale, mortgage backed securities available-
for-sale and loans receivable, net. These increases were funded primarily by
FHLB advances and borrowings in the form of reverse repurchase agreements. The
purchase of investment securities and mortgage-backed securities are part of a
"wholesale leveraging" strategy, providing the Savings Bank the opportunity to
earn income based on the differential between the interest rates earned on such
securities and the interest rates paid on the borrowed funds.
In December 1996, the Savings Bank invested in a limited partnership
that invests in mortgage servicing rights. The investment in the Limited
Partnership increased 2.0% from $5.0 million at September 30, 1997 to $5.1 at
December 31, 1997. The value of this investment would be adversely impacted in
the event of a decrease in market interest rates. See "BUSINESS OF THE SAVINGS
BANK -- Lending Activities -- Equity Investment in Limited Partnership" for
additional information.
Investment securities available-for-sale increased 37.2% from $11.3
million at September 30, 1997 to $15.5 million at December 31, 1997. The
Savings Bank invested $6.2 million to purchase a $12.0 million FHLB Zero Coupon
Bond yielding 7.06%. The bond is callable in August 1998 and has a final
maturity of August 2007.
Mortgaged-backed securities available-for-sale increased 59.3% from
$35.9 million at September 30, 1997 to $57.2 million at December 31, 1997.
During the three months ended December 31, 1997, the Savings Bank invested $5.1
million in a 20-year, fixed-rate FHLMC security with a yield of 7.01% at
December 31, 1997, $5.1 million in a 20-year, fixed-rate FHLMC security with a
yield of 6.93% at December 31, 1997, $7.4 million in a one year adjustable rate
GNMA security yielding 5.69% at December 31, 1997, and $4.5 million in a monthly
adjustable interest rate CMO secured by FHLMC and GNMA obligations, with a yield
of 7.20% at December 31, 1997.
Loans receivable increased 6.3% from $178.8 million at September 30,
1997 to $190.0 million at December 31, 1997, primarily as a result of increased
refinancings of one- to- four family mortgage loans as a result of lower market
interest rates. One- to- four family mortgage loans increased $6.8 million
between September 30, 1997 and December 31, 1997.
Deposits increased $1.6 million from $201.0 million at September 30,
1997 to $202.6 million at December 31, 1997 as a result of normal growth, as
well as the promotion of short-term certificates of deposit.
Borrowings at December 31, 1997 consisted of FHLB advances and reverse
repurchase agreements. FHLB advances increased $19.0 million from $15.0 million
at September 30, 1997 to $34.0 million at December 31, 1997
(xviii)
and were used to fund loan growth and the purchase of investment and mortgage-
backed securities. Reverse repurchase agreements amounted to $20.0 at December
31, 1997. There were no reverse repurchase agreements outstanding at September
30, 1997. Reverse repurchase agreements are a form of borrowings by the Savings
Bank where the Savings Bank sells securities under the agreement that it will
repurchase them at a later date, for which the Savings Bank receives funds from
the purchaser of the securities at an agreed upon interest rate. At December
31, 1997, there were two reverse repurchase agreements outstanding: (i) $10.0
million at an interest rate of 5.59%, which is callable away from the Savings
Bank after November 13, 2000, and has a maturity date of November 13, 2002, and
(ii) $10.0 million at an interest rate of 5.49%, which is callable away from the
Savings Bank after November 6, 1998, and has a maturity date of November 6,
2000.
Stockholders' equity was $30.6 million at September 30, 1997 and
December 31, 1997. Retained income was offset by dividends paid on the Public
Savings Bank and increased deferred compensation expense for the 1996 MRP. The
Savings Bank paid $248,000 in dividends on the Public Savings Bank Shares during
the three months ended December 31, 1997. Deferred compensation associated with
the 1996 MRP, which is recorded on the Savings Bank's balance sheet as a contra-
equity account, increased $565,000 from $325,000 to $890,000 as a result of open
market purchases by the 1996 MRP trust during the three months ended December
31, 1997 of the remaining 11,415 shares required to fund the plan.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND
1996
NET INCOME. Net income increased 11.2% from $571,000, or $0.38 per
share, for the three months ended December 31, 1996 to $635,000, or $0.42 per
share, for the three months ended December 31, 1997.
INTEREST INCOME. Interest income increased 21.3% from $4.2 million
for the three months ended December 31, 1996 to $5.1 million for the three
months ended December 31, 1997. Interest income on loans increased 23.0% from
$3.3 million to $4.0 million as the average balance of loans receivable, net,
increased 29.6% from $144.5 million for the three months ended December 31, 1996
to $187.2 million for the three months ended December 31, 1997, primarily as a
result of growth in loan originations and purchases. Interest income on
mortgage- backed securities decreased 8.9% from $740,000 for the three months
ended December 31, 1996 to $674,000 for the three months ended December 31,
1997, as the average balance of mortgage backed securities decreased 5.9% from
$43.8 million for the three months ended December 31, 1996 to $41.2 million for
the three months ended December 31, 1997, primarily as a result of restructuring
the mortgage-backed securities portfolio in September 1997. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Comparison of Financial Condition at September 30, 1997 and 1996" for further
information regarding the restructuring. Interest income on other investments
increased 124.8% from $161,000 for the three months ended December 31, 1996 to
$362,000 for the three months ended December 31, 1997 as the average balance of
other interest earning assets increased 100.0% from $10.7 million for the three
months ended December 31, 1996 to $21.4 million for the three months ended
December 31, 1997, primarily as the result of the purchase of higher yielding
investment securities to enhance portfolio yield.
INTEREST EXPENSE. Interest expense increased 37.0% from $2.0 million
for the three months ended December 31, 1996 to $2.7 million for the three
months ended December 31, 1997. Interest on deposits increased 30.6% from $1.8
million for the three months ended December 31, 1996 to $2.3 million for the
three months ended December 31, 1997 as the average balance of deposits
increased 25.0% from $161.2 million for the three months ended December 31, 1996
to $201.5 million for the three months ended December 31, 1997, and the weighted
average cost of deposits increased from 4.39% for the three months ended
December 31, 1996 to 4.59% for the three months ended December 31, 1997. The
increase in the average balance of deposits and the increase in the weighted
cost of deposits resulted primarily from the promotion of short-term
certificates of deposits.
Interest expense on borrowings (FHLB advances and reverse repurchase
agreements) increased $200,000 or 86.6% from $231,000 for the three months ended
December 31, 1996 to $431,000 for the three months ended December 31, 1997 as
the average borrowings increased from $16.0 million for the three months ended
December
(xix)
31, 1996 to $30.3 million for the three months ended December 31, 1997 in order
to fund loan originations and purchases and the purchase of investment
securities and mortgage-backed securities.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered
adequate by management to provide for management's best estimate of inherent
loan losses. In determining the adequacy of the allowance for loan losses,
management evaluates various factors, including the market value of the
underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, loss
experience, delinquency trends and economic conditions. Management evaluates
the carrying value of loans periodically and the allowance for loan losses is
adjusted accordingly. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities -
- - Allowance for Loan Losses" and Note 4 to Notes to Consolidated Financial
Statements.
The provision for loan losses increased from $30,000 for the three
months ended December 31, 1996 to $88,000 for the three months ended December
31, 1997. Management deemed the increase necessary in light of the growth in
the loan portfolio in the three months ended December 31, 1997, particularly in
inherently riskier commercial real estate loans and consumer loans. At December
31, 1997, the allowance for loan losses was 1.02% of total loans and was deemed
adequate by management at that date.
OTHER INCOME. Total other income increased 40.7% from $511,000 for
the three months ended December 31, 1996 to $719,000 for the three months ended
December 31, 1997. Loan and deposit account service charges increased $35,000
as the result of an increase in the number of checking accounts. Gain or loss
on sale of real estate, net was a loss of $7,000 from the sale of one real
estate owned property for the three months ended December 31, 1997 compared to a
gain of $2,000 for the same three months of 1996. The gain or loss on sale of
loans, net increased $4,000 from $8,000 for the three months ended December 31,
1996 to $12,000 for the three months ended December 31, 1997. Other income
increased $178,000 from $67,000 for the three months ended December 31, 1996 to
$245,000 for the three months ended December 31, 1997 as a result of net income
earned from the mortgage banking company and the limited partnership. The
Savings Bank recorded net income from the mortgage banking company of $30,000
for the three months ended December 31, 1997, compared to a start-up loss of
$75,000 for the three months ended December 31, 1996. The Savings Bank recorded
net income of $65,000 from the limited partnership for the three months ended
December 31, 1997. The Savings Bank did not recognize any income from the
limited partnership during the three months ended December 31, 1996 because the
Savings Bank's investment in it commenced in December 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $202,000 from $1.8 million for the three months ended
December 31, 1996 to $2.0 million for the three months ended December 31, 1997.
Salaries and employee benefits increased 20.0% from $912,000 for the three
months ended December 31, 1996 to $1.1 million for the three months ended
December 31, 1997 as a result of staffing a call center ($79,000) and expenses
associated with the ESOP ($51,000) and the 1996 MRP ($52,000). Occupancy
expenses increased $3,000 from $111,000 for the three months ended December 31,
1996 to $114,000 for the three months ended December 31, 1997. Furniture and
equipment expense increased 22.7% or $39,000 from $172,000 for the three months
ended December 31, 1996 to $211,000 for the three months ended December 31, 1997
as the result of the purchase of additional computer hardware and software and
equipping the Perpetual Square Office. The FDIC insurance premiums decreased
$60,000 from $90,000 for the three months ended December 31, 1996 to $30,000 for
the three months ended December 31, 1997 as a result of the SAIF
recapitalization. Effective January 1, 1997, the insurance premium rate
decreased from 0.23% to 0.065% of assessable deposits. See "REGULATION --
Federal Regulation of Savings Associations -- Federal Deposit Insurance
Corporation."
Advertising expenses decreased $28,000 or 31.8% from $88,000 for the
three months ended December 31, 1996 to $60,000 for the three months ended
December 31, 1997 as a result of the winding down of the free checking
advertising campaign that began in October 1994. Data processing increased
$37,000 or 61.7% from $60,000 for the three months ended December 31, 1996 to
$97,000 for the three months ended December 31, 1997 as a result of increased
volume and cost of ATM and debit card processing. Office supplies decreased
$31,000 or 31.6% from
(xx)
$98,000 for the three months ended December 31, 1996 to $67,000 for the three
months ended December 31, 1997, as the Savings Bank was changing computer
systems in the quarter ended December 31, 1996 that required new internal
processing supplies. Other expenses increased $59,000 or 22.1% from $267,000
for the three months ended December 31, 1996 to $326,000 for the three months
ended December 31, 1997, primarily due to consultant fees for sales training for
the call center.
INCOME TAXES. Income taxes increased $33,000 or 11.2% from $294,000
for the three months ended December 31, 1996 to $327,000 for the three months
ended December 31, 1997 due to an increase in income before taxes. The
effective tax rate was 34% for both three months ended December 31, 1996 and
1997.
(xxi)
RISK FACTORS
Before investing in shares of the Common Stock offered hereby,
prospective investors should carefully consider the matters presented below, in
addition to matters discussed elsewhere in this Prospectus. The matters
presented below address the material risks associated with an investment in the
Common Stock.
CERTAIN LENDING RISKS
PURCHASED LOAN RISKS. The Savings Bank actively purchases loans,
other than consumer and commercial business loans. At September 30, 1997,
purchased loans totalled $25.2 million and consisted of one- to four-family
mortgage loans ($19.6 million), construction loans ($4.1 million) and commercial
real estate loans ($1.5 million). Such loans have been purchased primarily from
a mortgage company located in Hilton Head Island, South Carolina ($7.2 million),
and a mortgage banking company located in Greenville, South Carolina ($17.5
million), in which a service corporation subsidiary of the Savings Bank has an
equity investment. See "BUSINESS OF THE SAVINGS BANK -- Subsidiary Activities."
For the year ended September 30, 1997, the Savings Bank's purchases of one- to
four- family mortgage loans exceeded originations by approximately 25.5%. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Loan Purchases and Sales
and Servicing." The Savings Bank expects that future loans will be purchased
primarily from the Greenville-based mortgage banking company because of
increasing competition in the Hilton Head Island market.
In addition to the lending risks discussed below, purchased loans have
added risk because they are originated by a third party to borrowers residing,
and secured by properties located, outside of the Savings Bank's primary market
area. Purchased loans are also more difficult to underwrite and monitor because
of the Savings Bank's unfamiliarity with the economy in which the properties are
located relative to the economy of its primary market area, the higher
probability of lack of personal contact with the borrower, and the distant
location of the collateral, among other things. Furthermore, loans secured by
properties located in an area whose economy is heavily dependent on tourism,
such as Hilton Head Island, South Carolina, are subject to greater risk because
economic downturns often have a greater adverse impact on tourism. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Commercial Real Estate
Lending."
COMMERCIAL REAL ESTATE LENDING RISKS. At September 30, 1997, the
Savings Bank's commercial real estate loan portfolio amounted to $27.0 million,
or 15.1% of net loans receivable, compared to $2.6 million, or 2.7% of net loans
receivable, at September 30, 1993. Commercial real estate lending is inherently
riskier than one- to four-family mortgage lending. Because payments on loans
secured by commercial properties often depend upon the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy, among other things. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Commercial Real Estate
Loans."
CONSUMER LENDING RISKS. At September 30, 1997, the Savings Bank's
consumer loan portfolio amounted to $19.2 million, or 10.7% of net loans
receivable. Consumer lending is also inherently riskier than one- to four-
family mortgage lending. Collateral such as automobiles, boats and other
personal property depreciate rapidly and are often an inadequate repayment
source if a borrower defaults. In addition, consumer loan repayments depend on
the borrower's continuing financial stability and are more likely to be
adversely affected by job loss, divorce, illness, personal bankruptcy and other
financial hardship. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Consumer Loans."
CONSTRUCTION LENDING RISKS. At September 30, 1997, the Savings Bank's
construction loan portfolio amounted to $17.1 million, or 9.6% of net loans
receivable, of which $6.4 million consisted of speculative construction loans.
Speculative construction loans are so named because there is not a commitment
for permanent financing in place at the time the construction loan is
originated.
1
Construction lending is inherently riskier than one- to four-family
mortgage lending. Construction loans generally have higher loan balances than
one- to four-family mortgage loans. In addition, the potential for cost
overruns because of the inherent difficulties in estimating construction costs
and, therefore, collateral values and the difficulties and costs associated with
monitoring construction progress, among other things, are major contributing
factors to this greater credit risk. Speculative construction loans have the
added risk that there is not an identified buyer for the completed home when the
loan is originated, with the risk that the builder will have to service the
construction loan debt and finance the other carrying costs of the completed
home for an extended time period until a buyer is identified. Furthermore, the
demand for construction loans and the ability of construction loan borrowers to
service their debt depends highly on the state of the general economy, including
market interest rate levels, and the state of the economy of the Savings Bank's
primary market area. A material downturn in economic conditions would be
expected to have a material adverse effect on the credit quality of the
construction loan portfolio. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities -- Construction Loans."
COMMERCIAL BUSINESS LENDING RISKS. At September 30, 1997, the Savings
Bank's commercial business loan portfolio amounted to $7.2 million, or 4.0% of
net loans receivable. Subject to market conditions and other factors, the
Savings Bank intends to expand its commercial business lending activities within
its primary market area. Commercial business lending is inherently riskier than
one- to four-family mortgage lending. Although commercial business loans are
often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation value of these assets in the event of a
borrower default is often an insufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Commercial Business Loans."
GEOGRAPHIC CONCENTRATION OF CREDIT AND INVESTMENT RISK. The Savings
Bank has no significant concentration of credit and investment risk other than
that a substantial portion of its loan portfolio is secured by real estate,
either as primary or secondary collateral, located in its primary market area.
In addition to its lending activities, the Savings Bank, through its investment
in a service corporation subsidiary, engages in commercial and residential
property development in its primary market area. See "BUSINESS OF THE SAVINGS
BANK --Subsidiary Activities." This geographic concentration of credit and
investment risk could have a material adverse effect on the Savings Bank's
financial condition and results of operations to the extent there is a material
deterioration in that area's economy and real estate values. See "BUSINESS OF
THE SAVINGS BANK -- Lending Activities."
INTEREST RATE RISK
GENERAL. The Savings Bank's profitability, like that of most
financial institutions, depends largely on its net interest income, which is the
difference between the interest income received from its interest-earning assets
and the interest expense incurred in connection with its interest-bearing
liabilities. To better control the impact of changes in interest rates, the
Savings Bank has sought to improve the match between asset and liability
maturities or repricing periods and rates by emphasizing the origination and
purchase of adjustable-rate mortgage ("ARM") loans and shorter term
construction, commercial real estate, commercial business and consumer loans.
POTENTIAL ADVERSE IMPACT ON RESULTS OF OPERATIONS. The Savings Bank's
operations would be adversely affected by a material prolonged increase in
market interest rates. At September 30, 1997, assuming an instantaneous 200
basis point increase in market interest rates, the Savings Bank's net portfolio
value ("NPV") would decrease by
2
approximately $6.5 million or 17%. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Interest Rate Sensitivity
Analysis of Net Portfolio Value."
POTENTIAL ADVERSE IMPACT ON FINANCIAL CONDITION. Changes in the level
of interest rates also affect the volume of loans originated or purchased by the
Savings Bank and, thus, the amount of loan and commitment fees, as well as the
market value of the Savings Bank's investment securities and other interest-
earning assets. Changes in interest rates also can affect the average life of
loans. Decreases in interest rates may result in increased prepayments of loans,
as borrowers refinance to reduce borrowing costs. Under these circumstances, the
Savings Bank is subject to reinvestment risk to the extent that it is not able
to reinvest such prepayments at rates which are comparable to the rates on the
maturing loans or securities. Moreover, volatility in interest rates also can
result in disintermediation, or the flow of funds away from savings institutions
into direct investments, such as U.S. Government and corporate securities and
other investment vehicles which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than
savings institutions.
At September 30, 1997, out of total one-to four-family mortgage loans
of $110.6 million, the Savings Bank had $45.6 million of ARM loans in its
portfolio, the majority of which reprice every year. Furthermore, the Savings
Bank's ARM loans contain periodic and lifetime interest rate adjustment limits
which, in a rising interest rate environment, may prevent such loans from
repricing to market interest rates. While management anticipates that ARM loans
will better offset the adverse effects of an increase in interest rates as
compared to fixed-rate mortgages, the increased mortgage payments required of
ARM borrowers in a rising interest rate environment could potentially cause an
increase in delinquencies and defaults. The Savings Bank has not historically
had an increase in such delinquencies and defaults on ARM loans, but no
assurance can be given that such delinquencies or defaults would not occur in
the future. The marketability of the underlying property also may be adversely
affected in a high interest rate environment. Moreover, the Savings Bank's
ability to originate or purchase ARM loans may be affected by changes in the
level of interest rates and by market acceptance of the terms of such loans. In
a relatively low interest rate environment, as currently exists, borrowers
generally tend to favor fixed-rate loans over ARM loans to hedge against future
increases in interest rates.
Changes in the level of interest rates also affect the Savings Bank's
portfolio of mortgage-backed securities and CMOs. Payments in the Savings
Bank's mortgage-backed securities and CMO portfolios may be affected by
declining and rising interest rate environments. In a low and falling interest
rate environment, prepayments could be expected to increase in future periods.
The Savings Bank's adjustable-rate instruments would be expected to generate
lower yields as a result of the effect of falling interest rates on the indices
for determining payment of interest. Additionally, the increased principal
payments received may be subject to reinvestment at lower rates. Conversely, in
a period of rising interest rates, prepayments would be expected to decrease,
which would make less principal available for reinvestment at higher rates. In
a rising interest rate environment, adjustable-rate instruments generally would
generate higher yields to the extent that the indices for determining payment of
interest did not exceed the lifetime interest rate caps. Such changing interest
rate environment may subject the Savings Bank's mortgage-backed securities and
CMO portfolios to yield and price volatility.
The Savings Bank has an equity investment in a limited partnership
that invests in mortgage servicing rights. The value of that investment was
$5.0 million at September 30, 1997. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Equity Investment in Limited Partnership" for additional
information. The value of this investment would be adversely affected if the
mortgage servicing rights were prematurely extinguished by the prepayment of the
underlying loans. A decrease in market interest rates could be expected to
increase the rate of prepayments as borrowers refinance at lower interest rates.
In that event, the Savings Bank may be required to accelerate its amortization
of this investment, or even write-off the full value of the investment in a
given period, which would have a material adverse effect on the Savings Bank.
3
COMPETITION
The Savings Bank faces significant competition in its primary market
area (Anderson and Oconee Counties, South Carolina) both in making loans and
attracting deposits. Both counties have a high density of financial
institutions, many of which are branches of Southeastern region bank holding
companies which have greater financial resources than the Savings Bank, all of
which compete with the Savings Bank in varying degrees. The Savings Bank
competes for loans principally with commercial banks, thrift institutions,
credit unions, mortgage banking companies and insurance companies.
Historically, commercial banks, thrift institutions and credit unions have been
the Savings Bank's most direct competition for deposits. The Savings Bank also
competes with short-term money market funds and with other financial
institutions, such as brokerage firms and insurance companies, for deposits. See
"BUSINESS OF THE SAVINGS BANK -- Competition."
ESTIMATED VALUATION RANGE BELOW MARKET VALUE
OTS policy requires that the final Exchange Ratio be determined based
on the number of shares issued in the Conversion Offering in order to maintain
the Public Stockholders' approximate 46.98% ownership interest in the Savings
Bank. THE FINAL EXCHANGE RATIO WILL NOT BE BASED ON THE MARKET VALUE OF THE
PUBLIC SAVINGS BANK SHARES. Based on the Purchase Price ($20.00 per share) and
the Exchange Ratio, an Exchange Share has an equivalent value of $36.66, $43.13,
$49.59 and $57.03 at the minimum, midpoint, maximum, and maximum, as adjusted,
of the Estimated Valuation Range, respectively. As of _________ ____, 1998, the
last trade in the Public Savings Bank Shares as reported by the Nasdaq Stock
Market was at $____ per share. There can be no assurance as to the market price
of a Public Savings Bank Shares at the consummation of the Conversion and
Reorganization. See "THE CONVERSION AND REORGANIZATION -- Stock Pricing,
Exchange ratio and Number of Shares to be Issued."
RETURN ON EQUITY AFTER CONVERSION AND REORGANIZATION
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Savings
Bank's return on equity for the year ended September 30, 1997 was, and the
Holding Company's post-Conversion and Reorganization return on equity will be,
less than the average return on equity for publicly traded thrift institutions
and their holding companies. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION"
for numerical information regarding the Savings Bank's historical return on
equity and "CAPITALIZATION" for a discussion of the Holding Company's estimated
pro forma consolidated capitalization as a result of the Conversion and
Reorganization. In order for the Holding Company to achieve a return on equity
comparable to the historical levels of the Savings Bank, the Holding Company
either would have to increase net income or reduce stockholders' equity, or
both, commensurate with the increase in equity resulting from the Conversion and
Reorganization. Reductions in equity could be achieved by, among other things,
the payment of regular or special cash dividends (although no assurances can be
given as to their payment or, if paid, their amount and frequency), the
repurchase of shares of Common Stock subject to applicable regulatory
restrictions, or the acquisition of branch offices, other financial institutions
or related businesses (neither the Holding Company nor the Savings Bank has any
present plans, arrangements, or understandings, written or oral, regarding any
repurchase or acquisitions). See "DIVIDEND POLICY" and "USE OF PROCEEDS."
Achievement of increased net income levels will depend on several important
factors outside management's control, such as general economic conditions,
including the level of market interest rates, competition and related factors,
among others. In addition, the expenses associated with the 1996 and 1998 MRPs
(see "-- Expenses Associated with MRP"), along with other post-Conversion and
Reorganization expenses are expected to contribute initially to reduced earnings
levels. Subject to market conditions, initially the Savings Bank intends to
deploy the net proceeds of the Conversion Offerings to support its lending
activities to increase earnings per share and book value per share, with the
goal of achieving a return on equity comparable to the average for publicly
traded thrift institutions and their holding companies. This goal will likely
take a number of years to achieve and no assurances can be given that this goal
can be attained. Consequently, for the foreseeable future, investors should not
expect a return on equity which will meet or exceed the average return on equity
for publicly
4
traded thrift institutions, many of which are not newly converted institutions
and have had time to deploy their conversion capital.
EXPENSES ASSOCIATED WITH MRP
In addition to the expense that the Savings Bank will recognize in
connection with the 1996 MRP as shares awarded to recipients vest, the Savings
Bank will recognize material employee compensation and benefit expenses assuming
the 1998 MRP is implemented. The actual aggregate amount of these new expenses
cannot be currently predicted because applicable accounting practices require
that they be based on the then fair market value of the shares of Common Stock
on the date on which the shares are acquired. These expenses have been reflected
in the pro forma financial information under "PRO FORMA DATA" assuming the
Purchase Price ($20.00 per share) as fair market value. Actual expenses,
however, will be based on the fair market value of the Common Stock at the time
of recognition, which may be higher or lower than the Purchase Price. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition Plan."
ANTI-TAKEOVER CONSIDERATIONS
PROVISIONS IN THE HOLDING COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE
AND FEDERAL LAW. Certain provisions included in the Holding Company's
Certificate of Incorporation and in the DGCL might discourage potential proxy
contests and other potential takeover attempts, particularly those that have not
been negotiated with the Board of Directors. As a result, these provisions may
preclude takeover attempts that certain stockholders may deem to be in their
best interest and may tend to perpetuate existing management. These provisions
include, among other things, a provision limiting voting rights of beneficial
owners of more than 10% of the Common Stock and supermajority voting
requirements for certain business combinations. In addition, the Certificate of
Incorporation provides for the election of directors to staggered terms of three
years, eliminates cumulative voting for directors, and permits the removal of
directors without cause only upon the vote of holders of 80% of the outstanding
voting shares. Certain provisions of the Certificate of Incorporation of the
Holding Company cannot be amended by stockholders unless an 80% stockholder vote
is obtained. The Certificate of Incorporation also contains provisions
regarding the timing and content of stockholder proposals and nominations and
limiting the calling of special meetings. The existence of these anti-takeover
provisions could result in the Holding Company being less attractive to a
potential acquiror and in stockholders receiving less for their shares than
otherwise might be available in the event of a takeover attempt. Furthermore,
federal regulations prohibit for three years after consummation of the
Conversion and Reorganization the ownership of more than 10% of the Savings Bank
or the Holding Company without prior OTS approval. Federal law also requires
OTS approval prior to the acquisition of "control" (as defined in OTS
regulations) of an insured institution. See "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY."
VOTING CONTROL BY INSIDERS. Management's potential voting control
alone, as well as together with additional stockholder support, might preclude
or make more difficult takeover attempts that certain stockholders may deem to
be in their best interest and might tend to perpetuate existing management.
Upon consummation of the Conversion and Reorganization, directors, officers and
employees of the Holding Company and the Savings Bank would have voting control,
on a fully diluted basis, of 22.6% and 22.1% of the Common Stock, based on the
issuance of the minimum and maximum of the Estimated Valuation Range,
respectively. These percentages include the anticipated number of Exchange
Shares to be received and the anticipated number of Conversion Shares to be
purchased by such individuals (see "CONVERSION SHARES TO BE PURCHASED BY
MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS"), as well as allocation to
participants' accounts of all shares of Common Stock that will be held by the
ESOP, the exercise of all options under the 1993, 1996 and 1998 Stock Option
Plans, and the funding of the 1996 and 1998 MRPs with Common Stock purchased in
the open market. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits" for a
discussion of the ESOP, 1993, 1996 and 1998 Stock Option Plans, and the 1996 and
1998 MRPs.
5
PROVISIONS OF EMPLOYMENT AGREEMENTS. The employment agreements of
Messrs. Orr, Hall and Visioli provide for cash severance payments and/or the
continuation of health, life and disability benefits in the event of their
termination of employment following a change in control of the Holding Company
or the Savings Bank. Assuming a change of control occurred as of September 30,
1997, the aggregate value of the severance benefits available to these executive
officers under the agreements would have been approximately $583,000. These
employment agreements may have the effect of increasing the costs of acquiring
the Holding Company, thereby discouraging future attempts to take over the
Holding Company or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE
HOLDING COMPANY."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
The exercise of options under the 1993 and 1996 Stock Option Plans and
the 1998 Stock Option Plan (assuming its implementation) will be dilutive to
stockholders. Furthermore, the implementation of the 1998 MRP will also be
dilutive to stockholders to the extent its is funded with authorized but
unissued shares of Common Stock of the Holding Company. Assuming the exercise
of all outstanding options under the 1993, 1996 and 1998 Stock Option Plans and
the funding of the 1998 MRP with authorized but unissued shares of Common Stock
of the Holding Company, the voting control of stockholders of the Holding
Company would be diluted by 10.4% at each of the minimum, midpoint, maximum, and
maximum, as adjusted, of the Estimated Valuation Range. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits" for a discussion of these stock benefit plans.
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Prior to the Conversion and
Reorganization, the Public Savings Bank Shares have been listed on the Nasdaq
Smallcap Market under the symbol "PERT." Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market also under the same symbol, there can be no assurance that an active and
liquid trading market for the Common Stock will develop or, if developed, will
continue. Furthermore, there can be no assurance that purchasers will be able
to sell their shares at or above the Purchase Price. See "MARKET FOR COMMON
STOCK."
POSSIBLE INCREASE IN ESTIMATED VALUATION RANGE AND NUMBER OF SHARES ISSUED
The Estimated Valuation Range may be increased up to 15% to reflect
material changes in the financial condition or results of operations of the
Savings Bank or changes in market conditions or general financial, economic or
regulatory conditions following the commencement of the Conversion Offerings.
If the Estimated Valuation Range is increased, it is expected that the Holding
Company would increase the Estimated Price Range so that up to 2,281,312
Conversion Shares at the Purchase Price would be issued for an aggregate price
of up to $45.6 million. This increase in the number of shares would decrease a
subscriber's pro forma net income per share and stockholders' equity per share,
increase the Holding Company's pro forma consolidated stockholders' equity and
net earnings, and increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net income per share. See "PRO FORMA DATA."
6
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $28.3 million to $38.5 million, or up to $44.4 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has
received conditional OTS approval to purchase all of the capital stock of the
Savings Bank to be issued in the Conversion and Reorganization in exchange for
50% of the net proceeds of the Conversion Offerings. This will result in the
Holding Company retaining approximately $14.2 million to $19.3 million of net
proceeds, or up to $22.2 million if the Estimated Valuation Range is increased
by 15%, and the Savings Bank receiving an equal amount. See "PRO FORMA DATA."
Receipt of 50% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including, initially,
lending and investment in short-term U.S. Government and agency obligations and
mortgage-backed securities.
The net proceeds retained by the Holding Company initially will be
invested primarily in short-term U.S. Government and agency obligations and
mortgage-backed securities or in a deposit account either at the Savings Bank or
another financial institution. Such proceeds will be available for additional
contributions to the Savings Bank in the form of debt or equity, to support
future diversification or acquisition activities, as a source of dividends to
the stockholders of the Holding Company and for future repurchases of Common
Stock to the extent permitted under Delaware law and federal regulations. The
Holding Company will also use a portion of the net proceeds retained by it to
refinance the ESOP's third party loan, which had an outstanding balance of
$804,000 at September 30, 1997. See "PRO FORMA DATA."
The Holding Company will consider exploring opportunities to use such
funds to expand operations through acquiring or establishing additional branch
offices or acquiring other financial institutions. In addition, the Holding
Company may consider exploring opportunities to expand into non-traditional
lines of business, such as securities brokerage, insurance agency and real
estate development activities, to the extent permitted by applicable law.
Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any diversification activities.
Following consummation of the Conversion and Reorganization, the
Holding Company's Board of Directors will have the authority to adopt plans for
repurchases of Common Stock, subject to statutory and regulatory requirements.
Since the Holding Company has not yet issued stock, there currently is
insufficient information upon which an intention to repurchase stock could be
based. The facts and circumstances upon which the Board of Directors may
determine to repurchase stock in the future would include but are not limited
to: (i) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the ability to improve the Holding
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders. Any stock repurchases will be subject to a determination by the
Board of Directors that both the Holding Company and the Savings Bank will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that capital will be adequate, taking into account, among other
things, the level of nonperforming and classified assets, the Holding Company's
and the Savings Bank's current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. For a discussion of
7
the regulatory limitations applicable to stock repurchases and current OTS
policy with respect thereto, see "THE CONVERSION AND REORGANIZATION --
Restrictions on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
The Savings Bank's Board of Directors has adopted a policy of paying
regular cash dividends on the Public Savings Bank Shares. The MHC has waived
receipt of all cash dividends paid by the Savings Bank to date. See "MARKET FOR
COMMON STOCK" for additional information. The Board of Directors intends to
declare and pay a regular cash dividend for the first calendar quarter of 1998
to holders of Savings Bank Common Stock. The MHC does not intend to waive
receipt of this dividend in order to avoid the expense obtaining regulatory
approval to waive the dividend. The record date for determining the holders of
Savings Bank Common Stock entitled to receipt of the dividend is expected to
pre-date the consummation of the Conversion and Reorganization. Consequently,
dividends, if any, would not be paid on the Common Stock until after the
consummation of the Conversion and Reorganization, and may not occur before the
first full quarter following the consummation of the Conversion and
Reorganization.
Upon completion of the Conversion and Reorganization, the Holding
Company's Board of Directors will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. The Board of
Directors of the Holding Company intends to pay cash dividends on the Common
Stock at an initial quarterly rate equal to $0.35 per share divided by the final
Exchange Ratio, resulting in intended economic parity with the dividends
currently paid on the Public Savings Bank Shares. The first dividend payment on
the Common Stock is expected during the month following the end of the quarter
in which the Conversion and Reorganization is consummated. Based upon the
Estimated Valuation Range, the Exchange Ratio is expected to be 1.83281,
2.15625, 2.47969 and 2.85164 at the minimum, midpoint, maximum and 15% above the
maximum of the Valuation Price Range, respectively, resulting in an initial
quarterly dividend rate of $0.19, $0.16, $0.14 and $0.12 per share,
respectively, commencing with the first full quarter following consummation of
the Conversion and Reorganization. In addition, the Board of Directors may
determine to pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. Declarations or payments of any dividends (regular and
special) will be subject to determination by the Board of Directors, which will
take into account the amount of the net proceeds retained by the Holding
Company, the Holding Company's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and other factors, including the regulatory restrictions that affect the payment
of dividends by the Savings Bank to the Holding Company discussed below. No
assurances can be given that any dividends, either regular or special, will be
declared or, if declared, what the amount of dividends will be or whether such
dividends, if commenced, will continue.
CURRENT RESTRICTIONS
Dividends from the Holding Company may depend, in part, upon receipt
of dividends from the Savings Bank because the Holding Company initially will
have no source of income other than dividends from the Savings Bank and earnings
from the investment of the net proceeds from the Conversion Offerings retained
by the Holding Company. OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends to the
Holding Company, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends to the Holding Company. The OTS imposes
certain limitations on the payment of dividends from the Savings Bank to the
Holding Company which utilize a three-tiered approach that permits various
levels of distributions based primarily upon a savings association's capital
level. The Savings Bank currently meets the criteria to be designated a Tier 1
association, as hereinafter defined, and consequently could at its option (after
prior notice to and no objection made by the OTS) distribute up to 100% of its
net income during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during the
year. In addition, the Savings Bank may not declare or pay a cash dividend on
its capital stock if the effect thereof would be to reduce the regulatory
capital of the Savings Bank below the amount required for the
8
liquidation account to be established pursuant to the Savings Bank's of
Conversion. See "REGULATION -- Federal Regulation of the Savings Bank --
Limitations on Capital Distributions," "THE CONVERSION AND REORGANIZATION --
effects of Conversion and Reorganization on Depositors and Borrowers of the
Savings Bank -- Liquidation Account" and Note 12 of Notes to the Consolidated
Financial Statements included elsewhere herein.
Under Delaware law, the Holding Company is generally limited to paying
dividends in an amount equal to the excess of its net assets (total assets minus
total liabilities) over its statutory capital or, if no such excess exists, to
its net profits for the current and/or immediately preceding fiscal year.
The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take any
preliminary action in contemplation of any such distributions, within the first
year following the consummation of the Conversion.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Savings Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Savings Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note 11 of Notes to the Consolidated
Financial Statements included elsewhere herein. The Holding Company does not
contemplate any distribution by the Savings Bank that would result in a
recapture of the Savings Bank's bad debt reserve or create the above-mentioned
federal tax liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding Company
has received preliminary approval to list the Common Stock on the Nasdaq
National Market System under the symbol "PERT," there can be no assurance that
the Holding Company will meet Nasdaq National Market System listing
requirements, which include a minimum market capitalization, at least three
market makers and a minimum number of record holders. Sandler O'Neill has agreed
to make a market for the Common Stock following consummation of the Conversion
and Reorganization and will assist the Holding Company in seeking to encourage
at least two additional market makers to establish and maintain a market in the
Common Stock. Making a market involves maintaining bid and ask quotations and
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. Based on the level of market making in the Public Savings Bank
Shares, the Holding Company anticipates that prior to the completion of the
Conversion and Reorganization it will be able to obtain the commitment from at
least two additional broker-dealers to act as market maker for the Common Stock.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of the Holding Company, the Savings Bank or any market maker. There can be no
assurance that an active and liquid trading market for the Common Stock will
develop or that, if developed, it will continue. The number of active buyers and
sellers of the Common Stock at any particular time may be limited. Under such
circumstances, investors in the Common Stock could have difficulty disposing of
their shares on short notice and should not view the Common Stock as a
short-term investment. Furthermore, there can be no assurance that purchasers
will be able to sell their shares at or above the Purchase Price or that
quotations will be available on the Nasdaq National Market System as
contemplated.
Since September 30, 1996 (the consummation date of the Additional
Offering), the Public Savings Bank Shares have been listed on the Nasdaq
SmallCap Market under the symbol "PERT." Before that date, the Public Savings
Bank Shares were unlisted and traded in privately negotiated transactions. At
September 30, 1997, there were 294 record holders of the Public Savings Bank
Shares (not including holders in nominee or "street name") and four market
makers in the Public Savings Bank Shares as reported by the Nasdaq Stock Market.
The following table
9
sets forth the high and low trading prices, as reported by Nasdaq, and cash
dividends paid for each quarter during the fiscal 1997. Market price data for
fiscal 1996 is not presented because the Public Savings Bank Shares traded in
private transactions for which comparable data is unavailable. The Savings Bank
paid a quarterly cash dividend of $0.30 on the outstanding Public Savings Bank
Shares during fiscal 1996.
Cash Dividend
Fiscal 1997 High Lo Declared
- ----------- ---- --- --------
Quarter Ended December 31, 1996.......... $24.25 $20.25 $0.30
Quarter Ended March 31, 1997............. 26.50 22.50 0.35
Quarter Ended June 30, 1997.............. 29.75 24.00 0.35
Quarter Ended September 30, 1997......... 57.0 30.25 0.35
10
CAPITALIZATION
The following table presents the historical capitalization of the
Savings Bank at September 30, 1997, and the pro forma consolidated
capitalization of the Holding Company after giving effect to the assumptions set
forth under "PRO FORMA DATA," based on the sale of the number of Conversion
Shares at the minimum, midpoint, maximum and maximum, as adjusted, of the
Estimated Valuation Range. The Conversion Shares that would be issued at the
maximum, as adjusted, of the Estimated Valuation Range would be subject to
receipt of OTS approval of an updated appraisal confirming such valuation. A
change in the number of Conversion Shares to be issued in the Conversion and
Reorganization would materially affect pro forma consolidated capitalization.
Holding Company Pro Forma Consolidated Capitalization
Savings Based Upon the Sale of
Bank 1,466,250 1,725,000 1,983,750 2,281,312
Capitalization Shares at Shares at Shares at Shares at
at $20.00 $20.00 $20.00 $20.00
September 30, 1997 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
(In thousands)
Deposits(3)........................... $201,002 $201,002 $201,002 $201,002 $201,002
FHLB advances......................... 15,000 15,000 15,000 15,000 15,000
ESOP debt(4).......................... 804 804 804 804 804
---------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds..... $216,806 $216,806 $216,806 $216,806 $216,806
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
250,000 shares, $.01 par
value per share, authorized;
none issued or outstanding....... -- -- -- -- --
Common Stock:
7,500,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(5)................... 1,509 14 17 20 23
Additional paid-in capital......... 11,652 41,482 46,574 51,666 57,525
Retained earnings(6)............... 18,382 18,382 18,382 18,382 18,382
Unrealized loss on securities
available-for-sale, net of tax.... 188 188 188 188 188
Less:
Savings Bank Common Stock
acquired by ESOP in MHC
Reorganization and
Additional Offering............. (804) (804) (804) (804) (804)
Common Stock to be acquired
by 1996 MRP(7).................. (325) (938) (938) (938) (938)
Common Stock to be acquired
by 1998 MRP(8).................. -- (1,173) (1,380) (1,587) (1,825)
---------- --------- --------- --------- ---------
Total stockholders' equity............ $30,602 $57,151 $62,039 $66,927 $72,551
======= ======= ======= ======= =======
(footnotes on following page)
11
- ----------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or results of
operations of the Savings Bank or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the 1998 Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
if the aggregate number of Conversion Shares issued in the Conversion and
Reorganization is 15% above the maximum of the Estimated Valuation Range.
See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Conversion Shares
are not reflected. Such withdrawals will reduce pro forma deposits by the
amounts thereof.
(4) Represents outstanding balance on third party loan used by ESOP to acquire
shares of Savings Bank Common Stock in the MHC Reorganization and the
Additional Offering.
(5) The Savings Bank's authorized capital will consist solely of 1,000 shares
of common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
Conversion and Reorganization.
(6) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank will be prohibited
from paying any dividend that would reduce its regulatory capital below
the amount in the liquidation account, which will be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account
Holders at the consummation of the Conversion and Reorganization and
adjusted downward thereafter as such account holders reduce their balances
or cease to be depositors. See "THE CONVERSION AND REORGANIZATION --
Effects of Conversion and Reorganization on Depositors and Borrowers of
the Savings Bank -- Liquidation Account."
(7) Pro forma consolidated capitalization reflects funding of remaining shares
authorized for awards under the 1996 MRP through open market purchases of
Common Stock.
(8) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed 1998 MRP, of a number of shares equal to 4% of the shares of
Conversion Shares issued in the Conversion and Reorganization at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range. The issuance of such additional Conversion Shares from
authorized but unissued shares of Common Stock would dilute the ownership
interest of stockholders by 2.08%. The shares are reflected as a reduction
of stockholders' equity. See "RISK FACTORS -- Possible Dilutive Effect of
Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Management Recognition Plan." The 1998 MRP is subject to
stockholder approval, which is expected to be sought at a meeting to be
held no earlier than six months following consummation of the Conversion
and Reorganization.
12
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro
forma capital position relative to its capital requirements at September 30,
1997. The amount of capital infused into the Savings Bank for purposes of the
following table is 50% of the net proceeds of the Conversion Offerings. For
purposes of the table below, the cost of the shares acquired by the 1996 MRP
(completed subsequent to September 30, 1997), and expected to be acquired by the
1998 MRP is deducted from pro forma regulatory capital. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
"USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA." The definitions of the
terms used in the table are those provided in the OTS capital regulations as
discussed under "REGULATION -- Federal Regulation of the Savings Bank -- Capital
Requirements."
PRO FORMA AT SEPTEMBER 30, 1997
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
1,466,250 Conversion Shares 1,725,000 Conversion Shares
September 30, 1997 at $20.00 Per Share at $20.00 Per Share
--------------------------- --------------------------- ---------------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
GAAP capital(2).......... $30,602 11.91% $41,811 15.59% $43,945 16.26%
Tangible capital(2)...... 27,321 10.71 38,530 14.47 40,664 15.15
Tangible capital requirement 3,825 1.50 3,994 1.50 4,026 1.50
-------- ----- -------- ----- ------- -----
Excess................... $23,496 9.21% $34,536 12.97% $36,638 13.65%
======= ===== ======= ===== ======= =====
Core capital(2).......... $27,321 10.71% $38,530 14.47% $40,664 15.15%
Core capital requirement(3) 7,651 3.00 7,987 3.00 8,051 3.00
-------- ----- -------- ----- ------- -----
Excess................... $19,670 7.71% $30,543 11.47% $32,613 12.15%
======= ===== ======= ===== ======= =====
Total capital(4)......... $29,067 18.35% $40,276 25.08% $42,410 26.33%
Risk-based
capital requirement..... 12,670 8.00 12,849 8.00 12,883 8.00
------- ----- ------- ----- ------- -----
Excess................... $16,397 10.35% $27,426 17.08% $29,527 18.33%
======= ===== ======= ===== ======= =====
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
1,983,750 Conversion Shares 2,281,312 Conversion Shares
at $20.00 Per Share at $20.00 Per Share
--------------------------- -----------------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets (1) Amount Assets (1)
------ ----------- ------ -----------
GAAP capital(2).......... $46,078 16.91% $48,533 17.65%
Tangible capital(2)...... 42,797 15.82 45,252 16.58
Tangible capital requirement 4,058 1.50 4,094 1.50
------- ----- -------- -----
Excess................... $38,739 14.32% $41,158 15.08%
======= ===== ======= =====
Core capital(2).......... $42,797 15.82% $45,252 16.58%
Core capital requirement(3) 8,115 3.00 8,189 3.00
------- ----- -------- -----
Excess................... $34,682 12.82% $37,063 13.58%
======= ===== ======= =====
Total capital(4)......... $44,543 27.59% $46,998 29.02%
Risk-based
capital requirement..... 12,918 8.00 12,957 8.00
------- ----- ------- -----
Excess................... $31,625 19.59% $34,041 21.02%
======= ===== ======= =====
(1) Based upon total tangible assets of $255.0 million at September 30, 1997
and $266.2 million, $268.4 million, $270.5 million and $273.0 million at
the minimum, midpoint, maximum, and maximum, as adjusted, of the Estimated
Valuation Range, respectively, for purposes of the tangible capital
requirement, upon total adjusted assets of $255.0 million at September 30,
1997 and $266.2 million, $268.2 million, $270.5 million and $273.0 million
at the minimum, midpoint, maximum, and maximum, as adjusted, of the
Estimated Valuation Range, respectively, and upon risk-weighted assets of
$158.4 million at September 30, 1997 and $160.6 million, $161.0 million,
$161.5 million and $162.0 million at the minimum, midpoint, maximum, and
maximum, as adjusted, of the Estimated Valuation Range, respectively, for
purposes of the risk-based capital requirement.
(2) A $2.1 million investment in non-includable subsidiaries, a $1.0 million
deduction associated with the limited partnership interest discussed under
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Equity Investment in
Limited Partnership" and an unrealized gain on securities
available-for-sale, net of taxes, of $188,000 account for the difference
between generally accepted accounting principals ("GAAP") capital and both
tangible capital and core capital.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
13
PRO FORMA DATA
Under the Plan of Conversion, the Conversion Shares must be sold at a
price equal to the estimated pro forma market value of the MHC and the Savings
Bank, as converted, based upon an independent valuation. The Estimated Valuation
Range as of December 5, 1997, when multiplied by approximately 53.02%, which
represents the MHC's percentage ownership interest in the Savings Bank, is from
a minimum of $29.3 million to a maximum of $39.7 million with a midpoint of
$34.5 million or, at a price per share of $20.00, a minimum number of 1,466,250
Conversion Shares, a maximum number of 1,983,750 Conversion Shares and a
midpoint of 1,725,000 Conversion Shares. The actual net proceeds from the sale
of the Conversion Shares cannot be determined until the Conversion and
Reorganization is completed. However, net proceeds set forth on the following
table are based upon the following assumptions: (i) Sandler O'Neill will receive
fees of $428,625, $506,250, $583,875 and $673,145 at the minimum, midpoint,
maximum and 15% above the Estimated Valuation Range, respectively (see "THE
CONVERSION AND REORGANIZATION -- Plan of Distribution and Selling Commissions);
(ii) all of the Conversion Shares will be sold in the Subscription and Direct
Community Offerings; and (iii) Conversion and Reorganization expenses, excluding
the fees paid to Sandler O'Neill, will total approximately $560,000 at each of
the minimum, midpoint, maximum and 15% above the Estimated Valuation Range.
Actual expenses may vary from this estimate, and the fees paid will depend upon
the percentages and total number of shares sold in the Subscription, Direct
Community and Syndicated Community Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the year
ended September 30, 1997 has been calculated as if the Conversion and
Reorganization had been consummated at the beginning of the period and the
estimated net proceeds received by the Holding Company and the Savings Bank had
been invested at 5.68% at the beginning of the period, which represents the
yield on the one-year U.S. Treasury Bill at September 30, 1997. Although OTS
regulations require the use of the arithmetic average of the average yield on
all interest-earning assets and the average rate paid on all deposits in
computing investment returns on net proceeds, the yield on the one-year U.S.
Treasury Bill is used because management believes it more appropriately reflects
a market rate of return. As discussed under "USE OF PROCEEDS," the Holding
Company expects to retain 50% of the net proceeds of the Conversion Offerings
from which it will refinance the existing third-party ESOP loan, with an
outstanding balance of $804,000 at September 30, 1997. The new loan is expected
to have a 10-year term and an interest rate equal to the prime rate as published
in The Wall Street Journal on the closing date of the Conversion and
Reorganization (currently 8.50%). A pro forma after-tax return of 3.69% is used
for both the Holding Company and the Savings Bank for the period, after giving
effect to an incremental combined federal and state income tax rate of 35.0% for
the year ended September 30, 1997. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the number
of shares of Common Stock indicated in the footnotes to the table. Per share
amounts have been computed as if the Common Stock had been outstanding at the
beginning of the period or at September 30, 1997, but without any adjustment of
per share historical or pro forma stockholders' equity to reflect the earnings
on the estimated net proceeds.
The following table summarizes the historical net income and
stockholders' equity of the Savings Bank and the pro forma consolidated net
income and stockholders' equity of the Holding Company for the periods and at
the date indicated, based on the minimum, midpoint and maximum of the Estimated
Valuation Range and based on a 15% increase in the maximum of the Estimated
Valuation Range. No effect has been given to: (i) the shares to be reserved for
issuance under the 1998 Stock Option Plan, which is expected to be voted upon by
stockholders at a meeting to be held no earlier than six months following
consummation of the Conversion and Reorganization; (ii) withdrawals from deposit
accounts for the purpose of purchasing Conversion Shares in the Conversion
Offerings; (iii) the issuance of shares from authorized but unissued shares to
the 1998 MRP, which is expected to be voted upon by stockholders at a meeting to
be held no earlier than six months following consummation of the Conversion and
Reorganization; or (iv) the establishment of a liquidation account for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1998 Stock Option Plan" and
"THE CONVERSION AND REORGANIZATION -- Stock Pricing, Exchange Ratio and Number
of Shares Issued."
The following pro forma information may not be representative of the
financial effects of the Conversion and Reorganization at the date on which the
Conversion and Reorganization actually occurs and should not be taken as
indicative of future results of operations. Stockholders' equity represents the
difference between the stated amounts of consolidated assets and liabilities of
the Holding Company computed according to GAAP. Stockholders' equity has not
been increased or decreased to reflect the difference between the carrying value
of loans and other assets and market value. Stockholders' equity is not intended
to represent fair market value nor does it represent amounts that would be
available for distribution to stockholders in the event of liquidation.
14
At or For the Year Ended September 30, 1997
----------------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range(1)
--------- --------- --------- ------------------
1,466,250 1,725,000 1,983,750 2,281,312
Shares Shares Shares Shares
at $20.00 at $20.00 at $20.00 at $20.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
Gross proceeds.............................. $29,325 $34,500 $39,675 $45,626
Less: estimated expenses.................... 990 1,070 1,150 1,240
-------- -------- -------- --------
Estimated net proceeds...................... 28,335 33,430 38,525 44,386
Less: Common Stock to be acquired by
1998 MRP........................... (1,173) (1,380) (1,587) (1,825)
Add: Assets consolidated from MHC(10)..... -- -- -- --
--------- --------- --------- ---------
Net investable proceeds................ $27,162 $32,050 $36,938 $42,561
======= ======= ======= =======
Consolidated net income:
Historical................................. 1,728 1,728 1,728 1,728
Pro forma income on net proceeds(2)........ 1,003 1,183 1,364 1,571
Pro forma 1996 MRP adjustments(3).......... (84) (84) (84) (84)
Pro forma 1998 MRP adjustments(4).......... (152) (179) (206) (237)
-------- -------- -------- --------
Pro forma net income..................... $2,495 $2,648 $2,802 $2,978
====== ====== ====== ======
Consolidated net income per share(5)(6):
Historical................................. $0.64 $0.55 $0.47 $0.41
Pro forma income on net proceeds........... 0.38 0.38 0.37 0.38
Pro forma 1996 MRP adjustments(3).......... (0.03) (0.03) (0.02) (0.02)
Pro forma 1998 MRP adjustments(4).......... (0.06) (0.06) (0.06) (0.06)
------- ------- ------- -------
Pro forma net income per share........... $0.93 $0.84 $0.76 $0.71
===== ===== ===== =====
Consolidated stockholders' equity (book value):
Historical(10)............................. $31,731 $31,731 $31,731 $31,731
Estimated net proceeds..................... 28,335 33,430 38,525 44,386
Less: Common Stock to be acquired by
ESOP............................. (804) (804) (804) (804)
Common Stock acquired by
1996 MRP......................... (938) (938) (938) (938)
Common Stock to be acquired by
1998 MRP(4)...................... (1,173) (1,380) (1,587) (1,825)
--------- --------- --------- ---------
Pro forma stockholders' equity(7)........ $57,151 $62,039 $66,927 $72,550
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(4)(10).......................... $11.48 $ 9.76 $ 8.48 $ 7.38
Estimated net proceeds..................... 10.24 10.27 10.29 10.32
Less: Common Stock acquired by
ESOP............................. (0.29) (0.25) (0.21) (0.19)
Common Stock acquired by
1996 MRP(3)...................... (0.34) (0.29) (0.25) (0.22)
Common Stock to be acquired by
1998 MRP(3)....................... (0.42) (0.42) (0.42) (0.42)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9)$20.67 $19.07 $17.89 $16.87
====== ====== ====== ======
Purchase Price as a percentage of pro forma
stockholders' equity per share............. 96.76% 104.88% 111.79% 118.55%
===== ====== ====== ======
Purchase Price as a multiple of pro forma
net income per share....................... 21.51x 23.81x 26.32x 28.17x
===== ===== ===== =====
(footnotes on following page)
15
(1) Gives effect to the sale of an additional 297,562 Conversion Shares in
the Conversion and Reorganization, which may be issued to cover an
increase in the pro forma market value of the MHC and the Savings Bank, as
converted, without the resolicitation of subscribers or any right of
cancellation. The issuance of such additional shares will be conditioned
on a determination by RP Financial that such issuance is compatible with
its determination of the estimated pro forma market value of the MHC and
the Savings Bank, as converted. See "THE CONVERSION AND REORGANIZATION --
Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Conversion Shares. Since funds on deposit at the
Savings Bank may be withdrawn to purchase shares of Common Stock (which
will reduce deposits by the amount of such purchases), the net amount of
funds available to the Savings Bank for investment following receipt of
the net proceeds of the Conversion Offerings will be reduced by the amount
of such withdrawals.
(3) In calculating the pro forma effect of the 1996 MRP, the table reflects
the effect of completed open market purchases of all remaining 1996 MRP
shares subsequent to September 30, 1997. Pro forma net income adjustments
reflect additional expenses required for a full-year amortization above
the actual expense (equal to $79,000 on a pre-tax basis) recorded for the
year ended September 30, 1997. Pro forma stockholders' equity adjustments
take into account 1996 MRP stock purchases as of September 30, 1997 and
open market purchases of all remaining shares completed subsequent to
September 30, 1997. As all shares for the 1996 MRP have, subsequent to
September 30, 1997, have been purchased in open market transactions, no
assumptions have been made for the effects of issuing authorized but
unissued shares. The total additional estimated pre-tax 1996 MRP expenses
not already reflected in net income was equal to $129,000 at each of the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the year ended September 30, 1997. No effect has been
given to the shares reserved for issuance under the 1996 Stock Option
Plan. See footnote 4 for an analysis of the combined effects of the 1996
and 1998 Stock Option Plans.
(4) In calculating the pro forma effect of the 1998 MRP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the 1998 MRP at the beginning of the period presented in open
market purchases at the Purchase Price, that 20% of the amount contributed
was an amortized expense during such period, and that the combined federal
and state income tax rate is 35.0%. The issuance of authorized but
unissued shares of the Common Stock instead of open market purchases would
dilute the voting interests of existing stockholders by approximately
2.08% and pro forma net income per share would be $0.92, $0.83, $0.77 and
$0.71 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the year ended September 30, 1997,
respectively, and pro forma stockholders' equity per share would be
$20.66, $19.09, $17.94 and $16.93 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range at September 30,
1997, respectively. Shares issued under the 1998 MRP vest 20% per year
and, for purposes of this table, compensation expense is recognized on a
straight-line basis over each vesting period. In the event the fair market
value per share is greater than $20.00 per share on the date shares are
awarded under the 1998 MRP, total 1998 MRP expense would increase. See
"RISK FACTORS --Expenses Associated with MRP." The total estimated 1998
MRP expense was multiplied by 20% (the total percent of shares for which
expense is recognized in the first year) resulting in pre-tax 1998 MRP
expense of $235,000, $276,000, $317,000 and $365,000 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range for the year ended September 30, 1997, respectively. No effect has
been given to the shares reserved for issuance under the 1996 Stock Option
Plan (previously approved by stockholders) or the proposed 1998 Stock
Option Plan. Under the 1996 Stock Option Plan, 58,500 shares were reserved
for issuance and options have been granted thereunder at an exercise price
of $25.25 per share. If stockholders approve the 1998 Stock Option Plan
following the Conversion and Reorganization, the Holding Company will have
reserved for issuance under the 1998 Stock Option Plan authorized but
unissued shares of Common Stock representing an amount of shares equal to
10% of the Conversion Shares sold in the Conversion Offerings. If all of
the options were to be exercised utilizing these authorized but unissued
shares rather than treasury shares which could be acquired (for both the
1996 and 1998 Stock Option Plans), the voting interests of existing
stockholders would be diluted by approximately 8.25%. Assuming stockholder
approval of the 1998 Stock Option Plan, and that all options under the
1996 and 1998 Stock Option Plans were exercised at
16
September 30, 1997 at an exercise price of $25.25 (to be adjusted pursuant
to the final Exchange Ratio) and $20.00 per share, respectively, pro forma
net earnings per share would be $0.90, $0.81, $0.75 and $0.70,
respectively, for the year ended September 30, 1997, and pro forma
stockholders' equity per share would be $20.38, $18.87, $17.76 and $16.79,
respectively, for the year ended September 30, 1997 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1998 Stock
Option Plan" and "-- Benefits -- Management Recognition Plan" and "RISK
FACTORS -- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 2,696,003,
3,171,768, 3,647,533 and 4,194,664 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the year ended
September 30, 1997, respectively, which includes the Conversion Shares
sold in the Conversion and Reorganization, less the number of shares
assumed to be held by the ESOP not committed to be released within the
first year following the Conversion and Reorganization.
(6) Historical per share amounts have been computed as if the Conversion
Shares expected to be issued in the Conversion and Reorganization had been
outstanding at the beginning of the period or on the date shown, but
without any adjustment of historical net income or historical retained
earnings to reflect the investment of the estimated net proceeds of the
sale of shares in the Conversion and Reorganization, the ongoing ESOP
expense, or the proposed 1998 MRP expense described above.
(7) "Book value" represents the difference between the stated amounts of the
Savings Bank's assets and liabilities. The amounts shown do not reflect
the liquidation account which will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in the
Conversion and Reorganization, or the federal income tax consequences of
the restoration to income of the Savings Bank's special bad debt reserves
for income tax purposes which would be required in the unlikely event of
liquidation. See "THE CONVERSION AND REORGANIZATION -- Effects of
Conversion and Reorganization to Stock Form on Depositors and Borrowers of
the Savings Bank" and "TAXATION." The amounts shown for book value do not
represent fair market values or amounts distributable to stockholders in
the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 2,765,481,
3,253,507, 3,741,533 and 4,302,763 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
(10) Assets of the MHC (other than investment in the Savings Bank) consist
solely of $47,000 of cash on deposit at the Savings Bank, which amount is
eliminated in consolidation.
17
CONVERSION SHARES TO BE PURCHASED
BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth, for each director and executive officer
of the Savings Bank (and their associates) and for all of the directors and
executive officers as a group, (i) Exchange Shares to be held upon consummation
of the Conversion and Reorganization based upon their beneficial ownership of
Public Savings Bank Shares as of September 30, 1997, (ii) proposed purchases of
Conversion Shares, assuming shares available to satisfy their subscriptions, and
(iii) total shares of Common Stock to be held upon consummation of the
Conversion and Reorganization, in each case assuming that 1,725,000 Conversion
Shares are sold at the midpoint of the Estimated Valuation Range. No individual
has entered into a binding agreement with respect to such intended purchases,
and, therefore, actual purchases could be more or less than indicated below.
Directors and executive officers and their associates may not purchase in excess
of 31% of the shares sold in the Conversion and Reorganization. Directors,
officers and employees will pay the Purchase Price ($20.00 per share) for each
share for which they subscribe.
Number of
Exchange Proposed Purchase of Total Common Stock
Shares to Conversion Shares to be Held
be Held Number Number Percentage
(1)(2) Amount of Shares of Shares of Total
------------ ------ --------- --------- --------
Harold A. Pickens, Jr. 22,657 $100,000 5,000 27,657 *
Chairman of the Board
Robert W. Orr 31,533 40,000 2,000 33,533 1.0%
President and Managing Officer
Martha S. Clamp 13,485 100,000 5,000 18,485 *
Director
Jack F. McIntosh 12,253 100,000 5,000 17,253 *
Director
Charles W. Fant, Jr. -- -- -- -- --
Director
Cordes G. Seabrook, Jr. 19,082 100,000 5,000 24,082 *
Director
Jim Gray Watson 6,891 100,000 5,000 11,891 *
Director
Richard R. Ballenger 4,801 20,000 1,000 5,801 *
Director
F. Stevon Kay 15,419 100,000 5,000 20,419 *
Director
Thomas C. Hall 25,167 10,000 500 25,667 *
Treasurer and Chief Financial Officer
Barry C. Visioli 22,442 27,500 1,375 23,817 *
Senior Vice President
All officers and directors 214,443 1,038,500 51,925 266,368 8.2
as a group (21 persons)
- ----------
(1) Excludes shares which may be received upon the exercise of outstanding
stock options granted under the 1993 Stock Option Plan (which are
immediately exercisable) and the 1996 Stock Option Plan (which are
subject to pro rata vesting over a five year period beginning April 8,
1998). Based upon the Exchange Ratio of 2.15625 Exchange Shares for
each Public Savings Bank Share at the midpoint of the Estimated
Valuation Range, the following persons named in the table would have
options to purchase Common Stock as follows: Mr. Pickens, 4,730 shares;
Mr. Orr, 22,101 shares; Ms. Clamp, 4,730 shares; Mr. McIntosh, 4,730
shares; Mr. Fant, 4,730 shares; Mr. Seabrook, 4,730 shares; Mr. Watson,
4,730 shares; Mr. Ballenger, 4,728 shares; Mr. Kay, 4,728 shares; Mr.
Hall, 27,060; Mr. Visioli, 27,060 and all directors and executive
officers as a group, 133,859 shares.
(2) Excludes stock options that may be granted under the 1998 Stock Option
Plan and awards that may be granted under 1998 MRP if such plans are
approved by stockholders at an annual or special meeting at least six
months following the Conversion and Reorganization. See "MANAGEMENT OF
THE SAVINGS BANK -- Benefits."
(*) Less than 1%.
18
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of Perpetual Bank,
A Federal Savings Bank and Subsidiary for the fiscal years ended September 30,
1997, 1996 and 1995 have been audited by KPMG Peat Marwick LLP, Greenville,
South Carolina, independent auditors, whose report thereon appears elsewhere in
this Prospectus. These statements should be read in conjunction with the
Consolidated Financial Statements and related Notes included elsewhere herein.
1997 1996 1995
---- ---- ----
Interest income:
Loans................................................. $14,406,160 $11,510,222 $9,828,507
Mortgage-backed securities............................ 3,302,541 3,071,524 3,418,355
Other investment...................................... 687,736 339,222 296,164
----------- ----------- -----------
Total interest income............................... 18,396,437 14,920,968 13,543,026
----------- ----------- -----------
Interest expense:
Interest on deposits:
Transaction accounts................................ 547,795 467,395 361,486
Passbook accounts................................... 590,738 622,008 742,786
Certificate accounts................................ 6,979,888 5,679,186 4,904,477
---------- ---------- ----------
Total interest on deposits.......................... 8,118,421 6,768,589 6,008,749
Interest on borrowings................................ 1,377,960 656,203 2,752,221
---------- ---------- ----------
Total interest expense.............................. 9,496,381 7,424,792 8,760,970
---------- ---------- ----------
Net interest income.................................... 8,900,056 7,496,176 4,782,056
Provision for loan losses.............................. 655,000 349,250 362,000
---------- ---------- -----------
Net interest income after provision for loan losses.... 8,245,056 7,146,926 4,420,056
---------- ---------- ----------
Other income:
Loan and deposit account service charges.............. 1,526,208 1,268,722 770,212
Gain (loss) on sale of securities, net................ (307,534) 53,963 1,777,471
Gain on sale of real estate, net...................... 19,894 79,034 47,544
Gain on sale of loans, net............................ 12,509 (23,328) 66,785
Gain (loss) on sale of fixed assets, net.............. (191,894) 23,724 150
Other................................................. 795,773 548,945 568,607
---------- ---------- ----------
Total other income.................................. 1,854,956 1,927,336 3,230,769
---------- ---------- ----------
General and administrative expenses:
Salaries and employee benefits........................ 3,926,888 3,056,726 2,801,915
Occupancy............................................. 486,776 386,796 343,762
Furniture and equipment expense....................... 746,182 542,481 464,250
FDIC insurance premiums............................... 151,903 1,292,262 330,444
Advertising........................................... 351,694 390,721 475,007
Data processing....................................... 299,951 237,980 204,463
Office supplies....................................... 386,525 332,794 269,302
Other................................................. 1,095,927 654,304 650,902
---------- ---------- ----------
Total general and administrative.................... 7,445,846 6,894,064 5,540,045
---------- ---------- ----------
Income before income taxes............................. 2,654,166 2,180,198 2,110,780
Income taxes........................................... 925,803 755,811 193,742
---------- ---------- ----------
Net income............................................. $1,728,363 $1,424,387 $1,917,038
========== ========== ==========
Earnings per share:
Net income............................................. $1.15 $0.95 $1.27
Weighted average shares outstanding.................... 1,505,432 1,504,601 1,504,059
See accompanying Notes to Consolidated Financial Statements.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
For much of its existence, the Savings Bank's investment powers were
limited primarily to fixed-rate mortgage loans, share loans and investment
securities funded by a limited range of deposit products. Since 1989, however,
when applicable law and regulations permitted savings associations to expand the
scope of their operations, the Savings Bank has gradually refocused operations
to become a retail, community-oriented institution by, among other things, (i)
diversifying its balance sheet by placing increasing emphasis on construction,
commercial real estate, commercial business and consumer lending and (ii)
increasing core deposits through the marketing of checking accounts. The goal of
these strategies is to diversify and maximize the Savings Bank's earnings
stream, while attempting to minimize interest rate risk. See "RISK FACTORS --
Certain lending Risks" and "-- Interest Rate Risk."
The Savings Bank's current business plan is focused on a continuation
of its retail community banking strategy. Key aspects of the business plan
include: (i) continued balance sheet diversification by pursuing commercial real
estate lending, consumer lending and commercial business lending in its primary
market area; (ii) building its retail customer base by increasing consumer
checking accounts and expanding its retail branch network in Anderson, South
Carolina, and surrounding communities; (iii) preserving asset quality by
emphasizing residential mortgage lending in its primary market area, as well as
purchasing loans from selected South Carolina lenders; (iv) maintaining a
substantial portfolio of mortgage-backed securities and investment grade CMOs to
limit credit risk exposure and to earn a spread on excess investable funds; and
(v) offering non-deposit investment products though a wholly-owned service
corporation (see "BUSINESS OF THE SAVINGS BANK -- Subsidiary Activities").
The Savings Bank has taken traditional steps to implement its retail
community banking strategy. The Savings Bank opened a branch office in Seneca,
South Carolina, in December 1996 and a new branch office in Anderson, South
Carolina, in October 1997. Also, during 1996, the Savings Bank established a
customer call center at the main office as a vehicle to cross-sell the Savings
Bank's products and services to its customers. The opening of the Seneca branch
office and the establishment of the customer call center resulted in increased
general and administrative expenses in recent periods. The opening of the new
Anderson branch office is expected to increase general and administrative
expenses in future periods; however, management is unable to quantify accurately
the magnitude of such increases. Furthermore, the Savings Bank has actively
marketed checking accounts through a free checking program, which has led to an
increase in checking account balances and an increase in service charges and fee
income, but has also led to an increase in general and administrative expenses
relating to marketing and promotion of such accounts. See "BUSINESS OF THE
SAVINGS BANK -- Deposit Activities and Other Sources of Funds."
The Savings Bank has also used non-traditional vehicles to implement
its retail community banking strategy. The Savings Bank has an equity
investment, through a service corporation, in a regional mortgage company, from
which the Savings Bank currently purchases one- to four-family mortgage loans
and commercial real estate loans secured by properties located in South
Carolina. See "BUSINESS OF THE SAVINGS BANK -- Subsidiary Activities." In
addition, the Savings Bank has an equity investment in a limited partnership
that invests in mortgage servicing rights. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Equity Investment in Limited Partnership" and "RISK
FACTORS -- Certain Lending Risks -- Purchased Loans and Interest Rate Risk."
Upon consummation of the Conversion and Reorganization, the Holding
Company will be a unitary savings and loan holding company. Under current law, a
unitary saving and loan holding company is not subject to any activity
restrictions. See "REGULATION -- Savings and Loan Holding Company Regulations."
The Holding Company may consider exploring opportunities to expand into
non-traditional lines of business, such as securities brokerage, insurance
agency and real estate development activities, to the extent permitted by
applicable law. Currently, the Holding Company has no definitive plans to expand
into such non-traditional lines of business. The Savings Bank, however,
currently conducts real estate development activities through subsidiaries. See
"BUSINESS OF THE SAVINGS BANK -- Subsidiary Activities."
20
Average Balance Sheet
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, ratio of interest-earning assets to interest-bearing liabilities and net
interest margin. Average balances for 1977 have been calculated using daily
balances, while average balances for 1996 and 1995 have been calculated using
monthly balances. Management does not believe that the use of monthly balances
rather than daily balances for 1996 and 1995 has caused any material
inconsistencies in the information presented.
Years Ended September 30,
-------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ----- ------- --------- -----
(Dollars in Thousands)
Interest-earning assets(1):
Mortgage loans.................................... $118,030 $9,790 8.29% $91,535 $7,984 8.72%
Commercial real estate loans...................... 23,098 2,102 9.10 14,045 1,338 9.52
Commercial other.................................. 6,114 592 9.68 4,468 395 8.84
Consumer loans.................................... 17,755 1,922 10.82 18,563 1,793 9.66
--------- -------- --------- -------
Total loans...................................... 164,997 14,406 8.73 128,611 11,510 8.95
Mortgage-backed securities and CMOs................ 48,638 3,303 6.79 44,793 3,072 6.86
Investment securities.............................. 5,271 339 6.43 896 65 7.25
Interest-bearing deposits.......................... 4,485 251 5.60 4,593 193 4.20
Other earning assets............................... 1,311 97 7.40 1,102 81 7.35
--------- -------- --------- -------
Total interest-earning assets................... 224,702 18,396 8.19 179,995 14,921 8.29
Non-interest-earning assets:
Mutual funds(3)................................... -- --
Office properties and equipment, net.............. 5,645 4,048
Real estate, net.................................. 56 20
Other non-interest-earning assets................. 8,072 5,339
--------- ---------
Total assets.................................... $238,475 $189,402
======== ========
Interest-bearing liabilities:
Savings........................................... 22,923 590 2.57 23,482 622 2.65
Negotiable order of withdrawal
("NOW") accounts................................. 35,196 548 1.56 28,412 468 1.65
Certificates of deposit........................... 123,407 6,980 5.56 102,721 5,679 5.53
--------- -------- --------- -------
Total deposits.................................. 181,526 8,118 4.47 154,615 6,769 4.38
Other interest-bearing liabilities................ 23,951 1,378 5.75 12,531 656 5.24
--------- -------- --------- -------
Total interest-bearing liabilities.............. 205,477 9,496 4.62 167,146 7,425 4.44
(table continued on next page)
1995
-----------------------------
Interest
Average and Yield/
Balance Dividends Cost
------- --------- -----
Interest-earning assets(1):
Mortgage loans.................................... $88,153 $7,292 8.28%
Commercial real estate loans...................... 5,583 524 9.39
Commercial other.................................. 2,061 219 10.63
Consumer loans.................................... 16,697 1,794 10.74
--------- --------
Total loans...................................... 112,494 9,829 8.74
--------- --------
Mortgage-backed securities and CMOs................ 48,263 3,418 7.08
Investment securities.............................. 246 9 3.66
Interest-bearing deposits.......................... 1,682 127 7.55
Other earning assets............................... 2,205 160 7.26
--------- --------
Total interest-earning assets................... 164,890 13,543 8.21
Non-interest-earning assets:
Mutual funds(3)................................... 33,578
Office properties and equipment, net.............. 3,887
Real estate, net.................................. 382
Other non-interest-earning assets................. 4,801
---------
Total assets.................................... $207,538
========
Interest-bearing liabilities:
Savings........................................... 26,885 743 2.76
Negotiable order of withdrawal
("NOW") accounts................................. 20,923 362 1.73
Certificates of deposit........................... 99,653 4,904 4.92
--------- --------
Total deposits.................................. 147,461 6,009 4.07
Other interest-bearing liabilities................ 43,036 2,752 6.39
--------- --------
Total interest-bearing liabilities.............. 190,497 8,761 4.60
21
Years Ended September 30,
-------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
----------------------------- ----------------------------------
(Dollars in Thousands)
Non-interest-bearing liabilities:
Non-interest-bearing deposits..................... 397 1,186
Other liabilities................................. 2,693 1,827
--------- ---------
Total liabilities............................... 3,090 170,159
Stockholders' equity............................... 29,908 19,243
--------- ---------
Total liabilities and stockholders' equity...... $238,475 $189,402
======== ========
Net interest income................................ $8,900 $7,496
====== ======
Interest rate spread............................... 3.57% 3.85%
==== ====
Net interest margin................................ 3.96% 4.16%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities............. 109.36% 107.69%
====== ======
----------------------------------
1995
----------------------------------
Interest
Average and Yield/
Balance Dividends Cost
----------------------------------
Non-interest-bearing liabilities:
Non-interest-bearing deposits..................... 909
Other liabilities................................. --
--------
Total liabilities............................... 191,406
Stockholders' equity............................... 16,132
--------
Total liabilities and stockholders' equity...... $207,538
========
Net interest income................................ $4,782
======
Interest rate spread............................... 3.61%
====
Net interest margin................................ 2.90%
====
Ratio of average interest-earning assets to
average interest-bearing liabilities............. 86.56%
=====
- ----------
(1) Excludes interest on loans 90 days or more past due.
(2) Represents mutual funds which do not pay interest or dividends.
22
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates
indicated, the weighted average yields earned on the Savings Bank's assets, the
weighted average interest rates paid on the Savings Bank's liabilities, together
with the net yield on interest-earning assets.
At Year Ended
September 30, September 30,
1997 1997 1996 1995
------------ ---- ---- ----
Weighted average yield earned on:
Loan portfolio........................................... 8.49% 8.73% 8.95% 8.74%
Mortgage-backed securities, CMOs and
adjustable-rate mortgage ("ARM") mutual fund............ 7.25 6.79 6.86 7.08
Investment securities and interest-earning deposits...... 7.03 6.21 4.70 7.05
All interest-earning assets.............................. 8.20 8.19 8.29 8.21
Weighted average rate paid on:
Deposits................................................. 4.64 4.47 4.38 4.07
FHLB advances and other borrowings....................... 6.24 5.53 5.24 6.39
All interest-bearing liabilities......................... 4.75 4.60 4.44 4.60
Interest rate spread (spread between weighted
average rate on all interest-earning assets
and all interest-bearing liabilities).................. 3.45 3.57 3.85 3.61
Interest rate margin (net interest income as a
percentage of average interest-earning assets)......... N/A 3.96 4.16 2.90
23
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Savings Bank. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) the net change (the sum of the prior columns).
Years Ended September 30, Years Ended September 30,
1997 Compared to September 30, 1996 Compared to September 30,
1996 Increase (Decrease) Due to 1995 Increase (Decrease) Due to
--------------------------------- --------------------------------
Rate/ Rate/
--------------------------------- --------------------------------
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans.................. 2,311 (392) (113) 1,806 280 397 15 692
Commercial real estate.......... 862 (60) (39) 763 794 8 12 814
Commercial other................ 146 38 14 198 256 (37) (43) 176
Consumer loans.................. (78) 216 (9) 129 200 (180) (20) --
------- ------ ------ ------- ------ ------- ----- ----
Total loans.................... 3,241 (198) (147) 2,896 1,530 188 (36) 1,682
Mortgage-backed securities and
CMOs........................... 263 (30) (2) 231 (246) (109) 8 (347)
Investment securities........... 320 (8) (38) 274 23 9 25 57
Mutual funds.................... -- -- -- -- -- -- -- --
Interest-earning deposits....... (5) 65 (2) 58 220 (57) (98) 65
Other interest-earning assets... 16 -- -- 16 (80) 2 (1) (79)
------- -------- -------- ------- ------- ------ ------ -------
Total net change in income on
interest-earning assets........ 3,800 (143) (182) 3,475 1,312 89 (23) 1,378
------- ------ ------ ------- ------ ------ ------ -------
Interest-bearing liabilities:
Savings accounts................ (15) (18) -- (33) (94) (31) 4 (121)
NOW accounts.................... 112 (25) (6) 81 129 (17) (6) 106
Certificates of deposit......... 1,144 131 26 1,301 151 605 19 775
------- ------ ------ ------- ------ ------ ----- -------
Total deposits................... 1,241 88 20 1,349 186 557 17 760
------- ------ ------ ------- ------ ------ ----- -------
Other interest-bearing liabilities 648 37 37 722 (1,951) (498) 353 (2,096)
------- ------ ------ ------- -------- ------- ----- --------
Total net change in expense on
interest-bearing liabilities... 1,889 125 57 2,071 (1,765) 59 370 (1,336)
------- ------ ------ ------- ------- ----- ----- --------
Net change in net interest income $1,911 $(268) $(239) $1,404 $3,077 $ 30 $(393) $2,714
====== ===== ===== ====== ====== ===== ====== ======
Years Ended September 30,
1995 Compared to September 30,
1994 Increase (Decrease) Due to
----------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
Interest-earning assets:
Mortgage loans.................. 882 97 14 993
Commercial real estate.......... 313 19 39 371
Commercial other................ 134 8 19 161
Consumer loans.................. (375) 330 (65) (110)
----- ---- ------ ------
Total loans.................... 954 454 7 1,415
Mortgage-backed securities and
CMOs........................... (615) 725 (130) (20)
Investment securities........... 7 (7) (4) (4)
Mutual funds.................... 229 (15) (229) (15)
Interest-earning deposits....... (83) 198 (122) (7)
Other interest-earning assets... 50 27 22 99
------- ------ ------ --------
Total net change in income on
interest-earning assets........ 520 1,439 (491) 1,468
-------- ------ ------- --------
Interest-bearing liabilities:
Savings accounts................ (173) (11) 2 (182)
NOW accounts.................... 189 (24) (21) 144
Certificates of deposit......... 178 784 36 998
------- ------ ------- -------
Total deposits................... 194 749 17 960
------- ------ ------- --------
Other interest-bearing liabilities 1,290 274 613 2,177
------- ------ ------ --------
Total net change in expense on
interest-bearing liabilities... 1,484 1,023 630 3,137
------- ------ ------ --------
Net change in net interest income $ (964) $ 416 $(1,121) $(1,669)
======= ===== ======== ========
- ----------
(1) Excludes interest on loans 90 days or more past due.
24
Comparison of Financial Condition at September 30, 1997 and 1996
Total assets increased 22.5% from $209.8 million at September 30, 1996
to $257.0 million at September 30, 1997 primarily as a result of an increase in
loans receivable and an increase in investment securities available- for-sale.
These increases were funded primarily by deposit growth, FHLB advances and
repayment of mortgage-backed securities.
Loans receivable increased 27.0% from $140.8 million at September 30,
1996 to $178.8 million at September 30, 1997. The increase in loans receivable
resulted from growth in all loan categories, except construction loans which
declined slightly from $19.5 million at September 30, 1997 to $17.1 million at
September 30, 1997.
In December 1996, the Savings Bank invested in a limited partnership
that invests in mortgage loan servicing rights. At September 30, 1997, the value
of the limited partnership investment was $5.0 million. See "BUSINESS OF THE
SAVINGS BANK -- Lending Activities -- Equity Investment in Limited Partnership"
for further information. The value of this investment would be adversely
impacted in the event of a decrease in market interest rates. See "RISK FACTORS
- -- Interest Rate Risk."
Investment securities available-for-sale increased from $2.5 million at
September 30, 1996 to $11.3 million at September 30, 1997. In an effort to
increase the average portfolio yield, the Savings Bank purchased additional
investment securities during the year ended September 30, 1997, including a $4.0
million FHLB bond with a yield of 6.30% at September 30, 1997 and a final
maturity of October 2001. The Savings Bank also invested $3.1 million to
purchase a $15.0 million FHLB zero coupon bond with a coupon rate of 8.00%,
callable in July 2000, and with a final maturity of July 2017, and $3.0 million
to purchase a second $15.0 million FHLB zero coupon bond with a coupon rate of
8.20%, callable in September 1998, and with a final maturity of July 2017.
Although these long-term zero coupon bonds offer higher yields, an increase in
market interest rates would have a material adverse effect on their value. The
Savings Bank restructured its mortgage-backed securities portfolio by selling
(i) $19.8 million of fixed-rate CMOs yielding 6.25% and with final maturities
ranging from 2001 through 2005, incurring a loss on sale of $280,000 and (ii)
$3.1 million of fixed-rate mortgage-backed securities yielding 6.32%, incurring
a loss on sale of $28,000. The Savings Bank purchased $8.0 million of adjustable
rate CMOs with a yield of 7.03% at September 30, 1997 and $10.7 million of
fixed-rate mortgage-backed securities with a yield of 7.33% at September 30,
1997. See "RISK FACTORS -- Interest Rate Risk." At September 30, 1997, the
Savings Bank's CMO portfolio consisted of U.S. Government agency issues, as well
as investment grade private issues that are generally riskier because they are
not guaranteed or insured by the U.S. Government. See "BUSINESS OF THE SAVINGS
BANK -- Investment Activities."
Real estate held for development increased from $1.4 million at
September 30, 1996 to $2.3 million at September 30, 1997 primarily as a result
of the acquisition of the Meadows Development project. See "BUSINESS OF THE
SAVINGS BANK -- Subsidiary Activities" for further information regarding the
Meadows Development project.
Premises and equipment, net, increased from $4.9 million at September
30, 1996 to $6.3 million at September 30, 1997 primarily as a result of the
construction of the Perpetual Square branch office in Anderson, South Carolina
($606,000), and the purchase of new hardware and software for the in-house
computer system ($1.1 million). The Perpetual Square branch office was opened in
October 1997 to replace a leased branch office located in a Winn Dixie
supermarket. The lease was scheduled to expire on March 1, 1998. The supermarket
branch office was closed in connection with the opening of the Perpetual Square
branch office and the supermarket branch personnel were transferred to the
Perpetual Square branch office. Although no assurances can be given regarding
the future operations of the Perpetual Square branch office, the Savings Bank
believes that its better facilities and location will contribute to an increase
in both loan and deposit volume. See "BUSINESS OF THE SAVINGS BANK --
Properties."
25
Deposits increased 25.5% from $160.2 million at September 30, 1996 to
$201.0 million at September 30, 1997 primarily as a result of an increase in
one-year certificate of deposits. The Savings Bank aggressively marketed special
seven-month and 13-month certificates of deposit to attract operating funds.
Although no assurances can be given, based on management's experience and
familiarity with the customers involved and the Savings Bank's pricing policy
relative to that of its competitors, management believes that a significant
portion of such deposits will remain with the Savings Bank.
Stockholders' equity increased from $29.1 million at September 30, 1996
to $30.6 million at September 30, 1997 as a result of retained net income, less
dividends paid on the Public Savings Bank Shares.
Comparison of the Year Ended September 30, 1997 to the Year Ended September 30,
1996
Net Income. Net income increased 21.4% from $1.4 million, or $0.95 per
share, in 1996 to $1.7 million, or $1.15 per share, in 1997. Net income for 1996
was adversely affected by the one-time SAIF recapitalization assessment. See "--
General and Administrative Expenses" below. Without this one-time assessment,
1996 net income would have been $2.0 million, or $1.36 per share.
Net Interest Income. Net interest income increased 18.7% from $7.5
million in 1996 to $8.9 million in 1997. Interest income on loans increased
25.2% from $11.5 million to $14.4 million as the average balance of loans
receivable increased 28.3% from $128.6 million in 1996 to $165.0 in 1997
primarily as a result of growth in loan originations and purchases. Interest
income on mortgage-backed securities increased 6.5% from $3.1 million in 1966 to
$3.3 million in 1997 as the average balance of mortgage-backed securities
increased 8.5% from $44.8 million in 1996 to $48.6 million in 1997. Interest
income on other investments increased 102.9% from $339,000 in 1996 to $688,000
in 1997 as the average balance of other interest earning assets increased 68.2%
from $6.6 million in 1996 to $11.1 million in 1997 primarily as a result of
investment securities purchases.
Interest Expense. Interest expense on deposits increased 19.1% from
$6.8 million in 1996 to $8.1 million in 1997 as the average balance of deposits
increased 17.4% from $154.6 million in 1996 to $181.5 million in 1997 and the
weighted average cost of deposits increased from 4.38% for 1996 to 4.47% for
1997. The increase in the average balance of deposits and the increase in the
weighted average cost of deposits resulted primarily from the promotion of
short-term certificates of deposit. See "-- Comparison of Financial Condition at
September 30, 1997 and 1996" for further discussion.
Interest expense on borrowings increased 110.1% from $656,000 for
fiscal 1996 to $1.4 million for fiscal 1997 as the average borrowings increased
from $12.5 million in 1996 to $24.9 million in 1997 in order to fund loan
originations and purchases.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered
adequate by management to provide for management's best estimate of inherent
loan losses. In determining the adequacy of the allowance for loan losses,
management evaluates various factors, including the market value of the
underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, loss
experience, delinquency trends and economic conditions. Management evaluates the
carrying value of loans periodically and the allowance for loan losses is
adjusted accordingly. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Allowance for Loan Losses" and Note 4 to Notes to Consolidated Financial
Statements.
The provision for loan losses increased 87.7% from $349,000 in 1996 to
$655,000 in 1997. Management deemed the increase necessary in light of net
charge-offs of $304,000 and the growth in the loan portfolio during 1997,
particularly in inherently riskier commercial real estate loans and consumer
loans. At September 30, 1997, the allowance for loan losses was 1.04% of total
loans and was deemed adequate by management at that date.
26
Other Income. Total other income decreased $72,000 from 1996 to 1997.
Loan and deposit account service charges increased $257,000 from $1.3 million in
1996 to $1.5 million in 1997 as a result of an increase in the number of
checking accounts. Other income increased $271,000 from $525,000 in 1996 to
$796,000 in 1997 primarily as a result of income of $185,000 from the investment
in a limited partnership that invests in mortgage servicing rights (see
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Loan Purchases and, Sales
and Servicing") and gains from sale of real estate held for development (see
"BUSINESS OF THE SAVINGS BANK -- Subsidiary Activities"). These increases were
offset by losses on sale of investments of $308,000 in connection with the
restructuring of the investment securities portfolio and the write-off of
$192,000 of computer hardware and software as a result of the upgrading of the
computer system. See "-- Comparison of Financial Condition at September 30, 1997
and 1996" for information regarding the restructuring of the investment
securities portfolio.
General and Administrative Expenses. General and administrative
expenses increased $552,000 from $6.9 million in 1996 to $7.4 million in 1997.
Salaries and employee benefits increased 28.5% from $3.1 million in 1996 to $3.9
million in 1997 as a result of the opening of the Seneca branch office, staffing
a call center at the main office, and expenses associated with the ESOP and the
1996 MRP. Occupancy expense increased $100,000, or 25.8%, primarily as a result
of the opening of the Seneca branch office. Furniture and equipment expense
increased 37.6% from $542,000 in 1996 to $746,000 in 1997 as a result of the
purchase of additional computer equipment and equipping the Seneca branch office
and the call center. The FDIC insurance premiums decreased $1.1 million from
$1.3 million in 1996 to $152,000 in 1997, due to the one-time SAIF
recapitalization assessment of $946,000 incurred in September 1996. Prior to the
SAIF recapitalization, the Savings Bank's total annual deposit insurance
premiums amounted to 0.23% of assessable deposits. Effective January 1, 1997,
the rate decreased to 0.065% of assessable deposits. See "REGULATION -- Federal
Regulation of Savings Associations -- Federal Deposit Insurance Corporation."
Advertising expense decreased 10.0% from $391,000 in 1996 to $352,000 in 1997 as
a result of the winding down of the free checking advertising campaign that
began in October 1994. Data processing expense increased 26.1% from $238,000 in
1996 to $300,000 in 1997 primarily as a result of the new Seneca branch office
and the new call center. Office supplies increased 16.2% from $333,000 in 1996
to $387,000 in 1997 primarily as a result of the opening of the Seneca branch
office.
Other operating expenses increased 68.2% from $654,000 in 1996 to $1.1
million in 1997 as a result of acquiring the telephone system for the call
center and sales training for the call center staff ($159,000), closing costs
paid by the Savings Bank as part of a home equity loan promotion ($42,000),
increased professional fees related to regular regulatory and securities
compliance matters ($39,000), the replacement of the Savings Bank's in-house
courier with an armored car courier service in conjunction with the opening of
the Seneca branch office, which is located approximately 30 miles outside of
Anderson ($34,000), and increased postage expense associated with the increased
number of checking accounts ($26,000).
Income Taxes. Income taxes increased 22.5% from $756,000 in 1996 to
$926,000 in 1997 due to an increase in income before taxes. The effective tax
rate was 35% for both 1996 and 1997.
Comparison of the Year Ended September 30, 1996 to the Year Ended September 30,
1995
Net Income. Net income decreased from $1.9 million, or $1.27 per share,
in 1995 to $1.4 million, or $0.95 per share, in 1996 primarily as a result of
the one-time SAIF recapitalization assessment of $946,000 ($615,000 after tax).
Without this one-time assessment, 1996 net income would have been $2.0 million,
or $1.36 per share. Net income for 1995 benefitted from a one-time gain of $1.8
million on the sale of mutual funds.
Net Interest Income. Net interest income increased 56.3% from $4.8
million in 1996 to $7.5 million in 1996 primarily as a result of decreased
interest expense on borrowings used to purchase mutual fund shares in 1995. The
mutual funds were sold in 1995 at a gain of $1.8 million. These funds were
selected for their capital appreciation characteristics; no interest income was
recognized on the mutual fund investments in 1995. Interest
27
income on loans increased 17.3% from $9.8 million in 1995 to $11.5 in 1996 as
the average balance of loans receivable increased 14.3% from $112.5 million in
1995 to $128.6 million in 1996. Interest income on mortgage-backed securities
decreased 9.7% from $3.4 million in 1995 to $3.1 million in 1996 as the average
balance of mortgage-backed securities decreased 7.8% from $48.3 million in 1995
to $44.8 million in 1996.
Interest Expense. Interest expense on deposits increased 13.3% from
$6.0 million in 1995 to $6.8 million in 1996 as the average balance of deposits
increased from $147.5 million in 1995 to $154.6 million in 1996 and the weighted
average cost of deposits increased from 4.07% in 1995 to 4.38% in 1996 as a
result of an increase in market interest rates. Management attributes the
increase in average deposits to normal deposit growth.
Interest expense on borrowings decreased $2.1 million from $2.8 million
in 1995 to $656,000 in 1996 as the average borrowings decreased from $43.0
million in 1995 to $12.5 million in 1996. The FHLB advances were used to fund
the mutual fund investment in 1995.
Provision for Loan Losses. The provision for loan losses decreased 3.3%
from $362,000 in 1995 to $349,000 in 1996. The provision for loan losses
remained relatively constant between 1995 and 1996, which resulted in a ratio of
allowance for loan losses to total loans of 1.08% at both September 30, 1996 and
1995. At September 30, 1996, the allowance for loan losses was 1.08% of total
loans and was deemed adequate by management at that date .
Other Income. Other income decreased $1.3 million from $3.2 million in
1995 to $1.9 million in 1996, primarily as a result of capital gains on the sale
of mutual funds of $1.8 million in 1995 and a 68.8% increase in loan and deposit
account service charges from $770,000 in 1995 to $1.3 million in 1996 as a
result of an increase in the number of deposit accounts.
General and Administrative Expenses. General and administrative
expenses increased 25.5% from $5.5 million in 1995 to $6.9 million in 1996.
Salaries and employee benefits increased 9.1% primarily as a result of increases
in clerical staff needed to service the increased number of checking accounts.
Office occupancy increased 12.5% primarily as a result of general building
maintenance costs. Furniture and equipment expense increased 16.8% from $464,000
in 1995 to $542,000 in 1996 as a result of an increase in depreciation expense
related to the purchase of check imaging equipment. FDIC insurance premiums
increased 293.9% from $330,000 in 1995 to $1.3 million in 1996 as a result of
the one-time SAIF recapitalization assessment of $946,000. Advertising expense
decreased 17.7% from $475,000 in 1995 to $391,000 in 1996 primarily as a result
of the opening of the Northtowne office in 1995. Office supplies increased 23.4%
from $269,000 in 1995 to $332,000 in 1996 primarily as a result of the increase
in the number of checking accounts.
Income Taxes. Income taxes increased from $194,000 (effective tax rate
of 9.2%) in 1995 to $756,000 (effective tax rate of 35%) in 1996 due to an
increase in income before taxes. The lower effective tax rate in 1995 resulted
from the use of capital loss carryforwards to offset $1.8 million in capital
gains income generated by the sale of mutual funds in 1995.
Market Risk and Asset and Liability Management
Market risk is the risk of loss from adverse changes in market prices
and rates. The Savings Bank's market risk arises principally from interest rate
risk inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Savings Bank manages other risks, such as credit quality and
liquidity risk, in the normal course of business, management considers interest
rate risk to be its most significant market risk that could potentially have the
largest material effect on the Savings Bank's financial condition and results of
operations. Other types of market risks, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the Savings
Bank's business activities.
28
The Savings Bank's profitability is affected by fluctuations in market
interest rates. Management's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings. A sudden and substantial
increase in interest rates may adversely impact the Savings Bank's earnings to
the extent that the interest rates on interest-earning assets and interest-
bearing liabilities do not change at the same rate, to the same extent or on the
same basis. The Savings Bank monitors the impact of changes in interest rates on
its net interest income using a test that measures the impact on net interest
income and net portfolio value of an immediate change in interest rates in 100
basis point increments. Net portfolio value is defined as the net present value
of assets, liabilities and off-balance sheet contracts. At September 30, 1997,
the Savings Bank's calculations based on the information and assumptions
produced for the analysis, suggested that a 200 basis point increase in rates
would reduce net interest income over a twelve-month period by 5.0% and reduce
net portfolio value by 17.0% while a 200 basis point decline in rates would
increase net interest income over a twelve-month period by 1.0% and increase net
portfolio value by 13.0% in the same period.
The following table is provided to the Savings Bank by the OTS and
illustrates the percent change in NPV as of September 30, 1997, based on OTS
assumptions. No effect has been given to any steps that the Savings Bank may
take to counteract the effect of the interest rate movements presented in the
table.
Basis
Point ("bp") NPV as Percent of
Change Net Interest Income Net Portfolio Value Present Value of Assets
In Rates Amount % Change Amount $ Change % Change NPV Ratio Change
- -------- ------ -------- ------ -------- -------- --------- ------
400 bp $7,297 (14)% 24,652 $(14,153) (36)% 9.99% (476)bp
300 bp 7,699 (9) 28,465 (10,340) (27) 11.32 (334)
200 bp 7,998 (5) 32,270 (6,536) (17) 12.60 (207)
100 bp 8,219 (3) 35,681 (3,124) (8) 13.70 (97)
0 bp 8,447 -- 38,806 -- -- 14.66 --
(100 bp) 8,476 -- 41,335 2,529 7 15.41 75
(200 bp) 8,494 1 43,782 4,977 13 16.11 145
(300 bp) 8,305 (2) 46,941 8,136 21 17.00 234
(400 bp) 7,765 (8) 51,390 12,585 32 18.24 358
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Furthermore, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates likely could
deviate significantly from those assumed in calculating the table. Therefore,
the data presented in the table should not be relied upon as necessarily
indicative of actual results.
29
The following table shows the Savings Bank's financial instruments
that are sensitive to changes in interest rates, categorized by expected
maturity, and the instruments' fair values at September 30, 1997. Market risk
sensitive instruments are generally defined as on- and off-balance sheet
derivatives and other financial instruments.
Average Within One One Year After 3 Years After 5 Years
Rate Year To 3 Years To 5 Years To 10 Years
------- ---------- ---------- ------------- -------------
(Dollars in thousands)
Interest-Sensitive Assets:
Loans receivable..................... 8.49% $78,083 $48,576 $37,552 $11,569
Mortgage-backed securities........... 7.25 15,444 7,597 6,872 5,950
Investments and other
interest-earning assets............. 7.01 14,458 -- 5,004 6,332
FHLB stock........................... 7.25 -- -- -- --
Interest-Sensitive Liabilities:
Checking accounts.................... 1.57 8,043 8,050 2,072 7,471
Savings accounts..................... 2.61 4,855 7,124 3,959 8,422
Certificate accounts................. 5.82 115,651 22,347 665 171
Borrowings........................... 6.24 10,000 5,000 -- --
Off-Balance Sheet Items:
Commitments to extend credit......... 8.75 11,028
Unused lines of credit............... 9.50 16,913
Beyond 10
Years Total Fair Value
--------- ----- ----------
Interest-Sensitive Assets:
Loans receivable..................... $5,235 $181,015 $180,718
Mortgage-backed securities........... -- 35,863 35,863
Investments and other
interest-earning assets............. -- 25,794 25,794
FHLB stock........................... 1,650 1,650 1,650
Interest-Sensitive Liabilities:
Checking accounts.................... 11,812 37,808 37,871
Savings accounts..................... -- 24,340 24,397
Certificate accounts................. -- 138,834 139,273
Borrowings........................... -- 15,000 15,070
Off-Balance Sheet Items:
Commitments to extend credit......... 11,028 11,028
Unused lines of credit............... 16,913 16,913
30
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are deposits, repayment of
loan principal (including mortgage-backed securities ("MBSs" and CMOs) and, to a
lesser extent, sales of mortgage-backed securities available for sale,
maturities of investment securities, and short-term investments and operations.
While scheduled
31
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, general
economic conditions, and competition. The Savings Bank attempts to price its
deposits to meet its asset/liability objectives discussed above, consistent with
local market conditions. Excess balances are generally invested in overnight
funds. In addition, the Savings Bank is eligible to borrow funds from the FHLB
of Atlanta.
Under OTS regulations, a member thrift institution is required to
maintain an average daily balance of liquid assets (cash, certain time deposits
and savings accounts, bankers' acceptances, and specified U.S. Government, state
or federal agency obligations and certain other investments) equal to a monthly
average of not less than a specified percentage of its net withdrawable accounts
plus short-term borrowings. The current liquidity requirement is 4.0%. Monetary
penalties may be imposed for failure to meet liquidity requirements. The Savings
Bank's liquidity ratio at September 30, 1997 was 5.64%.
The primary investing activity of the Savings Bank is lending. During
the years ended September 30, 1997 and 1996, the Savings Bank originated $77.3
million and $68.3 million, respectively, of loans, of which $5.7 million in 1997
and $9.6 million in 1996 were sold to the Federal Home Loan Mortgage Corporation
("FHLMC"). The retained originations were funded by $59.5 million and $27.0
million, respectively, in principal repayments on loans and mortgage-backed
securities.
Liquidity management is both a short-and long-term responsibility of
the Savings Bank's management. The Savings Bank adjusts its investments in
liquid assets based upon management's assessment of (i) expected loan demand,
(ii) projected loan sales, (iii) expected deposit flows, (iv) yields available
on interest-bearing deposits, and (v) liquidity of its asset/liability
management program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If
the Savings Bank requires funds beyond its ability to generate them internally,
it has additional borrowing capacity with the FHLB and collateral eligible for
repurchase agreements.
The Savings Bank anticipates that it will have sufficient funds
available to meet current loan commitments. At September 30, 1997, the Savings
Bank had outstanding commitments to originate loans (including commitments to
fund letters of credit) of $27.9 million. The Savings Bank expects to fund these
commitments with funds received from normal operations. See Note 17 to
Consolidated Financial Statements.
Certificates of deposit scheduled to mature in one year or less at
September 30, 1997 totaled $115.7 million. Although no assurances can be given,
based upon management's experience and familiarity with the customers involved
and the Savings Bank's pricing policy relative to that of its perceived
competitors, management believes that a significant portion of such deposits
will remain with the Savings Bank.
Since 1980, the Savings Bank has diversified its lending to include
home equity, second mortgage and consumer loans. This diversification has been
designed to increase earnings and reduce interest rate risk. The Savings Bank
has also increased the origination of home equity and second mortgage loans
secured by one- to four-family dwellings and intends to reduce the balance of
its MBSs by deploying funds into more profitable whole loans and becoming more
commercial bank-like in lending philosophy and direction. The Savings Bank will
continue to divest itself of mortgage-backed securities, when opportunities
arise to invest such funds in higher yielding whole loans. These changes in
lending and investment strategy will reduce the Savings Bank's liquidity in the
future as lower-yielding, more liquid assets are redeployed into higher-yielding
assets.
The Savings Bank must maintain minimum capital standards as promulgated
by the FDIC and the OTS which are: (1) a leverage limit requiring all thrift
institutions to maintain core capital in an amount not less than 3% of the
institution's total assets; (2) a tangible capital requirement of not less than
1.5% of total assets; and (3) a risk-based capital requirement of not less than
8% of the institution's total assets, substantially the same as the risk-based
capital requirements for national banks. The Savings Bank met all regulatory
capital requirements at
32
September 30, 1997 and 1996. See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL
COMPLIANCE."
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Stock-Based Compensation. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," establishes financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting
method are required to disclose in a footnote to the financial statements pro
forma net income and, if presented, earnings per share, as if this statement had
been adopted. The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. Management of the
Savings Bank uses the intrinsic value method.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement applies prospectively
to transactions occurring after December 31, 1996, and establishes new standards
that focus on control whereas, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The adoption of SFAS No. 125 did
not have a material impact on the Savings Bank's results of operations or
financial position.
Deferral of the Effective Date of Certain Provisions of SFAS No. 125.
In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." SFAS No. 127 defers for one year the effective date of portions of
SFAS No. 125 that address secured borrowings and collateral for all
transactions. Additionally, SFAS No. 127 defers for one year the effective date
of transfers of financial assets that are part of repurchase agreements,
securities lending and similar transactions.
Earnings Per Share. In February 1997, the FASB issued SFAS No. 128,
"Earnings Per Share." SFAS 128 applies to entities with publicly traded common
stock or potential common stock and is effective for financial statements for
periods ending after December 15, 1997, including interim periods. SFAS 128
simplifies the standards for computing earnings per share ("EPS") previously
found in Accounting Principles Board ("APB") Opinion 15, "Earnings Per Share."
It replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all companies with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. The Savings
Bank's present computation of diluted EPS under APB Opinion 15 is applied
against a materiality test of 3%. For financial statements issued by the Savings
Bank after December 15, 1997, the materiality test will no longer apply and the
Savings Bank will report basic and diluted EPS for each period presented as well
as the further reconciliations required by SFAS 128. Although earlier
application is not permitted, SFAS 128 will require restatement of all prior-
period EPS data presented.
Disclosure of Information about Capital Structure. In February 1997,
the FASB also issued SFAS No. 129, "Disclosure of Information about Capital
Structure." The purpose of SFAS 129 is to consolidate existing disclosure
requirements for ease of retrieval. SFAS 129 contains no change in disclosure
requirements for
33
companies, such as the Savings Bank that were subject to the previously existing
requirements. It applies to all entities and is effective for financial
statement issued for periods ending after December 15, 1997.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." The purpose of SFAS 130 is to address
concerns over the practice of reporting elements of comprehensive income
directly in equity. This SFAS requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with the
other financial statements. This statement is effective for periods beginning
after December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. The Savings Bank will
adopt the provisions of this SFAS for fiscal year 1998.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement applies to all public
entities. The provisions of SFAS 131 require certain disclosures regarding
material industry segments within an entity. SFAS 131 is not expected to have a
material impact on the Savings Bank.
Year 2000 Considerations
Many existing computer programs use only two digits to identify a year
in the date datum field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Savings Bank has an in-house computer system to process customer
records and monetary transactions, post deposit and general ledger entries and
record activity in installment lending, loan servicing and loan originations.
Although no assurances can be given, based on internal testing procedures and
conversations with the software provider, the Savings Bank does not expect that
the cost of addressing any Year 2000 issue will be a material event or
uncertainty that would cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition. Incomplete or untimely
compliance, however, would have a material adverse effect on the Savings Bank,
the dollar amount of which cannot be accurately quantified at this time because
of the inherent variables and uncertainties involved.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with GAAP which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the changes in relative purchasing power of money
over time due to inflation. The primary impact of inflation on operations of the
Savings Bank is reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
34
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation
at the direction of the Savings Bank on November 5, 1997 for the purpose of
becoming a holding company for the Savings Bank upon completion of the
Conversion and Reorganization. As a result of the Conversion and Reorganization,
the Savings Bank will be a wholly-owned subsidiary of the Holding Company and
all of the issued and outstanding capital stock of the Savings Bank will be
owned by the Holding Company.
Business
Prior to the Conversion and Reorganization, the Holding Company has not
engaged and will not engage in any significant activities other than of an
organizational nature. Upon completion of the Conversion and Reorganization, the
Holding Company's primary business activity will be the ownership of the
outstanding capital stock of the Savings Bank. In the future, the Holding
Company may acquire or organize other operating subsidiaries, although there are
no current plans, arrangements, agreements or understandings, written or oral,
to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Savings Bank
with the payment of appropriate rental fees, as required by applicable law and
regulations.
Since the Holding Company will only hold the outstanding capital stock
of the Savings Bank upon consummation of the Conversion and Reorganization, the
competitive conditions applicable to the Holding Company will be the same as
those confronting the Savings Bank. See "BUSINESS OF THE SAVINGS BANK --
Competition."
BUSINESS OF THE SAVINGS BANK
General
The Savings Bank operates, and intends to continue to operate, as a
community oriented financial institution and is devoted to serving the needs of
its customers. The Savings Bank's business consists primarily of attracting
retail deposits from the general public and using those funds to originate real
estate loans. See "-- Lending Activities."
Market Area
The Savings Bank considers Anderson and Oconee Counties, South
Carolina, as its primary market area. Additional loan origination demand is
generated from customers living in contiguous counties. The Savings Bank also
purchases loans secured by properties in South Carolina located outside its
primary market area.
The Savings Bank's main office and four branch offices are located in
the City of Anderson, the county seat and largest city in Anderson County, South
Carolina. Anderson County is included in the Greenville/Spartanburg metropolitan
statistical area. The Cities of Greenville and Spartanburg are located 30 and 60
miles northeast of Anderson, respectively, and Atlanta,the closest major city,
is 120 miles to the southwest.
Much of Anderson County is rural and roughly half of the land area is
used for agricultural purposes. Anderson County has benefitted from the growth
of the Greenville metropolitan area and is experiencing significant residential
and commercial development along Interstate 85, a major transportation route
that crosses through
35
Anderson County. Major area employers include BMW Manufacturing Corp., Hoechst
Celenese Corporation, Owens Corning and Michelin Tire. Oconee is a smaller but
rapidly growing county located west of Anderson County. According to recent
government statistics, the September 1997 unemployment rates for Anderson and
Oconee Counties were both less than the South Carolina and national averages.
Lending Activities
General. Historically, the Savings Bank's principal lending activity
has been the origination of residential real estate loans for the purpose of
constructing or financing one- to four-family residential properties. At
September 30, 1997, the Savings Bank's loan portfolio consisted of $118.3
million of one- to four-family residential loans, $17.1 million of construction
loans, $19.2 million of consumer loans, $27.0 million of commercial real estate
loans, and $7.2 million of commercial business loans. In recent periods, the
Savings Bank has increased its investment in commercial real estate loans,
commercial business loans and construction loans.
36
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio at the dates indicated.
At September 30,
----------------------------------------------------------------------
1997 1996 1995
------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Mortgage loans:
One- to four-family(1)........................... $118,279 66.16% $ 91,186 64.78% $ 81,226 69.70%
Multi-family..................................... 1,245 0.70 1,010 0.72 630 0.54
Commercial real estate........................... 26,976 15.09 17,009 12.08 7,355 6.31
Construction..................................... 17,145 9.59 19,509 13.86 11,523 9.89
--------- ------ -------- ------ -------- ------
Total mortgage loans........................ 163,645 91.54 128,714 91.44 100,734 86.44
--------- ------ -------- ------ -------- ------
Commercial business loans........................ 7,182 4.02 5,529 3.93 3,657 3.13
Consumer loans:
Home equity and second mortgage................. 3,405 1.90 5,036 3.58 7,535 6.47
Lines of credit................................. 9,156 5.12 6,713 4.77 6,279 5.39
Automobile loans................................ 3,540 1.98 2,677 1.90 1,438 1.23
Other........................................... 3,072 1.72 2,490 1.77 2,293 1.97
-------- ------ -------- ------ ------- ------
Total consumer loans........................ 19,173 10.72 16,916 12.02 17,545 15.06
-------- ------ -------- ------ ------- ------
Total loans................................. 190,000 106.28 151,159 107.39 121,936 104.63
Less:
Undisbursed proceeds for loans in process........ 8,985 (5.03) 8,866 (6.30) 4,119 (3.53)
Unearned discounts............................... 357 -- -- -- -- --
Allowance for loan losses........................ 1,886 (1.05) 1,535 (1.09) 1,278 (1.10)
-------- ------- --------- ------ --------- -------
Net loans receivable........................ $178,772 100.00% $140,758 100.00% $116,539 100.00%
======== ====== ======== ====== ======== ======
1994 1993
------------------- ----------------------
Amount Percent Amount Percent
(Dollars in Thousands)
Mortgage loans:
One- to four-family(1)........................... $ 77,624 74.03% $ 68,461 70.58%
Multi-family..................................... -- -- -- --
Commercial real estate........................... 5,158 4.92 2,584 2.66
Construction..................................... 7,159 6.83 5,112 5.27
-------- ------ -------- ------
Total mortgage loans........................ 89,941 85.78 76,157 78.51
-------- ------ -------- ------
Commercial business loans........................ 1,222 1.17 222 0.23
Consumer loans:
Home equity and second mortgage................. 10,071 9.60 14,956 15.42
Lines of credit................................. 6,045 5.77 5,915 6.10
Automobile loans................................ 735 0.70 942 0.97
Other........................................... 1,837 1.75 2,168 2.23
-------- ------ -------- ------
Total consumer loans........................ 18,688 17.82 23,981 24.72
-------- ------ -------- ------
Total loans................................. 109,851 104.77 100,360 103.46
Less:
Undisbursed proceeds for loans in process........ 4,037 (3.85) 2,471 (2.55)
Unearned discounts............................... -- -- -- --
Allowance for loan losses........................ 962 (0.92) 884 (0.91)
--------- ------- --------- -------
Net loans receivable........................ $104,852 100.00% $ 97,005 100.00%
======== ====== ======== ======
- ----------
(1) Includes construction loans converted to permanent loans and participation
loans.
37
One- to Four-Family and Multi-Family Mortgage Loans. The Savings Bank
originates permanent conventional mortgage loans secured by one- to four-family
residential properties with original loan-to-value ratios up to 90% of the
appraised value or the purchase price of the property, whichever is less. At
September 30, 1997, the Savings Bank had $118.3 million, or 66% of total loans,
in one- to four-family mortgage loans. The Savings Bank requires hazard
insurance on the property securing the loan. All one- to four-family mortgage
loans require a title examination or abstract of title. Title insurance is
required on all fixed-rate mortgage loans so that they may be sold in the
secondary market. One- to four-family mortgage loans are generally underwritten
to conform to FHLMC guidelines. Loan to value ratios are limited to 80% but may
be increased to 95%, provided that private mortgage insurance coverage is
obtained for amounts over 80%.
The Savings Bank offers both fixed-rate mortgages and ARM loans with
terms of 15 to 30 years. At September 30, 1997, ARM loans totalled $45.6
million, or 38.5% of the one- to four-family loan portfolio. The Savings Bank
offers four conventional ARM loans: a one year ARM loan with annual adjustment
periods indexed to the One Year Treasury Bill; a three year ARM loan with annual
adjustment periods indexed to the Three Year Treasury Bill; a five year ARM loan
with annual adjustment periods indexed to the One Year Treasury Bill; and a ten
year ARM loan with annual adjustment periods indexed to the One Year Treasury
Bill. The one year ARM loan and the three year ARM loan provide that the amount
of any increase or decrease in the interest rate is limited to two percentage
points (upward or downward) per adjustment period and generally contain a 6%
maximum adjustment over the life of the loan. The five year ARM loan and the ten
year ARM loan provide that the amount of any increase or decrease in the
interest rate is limited to two percentage points (upward or downward) per
adjustment period and generally contain a 5% maximum adjustment over the life of
the loan. At September 30, 1997, the majority of the ARM loans in the Savings
Bank's portfolio, that were originated by the Savings Bank, were the three year
and five year varieties. If market interest rates increase, these rate
adjustment limitations may prevent such ARM loans from repricing to market
interest rates, which would have an adverse effect on net interest income.
Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the
level of interest rates, the expectations of changes in the level of interest
rates and the difference between the interest rates and loan fees for fixed-rate
mortgage loans and interest rates and loan fees for ARMs. Fixed-rate loans are
originated for sale in the secondary market, though loans with terms of 15 years
occasionally are retained in the Savings Bank's portfolio. The relative amount
of fixed-rate and ARM loans that can be originated at any time is largely
determined by the demand for each in the prevailing competitive environment.
In recent periods, the Savings Bank has purchased one- to four-family
mortgage loans from a mortgage banking company located in Hilton Head Island,
South Carolina, and a mortgage banking company located in Greenville, South
Carolina. These purchases account for a substantial portion of the growth in the
one- to four-family loan portfolio in recent periods. During the year ended
September 30, 1997, the Savings Bank purchased $23.6 million of one- to
four-family mortgage loans. Substantially all of these purchases were from the
Greenville mortgage company. In future periods, the Savings Bank expects that a
substantial portion of purchased loan volume will come from that company, rather
than the Hilton Head Island mortgage company, because of the increasing
competition in the Hilton Head Island market.
At September 30, 1997, the Savings Bank had $4.1 million of purchased
loans secured by residential properties on Hilton Head Island, South Carolina,
all of which were one year ARM loans. These loans were all purchased from the
same mortgage company, located on Hilton Head Island. Prior to purchase, the
Savings Bank reviews each loan for conformance to the Savings Bank's
underwriting criteria. At September 30, 1997, the average size of such loans was
approximately $238,000 and the largest loan had an outstanding balance of $1.3
million. Although all such loans were performing according to their terms at
September 30, 1997, they do possess certain risks due to the average size of
such loans and the location of the properties outside the Savings Bank's primary
market area. Subject to market conditions, the Savings Bank expects to purchase
additional such loans.
At September 30, 1997, the Savings Bank had $23.7 million of purchased
one- to four-family mortgage loans secured by residential properties located
primarily in Greenville, South Carolina. These loans were all
38
purchased from the mortgage company in which a service corporation subsidiary of
the Savings Bank has an equity investment. See "-- Subsidiary Activities." Prior
to purchase, the Savings Bank reviews each loan for conformity with the Savings
Bank's underwriting criteria. At September 30, 1997, the average size of such
loans was approximately $126,000. Subject to market conditions, the Savings Bank
expects to purchase additional such loans.
The Savings Bank does not actively solicit multi-family loans but
extends them as an accommodation to existing customers. At September 30, 1997,
multi-family loans totalled $1.2 million, or 0.7% of net loans receivable, and
consisted of two loans, the largest of which had an outstanding balance of
$240,000. All such loans are secured by properties located in the Savings Bank's
primary market area. At September 30, 1997, all multi-family loans were
performing according to their terms.
Construction Loans. The construction loan portfolio was $17.1 million,
or 9.6% of the total loan portfolio at September 30, 1997. The Savings Bank
intends to continue emphasizing and expanding this type of lending. Such loans
are primarily combined construction and permanent mortgage loans. The
construction portion of the loan is for a period of up to 12 months on an
interest only basis and at a maximum loan to value ratio of 95%. The permanent
mortgage is made for up to 30 years. Construction-permanent loans are made at
the same fixed- or adjustable-rates of interest that are offered for permanent
residential mortgage loans made by the Savings Bank. The majority of
construction loans are made against binding sales contracts for the home being
built. The Savings Bank also originates speculative construction loans to a
small number of residential builders in its primary market area well known to
the Savings Bank. At September 30, 1997, the Savings Bank had $17.1 million, or
9.59% of total loans, in construction loans, of which $6.4 million were
speculative constructive loans. During the year ended September 30, 1997, the
Savings Bank purchased speculative construction loans secured by one- to
four-family properties located on Hilton Head Island, South Carolina, in the
aggregate amount of $2.5 million, of which $343,000 was outstanding as of
September 30, 1997. All of these purchased construction loans were performing
according to their terms at September 30, 1997.
Construction lending generally is considered to involve a higher degree
of credit risk than long-term financing of residential properties. The risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction cost and the marketability of the property upon
completion of the project prove to be inaccurate, the Savings Bank may be
compelled to advance additional funds to complete the development. If the
borrower is unable to sell the completed project in a timely manner or obtain
adequate proceeds to repay the loan, the loan may become non-performing.
Furthermore, if the estimate of value proves to be inaccurate, the Savings Bank
may be confronted with, at or prior to the maturity of the loan, a project with
a value which is insufficient to assure full repayment. The ability of the
developer or builder to sell developed lots or completed dwelling units will
depend on, among other things, demand, pricing and availability of comparable
properties, and economic conditions.
The Savings Bank's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Among other things, the Savings
Bank considers evidence of the availability of permanent financing for the
borrower, the reputation of the borrower, the amount of the borrower's equity in
the project, the independent appraisal and review of cost estimates, the
pre-construction sale and leasing information, and the cash flow projections of
the borrower. In addition, except for the purchased construction loans on Hilton
Head Island, South Carolina, the majority of the construction loans granted by
the Savings Bank are secured by property in the Savings Bank's primary market
area. The Savings Bank reviews such purchased construction loans for conformity
with the Savings Bank's underwriting criteria before purchase.
Commercial Real Estate Loans. The Savings Bank originates and purchases
commercial real estate loans. Commercial real estate loans totalled $27.0
million, or 15.1% of the total loan portfolio, at September 30, 1997. Currently,
the Savings Bank originates commercial real estate loans only to select
borrowers known to the Savings Bank and secured by properties in its primary
market area and generally in amounts between $100,000 and
39
$500,000. The commercial real estate loan portfolio has increased in recent
periods from $17.0 million, or 12.1% of the total loan portfolio at September
30, 1996, to $27.0 million, or 15.1%, at September 30, 1997. The Savings Bank
intends to continue emphasizing and expanding this type of lending. At September
30, 1997, the largest commercial real estate loan originated by the Savings Bank
had an outstanding balance of $2.0 million and was secured by multiple units of
one- to- four family dwellings and land located in Anderson. The loan was
performing according to its terms at that date. At September 30, 1997, the
largest purchased commercial real estate loan had an outstanding balance of $1.5
million and was secured by a sub-division development located in Greenville,
South Carolina. The loan was performing according to its terms at that date.
Of primary concern in commercial real estate lending is the borrower's
creditworthiness and the feasibility and cash flow potential of the project. The
Savings Bank's income property collateral is not concentrated in any one
industry or area. Examples of the types of collateral securing the income
property loans include office buildings and residential rental properties. Loans
secured by income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are often dependent on successful operation or management of the
properties. As a result, repayment of such loans may be subject, to a greater
extent than residential real estate loans, to supply and demand in the market in
the type of property securing the loan and, therefore, may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced, the borrowers ability to repay the loan may be impaired.
Commercial Business Loans. At September 30, 1997, the Savings Bank had
$7.2 million of commercial business loans, which represented 4.0% of total
loans. Commercial business loans generally include equipment loans with terms of
up to five years and lines of credit secured by savings accounts and unsecured
line of credit. Such loans are generally made in amounts up to $100,000 and
carry adjustable rates of interest. The Savings Bank generally requires annual
financial statements from its commercial business borrowers and personal
guarantees if the borrower is a corporation. At September 30, 1997, the largest
outstanding commercial business loan was a $500,000 line of credit with an
outstanding balance of $237,000 that was secured by an assignment of residential
mortgages. The loan was performing according to its terms at that date.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
Consumer Loans. The Savings Bank originates a wide variety of consumer
loans, which are made primarily on a secured basis to existing customers.
Consumer loans include savings account loans, direct automobile loans, direct
boat loans, renewable lines of credit and unsecured loans. These loans are made
at both fixed- and variable-rates of interest, adjustable annually, and with
varying terms depending on the type of loan. In addition, the Savings Bank
offers unsecured consumer loans. Consumer loans totalled $19.2 million at
September 30, 1997, or 11% of the Savings Bank's total loan portfolio.
At September 30, 1997, the largest components of the consumer loan
portfolio were home equity and second mortgage loans and lines of credit. At
September 30, 1997, such loans totalled $12.6 million, or 7.0% of the total loan
portfolio. At September 30, 1997, commitments to extend credit under lines of
credit totalled $10.3 million.
40
Home equity and second mortgage loans are generally for the improvement
of residential properties. The majority of these loans are made to existing loan
customers and are secured by a first or second mortgage on residential property.
The Savings Bank actively solicits these types of loans by contacting their
borrowing customers directly. The loan-to-value ratio on these properties is
typically below 80%, including the first mortgage and home equity or second
mortgage loan. Home equity and second mortgage loans are typically variable rate
loans with a fixed payment that matures over 15 years. Rates adjust monthly;
however, the payment remains constant over the loan term and any rate adjustment
is reflected in an increase in the loan term. The interest rate is tied to the
prime lending rate.
Lines of credit are generally secured by a second mortgage on
residential property and are generally made to existing customers. Credit lines
are generally 80% of the appraised value of the collateral property. Terms range
from five to 15 years and the interest rate is generally tied to the prime
lending rate.
The Savings Bank views consumer lending as an important component of
its business operations because consumer loans generally have shorter-terms and
higher yields, thus reducing exposure to changes in interest rates. In addition,
the Savings Bank believes that offering consumer loans helps to expand and
create stronger ties to its customer base. The Savings Bank intends to continue
emphasizing this type of lending.
The Savings Bank employs strict underwriting standards for consumer
loans. These procedures include an assessment of the applicant's payment history
on other debts and ability to meet existing obligations and payments on the
proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, to the proposed loan amount. The Savings Bank
underwrites and originates all of its consumer loans internally, which
management believes limits exposure to credit risks relating to loans
underwritten or purchased from brokers or other outside sources.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by the borrower against the
Savings Bank as the holder of the loan, and a borrower may be able to assert
claims and defenses which it has against the seller of the underlying
collateral.
Loan Maturity
The following table sets forth certain information at September 30,
1997 regarding the dollar amount of loans maturing in the Savings Bank's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
41
Within One Year After 3 Years After 5 Years
One Year Through 3 Years Through 5 Years Through 10 Years Beyond 10 Years Total
-------- --------------- --------------- ---------------- --------------- -----
(In Thousands)
Residential mortgage(1).. $29,718 $34,977 $30,489 $10,267 $5,132 $110,583
Commercial real estate... 13,365 7,884 5,024 568 91 26,932
Commercial business...... 5,491 1,691 -- -- -- 7,182
Construction............. 16,698 447 -- -- -- 17,145
Automobile............... 203 1,350 1,939 48 -- 3,540
Savings account loans.... 1,089 144 88 12 12 1,345
Other.................... 11,519 2,083 12 674 -- 14,288
--------- --------- --------- --------- --------- ----------
Total loans......... $78,083 $48,576 $37,552 $11,569 $5,235 $181,015
======= ======= ======= ======= ====== ========
- ----------
(1) Includes one- to four-family and multi-family loans.
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In Thousands)
Residential mortgage(1)....... $48,713 $32,152
Commercial real estate........ 12,101 1,466
Commercial business........... 1,220 471
Construction.................. 447 --
Automobile.................... 3,337 --
Savings account loans......... 256 --
Other......................... 748 2,021
------- -------
Total.................... $66,822 $36,110
======= =======
- ----------
(1) Includes one- to four-family and multi-family loans.
Loan Soliciting and Processing. Loan originations come from a number of
sources. The Savings Bank's customary sources of loans are from realtors,
walk-in customers, referrals and existing customers. A formal business
development program has been implemented where loan officers and sales personnel
make regular sales calls on building contractors and realtors.
The Savings Banks' Loan Committee approves loan applications up to and
including $500,000. The Loan Committee is composed of Robert W. Orr, President,
Managing Officer and Director, Barry C. Visioli, Senior Vice President, John
Dawkins, Vice President, and David Peters, Vice President. Loan applications in
excess of $500,000 must be approved by the full Board of Directors.
Loan Purchases and Sales and Servicing. The Savings Bank is an active
purchaser of loans. In recent periods, the Savings Bank has purchased ARM loans,
construction loans and lot loans secured by properties on Hilton Head Island,
South Carolina. See "-- Lending Activities -- One- to Four-Family and
Multi-Family Mortgage Loans" and "-- Lending Activities -- Construction Loans."
In addition, the Savings Bank purchases one- to four-family, commercial real
estate and construction loans from a mortgage company in which a service
corporation subsidiary of the Savings Bank has an equity investment.
Furthermore, the Savings Bank purchases periodically participation interests in
permanent real estate loans and construction loans. Any participation interest
purchased must meet the Savings Bank's own underwriting standards. The Savings
Bank purchases loans from institutions in the State of South Carolina.
42
The Savings Bank periodically sells one- to four-family mortgage loans
to the FHLMC in order to comply with the regulations limiting the amount of
loans to one borrower or to reduce the amount of fixed-rate loans in the Savings
Bank's portfolio. The Savings Bank generally sells all fixed-rate, 30-year
residential mortgage loans.
The Savings Bank participates in loan servicing activities both
directly and indirectly. Direct servicing activities arise in connection with
loans that the Savings Bank originates but sells with servicing rights retained.
The Savings Bank generally receives a fee payable monthly of 1/4% to 3/8% per
annum of the unpaid balance of each loan for which it retains servicing rights.
At September 30, 1997, the Savings Bank was servicing loans for others
aggregating $62.1 million. During the year ended September 30, 1997, the Savings
Bank earned servicing fee income of $198,000.
The Savings Bank participates indirectly in loan servicing activities
through its equity investment, through a service corporation subsidiary, in a
mortgage banking company (see "-- Subsidiary Activities") and through an
investment in a limited partnership. At September 30, 1997, the mortgage banking
company was servicing 226 loans for others aggregating $28.0 million.
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Years Ended September 30,
-----------------------------------
1997 1996 1995
------- ------ ------
(Dollars in Thousands)
Total loans at beginning of
period............................. $151,159 $121,936 $109,851
-------- -------- --------
Loans originated:
One- to four-family................ 25,836 30,065 16,167
Multi-family....................... 240 1,312 526
Commercial real estate............. 11,912 7,113 5,804
Construction loans................. 10,934 12,816 12,169
Commercial business................ 10,731 6,302 4,735
Consumer........................... 24,739 10,696 14,984
-------- --------- --------
Total loans originated........... $84,397 $ 68,304 54,385
------- -------- --------
Loans purchased:
One- to four-family................ 23,581 18,242 6,543
Commercial real estate(1).......... 3,146 -- 813
-------- ------- --------
Total loans purchased............ 26,727 18,242 7,356
-------- ------- --------
Loans sold:
Total whole loans sold............. (5,747) (9,556) (9,614)
-------- ------- -------
Total loans sold................ (5,747) (9,556) (9,614)
Mortgage loan principal
repayments......................... (66,531) (47,767) (40,042)
Net loan activity................... 38,841 29,223 12,085
--------- --------- ---------
Total loans at end of period........ $190,000 $151,159 $121,936
======== ======== ========
- ----------
(1) In 1997, includes a $2.3 million purchased loan secured by single-
family lots located in Greenville, South Carolina.
43
Equity Investment in Limited Partnership. In December 1996, the Savings
Bank purchased a 20.625% interest in a limited partnership that invests in
mortgage servicing rights. Through this limited partnership, the Savings Bank
invests in servicing rights tied to a national portfolio of residential mortgage
loans. For the year ended September 30, 1997, the Savings Bank's return on
investment was approximately 5.89%. For the year ended September 30, 1997, the
Savings Bank recorded other income of $185,000 on its investment based on the
net income of the limited partnership as audited by independent certified public
accountants. See Note 3 of Notes to Consolidated Financial Statements. The value
of the Savings Bank's investment in the limited partnership would be adversely
affected by credit quality deterioration of the underlying mortgage loans. The
value of the investment would also be adversely affected by an increase in
market interest rates because of accelerated prepayments of the underlying
mortgage loans. See "RISK FACTORS -- Interest Rate Risk."
Loan Commitments. The Savings Bank issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on specified
terms and conditions and are honored for up to 30 days from approval, depending
on the type of transaction. The Savings Bank had outstanding loan commitments
(including commitments to fund letters of credit) of approximately $27.9 million
at September 30, 1997. See Note 17 of Notes to Consolidated Financial
Statements.
Loan Origination and Other Fees. The Savings Bank, in most instances,
receives loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan that are charged to the
borrower for funding the loan. The Savings Bank usually charges origination fees
of 0.5% to 1.0% on one- to four-family residential real estate loans and 1.0% to
2.0% on long-term commercial real estate loans. Current accounting standards
require fees received for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Deferred fees associated
with loans that are sold are recognized as income at the time of sale.
The Savings Bank offsets all loan origination fees and certain related
direct loan origination costs against all fees and costs associated with loan
origination. The resulting net amount is deferred and amortized over the
contractual life of the related loans as an adjustment to the yield on such
loans, unless prepayments of a large group of similar loans are probable and the
timing and amount of prepayments can be reasonably estimated. The Savings Bank
offsets commitment fees against related direct costs and the resulting net
amount is recognized over the contractual life of the related loans as an
adjustment of yield if the commitment is exercised. If the commitment expires
unexercised, the fees collected are recognized as non-interest income upon
expiration of the commitment.
Delinquencies. The Savings Bank's collection procedures provide for a
series of contacts with delinquent borrowers. After a delinquency of 15 days, a
late charge is assessed. If the delinquency continues, subsequent efforts will
be made to contact the delinquent borrower. The Savings Bank's collection
procedures provide that when a loan is 30 days overdue, and again on the 45th
day, the borrower will be contacted by mail and payment will be requested. If a
loan continues in a delinquent status for 90 days or more, the Savings Bank
generally initiates foreclosure proceedings. In certain instances, however, the
Board may decide to modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs.
44
The following table sets forth information with respect to the Savings
Bank's non-performing assets for the periods indicated. During the periods
shown, the Savings Bank had no restructured loans within the meaning of SFAS No.
15.
At September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage.............................. $ 220 $190 $348 $ 435 $ --
Consumer.............................. -- -- 124 163 448
Commercial............................ 183 126 -- -- --
------- ----- ------ -------- ---------
403 316 472 598 448
------- ----- ----- ------- -------
Accruing loans which are contractually
past due 90 days or more: Real estate:
Residential.......................... 6 467 82 60 826
Consumer.............................. 8 2 9 17 17
Commercial............................ 465 10 -- -- --
------- ----- ----- ------- -------
479 479 91 77 843
------- ----- ----- ------- -------
Total of non-accrual and
past due 90 days or more............. 882 795 563 675 1,291
------- ----- ----- ------- -------
Real estate owned, net................ 163 3 32 575 87
------- ----- ----- ------- -------
Total non-performing assets........... $1,045 $798 $595 $1,250 $1,378
====== ==== ==== ====== ======
Total loans delinquent 90 days
or more to net loans................ 0.49% 0.56% 0.48% 0.64% 1.33%
Total loans delinquent 90 days
or more to total assets............. 0.34% 0.38% 0.32% 0.39% 0.77%
Total non-performing assets to
total assets......................... 0.41% 0.38% 0.33% 0.73% 0.82%
The increase in non-performing assets at September 30, 1997 resulted
primarily from an increase in accruing commercial real estate loans
contractually past due 90 days or more. At September 30, 1997, accruing
commercial real estate loans contractually past due 90 days or more consisted
primarily of one loan with an outstanding balance of $330,000, which was secured
by a commercial property located in the Savings Bank's primary market area.
The Savings Bank does not accrue interest on loans, including impaired
loans under SFAS No. 114, for which management deems the collection of
additional interest to be doubtful. If interest on these non-accrual loans had
been accrued, interest income of approximately $19,000 would have been recorded
for the year ended September 30, 1997.
Asset Classification. OTS regulations require that each insured
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. "Substandard" assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies
45
are not corrected. "Doubtful" assets have the weaknesses of substandard assets
with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. The regulations
have also created a "special mention" category, described as assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified loss, the insured
institution must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified loss or charge-off such
amount. A portion of general loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The aggregate amounts of the Savings Bank's classified assets and of
the Savings Bank's general and specific loss allowances and charge-offs for the
period then ended, were as follows:
At or For the Years
Ended September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Loss..................... $ 140 $ 125 $ 86
Doubtful................. 8 32 --
Substandard assets....... 1,227 598 575
Special mention.......... 58 -- --
------ ------ ------
$1,433 $ 755 $ 661
====== ====== ======
General loss allowances.. 1,746 1,410 1,192
Specific loss allowances. 140 125 86
Net charge-offs.......... 304 92 46
At September 30, 1997, loss assets consisted of one commercial real
estate loan ($10,000), five one- to four-family mortgage loans ($34,000), one
secured commercial business loan ($9,000), and one unsecured commercial business
loan ($87,000); doubtful assets consisted of an unsecured consumer loan;
substandard assets consisted of 18 one- to four-family mortgage loans
($662,000), two commercial real estate loans ($370,000), two secured commercial
business loan ($168,000), four secured consumer loans ($16,000) and seven
unsecured consumer loan ($11,000); and special mention assets consisted of one
commercial real estate loan ($3,000) and a one- to four-family mortgage loan
($55,000).
Real Estate Owned. Real estate acquired by the Savings Bank as a result
of foreclosure or by deed-in- lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the fair
value of the property received. Subsequently, it is carried at the lower of its
new cost basis or fair value, less estimated selling costs. The Savings Bank had
$163,000 of real estate owned at September 30, 1997.
Allowance for Loan Losses. The Savings Bank's management evaluates the
need to establish allowances against losses on loans each year based on
estimated losses on specific loans when a decline in value has occurred. Such
evaluation includes a review of all loans for which full collectibility may not
be reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. The provision for loan losses
is charged against earnings in the year it is established. In recent periods,
the Savings Bank has increased the provision for loan losses in recognition of
the changing composition of the loan portfolio toward an increased emphasis on
commercial real estate loans, construction loans, and other types of lending
that carry a greater degree of credit risk than one- to
46
four-family mortgage lending. At September 30, 1997, the Savings Bank had an
allowance for loan losses of $1.9 million, or 1.04% of total loans. Based on
past experience and future expectations, management believes that the allowance
for loan losses is adequate at September 30, 1997.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, the allowance is based on
estimates which are subject to change based upon changes in the loan portfolio
and economic conditions, among other things. Furthermore, there can be no
assurance that the Savings Bank's regulators, in reviewing the Savings Bank's
loan portfolio, will not request that the Savings Bank increase its allowance
for loan losses, thereby negatively affecting the Savings Bank's financial
condition and earnings based upon information available to the regulators at the
time of their examination.
The following table sets forth an analysis of the Savings Bank's gross
allowance for loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and the
amount of loss realized has been charged or credited to current income.
Years Ended September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period............ $1,535 $1,278 $ 962 $884 $624
------ ------ ------ ---- ----
Provision for loan losses................... 655 349 362 120 364
Transfers to real estate owned
valuation allowance....................... -- -- -- -- 50
Recoveries:
Residential mortgage...................... 4 6 -- -- --
Consumer.................................. 24 17 6 6 7
Total recoveries........................ 28 23 6 6 7
------- ------- ------- ----- -----
Charge-offs:
Residential mortgage...................... 4 18 -- 13 4
Consumer.................................. 100 97 52 35 57
Commercial................................ 228 -- -- -- --
------- -------- -------- ------ --
Total charge-offs....................... 332 115 52 48 61
------- ------- ------- ----- -----
Net charge-offs......................... 304 92 46 42 54
------- ------- ------- ----- -----
Allowance at end of period.................. $1,886 $1,535 $1,278 $962 $884
====== ====== ====== ==== ====
Ratio of allowance to total loans
outstanding at the end of the period....... 1.04% 1.08% 1.08% 0.92% 0.91%
Ratio of net charge-offs to average
loans outstanding during the period....... 0.18% 0.07% 0.04% 0.84% 0.06%
47
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At September 30,
----------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------- ---------------------------
As a % % of As a % % of As a % % of
of Out- Loans in of Out- Loans in of Out- Loans in
standing Category standing Category standing Category
Loans in to Total Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------- ------ -------- ---------
(Dollars in Thousands)
Real estate -
mortgage............................ $ 766 0.60% 70 $ 726 0.71% 72% $ 573 0.57% 83%
Commercial real estate
and commercial
business............................ 737 2.16 19 465 2.06 16 297 8.12 3
Consumer............................. 383 2.00 11 344 2.03 12 408 2.32 14
------- ---- ------- ---- ------- ----
Total allowance for loan
losses.............................. $1,886 1.04% 100% $1,535 1.08% 100% $1,278 1.08% 100%
====== === ====== === ====== ===
----------------------------------------------------------
1994 1993
--------------------------- ----------------------------
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
------ -------- --------- ------ -------- -------
Real estate -
mortgage............................ $493 0.48% 51% $506 0.67% 76%
Commercial real estate
and commercial
business............................ 100 1.94 10 -- -- --
Consumer............................. 369 1.70 39 378 1.56 24
----- ---- ------ ----
Total allowance for loan
losses.............................. $962 0.92% 100% $884 0.91% 100%
==== === ==== ===
48
Investment Activities
The Savings Bank has made significant investments in mortgage-backed
securities, including CMOs. The Savings Bank had mortgage-backed securities with
an amortized cost of $35.7 million and a market value of $35.9 million at
September 30, 1997, all of which were invested in U.S. Government agency
securities, investment grade securities, and securities guaranteed by the
funding arm of the Resolution Trust Corporation ("RTC").
In an effort to increase the average portfolio yield, the Savings Bank
restructured its investment securities portfolio during the year ended September
30, 1997 by, in part, investing in callable, U.S. Government agency zero coupon
bonds with maturities exceeding ten years. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Comparison of
Financial Condition at September 30, 1997 and 1996" for further discussion.
Although these bonds offer higher yields, an increase in market interest rates
would have a material adverse effect on their value. See "RISK FACTORS --
Interest Rate Risk."
At September 30, 1997, the Savings Bank had invested $22.0 million in
CMOs ($10.3 million in U.S. Government agency issues and $11.7 million in
investment grade private issues) with an average estimated life varying from six
months to five years and ranging in original principal amount from $2.0 million
to $6.0 million. The weighted average yield to expected maturity on the CMOs at
September 30, 1997 was 7.30%. At September 30, 1997, CMOs consisted of Federal
National Mortgage Association ("FNMA") issues, as well as investment grade
private issues that are generally riskier because they are not guaranteed or
insured by the U.S. Government. CMOs may be used as collateral for borrowings
and, through repayments, as a source of liquidity. Management considers CMOs to
be advantageous since they offer yields above those available for investments of
comparable credit quality and duration and qualify as thrift investments under
the qualified thrift lender ("QTL") test. See "REGULATION -- Federal Regulation
of Savings Associations -- Qualified Thrift Lender Test." At September 30, 1997,
the CMO portfolio consisted of various tranches but no residuals. In recent
years, the Savings Bank has used the proceeds from the paydown of CMOs to invest
in one- to four-family and other types of lending, and expects to continue to do
so in the future, subject to market conditions.
CMOs are subject to repayment by the mortgagors of the underlying
collateral at any time. Such prepayment may subject the Savings Bank's CMOs to
yield and price volatility. To assess this volatility, the OTS requires the
Savings Bank to test annually its CMOs to determine whether they are high-risk
or non-high-risk securities. The policy established a three-part risk
measurement test for fixed-rate and a one-part test for floating-rate CMOs and
other mortgage derivative securities. Securities failing any one of the tests
are deemed to be high-risk securities. The OTS may require an institution to
dispose of one or all of the CMOs failing such tests. At September 30, 1997, all
of the Savings Bank's CMOs met the criteria established by the policy designated
as non-high-risk securities for continuing classification as suitable
investments. However, changes in interest rates may cause one or more of the
Savings Bank's CMOs to fail a stress test. The OTS may then require the Bank to
dispose of the CMOs failing the test. This may affect the classification of such
securities under SFAS No. 115.
Changes in the level of interest rates can have an adverse effect on
the mortgage-backed securities and CMO portfolio, thereby exposing the Savings
Bank to repayment risk and reinvestment risk. See "RISK FACTORS -- Interest Rate
Risk."
Investment decisions are made by the Savings Bank's Asset/Liability
Committee which consists of Senior Vice President Thomas C. Hall (Chairman),
President Robert W. Orr, Senior Vice President Barry C. Visioli, Vice President
David L. Peters, Vice President Teresa Hix, Vice President Quinnette Morrison
and Assistant Treasurer Brad Jones. The Savings Bank's investment objectives
are: (i) to provide and maintain liquidity within regulatory guidelines; (ii) to
maintain a balance of high quality, diversified investments to minimize risk;
(iii) to serve as a balance to earnings; and (iv) to maximize returns.
49
The following table sets forth the composition of the Savings Bank's
investment portfolio at the dates indicated.
At September 30,
1997 1996 1995
------------------------- ---------------------------- -----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
------- --------- ------- --------- ------- ---------
(Dollars in Thousands)
U.S. agency securities........... $10,191 22% $ -- --% $ -- --%
Certificates of deposit.......... -- -- 100 -- -- --
U.S. Treasury securities......... 998 2 2,395 5 798 2
Mortgage-backed securities
and CMOs....................... 35,714 76 44,362 95 47,269 98
-------- ---- -------- ---- ------- ---
Total............................ $46,903 100% $46,857 100% $48,067 100%
======= === ======= === ======= ===
(1) The market value of the Savings Bank's investment portfolio amounted
to $47.2 million, $45.6 million and $47.1 million at September 30,
1997, 1996, and 1995, respectively.
The following table sets forth the maturities and weighted average
yields of the debt securities in the Savings Bank's investment securities
portfolio at September 30, 1997.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
--------------- ---------------- ----------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. agency securities.......................$ -- --% $4,003 6.26% $ -- --% $ 6,188 8.10%
U.S. Treasury securities..................... 998 5.17 -- -- -- -- -- --
Mortgage-backed securities
and CMOs................................... 395 6.65 1,455 7.56 11,666 7.55 22,198 7.08
------- ------- ------- --------
Total........................................ $1,393 5.59 $5,458 6.61 $11,666 7.55 $28,386 7.30
====== ====== ======= =======
The following table sets forth certain information with respect to
each security (other than U.S. Government and agency securities) which had an
aggregate amortized cost in excess of 10% of the Savings Bank's stockholders'
equity at the dates indicated.
At September 30,
1997 1996 1995
------------------------ --------------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
RTC mortgage-backed
securities.................... $ 889 $ 888 $ 1,447 $ 1,414 $ 1,479 $ 1,430
CMOs........................... 21,138 21,211 34,836 33,804 36,743 35,900
-------- -------- ------- ------- ------- -------
Total....................... $22,027 $22,099 $36,283 $35,218 $38,222 $37,330
======= ======= ======= ======= ======= =======
50
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of the Savings Bank's funds for
lending and other investment purposes. In addition to deposits, the Savings Bank
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds while deposit inflows and outflows may be significantly
influenced by general interest rates and money market conditions. The Savings
Bank also has access to advances from the FHLB-Atlanta. These advances can be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or they may be used on a longer-term basis for general
business purposes. The Savings Bank has also on occasion utilized repurchase
agreements.
Deposit Accounts. Local deposits are and traditionally have been the
primary source of the Savings Bank's funds for use in lending and other general
business purposes. The Savings Bank offers a number of deposit accounts,
including passbook, individual retirement accounts ("IRAs"), money market
deposits and certificate accounts currently ranging in maturity from three
months to five years. Deposit accounts vary as to terms, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit and the interest rate. From time to time, the Savings Bank
offers premiums to attract deposits. The Savings Bank is a member of an
automated teller machine network, which is available to the Savings Bank's
checking account depositors.
In recent years, the Savings Bank has offered newly authorized types of
short-term accounts and other savings alternatives that are more responsive to
changes in market rates of interest than passbook accounts and longer maturity
fixed-rate, fixed-term certificates that were the Savings Bank's primary source
of deposits prior to 1978. There has been some shifting of deposit mix which has
primarily resulted from the progressive elimination of federally imposed rate
ceilings on various types of deposits offered by federally insured financial
institutions such as the Savings Bank. The deregulation of various federal
controls on insured deposits has allowed the Savings Bank to be more competitive
in obtaining funds and has given it more flexibility to meet the threat of net
deposit outflows. The Savings Bank reviews the interest rates offered on various
savings accounts periodically so as to remain competitive with other financial
institutions in its market area.
Since early 1995, the Savings Bank has increased its core deposit base
by aggressively promoting checking accounts. At September 30, 1997, checking
account balances totalled $37.8 million.
At September 30, 1997, certificate of deposits scheduled to mature
within one year totalled $115.7 million. Although no assurances can be given,
based on past experience, the Savings Bank believes that a substantial portion
of these certificates of deposit will be renewed.
At September 30, 1997, the Savings Bank had no brokered deposits.
51
The following table sets forth information concerning the Savings
Bank's deposits at September 30, 1997.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In Thousands)
2.28% None NOW accounts $ 100 $ 25,996 12.93%
-- None Non-interest-bearing accounts 100 11,812 5.88
2.67 None Savings accounts 100 24,360 12.12
Certificates of Deposit
-----------------------
5.71 Within 6 months Fixed-term, fixed-rate 1,000 75,002 37.31
5.89 7 - 12 months Fixed-term, fixed-rate 1,000 40,649 20.22
6.00 13 - 36 months Fixed-term, fixed-rate 1,000 22,347 11.12
6.06 37 - 120 months Fixed-term, fixed-rate 1,000 836 0.42
-------- ------
$201,002 100.00%
======== =======
The following table indicates the amount of jumbo certificates of
deposit by time remaining until maturity at September 30, 1997. Jumbo
certificates of deposit require minimum deposits of $100,000 and have negotiable
interest rates.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In Thousands)
Three months or less............................. $ 4,677
Over three through six months.................... 5,721
Over six through twelve months................... 5,061
Over twelve months............................... 3,081
--------
Total....................................... $18,540
========
52
Deposit Flow
The following table sets forth the balances of deposits in the various
types of accounts offered by the Savings Bank at the dates indicated.
At September 30,
1997 1996 1995
------------------------ ---------------------------- ----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in Thousands)
Non-interest-bearing............. $ 11,812 5.88% $ 3,464 $ 8,957 5.59% $ 4,885 $ 4,072 2.74%
NOW checking..................... 25,996 12.93 1,703 24,293 15.16 4,401 19,892 13.37
Regular savings accounts......... 24,360 12.12 1,249 23,111 14.42 80 23,031 15.49
Fixed-rate certificates which
mature in the year ending(1)(2):
Within 1 year.................. 115,651 57.53 31,881 83,770 52.28 2,148 81,622 54.89
After 1 year, but within 2 years 16,999 8.46 1,148 15,851 9.89 3,311 12,540 8.43
After 2 years, but within 5 years 6,184 3.08 1,922 4,262 2.66 (3,290) 7,552 5.08
-------- ------- -------- --------- ------- --------- ---------- -------
Total....................... $201,002 100.00% $41,367 $160,244 100.00% $11,535 $148,709 100.00%
======== ====== ======= ======== ====== ======= ======== ======
(1) At September 30, 1997, 1996 and 1995, jumbo certificates amounted to
$18.5 million, $13.7 million and $11.8 million, respectively.
(2) IRA accounts included in certificate balances are $18.8 million, $15.7
million and $14.8 million at September 30, 1997, 1996 and 1995,
respectively.
Time Deposits by Rates and Maturities
The following table sets forth the time deposits in the Savings Bank
classified by rates at the dates indicated.
At September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Below 3.00%................... $ 194 $ -- $ 503
3.00 - 5.00%................. 2,012 4,119 18,623
5.01 - 7.00%................. 136,400 99,182 81,903
7.01 - 9.00%................. 228 582 685
--------- ---------- ----------
Total..................... $138,834 $103,883 $101,714
======== ======== ========
53
The following table sets forth the amount and maturities of time
deposits at September 30, 1997.
Amount Due
---------------------------------------------------------------------
Percent
One to Over Two Over Three Over Five of Total
Less Than Two to Three to Five to Ten Certificate
One Year Years Years Years Years Total Accounts
-------- ----- ----- ----- ----- ----- --------
(Dollars in Thousands)
2.50 - 5.00%.................. $ 2,206 $ -- $ -- $ -- $ -- $ 2,206 1.58%
5.01 - 7.00%.................. 113,445 17,017 5,330 506 102 136,400 98.26
7.01 - 9.00%.................. -- -- -- 159 69 228 0.16
------------ ---------- -------- ----- ----- --------- -------
Total......................... $115,651 $17,017 $5,330 $665 $171 $138,834 100.00%
======== ======= ====== ==== ==== ======== ======
Deposit Activity
The following table sets forth the savings activities of the Savings
Bank for the periods indicated.
Years Ended September 30,
-------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Beginning balance.......................... $160,244 $148,709 $143,380
-------- -------- --------
Net increase (decrease) before
interest credited........................ 32,599 4,724 (496)
Interest credited.......................... 8,159 6,811 5,825
Net increase in savings deposits........... 40,758 11,535 5,329
--------- --------- ---------
Ending balance............................. $201,002 $160,244 $148,709
======== ======== ========
Borrowings. Historically, the Savings Bank has relied on repurchase
agreements as a source of borrowings to finance the purchase of investment
securities. Funding for lending activities has been provided from deposits and
borrowings from the FHLB-Atlanta. Under repurchase agreements, the Savings Bank
"sells" securities (generally U.S. Treasury securities and federal agency
obligations and mortgage-backed securities) under an agreement to buy them back
at a specified price at a later date. Repurchase agreements are subject to
renewal, and are deemed to be borrowings collateralized by the securities sold.
The Savings Bank had no repurchase agreements outstanding at September 30, 1997.
The Savings Bank has issued retail and commercial repurchase agreements
and would consider issuing them again in the future in an appropriate interest
rate environment. Under commercial repurchase agreements, the Savings Bank sells
the investment security to broker dealers who may then loan the security to
other parties in the normal course of operations. Commercial repurchase
agreements generally mature within 90 days from the date of the transaction.
Advances from the FHLB are typically secured by the Savings Bank's
first mortgage loans. At September 30, 1997, the Savings Bank was eligible to
borrow up to $55.0 million from the FHLB-Atlanta. The Savings Bank had FHLB
advances of $15.0 million outstanding at September 30, 1997. See Note 9 of Notes
to Consolidated Financial Statements.
54
The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Savings Bank is required to own capital stock in the FHLB and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the U.S. Government) provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's net worth or
on the FHLB's assessment of the institution's creditworthiness. Under its
current credit policies, the FHLB generally limits advances to 20% of a member's
assets, and short-term borrowings of less than one year may not exceed 10% of
the institution's assets. The FHLB determines specific lines of credit for each
member institution.
The following table sets forth certain information regarding borrowings
by the Savings Bank at the end of and during the periods indicated:
At September 30,
-------------------------------------
1997 1996 1995
---- ---- ----
Weighted average rate paid on:
FHLB-Atlanta advances.................. 6.24% 5.30% 5.77%
Years Ended September 30,
------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase.................... $ -- $ -- $ 5,907
FHLB-Atlanta advances............................................. 15,000 19,000 57,500
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase.................... -- -- 1,338
FHLB-Atlanta advances............................................. 23,951 12,531 39,222
Approximate weighted average rate paid on:
Securities sold under agreements to repurchase.................... -- -- 5.73%
FHLB-Atlanta advances............................................. 5.75% 5.24% 6.22
Competition
Anderson and Oconee Counties have a relatively large number of
financial institutions, many of which are branches of large southeast regional
financial institutions, and thus the Savings Bank faces strong competition in
the attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits and
loans has historically come from other thrift institutions, credit unions and
commercial banks located in its market area. Particularly in times of high
interest rates, the Savings Bank has faced additional significant competition
for investors' funds from short-term money market securities and other corporate
and government securities and mutual funds. The Savings Bank's competition for
loans comes principally from other thrift institutions, credit unions,
commercial banks, finance companies, mortgage banking companies and mortgage
brokers.
Subsidiary Activities
The Savings Bank had an ownership interest in three service
corporations at September 30, 1997. Under OTS regulations, the Savings Bank is
authorized to invest up to 3% of its assets in service corporations, with
55
amounts in excess of 2% only if used primarily for community purposes. At
September 30, 1997, the Savings Bank's net investment of approximately $2.1
million in its service corporations did not exceed this investment authority.
The Savings Bank has three service corporations: United Service
Corporation of Anderson, Inc. ("United Service"), United Investments Services,
Inc. ("United Investments") and Mortgage First Service Corporation ("Mortgage
First").
United Service is a wholly-owned subsidiary of the Savings Bank. At
September 30, 1997, United Service had assets of $2.4 million. United Service is
involved in the following residential and commercial real estate development
projects:
Perpetual Square. A 33-acre commercial development in Anderson County
purchased in January 1996 for a purchase price of $970,000. The purchase price
and infrastructure improvement costs (i.e., installation of roads, utilities,
etc.) were financed by a loan from the Savings Bank that had an outstanding
balance of $375,000 at September 30, 1997. As of September 30, 1997,
approximately eight acres have been sold and the Savings Bank did not have loans
outstanding to any of the purchasers. In October 1997, the Savings Bank
established a branch office at this location. See "-- Properties." At September
30, 1997, the Savings Bank's net investment in this project was approximately
$566,000.
The Meadows Development. A 99-acre residential subdivision consisting
of approximately 108 lots located in Anderson County purchased in October 1996
for a purchase price of $600,000. The purchase price and infrastructure
improvement costs were financed by a loan from the Savings Bank that had an
outstanding balance of $1.0 million at September 30, 1997. The Savings Bank has
entered into a contractual agreement with the local office of a national realtor
to market the subdivision lots, and marketing began in September 1997. The
realtor has no investment in the project. As of September 30, 1997, three lots
were sold and the Savings Bank had outstanding loans to purchasers totaling
$21,000. At September 30, 1997, the Savings Bank's net investment in this
project was approximately $1.1 million.
Ashton Place Subdivision. A 24-acre multi-family housing development
consisting of 44 lots located in Anderson County purchased in January 1996 for a
purchase price of $164,000. The purchase price and infrastructure improvement
costs were financed by a loan from the Savings Bank that had an outstanding
balance of $82,000 as of September 30, 1997. The lots are being developed in
four phases of 11 lots each. As of September 30, 1997, 29 lots have been sold,
four lots remain unsold in phase III and all 11 lots remain unsold in phase IV.
At September 30, 1997, the Savings Bank had loans outstanding to purchasers
totaling $397,000. At September 30, 1997, the Savings Bank's net investment in
this project was approximately $271,000.
North Park. A 57-acre industrial park located in Anderson County
purchased in June 1996 at a purchase price of $248,000. The purchase price and
infrastructure improvement costs were financed by a loan from the Savings Bank
that had an outstanding balance of $203,000 as of September 30, 1997. As of
September 30, 1997, 12 acres had been sold and the Savings Bank had outstanding
loans to purchasers totaling $573,000, all of which were permanent mortgage
loans. At September 30, 1997, the Savings Bank's net investment in this project
was approximately $389,000.
United Investments, a wholly-owned subsidiary of United Service, offers
full service brokerage services. On a consolidated basis United Service and
United Investments had net income of $395,000 for the year ended September 30,
1997.
Mortgage First is a wholly-owned subsidiary of the Savings Bank. In
August 1996, Mortgage First made a $400,000 equity investment in a start-up
regional mortgage banking company known as "First Trust Mortgage
56
Corporation of the South" ("First Trust"), with offices in Rock Hill, Columbia,
Clemson and Greenville, South Carolina. During the year ended September 30,
1997, First Trust closed 810 loans totalling $100.6 million.
The Savings Bank has purchased loans from First Trust in recent
periods. See "-- Lending Activities -- Loan Purchases and Sales and Servicing."
All loans are purchased from First Trust subject to the Savings Bank's
underwriting standards. The Savings Bank intends to purchase at least $18.0
million of loans from First Trust monthly. At September 30, 1997, the Savings
Bank's financial commitment to First Trust and its maximum exposure to share in
any losses incurred by First Trust were limited solely to the amount of its
equity investment through Mortgage First. The Savings Bank, either directly or
through Mortgage First, may undertake future additional financial commitments
that would increase its loss exposure to First Trust's operations; however,
there are no such agreements, plans or understandings at present. The Savings
Bank recorded a loss of approximately $100,000 related to First Trust's
operations for the year ended September 30, 1997. Robert W. Orr and Barry C.
Visioli are directors of First Trust. See "MANAGEMENT OF THE SAVINGS BANK --
Directors and Executive Officers and Directors."
Properties
The following table sets forth certain information relating to the
Savings Bank's offices as of March 31, 1997. All offices are owned by the
Savings Bank except as noted in the table.
Lease
Year Owned or Square Expiration
Location Opened Leased Footage Date
- -------- ------ ------ ------- ----
Main Office:
907 N. Main Street 1979 Owned 50,000 --
Anderson, South Carolina
Branch Offices:
104 Whitehall Road 1975 Building owned 2,000 December 31, 2004, with
Anderson, South Carolina Land leased two renewal options for ten
years each
2821 South Main Street 1976 Building owned 2,500 April 30, 2000, with five
Anderson, South Carolina Land leased renewal options for five years
each
Windsor Place Winn Dixie(1) 1993 Leased 450 March 1, 1998, with two
SC Highway 81 renewal options for five
Anderson, South Carolina years each
Northtowne 1994 Owned 2,800 --
3898 Liberty Highway
Anderson, South Carolina
1007 By-Pass 123 1996 Owned 2,900 --
Seneca, South Carolina
- -----------------
(1) In October 1997, this branch office was closed in conjunction with the
opening of a new 2,700 square foot branch office on SC Highway 81,
Anderson, South Carolina in the Perpetual Square complex. The Savings
57
Bank owns the building and real estate of this new branch office. See
"-- Subsidiary Activities" for additional information regarding
Perpetual Square.
The Savings Bank has an in-house computer system to process customer
records and monetary transactions, post deposit and general ledger entries and
record activity in installment lending, loan servicing and loan originations.
See "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Year 2000 Considerations."
Personnel
As of September 30, 1997, the Savings Bank had 96 full-time employees
and 33 part-time employees. The employees are not represented by a collective
bargaining unit. The Savings Bank believes its relationship with its employees
are good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company
for staggered three-year terms, or until their successors are elected and
qualified, at the first annual meeting of stockholders following the
consummation of the Conversion and Reorganization. The Holding Company's Board
of Directors consists of nine persons, divided into three classes, each of which
will contain approximately one third of the Board. One class will have a term of
office expiring at the first annual meeting of stockholders; a second class will
have a term of office expiring at the second annual meeting of stockholders; and
a third class will have a term of office expiring at the third annual meeting of
stockholders.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are:
Name Position
---- --------
Cordes G. Seabrook, Jr. Chairman of the Board
Robert W. Orr President and Chief Executive Officer
Thomas C. Hall Treasurer and Chief Financial Officer
Barry C. Visioli Senior Vice President
Sylvia B. Reed Corporate Secretary
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. For information concerning the principal occupations,
employment and compensation of the directors and executive officers of the
Holding Company during the past five years, see "MANAGEMENT OF THE SAVINGS BANK
- -- Biographical Information."
58
MANAGEMENT OF THE SAVINGS BANK
Directors and Executive Officers
The Board of Directors of the Savings Bank is presently composed of
nine members who are elected for terms of three years, approximately one-third
of whom are elected annually in accordance with the Bylaws of the Savings Bank.
The Savings Bank also has two non-voting Directors Emeriti. The executive
officers of the Savings Bank are elected annually by the Board of Directors and
serve at the Board's discretion. The following table sets forth information,
with respect to the directors and executive officers of the Savings Bank, all of
whom will continue to serve as directors and executive officers of the Savings
Bank and the Holding Company.
Directors
Current
Director Term
Name Age (1) Position Since Expires
- ---- ------- -------- ----- -------
Harold A. "Drew" Pickens, 64 Chairman of Board 1977 1998
Jr.
Robert W. "Lujack" Orr 49 President, Managing Officer 1989 1998
and a Director
Jack F. McIntosh 69 Director 1988 1999
Charles W. Fant, Jr. 71 Director 1977 1999
Cordes G. Seabrook, Jr. 70 Director 1976 1999
Richard C. Ballenger 49 Director 1996 1999
F. Stevon Kay 46 Director 1996 1999
Jim Gray Watson 68 Director 1976 1998
Martha S. Clamp 55 Director 1988 1997
J. Roy Martin, Jr. 79 Director Emeritus 1988 --
Wade A. Watson, Jr. 79 Director Emeritus 1989 --
Executive Officers Who Are Not Directors
Thomas C. Hall 50 Senior Vice President -- --
and Treasurer
Barry C. Visioli 49 Senior Vice President -- --
Sylvia B. Reed 57 Corporate Secretary -- --
- ---------------
(1) As of September 30, 1997.
59
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. There are no family relationships among or between the Directors or
executive officers except as noted below.
60
Harold A. "Drew" Pickens, Jr. joined the Board of Directors of the
Savings Bank in 1997 and has served as Chairman of the Board since January 1996.
He is the owner of Harold A. Pickens and Sons, Inc., a commercial construction
contractor, with which he has been affiliated since 1956. Mr. Pickens serves as
an Elder at First Presbyterian Church, serves on the Anderson Area Medical
Center's Board of Directors, and is associated with the Boy Scouts.
Robert W. "Lujack" Orr has been employed by the Savings Bank since 1974
and has held a variety of positions, such as Senior Vice President/Funds
Acquisition and Executive Vice President, prior to assuming his current position
as President and Managing Officer on January 1, 1991. Mr. Orr has been a member
of the Board of Directors of the Savings Bank since 1989. Mr. Orr is past
President of the YMCA and an Elder of Central Presbyterian Church. He is a
director of First Trust, the mortgage banking company in which a service
corporation subsidiary of the Savings Bank has an equity investment.
Jack F. McIntosh is a partner in the law firm of McIntosh and Sherard,
Anderson, South Carolina, with which he has been affiliated for 41 years. Mr.
McIntosh joined the Board of Directors of the Savings Bank in 1998 and has
served as General Counsel for the Savings Bank's wholly-owned subsidiary, United
Service, since 1984. Mr. McIntosh is active in community affairs related to
health and education.
Charles W. Fant, Jr. joined the Board of Directors of the Savings Bank
in 1970 and served as Chairman of the Board from 1990 until 1996. Mr. Fant is a
partner in the architectural firm of Fant & Fant Architects, Anderson, South
Carolina, with which he has been affiliated since 1956. Mr. Fant is active in
community affairs and is a member of the Board of Adjustment and Appeals for
both the City of Anderson and Anderson County, a member of the Rotary Club,
Anderson College Board of Visitors, and a Trustee of Wilmary Apartments (Housing
Ministry).
61
Cordes G. Seabrook, Jr. joined the Board of Directors of the Savings
Bank in 1976. He is retired from Value Systems located in Anderson, South
Carolina, owns a small business mentoring, and is a partner in Juno Investors, a
real estate holding company.
Richard C. Ballenger was appointed to the Board of Directors of the
Savings Bank in May 1996. Mr. Ballenger is the President of City Glass Company
and D&B Glass Company, Inc., with which he has been affiliated since 1972. He is
an Elder of First Presbyterian Church, a member of the Anderson Rotary Club, and
is on the Advisory Board of the Salvation Army.
F. Stevon Kay was elected to the Board of Directors of the Savings Bank
in May 1996. Mr. Kay is the President of Hill Electric Company, Inc., with which
he has been affiliated since 1969. He is a Board member of the Salvation Army
Boys and Girls Club and the President of the Anderson Youth Association. He is a
member of Concord Baptist Church.
Jim Gray Watson, the Savings Bank's former President and Chief
Executive Officer, was employed by the Savings Bank for 31 years prior to his
retirement in December 1990. Mr. Watson continues to serve as a member of the
Savings Bank's Board of Directors. He is involved in numerous charitable and
community organizations. He is an Elder of Central Presbyterian Church. He is a
brother to Wade A. Watson, Jr., Director Emeritus of the Savings Bank.
Martha C. Clamp, a semi-retired certified public accountant, joined the
Board of Directors of the Savings Bank in 1988. Ms. Clamp was employed for six
years as a staff accountant for the accounting firm of Cole, Hook & Cleary,
CPAs, Anderson, South Carolina, and was self-employed as an accountant from 1988
to 1995. She is a member of the Board of Directors of the Greater Anderson
Rotary Club.
J. Roy Martin, Jr. served as a member of the Savings Bank's Board of
Directors from 1970 until 1988. Since 1988, Mr. Martin has served as a Director
Emeritus of the Savings Bank.
Wade A. Watson, Jr., former President of the Savings Bank, served as a
member of the Savings Bank's Board of Directors from 1960 until 1989. Mr. Watson
has served as a Director Emeritus of the Savings Bank since 1989. He is an Elder
of Central Presbyterian Church and the brother of Jim Gray Watson, former
President and Chief Executive Officer of the Savings Bank.
Thomas C. Hall has been employed by the Savings Bank since 1975 and
currently serves as Senior Vice President, Treasurer and Chief Financial Officer
responsible for areas of accounting, investments, data processing and deposits.
Mr. Hall is a member of the Financial Managers Society and a Board member of the
Foothills United Way.
Barry C. Visioli has been affiliated with the Savings Bank since 1973.
He serves as Senior Vice President and is responsible for Lending Operations. He
is a Council Member of the Salvation Army Boys and Girls Club, serves on the
Anderson County Board of Assessment Appeals, and is on the Industry Advisory
Council for School District Five. Mr. Visioli is also a director of First Trust,
the mortgage banking company in which a service corporation subsidiary of the
Savings Bank has an equity investment.
Sylvia B. Reed joined the Savings Bank in 1986 and currently serves as
Corporate Secretary and Assistant Vice President. Ms. Reed is a member and past
President and past Treasurer of the Anderson Chapter of the American Business
Women's Association, which furnishes college scholarships for students. She is a
member of the choir at Taylor Memorial Church.
62
Beneficial Ownership of Savings Bank Common Stock by Directors and Executive
Officers
The following table sets forth, as of September 30, 1997, certain
information as to the beneficial ownership of Savings Bank Common Stock by: (i)
persons known by the Savings Bank to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) the directors of the Savings Bank,
(iii) the executive officers of the Savings Bank, and (iv) by all officers and
directors as a group. For purposes of this table, an individual is considered to
beneficially own shares of Savings Bank Common Stock if he or she has or shares
voting power (which includes the power to vote or direct the voting of the
shares) or investment power (which includes the power to dispose of or direct
the disposition of the shares). Unless otherwise indicated, all shares are owned
directly by the officers and directors or by the officers and directors
indirectly through a trust, corporation or association, or by the officers and
directors or their spouses as custodians or trustees for the shares of minor
children. The officers and directors effectively exercise sole voting and
investment power over such shares. Shares which are subject to stock options
that are exercisable within 60 days of September 30, 1997 are deemed to be
beneficially owned. For information regarding proposed purchases of Conversion
Shares by the directors and officers and their anticipated ownership of Common
Stock upon consummation of the Conversion and Reorganization, see "CONVERSION
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS."
63
Shares Beneficially
Owned at
September 30, 1997
-----------------------------------
Number(1) Percent
--------- -------
SouthBanc Shares, M.H.C. 800,000 53.02%
Harold A. Pickens, Jr. 10,508 0.70
Martha S. Clamp 6,254 0.41
Jack F. McIntosh 5,683 0.38
Charles W. Fant, Jr. -- --
Cordes G. Seabrook, Jr. 8,850 0.59
Jim Gray Watson 3,196 0.21
Richard C. Ballenger 2,227 0.15
F. Stevon Kay 7,151 0.47
J. Roy Martin, Jr. -- --
Wade A. Watson, Jr. 5,538 0.23
Robert W. Orr 14,624 0.97
Thomas C. Hall 13,972(2) 0.93
Barry C. Visioli 12,708(3) 0.84
All Officers and
Directors as a
Group (21 persons) 104,052(4) 6.90%
- ---------------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock if he or she has voting and/or investment power
with respect to such security. The table includes shares owned by
spouses, other immediate family members in trust, shares held in
retirement accounts or funds for the benefit of the named individuals,
and other forms of ownership, over which shares the persons named in
the table may possess voting and/or investment power. Shares which are
subject to stock options that are exercisable within 60 days of
September 30, 1997 are deemed to be beneficially owned.
(2) Includes 2,300 shares of Common Stock which may be received upon the
exercise of stock options that are exercisable within 60 days of
September 30, 1997.
(3) Includes 2,300 shares of Common Stock which may be received upon the
exercise of stock options that are exercisable within 60 days of
September 30, 1997.
(4) Includes 4,600 shares of Common Stock which may be received upon the
exercise of stock options that are exercisable within 60 days of
September 30, 1997.
Meetings and Committees of the Board of Directors
The business of the Savings Bank is conducted through meetings and
activities of its Board of Directors and its committees. During the fiscal year
ended September 30, 1997, the Board of Directors held 12 regular meetings and no
director attended fewer than 75% of the total meetings of the Board of Directors
of the Savings Bank and committees on which such director served.
The Executive Committee of the Board of Directors, which consists of
Directors Fant (Chairman), Pickens, Seabrook, Watson and Orr, meets as necessary
in between meetings of the full Board of Directors. All actions of the Executive
Committee must be ratified by the full Board of Directors. The Executive
Committee reviews directors' and officers' compensation and makes
recommendations to the full Board of Directors in this regard. The Executive
Committee also recommends prospective new Board members to the full Board of
Directors and insures
64
that all directors, directors emeriti and officers are acting in compliance with
the Savings Bank's Charter and Bylaws. The Executive Committee met once during
the fiscal year ended September 30, 1997.
The Audit Committee of the Savings Bank consists of Directors Pickens
(Chairman), Clamp, Orr and Watson and Thomas C. Hall, Senior Vice President, and
Doris Hoover, a Savings Bank staff member. This committee is responsible for
developing and monitoring the Savings Bank's audit program. The committee
selects the Savings Bank's outside auditor and meets with them to discuss the
results of the annual audit and any related matters. The members of the
committee also receive and review all the reports and findings and other
information presented to them by the Savings Bank's officers regarding financial
reporting policies and practices. In addition, the Savings Bank's Internal
Auditor and Compliance Coordinator operate under the direction of the Audit
Committee and report quarterly to the committee. The committee meets quarterly.
The Audit Committee met four times during the fiscal year ended September 30,
1997.
The Savings Bank's full Board of Directors serves as a Nominating
Committee. The Board of Directors met once in its capacity as the nominating
committee during the 1997 fiscal year.
The Savings Bank also has standing Loan, Pension Plan, Strategic
Planning and Asset/Liability Management Committees.
Directors' Compensation
Directors (including Directors Emeriti, but excluding directors who are
full-time employees) receive annual compensation of $10,800, payable $900
monthly, and $100 for each committee meeting attended. No fees are paid for
attending special meetings of the Board. The Savings Bank's Chairman of the
Board receives compensation of $12,000 per year. The Savings Bank paid a total
of $109,000 in directors' and committee fees for the fiscal year ended September
30, 1997. Director compensation is deducted by $100 for each meeting absence.
Directors also participate in the Savings Bank's stock option programs.
65
Executive Compensation
Summary Compensation Table. The following information is furnished for
the named executive officers.
=================================================================================================================================
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
Annual Compensation
---------------------------------------------------
Awards Payouts
- ---------------------------------------------------------------------------------------------------------------------------------
Name and Other
Principal Annual Restricted All Other
Position Compen- Stock LTIP Compensa-
with the Salary Bonus sation Awards Options Payouts tion
Savings Bank Year ($)(1) ($) ($) ($)(2) (#) ($) ($)(3)
- --------------------------------------------------------------------------------------------------------------------------------
Robert W. Orr, 1997 $95,000 $59,299 $ -- 330,525 10,250 -- $14,658
President and
Managing Officer 1996 71,350 61,017 5,750 -- -- -- 13,085
1995 69,077 58,889 5,750 -- -- -- 12,185
Thomas C. Hall, 1997 80,000 50,616 -- 330,525 10,250 -- 12,409
Senior Vice
President 1996 60,902 52,082 2,880 -- -- -- 10,904
1995 58,962 50,265 2,870 -- -- -- 10,218
Barry C. Visioli 1997 70,000 48,552 -- 330,525 10,250 -- 11,263
Senior Vice
President 1996 58,418 49,958 2,880 -- -- -- 10,483
1995 56,557 48,216 2,870 -- -- -- 9,844
=================================================================================================================================
- ----------------------------------
(1) Includes salary and directors' fees.
(2) Represents the value of shares of Savings Bank Common Stock awarded
under the 1996 MRP that vested in equal installment over a five-year
period beginning on April 7, 1998. Dividends are paid on such awards if
and when dividends are declared and paid by the Savings Bank. At
September 30, 1997, the value of the awards were $330,525 for each of
Mr. Orr, Mr. Hall and Mr. Visioli (5,850 shares at $56.50 per share).
(3) Represents employer 401(k) Plan contributions.
66
Employment Agreements
The MHC and the Savings Bank currently maintain employment agreements
with Messrs. Orr, Hall and Visioli that were entered into in connection with the
MHC Reorganization. In connection with the Conversion and Reorganization, the
Holding Company and the Savings Bank (collectively, the "Employers") will enter
into three-year employment agreements ("Employment Agreements") with these same
individuals (individually, the "Executive"), which have substantially the same
terms as and will replace the existing agreements.
Under the Employment Agreements, the initial salary levels for Messrs.
Orr, Hall and Visioli will be $98,800, $83,200 and $72,800, respectively, which
amounts will be paid by the Savings Bank and may be increased at the discretion
of the Board of Directors. On each anniversary of the commencement date of the
Employment Agreements, the term of each agreement may be extended for an
additional year at the discretion of the Board. The agreement is terminable by
the Employers at any time, by the Executive if the Executive is assigned duties
inconsistent with his initial position, duties, responsibilities and status, or
upon the occurrence of certain events specified by federal regulations. In the
event that an Executive's employment is terminated without cause or upon the
Executive's voluntary termination in certain circumstances, the Savings Bank
would be required to honor the terms of the agreement through the expiration of
the then current term, including payment of current cash compensation and
continuation of employee benefits.
The Employment Agreements also provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, an Executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of Common Stock pursuant
to a tender or exchange offer for such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the Holding Company
representing 25% or more of the combined voting power of the Holding Company's
then outstanding securities, (c) the membership of the Board of Directors
changes as the result of a contested election, or (d) shareholders of the
Holding Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Holding Company's assets, or a plan of partial or
complete liquidation.
The maximum value of the severance benefits under the Employment
Agreements is 2.99 times the Executive's average annual compensation during the
five-year period preceding the effective date of the change in control (the
"base amount"). The Employment Agreements provide that the value of the maximum
benefit may be distributed, at the Executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the Executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total present value of which does not exceed 2.99 times the
Executive's base amount. Assuming that a change in control had occurred at
September 30, 1997 and that each Executive elected to receive a lump sum cash
payment, Messrs. Orr, Hall and Visioli would be entitled to payments of
approximately $220,000, $187,000 and $176,000, respectively. Section 280G of the
Internal Revenue Code of 1986, as amended ("Code"), provides that severance
payments that equal or exceed three times the individual's base amount are
deemed to be "excess parachute payments" if they are contingent upon a change in
control. Individuals receiving excess parachute payments are subject to a 20%
excise tax on the amount of such excess payments, and the Employers would not be
entitled to deduct the amount of such excess payments.
The Employment Agreements restrict the Executive's right to compete
against the Employers for a period of one year from the date of termination of
the agreement if an Executive's employment is terminated without cause, except
if such termination occurs after a change in control.
67
Option Grants Table. The following table sets forth all grants of
options to the named executive officers for the fiscal year ended September 30,
1997.
================================================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------------------------------------------------------
Percent of
Total Options
Number of Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year Per Share Date
- --------------------------------------------------------------------------------------------------------------------------------
Robert W. Orr 10,250 26% $25.25 April 2007
- --------------------------------------------------------------------------------------------------------------------------------
Thomas C. Hall 10,250 26% $25.25 April 2007
- --------------------------------------------------------------------------------------------------------------------------------
Barry C. Visioli 10,250 26% $25.25 April 2007
================================================================================================================================
Option Exercise/Value Table. The following table sets forth all
exercises of options by the named executive officers for the fiscal year ended
September 30, 1997.
=================================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Number of Unexercised In-the-Money
Shares Options at Options at
Acquired Dollar Fiscal Year End Fiscal Year End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Robert W. Orr 2,956 $57,642 --/-- $--/$--
- ---------------------------------------------------------------------------------------------------------------------------------
Thomas C. Hall -- -- 2,300/-- $106,950/$--
- ---------------------------------------------------------------------------------------------------------------------------------
Barry C. Visioli -- -- 2,300/-- $106,950/$--
=================================================================================================================================
Benefits
Insurance. Full-time employees are provided, with minimal contribution
or expense to them, with group plan insurance that covers hospitalization,
dependent coverage, long-term disability and life insurance. This insurance is
available generally and on the same basis to all full-time employees. Long-term
disability insurance is available after completion of a minimum of one year of
service, while the other benefits are available immediately.
Cafeteria Plan. The Savings Bank offers full-time employees the ability
to enroll in a cafeteria or flexible benefit plan which allows employees to set
aside a portion of their pre-tax salary to be used for, among other things,
68
medical expenses not covered by insurance and child care expenses. The decision
to enroll in the Cafeteria Plan and the benefits selected is at each employee's
discretion.
Profit Sharing and 401(k) Plan. The Savings Bank sponsors a
tax-qualified cash or deferred profit sharing plan ("401(k) Plan") for the
benefit of its employees. Employees become eligible to participate under the
401(k) Plan on the first day of October following their date of employment.
Benefits under the 401(k) Plan are determined based upon annual employee salary
reduction and employer discretionary contributions to the 401(k) Plan. Employer
discretionary contributions are allocated to participant accounts as a
percentage of total compensation of such participant to the compensation of all
participants. At the end of each year the Board of Directors determines whether
to make a discretionary contribution and the amount of the contribution to the
401(k) Plan, based upon a number of factors, such as the Savings Bank's retained
earnings, profits, regulatory capital and employee performance. In addition, the
Board of Directors may authorize a discretionary matching contribution not to
exceed 4.5% of each participants compensation for the 401(k) Plan year. Each
year participants are permitted to contribute voluntarily up to $10,000 (as
indexed for inflation). However, each participant's salary deferrals and
employee and employer contributions when added to other defined contribution
plan contributions each year cannot exceed the lessor of 25% of compensation or
$30,000 for each 401(k) Plan year.
Benefits are payable upon termination of employment, retirement, death,
disability or 401(k) Plan termination. Additionally, under certain financial
hardship circumstances, early withdrawal of salary deferrals may be authorized
by the Savings Bank. Benefits are normally paid in a lump-sum payment or under
various installment payment or annuity alternatives. Normal retirement age under
the 401(k) Plan is age 65. Early retirement age under the 401(k) Plan is age 55
with at least ten years of service.
Employer discretionary contributions under the 401(k) Plan are fully
vested upon the completion of five years of service. Employees are always 100%
vested in their salary deferrals and in the employer matching contributions. The
Savings Bank's total contribution to the 401(k) Plan for all employees for the
fiscal year ended September 30, 1997 was $219,000.
Participants in the 401(k) Plan self-direct the investment of plan
assets credited to their account. The available investment options include
mutual funds and Common Stock. In connection with the Conversion and
Reorganization, eligible Participants will have the opportunity to direct the
investment of their 401(k) Plan account balance to purchase shares of the Common
Stock. A participant in the 401(k) Plan who elects to purchase Common Stock in
the Conversion and Reorganization through the 401(k) Plan will receive the same
subscription priority and be subject to the same individual purchase limitations
as if the participant had elected to make such purchase using other funds. See
"THE CONVERSION AND REORGANIZATION -- Limitations on Purchases of Conversion
Shares."
Employee Stock Ownership Plan. In connection with the MHC
Reorganization, the Savings Bank established an ESOP for the exclusive benefit
of participating employees. In order to participate under the ESOP, employees
must be 21 years old and complete one year of service with the Savings Bank. The
ESOP acquired 8,050 shares of Savings Bank Common Stock in the MHC
Reorganization with the proceeds of a loan obtained from a third party lender.
The ESOP debt was retired on January 24, 1996 and all shares were allocated to
the accounts of participating employees. In connection with the Additional
Offering, the ESOP acquired 46,800 shares of Savings Bank Common Stock with the
proceeds of a loan obtained from an unrelated third party lender. The loan is
repaid principally from the Savings Bank's contributions to the ESOP and
dividends payable on Savings Bank Common Stock held by the ESOP over the term of
the loan. In connection with the Conversion and Reorganization, it is
anticipated that the Holding Company will lend sufficient funds to the ESOP to
enable the ESOP to repay the outstanding principal balance of the loan ($804,000
at September 30, 1997) and accrued interest thereon through the closing date of
the Conversion and Reorganization. Shares of Common Stock acquired by the ESOP
in the Additional Offering will, to the extent not yet allocated to ESOP
participants, serve as collateral for the Holding Company loan and be held in a
suspense account pending repayment of the loan. It is anticipated that the
interest
69
rate on the Holding Company loan will be equal to the prime rate reported in The
Wall Street Journal on the closing date of the Conversion and Reorganization.
In connection with the Conversion and Reorganization, the shares of
Savings Bank Common Stock held by the ESOP will be converted into Exchange
Shares based on the final Exchange Ratio. In light of management's evaluation of
the anticipated compensation expense associated with the ESOP, the ESOP does not
intend to purchase any Conversion Shares in the Conversion Offerings.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants based on compensation. Except for
participants who retire, become disabled or die during the Plan year, all other
participants will be required to have completed at least 1,000 hours of service
and be employed on the last day of the Plan year in order to receive an
allocation. Participant benefits vest over a seven-year period with 20% vested
after three years of service and 100% vested after seven years of service. All
years of service are counted toward vesting. Vesting will be accelerated upon
retirement, death, disability or termination of the ESOP. Forfeitures are
applied to reduce future contributions by the Savings Bank or reallocated to
other participants to reduce future funding costs. Benefits may be payable upon
retirement, death, disability or separation from service. Contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
Under the ESOP, participating employees may vote shares of Common Stock
allocated to their account. Shares for which employees do not give instructions
and unallocated shares will be voted by the ESOP Trustee in the same proportion
as determined by the vote of participants with respect to allocated shares.
The Board of Directors has appointed Directors Fant, Jim Gray Watson,
Orr and McIntosh and Director Emeritus Wade Watson as the committee ("ESOP
Committee") to administer the ESOP and the serve as ESOP trustees. The Board of
Directors may amend the ESOP in any manner which it deems desirable, except that
the ESOP may not be amended in any way to deprive any participant or beneficiary
of any benefits to which he is entitled with respect to contributions previously
made.
Although the ESOP will not purchase any Conversion Shares in the
Conversion Offerings, the ESOP may purchase Common Stock in the open market at
then prevailing prices from time to time following the Conversion and
Reorganization. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, market
conditions.
Stock Option Plans. In connection with the MHC Reorganization, the
Savings Bank adopted the 1993 Option Plan for the benefit of key employees and
nonemployee directors, pursuant to which 11,504 shares of Savings Bank Common
Stock were reserved for issuance upon the exercise of stock options awarded
thereunder. In connection with the Additional Offering, the Savings Bank adopted
the 1996 Option Plan for the benefit of key employees and nonemployee directors,
pursuant to which 58,500 shares of Savings Bank Common Stock were reserved for
issuance upon the exercise of stock options awarded thereunder. As of September
30, 1997, stock options have been awarded with respect to all shares reserved
under the 1993 Option Plan, and with respect to 58,500 shares reserved under the
1996 Stock Option Plan, including 10,250 options to each of Mr. Orr, Mr. Hall
and Mr. Visioli. The Holding Company will assume the 1993 and 1996 Stock Option
Plans in connection with the Conversion and Reorganization, and appropriate
adjustments to the exercise price and the number of shares subject to stock
options outstanding under each plan will be made in accordance with the final
Exchange Ratio.
The 1998 Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such key employees
and nonemployee directors with a proprietary interest in the Holding Company as
an incentive to contribute to the success of the Holding Company and the Savings
Bank, and to reward officers and key employees for outstanding performance. The
1998 Option Plan will provide for the grant of incentive stock options ("ISOs")
intended to comply with the requirements of Section 422 of the Code and for
70
nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the
1998 Option Plan, stock options may be granted to nonemployee directors and key
employees of the Holding Company and its subsidiaries. Unless sooner terminated,
the 1998 Option Plan will continue in effect for a period of ten years from the
date the 1998 Option Plan is approved by stockholders. Under current OTS
regulations, the approval of a majority vote of the Holding Company's
outstanding shares is required prior to the implementation of the 1998 Option
Plan within one year of the consummation of the Conversion and Reorganization.
A number of authorized shares of Common Stock equal to 10% of the
number of Conversion Shares issued in connection with the Conversion and
Reorganization will be reserved for future issuance under the 1998 Option Plan
(198,375 shares based on the issuance of 1,983,750 Conversion Shares at the
maximum of the Estimated Valuation Range). Shares acquired upon exercise of
options will be authorized but unissued shares or treasury shares. In the event
of a stock split, reverse stock split, stock dividend, or similar event, the
number of shares of Common Stock under the 1998 Option Plan, the number of
shares to which any award relates and the exercise price per share under any
option may be adjusted by the Committee (as defined below) to reflect the
increase or decrease in the total number of shares of Common Stock outstanding.
The 1998 Option Plan will be administered and interpreted by the Board
of Directors. Subject to applicable OTS regulations, the Board will determine
which nonemployee directors and key employees will be granted options, whether,
in the case of officers and employees, such options will be ISOs or NQOs, the
number of shares subject to each option, and the exercisability of such options.
All options granted to nonemployee directors will be NQOs. The per share
exercise price of all options will equal at least 100% of the fair market value
of a share of Common Stock on the date the option is granted.
It is anticipated that all options granted under the 1998 Option Plan
will be granted subject to a vesting schedule whereby the options become
exercisable over a specified period following the date of grant. Under OTS
regulations, if the Stock Option plan is implemented within the first year
following consummation of the Conversion and Reorganization the minimum vesting
period will be five years. All unvested options will be immediately exercisable
in the event of the recipient's death or disability. Unvested options also will
be exercisable following a change in control (as defined in the 1998 Option
Plan) of the Holding Company or the Savings Bank to the extent authorized or not
prohibited by applicable law or regulations. OTS regulations currently provide
that, if the 1998 Option Plan is implemented prior to the first anniversary of
the Conversion and Reorganization, vesting may not be accelerated upon a change
in control of the Holding Company or the Savings Bank.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Board. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. Except as authorized by the Board,
all stock options are nontransferable except by will or the laws of descent or
distribution.
Under current provisions of the Code, the federal tax treatment of ISOs
and NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference
71
between the fair market value of the Common Stock on the date of exercise and
the option exercise price generally will be treated as compensation to the
optionee upon exercise, and the Holding Company will be entitled to a
compensation expense deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time,
the Holding Company and the Savings Bank anticipate that if stockholder approval
is obtained it would provide awards to its directors and key employees to the
extent and under terms and conditions permitted by applicable regulations. Under
current OTS regulations, if the 1998 Option Plan is implemented within one year
of the consummation of the Conversion and Reorganization, (i) no officer or
employee may receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, may not receive in excess of 30% of the number of shares
reserved for issuance under the 1998 Option Plan.
Management Recognition Plans. In connection with the MHC
Reorganization, the Savings Bank adopted the 1993 MRP for the benefit of key
employees, pursuant to which 3,450 shares of Savings Bank Common Stock were
reserved for issuance in the form of restricted stock. In connection with the
Additional Offering, the Savings Bank adopted the 1996 MRP for the benefit of
key employees, pursuant to which 23,400 shares of Savings Bank Common Stock were
reserved for issuance in the form of restricted stock. As of September 30, 1997,
all shares under the 1993 MRP have been awarded and are fully vested, and such
shares will be converted into Exchange Shares based on the final Exchange Ratio
in the same manner as shares held by other Public Stockholders. As of September
30, 1997, awards for 23,400 shares of Savings Bank Common Stock have been
awarded under the 1996 MRP, including 5,850 shares to Mr. Orr, 5,850 shares to
Mr. Hall and 5,850 shares to Mr. Visioli, subject to a five-year vesting period.
Such shares will be converted into Exchange Shares based on the final Exchange
Ratio in the same manner as shares held by other Public Stockholders. The
Holding Company will assume and continue the 1996 MRP in connection with the
Conversion and Reorganization.
The Board of Directors believes that continuation of the MRP is
important to the Savings Bank's overall compensation strategy, which emphasizes
providing appropriate incentives to attract and retain capable employees.
Specifically, the continuation of the MRP will enable the Holding Company to
provide participants with a proprietary interest in the Holding Company as an
incentive to contribute to the success of the Holding Company. Accordingly, the
Holding Company's Board of Directors intends to adopt the 1998 MRP for officers
and employees of the Holding Company.
The 1998 MRP will be submitted to stockholders for approval at a
meeting to be held no earlier than six months following consummation of the
Conversion and Reorganization. The approval of a majority vote of the Holding
Company's stockholders is required prior to implementation of the 1998 MRP
within one year of the consummation of the Conversion and Reorganization. The
1998 MRP expects to acquire a number of shares of Common Stock equal to 4% of
the Conversion Shares issued in the Conversion Offerings (79,350 shares based on
the issuance of 1,983,750 Conversion Shares at the maximum of the Estimated
Valuation Range). Such shares will be acquired on the open market, if available,
with funds contributed by the Savings Bank to a trust which the Holding Company
may establish in conjunction with the 1998 MRP ("1998 MRP Trust") or from
authorized but unissued shares or treasury shares of the Holding Company.
The Board of Directors will administer the 1998 MRP, members of which
will also serve as trustees of the 1998 MRP Trust, if formed. The trustees will
be responsible for the investment of all funds contributed by the Savings Bank
to the 1998 MRP Trust.
It is anticipated that shares of Common Stock granted pursuant to the
1998 MRP will be in the form of restricted stock payable ratably over a
five-year period following the date of grant. During the period of restriction,
all shares will be held in escrow by the Holding Company or by the 1998 MRP
Trust. If a recipient terminates employment for reasons other than death or
disability, the recipient will forfeit all rights to allocated shares that are
then subject to restriction. In the event of the recipient's death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. In addition, all allocated shares will become unrestricted in the
event of
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a change in control (as defined in the 1998 MRP) of the Holding Company to the
extent authorized or not prohibited by applicable law or regulations. Current
OTS regulations, however, do not permit accelerated vesting of 1998 MRP awards
in the event of a change in control. Compensation expense in the amount of the
fair market value of the Common Stock at the date of the grant to the recipient
will be recognized during the years in which the shares vest.
The Board of Directors may terminate the 1998 MRP at any time and, upon
termination, all unallocated shares of Common Stock will revert to the Savings
Bank.
A recipient of a 1998 MRP award in the form of restricted stock
generally will not recognize income upon an award of shares of Common Stock, and
the Holding Company will not be entitled to a federal income tax deduction,
until the termination of the restrictions. Upon such termination, the recipient
will recognize ordinary income in an amount equal to the fair market value of
the Common Stock at the time and the Holding Company will be entitled to a
deduction in the same amount after satisfying federal income tax withholding
requirements. However, the recipient may elect to recognize ordinary income in
the year the restricted stock is granted in an amount equal to the fair market
value of the shares at that time, determined without regard to the restrictions.
In that event, the Holding Company will be entitled to a deduction in such year
and in the same amount. Any gain or loss recognized by the recipient upon
subsequent disposition of the stock will be either a capital gain or capital
loss.
Although no specific award determinations have been made, the Savings
Bank anticipates that if stockholder approval is obtained it would provide
awards to its directors, officers and employees to the extent permitted by
applicable regulations. OTS regulations currently provide that no individual
officer or employee may receive more than 25% of the shares reserved for
issuance under any stock compensation plan and that non-employee directors may
not receive more than 5% of such shares individually or 30% in the aggregate for
all non employee directors.
Transactions with the Savings Bank
Federal regulations require that all loans or extensions of credit by
the Savings Bank to executive officers and directors must generally be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons (unless
the loan or extension of credit is made under a benefit program generally
available to all other employees and does not give preference to any insider
over any other employee) and must not involve more than the normal risk of
repayment or present other unfavorable features. The Savings Bank's policy is
not to make any new loans or extensions of credit to the Savings Bank's
executive officers and directors at different rates or terms than those offered
to the general public. In addition, loans made to a director or executive
officer in an amount that, when aggregated with the amount of all other loans to
such person and his or her related interests, are in excess of the greater of
$25,000, or 5% of the Savings Bank's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors. See "REGULATION -- Federal Regulation of the Savings
Bank -- Transactions with Affiliates." The aggregate amount of loans by the
Savings Bank to its executive officers and directors and their associates was
$926,000 at September 30, 1997, or approximately 1.4% of the Holding Company's
pro forma stockholders' equity (based on the issuance of Conversion Shares at
the maximum of the Estimated Valuation Range).
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the Federal
Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and the
FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a
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great extent, especially in such matters as the ownership of deposit accounts
and the form and content of the Savings Bank's mortgage documents. The Savings
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and the
FDIC to review the Savings Bank's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Holding Company,
the Savings Bank and their operations. The Holding Company, as a savings and
loan holding company, will also be required to file certain reports with, and
otherwise comply with the rules and regulations of, the OTS and the SEC.
Federal Regulation of the Savings Bank
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner. The Savings Bank, as a member of the
FHLB-Atlanta, is required to acquire and hold shares of capital stock in the
FHLB-Atlanta in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or (ii) 1/20 of
its advances (borrowings) from the FHLB-Atlanta. At September 30, 1997, the
Savings Bank complied with this requirement with an investment in FHLB-Atlanta
stock of $1.7 million. Among other benefits, the FHLB-Atlanta provides a central
credit facility primarily for member institutions. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Savings
Bank's deposits, the FDIC has examination, supervisory and enforcement authority
over all savings associations.
The Savings Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Savings Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system under
the FDIA as discussed below. The Savings Bank's assessments expensed for the
year ended September 30, 1997 equaled $152,000.
Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in
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1995. In addition, since January 1, 1997, SAIF members are charged an assessment
of 0.065% of SAIF-assessable deposits for the purpose of paying interest on the
obligations issued by the Financing Corporation ("FICO") in the 1980s to help
fund the thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be the
same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
elimination of federal savings association charter, and would require all
federal savings associations to become national banks or state-chartered
institutions. It is not known what effect, if any, the adoption of such
legislation would have on the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. At
September 30, 1997, the Savings Bank's liquidity ratio was 5.64%.
Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency
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within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1997, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently adopted
final regulations and Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines"). The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. If the OTS
determines that the Savings Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Savings Bank to submit to the agency an
acceptable plan to achieve compliance with the standard. OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a QTL test to avoid certain restrictions on their operations. A savings
institution that fails to become or remain a QTL shall either become a national
bank or be subject to the following restrictions on its operations: (i) the
association may not make any new investment or engage in activities that would
not be permissible for national banks; (ii) the association may not establish
any new branch office where a national bank located in the savings institution's
home state would not be able to establish a branch office; (iii) the association
shall be ineligible to obtain new advances from any FHLB; and (iv) the payment
of dividends by the association shall be subject to the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as
a domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by FHLMC or FNMA. Portfolio assets consist of
total assets minus the sum of (i) goodwill and other intangible assets, (ii)
property used by the savings institution to conduct its business, and (iii)
liquid assets up to 20% of the institution's total assets. At September 30,
1997, the qualified thrift investments of the Savings Bank were approximately
88.8% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Holding Company is not subject to
any minimum capital requirements.
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OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. An institution
that fails to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--
Federal Regulation of the Savings Bank -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights. The prompt corrective action standards also
establish, in effect, a 2% tangible capital standard.
Each savings institution must maintain Tier 1 (core) capital to
risk-weighted assets of at least 4% and total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk- weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's
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assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk- based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the OTS-calculated
amount. Presently, the OTS has postponed the date that the component will first
be deducted from an institution's total capital.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a
table that sets forth in terms of dollars and percentages the OTS tangible, core
and risk-based capital requirements, the Savings Bank's historical amounts and
percentages at September 30, 1997 and pro forma amounts and percentages based
upon the assumptions stated therein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits various
levels of distributions based primarily upon a savings association's capital
level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus one-half its surplus capital ratio (i.e., the amount of capital in
excess of its fully phased-in requirement) at the beginning of the calendar year
or the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital requirement
but below its fully phased-in capital requirement (both before and after the
proposed capital distribution). Such an association may make (without
application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters depending on how close the association
is to meeting its fully phased-in capital requirement. Capital distributions
exceeding this amount require prior OTS approval. A Tier 3 savings association
has capital below the minimum capital requirement (either before or after the
proposed capital distribution). A Tier 3 savings association may not make any
capital distributions without prior approval from the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At September 30, 1997, the Savings Bank's
largest aggregate amount of loans to one borrower was $2.0 million, which
represented 6.5% of the Savings Bank's unimpaired capital and surplus at
September 30, 1997.
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Activities of Savings Banks and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions. Any loan or extension of credit by the Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations generally require
that such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Generally, Regulation O also places individual and aggregate limits
on the amount of loans the Savings Bank may make to such persons based, in part,
on the Savings Bank's capital position, and requires certain board approval
procedures to be followed. The OTS regulations, with certain minor variances,
apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal Community Reinvestment
Act ("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
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acquire the assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Savings Bank received an "outstanding" rating as a
result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has
the authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Holding Company generally is not subject to activity restrictions
under the HOLA. If the Holding Company acquires control of another savings
association as a separate subsidiary other than in a supervisory acquisition, it
would become a multiple savings and loan holding company. There generally are
more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of the Savings Bank - Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
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TAXATION
Federal Taxation
General. Upon consummation of the Conversion and Reorganization, the
Holding Company and the Savings Bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Savings Bank's reserve for bad debts discussed below.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Savings Bank or the Holding Company. For additional information regarding income
taxes, see Note 11 of Notes to Consolidated Financial Statements.
Bad Debt Reserve. Historically, savings institutions such as the
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings Bank's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Savings Bank's actual loss experience, or a percentage equal
to 8% of the Savings Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience, the Savings Bank generally
recognized a bad debt deduction equal to 8% of taxable income.
The provisions repealing the current thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Savings Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on the net income or federal income tax expense. For taxable
years beginning after December 31, 1995, the Savings Bank's bad debt deduction
will be determined under the experience method using a formula based on actual
bad debt experience over a period of years or, if the Savings Bank is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs
during the taxable year. The new rules allow an institution to suspend bad debt
reserve recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institutions average
mortgage lending activity for the six taxable years preceding 1996 adjusted for
inflation. For this purpose, only home purchase or home improvement loans are
included and the institution can elect to have the tax years with the highest
and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provisions of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Savings Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess Distributions
will be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the Savings
Bank's current or accumulated earnings and profits, as calculated for federal
income tax purposes, will not be considered to result in a distribution from the
Savings Bank's bad debt reserve. The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Savings Bank makes a "nondividend
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distribution," then approximately one and one-half times the Excess Distribution
would be includable in gross income for federal income tax purposes, assuming a
34% corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" and "DIVIDEND POLICY" for limits on the payment of dividends by the
Savings Bank. The Savings Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Savings Bank, whether or not an
Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Holding Company may exclude from its
income 100% of dividends received from the Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Savings Bank will not file a consolidated
tax return, except that if the Holding Company or the Savings Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
Audits. The Savings Bank's federal income tax returns have not been
audited within the last five years.
State Taxation
South Carolina Taxation. South Carolina has adopted the Code, with
certain modifications, as it relates to savings and loan associations, effective
for taxable years beginning after December 31, 1984. The Savings Bank is subject
to South Carolina income tax at the rate of 6%. This rate of tax is imposed on
savings and loan associations and savings banks in lieu of the general state
business corporation income tax.
At September 30, 1997, the Savings Bank had net operating loss
carryforwards for state tax purposes of approximately $62.0 million, which
expire in varying amounts between fiscal years 1998 and 2006.
The Savings Bank's state income tax returns have not been audited
within the last five years.
Delaware. As a Delaware holding company not earning income in Delaware,
the Holding Company is exempt from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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THE CONVERSION AND REORGANIZATION
The OTS has approved the Plan of Conversion subject to its approval by
the members of the Savings Bank and the stockholders of the Savings Bank
entitled to vote thereon and to the satisfaction of certain other conditions
imposed by the OTS in its approval. OTS approval does not constitute a
recommendation or endorsement of the Plan of Conversion.
General
On September 22, 1997, the Boards of Directors of the MHC and the
Savings Bank unanimously adopted, and on December 22, 1997, unanimously amended,
the Plan of Conversion, pursuant to which the MHC will convert from a mutual
holding company to a stock holding company and the Savings Bank simultaneously
reorganize as a wholly-owned subsidiary of the Holding Company, a newly formed
Delaware corporation. The following discussion of all material aspects of the
Plan of Conversion is qualified in its entirety by reference to the Plan of
Conversion, which is attached as Exhibit A to both the MHC's Proxy Statement and
the Savings Bank's Proxy Statement, and is available to both members of the MHC
and stockholders of the Savings Bank upon request. The Plan of Conversion is
also filed as an exhibit to the Registration Statement. See "ADDITIONAL
INFORMATION." The OTS has approved the Plan of Conversion subject to its
approval by the members of the MHC entitled to vote on the matter at the Special
Meeting of Members called for that purpose to be held on ____________, 1998, its
approval by the stockholders of the Savings Bank entitled to vote on the matter
at the Stockholders' Meeting called for that purpose to be held on ____________,
1998, and its approval by the stockholders of the Savings Bank (excluding the
MHC) entitled to vote on the matter at the Stockholders' Meeting, and subject to
the satisfaction of certain other conditions imposed by the OTS in its approval.
Pursuant to the Plan of Conversion, (i) the MHC will convert from a
federally-chartered mutual holding company to a federally-chartered interim
stock savings bank (i.e. Interim A) and simultaneously merge with and into the
Savings Bank, pursuant to which the MHC will cease to exist and the shares of
Savings Bank Common Stock held by the MHC will be canceled, and (ii) an interim
federal stock savings bank ("Interim B") will be formed as a wholly-owned
subsidiary of the Holding Company and Interim B will merge with and into the
Savings Bank. As a result of the merger of Interim B with and into the Savings
Bank, the Savings Bank will become a wholly owned subsidiary of the Holding
Company and the Public Savings Bank Shares will be converted into the Exchange
Shares pursuant to the Exchange Ratio, which will result in the holders of such
shares owning in the aggregate approximately the same percentage of the Common
Stock to be outstanding upon the completion of the Conversion and Reorganization
(i.e., the Conversion Shares and the Exchange Shares) as the percentage of
Savings Bank Common Stock owned by them in the aggregate immediately prior to
consummation of the Conversion and Reorganization, but before giving effect to
(a) the payment of cash in lieu of issuing fractional Exchange Shares and (b)
any shares of Conversion Stock purchased by the Savings Bank's stockholders in
the Conversion Offerings.
As part of the Conversion and Reorganization, the Holding Company is
offering Conversion Shares in the Subscription Offering to holders of
Subscription Rights in the following order of priority: (i) Eligible Account
Holders (depositors of the Savings Bank with $50.00 or more on deposit as of the
close of business on June 30, 1996); (ii) Supplemental Eligible Account Holders
(depositors of the Savings Bank with $50.00 or more on deposit as of the close
of business on December 31, 1997); and (iii) Other Members (depositors of the
Savings Bank as of the close of business on ___________, 1998 and borrowers of
the Savings Bank with loans outstanding as of the close of business on October
26, 1993, which continue to be outstanding as of the close of business on
__________, 1997).
Concurrently with the Subscription Offering, any Conversion Shares not
subscribed for in the Subscription Offering may be offered for sale in the
Direct Community Offering to members of the general public, with priority being
given first to Public Stockholders as of the close of business on the Voting
Record Date (who are not Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members) and then to natural persons and trusts of natural
persons residing in the Local Community. Conversion Shares not sold in the
Subscription and Direct
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Community Offerings may be offered in the Syndicated Community Offering.
Regulations require that the Direct Community and Syndicated Community Offerings
be completed within 45 days after completion of the fully extended Subscription
Offering unless extended by the Savings Bank or the Holding Company with the
approval of the regulatory authorities. If the Syndicated Community Offering is
determined not to be feasible because of market conditions or otherwise, the
Board of Directors of the Savings Bank will consult with the regulatory
authorities to determine an appropriate alternative method for selling the
unsubscribed Conversion Shares. The Plan of Conversion provides that the
Conversion and Reorganization must be completed within 24 months after the date
of the approval of the Plan of Conversion by the members of the MHC.
No sales of Common Stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offerings unless the
Plan of Conversion is approved by the members of the MHC and the stockholders of
the Savings Bank.
The completion of the Conversion Offerings, however, is subject to
market conditions and other factors beyond the Savings Bank's control. No
assurance can be given as to the length of time after approval of the Plan of
Conversion at the Special Members Meeting and the Stockholders Meeting that will
be required to complete the Direct Community or Syndicated Community Offerings
or other sale of the Conversion Shares. If delays are experienced, significant
changes may occur in the estimated pro forma market value of the MHC and the
Savings Bank, as converted, together with corresponding changes in the net
proceeds realized by the Holding Company from the sale of the Conversion Shares.
If such events occur, and the Savings Bank does not terminate the Conversion and
Reorganization, subscribers will be resolicited and given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative response is
received from subscribers that they wish to confirm their orders, the funds will
be returned promptly, together with accrued interest at the Savings Bank's
passbook rate from the date payment is received until the funds are returned to
the subscriber. If the Conversion and Reorganization is terminated, the Savings
Bank would be required to charge all Conversion and Reorganization expenses
against current income.
Orders for Conversion Shares will not be filled until at least
1,466,250 Conversion Shares have been subscribed for or sold and the OTS
approves the final valuation and the Conversion and Reorganization closes. If
the Conversion and Reorganization is not completed within 45 days after the last
day of the fully extended Subscription Offering and the OTS consents to an
extension of time to complete the Conversion and Reorganization, subscribers
will be given the right to increase, decrease or rescind their subscriptions.
Unless an affirmative indication is received from subscribers that they wish to
continue to subscribe for shares, the funds will be returned promptly, together
with accrued interest at the Savings Bank's passbook rate from the date payment
is received until the funds are returned to the subscriber. If such period is
not extended, or, in any event, if the Conversion and Reorganization is not
completed, all withdrawal authorizations will be terminated and all funds, which
will be held by the Savings Bank in a segregated deposit account insured by the
FDIC up to the applicable $100,000 legal limit, will be promptly returned
together with accrued interest at the Savings Bank's passbook rate from the date
payment is received until the Conversion and Reorganization is terminated.
Purposes of Conversion and Reorganization
The MHC, as a federally chartered mutual holding company, does not have
stockholders and has no authority to issue capital stock. As a result of the
Conversion and Reorganization, the Holding Company will be structured in the
form used by holding companies of commercial banks, most business entities and a
growing number of savings institutions. The holding company form of organization
will provide the Holding Company with the ability to diversify the Holding
Company's and the Savings Bank's business activities through acquisition of or
mergers with both stock savings institutions and commercial banks, as well as
other companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Holding Company will be in a
position after the Conversion and Reorganization, subject to regulatory
limitations and the Holding Company's financial position, to take advantage of
any such opportunities that may arise.
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In their decision to pursue the Conversion and Reorganization, the
Board of Directors of the MHC and the Savings Bank considered various regulatory
uncertainties associated with the mutual holding company structure including the
ability to waive dividends in the future as well as the general uncertainty
regarding a possible elimination of the federal savings association charter.
The Conversion and Reorganization will be important to the future
growth and performance of the holding company organization by providing a larger
capital base to support the operations of the Savings Bank and Holding Company
and by enhancing their future access to capital markets, their ability to
diversify into other financial services related activities, and their ability to
provide services to the public. Since the MHC's ownership interest in the
Savings Bank is 53.03% as of the date of this Prospectus, the Savings Bank
currently does not have the ability to raise additional capital through the sale
of additional shares of Savings Bank Common Stock because OTS regulations
require that the MHC hold a majority of the outstanding shares of Savings Bank
Common Stock.
The Conversion and Reorganization also will result in an increase in
the number of shares of Common Stock to be outstanding as compared to the number
of outstanding shares of Public Savings Bank Shares which will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "MARKET FOR COMMON STOCK." In addition, the Conversion and
Reorganization permit the Holding Company to engage in stock repurchases without
adverse federal income tax consequences, unlike the Savings Bank. Currently, the
Holding Company has no plans or intentions to engage in any stock repurchases.
An additional benefit of the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Savings Bank for federal
income tax purposes. When the Savings Bank (as a mutual institution) transferred
substantially all of its assets and liabilities to its stock savings bank
successor in the MHC Reorganization, its accumulated earnings and profits tax
attribute was not able to be transferred to the Savings Bank because no tax-free
reorganization was involved. Accordingly, this tax attribute was retained by the
Savings Bank when it converted its charter to that of the MHC, even though the
underlying retained earnings were transferred to the Savings Bank. The
Conversion and Reorganization has been structured to re-unite the accumulated
earnings and profits tax attribute retained by the MHC in the MHC Reorganization
with the retained earnings of the Savings Bank by merging the MHC with and into
the Savings Bank in a tax-free reorganization. This transaction will increase
the Savings Bank's ability to pay dividends to the Holding Company in the
future. See "DIVIDEND POLICY."
If the Savings Bank had undertaken a standard conversion involving the
formation of a stock holding company in 1993, applicable OTS regulations would
have required a greater amount of common stock to be sold than the amount of net
proceeds raised in the MHC Reorganization. Management believed that it was
advisable to profitably invest the $946,000 of net proceeds raised in the MHC
Reorganization and the $10.7 million of net proceeds raised in the Additional
Offering prior to raising the larger amount of capital that would have been
raised in a standard conversion. A standard conversion in 1993 also would have
immediately eliminated all aspects of the mutual form of organization.
In light of the foregoing, the Boards of Directors of the Primary
Parties believe that the Conversion and Reorganization is in the best interests
of the MHC and the Savings Bank, their respective members and stockholders, and
the communities served by the Savings Bank.
Effects of Conversion and Reorganization on Depositors and Borrowers of the
Savings Bank
General. Prior to the Conversion and Reorganization, each depositor in
the Savings Bank has both a deposit account in the institution and a pro rata
ownership interest in the net worth of the MHC based upon the balance in his or
her account, which interest may only be realized in the event of a liquidation
of the MHC. However, this ownership interest is tied to the depositor's account
and has no tangible market value separate from such deposit account. A depositor
who reduces or closes his or her account receives a portion or all of the
balance in the account but nothing for his or her ownership interest in the net
worth of the MHC, which is lost to the extent that the balance in the account is
reduced.
85
Consequently, the depositors of the Savings Bank normally have no way
to realize the value of their ownership interest in the MHC, which has
realizable value only in the unlikely event that the MHC is liquidated. In such
event, the depositors of record at that time, as owners, would share pro rata in
any residual surplus and reserves of the MHC after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Holding Company. The Common Stock is separate and apart from
deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
deposit and/or loan account(s) the seller may hold in the Savings Bank.
Continuity. The Conversion and Reorganization will not interrupt the
Savings Bank's normal business of accepting deposits and making loans. The
Savings Bank will continue to be subject to regulation by the OTS and the FDIC.
After the Conversion and Reorganization, the Savings Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The directors and officers of the Savings Bank at the time of the
Conversion and Reorganization will continue to serve as directors and officers
of the Savings Bank after the Conversion and Reorganization. The directors and
officers of the Holding Company consist of individuals currently serving as
directors and officers of the MHC and the Savings Bank, and they generally will
retain their positions in the Holding Company after the Conversion and
Reorganization.
Effect on Public Savings Bank Shares. Under the Plan of Conversion,
upon consummation of the Conversion and Reorganization, the Public Savings Bank
Shares shall be converted into Exchange Shares based upon the Exchange Ratio
without any further action on the part of the holder thereof. Upon surrender of
the Public Savings Bank Shares, Common Stock will be issued in exchange for such
shares. See "-- Delivery and Exchange of Stock Certificates."
Upon consummation of the Conversion and Reorganization, the Public
Stockholders will become stockholders of the Holding Company. For a description
of certain changes in the rights of stockholders as a result of the Conversion
and Reorganization, see "COMPARISON OF STOCKHOLDERS' RIGHTS."
Voting Rights. Presently, depositors and borrowers of the Savings Bank
are members of, and have voting rights in, the MHC as to all matters requiring
membership action. Upon completion of the Conversion and Reorganization, the MHC
will cease to exist and all voting rights in the Savings Bank will be vested in
the Holding Company as the sole stockholder of the Savings Bank. Exclusive
voting rights with respect to the Holding Company will be vested in the holders
of Common Stock. Depositors and borrowers of the Savings Bank will not have
voting rights in the Holding Company after the Conversion and Reorganization,
except to the extent that they become stockholders of the Holding Company.
Savings Accounts and Loans. The Savings Bank's savings accounts,
account balances and existing FDIC insurance coverage of savings accounts will
not be affected by the Conversion and Reorganization. Furthermore, the
Conversion and Reorganization will not affect the loan accounts, loan balances
or obligations of borrowers under their individual contractual arrangements with
the Savings Bank.
Tax Effects. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion and Reorganization will
constitute a nontaxable reorganization under Section 368(a)(1)(A) of the Code.
Among other things, the opinion provides that: (i) the conversion of the MHC
from a mutual holding company to a federally-chartered interim stock savings
bank (i.e., Interim A) and its simultaneous merger with and into the Savings
Bank, with the Savings Bank as the surviving entity will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code, (ii) no
gain or loss will be recognized by the Savings Bank upon the
86
receipt of the assets of the MHC in such merger, (iii) the merger of Interim B
with and into the Savings Bank, with the Savings Bank as the surviving entity,
will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Code, (iv) no gain or loss will be recognized by Interim B upon the transfer
of its assets to the Savings Bank, (v) no gain or loss will be recognized by the
Savings Bank upon the receipt of the assets of Interim B, (vi) no gain or loss
will be recognized by the Holding Company upon the receipt of Savings Bank
Common Stock solely in exchange for Common Stock, (vii) no gain or loss will be
recognized by the Public Stockholders upon the receipt of Exchange Shares in
exchange for their Public Savings Bank Shares, (viii) the basis of the Exchange
Shares to be received by the Public Stockholders will be the same as the basis
of the Public Savings Bank Shares surrendered in exchange therefor, before
giving effect to any payment of cash in lieu of fractional Exchange Shares, (ix)
the holding period of the Exchange Shares to be received by the Public
Stockholders will include the holding period of the Public Savings Bank Shares,
provided that the Public Savings Bank Shares were held as a capital asset on the
date of the exchange, (x) no gain or loss will be recognized by the Holding
Company upon the sale of shares of Conversion Shares in the Conversion
Offerings, (xi) the Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members will recognize gain, if any, upon the issuance to them
of withdrawable savings accounts in the Savings Bank following the Conversion
and Reorganization, interests in the liquidation account and nontransferable
subscription rights to purchase Conversion Stock, but only to the extent of the
value, if any, of the subscription rights, and (xii) the tax basis to the
holders of Conversion Shares purchased in the Conversion Offerings will be the
amount paid therefor, and the holding period for the Conversion Shares will
begin on the date of consummation of the Conversion Offerings, if purchased
through the exercise of Subscription Rights, and on the day after the date of
purchase, if purchased in the Community Offering or the Syndicated Community
Offering. Unlike a private letter ruling issued by the IRS, an opinion of
counsel is not binding on the IRS and the IRS could disagree with the
conclusions reached therein. In the event of such disagreement, no assurance can
be given that the conclusions reached in an opinion of counsel would be
sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. RP Financial, a financial consulting firm retained by the
Savings Bank, whose findings are not binding on the IRS, has issued a letter
indicating that the Subscription Rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration and afford the recipients the right only
to purchase shares of the Common Stock at a price equal to its estimated fair
market value, which will be the same price paid by purchasers in the Direct
Community Offering for unsubscribed shares of Common Stock. If the Subscription
Rights are deemed to have a fair market value, the receipt of such rights may
only be taxable to those Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members who exercise their Subscription Rights. The Savings
Bank could also recognize a gain on the distribution of such Subscription
Rights. Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are encouraged to consult with their own tax advisors as to the
tax consequences in the event the Subscription Rights are deemed to have a fair
market value.
The Savings Bank has also received an opinion from Evans, Carter, Kunes
& Bennett, P.A., Charleston, South Carolina, that, assuming the Conversion and
Reorganization does not result in any federal income tax liability to the
Savings Bank, its account holders, or the Holding Company, implementation of the
Plan of Conversion will not result in any South Carolina tax liability to such
entities or persons.
The opinions of Breyer & Aguggia and Evans, Carter, Kunes & Bennett,
P.A. and the letter from RP Financial are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
THE PRECEDING DISCUSSION SUMMARIZES THE MATERIAL TAX CONSEQUENCES OF
THE CONVERSION AND REORGANIZATION. PROSPECTIVE INVESTORS, HOWEVER, ARE URGED
TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE
CONVERSION AND REORGANIZATION PARTICULAR TO THEM.
87
Liquidation Account. In the unlikely event of a complete liquidation of
the MHC, each depositor of the Savings Bank would receive his or her pro rata
share of any assets of the MHC remaining after payment of claims of all
creditors. Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his or her deposit account was to the total
value of all deposit accounts in the Savings Bank at the time of liquidation.
After the Conversion and Reorganization, each depositor, in the event of a
complete liquidation of the Savings Bank, would have a claim as a creditor of
the same general priority as the claims of all other general creditors of the
Savings Bank. However, except as described below, his or her claim would be
solely in the amount of the balance in his or her deposit account plus accrued
interest. Each stockholder would not have an interest in the value or assets of
the Savings Bank or the Holding Company above that amount.
The Plan of Conversion provides for the establishment, upon the
completion of the Conversion and Reorganization, of a special "liquidation
account" for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the amount of any dividends waived by the
MHC plus the greater of (i) the Savings Bank's retained earnings of $12.9
million at March 31, 1993, the date of the latest statement of financial
condition contained in the final offering circular utilized in the MHC
Reorganization, or (ii) 53.02% of the Savings Bank's total stockholders' equity
as reflected in its latest statement of financial condition contained in the
final Prospectus utilized in the Conversion Offerings. As of the date of this
Prospectus, the initial balance of the liquidation account would be $____
million. Each Eligible Account Holder and Supplemental Eligible Account Holder,
if he or she were to continue to maintain his or her deposit account at the
Savings Bank, would be entitled, upon a complete liquidation of the Savings Bank
after the Conversion and Reorganization to an interest in the liquidation
account prior to any payment to the Holding Company as the sole stockholder of
the Savings Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account, including passbook accounts, transaction accounts such as
checking accounts, money market deposit accounts and certificates of deposit,
held in the Savings Bank at the close of business on June 30, 1996 or December
31, 1997, as the case may be. Each Eligible Account Holder and Supplemental
Eligible Account Holder will have a pro rata interest in the total liquidation
account for each of his or her deposit accounts based on the proportion that the
balance of each such deposit account on the Eligibility Record Date (June 30,
1996) or the Supplemental Eligibility Record Date (December 31, 1997), as the
case may be, bore to the balance of all deposit accounts in the Savings Bank on
such date.
If, however, on any September 30 annual closing date of the Savings
Bank, commencing September 30, 1998, the amount in any deposit account is less
than the amount in such deposit account on June 30, 1996 or December 31, 1997,
as the case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Holding Company as the sole stockholder of the Savings Bank.
The Exchange Offering
The Exchange Offering is being undertaken pursuant to the Plan of
Conversion, which must be approved by the members of the MHC at a Special
Meeting of Members and by the stockholders of the Savings Bank at the Annual
Meeting of Stockholders, both to be held on March ___, 1998. In the Exchange
Offering, each share of Savings Bank Common Stock held by the MHC (800,000
shares, or 53.02% of the outstanding shares, as of the date of this Prospectus)
will be canceled and each Public Savings Bank Share (708,873 shares, or 46.98%
of the outstanding shares, as of the date of this Prospectus) will be exchanged
for Exchange Shares pursuant the final Exchange Ratio that will result in the
Public Stockholders' aggregate ownership of approximately 46.98% of the
outstanding shares of Common Stock before giving effect to any (i) payment of
cash in lieu of issuing fractional Exchange Shares and (ii) Conversion Shares
purchased by the Public Stockholders in the Conversion Offerings. The final
Exchange Ratio will be based on the Public Stockholders' ownership interest and
not on the market value of
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the Public Savings Bank Shares. See "-- Stock Pricing and Number of Shares to be
Issued in the Conversion and Reorganization."
The Exchange Offering is an integral part of the Conversion and
Reorganization. Pursuant to OTS regulations, holders of Savings Bank Common
Stock do not have dissent and appraisal rights with respect to the Conversion
and Reorganization because the Savings Bank Common Stock is listed on The Nasdaq
Stock Market. Accordingly, the exchange of each Public Savings Bank Share for
Exchange Shares is mandatory. PUBLIC STOCKHOLDERS SHOULD NOT SEND THEIR
CERTIFICATES FOR EXCHANGE AT THIS TIME. The Holding Company will mail to each
Public Stockholder to their address of record exchange instructions and a
transmittal letter after the consummation of the Conversion and Reorganization.
See "-- Delivery and Exchange of Stock Certificates -- Exchange Shares."
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Conversion Shares have been
issued to persons and entities entitled to purchase the Conversion Shares in the
Subscription Offering. The amount of Conversion Shares which these parties may
purchase will be subject to the availability of the Conversion Shares for
purchase under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the Conversion Shares are available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at the Savings Bank as of the close of business on June 30, 1996
will receive nontransferable Subscription Rights to subscribe for up to the
greater of 50,000 Conversion Shares, one-tenth of one percent of the total
offering of Conversion Shares or 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of Conversion Shares to
be issued by a fraction of which the numerator is the amount of qualifying
deposit of the Eligible Account Holder and the denominator is the total amount
of qualifying deposits of all Eligible Account Holders. If the exercise of
Subscription Rights in this category results in an oversubscription, Conversion
Shares will be allocated among subscribing Eligible Account Holders so as to
permit each Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make such person's total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Eligible
Account Holders proportionately, based on the amount of their respective
qualifying deposits as compared to total qualifying deposits of all Eligible
Account Holders. Subscription Rights received by officers and directors in this
category based on their increased deposits in the Savings Bank in the one year
period preceding June 30, 1996 are subordinated to the Subscription Rights of
other Eligible Account Holders.
Category 2: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of the close of business on December 31, 1997 will
receive nontransferable Subscription Rights to subscribe for up to the greater
of 50,000 Conversion Shares, one-tenth of one percent of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of Conversion Shares to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
Conversion Shares will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal 100 shares or the number of shares actually subscribed for,
whichever is less. Thereafter, unallocated shares will be allocated among
subscribing Supplemental Eligible Account Holders proportionately, based on the
amount of their respective qualifying deposits as compared to total qualifying
deposits of all Supplemental Eligible Account Holders.
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Category 3: Other Members. Each depositor of the Savings Bank as of the
close of business on the Voting Record Date (___________, 1998) and each
borrower with a loan outstanding as of the close of business on October 26,
1993, which continues to be outstanding as of the close of business on the
Voting Record Date, will receive nontransferable Subscription Rights to purchase
up 50,000 Conversion Shares or one-tenth of one percent of the total offering of
Conversion Shares to the extent shares are available following subscriptions by
Eligible Account Holders and Supplemental Eligible Account Holders. In the event
of an oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for Common Stock in the Subscription
Offering or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS or another agency of the U.S. Government. Each
person exercising Subscription Rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of such shares. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE
CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Holding Company and the Savings Bank will make reasonable attempts
to provide a Prospectus and related offering materials to holders of
Subscription Rights. However, the Subscription Offering and all Subscription
Rights under the Plan of Conversion will expire at Noon, Eastern Time, on the
Expiration Date, whether or not the Savings Bank has been able to locate each
person entitled to such Subscription Rights. Orders for Common Stock in the
Subscription Offering received in hand by the Savings Bank after the Expiration
Date will not be accepted. The Subscription Offering may be extended by the
Holding Company and the Savings Bank up to ______, 1998 without the OTS's
approval. OTS regulations require that the Holding Company complete the sale of
Conversion Shares within 45 days after the close of the Subscription Offering.
If the Direct Community Offering and the Syndicated Community Offerings are not
completed by __________, 1998 (or ___________, 1998, if the Subscription
Offering is fully extended), all funds received will be promptly returned with
interest at the Savings Bank's passbook rate and all withdrawal authorizations
will be canceled or, if regulatory approval of an extension of the time period
has been granted, all subscribers and purchasers will be given the right to
increase, decrease or rescind their orders. If an extension of time is obtained,
all subscribers will be notified of such extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled). No
single extension can exceed 90 days.
Direct Community Offering. Concurrently with the Subscription Offering,
Conversion Shares will be offered by the Holding Company to certain members of
the general public in a Direct Community Offering, with preference given first
to Public Stockholders as of the close of business on the Voting Record Date
(who are not eligible to subscribe for Conversion Shares in the Subscription
Offering) and then to natural persons and trusts of natural persons residing in
the Local Community. Purchasers in the Direct Community Offering are eligible to
purchase up to 50,000 Conversion Shares. In the event an insufficient number of
shares are available to fill orders in the Direct Community Offering, the
available shares will be allocated on a pro rata basis determined by the amount
of the respective orders. The Direct Community Offering will terminate on the
Expiration Date, unless extended by the Holding Company and the Savings Bank,
with approval of the OTS. Any extensions beyond 45 days after the close of the
fully extended Subscription Offering would require a resolicitation of orders,
wherein subscribers for the maximum numbers of shares of Common Stock would be,
and certain other large subscribers who have subscribed for close to the maximum
number of shares of Common Stock, in the discretion of the Holding Company and
the Savings Bank may be, given the opportunity to reconfirm their orders, in
which case they will need to reconfirm affirmatively their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Savings Bank's passbook rate, or
be permitted to modify or cancel their orders. The right of any person to
purchase shares in the Direct Community Offering
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is subject to the absolute right of the Holding Company and the Savings Bank to
accept or reject such purchases in whole or in part. If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. The Holding Company presently intends to terminate the Direct Community
Offering as soon as it has received orders for all shares available for purchase
in the Conversion and Reorganization.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be promptly refunded with interest.
Syndicated Community Offering. The Plan of Conversion provides that all
shares of Common Stock not purchased in the Subscription Offering and Direct
Community Offering may be offered for sale to certain members of the general
public in a Syndicated Community Offering through a syndicate of registered
broker-dealers to be managed by Sandler O'Neill acting as agent of the Holding
Company. The Holding Company and the Savings Bank have the right to reject
orders, in whole or part, in their sole discretion in the Syndicated Community
Offering. Neither Sandler O'Neill nor any registered broker-dealer shall have
any obligation to take or purchase any shares of the Common Stock in the
Syndicated Community Offering; however, Sandler O'Neill has agreed to use its
best efforts in the sale of shares in the Syndicated Community Offering.
Conversion Shares sold in the Syndicated Community Offering also will
be sold at the $20.00 Purchase Price. See "-- Stock Pricing, Exchange Ratio and
Number of Shares to be Issued." No person will be permitted to subscribe for
more than 50,000 Conversion Shares in the Syndicated Community Offering. See "--
Plan of Distribution and Selling Commissions" for a description of the
commission to be paid to the selected dealers and to Sandler O'Neill.
Sandler O'Neill may enter into agreements with selected dealers to
assist in the sale of shares in the Syndicated Community Offering. During the
Syndicated Community Offering, selected dealers may only solicit indications of
interest from their customers to place orders with the Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock. When
and if Sandler O'Neill and the Holding Company believe that enough indications
of interest and orders have been received in the Subscription Offering, the
Direct Community Offering and the Syndicated Community Offering to consummate
the Conversion and Reorganization, Sandler O'Neill will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations to such customers on the next business day after the Order
Date. Selected dealers may debit the accounts of their customers on a date which
will be three business days from the Order Date ("Settlement Date"). Customers
who authorize selected dealers to debit their brokerage accounts are required to
have the funds for payment in their account on but not before the Settlement
Date. On the Settlement Date, selected dealers will remit funds to the account
that the Holding Company established for each selected dealer. Each customer's
funds so forwarded to the Holding Company, along with all other accounts held in
the same title, will be insured by the FDIC up to the applicable $100,000 legal
limit. After payment has been received by the Holding Company from selected
dealers, funds will earn interest at the Savings Bank's passbook rate until the
completion of the Conversion Offerings. At the completion of the Conversion and
Reorganization, the funds received in the Conversion Offerings will be used to
purchase the shares of Common Stock ordered. The shares issued in the Conversion
and Reorganization cannot and will not be insured by the FDIC or any other
government agency. In the event the Conversion and Reorganization is not
consummated as described above, funds with interest will be returned promptly to
the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The Syndicated Community Offering may terminate on or at any time
subsequent to the Expiration Date, but no later than 45 days after the close of
the Subscription Offering, unless extended by the Holding Company and the
Savings Bank, with approval of the OTS.
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In the event the Savings Bank is unable to find purchasers from the
general public for all unsubscribed shares, other purchase arrangements will be
made by the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan of Conversion. If the Conversion and Reorganization is not
completed within 45 days after the close of the Subscription Offering, either
all funds received will be returned with interest (and withdrawal authorizations
canceled) or, if the OTS has granted an extension of time, all subscribers will
be given the right to increase, decrease or rescind their subscriptions at any
time prior to 20 days before the end of the extension period. If an extension of
time is obtained, all subscribers will be notified of such extension and of
their rights to modify their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled).
Persons in Non-Qualified States. The Holding Company and the Savings
Bank will make reasonable efforts to comply with the securities laws of all
states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan of Conversion reside. However, the Holding Company and the
Savings Bank are not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside in such state or (ii) the Holding
Company or the Savings Bank determines that compliance with the securities laws
of such state would be impracticable for reasons of cost or otherwise, including
but not limited to a request or requirement that the Holding Company and the
Savings Bank or their officers, directors or trustees register as a broker,
dealer, salesman or selling agent, under the securities laws of such state, or a
request or requirement to register or otherwise qualify the Subscription Rights
or Common Stock for sale or submit any filing with respect thereto in such
state. Where the number of persons eligible to subscribe for shares in one state
is small, the Holding Company and the Savings Bank will base their decision as
to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of reviewing the registration and qualification requirements of the
state (and of actually registering or qualifying the shares) or the need to
register the Holding Company, its officers, directors or employees as brokers,
dealers or salesmen.
Plan of Distribution and Selling Commissions
The Primary Parties have engaged Sandler O'Neill as a financial and
marketing advisor in connection with the Offering, and Sandler O'Neill has
agreed to use its best efforts to assist the Holding Company with the
solicitation of subscriptions and purchase orders for Conversion Shares in the
Conversion Offerings. The services to be rendered by Sandler O'Neill include the
following: (i) consulting as to the securities marketing implications of any
aspect of the Plan of Conversion or related corporate documents; (ii) reviewing
with the Board of Directors RP Financial's appraisal of the aggregate pro forma
market value of the MHC and the Savings Bank, as converted; (iii) reviewing all
offering documents, including this Prospectus, stock order forms and related
offering materials; (iv) assisting in the design and implementation of a
marketing strategy for the Conversion Offerings; (v) assisting in obtaining all
requisite regulatory approvals, (vi) assisting management in scheduling and
preparing for meetings with potential investors and broker-dealers; and (vii)
providing such other general advice and assistance as may be requested to
promote the successful completion of the Conversion Offerings. In addition,
Sandler O'Neill will manage the Syndicated Community Offering, if necessary. The
engagement of Sandler O'Neill and the services performed thereunder, including
any "due diligence" investigation of the operations of the Primary Parties,
should not be construed as an endorsement or recommendation of the suitability
of an investment in the Common Stock or a verification of the accuracy or
completeness of the information contained herein. Sandler O'Neill has not
prepared any report or opinion constituting a recommendation or advice to the
Primary Parties or to persons who may purchase Conversion Shares regarding the
suitability of an investment in the Common Stock or as to the prices at which
the Common Stock may trade after the consummation of the Conversion and
Reorganization.
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Based upon negotiations between the Primary Parties and Sandler
O'Neill, Sandler O'Neill will receive a fee equal to 1.50% of the aggregate
purchase price of Conversion Shares sold in the Subscription and Community
Offerings. No fees will be paid to Sandler O'Neill on subscriptions by any
director, officer or employee of the Primary Parties or members of their
immediate families. In the event that a selected dealers agreement is entered
into in connection with a Syndicated Community Offering, the Primary Parties
will pay a fee to such selected dealers, any sponsoring dealer's fees, and a
management fee to Sandler O'Neill of 1.75% for shares sold by a National
Association of Securities Dealers, Inc. ("NASD") member firm, other than Sandler
O'Neill, pursuant to a selected dealers agreement; provided, however, that any
fees payable to Sandler O'Neill for any Conversion Shares sold by them pursuant
to such a selected dealers agreement shall not exceed 1.75% of the aggregate
purchase price of such shares and that the aggregate fees payable to Sandler
O'Neill and selected dealers shall not exceed 7.0% of the aggregate purchase
price of such shares. Sandler O'Neill will also be reimbursed for its reasonable
out-of-pocket expenses, including legal fees, for these services, in an amount
not to exceed $75,000. Notwithstanding the foregoing, in the event the
Conversion Offerings are not consummated or Sandler O'Neill ceases, under
certain circumstances after the subscription solicitation activities are
commenced, to provide assistance to the Primary Parties, Sandler O'Neill will be
entitled to be reimbursed for its reasonable out-of-pocket expenses as described
above. The Primary Parties have agreed to indemnify Sandler O'Neill in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act. Sandler O'Neill has received advances towards its fees
totalling $25,000. Total marketing fees to Sandler O'Neill are expected to be
$428,625, $506,250, $583,875 and $673,145 at the minimum, midpoint, maximum, and
15% above the maximum of the Estimated Valuation Range, respectively. See "PRO
FORMA DATA" for the assumptions used to arrive at these estimates.
The management and employees of the Primary Parties may participate in
the Conversion Offerings in clerical capacities, providing administrative
support in effecting sales transactions or answering questions of a mechanical
nature relating to the proper execution of the order form. Management of the
Primary Parties may answer questions regarding the respective businesses of the
Primary Parties. Other questions of prospective purchasers, including questions
as to the advisability or nature of the investment, will be directed to
registered representatives. The management and employees of the Primary Parties
have been instructed not to solicit offers to purchase Conversion Shares or to
provide advice regarding the purchase of Conversion Shares. None of the Primary
parties' employees or directors who participate in the Conversion Offerings will
receive any special compensation or other remuneration for such activities.
None of the Primary Parties' personnel participating in the
Subscription and Community Offering are registered or licensed as a broker or
dealer or an agent of a broker or dealer. The Primary Parties' personnel will
assist in the above-described sales activities pursuant to an exemption from
registration as a broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1")
promulgated under the Exchange Act. Rule 3a4-1 generally provides that an
"associated person of an issuer" of securities shall not be deemed a broker
solely by reason of participation in the sale of securities of such issuer if
the associated person meets certain conditions. Such conditions include, but are
not limited to, that the associated person participating in the sale of an
issuer's securities not be compensated in connection therewith at the time of
participation, that such person not be associated with a broker or dealer and
that such person observe certain limitations on his participation in the sale of
securities. For purposes of this exemption, "associated person of an issuer" is
defined to include any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by or is under common control
with the issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order Forms will only be distributed with a Prospectus. The Savings Bank will
accept for processing only orders submitted on original Order Forms. The Savings
Bank is not obligated to accept orders submitted on photocopied or telecopied
Order Forms. Orders cannot and will not be accepted without the execution of the
Certification appearing on the reverse side of the Order Form.
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To purchase shares in the Subscription Offering, an executed Order Form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Savings Bank (which may be given by completing the
appropriate blanks in the Order Form), must be received by the Savings Bank by
Noon, Eastern Time, on the Expiration Date. Order Forms which are not received
by such time or are executed defectively or are received without full payment
(or without appropriate withdrawal instructions) are not required to be
accepted. The Holding Company and the Savings Bank have the right to waive or
permit the correction of incomplete or improperly executed Order Forms, but do
not represent that they will do so. Pursuant to the Plan of Conversion, the
interpretation by the Holding Company and the Savings Bank of the terms and
conditions of the Plan of Conversion and of the Order Form will be final. In
order to purchase shares in the Direct Community Offering, the Order Form,
accompanied by the required payment for each share subscribed for, must be
received by the Savings Bank prior to the time the Direct Community Offering
terminates, which may be on or at any time subsequent to the Expiration Date.
Once received, an executed Order Form may not be modified, amended or rescinded
without the consent of the Savings Bank unless the Conversion and Reorganization
has not been completed within 45 days after the end of the Subscription
Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the close of business on the Eligibility
Record Date (June 30, 1996) and/or the Supplemental Eligibility Record Date
(December 31, 1997) and/or the Voting Record Date (___________, 1998) must list
all accounts on the Order Form giving all names in each account, the account
number and the approximate account balance as of such date.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Stock Information Center, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Savings Bank. Appropriate means by which such withdrawals may be
authorized are provided on the Order Form. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check, bank draft or money order
at the Savings Bank's passbook rate from the date payment is received until the
completion or termination of the Conversion and Reorganization. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion and
Reorganization (unless the certificate matures after the date of receipt of the
Order Form but prior to closing, in which case funds will earn interest at the
passbook rate from the date of maturity until consummation of the Conversion and
Reorganization), but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion
and Reorganization. At the completion of the Conversion and Reorganization, the
funds received in the Conversion Offerings will be used to purchase the shares
of Common Stock ordered. The shares of Common Stock issued in the Conversion and
Reorganization cannot and will not be insured by the FDIC or any other
government agency. If the Conversion and Reorganization is not consummated for
any reason, all funds submitted will be promptly refunded with interest as
described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of
the aggregate Purchase Price from his or her deposit account, the Savings Bank
will do so as of the effective date of Conversion and Reorganization, though the
account must contain the full amount necessary for payment at the time the
subscription order is received. The Savings Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Savings
Bank's passbook rate.
IRAs maintained in the Savings Bank do not permit investment in the
Common Stock. A depositor interested in using his or her IRA funds to purchase
Common Stock must do so through a self-directed IRA. Since the Savings Bank does
not offer such accounts, it will allow such a depositor to make a
trustee-to-trustee transfer of the IRA funds to a trustee offering a
self-directed IRA program with the agreement that such funds will be used to
purchase Conversion Shares. There will be no early withdrawal or IRS interest
penalties for such transfers. The
94
new trustee would hold the Conversion Shares in a self-directed account in the
same manner as the Savings Bank now holds the depositor's IRA funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
using funds in a Savings Bank IRA to purchase Common Stock should contact the
Stock Information Center so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Date. In addition, the provisions
of ERISA and IRS regulations require that officers, directors and 10%
shareholders who use self-directed IRA funds to purchase shares of Common Stock
in the Subscription Offering, make such purchases for the exclusive benefit of
IRAs.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued
The Plan of Conversion requires that the purchase price of the
Conversion Shares must be based on the appraised pro forma market value of the
Conversion Shares, as determined on the basis of an independent valuation. The
Primary Parties have retained RP Financial to make such valuation. For its
services in making such appraisal and any expenses incurred in connection
therewith, RP Financial will receive a maximum fee of $30,000 plus out-of-pocket
expenses, together with a fee of no greater than $7,500 plus out-of-pocket
expenses for the preparation of a business plan and other services performed in
connection with the Holding Company's holding company application to the OTS.
The Primary Parties have agreed to indemnify RP Financial and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where RP Financial's liability results from its negligence or
bad faith.
The appraisal has been prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the
Primary Parties and the economic and demographic conditions in the Savings
Bank's existing market area; certain historical, financial and other information
relating to the Savings Bank; a comparative evaluation of the operating and
financial statistics of the Savings Bank with those of other similarly situated
publicly-traded companies located in South Carolina and other regions of the
United States; the aggregate size of the offering of the Conversion Shares; the
impact of the Conversion and Reorganization on the Savings Bank's capital and
earnings potential; the proposed dividend policy of the Holding Company and the
Savings Bank; and the trading market for the Savings Bank Common Stock and
securities of comparable companies and general conditions in the market for such
securities.
On the basis of the foregoing, RP Financial has advised the Primary
Parties in its opinion that the estimated pro forma market value of the MHC and
the Savings Bank, as converted, was $65.1 million as of December 5, 1997.
Because the holders of the Public Savings Bank Shares will continue to hold the
same aggregate percentage ownership interest in the Holding Company as they
currently hold in the Savings Bank (before giving effect to the payment of cash
in lieu of issuing fractional Exchange Shares and any Conversion Shares
purchased by the Savings Bank's stockholder in the Conversion Offerings), the
appraisal was multiplied by 53.02%, which represents the MHC's percentage
interest in the Savings Bank. The resulting amount represents the midpoint of
the valuation ($65.1 million), and the minimum and maximum of the valuation were
set at 15% below and above the midpoint, respectively, resulting in a range of
$55.3 million to $74.8 million. Based on such valuation, the Boards of Directors
of the Primary Parties determined that the Conversion Shares would be sold at
$20.00 per share, resulting in a range of 1,466,250 to 1,983,750 Conversion
Shares being offered, and that Exchange Shares would be issued at $20,000 per
share resulting in a range of 1,299,231 to 1,757,783 Exchange Shares being
offered. Upon consummation of the Conversion and Reorganization, the Conversion
Shares and the Exchange Shares will represent approximately 53.02% and 46.98%,
respectively, of the Holding Company's total outstanding shares. The Boards of
Directors of the Primary Parties reviewed RP Financial's appraisal report,
including the methodology and the assumptions used by RP Financial, and
determined that the Estimated Valuation Range was reasonable and adequate. The
Boards of Directors of the Primary Parties also established the formula for
determining the Exchange Ratio. Based upon such formula and the Estimated
Valuation Range, the Exchange Ratio ranged from a minimum of 1.83281 to a
maximum of 2.47969 Exchange Shares for each Public Savings Bank Shares, with a
midpoint of 2.15625. Based upon these Exchange Ratios, the Holding Company
expects to issue between 1,299,231 and 1,757,783 shares of Exchange Shares to
the holders of Public Savings Bank Shares outstanding immediately
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prior to the consummation of the Conversion and Reorganization. The Estimated
Valuation Range and the Exchange Ratio may be amended with the approval of the
OTS, if required, or if necessitated by subsequent developments in the financial
condition of any of the Primary Parties or market conditions generally. If the
appraisal is updated to below $55.3 million or above $86.1 million (the maximum
of the Estimated Valuation Range, as adjusted by 15%), such appraisal will be
filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Holding Company receives orders for
Conversion Shares in excess of $39.7 million (1,983,750 Conversion Shares) and
up to $45.6 million (2,281,312 Conversion Shares), the Holding Company may be
required by the OTS to accept all such orders. No assurances, however, can be
made that the Holding Company will receive orders for Conversion Shares in
excess of the maximum of the Estimated Valuation Range or that, if such orders
are received, that all such orders will be accepted because the Holding
Company's final valuation and number of shares to be issued are subject to the
receipt of an updated appraisal from RP Financial which reflects such an
increase in the valuation and the approval of such increase by the OTS. There is
no obligation or understanding on the part of management to take and/or pay for
any shares of Conversion Shares to complete the Conversion Offerings.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the Savings Bank's Consolidated
Financial Statements and other information provided by the Savings Bank and the
MHC, nor did RP Financial value independently the assets or liabilities of the
Savings Bank. The valuation considers the Savings Bank and the MHC as going
concerns and should not be considered as an indication of the liquidation value
of the Savings Bank and the MHC. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing Conversion Shares or receiving Exchange Shares in the Conversion and
Reorganization will thereafter be able to sell such shares at prices at or above
the Purchase Price or in the range of the foregoing valuation of the pro forma
market value thereof.
No sale of Conversion Shares or issuance of Exchange Shares may be
consummated unless prior to such consummation RP Financial confirms that nothing
of a material nature has occurred which, taking into account all relevant
factors, would cause it to conclude that the Purchase Price is materially
incompatible with the estimate of the pro forma market value of a share of
Common Stock upon consummation of the Conversion and Reorganization. If such is
not the case, a new Estimated Valuation Range may be set, a new Exchange Ratio
may be determined based upon the new Estimated Valuation Range, a new
Subscription and Community Offering and/or Syndicated Community Offering or
Public Offering may be held or such other action may be taken as the Primary
Parties shall determine and the OTS may permit or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of Conversion Shares
to be issued in the Conversion Offerings may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number of
shares times the Purchase Price is not below the minimum or more than 15% above
the maximum of the Estimated Valuation Range. In the event market or financial
conditions change so as to cause the aggregate Purchase Price of the shares to
be below the minimum of the Estimated Valuation Range or more than 15% above the
maximum of such range, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Savings
Bank's passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Any increase or decrease in the number of Conversion Shares will
result in a corresponding change in the number of Exchange Shares, so that upon
consummation of the Conversion and Reorganization, the Conversion Shares and the
Exchange Shares will represent approximately 53.03% and 46.97%, respectively, of
the Holding Company's total outstanding shares of Common Stock (exclusive of the
effects of the exercise of outstanding stock options).
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An increase in the number of Conversion Shares as a result of an
increase in the appraisal of the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Holding Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease in
the number of Conversion Shares would increase both a subscriber's ownership
interest and the Holding Company's pro forma net earnings and stockholders'
equity on a per share basis while decreasing pro forma net earnings and
stockholders' equity on an aggregate basis. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs" and "PRO FORMA DATA."
The appraisal report of RP Financial has been filed as an exhibit to
this Registration Statement and Application for Conversion of which this
Prospectus is a part and is available for inspection in the manner set forth
under "ADDITIONAL INFORMATION."
Limitations on Purchases of Conversion Shares
The Plan of Conversion provides for certain limitations to be placed
upon the purchase of Common Shares by eligible subscribers and others in the
Conversion and Reorganization. Each subscriber must subscribe for a minimum of
25 Conversion Shares. The Plan of Conversion provides for the following purchase
limitations: (i) no person may purchase in either the Subscription Offering,
Direct Community Offering or Syndicated Community Offering more 50,000
Conversion Shares, (ii) no person, together with associates of or persons acting
in concert with such person, may purchase in either the Subscription Offering,
Direct Community Offering or Syndicated Community Offering more than 50,000
Conversion Shares, (iii) the maximum number of shares of Conversion Shares which
may be subscribed for or purchased in all categories in the Conversion and
Reorganization by any person, when combined with any Exchange Shares received,
shall not exceed 50,000 shares of Common Stock to be issued in the Conversion
and Reorganization, and (iv) the maximum number of shares of Conversion Shares
which may be subscribed for or purchased in all categories in the Conversion and
Reorganization by any person, together with any associate or any group of
persons acting in concert, when combined with any Exchange Shares received,
shall not exceed 50,000 shares of Common Stock to be issued in the Conversion
and Reorganization. For purposes of the Plan of Conversion, the directors are
not deemed to be acting in concert solely by reason of their Board membership.
Pro rata reductions within each Subscription Rights category will be made in
allocating shares to the extent that the maximum purchase limitations are
exceeded.
Because OTS policy requires that the maximum purchase limitation
includes Exchange Shares to be issued to Public Stockholders in exchange for
their Public Savings Bank Shares, certain Public Stockholders may be limited in
their ability to purchase Conversion Shares, or even prevented from purchasing
Conversion Shares.
The Boards of Directors of the Primary Parties may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the Conversion Shares sold in the Conversion and Reorganization, provided
that orders for shares which exceed 5% of the Conversion Shares sold in the
Conversion and Reorganization may not exceed, in the aggregate, 10% of the
shares sold in the Conversion and Reorganization. The Savings Bank and the
Holding Company do not intend to increase the maximum purchase limitation unless
market conditions are such that an increase in the maximum purchase limitation
is necessary to sell a number of shares in excess of the minimum of the
Estimated Valuation Range. If the Boards of Directors decide to increase the
purchase limitation above, persons who subscribed for the maximum number of
Conversion Shares will be, and other large subscribers in the discretion of the
Holding Company and the Savings Bank may be, given the opportunity to increase
their subscriptions accordingly, subject to the rights and preferences of any
person who has priority Subscription Rights.
The term "acting in concert" is defined in the Plan of Conversion to
mean (i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
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written or otherwise. In general, a person who acts in concert with another
party shall also be deemed to be acting in concert with any person who is also
acting in concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion
to mean (i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity (excluding tax-qualified
employee plans); and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as such person or who is a
director or officer of the Savings Bank or any of its parents or subsidiaries.
For example, a corporation of which a person serves as an officer would be an
associate of such person and, therefore, all shares purchased by such
corporation would be included with the number of shares which such person could
purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Savings Bank, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common Shares purchased pursuant to the Conversion and Reorganization
will be freely transferable, except for shares purchased by directors and
officers of the Savings Bank and the Holding Company and by NASD members. See
"-- Restrictions on Transferability by Directors and Officers and NASD Members."
Delivery and Exchange of Stock Certificates
Conversion Stock. Certificates representing Conversion Shares will be
mailed by the Holding Company's transfer agent to the persons entitled thereto
at the addresses of such persons appearing on the Order Form as soon as
practicable following the consummation of the Conversion and Reorganization. Any
undeliverable certificates will be held by the Holding Company until claimed by
persons legally entitled thereto or otherwise disposed according to applicable
law. Purchasers of Conversion Shares may be unable to sell such shares until
certificates are available and delivered to them.
Exchange Shares. After the consummation of the Conversion and
Reorganization, each holder of a certificate(s) theretofore evidencing issued
and outstanding shares of Savings Bank Common Stock (other than the MHC), upon
surrender of the same to an agent, duly appointed by the Holding Company, which
is anticipated to be the transfer agent for the Common Stock ("Exchange Agent"),
shall be entitled to receive in exchange therefor a certificate(s) representing
the number of full Exchange Shares based on the Exchange Ratio. The Exchange
Agent shall mail a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to such certificate shall
pass, only upon delivery of such certificate to the Exchange Agent) advising
such holder of the terms of the Exchange Offering and the procedure for
surrendering to the Exchange Agent such certificates in exchange for a
certificate(s) evidencing Common Stock. The Savings Bank stockholders should not
forward Savings Bank Common Stock certificates to the Savings Bank or the
Exchange Agent until they have received the transmittal letter.
No holder of a certificate theretofore representing shares of Savings
Bank Common Stock shall be entitled to receive any dividends on the Common Stock
until the certificate representing such shares is surrendered in exchange for
certificates representing shares of Common Stock. In the event that dividends
are declared and paid by the Holding Company in respect of Common Stock after
the consummation of the Conversion and Reorganization, but before surrender of
certificates representing shares of Savings Bank Common Stock, dividends payable
in respect of shares of Common Stock not then issued shall accrue (without
interest). Any such dividends shall be paid (without interest) upon surrender of
the certificates representing such shares of Savings Bank Common Stock. After
the consummation of the Conversion and Reorganization, the Holding Company shall
be entitled to treat certificates representing shares of Savings Bank Common
Stock as evidencing ownership of the number of full shares of
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Common Stock into which the shares of Savings Bank Common Stock represented by
such certificates shall have been converted, notwithstanding the failure on the
part of the holder thereof to surrender such certificates.
The Holding Company shall not be obligated to deliver a certificate(s)
representing shares of Common Stock to which a holder of Savings Bank Common
Stock would otherwise be entitled as a result of the Conversion and
Reorganization until such holder surrenders the certificate(s) representing the
shares of Savings Bank Common Stock for exchange as provided above, or, in
default thereof, an appropriate affidavit of loss and indemnity agreement and/or
a bond as may be required in each case by the Holding Company. If any
certificate evidencing shares of Common Stock is to be issued in a name other
than that in which the certificate evidencing Savings Bank Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange Agent any transfer or other tax required by reason
of the issuance of a certificate for shares of Common Stock in any name other
than that of the registered holder of the certificate surrendered or otherwise
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
Restrictions on Repurchase of Stock
Pursuant to OTS regulations, OTS-regulated savings associations (and
their holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases of any common stock are prohibited if the effect thereof would cause
the association's regulatory capital to be reduced below (a) the amount required
for the liquidation account or (b) the regulatory capital requirements imposed
by the OTS. Repurchases are generally prohibited during the first year following
conversion. Upon ten days' written notice to the OTS, and if the OTS does not
object, an institution may make open market repurchases of its outstanding
common stock during years two and three following the conversion, provided that
certain regulatory conditions are met and that the repurchase would not
adversely affect the financial condition of the association. Any repurchases of
common stock by the Holding Company would be subject to these regulatory
restrictions unless the OTS would provide otherwise.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Conversion Offerings by
directors and officers of the Holding Company may not be sold for a period of
one year following consummation of the Conversion and Reorganization, except in
the event of the death of the stockholder or in any exchange of the Common Stock
in connection with a merger or acquisition of the Holding Company. Shares of
Common Stock received by directors or officers through the ESOP or the MRP or
upon exercise of options issued pursuant to the Stock Option Plan or purchased
subsequent to the Conversion and Reorganization are not subject to this
restriction. Accordingly, shares of Common Stock issued by the Holding Company
to directors and officers shall bear a legend giving appropriate notice of the
restriction and, in addition, the Holding Company will give appropriate
instructions to the transfer agent for the Holding Company's Common Stock with
respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted Common Stock shall be subject to the same restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion and
Reorganization) and their associates during the three-year period following
Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Holding Company's outstanding Common Stock or to the purchase of
stock pursuant to the Stock Option Plan.
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The Holding Company has filed with the SEC a registration statement
under the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion and Reorganization. The registration under the
Securities Act of shares of the Common Stock to be issued in the Conversion and
Reorganization does not cover the resale of such shares. Shares of Common Stock
purchased by persons who are not affiliates of the Holding Company may be resold
without registration. Shares purchased by an affiliate of the Holding Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Holding Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks. Provision may be made in
the future by the Holding Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with Subscription Rights and to certain reporting requirements upon
purchase of such securities.
COMPARISON OF STOCKHOLDERS' RIGHTS
General. As a result of the Conversion and Reorganization, holders of
the Savings Bank Common Stock will become stockholders of the Holding Company, a
Delaware corporation. There are certain differences in stockholder rights
arising from distinctions between the Savings Bank's Federal Stock Charter and
Bylaws and the Holding Company's Certificate of Incorporation and Bylaws and
from distinctions between laws with respect to federally chartered savings
institutions and Delaware law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and similarities affecting the rights of stockholders. The
discussion herein is qualified in its entirety by reference to the Certificate
of Incorporation and Bylaws of the Holding Company and the DGCL. See "ADDITIONAL
INFORMATION" for procedures for obtaining a copy of the Holding Company's
Certificate of Incorporation and Bylaws.
Authorized Capital Stock. The Holding Company's authorized capital
stock consists of 7,500,000 shares of Common Stock, par value $.01 per share and
250,000 shares of preferred stock, par value $.01 per share ("Preferred Stock").
The Savings Bank's authorized capital stock consists of 4,000,000 shares of
Savings Bank Common Stock and 1,000,000 shares of serial preferred stock, par
value $1.00 per share. The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion and
Reorganization to provide the Holding Company's Board of Directors with
flexibility to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of the Holding Company.
The Board of Directors also has sole authority to determine the terms of any one
or more series of Preferred Stock, including voting rights, conversion rates,
and liquidation preferences. As a result of the ability to fix voting rights for
a series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Holding Company's Board currently has no
plan for the issuance of additional shares, other than the issuance of
additional shares pursuant to stock benefit plans.
Issuance of Capital Stock. Pursuant to applicable laws and regulations,
the MHC is required to own not less than a majority of the outstanding Savings
Bank Common Stock. There will be no such restriction applicable to the Holding
Company following consummation of the Conversion and Reorganization.
100
The Holding Company's Certificate of Incorporation do not contain
restrictions on the issuance of shares of capital stock to directors, officers
or controlling persons of the Holding Company, whereas the Savings Bank's
Federal Stock Charter restricts such issuance to general public offerings, or if
qualifying shares, to directors, unless the share issuance or the plan under
which they would be issued has been approved by a majority of the total votes
eligible to be cast at a legal stockholders meeting. Thus, stock-related
compensation plans such as stock option plans could be adopted by the Holding
Company without stockholder approval and shares of Holding Company capital stock
could be issued directly to directors or officers without stockholder approval.
The Bylaws of the NASD, however, generally require corporations with securities
which are quoted on the Nasdaq National Market System to obtain stockholder
approval of most stock compensation plans for directors, officers and key
employees of the corporation. Moreover, although generally not required,
stockholder approval of stock related compensation plans may be sought in
certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations. The Holding
Company plans to submit the stock compensation plans discussed herein to its
stockholders for approval.
Voting Rights. Neither the Savings Bank's Federal Stock Charter or
Bylaws nor the Holding Company's Certificate of Incorporation or Bylaws
currently provide for cumulative voting in elections of directors. For
additional information regarding voting rights, see "-- Limitations on
Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of the Savings Bank to pay dividends
on its capital stock is restricted by OTS regulations and by federal income tax
considerations related to savings institutions such as the Savings Bank. See
"REGULATION -- Federal Regulation of the Savings Bank -- Capital Requirements"
and "TAXATION." Although the Holding Company is not subject to these
restrictions as a Delaware corporation, such restrictions will indirectly affect
the Holding Company because dividends from the Savings Bank will be a primary
source of funds of the Holding Company for the payment of dividends to
stockholders of the Holding Company.
Certain restrictions generally imposed on Delaware corporations may
also have an impact on the Holding Company's ability to pay dividends. The DGCL
generally provides that the Holding Company is limited to paying dividends in an
amount equal to the excess of its net assets (total assets minus total
liabilities) over its statutory capital or, if no such excess exists, equal to
its net profits for the current year and/or the immediately preceding fiscal
year.
Board of Directors. The Savings Bank's Federal Stock Charter and Bylaws
and the Holding Company's Certificate of Incorporation and Bylaws each require
the Board of Directors of the Savings Bank and the Holding Company to be divided
into three classes as nearly equal in number as possible and that the members of
each class shall be elected for a term of three years and until their successors
are elected and qualified, with one class being elected annually.
Under the Savings Bank's Bylaws, any vacancies in the Board of
Directors of the Savings Bank may be filled by the affirmative vote of a
majority of the remaining directors although less than a quorum of the Board of
Directors. Persons elected by the directors of the Savings Bank to fill
vacancies may only serve until the next annual meeting of stockholders. Under
the Holding Company's Certificate of Incorporation, any vacancy occurring in the
Board of Directors of the Holding Company, including any vacancy created by
reason of an increase in the number of directors, may be filled by the remaining
directors, and any director so chosen shall hold office for the remainder of the
term to which the director has been elected and until his or her successor is
elected and qualified.
Under the Savings Bank's Bylaws, any director may be removed for cause
by the holders of a majority of the outstanding voting shares. The Holding
Company's Certificate of Incorporation provide that any director may be removed
for cause by a majority of the directors of the Holding Company or by the
holders of at least 80% of the outstanding voting shares of the Holding Company.
101
Limitations on Liability. The Holding Company's Certificate of
Incorporation provides that the directors of the Holding Company shall not be
personally liable for monetary damages to the Holding Company for certain
breaches of their fiduciary duty as directors, except for liabilities that
involve intentional misconduct or a knowing violation of law by the director,
the authorization or illegal distributions or receipt of an improper personal
benefit from their actions as directors. This provision might, in certain
instances, discourage or deter shareholders or management from bringing a
lawsuit against directors for a breach of their duties even though such an
action, if successful, might have benefitted the Holding Company.
Currently, federal law does not permit federally chartered savings
institutions such as the Savings Bank to limit the personal liability of
directors in the manner provided by the DGCL and the laws of many other states.
Indemnification of Directors, Officers, Employees and Agents. The
Savings Bank's Federal Stock Charter and Bylaws do not contain any provision
relating to indemnification of directors and officers of the Savings Bank. Under
current OTS regulations, however, the Savings Bank shall indemnify its
directors, officers and employees for any costs incurred in connection with any
litigation involving any such person's activities as a director, officer or
employee if such person obtains a final judgment on the merits in his or her
favor. In addition, indemnification is permitted in the case of a settlement, a
final judgment against such person or final judgment other than on the merits,
if a majority of disinterested directors determine that such person was acting
in good faith within the scope of his or her employment as he or she could
reasonably have perceived it under the circumstances and for a purpose he or she
could reasonably have believed under the circumstances was in the best interest
of the Savings Bank or its stockholders. The Savings Bank also is permitted to
pay ongoing expenses incurred by a director, officer or employee if a majority
of disinterested directors concludes that such person may ultimately be entitled
to indemnification. Before making any indemnification payment, the Savings Bank
is required to notify the OTS of its intention and such payment cannot be made
if the OTS objects thereto.
The officers, directors, agents and employees of the Holding Company
are indemnified with respect to certain actions pursuant to the Holding
Company's Certificate of Incorporation, which complies with the DGCL regarding
indemnification. The DGCL allows the Holding Company to indemnify the
aforementioned persons for expenses, settlements, judgments and fines in suits
in which such person has made a party by reason of the fact that he or she is or
was an agent of the Holding Company. No such indemnification may be given if the
acts or omissions of the person are adjudged to be in violation of law, if such
person is liable to the corporation for an unlawful distribution, or if such
person personally received a benefit to which he or she was not entitled.
Special Meetings of Stockholders. The Holding Company's Certificate of
Incorporation provides that special meetings of the stockholders of the Holding
Company may be called only by the board of directors or an authorized committee
thereof. The Savings Bank's Federal Stock Charter provides that, until October
26, 1998 (i.e., five years after the consummation of the MHC Reorganization),
special meetings of the Savings Bank's stockholders may only be called by the
Board of Directors. Thereafter, special meetings may be called by the Chairman,
President, a majority of the Board of Directors or the holders of not less than
a majority of the outstanding capital stock of the Savings Bank entitled to vote
at the meeting.
Stockholder Nominations and Proposals. The Savings Bank's Bylaws
generally provide that stockholders may submit nominations for election as
director at an annual meeting of stockholders and any new business to be taken
up at such a meeting by filing such in writing with the Savings Bank at least
thirty days before the date of any such meeting.
The Holding Company's Bylaws generally provide that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to the
Holding Company at least 30 days and not more than 60 days in advance of the
meeting, together with certain information relating to the nomination or new
business. However, if less than 31 days notice of the meeting is given,
stockholders must submit such written notice no later than the tenth day
following the date on which notice of the meeting is mailed to stockholders.
Failure to comply with these advance notice requirements will preclude such
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nominations or new business from being considered at the meeting. Management
believes that it is in the best interests of the Holding Company and its
stockholders to provide sufficient time to enable management to disclose to
stockholders information about a dissident slate of nominations for directors.
This advance notice requirement may also give management time to solicit its own
proxies in an attempt to defeat any dissident slate of nominations, should
management determine that doing so is in the best interest of stockholders
generally. Similarly, adequate advance notice of stockholder proposals will give
management time to study such proposals and to determine whether to recommend to
the stockholders that such proposals be adopted. In certain instances, such
provisions could make it more difficult to oppose management's nominees or
proposals, even if stockholders believe such nominees or proposals are in their
best interests.
Stockholder Action Without a Meeting. The Bylaws of the Savings Bank
provide that any action to be taken or which may be taken at any annual or
special meeting of stockholders may be taken if a consent in writing, setting
forth the actions so taken, is given by the holders of all outstanding shares
entitled to vote. The Holding Company's Certificate of Incorporation
specifically denies the authority of stockholders to act without a meeting.
Stockholder's Right to Examine Books and Records. A federal regulation
which is applicable to the Savings Bank provides that stockholders may inspect
and copy specified books and records of a federally chartered savings
institution after proper written notice for a proper purpose. The DGCL similarly
provides that a stockholder may inspect books and records upon written demand
stating the purpose of the inspection, if such purpose is reasonably related to
such person's interest as a stockholder.
Limitations on Acquisitions of Voting Stock and Voting Rights. The
Holding Company's Certificate of Incorporation provide that no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
(i) more than 10% of the issued and outstanding shares of any class of an equity
security of the Holding Company, or (ii) any securities convertible into, or
exercisable for, any equity securities of the Holding Company if, assuming
conversion or exercise by such person of all securities of which such person is
the beneficial owner which are convertible into, or exercisable for, such equity
securities (but of no securities convertible into, or exercisable for, such
equity securities of which such person is not the beneficial owner), such person
would be the beneficial owner of more than 10% of any class of an equity
security of the Holding Company. The term "person" is broadly defined in the
Certificate of Incorporation to prevent circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Holding Company by underwriters or
a selling group acting on its behalf, (ii) any employee benefit plan established
by the Holding Company or the Savings Bank, and (iii) any other offer or
acquisition approved in advance by the affirmative vote of two-thirds of the
Holding Company's Board of Directors. In the event that shares are acquired in
violation of this restriction, all shares beneficially owned by any person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to stockholders for a vote.
Neither the Charter nor the Bylaws of the Savings Bank contains a
provision which restricts voting rights of certain stockholders of the Savings
Bank in the manner set forth above.
Mergers, Consolidations and Sales of Assets. A federal regulation
requires the approval of two-thirds of the Board of Directors of the Savings
Bank and the holders of two-thirds of the outstanding stock of the Savings Bank
entitled to vote thereon for mergers, consolidations and sales of all or
substantially all of the Savings Bank's assets. Such regulation permits the
Savings Bank to merge with another corporation without obtaining the approval of
its stockholders if: (i) it does not involve an interim savings institution;
(ii) the Savings Bank's Federal Stock Charter is not changed; (iii) each share
of the Savings Bank's stock outstanding immediately prior to the effective date
of the transaction is to be an identical outstanding share or a treasury share
of the Savings Bank after such effective date; and (iv) either: (A) no shares of
voting stock of the Savings Bank and no securities convertible into such stock
are to be issued or delivered under the plan of combination or (B) the
authorized unissued shares or the treasury shares of voting stock of the Savings
Bank to be issued or delivered under the plan of combination, plus
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those initially issuable upon conversion of any securities to be issued or
delivered under such plan, do not exceed 15% of the total shares of voting stock
of the Savings Bank outstanding immediately prior to the effective date of the
transaction.
The Holding Company's Certificate of Incorporation requires the
approval of the holders of at least 80% of the Holding Company's outstanding
shares of voting stock to approve certain "Business Combinations" (as defined
therein) involving a "Related Person" (as defined therein) except in cases where
the proposed transaction has been approved in advance by a majority of those
members of the Holding Company's Board of Directors who are unaffiliated with
the Related Person and were directors prior to the time when the Related Person
became a Related Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity (other than the Holding
Company or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the Holding
Company or an affiliate of such person or entity. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include: (i) any merger or consolidation of the Holding Company with
or into any Related Person; (ii) any sale, lease, exchange, mortgage, transfer,
or other disposition of 25% or more of the assets of the Holding Company or
combined assets of the Holding Company and its subsidiaries to a Related Person;
(iii) any merger or consolidation of a Related Person with or into the Holding
Company or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of the
Holding Company and any other affected class of stock. One exception under
Delaware law to the majority approval requirement applies to stockholders owning
15% or more of the common stock of a corporation for a period of less than three
years. Such 15% stockholder, in order to obtain approval of a business
combination, must obtain the approval of two-thirds of the outstanding stock,
excluding the stock owned by such 15% stockholder, or satisfy other requirements
under Delaware law relating to board of director approval of his or her
acquisition of the shares of the Holding Company. The increased stockholder vote
required to approve a business combination may have the effect of foreclosing
mergers and other business combinations which a majority of stockholders deem
desirable and placing the power to prevent such a merger or combination in the
hands of a minority of stockholders.
The Holding Company's Certificate of Incorporation requires the Holding
Company's Board of Directors to consider certain factors in addition to the
amount of consideration to be paid when evaluating certain business combinations
or a tender or exchange offer. These additional factors include: (i) the social
and economic effects of the transaction; (ii) the business and financial
condition and earnings prospects of the acquiring person or entity; and (iii)
the competence, experience, and integrity of the acquiring person or entity and
its management.
As holder of all of the outstanding Savings Bank Common Stock after
consummation of the Conversion and Reorganization, the Holding Company generally
will be able to authorize a merger, consolidation or other business combination
involving the Savings Bank without the approval of the stockholders of the
Holding Company.
Dissenters' Rights of Appraisal. OTS regulations generally provide that
a stockholder of a federally chartered savings institution that engages in a
merger, consolidation or sale of all or substantially all of its assets shall
have the right to demand from such institution payment of the fair or appraised
value of his or her stock in the institution, subject to specified procedural
requirements. This regulation also provides, however, that the stockholders of a
federally chartered savings institution with stock which is listed on a national
securities exchange or quoted on the Nasdaq Stock System are not entitled to
dissenters' rights in connection with a merger involving such savings
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institution if the stockholder is required to accept only "qualified
consideration" for his or her stock, which is defined to include cash, shares of
stock of any institution or corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the Nasdaq
National Market System or any combination of such shares of stock and cash.
Under the DGCL, shareholders of the Holding Company will generally have
dissenter's appraisal rights in connection with (i) a plan of merger to which
the Holding Company is a party; (ii) a plan of share exchange to which the
Holding Company is a party as the corporation whose shares will be acquired;
(iii) certain sales or exchanges of all, or substantially all, of the Holding
Company's property other than in the regular course of business; and (iv)
amendments to the Holding Company's Certificate of Incorporation effecting a
material reverse stock split.
Amendment of Governing Instruments. No amendment of the Savings Bank's
Federal Stock Charter may be made unless it is first proposed by the Board of
Directors of the Savings Bank, then preliminarily approved by the OTS, and
thereafter approved by the holders of a majority of the total votes eligible to
be cast at a legal meeting. The Holding Company's Certificate of Incorporation
may be amended by the vote of the holders of a majority of the outstanding
shares of Holding Company Common Stock, except that the provisions of the
Certificate of Incorporation governing (i) the calling of meeting of
stockholders, (ii) stockholders' nominations and proposals, (iii) authorized
capital stock, (iv) denial of preemptive rights, (v) the number and staggered
terms of directors, (vi) removal of directors, (vii) approval of certain
business combinations, (viii) the evaluation of certain business combinations,
(ix) elimination of directors' liability, (x) indemnification of officers and
directors, and (xi) the manner of amending the Certificate of Incorporation and
Bylaws, each may not be repealed, altered, amended or rescinded except by the
vote of the holders of at least 80% of the outstanding shares of the Holding
Company. This provision is intended to prevent the holders of a lesser
percentage of the outstanding stock of the Holding Company from circumventing
any of the foregoing provisions by amending the Certificate of Incorporation to
delete or modify one of such provisions.
The Bylaws of the Savings Bank may be amended by a majority vote of the
full Board of Directors of the Savings Bank or by a majority vote of the votes
cast by the stockholders of the Savings Bank at any legal meeting. The Holding
Company's Bylaws may only be amended by a majority vote of the Board of
Directors of the Holding Company or by the holders of at least 80% of the
outstanding stock by the Holding Company.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the Savings
Bank believes that the provisions described above are prudent and will reduce
the Holding Company's vulnerability to takeover attempts and certain other
transactions that have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Savings Bank in the orderly
deployment of the Conversion and Reorganization proceeds into productive assets
during the initial period after the Conversion and Reorganization. The Board of
Directors believes these provisions are in the best interest of the Savings Bank
and Holding Company and its stockholders. In the judgment of the Board of
Directors, the Holding Company's Board will be in the best position to determine
the true value of the Holding Company and to negotiate more effectively for what
may be in the best interests of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interest of the Holding Company and
its stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of the Holding Company and that is in the best interest of all
stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders,
105
with due consideration given to matters such as the management and business of
the acquiring corporation and maximum strategic development of the Holding
Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
Despite the belief of the Savings Bank and the Holding Company as to
the benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and Bylaws, these provisions may also have the
effect of discouraging a future takeover attempt that would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board of Directors of the Savings Bank and the Holding Company, however,
have concluded that the potential benefits outweigh the possible disadvantages.
Following the Conversion and Reorganization, pursuant to applicable law
and, if required, following the approval by stockholders, the Holding Company
may adopt additional anti-takeover charter provisions or other devices regarding
the acquisition of its equity securities that would be permitted for a Delaware
business corporation.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws of the Holding
Company and in Federal and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal
law and regulations and Delaware corporate law relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations.
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a
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selling group acting on the converting institution's (or its holding company's)
behalf for resale to the general public are excepted. The regulation also
provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
As permitted by OTS regulations, the Savings Bank's Federal Stock
Charter contains a provision whereby the acquisition or offer to acquire
ownership of more than 10% of the issued and outstanding shares of any class of
equity securities of the Savings Bank by any person, either directly or through
an affiliate of such person, will be prohibited for a period of five years
following the date of consummation of the Conversion and Reorganization. Any
stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. Furthermore,
for five years from the consummation date of the MHC Reorganization,
stockholders of the Savings Bank will not be permitted to call a special meeting
of stockholders relating to a change of control of the Savings Bank or a charter
amendment and will not be permitted to cumulate their votes in the election of
directors.
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of
an insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include the
acquiror being one of the two largest stockholders. The determination of control
may be rebutted by submission to the OTS, prior to the acquisition of stock or
the occurrence of any other circumstances giving rise to such determination, of
a statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification form that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or approval of the OTS, as applicable. There
are also rebuttable presumptions in the regulations concerning whether a group
"acting in concert" exists, including presumed action in concert among members
of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
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DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 7,500,000 shares of Common
Stock having a par value of $.01 per share and 250,000 shares of preferred stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 3,741,533 shares of Common Stock (subject to adjustment up to
4,302,763 shares) and no shares of preferred stock in the Conversion and
Reorganization. Each share of the Holding Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
The Common Stock of the Holding Company will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "DIVIDEND
POLICY" and "REGULATION." The holders of Common Stock of the Holding Company
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues preferred stock, the holders
thereof may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "THE CONVERSION AND REORGANIZATION --Restrictions on Repurchase of Stock"
and "USE OF PROCEEDS."
Voting Rights. Upon Conversion and Reorganization, the holders of
Common Stock of the Holding Company will possess exclusive voting rights in the
Holding Company. They will elect the Holding Company's Board of Directors and
act on such other matters as are required to be presented to them under Federal
law or as are otherwise presented to them by the Board of Directors. Except as
discussed in "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder
of Common Stock will be entitled to one vote per share and will not have any
right to cumulate votes in the election of directors. If the Holding Company
issues preferred stock, holders of the Holding Company preferred stock may also
possess voting rights. Certain matters require a vote of 80% of the outstanding
shares entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal stock savings bank, corporate powers and control of the
Savings Bank are vested in the Board of Directors, who elect the officers of the
Savings Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion and Reorganization. Subsequent to Conversion and Reorganization,
voting rights will be vested exclusively in the owners of the shares of capital
stock of the Savings Bank, all of which will be owned by the Holding Company,
and voted at the direction of the Holding Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Savings Bank.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Savings Bank, the Holding Company, as holder of the Savings Bank's
capital stock would be entitled to receive, after payment or provision for
payment of all debts and liabilities of the Savings Bank (including all deposit
accounts and accrued interest thereon) and after distribution of the balance in
the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders (see "THE CONVERSION AND REORGANIZATION"), all assets
of the Savings Bank available for distribution. In the event of liquidation,
dissolution or winding up of the Holding Company, the holders
108
of its common stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Holding
Company available for distribution. If Holding Company preferred stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Holding Company
will not be entitled to preemptive rights with respect to any shares that may be
issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Holding Company preferred stock
will be issued in the Conversion and Reorganization and there are no plans to
issue the preferred stock. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
Effect of Receivership on the Common Stock
In the event of the receivership of the Savings Bank, the FDIC, as
receiver, shall, by operation of law, succeed to, among other things, all the
rights, titles, powers and privileges of the Savings Bank and its stockholder,
the Holding Company. As provided by the procedures and priorities applicable to
receiverships of savings institutions, the holders of the Common Stock would be
entitled to receive any funds remaining after all depositors, creditors, other
claimants (other than holders of stock ranking junior to or on a parity with the
Common Stock) and administrative expenses are paid.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. is the transfer agent and
registrar for shares of the Common Stock.
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC
pursuant to Section 12(g) of the Exchange Act upon the completion of the
Conversion and Reorganization and will not deregister its Common Stock for a
period of at least three years following the completion of the Conversion and
Reorganization. Upon such registration, the proxy solicitation and tender offer
rules, insider trading reporting and restrictions, annual and periodic reporting
and other requirements of the Exchange Act will apply.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Conversion and Reorganization have been opined upon by Breyer & Aguggia and
the South Carolina tax consequences of the Conversion and Reorganization have
been opined upon by Evans, Carter, Kunes & Bennett, P.A., Charleston, South
Carolina. Breyer & Aguggia and Evans, Carter,
109
Kunes & Bennett, P.A. have consented to the references herein to their opinions.
Certain legal matters will be passed upon for Sandler O'Neill by Muldoon, Murphy
& Faucette, Washington, D.C.
EXPERTS
The consolidated financial statements of the Savings Bank as of
September 30, 1997 and 1996 and for each of the years in the three-year period
ended September 30, 1997, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the MHC and the Savings Bank, as converted, and its letter
with respect to subscription rights and to the use of its name and statements
with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form S-1 (File No. 333-42517) under the Securities Act with respect to the
Common Stock offered in the Conversion and Reorganization. This Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. Such information may be inspected at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 and at its regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies may be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement also is available through the SEC's World Wide Web site
on the Internet (http://www.sec.gov).
The MHC has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Special Members' Meeting and
the Stockholders' Meeting and certain other information. This Prospectus omits
certain information contained in such Application. The Application, including
the proxy materials, exhibits and certain other information that are a part
thereof, may be inspected, without charge, at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the office of the Regional Director
of the OTS at the OTS Southeast Regional Office, 1475 Peachtree Street, N.E.,
Atlanta, Georgia 30309.
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Index To Consolidated Financial Statements
Perpetual Bank, A Federal Savings Bank and Subsidiary
Page
Independent Auditors' Report...................................... F-1
Consolidated Balance Sheets as of
September 30, 1997 and 1996...................................... F-2
Consolidated Statements of Operation for the
Years Ended September 30, 1997, 1996 and 1995.................... 19
Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 1997, 1996 and 1995............ F-3
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1997, 1996 and 1995.................... F-4
Notes to Consolidated Financial Statements........................ F-6
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the MHC have not been included herein
because the MHC has no material assets other than shares of Savings Bank Common
Stock (which will be canceled as part of the Conversion and Reorganization) and
no significant liabilities (contingent or otherwise), revenues or expenses, and
has not engaged in any significant activities to date.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
111
KPMG Peat Marwick LLP
One Insignia Financial Plaza
P.O. Box 10529
Greenville, SC 29603
Independent Auditors' Report
----------------------------
The Board of Directors
Perpetual Bank, A Federal Savings Bank
and Subsidiaries
We have audited the consolidated balance sheets of Perpetual Bank, A Federal
Savings Bank and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholdersO equity and cash flows for
each of the years in the three-year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perpetual Bank, A
Federal Savings Bank and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Greenville, South Carolina
November 7, 1997
F-1
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets 1997 1996
-------------- ---- -----
Cash and cash equivalents $13,499,332 13,584,568
Investment securities available for sale (amortized cost
of $11,188,937 in 1997 and $2,494,535 in 1996) 11,325,700 2,493,888
Federal Home Loan Bank stock, at cost 1,650,000 993,700
Mortgage-backed securities available for sale (amortized cost
of $35,713,975 in 1997 and $44,362,007 in 1996) 35,862,700 43,124,998
Loans receivable, (net of allowance for loan losses of
$1,886,243 in 1997 and $1,534,773 in 1996) 178,772,266 140,757,990
Investment in limited partnership 5,003,835
Real estate acquired in settlement of loans 162,776 2,750
Real estate held for development 2,284,038 1,406,144
Premises and equipment, net 6,294,465 4,852,366
Accrued interest receivable:
Loans receivable 1,330,255 1,113,386
Mortgage-backed and other securities 238,186 356,827
Other 569,787 1,140,556
------------ -----------
Total assets $256,993,340 E 209,827,173
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits 201,001,858 160,243,623
Advances from the Federal Home Loan Bank ("FHLB") 15,000,000 16,000,000
Advance payments by borrowers for property taxes and insurance 396,886 404,322
Accrued interest payable 1,362,483 747,059
Accrued expenses and other liabilities 8,630,370 3,341,375
------------ -----------
Total liabilities 226,391,597 180,736,379
------------ -----------
Stockholders' equity:
Common stock ($1.00 par value; authorized 20,000,000 shares;
issued and outstanding 1,508,873 shares in 1997 and
1,504,601 shares in 1996 1,508,873 1,504,601
Additional paid-in capital 11,651,917 11,696,679
Retained earnings, restricted 18,381,766 17,607,269
Unrealized gain (loss) on securities available for sale, net
of income taxes 188,423 (816,855)
Indirect guarantee of ESOP debt (804,024) (900,900)
Deferred compensation for Management Recognition
Plan (OMRPO) (325,212) --
------------ -----------
Total stockholders' equity 30,601,743 29,090,794
------------ -----------
Commitments and contingencies
Total liabilities and stockholdersO equity $256,993,340 209,827,173
============ ===========
See accompanying notes to consolidated financial statements.
F-2
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997, 1996 and 1995
Unrealized
Gain (Loss)
on Indirect
Securities Guarantee Deferred
Additional Available of Compensation
Common Paid-in Retained Sale, Net ESOP for
Stock Capital Earnings of Taxes Debt MRP Total
------ ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30,
1994 $1,503,943 847,044 14,709,955 (2,320,660) (80,500) (23,010) 14,636,772
Change in unrealized loss
on securities available
for sale, net -- -- -- 1,711,405 -- -- 1,711,405
Exercise of stock options
(658 shares) 658 5,922 -- -- -- -- 6,580
Reduction of ESOP debt -- -- -- -- 73,790 -- 73,790
Earned portion of MRP -- -- -- -- -- 11,490 11,490
Dividends on common stock -- -- (125,089) -- -- -- (125,089)
Net income for 1995 -- -- 1,917,038 -- -- -- 1,917,038
------------ ---------- ----------- ---------- ---------- -------- ----------
Balance at September 30,
1995 1,504,601 852,966 16,501,904 (609,255) (6,710) (11,520) 18,231,986
Change in unrealized loss
on securities available
for sale, net -- -- -- (207,600) -- -- (207,600)
Reduction on ESOP debt -- -- -- -- 6,710 6,710
Earned portion of MRP -- -- -- -- -- 11,520 11,520
Dividends on common stock -- -- (319,022) -- -- -- (319,022)
Sale of common stock (less
offering cost of $417,536) -- 10,843,713 -- -- -- -- 10,843,713
Indirect guaranteed of
ESOP debt -- -- -- -- (900,900) -- (900,900)
Net income for 1996 -- -- 1,424,387 -- -- -- 1,424,387
----------- ---------- ----------- ---------- ---------- -------- -----------
Balance at September 30,
1996 1,504,601 11,696,679 17,607,269 (816,855) (900,900) -- 29,090,794
Change in unrealized loss
on securities, net -- -- -- 1,005,278 -- 1,005,278
Exercise of stock options 4,272 38,448 -- -- -- -- 42,720
Reduction of ESOP debt -- -- -- -- -- 96,876 96,876
ESOP expense -- 32,152 -- -- -- -- 32,152
Purchase of common stock
for MRP -- -- -- -- -- (404,093) (404,093)
Earned portion of MRP -- -- -- -- -- 78,881 78,881
Dividends on common stock -- -- (953,866) -- -- -- (953,866)
Offering costs for the
sale of common stock -- (115,362) -- -- -- -- (115,362)
Net income for 1997 -- -- 1,728,363 -- -- -- 1,728,363
----------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30,
1997 $1,508,873 11,651,917 18,381,766 188,423 (804,024) (325,212) 30,601,743
========= ========== ========== ========== ========== ========= ===========
See accompanying notes to consolidated financial statements.
F-3
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
------------- ------------ -------------
Cash flows from operating
activities:
Net income $ 1,728,363 1,424,387 1,917,038
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and
amortization 703,213 597,306 583,281
Provision for loan losses 655,000 349,250 362,000
Earnings of investment in
limited partnership (184,960) -- --
(Increase) decrease
in deferred tax assets -- -- 27,000
Gain on sale of
mutual funds, net -- -- (1,763,967)
Gain on sale of
investments, net 307,534 (53,963) (13,504)
Gain on sale of
real estate (19,894) (79,034) (47,544)
Deferred compensation 111,033 11,520 11,490
Loss (gain) on sale
of loans, net (12,509) 23,328 (66,785)
Loss (gain) on sale
of fixed assets, net 191,894 (26,096) --
Decrease (increase)
in accrued interest
receivable and other assets (46,895) (789,076) (205,004)
Increase (decrease)
in other liabilities 5,656,419 1,190,696 (131,300)
------------ ----------- ------------
Net cash provided by
operating activities 9,089,198 2,648,318 672,705
------------ ----------- ------------
Cash flows from investing
activities:
Proceeds from sales of
investment securities -- -- 7,625,359
Proceeds from maturities
of investment securities 2,550,000 800,000 393,242
Purchase of investment
securities (11,181,806) (2,488,144) (797,625)
Purchase of investments in
limited partnership (4,818,875) -- --
Purchase of mutual funds -- -- (144,640,000)
Proceeds from sales of
mutual funds -- -- 146,403,967
Proceeds from the sales
of fixed assets -- 91,096 --
Principal repayments on
mortgage-backed securities 4,412,449 2,967,619 3,501,516
Proceeds from sales of
mortgage-backed securities 22,570,776 2,922,009 --
Purchase of mortgage-backed
securities (18,760,688) -- (5,055,120)
Proceeds from redemption
of FHLB stock 650,000 1,804,600 1,110,000
Purchases of FHLB stock (1,306,300) (398,300) (2,424,700)
Increase in loans
receivable, net (12,676,474) (18,966,369) (21,874,020)
Purchases of loans receivable (31,960,810) (18,242,510) --
Sales of loans receivable 5,746,769 9,555,720 9,614,274
Proceeds from sale of
real estate owned 95,186 120,959 869,086
Proceeds from sale of
real estate held for development 1,149,353 -- --
Purchase of premises and
equipment (2,281,841) (1,558,569) (731,153)
Purchase of real estate
held for development (2,027,247) (1,406,144) --
------------ ----------- ------------
Net cash used in
investing activities (47,821,198) (24,798,033) (6,005,174)
------------ ------------ ------------
F-4
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1997 1996 1995
------------ ------------- ------------
Cash flows from financing activities:
Increase in deposit accounts 40,758,235 10,926,744 5,774,086
Proceeds from FHLB advances 68,000,000 61,000,000 216,150,000
Repayment of FHLB advances (69,000,000) (53,000,000) (218,650,000)
Proceeds from sale of common stock, less
expenses (72,642) 10,843,714 6,580
Purchase of stock for MRP (404,093) -- --
Repayments of ESOP Loan 96,876 -- --
Dividends paid on common stock (705,866) (319,022) (125,089)
(Decrease) increase in advance payments by
borrowers for property taxes and insurance (7,436) (346,858) 106,605
------------ ----------- ------------
Net cash provided by
financing activities 38,665,074 29,104,578 3,262,182
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (85,236) 6,954,863 (2,070,287)
Cash and cash equivalents, beginning of year 13,584,568 6,629,705 8,699,992
------------ ----------- ------------
Cash and cash equivalents, end of year $ 13,499,332 13,584,568 6,629,705
============ ============ ==========
Supplemental disclosures:
Cash paid during the year for
Interest $ 9,537,349 7,434,366 8,535,117
============ ============ ==========
Taxes $ 641,000 745,840 415,500
============ ============ ==========
Noncash investing activity:
Additions to real estate acquired in
settlement of loans $ 233,748 50,859 277,511
============ ============ ==========
Loans receivable exchanged for
mortgage-backed securities $ -- 3,061,294 --
=========== ============ ==========
Change in unrealized net loss on securities
available for sale, net of tax $ 1,005,278 (207,600) (1,711,405)
============ ============ ==========
Change in Employee Stock Ownership Plan
debt guaranteed by the Bank $ (96,876) 894,190 (73,790)
============ ============ ==========
See accompanying notes to consolidated financial statements.
F-5
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
On May 15, 1992, the Bank's Board of Directors adopted a plan of
reorganization pursuant to which Perpetual Bank, a Federal Savings Bank
("Perpetual" or "Bank") proposed to reorganize from a federally chartered
mutual savings and loan association into a mutual holding company ("MHC").
To implement the reorganization, Perpetual incorporated a federally
chartered capital stock savings bank (New Federal Savings Bank). In
exchange for the common shares of the New Federal Savings Bank to be issued
to the MHC, Perpetual transferred substantially all of its assets and all
of its liabilities to the New Federal Savings Bank. The New Federal Savings
Bank was renamed Perpetual Bank, a Federal Savings Bank and became a
majority-owned subsidiary of the MHC.
Perpetual has the power to issue shares of capital stock (including common
and preferred stock) to persons other than the MHC. So long as the MHC is
in existence, the aggregate amount of voting stock that may be issued to
persons other than the MHC must be less than 50% of the issued and
outstanding voting stock of Perpetual. The New Federal Savings Bank may
issue any amount of non-voting stock to persons other than the MHC.
On October 26, 1993, Perpetual completed the reorganization and sold
116,969 shares of common stock at $10 per share. The remaining 1,385,000
shares of common stock were transferred to the MHC.
The costs related to the reorganization and offering were charged against
the proceeds of the sale of stock. Capitalized costs related to this
transaction were approximately $223,443. These costs were treated as a
reduction of paid-in capital.
In September 1996, Perpetual sold 585,000 shares of common stock from its
authorized but unissued shares. SouthBanc Shares, MHC presently owns 53.02%
of Perpetual, and the minority ownership is 46.98%. The 585,000 shares were
sold at a price of $19.25 per share generating proceeds of $11,261,249,
less offering cost of $532,898, for a net proceed of $10,728,351.
In September 1997, the Board of Directors of Perpetual Bank and the MHC
adopted a proposed Plan of Conversion to convert the MHC to stock form and
to reorganize the MHC and Perpetual by forming a new Stock Holding Company
("SHC") to become the parent company of Perpetual. The SHC will exchange
certain shares of its common stock for the outstanding common stock of
Perpetual and will issue and offer for sale certain additional shares of
its common stock. The additional shares of common stock of the SHC will be
offered to eligible account holders of Perpetual as of June 30, 1996, who
will receive nontransferable subscription rights to purchase these shares,
as well as certain other persons as provided for in the Plan. The
F-6
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
amount and pricing of the proposed stock offering will be based on an
independent appraisal of Perpetual.
In connection with the proposed transaction, the MHC will file an
application with the Office of Thrift Supervision and a registration
statement with the U. S. Securities and Exchange Commission with respect to
the reorganization and common stock offering. After receipt of the required
regulatory approvals, the Plan of Conversion will be submitted to the
members of the MHC for approval by at least a majority of the votes eligible
to be cast at a special meeting and will also be submitted by Perpetual's
stockholders for approval at a special meeting. The transaction is expected
to be completed during the second calendar quarter of 1998.
At the time of the conversion, Perpetual will establish a liquidation
account in an amount equal to its equity as reflected in the consolidated
balance sheet used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their
accounts at Perpetual after the conversion. The liquidation account will be
reduced annually, to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying deposits
as of each anniversary date. Subsequent increases will not restore an
eligible account holder's or supplemental eligible account holder's interest
in the liquidation account. In the event of a complete liquidation of
Perpetual, each eligible account holder and supplemental eligible account
holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held.
Subsequent to the conversion, Perpetual may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirement.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will
be charged as an expense. Conversion costs incurred through September 30,
1997 were $16,350.
Consolidation
-------------
The accompanying consolidated financial statements include the accounts of
Perpetual and its wholly owned subsidiaries, United Service Corporation
("USC"), which has a wholly owned subsidiary, United Investment Service
Corporation and primarily engages in real estate development and Mortgage
First Service Corporation, which holds an equity investment in a mortgage
banking company (collectively the "Bank"). All significant intercompany
items and transactions have been eliminated in consolidation.
F-7
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Loans Receivable, Net
---------------------
Loans receivable are stated at their unpaid principle balances less the
allowance for loan losses, and net of deferred loan origination fees and
discounts.
The Bank provides for loan losses on the allowance method. Accordingly, all
loan losses are charged to the related allowance and all recoveries are
credited to the allowance. Additions to the allowance for loan losses are
provided by charges to operations based on various factors which, in
management's judgment, deserve current recognition in estimating losses.
Such factors considered by management include the market value of the
underlying collateral, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to outstanding loans, loss
experience, delinquency trends and economic conditions. Management evaluates
the carrying value of loans periodically and the allowance is adjusted
accordingly. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
evaluations. Allowances for loan losses are subject to periodic evaluation
by various regulatory authorities and may be subject to adjustment upon
their examination.
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan", ("SFAS No. 114") requires that
creditors value all specifically reviewed loans for which it is probable
that the creditors will be unable to collect all amounts due according to
the terms of the loan agreement at either the present value of expected cash
flows discounted at the loan's effective interest rate, or if more
practical, the market price or value of the collateral. If the resulting
value of the impaired loan is less than the recorded balance, the impairment
must be recognized by creating a valuation allowance for the difference and
recognizing a corresponding bad debt expense. SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures",
amends SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and requires additional
disclosures about how a creditor recognizes interest income related to
impaired loans. The Savings Bank adopted the provisions of SFAS No. 114 and
No. 118 effective OctoberE1, 1995. The adoption of these standards required
no increase to the reserve for loan losses and had no impact on net income.
Interest income on loans and lease financing is recorded on the accrual
basis. Accrual of interest on loans (including loans impaired under SFAS No.
114) generally is discontinued when the loan is 90 days past due and
management deems that collection of additional interest is doubtful.
Interest received on nonaccrual loans and impaired loans is generally
applied against principal or may be reported as interest income depending on
management's judgment as to the collectibility of principal. When borrowers
with loans on a nonaccrual status demonstrate their ability to repay their
loans in accordance with the contractual terms of the notes, the loans are
returned to accrual status.
F-8
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
The Bank provides an allowance for uncollectible interest based on an
experience method of anticipated collections. This allowance is netted
against accrued interest receivable for financial statement reporting
purposes.
Loan fees and direct incremental costs of originating loans are deferred and
amortized over the contractual life of the related loan. The amortization of
the net fees or costs are recognized as a yield adjustment using the
interest method.
Loans Held For Sale
-------------------
Loans held for sale are accounted for at the lower of aggregate cost
or market value.
Investment and Mortgage-Backed Securities
------------------------------------------
The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", on October 1, 1993. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
These investments are classified in three categories and are accounting for
as follows: (a) debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held for investment and
reported at amortized cost; (b) debt and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; and (c) debt and equity securities
not classified as either held for investment securities or trading
securities are classified as available for sale securities and reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. The Bank has no
securities classified as held for investment or trading. Upon adoption of
SFAS No. 115, the net unrealized loss on securities available for sale, net
of taxes, was reported as a separate component of stockholders' equity. SFAS
No. 115 will cause fluctuations in stockholders' equity based on changes in
values of debt and equity securities classified as available for sale.
Securities classified as available for sale will be considered in the
Bank's asset/liability management strategies and may be sold in response to
changes in interest rates, liquidity needs and/or significant prepayment
risk. The cost of investment securities sold is determined by the
"identified certificate" method.
Declines in the fair value of individual securities below their cost
that are deemed by management to be other than temporary result in write-
downs of the individual securities to their fair value. The write-downs are
included in earnings as realized losses.
F-9
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
At September 30, 1997, the Bank had increased stockholdersO equity by
approximately $188,000 for the unrealized gain, net of income taxes of
$97,000, on securities available for sale, and, at September 30, 1996, the
Bank had reduced stockholders' equity by approximately $817,000 for the
unrealized loss, net of income taxes of $421,000, on securities available
for sale.
Investment In Limited Partnership
---------------------------------
Investment in limited partnership represents an equity investment in a
limited partnership in which Perpetual owned more than 20 per cent but not
in excess of 50 per cent of the limited partnership and is accounted for
under the equity method. Accordingly, Perpetual records 20.625% of
Dovenmuehle's profits and losses in the consolidated statement of
operations.
Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure and is initially recorded at estimated fair
value. Subsequent to acquisition, real estate acquired in settlement of
loans is stated at the lower of cost or fair value, less estimated selling
costs. Costs related to holding these properties are charged to operations.
Market values of real estate acquired in settlement of loans are reviewed
regularly and allowances for losses are established when the carrying values
of real estate acquired in settlement of loans exceeds fair value less costs
to sell.
Premises and Equipment
----------------------
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated primarily on the straight-line
method over the estimated useful lives of the respective assets, five to
forty years.
Securities Sold Under Agreements to Repurchase
----------------------------------------------
The Bank enters into sales of securities under agreements to repurchase.
Fixed-coupon reverse repurchase agreements are treated as financings, with
the obligation to repurchase securities sold being reflected as a liability
and the securities underlying the agreements remaining as an asset. The
securities are delivered by appropriate entry by the Bank's safekeeping
agent to the counterparties' accounts. The dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course
of their operations, and have agreed to resell to the Bank substantially
identical securities at the maturities of the agreements.
F-10
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Income Taxes
------------
The provision for income taxes is based upon income and expense
reported for financial statement purposes after adjustment for permanent
differences such as tax-exempt interest income.
When income and expenses are recognized in different periods for financial
reporting purposes than for income tax purposes, deferred taxes are
provided in recognition of these temporary differences. The Bank computes
its income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires the use of the liability
method to record income taxes. The liability method calculates the effect
of tax rates expected to be in place when the related temporary differences
reverse. Subsequent changes in tax rates will require adjustment to these
deferred tax assets and liabilities.
Stock Based Compensation
------------------------
In 1996, the Bank adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation". The statement permits the Bank
to continue accounting for stock based compensation as set forth in
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees", provided the Bank discloses the pro forma effect on
net income and earnings per share of adopting the full provisions of SFAS
No. 123. Accordingly, the Bank continues to account for stock based
compensation under APB Opinion 25 and has provided the required pro forma
disclosures.
Earnings Per Share
------------------
Earnings per share for the year ended September 30, 1997, 1996, and
1995 were computed based upon the weighted average shares outstanding.
Risks and Uncertainties
-----------------------
In the normal course of its business, the Bank encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Bank is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases,
than its interest earning assets. Credit risk is the risk of default on the
Bank's loan portfolio that results from the borrowers' inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of collateral underlying loans receivable, the
valuation of real estate held by the Bank, and the valuation of loans held
for sale.
F-11
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
The Bank is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Bank
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
dates of the balance sheets and revenues and expenses for the periods
covered. Actual results could differ significantly from those estimates and
assumptions.
Reclassification
----------------
Certain reclassifications of accounts reported for previous periods
have been made in these consolidated financial statements. Such
reclassifications had no effect on stockholders' equity or the net income as
previously reported.
(2) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consisted of the following at September 30, 1997
and 1996:
1997 1996
---- ----
Working funds $ 2,229,557 1,789,074
Noninterest-earning demand deposits 1,805,522 2,352,194
Interest-earning overnight deposits 9,464,253 9,443,300
----------- ---------
$13,499,332 13,584,568
=========== ==========
(3) Investment In Limited Partnership
---------------------------------
At September 30, 1997, the Bank's investment in Limited Partnership
consisted of a 20.625 percent interest in Dovenmuehle Mortgage Company
Limited Partnership which invests in mortgage servicing rights. The Bank
invested in Dovenmuehle in December 1996.
F-12
PERPETUAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated financial Statements
(3) Investment In Limited Partnership, Continued
--------------------------------------------
The table below contains the summarized financial information of
Dovenmuehle (unaudited).
Year Ended
Condensed Income Statement September 30, 1997
---------------------
Service Fees $ 6,626,798
Other Income 416,475
-----------
Total Income 7,043,273
-----------
Servicing Expense 1,558,802
PMSR Amortization 3,429,082
Other Expense 1,153,408
-----------
Total Expense 6,141,292
-----------
Net Income $ 901,981
===========
Condensed Balance Sheet At September 30, 1997
-----------------------
Cash $ 2,049,912
Accounts Receivable 1,496,187
Purchased Mortgage Servicing Rights 48,412,490
Organizational Costs 472,827
-----------
Total Assets $52,431,416
===========
Accounts Payable 4,405,194
Long Term Debt 23,760,000
Shareholders' Equity 24,266,222
-----------
Total Liabilities and Shareholders'
Equity $52,431,416
===========
There are no commitments oral or written to Dovenmuehle other than the
limited partnership investment made in the company.
F-13
(4) Investment and Mortgage-Backed Securities Available for Sale
------------------------------------------------------------
The Bank had securities available for sale as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
September 30, 1997
------------------
Investment securities:
Federal Home Loan Bank
Indexed Principal
Reduction Bond $ 4,002,933 -- 7,773 3,995,160
FHLB Optional Principal
Redemption Bond 6,187,732 144,368 -- 6,332,100
U. S. Treasury Notes 998,272 168 -- 998,440
----------- ----------- ----------- -----------
$11,188,937 144,536 7,773 11,325,700
=========== =========== =========== ===========
Mortgage-backed securities:
FHLMC and FNMA
fixed rate 13,117,125 114,313 23,290 13,208,148
FHLMC five year balloons 131,893 -- 315 131,578
Agency adjustable rate,
30 year original
maturity 438,330 -- 14,271 424,059
Private label collateralized
mortgage obligations
(CMOs) 11,736,540 54,103 891 11,789,752
Agency CMOs 10,290,087 19,076 -- 10,309,163
----------- ----------- ----------- -----------
$35,713,975 187,492 38,767 35,862,700
=========== =========== =========== ===========
F-14
(4) Investment and Mortgage-Backed Securities Available for Sale (Continued)
------------------------------------------------------------------------
September 30, 1996
-------------------
Investment securities:
Federal Farm Credit Bond $ 1,999,533 - 1,033 1,998,500
Certificate of deposit 100,000 - - 100,000
FNMA discount note 395,002 386 - 395,388
------------ ----------- ---------- ------------
$ 2,494,535 386 1,033 2,493,888
============ =========== ========== ============
Mortgage-backed securities:
FHLMC and FNMA
fixed rate $ 6,411,100 31,646 197,050 6,245,696
FHLMC five year balloons 1,134,918 - 2,386 1,132,532
Agency adjustable rate,
generally 30 year
original maturities 532,971 - 3,928 529,043
Private label CMOs 27,885,137 - 864,237 27,020,900
Agency CMOs 8,397,881 12,764 213,818 8,196,827
------------ ----------- ---------- ------------
$ 44,362,007 44,410 1,281,419 43,124,998
============ =========== ========== ============
Included in accrued expenses and other liabilities in the accompanying
consolidated balance sheet at September 30, 1997, was an amount payable
for the purchase of an investment security totaling $5,177,284 included in
FHLMC and FNMA Fixed Rate above, which had not settled as of September 30,
1997.
The amounts of scheduled maturities of investment and mortgage-backed
securities at September 30, 1997 were as follows:
Amortized Fair
Cost Value
---- -----
Less than one year $ 1,393,377 1,393,231
One year to five years 5,457,451 5,457,979
Five years to ten years 11,666,060 11,740,436
Ten and Over 28,386,024 28,596,754
---------- ----------
$ 46,902,912 47,188,400
============ ============
F-15
(4) Investment and Mortgage-Backed Securities Available for Sale (Continued)
------------------------------------------------------------------------
Proceeds from sales of mutual funds and securities available for sale and
the related gross realized gains and losses were as follows:
1997 1996 1995
---- ---- ----
Proceeds from sales of mutual funds $ - - -
146,403,967
Proceeds from sales of securities $ 22,872,420 2,922,009 7,625,359
Gross realized gains $ 7,866 56,228 1,843,902
Gross realized losses $ 315,400 2,265 66,431
(5) Loans Receivable, Net
---------------------
Loans receivable at September 30, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
First mortgage loans, substantially all
one to four family $ 118,663,177 91,329,530
Construction 17,145,456 19,508,595
Commercial real estate 26,975,976 17,150,980
Loan participations purchased 859,952 979,951
Home improvement loans 3,405,621 5,035,871
Commercial loans 7,181,746 5,528,527
Consumer loans 14,422,484 10,931,490
Loans secured by deposits 1,345,137 948,337
-------------- --------------
189,999,549 151,413,281
Less:
Deferred loan fees, net 356,780 254,434
Allowance for loan losses 1,886,243 1,534,773
Undisbursed loans in process 8,984,260 8,866,084
-------------- --------------
Loans receivable, net $ 178,772,266 140,757,990
============== ==============
Changes in the allowance for loan losses for the years ended September 30,
1997, 1996, and 1995 are summarized as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $ 1,534,773 1,278,423 961,672
Provision for loan losses 655,000 349,250 362,000
Charge-offs (332,194) (115,558) (51,082)
Recoveries 28,664 22,658 5,833
----------- ---------- ----------
Balance, end of year $ 1,886,243 1,534,773 1,278,423
=========== ========== ==========
F-16
(5) Loans Receivable, Net, Continued
--------------------------------
Loans serviced for others amounted to approximately $62,148,000,
$73,303,000, and $73,195,000 at September 30, 1997, 1996 and 1995,
respectively.
At September 30, 1997 and 1996, the Bank had approximately $479,000 and
$368,000, respectively, in loans receivable, which were ninety days or
more delinquent and accruing interest.
As of September 30, 1997, the Bank had purchased loans in the state of
South Carolina as follows:
1 - 4 family residential $19,600,000
Real estate development 1,500,000
Construction 4,100,000
Loans Held for Sale at September 30, 1997 and September 30, 1996
were $7,102,00 and $1,101,000, respectively.
At September 30, 1997 and 1996, the Bank had approximately $403,000 and
$316,000, respectively, in non-accrual loans. The amount of interest
income that would have been recognized had these loans performed according
to their contractual terms amounted to approximately $19,000 and $22,000
during the years ended September 30, 1997 and 1996, respectively. The
actual interest income recognized on these loans amounted to approximately
$11,000 and $12,000 during the years ended September 30, 1997 and 1996,
respectively.
At September 30, 1997 and 1996, the carrying value of loans that are
considered to be impaired under SFAS No. 114 totaled approximately
$517,000 and $795,000, respectively. No impairment allowance has been
recorded on these impaired loans. The average balance of impaired loans
and interest income recognized on impaired loans for fiscal 1997 and 1996
were $512,000 and $68,414, and $687,400 and $28,176, respectively.
Activity in loans to officers, directors and other related parties for the
years ended September 30, 1997 and 1996 is summarized as follows:
1997 1996
---- ----
Balance at beginning of year $ 975,762 554,464
New loans 143,923 593,508
Repayments (194,182) (172,210)
--------- ---------
Balance at end of year $ 925,503 975,762
========= =========
F-17
(5) Loans Receivable, Net, Continued
--------------------------------
The Bank primarily grants residential loans to customers in Anderson
County, South Carolina, and the surrounding communities. The Bank's
ability to collect these balances depends substantially upon the economic
conditions and real estate market in the region. The Bank does not have
any concentrations of loans to any one borrower. The Bank has increased
its commercial and consumer loan portfolios which may entail greater risk
than residential mortgage loans.
(6) Real Estate
-----------
Real estate is summarized at September 30, 1997 and 1996 as follows:
1997 1996
---- ----
Real estate held for development $ 2,284,038 1,406,144
Real estate acquired in settlement of loans 162,776 2,750
------------ ----------
$ 2,446,814 1,408,894
============= ==========
(7) Premises and Equipment
----------------------
Premises and equipment are summarized at September 30, 1997 and 1996 as
follows:
1997 1996
---- ----
Land $ 871,242 707,876
Office and other buildings 3,643,431 3,289,002
Furniture, fixtures and equipment 4,543,952 4,003,594
------------ ------------
9,058,625 8,000,472
Less accumulated depreciation (2,764,160) (3,148,106)
------------ ------------
$ 6,294,465 4,852,366
============= ============
Depreciation expense was $647,848, $472,343, and $430,029 for the years
ended September 30, 1997, 1996 and 1995, respectively.
F-18
(8) Deposits
--------
Deposits outstanding by type of account and range of interest rates at
September 30, 1997 and 1996 are summarized as follows:
1997 1996
------------------------ -------------------------
Range of Range of
Interest Interest
Balance Rates Balance Rates
------- ----- ------- -----
Non-interest bearing checking accounts $ 11,811,694 -- $ 8,956,602 --
Interest-bearing checking accounts 25,995,824 1.75% - 4.76% 24,292,692 1.75% - 3.63%
Passbook accounts 24,359,999 1.75% - 3.00% 23,111,051 1.75% - 3.00%
------------ ------------
62,167,517 56,360,345
------------ ------------
Certificate accounts 138,834,341 2.50% - 8.00% 103,883,278 3.35% - 5.55%
------------ ------------
$201,001,858 $160,243,623
============ ============
Weighted average interest rate 4.64% 4.25%
===== ====
The amounts of scheduled maturities of certificate accounts at September
30, 1997 and 1996 were as follows:
1997 1996
---- ----
Maturing within one year $ 115,651,298 83,770,480
Maturing one through three years 22,328,414 19,334,013
Maturing after three years 854,629 778,785
------------ ------------
$ 138,834,341 103,883,278
=========== ============
At September 30, 1997 and 1996, the aggregate amounts of time deposits of
$100,000 or more amounted to approximately $18,540,473 and $13,650,728,
respectively. Deposits in excess of $100,000 are not federally insured.
Accrued interest payable on deposits was $1,362,480 and $747,059 at
September 30, 1997 and 1996, respectively, and included in accrued
expenses and other liabilities in the consolidated balance sheets.
F-19
(9) Advances from the FHLB
----------------------
Advances from the FHLB at September 30, 1997 and 1996 are summarized as
follows:
September 30, 1997 September 30, 1996
Maturity ------------------ ------------------
Date Interest Rate Balance Interest Rate Balance
---- ------------- ------- ------------- -------
1997 - % $ - 5.55% $ 2,000,000
1998 6.47 10,000,000 6.38 5,000,000
1999 5.78 5,000,000 4.64 9,000,000
----------- -----------
$15,000,000 $16,000,000
=========== ===========
During fiscal 1996, the line of credit expired and was replaced by a
blanket floating lien on qualifying mortgage loan collateral for advances.
At September 30, 1997, the Bank had $15,000,000 in outstanding FHLB
advances and, based upon eligible collateral, available credit of
$40,000,000.
At September 30, 1997 and 1996, as collateral for its advances, the Bank
has pledged securities with a carrying value of approximately $3,761,000
and $18,804,000, respectively. All of the pledged securities are held in
safekeeping at the FHLB of Atlanta.
(10) Securities Sold Under Agreements to Repurchase
----------------------------------------------
The Bank had no outstanding securities sold under agreements to repurchase
at September 30, 1997, 1996 and 1995, and the Bank did not enter into
agreements during fiscal 1997 and 1996. The maximum amount outstanding at
any month end during fiscal 1995 was $5,907,000. The average amount of
outstanding agreements for fiscal 1995 was approximately $1,338,000. The
securities underlying the agreements were under the institution's control.
(11) Income Taxes
------------
Income taxes for the years ended September 30, 1997, 1996, and 1995 are
summarized as follows:
1997 1996 1995
---- ---- ----
Current federal $544,803 1,008,811 292,313
Deferred federal 381,000 (253,000) (98,571)
----------- ---------- -----------
Total $925,803 755,811 193,742
=========== ========== ===========
F-20
(11) Income Taxes, Continued
-----------------------
Income tax expense differs from the amount computed at the federal
statutory rates of 34% for the years ended September 30, 1997, 1996 and
1995, as a result of the following:
1997 1996 1995
---- ---- ----
Income taxes at federal rate $ 902,416 741,267 717,665
Differences resulting from:
State taxes, net of
federal benefit 81,000 71,000 67,200
Change in amount of unrecognized
tax benefits relating to
future deductions -- -- 167,630
Decrease in beginning of year
valuation allowance (81,000) (71,000) (807,000)
Other 23,387 14,544 48,247
--------- --------- ---------
$ 925,803 755,811 193,742
========= ========= =========
Effective income tax rate 34.9% 34.7% 9.2%
===== ===== ====
At September 30, 1997, the Bank has state net operating loss carryforwards
of approximately $62 million. These carryforwards expire in various
amounts beginning in fiscal year 1998 through 2006.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997 and 1996 are presented below:
1997 1996
---- ----
Deferred tax assets:
Loan loss allowances deferred for tax purposes $716,000 583,000
Deferred fees recognized for tax purposes as received - 70,000
Expenses deducted under the economic
performance rules - 359,000
Unrealized losses on securities available for sale - 421,000
State loss carryforwards 2,465,000 2,502,000
Other 89,000 100,000
----------- ------------
Total gross deferred tax assets 3,270,000 4,035,000
Less valuation allowances, primarily for tax
loss carryforwards (2,480,000) (2,561,000)
------------ ------------
Net deferred tax assets 790,000 1,474,000
----------- ------------
F-21
(11) Income Taxes, Continued
-----------------------
1996 1997
---- ----
Deferred tax liabilities:
-------------------------
Depreciation for tax purposes in excess of such
amount for financial reporting purposes $ 172,000 99,000
Tax bad debt reserve in excess of base year 307,000 310,000
Unrealized gain on securities available for sale 97,000 -
Loan fee income adjustments for tax purposes 36,000 -
Other 148,000 136,000
------- -------
Total gross deferred tax liabilities 760,000 545,000
------- -------
Net deferred tax asset (included in other assets) $ 30,000 929,000
========= =======
A portion of the change in the deferred tax asset relates to unrealized
losses on securities available for sale. In fiscal 1997, the related
deferred tax expense of $518,000 has been recorded directly to
stockholders' equity. The balance of the change in the net deferred tax
asset results from the current period deferred tax expense of $381,000. In
fiscal 1996, the deferred taxes related to the unrealized losses on
securities available for sale of $107,000 has been recorded directly to
stockholders' equity with the balance of the change in the net deferred
tax asset resulting from the current period deferred tax benefit of
$253,000.
The realization of net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income
in certain periods, and the utilization of tax planning strategies.
Management has determined that it is more likely than not that the net
deferred tax assets can be supported based upon these criteria except for
the state loss carryforwards. A valuation allowance for the deferred tax
asset has been reflected to reduce the potential deferred tax assets,
primarily for state loss carryforwards, to an amount that more likely than
not can be realized at September 30, 1997 and 1996.
Prior to enactment of recent tax legislation (the Small Business Job
Protection Act of 1996 "SBJPA `96") effective with the year ending
September 30, 1997, savings and loan associations which met certain
definitional tests and operating requirements prescribed by the Internal
Revenue Code were allowed a special bad debt deduction and other special
tax provisions. If a savings and loan association did not continue to meet
the federal income tax requirements necessary to meet these definitions,
the savings and loan may have lost the benefits of these special
provisions. Taxable income of subsidiaries was generally computed without
the benefit of these special provisions.
The special bad debt deduction was based on either specified experience
formulas (the "Experience Method") or a specified percentage of taxable
income before such deduction (the "Percentage of Taxable Income Method").
For the two years ended September 30, 1996 and 1995, the percentage of
taxable income bad debt deduction was eight percent of adjusted taxable
income. The deduction was subject to certain limitations based on the
aggregate loans, saving account balances and retained earnings at year
end. Gains and losses on sales of repossessed property and provisions for
losses on loans and foreclosed real estate were generally
F-22
(11) Income Taxes, Continued
-----------------------
adjustments to the tax bad debt reserve and not includable in the
computation of taxable income before this deduction.
As a result of SBJPA `96, the Bank will be required to change its overall
method of accounting for tax bad debts to the Experience Method beginning
with the fiscal year ending September 30, 1997. The Bank will be required
to recapture approximately $808,000 over an eight-year period in
connection with the change.
Retained earnings at September 30, 1997 and 1996 includes tax bad debt
reserves of approximately $5.2 million for which no provision for federal
income tax has been made. If, in the future, these amounts are used for
any purpose other than to absorb bad debt losses, they may be subject to
federal income tax at the then prevailing corporate tax rate.
(12) Capital
-------
The Bank's actual capital and ratios, those required by the Bank's primary
regulator, the Office of Thrift Supervision (OTS), as well as those
required in order to be considered well capitalized according to the
Prompt Corrective Action Provisions are presented in the following table.
As of September 30, 1997, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risked-based, and Tier
I core ("leverage") ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of September 30, 1997:
- ------------------------
Tangible Capital To Total Assets) $27,320 10.6% 3,825 1.5% -- --
Core Capital (To Total Assets) 27,320 10.6 7,651 3.0 $12,811 5.00%
Tier I Capital (To Risk-Based
Assets 27,320 17.3 -- -- 9,503 6.00
Risk-Based apital (To
Risk-Based Assets) 29,066 18.4 12,670 8.00 15,838 10.00
As of September 30, 1996:
- -------------------------
Tangible Capital (To Total
Assets) 27,786 13.2 3,166 1.5 - -
Core Capital (To Total Assets) 27,786 13.2 6,332 3.0 10,495 5.00
Tier I Capital (To Risk-Based
Assets) 27,786 23.3 - - 7,155 6.00
Risk-Based Capital (To
Risk-Based Assets) 29,196 24.5 9,548 8.0 11,925 10.00
F-23
If the Bank were to fail to meet the minimum capital requirements, it will
be required to file a written capital restoration plan with regulatory
agencies and would be subject to various mandatory and discretionary
restrictions on its operations.
The following table reconciles the Bank's consolidated stockholders'
equity to its regulatory capital positions at September 30, 1997 and 1996:
1997 1996
---- ----
Stockholders' equity $ 30,601,743 29,090,794
Adjustments for unrealized (gains) losses on
available for sale securities (188,423) 816,855
Investments in and advances to nonincludable
subsidiaries (2,092,695) (2,121,457)
Disallowed servicing assets (1,000,767) -
------------ ------------
Regulatory tangible and core capital 27,319,858 27,786,192
Supplemental capital 1,746,230 1,409,415
----------- ------------
Risk-based capital $ 29,066,088 29,195,607
========== ==========
(13) Employee Benefit Plans
----------------------
The Bank has a profit sharing and deferred compensation plan for
substantially all full-time employees. The plan permits eligible
participants to contribute a percentage of their salary up to amounts
permitted by the Internal Revenue Code each year. At the discretion of the
Board of Directors, the Bank may match a percentage of each participant's
contribution during the plan year. In addition the Board of Directors may
from year to year make a discretionary contribution to the plan. The
Bank's contribution recorded as expense for the years ended September 30,
1997, 1996 and 1995, was $219,123, $160,525 and $141,879, respectively.
(14) Stock Option Plan
-----------------
In October 1993, the Bank's Board of Directors adopted a stock option and
incentive plan. Pursuant to the plan, an aggregate of 11,504 shares of
common stock were reserved for issuance by the Bank upon exercise of stock
options and awards to be granted to directors, officers, and other key
employees from time to time under the plan. The Bank's management was
granted incentive stock options, and the Bank's non-officer directors were
granted non-incentive stock options. These options expire on October 2003.
F-24
(14) Stock Option Plan, Continued
----------------------------
In April 1997, the stockholders approved a second stock option plan and
incentive plan. Pursuant to the plan, 58,500 shares of common stock have
been reserved for issuance by the Bank upon exercise of stock options and
awards to be granted to directors, officers, and other key employees from
time to time under the plan. The Bank's management was granted incentive
stock options, and the Bank's non-officer directors were granted
non-qualified stock options. These options are priced at $25.25 and expire
in April 2007.
The following table summarizes option activity during the years ended
September 30, 1997, 1996 and 1995:
Number of Price Per
Shares Share
------ -----
Outstanding at September 30, 1994 9,530 $ 10.00
Granted - -
Exercised 658 10.00
------- -------
Outstanding at September 30, 1995 8,872 10.00
Granted - -
Exercised - -
------- -------
Outstanding at September 30, 1996 8,872 10.00
Granted 58,500 25.25
Exercised 4,272 10.00
------- -------
Outstanding at September 30, 1997 63,100 $ 24.14
======= =======
The Bank applies APB Opinion 25 in accounting for the stock-based option
plans which are described in the preceding paragraph. Accordingly, no
compensation expense has been recognized for the stock-based option plans.
Had compensation cost been recognized for the stock-based option plans
applying the fair-value-based method as prescribed by SFAS 123, the Bank's
net income and earnings per share would have been reduced to the proforma
amounts indicated below:
1997 1996
---- ----
Net Income
----------
As Reported $1,728,303 1,424,387
Proforma 1,702,803 1,424,387
Earnings Per Share
As Reported $ 1.15 .95
Proforma 1.13 .95
F-25
(14) Stock Option Plan, Continued
----------------------------
The effects of applying SFAS 123 may not be representative of the effects
on reported net income in future years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997:
Dividend yield 3.25 %
Expected volatility 38 %
Risk-free interest rate 6.59 %
Expected lives 7.5 years
There were no options granted in 1996.
(15) Management Recognition Plan
---------------------------
The Board of Directors initially adopted a Management Recognition Plan
("MRP") during fiscal 1994. Those eligible to receive benefits under the
MRP included certain officers of the Bank as determined by a committee
appointed by the Board of Directors of the Bank. During the year ended
September 30, 1994, 3,450 shares of common stock were granted to
management under the MRP, vesting over a three year period. Vested shares
at September 30, 1997 and 1996 was 3,450 for both years. All shares are
vested at September 30, 1997 and 1996. Compensation related to vesting of
the shares was $0, $11,520, and $11,490 for fiscal 1997, 1996 and 1995,
respectively.
In April 1997, the stockholders approved a second Management Recognition
Plan ("1996 MRP") with 23,400 shares of common stock being granted to
management under the 1996 MRP, vesting over a five-year period. During the
fiscal year 1997, 11,985 shares were purchased by the Company with 11,415
shares remaining to be purchased. Compensation expense related to vesting
of shares was $78,881 for fiscal 1997.
F-26
(16) Employee Stock Ownership Plan
-----------------------------
The Bank has an Employee Stock Ownership Plan (ESOP) established by the
Board of Directors during fiscal 1994. The ESOP borrowed $80,500 from a
federal savings bank and acquired 8,050 shares of the Bank's common stock
in October 1993. All shares acquired in 1993 have been allocated to
participants. With the stock offering in September 1996, the ESOP borrowed
$900,900 from a federal savings bank and acquired 46,800 shares of the
Bank's common stock. The Bank has presented the outstanding loan amounts
as an other liability and as a reduction of stockholders' equity in the
accompanying consolidated balance sheets at September 30, 1997 and 1996.
Interest on the unpaid principal balance is due quarterly and is based on
the prime rate. During fiscal 1997 and 1996, the Bank paid interest of
$72,552 and $3,535, respectively. Compensation recorded under the ESOP was
$129,028, $10,245 and $74,490 for the fiscal years 1997, 1996 and 1995,
respectively.
(17) Commitments
-----------
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan commitments
(unfunded loans and unused lines of credit) and letters of credit are
issued to accommodate the financing needs of the Bank's customers. Loan
commitments are agreements by the Bank to lend monies at a future date, so
long as there are no violations of any conditions established in the
agreement. Letters of credit commit the Bank to make payments on behalf of
customers when certain specified events occur.
Financial instruments where the contract amount represents the Bank's
credit risk at September 30, 1997 and 1996, include loan and letter of
credit commitments of $27,941,000 and $10,014,175, respectively.
These loan and letter of credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon management's assessment of the
credit risk. Since many of the extensions of credit are expected to expire
without being drawn, the total commitment amounts do not necessarily
represent future cash requirements.
Outstanding commitments on mortgage loans not yet closed amounted to
approximately $174,000 and $119,000 at September 30, 1997 and 1996,
respectively. Substantially, all of these commitments were at variable
interest rates. Such commitments, which are funded subject to certain
limitations, extend over varying periods of time with the majority being
funded within thirty days.
These commitments will be funded with the cash flow generated from normal
operations, as well as possible utilization of existing credit facilities
available to the Bank.
F-27
(18) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The Bank's fair value methods, assumptions, carrying amounts and fair
value of financial instruments at September 30, 1997 and 1996 are
summarized below:
For cash and cash equivalents and FHLB stock, the carrying value is a
reasonable estimate of fair value.
For investment securities available for sale, mortgage-backed securities
and collateralized mortgage obligations, fair value is based on available
quoted market prices or quoted market prices for similar securities if a
quoted market price is not available.
The fair value of fixed and adjustable rate loans is estimated based upon
discounted future cash flows using discount rates comparable to rates
currently offered for such loans. The discounted future cash flows reflect
estimated maturity dates adjusted for expected prepayments.
The fair value of time deposits is estimated by discounting the amounts
payable at the certificate rates currently offered for deposits of similar
remaining maturities. The fair value of all other deposit account types is
the amount payable on demand at year-end.
For FHLB advances, fair value is estimated based on discounting amounts
payable at the current rates offered to the Bank for debt of the same
remaining maturities.
F-28
(18) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
1997 1996
------------------------- ---------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $ 13,499,332 13,499,332 13,584,568 13,584,568
Investment in Limited
Partnership 5,003,835 5,003,835 -- --
Investment securities
available for sale 11,325,700 11,325,700 2,493,888 2,493,888
Federal Home Loan Bank
stock 1,650,000 1,650,000 993,700 993,700
Mortgage-backed securities
and collateralized
mortgage obligations, net 35,862,700 35,862,700 43,124,998 43,124,998
Loans receivable, net 178,772,266 179,094,089 140,757,990 143,404,634
------------ ------------ ------------ ------------
$246,113,833 246,435,656 200,955,144 203,601,788
============ ============ ============ ============
Financial liabilities:
Deposits
Demand deposits $ 62,167,517 62,301,280 55,752,124 55,752,124
Certificate accounts 138,834,341 139,272,816 103,883,278 103,732,129
Advances from the FHLB 15,000,000 15,069,702 16,000,000 15,954,810
------------ ------------ ------------ ------------
$216,001,858 216,643,798 175,635,402 175,439,063
============ ============ ============ ============
The Bank had $27.9 million of off-balance sheet financial commitments,
which are commitments to originate loans and unused consumer lines of
credit. Since these obligations are based on current market rates, the
carrying amount is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale the Bank's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Bank's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and
prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates.
Further, the fair value estimates were calculated as of September 30, 1997
and 1996. Changes in market interest rates and prepayment assumptions
could significantly change the fair value. Therefore, management believes
that the foregoing information is of limited value and has no basis for
determining whether the fair value presented would be indicative of the
value which could be negotiated during an actual sale.
F-29
(18) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise value, loan servicing
portfolio, real estate, deferred tax liabilities, premises and equipment,
and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
these estimates.
(19) Dividends
---------
During fiscal 1997, the Board of Directors declared cash dividends of $.30
per share for the first quarter and $.35 per share for the second, third,
and fourth quarters. For all 1997 dividends, the Bank obtained permission
from the OTS to waive dividends payable to the MHC. The cumulative waived
dividends to the MHC are considered as a restriction on the retained
earnings of the Bank which totaled $4.6 million at September 30, 1997. To
the extent the conversion discussed in note 1 is successful, these waived
dividends would no longer be restricted.
During fiscal 1996, the Board of Directors declared cash dividends of $.30
per share for all four quarters. For fiscal 1996 dividends, the Bank
obtained permission from the OTS to waive dividends payable to the MHC.
During fiscal 1995, the Board of Directors declared cash dividends of $.25
per share for the first three quarters and $.30 per share for the fourth
quarter. The dividends payable to the MHC were waived by the OTS.
F-30
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Primary Parties or Sandler O'Neill. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person or in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Primary Parties since any of the dates as of which information is furnished
herein or since the date hereof.
Table of Contents Page
Prospectus Summary...................................
Selected Consolidated Financial Information..........
Recent Developments..................................
Risk Factors.........................................
Use of Proceeds......................................
Dividend Policy......................................
Market for Common Stock..............................
Capitalization.......................................
Historical and Pro Forma Regulatory Capital Compliance
Pro Forma Data.......................................
Conversion Shares to be Purchased by Management
Pursuant to Subscription Rights.....................
Perpetual Bank, A Federal Savings Bank and Subsidiary
Consolidated Statements of Operations...............
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................
Business of the Holding Company......................
Business of the Savings Bank.........................
Management of the Holding Company....................
Management of the Savings Bank.......................
Regulation...........................................
Taxation.............................................
The Conversion and Reorganization....................
Comparison of Stockholders' Rights...................
Restrictions on Acquisition of the Holding Company...
Description of Capital Stock of the Holding Company
Registration Requirements............................
Legal and Tax Opinions...............................
Experts..............................................
Additional Information...............................
Index to Consolidated Financial Statements...........
Until the later of ____________, 1998, or 25 days after commencement of the
Syndicated Community Offering of Common Stock, if any, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
SOUTHBANC SHARES, INC.
[Logo]
(Proposed Holding Company for
Perpetual Bank, A Federal Savings Bank)
Up to 4,301,736 Shares of
Common Stock
Prospectus
SANDLER O'NEILL & PARTNERS, L.P.
_______________, 1998
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Article XVI of the Certificate of Incorporation of SouthBanc Shares,
Inc. requires indemnification of directors, officers and employees to the
fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and agents may be
insured or indemnified against liability which they may incur in their
capacities:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
II-1
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
II-2
Item 25. Other Expenses of Issuance and Distribution(1)
Legal fees and expenses................................ $ 180,000
Securities Marketing Firm legal fees................... 75,000
EDGAR, printing, copying, postage, mailing............. 150,000
Appraisal/business plan fees and expenses.............. 40,000
Accounting fees........................................ 40,000
Securities marketing fees (1).......................... 506,250
Data processing fees and expenses...................... 18,000
SEC filing fee......................................... 21,500
OTS filing fee......................................... 8,400
Blue sky legal fees and expenses....................... 7,500
Other.................................................. 23,350
-----------
Total............................................ $1,070,000
===========
- ---------------
(1) Assumes a total offering of Conversion Shares of $34.5 million
(midpoint of the Estimated Valuation Range), a fee of 1.50% of the aggregate
Purchase Price of the shares of Common Stock sold in the Subscription and Direct
Community Offering and the Syndicated Community Offering, excluding shares
purchased by officers and directors of the Savings Bank and their associates.
See "THE CONVERSION AND REORGANIZATION -- Plan of Distribution and Selling
Commissions."
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits
The exhibits filed as part of this Registration Statement are as
follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among SouthBanc Shares, Inc.,
Perpetual Bank, a Federal Savings Bank, SouthBanc Shares, M.H.C. and
Sandler O'Neill & Partners, L.P.
1.2 -- Engagement Letter with Perpetual Bank, A Federal Savings Bank and
Sandler O'Neill & Partners, L.P. (a)
2 -- Plan of Conversion and Agreement and Plan of Reorganization of
SouthBanc Shares, M.H.C. and Perpetual Bank, A Federal Savings Bank
(attached as an exhibit to the Special Meeting Proxy Statement and the
Annual Meeting Proxy Statement included herein as Exhibits 99.5 and
99.6, respectively)
3.1 -- Certificate of Incorporation of SouthBanc Shares, Inc. (a)
3.2 -- Bylaws of SouthBanc Shares, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities registered
(a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia
II-3
8.2 -- State Tax Opinion of Evans, Carter, Kunes & Bennett, P.A.
8.3 -- Opinion of RP Financial, LC. as to the value of subscription rights
(a)
10.1 -- Proposed Form of Employment Agreement for Executive Officers (a)
10.2 -- Perpetual Bank, A Federal Savings Bank 401(k) Plan
21 -- Subsidiaries of SouthBanc Shares, Inc. (a)
23.1 -- Consent of KPMG Peat Marwick LLP (a)
23.2 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion
(contained in opinion included as Exhibit 8.1)
23.3 -- Consent of Evans, Carter, Kunes & Bennett, P.A. as to its State Tax
Opinion (contained in opinion included as Exhibit 8.2)
23.3 -- Consent of RP Financial, LC. (a)
24 -- Power of Attorney (included in signature page) (a)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included herein as Exhibit 99.2) (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with RP Financial, LC. (a)
99.4 -- Appraisal Report of RP Financial, LC.
99.5 -- Proxy Statement for Special Meeting of Members of SouthBanc Shares,
M.H.C.
99.6 -- Proxy Statement for Annual Meeting of Stockholders of Perpetual
Bank, A Federal Savings Bank
- ---------------
(a) Previously filed.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected
II-4
in the form of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time shall be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore, unenforceable. In the event
that a claim for indemnification against liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Amended Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Anderson, State of South Carolina, on this 3rd day of February 1998.
SOUTHBANC SHARES, INC.
By: /s/ Robert W. Orr
--------------------------------------
Robert W. Orr
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amended Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Robert W. Orr President, Chief Executive February 3, 1998
- -------------------------------- Officer and Director
Robert W. Orr (Principal Executive Officer)
/s/ Thomas C. Hall* Treasurer and Chief Financial February 3, 1998
- -------------------------------- Officer (Principal Financial
Thomas C. Hall and Accounting Officer)
/s/ Cordes G. Seabrook, Jr.* Chairman of the Board February 3, 1998
- --------------------------------
Cordes G. Seabrook, Jr.
/s/ Harold A. Pickens, Jr.* Director February 3, 1998
- --------------------------------
Harold A. Pickens, Jr.
/s/ Martha S. Clamp* Director February 3, 1998
- --------------------------------
Martha S. Clamp
/s/ Jack F. McIntosh* Director February 3, 1998
- --------------------------------
Jack F. McIntosh
/s/ Charles W. Fant, Jr.* Director February 3, 1998
- --------------------------------
Charles W. Fant, Jr.
/s/ Jim Gray Watson* Director February 3, 1998
- --------------------------------
Jim Gray Watson
/s/ Richard C. Ballenger* Director February 3, 1998
- --------------------------------
Richard C. Ballenger
/s/ F. Stevon Kay* Director February 3, 1998
- --------------------------------
F. Stevon Kay
* By power of attorney dated December 17, 1997.
As filed with the Securities and Exchange Commission on February 3, 1998
Registration No. 333-42517
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SOUTHBANC SHARES, INC.
----------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 6035 58-2361245
- ------------------------------- ------------------- ------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
907 N. Main Street
Anderson, South Carolina 29621
(864) 225-0241
-------------------------------------------------------------------
(Address and telephone number of principal executive offices)
Paul M. Aguggia, Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
------------------------------
(Name and address of agent for service)
INDEX TO EXHIBITS
1.1 -- Form of proposed Agency Agreement among SouthBanc Shares, Inc.,
Perpetual Bank, a Federal Savings Bank, SouthBanc Shares, M.H.C.
and Sandler O'Neill & Partners, L.P.
1.2 -- Engagement Letter with Perpetual Bank, A Federal Savings Bank and
Sandler O'Neill & Partners, L.P. (a)
2 -- Plan of Conversion and Agreement and Plan of Reorganization of
SouthBanc Shares, M.H.C. and Perpetual Bank, A Federal Savings
Bank (attached as an exhibit to the Special Meeting Proxy
Statement and the Annual Meeting Proxy Statement included herein
as Exhibits 99.5 and 99.6, respectively)
3.1 -- Certificate of Incorporation of SouthBanc Shares, Inc. (a)
3.2 -- Bylaws of SouthBanc Shares, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia
8.2 -- State Tax Opinion of Evans, Carter, Kunes & Bennett, P.A.
8.3 -- Opinion of RP Financial, LC. as to the value of subscription
rights (a)
10.1 -- Proposed Form of Employment Agreement for Executive Officers (a)
10.2 -- Perpetual Bank, A Federal Savings Bank 401(k) Plan
21 -- Subsidiaries of SouthBanc Shares, Inc. (a)
23.1 -- Consent of KPMG Peat Marwick LLP (a)
23.2 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion
(contained in opinion included as Exhibit 8.1)
23.3 -- Consent of Evans, Carter, Kunes & Bennett, P.A. as to their State
Tax Opinion (contained in opinion included as Exhibit 8.2)
23.4 -- Consent of RP Financial, LC. (a)
24 -- Power of Attorney (included in signature page) (a)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included herein as Exhibit 99.2) (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with RP Financial, LC. (a)
99.4 -- Appraisal Report of RP Financial, LC.
99.5 -- Proxy Statement for Special Meeting of Members of SouthBanc
Shares, M.H.C.
99.6 -- Proxy Statement for Annual Meeting of Stockholders of Perpetual
Bank, A Federal Savings Bank
- ---------------
(a) Previously filed.