PROSPECTUS SUPPLEMENT
FIRSTSPARTAN FINANCIAL CORP.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG
401(k) PLAN
This Prospectus Supplement relates to the offer and sale to
participants ("Participants") in the First Federal Savings and Loan Association
of Spartanburg 401(k) Plan ("Plan" or "401(k) Plan") of participation interests
and shares of FirstSpartan Financial Corp. common stock, par value $.01 per
share ("Common Stock"), as set forth herein.
In connection with the proposed conversion of First Federal Savings and
Loan Association of Spartanburg ("Association" or "Employer") from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association, a holding company, FirstSpartan Financial Corp.
("Holding Company"), has been formed. The simultaneous conversion of the
Association to stock form, the issuance of the Association's common stock to the
Holding Company and the offer and sale of the Holding Company's Common Stock to
the public are herein referred to as the "Conversion." Applicable provisions of
the 401(k) Plan permit the investment of the Plan assets in Common Stock of the
Holding Company 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.
The Prospectus dated May 14, 1997 of the Holding Company ("Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operation and business of the Association 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's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" 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. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus Supplement is May 14, 1997.
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 Association 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 Association 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 ............. S-1
Value of Participation Interests ................................ S-1
Method of Directing Transfer .................................... S-2
Time for Directing Transfer ..................................... S-2
Irrevocability of Transfer Direction ............................ S-2
Direction to Purchase Common Stock After the Conversion ......... S-2
Purchase Price of Common Stock .................................. S-2
Nature of a Participant's Interest in the Holding Company
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-8
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-11
Federal Income Tax Consequences ................................. S-11
Restrictions on Resale .......................................... S-14
Legal Opinions ....................................................... S-15
Investment Form ...................................................... 1
i
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan
and up to 3,852,500 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 Association 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 the financial condition, results of operation and business of the
Association and the Holding Company is contained in the attached Prospectus. The
address of the principal executive office of the Association is 380 E. Main
Street, Spartanburg, South Carolina 29302-1944. The Association's telephone
number is (864) 582-2391.
Election to Purchase Common Stock in the Conversion
In connection with the Association's Conversion, each Participant in
the 401(k) Plan may direct the trustees of the Plan ("Trustees") to transfer up
to 100% of a Participant's beneficial interest in the Plan's Money Market Fund
at March 31, 1997 to a newly created Employer Stock Fund and to use such funds
to purchase Common Stock issued in connection with the Conversion. Amounts
transferred will include salary deferral and employer matching contributions and
account balances transferred from the First Federal Savings and Loan Association
of Spartanburg Employee Retirement and Savings Fund ("Savings Fund"), which was
merged with the Plan on March 31, 1997. The Employer Stock Fund will consist of
investments in the Common Stock made on or after the effective date of the
Conversion. Funds not transferred to the Employer Stock Fund will 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 is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion. For general information as to the
ability of the Participants to purchase shares in the Conversion, see "THE
CONVERSION -- 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 quarterly basis. This value represents the market value of past
contributions to the Plan by the Association and by the Participants and
earnings thereon, less previous withdrawals, and transfers from the Savings
Fund.
S-1
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, 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 is June 10, 1997. The Investment Form should be returned to Gina
Smith at the Association 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 shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction to Purchase Common Stock After the Conversion
After the Conversion, a Participant will be able to direct that a
certain percentage of such Participant's interests in the trust assets ("Trust")
be transferred (i) to the Employer Stock Fund and invested in Common Stock at
prevailing market prices or (ii) 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 Participant's interest in the Employer Stock Fund
may be changed by the Participant on a quarterly basis in accordance with
administrative procedures and policies 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 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.
S-2
Nature of a Participant's Interest in the Holding Company Stock
The Holding Company Stock purchased for an account of a Participant
will be held in the name of the Trustee of the Plan in the Employer Stock Fund.
Any earnings, losses or expenses with respect to the Holding Company 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 Association adopted the Plan on March 15, 1995. The Savings Fund
was merged with and into the Plan, effective March 31, 1997. 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 Association intends that the Plan, in operation, will comply with
the requirements under Section 401(a) and Section 401(k) of the Code. The
Association 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 Association 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.
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
S-3
(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 ASSOCIATION. 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 ASSOCIATION 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 Association is eligible to participate and will
become a Participant in the Plan following completion of a minimum of 1,000
hours of service with the Association within a consecutive 12 month period of
employment and the attainment of age 21. The Plan fiscal year is the calendar
year ("Plan Year"). Directors who are not employees of the Association are not
eligible to participate in the Plan.
During 1996, approximately 77 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 ("deferral contributions"). Such amounts are credited to
the Participant's deferral contributions account. For purposes of the Plan,
"Compensation" means a Participant's total amount of earnings reportable W-2
wages for federal income tax withholding purposes plus a Participant's deferral
contributions pursuant to this 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 periodically pursuant to the Code). 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 transferred by the
Association to the Trustees on a periodic basis.
S-4
Employer Contributions. The Association currently makes a discretionary
matching contribution to the Plan in an amount equal to a percentage of each
Participant's annual deferral contributions not in excess of 5% of the
Participant's Compensation.
Discretionary Contributions. The Association may also make
discretionary nonmatching contributions to the Plan for each Plan Year.
Participants who are in service on the last day of the Plan Year and have
completed 1,000 hours of service during the Plan Year are eligible to share in
the allocation of the discretionary contributions (if any) for the Plan Year.
The Association's discretionary contributions are allocated among Participants
eligible to share in the allocation according to the relationship of each such
Participant's Compensation for the Plan Year to the total Compensation of all
such Participants for such Plan Year. In addition, the Association may make
discretionary contributions on behalf of certain non-highly compensated
employees to the extent necessary to satisfy the Code's nondiscrimination
requirements (see below).
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 pursuant to the Code). 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 Association 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 $9,500 (as adjusted periodically
pursuant to the Code). 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.
S-5
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 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 pursuant to the
Code) and, if elected by the Association, 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 Association 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 Association 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.
S-6
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a
Top-Heavy Plan (as defined below), then (i) the Association may be required to
make certain minimum contributions to the Plan on behalf of non-key employees
(as defined below), and (ii) certain 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 Association.
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 of the four preceding Plan Years, if (1) an officer of the Association
having annual compensation in excess of $60,000 who is in 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% 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 Trustee is appointed by
the Association's Board of Directors. The Plan provides that a Participant may
direct the Trustees to invest all or a portion of his Accounts in various
managed investment portfolios, as described below, A Participant may
periodically elect to change his investment directions with respect to both past
contributions and new contributions to the Participant's accounts.
Under the Plan, prior to the effective date of the Conversion, the
Accounts of Participant held in the Trust will be invested by the Trustees at
the direction of the Participant in the following managed portfolios:
Certificates of Deposit - Invests in bank certificates of deposits of varying
maturities which are federally insured.
Money Market Fund - Invests in money market mutual funds which invest in short
duration commercial paper and government securities.
Stock Fund - Investment holdings include stocks of medium and largely
capitalized domestic and international corporations.
Bond Fund - Funds are invested in high grade corporate, U.S. government and U.S.
government agency debt securities.
S-7
Aggressive Growth Fund - Invests in stocks of smaller capitalized domestic and
international growth-oriented corporations.
Brokerage Account - A discretionary brokerage account managed by the
Participant.
Effective upon the Conversion, a Participant may invest all or a
portion of his or her Accounts in the portfolios described above and in the
investment described below:
Employer Stock Fund - Invests in common stock of the Holding Company.
A Participant may elect to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or in any of the other investments listed above. Any amounts credited to a
Participant's Accounts for which investment directions are not given will be
invested in the Money Market Fund.
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 quarterly
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 will consist of investments in Common Stock
made on and after the effective date of the Conversion. In connection with the
Conversion, 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 subaccount for each Participant investing in the
Employer Stock Fund. The Trustees will, to the extent practicable, use all
amounts held by it in the Employer Stock Fund to purchase shares of Common
Stock. It is expected that all purchases will be made at prevailing market
prices. Under certain circumstances, the Trustees may be required to limit the
daily volume of shares purchased. 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. It is the present intention of the Board of
Directors of the Holding Company to pay an annual dividend of $0.60 per share on
the
S-8
Common Stock, however, no final decision has been made by the Board of the
Holding Company regarding the amount or timing of dividends.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund.
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 deferral contributions, matching contributions and
the earnings thereon under the Plan. A Participant is 100% vested in his or her
employer discretionary contributions after the completion of seven years of
service under the Plan's graded vesting schedule (20% per year beginning upon
completion of three 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, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. 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. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefit payments ordinarily shall be made
not later than 60 days following the end of the Plan Year in which occurs the
later of the Participant's: (i) termination of employment; (ii) 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 shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant consents to an earlier distribution. Special
restrictions may apply
S-9
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 the Plan are Billy L. Painter,
Robert L. Handell and Cheryl B. Pack.
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
engaged The Southeastern Trust Company, Columbia, South Carolina as custodian
and investment advisor.
Except as otherwise provided under the Plan, the Trustees have full
power to vote any corporate securities in the Trust in person or by proxy.
Participants will direct the Trustees as to voting and tendering of all Common
Stock held in the Employer Stock Fund.
The Trustees are not compensated for their services. The expenses
incurred in the administration of the Trust are paid out of the
Trust except to the extent such expenses are paid by the Association.
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The Trustees must render at least annual reports to the Association and
to the Participants in such form and containing information that the Trustees
deems 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 Trustees of the Plan have been designated by the Board of Directors
of the Association to act on the Association's behalf 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 Association 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 Association 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).
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
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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 Association 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 591/2; and (iii) consists of the balance to the
credits of the Participant under the Plan and all other profit sharing plans, if
any, maintained by the Association. 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
S-12
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plans maintained by the Association 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 591/2 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.
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
Trustee
S-13
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 or 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.
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is
an "affiliate" of the Association 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 Association) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Association
S-14
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 Association of 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 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 Association's Conversion from a
federally chartered mutual savings and loan association to a federally chartered
stock savings and loan association and the concurrent formation of the Holding
Company.
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Employer Stock Fund Investment Form
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG
401(k) PLAN
Name of Participant: _________________________________
Social Security Number: ______________________________
1. Instructions. In connection with the proposed conversion of First
Federal Savings and Loan Association of Spartanburg ("Association") to a stock
savings and loan association and the simultaneous formation of a holding company
("Conversion"), participants in the First Federal Savings and Loan Association
of Spartanburg 401(k) Plan ("Plan") may make a one-time election to direct the
investment of up to 100% of their March 31, 1997 Money Market Fund 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 submit subscription orders for shares of the common stock of
FirstSpartan Financial Corp. ("Common Stock"), the proposed holding company for
the Association. 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 and the maximum and minimum limitations set forth in the
Plan Conversion. See the Prospectus for additional information.
You may use this form to direct a transfer of funds credited to your
Plan account to the Employer Stock Fund to purchase Common Stock in the
Conversion. To direct such a transfer to the Employer Stock Fund, you should
complete this form and return it to Gina Smith at the Association, no later than
the close of business on June 10, 1997. The Association will keep a copy of this
form and return a copy to you. (If you need assistance in completing this form,
please contact Gina Smith.)
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $20) from my Money Market Fund account to
the Employer Stock Fund to purchase Common Stock.
3. Additional Instructions. If applicable, please select one or more of
the following by initialing the space provided:
a. _____ To the extent that my Plan
subscription order is not filled, I hereby
direct the Trustee of the Plan to apply the
excess funds to the purchase of Common Stock
in the open market following the closing of
the Conversion. I understand that all
purchases of Common Stock made after the
Conversion will be at prevailing
market prices, which may be higher or lower
than the initial offering price of $20.00
per share, and that any commissions
associated with such purchases will also be
charged against my account. Please note that
if you do not initial this section or
section (c) below, any excess funds will be
returned to the Money Market Fund following
the closing of the Conversion.
Page 1 of 2
b. _____ In addition to this Plan subscription order, I have
submitted a separate subscription order with personal
funds obtained from sources other than the Plan. In
the event that my combined order is not filled in its
entirety, I direct that my separate subscription order
be filled prior to this Plan subscription order.
Please note that if you do not initial this section,
this Plan subscription order will be filled prior to
the separate subscription order you submit.
c. _____ If my subscription order is not filled in its
entirety, please contact me for further instructions
regarding the investment of the excess funds. I
understand that after I have been contacted, I must
provide such instructions in writing no later than two
business days thereafter or my excess funds will be
returned to the Money Market Fund.
4. 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. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
_________________________ ___________________
Participant Signature Date
* * * * *
5. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator (or its designee) and will become effective on the date noted
below.
________________________________ ___________________
Plan Administrator (or designee) Date
Page 2 of 2
PROSPECTUS
FIRSTSPARTAN FINANCIAL CORP.
(Proposed Holding Company for First Federal Savings and Loan
Association of Spartanburg)
Up to 3,852,500 Shares of Common Stock
$20.00 Purchase Price Per Share
FirstSpartan Financial Corp. ("Holding Company"), a Delaware
corporation, is offering between 2,847,500 and 3,852,500 shares of its common
stock, $.01 par value per share ("Common Stock"), in connection with the
conversion of First Federal Savings and Loan Association of Spartanburg
("Association") from a federally chartered mutual savings and loan association
to a federally chartered capital stock savings and loan association and the
simultaneous issuance of all of the Association's outstanding capital stock to
the Holding Company. The simultaneous conversion of the Association to stock
form, the issuance of all of its outstanding capital stock to the Holding
Company, and the offer and sale of the Common Stock by the Holding Company
hereby are undertaken pursuant to a plan of conversion ("Plan of Conversion")
and are referred to herein as the "Conversion."
Pursuant to the Plan of Conversion, nontransferable rights to subscribe
for the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Association as
of December 31, 1995 ("Eligible Account Holders"), (ii) the Association's
employee stock ownership plan ("ESOP"), a tax-qualified employee benefit plan,
(iii) depositors with $50.00 or more on deposit at the Association as of March
31, 1997 ("Supplemental Eligible Account Holders"), and (iv) depositors of the
Association as of May 1, 1997 ("Voting Record Date") and borrowers of the
Association with loans outstanding as of March 12, 1997 which continue to be
outstanding as of the Voting Record Date ("Other Members"), subject to the
priorities and purchase limitations set forth in the Plan of Conversion
("Subscription
(cover continued on following page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL
THE STOCK INFORMATION CENTER AT (864) 580-5510.
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 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.
Estimated Underwriting
Purchase Commissions an Estimated Net
Price(1) Other Fees and Expenses(2) Proceeds(3)
Minimum Price Per Share . . . . . . . $20.00 $0.45 $19.55
Midpoint Price Per Share . . . . . . $20.00 $0.42 $19.58
Maximum Price Per Share . . . . . . . $20.00 $0.42 $19.58
Maximum Price Per Share, as adjusted(4) $20.00 $0.42 $19.58
Minimum Total(5) . . . . . . . . . . $56,950,000 $1,275,000 $55,675,000
Midpoint Total(6) . . . . . . . . . . $67,000,000 $1,400,000 $65,600,000
Maximum Total(7) . . . . . . . . . . $77,050,000 $1,400,000 $75,650,000
Maximum Total, as adjusted(4)(8) . . $88,607,500 $1,400,000 $87,207,500
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") as of February 21, 1997, which states
that the estimated aggregate pro forma market value of the Holding
Company and the Association as converted ranged from $56,950,000 to
$77,050,000, with a midpoint of $67,000,000 ("Estimated Valuation
Range"). See "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued."
(2) Includes estimated expenses to the Holding Company and the Association
arising from the Conversion, including fees to be paid to Trident
Securities, Inc. ("Trident Securities") in connection with the Offerings.
Trident Securities' fees amount to $672,000, $797,000, $797,000 and
$797,000 at the minimum, midpoint, maximum and 15% above the Estimated
Valuation Range, respectively. Such fees may be deemed to be underwriting
fees and Trident Securities may be deemed to be an underwriter. Expenses,
other than fees to be paid to Trident Securities, are estimated to total
approximately $603,000 at each of the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range. Actual expenses
may be more or less than estimated amounts. The Holding Company and the
Association have agreed to indemnify Trident Securities 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 - - Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
(3) Actual net proceeds can vary substantially from the estimated amounts
depending upon actual expenses and the relative number of shares sold in
the Offerings. See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares that could be sold in
the Offerings due to an increase in the pro forma market value of the
Holding Company and the Association as converted up to 15% above the
maximum of the Estimated Valuation Range, without the resolicitation of
subscribers or any right of cancellation. The ESOP shall have a first
priority right to subscribe for such additional shares up to an aggregate
of 8% of the Common Stock issued in the Conversion. 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 Holding Company and the Association as
converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
(5) Assumes the issuance of 2,847,500 shares at $20.00 per share.
(6) Assumes the issuance of 3,350,000 shares at $20.00 per share.
(7) Assumes the issuance of 3,852,500 shares at $20.00 per share.
(8) Assumes the issuance of 4,430,375 shares at $20.00 per share.
TRIDENT SECURITIES, INC.
The date of this Prospectus is May 14, 1997.
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 Office of Thrift Supervision ("OTS") or
another agency of the U.S. Government. The Subscription Offering will expire at
12 Noon, Eastern Time, on June 17, 1997 ("Expiration Date"), unless extended by
the Association and the Holding Company for up to 20 days to July 7, 1997. Such
extension may be granted without additional notice to subscribers. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" and "-- Limitations on Purchases of Shares."
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered for sale to members of the general public through a
direct community offering ("Direct Community Offering") with preference being
given to natural persons and trusts of natural persons who are permanent
residents of Spartanburg County, South Carolina ("Local Community"), subject to
the right of the Holding Company to accept or reject orders in the Direct
Community Offering in whole or in part. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering. The Direct Community
Offering may terminate on or after the Expiration Date, but not later than
August 1, 1997 (or August 21, 1997 if the Subscription Offering is fully
extended), unless further extended with the consent of the OTS. It is
anticipated that shares of Common Stock not subscribed for or purchased in the
Subscription Offering and 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 Trident Securities in a syndicated offering
("Syndicated Community Offering"). The Subscription Offering, Direct Community
Offering and Syndicated Community Offering are referred to collectively as the
"Offerings." If the Conversion is not consummated within 45 days after the
last day of the Subscription Offering (which date will be no later than
August 21, 1997, assuming a fully extended Subscription Offering) and the OTS
consents to an extension of time to complete the Conversion, subscribers will
be given the right to increase, decrease or rescind their orders. Such
extensions may not go beyond June 25, 1999.
With the exception of the ESOP, which is expected to subscribe for 8%
of the shares of Common Stock issued in the Conversion, the Plan of Conversion
provides for the following purchase limitations: (i) No Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, including, in each case,
all persons on a joint account, may purchase shares of Common Stock with an
aggregate purchase price of more than $325,000, (ii) no person, either alone or
together with associates of or persons acting in concert with such person, may
purchase in the Direct Community Offering, if any, or in the Syndicated
Community Offering, if any, shares of Common Stock with an aggregate purchase
price of more than $325,000, and (iii) no person (including all persons on a
joint account), either alone or together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of Common Stock
issued in the Conversion (exclusive of any shares issued pursuant to an increase
in the Estimated Valuation Range of up to 15%), or shares with an aggregate
purchase price of more than $770,500. If 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, the maximum
purchase limitation may be increased at the sole discretion of the Association
and the Holding Company subject to any required regulatory approval. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings," "-- Limitations on Purchases of Shares" and "-- Procedure for
Purchasing Shares in the Subscription and Direct Community Offerings" for other
purchase and sale limitations. The minimum order is 25 shares.
The Holding Company must receive a properly completed and signed stock
order form and certification ("Order Form") along with full payment (or
appropriate instructions authorizing a withdrawal of the full payment from a
deposit account at the Association) of $20.00 per share for all shares
subscribed for or ordered. Funds so received will be placed in segregated
accounts created for this purpose at the Association and will earn interest at
the Association's passbook rate from the date payment is received until the
Conversion 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 the contractual rate
until the Conversion is consummated or terminated, although such funds will be
unavailable for withdrawal until the Conversion is consummated or terminated.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE
ASSOCIATION AND THE HOLDING COMPANY. The Holding Company is not obligated to
accept orders submitted on photocopied or telecopied Order Forms.
The Association and the Holding Company have engaged Trident Securities
as their financial advisor and to assist the Holding Company in the sale of the
Common Stock in the Offerings. Trident Securities is a registered broker-dealer
and a member of the National Association of Securities Dealers, Inc. ("NASD").
Neither Trident Securities nor any other registered broker-dealer is obligated
to take or purchase any shares of Common Stock in the Offerings. The Holding
Company and the Association reserve the right, in their absolute discretion, to
accept or reject, in whole or in part, any or all orders in the Direct Community
or Syndicated Community Offerings either at the time of receipt of an order or
as soon as practicable following the termination of the Offerings. See "THE
CONVERSION -- Plan of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings."
Offering materials for the Subscription Offering initially will be
distributed to certain persons by mail, with copies also available by request or
at the Stock Information Center. The Association has established the Stock
Information Center for purposes of coordinating the Offerings, including
tabulating orders and answering questions about the Offerings by telephone. See
"THE CONVERSION -- Description of Sales Activities."
Prior to the Offerings, the Holding Company has not issued any capital
stock and accordingly there has been no market for the shares offered hereby.
There can be no assurance that an active and liquid trading market for the
Common Stock will develop or, if developed, will be maintained. The Holding
Company has received conditional approval to list the Common Stock the Nasdaq
National Market under the symbol "FSPT." See "RISK FACTORS -- Absence of Prior
Market for the Common Stock" and "MARKET FOR COMMON STOCK."
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG
SPARTANBURG, SOUTH CAROLINA
[Map of South Carolina with enlarged map of Greenville and Spartanburg Counties
depicting existing and under construction, office locations for First Federal
Savings and Loan Association of Spartanburg, in the cities of Boiling Springs,
Spartanburg, Greenville, Inman and Duncan, South Carolina.]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE ASSOCIATION'S PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE ASSOCIATION"S ELIGIBLE VOTING MEMBERS,
THE SALE OF AT LEAST 2,847,500 SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF
CONVERSION, AND 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."
FirstSpartan Financial Corp.
The Holding Company was organized on February 4, 1997 under Delaware
law at the direction of the Association to acquire all of the capital stock that
the Association will issue upon its conversion from the mutual to stock form of
ownership. 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 capital
stock of the Association. Immediately following the Conversion, the only
significant assets of the Holding Company will be the outstanding capital stock
of the Association, 50% of the net proceeds of the Offerings as permitted by the
OTS to be retained by it and a note receivable from the ESOP evidencing a loan
to enable the ESOP to purchase 8% of the Common Stock issued in the Conversion.
Funds retained by the Holding Company will be used for general business
activities. See "USE OF PROCEEDS." Upon Conversion, 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 380 E. Main Street,
Spartanburg, South Carolina 29302 and its telephone number is (864) 582-2391.
First Federal Savings and Loan Association of Spartanburg
Chartered in 1935, the Association is a federal mutual savings and loan
association headquartered in Spartanburg, South Carolina. As a result of the
Conversion, the Association will convert to a federal capital stock savings and
loan association and will become a wholly-owned subsidiary of the Holding
Company. The Association is regulated by the OTS, its primary regulator, and by
the FDIC, the insurer of its deposits. The Association's deposits have been
federally-insured since 1935 and are currently insured by the FDIC under the
SAIF. The Association has been a member of the Federal Home Loan Bank ("FHLB")
System since 1935. At December 31, 1996, the Association had total assets of
$375.5 million, total deposits of $324.0 million and total equity of $44.8
million on a consolidated basis.
The Association is a community oriented financial institution whose
principal business is attracting retail deposits from the general public and
using these funds to originate one- to- four family residential mortgage loans
within its primary market area. The Association is an approved Federal Housing
Administration ("FHA") and Veterans Administration ("VA") lender and
participates in the Spartanburg Residential Development Program, an affordable
housing program. The Association also actively originates construction loans and
consumer loans. To a lesser extent, the Association originates land loans,
commercial real estate loans and commercial business loans. The Association has
hired an experienced commercial loan officer familiar with the Association's
primary market area in an attempt to augment its commercial real estate and
commercial business lending. At December 31, 1996, one- to- four family
residential mortgage loans, consumer loans (including commercial business
loans), construction loans, commercial real estate loans and land loans amounted
to 77.3%, 11.5%, 9.2%, 1.3% and 0.7% of its total loan portfolio, respectively.
Loans receivable, net, constituted 88.3% of total assets at December 31, 1996.
See "RISK FACTORS -- Certain Lending Risks" and "BUSINESS OF THE ASSOCIATION --
Lending Activities."
(i)
The Association considers Spartanburg County and adjacent counties in
Northwest South Carolina to be its primary market area because a large number of
its depositors reside, and a substantial portion of its loan portfolio is
secured by properties located, in that geographic area. See "RISK FACTORS --
Concentration of Credit Risk." Since August 1996, the Association has purchased
a limited number of one- to- four family residential mortgage loans and
residential construction loans from a regional start-up mortgage banking company
in which the Association's service corporation subsidiary has an equity
investment. At December 31, 1996, a substantial portion of these purchased loans
were secured by properties located in the Association's primary market area.
Such loan purchases are expected to continue and increase in volume as that
company's mortgage banking operations expand, and are likely to include
purchases of loans, including commercial loans and home equity loans, secured by
properties inside and outside of the Association's primary market area. See
"FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG," "BUSINESS OF THE
ASSOCIATION -- Lending Activities -- Loan Originations, Sales and Purchases" and
"-- Subsidiary Activities."
In addition to its lending activities, the Association invests excess
liquidity in short term U.S. Government and agency securities, a mutual fund
that invests in adjustable rate mortgage loans and, to a substantially lesser
extent, mortgage-backed securities issued by U.S. Government agencies.
Investment securities and mortgage-backed securities, which constituted 3.6% of
total assets at December 31, 1996, had an amortized cost and a fair value of
$13.6 million at December 31, 1996. See "BUSINESS OF THE ASSOCIATION --
Investment Activities."
The Association conducts its operations from its main office and three
branch offices located in Spartanburg, South Carolina, a branch office in
Boiling Springs, South Carolina (Spartanburg County) and a loan production
office in Greenville, South Carolina, in adjacent Greenville County. Two
additional branch offices are under construction in Inman, South Carolina
(Spartanburg County), and in Duncan, South Carolina (Spartanburg County). Both
offices are scheduled to open by or around the end of the first half of calendar
1997. See "BUSINESS OF THE ASSOCIATION -- Properties." The main office is
located at 380 E. Main Street, Spartanburg, South Carolina 29302, and its
telephone number is (864) 582-2391.
The Conversion
The Association proposes to convert from a federally chartered mutual
savings and loan association to a federally chartered capital stock savings and
loan association and become a wholly-owned subsidiary of the Holding Company by
issuing all of its capital stock to the Holding Company in exchange for 50% of
the net proceeds of the Offerings. Simultaneously, the Holding Company will sell
its Common Stock in the Offerings. The Conversion has been approved by the OTS,
subject to approval by the Association's members at a special meeting to be held
on June 25, 1997. After consummation of the Conversion, depositors and borrowers
of the Association will have no voting rights in the Holding Company unless they
become stockholders.
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Association, as converted. RP Financial has advised the Association that in its
opinion, at February 21, 1997, the aggregate estimated pro forma market value of
the Holding Company and the Association, as converted, ranged from $56,950,000
to $77,050,000 or from 2,847,500 shares to 3,852,500 shares, assuming a $20.00
per share Purchase Price. The appraisal of the pro forma market value of the
Holding Company and the Association as converted is based on a number of factors
and should not be considered a recommendation to buy shares of the Common Stock
or any assurance that after the Conversion shares of Common Stock will be able
to be resold at or above the Purchase Price. The appraisal will be updated or
confirmed prior to consummation of the Conversion.
The Board of Directors and management believe that the Conversion is in
the best interests of the Association, its members and the communities it
serves. The capital raised in the Conversion is intended to support the
Association's current lending and investment activities and may also support
possible future expansion and diversification of operations, although there are
no current specific plans, arrangements or understandings, written
(ii)
or oral, regarding any such expansion or diversification. The
Conversion is also expected to afford the Association's members and others the
opportunity to become stockholders of the Holding Company and participate more
directly in, and contribute to, any future growth of the Holding Company and the
Association. The Conversion will also enable the Holding Company and the
Association to raise additional capital in the public equity or debt markets
should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities. As a mutual institution, the Association is unable to raise equity
capital or issue debt instruments (other than by accepting deposits). See "THE
CONVERSION -- Purposes of Conversion."
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 3,852,500 shares of Common Stock
at $20.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. In the event the
number of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the Association's ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock. Once tendered, orders are
irrevocable without the consent of the Association and the Holding Company. Any
shares of Common Stock not subscribed for in the Subscription Offering may be
offered in the Direct Community Offering to the general public with preference
being given to natural persons and trusts of natural persons who are permanent
residents of the Local Community. The Association has engaged Trident Securities
to consult with and advise the Holding Company and the Association in the
Offerings, and Trident Securities has agreed to use its best efforts to assist
the Holding Company with the solicitation of subscriptions and purchase orders
for shares of Common Stock in the Offerings. Trident Securities is not obligated
to take or purchase any shares of Common Stock in the Offerings. If all shares
of Common Stock to be issued in the Conversion are not sold through the
Subscription Offering and the Direct Community Offering, then the Holding
Company expects to offer the remaining shares in a Syndicated Community Offering
managed by Trident Securities, which would occur as soon as practicable
following the close of the Subscription and Direct Community Offerings. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription Offering and the Direct
Community Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE CONVERSION
- -- Stock Pricing and Number of Shares to be Issued." The Subscription Offering
will expire at 12 Noon, Eastern Time, on the Expiration Date, unless extended by
the Association and the Holding Company for up to 20 days. The Direct Community
Offering and Syndicated Community Offering, if any, may terminate on the
Expiration Date or on any date thereafter; however, in no event later than July
7, 1997, unless further extended with the consent of the OTS.
Benefits of the Conversion to Management
ESOP. In connection with the Conversion, the Association will adopt the
ESOP, a tax-qualified employee benefit plan for officers and employees of the
Holding Company and the Association, which intends to purchase 8% of the shares
of Common Stock issued in the Offerings (308,200 shares of Common Stock, based
on the issuance of the maximum of the Estimated Valuation Range). In the event
the number of shares offered in the Conversion is increased above the maximum of
the Estimated Valuation Range, the Association's ESOP shall have a priority
right to purchase any such shares exceeding the maximum of the Estimated
Valuation Range up to an aggregate of 8% of the Common Stock. In the event that
the ESOP's subscription is not filled in its entirety, the ESOP may purchase
additional shares in the open market or may purchase authorized but unissued
shares with cash contributed to it by the Association. See "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- Employee Stock Ownership Plan." As a result of the
adoption of the ESOP, the Holding Company will recognize compensation expense in
an amount equal to the fair market value of the ESOP shares when such shares are
committed to be released to participants' accounts. See "RISK FACTORS -- New
Expenses Associated With ESOP and MRP" and "PRO FORMA DATA."
MRP. The Holding Company expects to seek stockholder approval of the
FirstSpartan Financial Corp. 1997 Management Recognition Plan and Trust ("MRP").
The MRP will reserve a number of shares equal to 4% of the
(iii)
number of shares issued in the Conversion. 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 MRP within one year of the consummation of the Conversion. If stockholder
approval of the MRP is obtained, it is expected that awards of up to 154,100
shares of Common Stock (based on the issuance of the maximum of the Estimated
Valuation Range) will be made to key employees and directors of the Holding
Company and the Association at no cost to the recipient. Although no specific
award determinations have been made at this time, the Holding Company and the
Association 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 MRP is implemented
within one year of the consummation of the Conversion, (i) no officer or
employee could receive an award covering in excess of 25%, (ii) no nonemployee
director could receive in excess of 5% and (iii) nonemployee directors, as a
group, could not receive in excess of 30% of the number of shares reserved for
issuance under the MRP. In addition, all awards would be subject to vesting at a
minimum rate of 20% per year. The size of individual awards will be determined
prior to submitting the MRP for stockholder approval, and disclosure of
anticipated awards will be included in the proxy materials for such meeting. See
"PRO FORMA DATA" and "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Management
Recognition Plan."
Stock Option Plan. The Holding Company expects to seek stockholder
approval of the FirstSpartan Financial Corp. 1997 Stock Option Plan ("Stock
Option Plan"). The Stock Option Plan will reserve a number of shares equal to
10% of the number of shares issued in the Conversion. 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 Stock Option Plan within one year of the consummation of the Conversion. If
stockholder approval of the Stock Option Plan is obtained, it is expected that
options to acquire up to 385,250 shares of Common Stock of the Holding Company
will be awarded to key employees and directors of the Holding Company and the
Association (based on the issuance of the maximum of the Estimated Valuation
Range). 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
Association 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 Stock Option Plan
is implemented within one year of the consummation of the Conversion, (i) no
officer or employees could 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, could not receive in excess of 30% of the
number of shares reserved for issuance under the Stock Option Plan. In addition,
all awards would be subject to vesting at a minimum rate of 20% per year. The
size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting. 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
ASSOCIATION -- Benefits -- 1997 Stock Option Plan."
Employment and Severance Agreements. The Holding Company and the
Association have agreed to enter into employment agreements with three of the
Association's executive officers, which provide certain benefits in the event of
their termination following a change in control of the Holding Company or the
Association. In the event of a change in control of the Holding Company or the
Association, 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 December 31,
1996, the aggregate value of the severance benefits payable to these executive
officers under the agreements would have been approximately $946,000. See
"MANAGEMENT OF THE ASSOCIATION -- Executive Compensation -- Employment
Agreements."
The Holding Company and the Association have agreed to enter into
severance agreements with three of the Association's senior officers, none of
whom will be covered by an employment agreement. The severance
(iv)
agreements provide certain benefits in the event of their termination
following a change in control of the Holding Company or the Association. In the
event of a change in control of the Holding Company or the Association, as
defined in the agreement, each senior 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 December 31, 1996, the aggregate
value of the severance benefits payable to these senior officers under the
agreements would have been approximately $438,000. See "MANAGEMENT OF THE
ASSOCIATION -- Executive Compensation -- Severance Agreements."
Employee Severance Compensation Plan. In connection with the
Conversion, the Board of Directors of the Association intends to adopt an
Employee Severance Compensation Plan ("Severance Plan") to provide benefits to
eligible employees in the event of a change in control of the Holding Company or
the Association. Officers who enter into separate employment or severance
agreements with the Holding Company and the Association will not be eligible to
participate in the Severance Plan. The Severance Plan provides that, in the
event of a change in control of the Holding Company or the Association, eligible
employees who are terminated or who terminate employment (but only upon the
occurrence of events specified in the Severance Plan) within 12 months of the
effective date of a change in control will be entitled to a payment based on
years of service and/or position with the Association, subject to certain
limits. Assuming that a change in control had occurred at December 31, 1996 and
the termination of all eligible employees, the maximum aggregate payment due
under the Severance Plan would be approximately $1.2 million. See "MANAGEMENT OF
THE ASSOCIATION -- Executive Compensation -- Employee Severance Compensation
Plan."
Director Emeritus Plan. In connection with the Conversion, the
Association has formalized, with certain modifications, its existing policy
regarding director emeritus status by adopting the First Federal Savings and
Loan Association of Spartanburg Director Emeritus Plan ("Director Emeritus
Plan"). The Director Emeritus Plan provides that each director elected to the
Board of Directors of the Association on or after March 17, 1987 shall become a
director emeritus on the later to occur of (i) the date the director attains age
72 or (ii) the expiration of the director's then current term of office after
attaining age 72. In addition, a director with at least 10 years of service on
the Board may, upon attaining age 65, apply to the Board to assume director
emeritus status. Under the Director Emeritus Plan, a director emeritus receives
50% of the fee payable to regular Board members for attendance at monthly Board
meetings. If the director emeritus attends the monthly Board meeting, the amount
payable is increased to 75% of the fee payable to regular Board members. The
Director Emeritus Plan also provides that, in the event of a change in control
of the Holding Company or the Association (as defined in the Director Emeritus
Plan), each director would be treated as a director emeritus on the effective
date of the change in control. Within 30 days of such date, each director
emeritus would receive a payment equal to three times the fees received by the
director during the 12-month period ending prior to the effective date of the
change in control. Assuming a change in control had occurred at December 31,
1996, the aggregate amount payable under the Director Emeritus Plan to all
directors would be approximately $378,000. See "MANAGEMENT OF THE ASSOCIATION --
Directors' Compensation -- Director Emeritus Plan."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS -- Anti-
takeover Considerations -- Voting Control by Insiders."
Prospectus Delivery and Procedure for Purchasing Common Stock
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
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will
be mailed later than five days or hand delivered any later than two days prior
to the Expiration Date. Execution of the Order Form will confirm receipt or
delivery of a Prospectus in accordance with Rule 15c2-8. Order Forms will be
distributed only with a Prospectus. Neither the Holding Company, the Association
nor Trident Securities is obligated to deliver a Prospectus and an Order Form by
any means other than the U.S. Postal Service.
(v)
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Association, on the Order Form
giving all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date.
Full payment by check, cash (except by mail), money order, bank draft
or withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. The Holding Company 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. See "THE CONVERSION -- Procedure for Purchasing
Shares in the Subscription and Direct Community Offering."
Purchase Limitations
With the exception of the ESOP, which is expected to subscribe for 8%
of the shares of Common Stock issued in the Conversion, the Plan of Conversion
provides for the following purchase limitations: (i) No Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, including, in each case,
all persons on a joint account, may purchase shares of Common Stock with an
aggregate purchase price of more than $325,000, (ii) no person, either alone or
together with associates of or persons acting in concert with such person, may
purchase in the Direct Community Offering, if any, or in the Syndicated
Community Offering, if any, shares of Common Stock with an aggregate purchase
price of more than $325,000, and (iii) no person (including all persons on a
joint account), either alone or together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of Common Stock
issued in the Conversion (exclusive of any shares issued pursuant to an increase
in the Estimated Valuation Range of up to 15%), or shares with an aggregate
purchase price of more than $770,500. This maximum purchase limitation may be
increased consistent with OTS regulations in the sole discretion of the Holding
Company and the Association subject to any required regulatory approval. The
minimum purchase is 25 shares.
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 written or
otherwise. The Holding Company and the Association may presume that certain
persons are acting in concert based upon, among other things, joint account
relationships and the fact that such persons have filed joint Schedules 13D with
the Securities and Exchange Commission ("SEC") with respect to other companies.
The term "associate" of a person is defined in the Plan of Conversion to mean:
(i) any corporation or organization (other than the Association or a
majority-owned subsidiary of the Association) 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 Association or any of its parents or subsidiaries. The Holding
Company and the Association may presume that certain persons are acting in
concert based upon, among other things, joint account relationships and the fact
that such persons have filed joint Schedules 13D with the SEC with respect to
other companies.
Stock orders received either through the Direct Community Offering or
the Syndicated Community Offering, if held, may be accepted or rejected, in
whole or in part, at the discretion of the Holding Company and the Association.
See "THE CONVERSION -- Limitations on Purchases of Shares." If an order is
rejected in part, the purchaser does not have the right to cancel the remainder
of the order. In the event of an oversubscription, shares will be allocated in
accordance with the Plan of Conversion. See "THE CONVERSION - - The
Subscription, Direct Community and Syndicated Community Offerings."
(vi)
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Subscription Offering is a uniform price
established by the Board of Directors for all subscribers, including members of
the Holding Company's and the Association's Boards of Directors, their
management and tax-qualified employee plans. The number of shares to be offered
at the Purchase Price is based upon an independent appraisal of the aggregate
pro forma market value of the Holding Company and the Association, as converted.
The aggregate pro forma market value was estimated by RP Financial to range from
$56,950,000 to $77,050,000 as of February 21, 1997, or from 2,847,500 to
3,852,500 shares based on the Purchase Price. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued." The appraisal of the pro forma value
of the Holding Company and the Association, as converted, will be updated or
confirmed at the completion of the Offerings. The maximum of the Estimated
Valuation Range may be increased by up to 15% and the number of shares of Common
Stock to be issued in the Conversion may be increased to 4,430,375 shares due to
material changes in the financial condition or results of operations of the
Association 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 Common Stock are less than the minimum
or more than 15% above the maximum of the current Estimated Valuation Range. 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 Offerings
nor can assurance be given that purchasers of the Common Stock in the Offerings
will be able to sell such shares after consummation of the Conversion 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.
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to
range from $55.7 million to $75.7 million, or to $87.2 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received conditional
OTS approval to purchase all of the capital stock of the Association to be
issued in the Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately $27.9
million to $37.9 million of the net proceeds, or up to $43.6 million if the
Estimated Valuation Range is increased by 15%, and the Association receiving an
equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association 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. The
Association also intends to use a portion of the funds (up to approximately $1.5
million) to contribute to the ongoing construction of two branch offices and the
renovation of an existing branch office.
A portion of the net proceeds retained by the Holding Company will be
used for a loan by the Holding Company to the ESOP to enable it to purchase 8%
of the shares of Common Stock issued in the Conversion. Such loan would fund the
entire purchase price of the ESOP shares ($6,164,000 at the maximum of the
Estimated Valuation Range) and would be repaid principally from the
Association's contributions to the ESOP and from dividends payable on the Common
Stock held by the ESOP. The remaining proceeds retained by the Holding Company
initially will be invested primarily in short-term U.S. Government and agency
obligations. Such proceeds will be available for additional contributions to the
Association in the form of debt or equity, to support future growth and
diversification 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 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 will consider exploring opportunities to use such funds to
expand operations through acquiring
(vii)
or establishing additional branch offices and the acquisition of other
financial institutions. 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 "FSPT." Trident Securities
has agreed to act as a market maker for the Holding Company's Common Stock
following consummation of the Conversion. No assurance can be given that an
active and liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Conversion. See "RISK FACTORS -- Absence of
Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
Dividend Policy
The Holding Company's Board of Directors anticipates declaring and
paying quarterly cash dividends on the Common Stock at an annual rate of 3%, or
$0.60 per share per year based on the Purchase Price. The first quarterly cash
dividend is expected to be declared and paid during the first full quarter
following the consummation of the Conversion. 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 and payments of any
dividends (regular and special) by the Board of Directors will depend upon a
number of factors, including the amount of the net proceeds retained by the
Holding Company, capital requirements, regulatory limitations, the Association's
and the Holding Company's financial condition and results of operations, tax
considerations and general economic conditions. In order to pay such cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Offerings and retained by the Holding Company,
dividends received from the Association or earnings on Holding Company assets.
There are certain limitations on the payment of dividends from the Association
to the Holding Company. See "REGULATION -- Federal Regulation of Savings
Associations -- Limitations on Capital Distributions." No assurances can be
given that any dividends will be declared or, if declared, what the amount of
dividends will be or whether such dividends, if commenced, will continue. See
"DIVIDEND POLICY."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Association (15 persons) are expected to
subscribe for an aggregate of approximately 129,750 shares of Common Stock, or
4.6% and 3.4% of the shares based on the minimum and the maximum of the
Estimated Valuation Range, respectively. See "SHARES TO BE PURCHASED BY
MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS." In addition, purchases by the ESOP,
allocations under the MRP, and the exercise of stock options issued under the
Stock Option Plan, will increase the number of shares beneficially owned by
directors, officers and employees. Assuming (i) implementation of the MRP and
the Stock Option Plan, (ii) the open market purchase of shares on behalf of the
MRP, (iii) the purchase by the ESOP of 8% of the Common Stock sold in the
Offerings, and (iv) the exercise of stock options equal to 10% of the number of
shares of Common Stock issued in the Conversion, directors, officers and
employees of the Holding Company and the Association would have voting control,
on a fully diluted basis, of 24.14% and 23.06% of the Common Stock, based on the
issuance of the minimum and maximum of the Estimated Valuation Range,
respectively. See "RISK FACTORS -- Anti-takeover Considerations -- Voting
Control by Insiders." The MRP and Stock Option Plan are subject to approval by
the stockholders of the Holding Company at a meeting to be held no earlier than
six months following consummation of the Conversion.
Risk Factors
See "RISK FACTORS" beginning on page 1 for a discussion of certain
risks related to the Offerings that should be considered by all prospective
investors.
(viii)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Association and
its subsidiaries at the dates and for the periods indicated. Information at
December 31, 1996 and for the six months ended December 31, 1996 and 1995 are
unaudited, but, in the opinion of management, reflect all adjustments (none of
which are other than normal recurring entries) necessary for a fair
presentation. The results of operations for the six months ended December 31,
1996 are not necessarily indicative of the results of operations that may be
expected for the entire fiscal year. 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 December 31, At June 30,
1996 1996 1995 1994 1993 1992
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets . . . . . . . . $375,526 $356,966 $322,735 $309,879 $302,516 $283,332
Loans receivable, net . . . . 331,654 314,936 267,393 247,195 231,168 227,722
Loans held-for-sale . . . . . 1,444 1,911 15,324 16,892 23,837 20,394
Investment securities held-to-maturity -- -- 5,502 22,854 20,327 12,152
Investment securities available-for-sale 13,492 18,155 8,228 -- -- --
Mortgage-backed securities held-to-maturity 128 195 383 470 930 1,444
Cash, federal funds sold and overnight
interest-bearing deposits 17,104 10,784 15,967 11,728 17,236 12,912
Deposit accounts . . . . . . 323,951 305,831 275,915 270,182 267,461 253,616
Total equity, substantially restricted 44,833 44,154 40,660 36,455 32,088 26,689
Six Months Ended
December 31, Year Ended June 30,
1996 1995 1996 1995 1994 1993 1992
(In thousands)
SELECTED OPERATING DATA:
Investment income ....................... $14,157 $13,037 $26,445 $23,835 $23,153 $24,167 $24,825
Interest expense ........................ 7,568 7,332 14,669 11,302 10,387 11,623 14,816
Net interest income ..................... 6,589 5,705 11,776 12,533 12,766 12,544 10,009
Provision for loan losses ............... 675 4 419 9 -- 208 503
Net interest income
after provision for loan losses ......... 5,914 5,701 11,357 12,524 12,766 12,336 9,506
Gains (losses) from sale of mortgage
loans and investments .................. 21 -- -- (1,474) (335) 405 581
Other income ........................... 681 599 1,319 1,808 419 1,160 1,318
Other expenses .......................... 5,644 3,326 7,028 6,222 5,671 5,061 5,345
Income before income taxes .............. 972 2,974 5,648 6,636 7,179 8,840 6,060
Provision for income taxes............... 365 1,115 2,111 2,495 2,707 3,446 1,963
Net income ............................. $ 607 $ 1,859 $ 3,537 $ 4,141 $ 4,472 $ 5,394 $ 4,097
(ix)
At December 31, At June 30,
1996 1996 1995 1994 1993 1992
SELECTED OTHER DATA:
Number of:
Mortgage loans outstanding ...................... 4,684 4,425 4,319 4,340 4,332 4,454
Deposit accounts ................................ 37,739 35,687 30,258 27,267 26,454 25,907
Full-service offices ............................ 5 5 5 4 4 4
At or For Six
Months Ended At or For
December 31, Year Ended June 30,
1996 1995 1996 1995 1994 1993 1992
SELECTED FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets(2) ........ 0.33% 1.10% 1.03% 1.32% 1.45% 1.83% 1.49%
Return on average equity(3) ........ 2.68 8.86 8.23 10.74 12.88 18.17 16.73
Interest rate spread(4) ............ 3.21 2.92 3.01 3.71 3.94 4.14 3.42
Net interest margin(5) ............. 3.74 3.49 3.55 4.15 4.30 4.46 3.81
Average interest-earning assets
to average interest-bearing
liabilities ....................... 1.12 1.13 1.12 1.12 1.10 1.08 1.07
Noninterest expense as a
percentage of average total assets 3.08 1.96 2.05 1.98 1.84 1.71 1.94
Efficiency ratio(6) ................ 0.53 0.53 0.54 0.48 0.44 0.36 0.45
Asset Quality Ratios:
Nonperforming loans as a percentage
of loans receivable, net(7) ....... 1.32 0.66 1.87 1.79 0.96 0.93 1.22
Nonperforming assets as a
percentage of total assets(8) ... 1.20 0.54 1.66 1.50 0.77 0.84 1.19
Allowance for losses as a percentage
of gross loans receivable ......... 0.48 0.20 0.30 0.21 0.23 0.25 0.17
Allowance for losses as a
percentage of nonperforming loans . 37.55 31.70 17.02 12.52 25.20 27.91 14.42
Net charge-offs as a percentage of
average outstanding loans ......... 0.01 -- 0.01 -- -- -- 0.21
Capital Ratios:
Total equity to total assets ....... 11.94 12.22 12.37 12.60 11.76 10.61 9.40
Average equity to average assets ... 12.37 12.38 12.47 12.28 11.24 10.04 8.91
(1) Annualized, where appropriate.
(2) Net income as a percentage of average total assets.
(3) Net income as a percentage of average total equity.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses (excluding the one-time SAIF assessment with respect to
the six months ended December 31, 1996) divided by the sum of net
interest income and other income.
(7) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans contractually past due 90 days or more.
(8) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans. See
"BUSINESS OF THE ASSOCIATION -- Lending Activities -- Nonperforming
Assets and Delinquencies."
(x)
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Association at
the dates and for the periods indicated. Information at March 31, 1997 and
December 31, 1996, and for the three months and nine months ended March 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 operations
data for the three months and nine months ended March 31, 1997 are not
necessarily indicative of the results of operations 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 At
March 31, December 31, June 30,
1997 1996 1996
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . . . . $388,311 $375,526 $356,966
Loans receivable, net . . . . . . . 346,019 331,654 314,936
Loans held-for-sale . . . . . . . . . 877 1,444 1,911
Investment securities available-for-sale 13,521 13,492 18,155
Mortgage-backed securities held-to-maturity 128 128 195
Cash, federal funds sold and
overnight interest-bearing deposits 15,263 17,104 10,784
Deposit accounts . . . . . . . . . . 338,174 323,951 305,831
Total equity, substantially restricted 45,846 44,833 44,154
Three Months Nine Months
Ended March 31, Ended March 31,
1997 1996 1997 1996
(In thousands)
SELECTED OPERATING DATA:
Investment income . . . . . . . . . . $7,292 $6,665 $21,449 $19,702
Interest expense . . . . . . . . . . 3,938 3,685 11,506 11,017
Net interest income . . . . . . . . . 3,354 2,980 9,943 8,685
Provision for loan losses . . . . . . 75 14 750 18
Net interest income after provision
for loan losses ................... 3,279 2,966 9,193 8,667
Gains from sale of mortgage
loans and investments . . . . . . . -- -- 21 --
Other income . . . . . . . . . . . . 389 346 1,070 945
Other expenses . . . . . . . . . . . 1,997 1,717 7,641 5,043
Income before income taxes . . . . . 1,671 1,595 2,643 4,569
Provision for income taxes . . . . . 625 598 990 1,713
Net income . . . . . . . . . . . . . $1,046 $ 997 $1,653 $2,856
(xi)
At or For At or For
Three Months Nine Months
Ended March 31, Ended March 31,
1997 1996 1997 1996
SELECTED FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets(2) . . . . . 1.10% 1.15% 0.59% 1.12%
Return on average equity(3) . . . . . 9.13 9.16 4.85 8.97
Interest rate spread(4) . . . . . . . 3.19 3.02 3.20 2.95
Net interest margin(5) . . . . . . . 3.68 3.57 3.72 3.52
Average interest-earning assets to average
interest-bearing liabilities . . . . 1.11 1.12 1.12 1.13
Noninterest expense as a percentage
of average total assets . . . . . . 2.10 1.98 2.75 1.97
Efficiency ratio(6) . . . . . . . . . 0.53 0.52 0.53 0.52
Asset Quality Ratios:
Nonperforming loans as a percentage
of loans receivable, net(7) . . . . 0.81 1.74 0.81 1.74
Nonperforming assets as a
percentage of total assets(8) . . . 0.75 1.43 0.75 1.43
Allowance for losses as a percentage
of gross loans receivable . . . . . 0.50 0.21 0.50 0.21
Allowance for losses as a percentage
of nonperforming loans . . . . . . . 61.69 12.01 61.69 12.01
Net charge-offs as a percentage of
average outstanding loans . . . . . -- -- 0.01 0.01
Capital Ratios:
Total equity to total assets . . . . 11.81 12.43 11.81 12.43
Average equity to average assets . . 12.06 12.58 12.27 12.45
- --------------
(1) Annualized, where appropriate.
(2) Net income as a percentage of average total assets.
(3) Net income as a percentage of average total equity.
(4) Difference between weighted average yield on interest-earning
assets and weighted average cost of interest-bearing
liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses (excluding the one-time SAIF assessment with respect to
the nine months ended March 31, 1997) divided by the sum of
net interest income and other income.
(7) Nonperforming loans consist of loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90
days or more.
(8) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans. See
"BUSINESS OF THE ASSOCIATION -- Lending Activities -- Nonperforming
Assets and Delinquencies."
(xii)
Regulatory Capital
The table below sets forth the Association'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 Savings Associations -- Capital Requirements."
At March 31, 1997
Percentage of Adjusted
Amount Total Assets(1)
(In thousands)
Tangible capital . . . . . . . . . . $45,890 11.8%
Tangible capital requirement . . . . 5,826 1.5
Excess . . . . . . . . . . . . . . . $40,064 10.3%
Core capital . . . . . . . . . . . . $45,890 11.8%
Core capital requirement(2) . . . . . 11,652 3.0
Excess . . . . . . . . . . . . . . . $34,238 8.8%
Risk-based capital(3) . . . . . . . . $47,559 20.3%
Risk-based capital requirement . . . 18,734 8.0
Excess . . . . . . . . . . . . . . . $28,825 12.3%
-----------------------
(1) Based on adjusted total assets of $388.4 million for purposes
of the tangible and core capital requirements, and
risk-weighted assets of $234.1 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.
Nonperforming Assets and Delinquencies
At March 31, 1997, the Association had $1.5 million of loans accounted
for on a nonaccrual basis ($721,000 in one- to- four family mortgage loans,
$684,000 in construction loans, and $121,000 in consumer and other loans)
compared to $1.5 million at December 31, 1996. Classified assets at March 31,
1997 totalled $5.3 million ($13,000 classified as loss, $43,000 classified as
doubtful, $3.2 million classified as substandard and $2.1 million designated as
"special mention") compared to $4.9 million at December 31, 1996. At March 31,
1997, the Association had $1.3 million of accruing loans which were
contractually past due 90 days or more, $918,000 of restructured loans and
$106,000 of real estate acquired in settlement of loans compared to $2.9
million, $1.0 million and $102,000, respectively, at December 31, 1996.
The allowance for loan losses was $1.7 million at March 31, 1997. There
were no charge-offs for the three months ended March 31, 1997 and $25,000 of
charge-offs for the nine months ended March 31, 1997, compared to $14,000 and
$20,000 for the three months and nine months ended March 31, 1996, respectively.
There were no recoveries for either the three months or nine months ended March
31, 1997 and for the three months ended March 31, 1996. Recoveries for the nine
months ended March 31, 1996 were $2,000.
(xiii)
The following table sets forth the breakdown of the allowance for loan
losses by category at March 31, 1997.
Percent of
Loans in Each
Category to
Amount Total Loans
(In thousands)
Mortgage loans:
Residential . . . . . . . . . $1,395 85.8%
Nonresidential . . . . . . . . 181 2.2
Consumer and other loans . . . 149 12.0
Total allowance for loan losses $1,725 100.0%
Comparison of Financial Condition at March 31, 1997 and December 31, 1996
Total assets were $388.3 million at March 31, 1997 and $375.5 million
at December 31, 1996. This increase resulted primarily from growth in the loan
portfolio, which was funded primarily by deposit growth. Loans receivable, net,
increased to $346.0 million at March 31, 1997 from $331.7 million at December
31, 1996 primarily as a result of a $8.5 million increase in one- to- four
family mortgage loans, including the purchase of $2.8 million of one- to- four
family mortgage loans from the mortgage banking company in which the
Association's service corporation has an equity investment (see "BUSINESS OF THE
ASSOCIATION -- Subsidiary Activities"), and a $2.5 million increase in second
mortgage loans and home equity lines of credit. The increases in one- to- four
family mortgage loans and in second mortgage loans and home equity lines of
credit were attributable to market demand unaffected by any promotional interest
rate pricing or other promotions by the Association. Deposit accounts increased
to $338.2 million at March 31, 1997 from $324.0 million at December 31, 1996.
Cash and cash equivalents decreased to $15.3 million at March 31, 1997
from $17.1 million at December 31, 1996. Loans held for sale also decreased, to
$877,000 at March 31, 1997 from $1.4 million at December 31, 1996. The proceeds
from the sale of loans and such cash and cash equivalents were used primarily to
fund construction at the new Inman, South Carolina, branch office (see "BUSINESS
OF THE ASSOCIATION -- Properties") and reduce various other liabilities.
Total equity increased to $45.8 million at March 31, 1997 from $44.8
million at December 31, 1996 primarily as a result of retained earnings.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996
Net Income. Net income increased from $997,000 for the three months
ended March 31, 1996 to $1.0 million for the three months ended March 31, 1997
primarily as a result of increased net interest income offset by increased
provision for loan losses and increased other expenses.
Net Interest Income. Net interest income increased 12.6% from $3.0
million for the three months ended March 31, 1996 to $3.4 million for the three
months ended March 31, 1997. Investment income increased 9.4% from $6.7 million
for the three months ended March 31, 1996 to $7.3 million for the three months
ended March 31, 1997 as a result of an increase in the average balance of
interest-earning assets from $333.5 million to $364.9 million. The average yield
on interest earning-assets was 7.99% for the three months ended March 31, 1997
and 1996 as a result of stable market interest rates. Interest expense increased
6.9% from $3.7 million for the three months ended March 31, 1996 to $3.9 million
for the three months ended March 31, 1997 as a result of an increase in the
average balance of deposits from $296.7 million to $328.4 million. The increase
in the average balance of deposits more than offset a decrease in the average
cost of deposits from 4.97% for the three months ended March
(xiv)
31, 1996 to 4.80% for the three months ended March 31, 1997. The
decrease in the average cost of deposits resulted from a combination of a change
in the mix of deposits from higher cost certificates of deposit to lower cost
negotiable order of withdrawal ("NOW") and passbook accounts as a result of
promotions of NOW and passbook accounts. The weighted average cost of
certificates of deposit also decreased as a result of the Association's focus on
the NOW and passbook account promotions rather than certificate of deposit
promotions. Interest rate spread increased to 3.19% for the three months ended
March 31, 1997 from 3.02% for the three months ended March 31, 1996.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Management also
considers the level of problem assets that the Association classifies according
to OTS regulations. The Association gives greater weight to the level of
classified assets than to the level of nonperforming assets (nonaccrual loans,
accruing loans contractually past due 90 days or more, and real estate acquired
in settlement of loans) because classified assets include not only nonperforming
assets but also performing assets that otherwise exhibit, in management's
judgment, potential credit weaknesses. See "BUSINESS OF THE ASSOCIATION --
Lending Activities -- Nonperforming Assets and Delinquencies" and "-- Lending
Activities -- Asset Classification."
The provision for loan losses was $75,000 for the three months ended
March 31, 1997 compared to $14,000 for the three months ended March 31, 1996.
Management deemed the increase in the provision for loan losses necessary in
light of the increase in the relative level of estimated losses caused by the
growth of the loan portfolio and a continuing increase in classified assets
between December 31, 1996 and March 31, 1997. The increase in classified assets
resulted primarily from an increase in construction loan delinquencies, which
management attributes to slower sales of homes of the type sold by the
Association's construction loan borrowers in the Association's primary market
area. See "RISK FACTORS -- Certain Lending Risks." Although no assurances can be
given, management expects the trend of increased classified assets to continue
moderately based upon its expectation for continued loan growth, particularly in
the areas of construction, commercial real estate and consumer lending.
Management deemed the allowance for loan losses adequate at March 31, 1997.
Other Income. Other income increased from $346,000 for the three months
ended March 31, 1996 to $389,000 for the three months ended March 31, 1997,
primarily as a result of an increase in service charges and fees. Service
charges and fees increased from $243,000 for the three months ended March 31,
1996 to $288,000 for the same period in 1997 primarily as a result of increased
income associated with the origination and sale of FHA and VA mortgage loans and
increased deposit account fees, particularly on the increased number of NOW
accounts. Other income, net, decreased from $103,000 for the three months ended
March 31, 1996 to $101,000 for the three months ended March 31, 1997, which was
attributable partially to a $13,000 loss representing the Association's share of
losses incurred by the mortgage banking company in which the Association's
service corporation subsidiary has an equity investment. See "BUSINESS OF THE
ASSOCIATION -- Subsidiary Activities" and Note 1 of Notes to the Consolidated
Financial Statements.
Other Expenses. Other expenses were $2.0 million for the three months
ended March 31, 1997 compared to $1.7 million for the same period in 1996. This
increase resulted primarily from employee compensation and benefits, which
increased from $800,000 for the three months ended March 31, 1996 to $1.0
million for the same period in 1997 as a result of the hiring of additional
operations personnel to service the increased number of NOW accounts and the
hiring of the Association's current Chief Financial Officer in June 1996. The
increases in other categories of other operating expenses generally are
attributable to the growth of the Association and to inflation. The Association
anticipates that other operating expenses will increase in subsequent periods
following the consummation of the Conversion as a result of increased costs
associated with operating as a public company and increased compensation expense
as a result of the adoption of the ESOP and, if approved by the Holding
Company's stockholders, the MRP. See "RISK FACTORS -- New Expenses Associated
With ESOP and MRP." The opening
(xv)
of the new branch offices also will contribute to increased operating
expenses in future periods. See "RISK FACTORS -- Return on Equity After
Conversion" and "BUSINESS OF THE ASSOCIATION -- Properties."
Income Taxes. The provision for income taxes was $625,000 for the three
months ended March 31, 1997 compared to $598,000 for the three months ended
March 31, 1996 as a result of higher income before taxes.
Comparison of Operating Results for the Nine Months Ended March 31, 1997
and 1996
Net Income. Net income decreased 42.1% from $2.9 million for the nine
months ended March 31, 1996 to $1.7 million for the nine months ended March 31,
1997, primarily as a result of increases in the provision for loan losses and in
other expenses. The increase in other expenses was primarily the result of the
legislatively-mandated, one-time assessment levied by the FDIC on all
SAIF-insured institutions to recapitalize the SAIF. Without this assessment,
which amounted to approximately $1.1 million after tax, net income would have
been $2.8 million for the nine months ended March 31, 1997.
Net Interest Income. Net interest income increased 14.5% from $8.7
million for the nine months ended March 31, 1996 to $9.9 million for the nine
months ended March 31, 1997. Investment income increased 8.9% from $19.7 million
for the nine months ended March 31, 1996 to $21.4 million for the nine months
ended March 31, 1997 as a result of an increase in the average balance of
interest-earning assets from $329.0 million to $356.5 million and in the average
yield on interest earning-assets from 7.98% to 8.02%. While market interest
rates were slightly lower during the nine months ended March 31, 1997, the
weighted average yield on interest-earning assets remained relatively stable
because of the Association's emphasis on higher yielding construction loans,
commercial real estate loans and consumer and other loans, as well as the
stabilizing effect that fixed-rate loans in the portfolio have on the weighted
average yield. Interest expense increased 4.4% from $11.0 million for the nine
months ended March 31, 1996 to $11.5 million for the nine months ended March 31,
1997 as a result of an increase in the average balance of deposits from $292.1
million to $318.5 million. The increase in the average balance of deposits more
than offset a decrease in the average cost of deposits from 5.03% for the nine
months ended March 31, 1996 to 4.82% for the nine months ended March 31, 1997.
The decrease in the average cost of deposits resulted from a combination of a
change in the mix of deposits from higher cost certificates of deposit to lower
cost NOW and passbook accounts as a result of promotions of NOW and passbook
accounts. The weighted average cost of certificates of deposit also decreased as
a result of the Association's focus on the NOW and passbook account promotions.
Interest rate spread increased to 3.20% for the nine months ended March 31, 1997
from 2.95% for the nine months ended March 31, 1996.
Provision for Loan Losses. The provision for loan losses increased from
$18,000 for the nine months ended March 31, 1996 to $750,000 for the nine months
ended March 31, 1997. Management deemed the increase in the provision for loan
losses necessary in light of the increase in the relative level of estimated
losses caused by the growth of the loan portfolio and a continuing increase in
classified assets between June 30, 1996 and March 31, 1997. The increase in
classified assets resulted primarily from an increase in construction loan
delinquencies, which management attributes to slower sales of homes of the type
sold by the Association's construction loan borrowers in the Association's
primary market area. See "RISK FACTORS -- Certain Lending Risks." Although no
assurances can be given, management expects the trend of increased classified
assets to continue moderately based upon its expectation for continued loan
growth, particularly in the areas of construction, commercial real estate and
consumer lending. Management deemed the allowance for loan losses adequate at
March 31, 1997.
Other Income. Other income increased from $945,000 for the nine months
ended March 31, 1996 to $1.1 million for the nine months ended March 31, 1997,
primarily as a result of the increase in service charges and fees offset by a
decrease in other income. Service charges and fees increased from $656,000 for
the nine months ended March 31, 1996 to $884,000 for the same period in 1997
primarily as a result of increased income associated with the origination and
sale of FHA and VA loans and increased deposit account fees, particularly on the
increased number of NOW accounts. Other income, net, decreased from $289,000 for
the nine months ended March 31, 1996 to $186,000 for the nine months ended March
31, 1997 primarily as a result of a $113,000 loss representing the
(xvi)
Association's share of the losses incurred by the mortgage banking
company in which the Association's service corporation subsidiary has an equity
investment. See "BUSINESS OF THE ASSOCIATION -- Subsidiary Activities" and Note
1 of Notes to the Consolidated Financial Statements.
Other Expenses. Other expenses increased from $5.0 million for the nine
months ended March 31, 1996 to $7.6 million for the nine months ended March 31,
1997. This increase resulted primarily from the FDIC special assessment on all
SAIF-insured institutions to recapitalize the SAIF. The Association's assessment
amounted to $1.8 million and was accrued during the quarter ended September 30,
1996. Prior to the SAIF recapitalization, the Association'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" and Note 10 of Notes to the Consolidated Financial Statements.
Additionally, employee compensation and benefits increased from $2.3 million for
the nine months ended March 31, 1996 to $2.7 million for the same period in 1997
as a result of the hiring of additional operations personnel to service the
increased number of NOW accounts and the hiring of the Association's current
Chief Financial Officer in June 1996. The increases in other categories of other
operating expenses generally are attributable to the growth of the Association
and to inflation. The Association anticipates that other operating expenses will
increase in subsequent periods following the consummation of the Conversion as a
result of increased costs associated with operating as a public company and
increased compensation expense as a result of the adoption of the ESOP and, if
approved by the Holding Company's stockholders, the MRP. The opening of the new
branch offices also will contribute to increased operating expenses in future
periods. See "RISK FACTORS -- Return on Equity After Conversion," "-- New
Expenses Associated with the ESOP and MRP" and "BUSINESS OF THE ASSOCIATION --
Properties."
Income Taxes. The provision for income taxes was $1.7 million for the
nine months ended March 31, 1996 compared to $990,000 for the nine months ended
March 31, 1997 as a result of lower income before taxes.
(xvii)
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.
Interest Rate Risk
General. Like all financial institutions, the Association's financial
condition and operations are influenced significantly by general economic
conditions, the related monetary and fiscal policies of the federal government
and government regulations. Deposit flows and the cost of funds are influenced
by interest rates of competing investments and general market interest rates.
Lending activities are affected by the demand for mortgage financing and for
consumer and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and by other factors affecting the
supply of housing and the availability of funds. The Association'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 Association 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, and consumer loans.
Potential Adverse Impact on Results of Operations. The Association's
results of operations would be adversely affected by a material prolonged
increase in market interest rates. At December 31, 1996, assuming, for example,
an instantaneous 200 basis point increase in market interest rates, the
Association's net portfolio value ("NPV") (the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts) would decrease
by approximately $12.9 million, or 22.5%. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
Potential Adverse Impact on Financial Condition. Changes in the level
of interest rates also affect the volume of loans originated or purchased by the
Association and, thus, the amount of loan and commitment fees, as well as the
market value of the Association'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 Association 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 December 31, 1996, out of total gross loans of $346.3 million in the
Association's portfolio, $96.3 million were ARM loans, the majority of which
reprice every year. Furthermore, the Association'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 Association 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 Association'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.
1
Certain Lending Risks
While the Association's loan portfolio at December 31, 1996 consisted
primarily of one- to- four family mortgage loans, the portfolio also included
construction loans (both custom and speculative), consumer loans and, to a
lesser extent, commercial real estate loans, land loans for the purpose of
developing residential sub-divisions and commercial business loans. At December
31, 1996, construction loans, consumer loans (including commercial business
loans), commercial real estate loans and land loans totalled $31.9 million,
$39.8 million, $4.6 million and $2.4 million, or 9.2%, 11.5%, 1.3% and 0.7%, of
total loans, respectively. These forms of lending are generally viewed to
involve greater risk of loss than one- to- four family mortgage lending. This
risk is exacerbated in the case of construction loans, land loans and commercial
real estate loans because they generally have higher individual loan balances
than one- to- four family mortgage loans. Subject to market conditions, the
Association intends to continue originating these types of loans and, with
respect to consumer lending, actively continue to seek to expand it through
advertising campaigns and other promotions. A significant increase in the volume
of such originations would be a material factor in management's ongoing
evaluation of the adequacy of the Association's allowance for loan losses and
may, in management's judgment in future periods, warrant additional provisions
for loan losses, which could have a material adverse effect on net income. See
"BUSINESS OF THE ASSOCIATION -- Lending Activities."
Construction loan delinquencies, particularly speculative loan
delinquencies, have increased in recent periods. At December 31, 1996,
construction loans accounted for on a nonaccrual basis totalled $847,000, all of
which were speculative loans, and accruing construction loans contractually past
due 90 days or more totalled $2.9 million, all of which were speculative loans.
The Association attributes this increase principally to slower home sales in
certain price ranges of homes as nationally recognized home builders have become
increasingly active in the Association's primary market area. In addition,
competition from nationally recognized home builders may have a further adverse
impact on local home builders by, among other things, lengthening the marketing
for completed homes in certain price ranges and in certain segments of the
Association's primary market area. Consequently, the risk of materially
increased delinquencies and, although not expected, the risk of material losses
exist. The Association, however, believes it can mitigate these risks through
its procedures. See "BUSINESS OF THE ASSOCIATION -- Lending Activities --
Construction Lending" and " -- Nonperforming Assets and Delinquencies."
Competition
The Association has faced, and will continue to face, intense
competition both in making loans and attracting deposits. The Association's
primary market area of Spartanburg County has a high density of financial
institutions, many of which are branches of large Southeastern bank holding
companies which have greater financial resources than the Association and all of
which compete with the Association in varying degrees. Competition for loans
principally comes from commercial banks, thrift institutions, credit unions,
mortgage banking companies and insurance companies. Historically, commercial
banks, thrift institutions and credit unions have been the Association's most
direct competition for deposits. The Association also competes with short-term
money market funds and with other financial institutions, such as brokerage
firms and insurance companies, for deposits. In competing for loans, the
Association may be forced to offer lower loan interest rates periodically.
Conversely, in competing for deposits, the Association may be forced to offer
higher deposit interest rates periodically. Either case or both cases could
adversely affect net interest income. See "BUSINESS OF THE ASSOCIATION --
Competition."
Concentration of Credit Risk
The Association has no significant concentration of credit risk other
than that a substantial portion of its loan portfolio is secured by real estate,
either as primary or secondary collateral, located in Spartanburg County. This
concentration of credit risk could have a material adverse effect on the
Association's financial condition and results of operations to the extent there
is a material deterioration in that county's economy and real estate values. See
"BUSINESS OF THE ASSOCIATION -- Lending Activities."
2
Return on Equity After Conversion
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
Association's return on equity for the year ended June 30, 1996 was, and the
Holding Company's post-Conversion 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 Association'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. In order for
the Holding Company to achieve a return on equity comparable to the historical
levels of the Association, 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. 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 Association 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
ESOP and the MRP (see "-- New Expenses Associated with ESOP and MRP"), along
with other post-Conversion expenses, as well as operating expenses associated
with the new branch offices, are expected to contribute initially to reduced
earnings levels. Subject to market conditions, initially the Association intends
to deploy the net proceeds of the Offerings to support its core lending
activities to increase earnings per share and book value per share, without
assuming undue risk, 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 traded thrift institutions, many of which
are not newly converted institutions and have had time to deploy their
conversion capital.
New Expenses Associated With ESOP and MRP
The Association will recognize additional material employee
compensation and benefit expenses assuming the ESOP and the MRP are implemented.
The actual aggregate amount of these new expenses cannot be currently predicted
because applicable accounting practices require that they be based on the fair
market value of the shares of Common Stock when the expenses are recognized,
which would occur when shares are committed to be released in the case of the
ESOP and over the vesting period of awards made to recipients in the case of the
MRP. 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'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Impact of Accounting Pronouncements and
Regulatory Policies -- Accounting for Employee Stock Ownership Plans," "--
Accounting for Stock-Based Compensation," "MANAGEMENT OF THE ASSOCIATION --
Benefits -- Employee Stock Ownership Plan" and "-- 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 Delaware General Corporation Law
("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 might preclude takeover attempts that
certain stockholders may deem to be in their best interest and might tend to
perpetuate existing
3
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 of the Holding Company 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 the
ownership of more than 10% of the Association 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. Directors and officers of the Association
and the Holding Company (and their associates) expect to purchase 129,750 shares
of Common Stock, or 4.6% and 3.4% of the shares issued in the Offerings at the
minimum and the maximum of the Estimated Valuation Range, respectively.
Directors and officers are also expected to control indirectly the voting of
approximately 8% of the shares of Common Stock issued in the Conversion through
the ESOP (assuming shares have been allocated under the ESOP). Under the terms
of the ESOP, the unallocated shares will be voted by the ESOP trustees in the
same proportion as the votes cast by participants with respect to the allocated
shares. Three, current, non-employee directors of the Holding Company and the
Association will serve as the ESOP trustees.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company expects to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Association. The Holding Company expects to acquire
common stock of the Holding Company on behalf of the MRP in an amount equal to
4% of the Common Stock issued in the Conversion, or 113,900 and 154,100 shares
at the minimum and the maximum of the Estimated Valuation Range, respectively.
These shares will be acquired either through open market purchases through a
trust established in conjunction with the MRP or from authorized but unissued
shares of Common Stock. A committee of the Board of Directors of the Holding
Company will administer the MRP, the members of which would also serve as
trustees of the MRP trust, if formed. Under the terms of the MRP, the MRP
committee or the MRP trustees, will have the power to vote unallocated and
unvested shares. In addition, the Holding Company intends to reserve for future
issuance pursuant to the Stock Option Plan a number of authorized shares of
Common Stock equal to 10% of the Common Stock issued in the Conversion (284,750
and 385,250 shares at the minimum and the maximum of the Estimated Valuation
Range, respectively). The Holding Company also intends to seek approval of the
Stock Option Plan at a meeting of stockholders to be held no earlier than six
months following the consummation of the Conversion.
Assuming (i) the implementation of the MRP and the Stock Option Plan,
(ii) the open market purchase of shares on behalf of the MRP, (iii) the purchase
by the ESOP of 8% of the Common Stock sold in the Offerings, and (iv) the
exercise of stock options equal to 10% of the number of shares of Common Stock
issued in the Conversion, directors, officers and employees of the Holding
Company and the Association would have voting control, on a fully diluted basis,
of an additional 24.14% and 23.06% of the Common Stock, based on the issuance of
the minimum and maximum of the Estimated Valuation Range, respectively.
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 deem to be in their best interest and might tend to
perpetuate existing management.
Provisions of Employment and Severance Agreements, Severance Plan and
Director Emeritus Plan. The employment and severance agreements of Billy L.
Painter, President and Chief Executive Officer or the Holding Company and the
Association, and other senior officers of the Holding Company and the
Association
4
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
Association. Assuming a change of control occurred as of December 31, 1996, the
aggregate value of the severance benefits available to these executive officers
under the agreements would have been approximately $921,000. In addition,
assuming that a change in control had occurred at December 31, 1996 and the
termination of all eligible employees, the maximum aggregate payment due under
the Severance Plan would be approximately $1.2 million. Furthermore, assuming a
change in control had occurred at December 31, 1996, the aggregate amount
payable under the Director Emeritus Plan to all directors would be approximately
$378,000. These agreements and plans 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 Association.
See "MANAGEMENT OF THE ASSOCIATION -- Benefits," "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE
HOLDING COMPANY."
Possible Dilutive Effect of Benefit Programs
The MRP intends to acquire an amount of Common Stock of the Holding
Company equal to 4% of the shares issued in the Conversion. Such shares of
Common Stock of the Holding Company may be acquired by the Holding Company in
the open market or from authorized but unissued shares of Common Stock of the
Holding Company. In the event that the MRP acquires authorized but unissued
shares of Common Stock from the Holding Company, the voting interests of
existing stockholders will be diluted and net income per share and stockholders'
equity per share will be decreased. See "PRO FORMA DATA" and "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- Management Recognition Plan." The MRP is subject to
approval by the Holding Company's stockholders.
The Stock Option Plan will provide for options for up to a number of
shares of Common Stock of the Holding Company equal to 10% of the shares issued
in the Conversion. Such shares may be authorized but unissued shares of Common
Stock of the Holding Company and, upon exercise of the options, will result in
the dilution of the voting interests of existing stockholders and may decrease
net income per share and stockholders' equity per share. See "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- 1997 Stock Option Plan." The Stock Option Plan is
subject to approval ny the Holding Company's stockholders.
If the ESOP is not able to purchase 8% of the shares of Common Stock
issued in the Offerings, the ESOP may purchase newly issued shares from the
Holding Company. In such event, the voting interests of existing stockholders
will be diluted and net income per share and stockholders' equity per share will
be decreased. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock
Ownership Plan."
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. Although the Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market under the symbol "FSPT," there can be no assurance that an
active and liquid trading market for the Common Stock will develop, or once
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 Price 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
Association or changes in market conditions or general financial, economic or
regulatory conditions following the commencement of the 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 4,430,375
5
shares of Common Stock at the Purchase Price would be issued for an aggregate
price of up to $88,607,500. This increase in the number of shares would decrease
a subscriber's pro forma net earnings 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 earnings per share. See "PRO FORMA
DATA."
Potential Delay in Consummating the Conversion
Once tendered, subscription orders cannot be revoked during the
Offerings without the consent of the Holding Company and the Association, unless
the Conversion is terminated or there is a resolicitation offering. If the
Conversion is not completed by August 21, 1997 as a result of changes that lead
to a material revision in the Estimated Valuation Range and the OTS consents to
an extension of time to complete the Conversion, there would be a resolicitation
offering. OTS regulations permit the OTS to grant one or more time extensions,
none of which shall exceed 90 days. In the resolicitation offering, all
subscribers would be mailed a supplement to this Prospectus and given the
opportunity to confirm, modify or cancel their subscriptions. Failure to confirm
affirmatively or modify would be deemed a cancellation and all subscription
funds, together with accrued interest, would be returned to the subscriber, or
if the subscriber authorized payment by withdrawal of funds on deposit at the
Association, that authorization would terminate. If a subscriber affirmatively
confirms his subscription order during the resolicitation offering, the Holding
Company and the Association would continue to hold all subscription orders and
all subscription funds until the expiration of the resolicitation offering. All
subscriptions held by the Holding Company and the Association when the
resolicitation offering expires would be irrevocable without the consent of the
Holding Company and the Association until the completion or termination of the
Conversion.
Recent Legislation and the Future of the Thrift Industry
The Association is, and the Holding Company upon consummation of the
Conversion will be, subject to extensive government regulation designed
primarily to protect the federal deposit insurance fund and depositors. Such
regulation often has a material impact on the Association's financial condition
and results of operations. For example, recent legislation required the
Association to pay a one-time assessment of $1.1 million, after-tax, to the FDIC
to recapitalize the SAIF. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Comparison of Operating Results for the
Six Months Ended December 31, 1996 and 1995."
The U.S. Congress is expected to consider legislation that may
eliminate the thrift industry as a separate industry. The Deposit Insurance
Funds Act of 1996 ("DIF Act") provides that the SAIF will be merged with the
Bank Insurance Fund ("BIF") on January 1, 1999, but only if there are no thrift
institutions in existence. The DIF Act requires the Treasury Department to study
the development of a common charter for banks and thrifts and to submit a report
of its finding to Congress. The Association cannot predict what the attributes
of such common charter would be or whether any legislation will result from this
study. If developed, the common charter may not offer all the advantages that
the Association now enjoys (e.g., unrestricted nationwide branching) or that the
Holding Company, as a unitary savings and loan holding company, will enjoy upon
consummation of the Conversion (e.g., the absence of restrictions on non-banking
activities). If Congress fails to create a common charter, or does not act
otherwise to end the thrift industry's separate existence, the merger of the
SAIF and BIF contemplated by the DIF Act would not likely occur. Although the
SAIF currently meets its statutory reserve ratios, there can be no assurance
that it will continue to do so. The financial burden of any future
recapitalization likely would fall on a smaller assessment base, potentially
increasing the burden on individual institutions, including the Association. See
"REGULATION."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Association are
deemed to have an ascertainable value, receipt of such rights may be a taxable
6
event (either as capital gain or ordinary income), to those Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members who
receive and/or exercise the Subscription Rights in an amount equal to such
value. Additionally, the Association could be required to recognize a gain for
tax purposes on such distribution. Whether Subscription Rights are considered to
have ascertainable value is an inherently factual determination. The Association
has been advised by RP Financial that such rights have no value; however, RP
Financial's conclusion is not binding on the Internal Revenue Service ("IRS").
See "THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association -- Tax Effects."
FIRSTSPARTAN FINANCIAL CORP.
The Holding Company was organized on February 4, 1997 under Delaware
law at the direction of the Association to acquire all of the capital stock that
the Association will issue upon its conversion from the mutual to stock form of
ownership. The Holding Company has received conditional OTS approval to become a
savings and loan holding company through the acquisition of 100% of the capital
stock of the Association. Prior to the Conversion, the Holding Company will not
engage in any material operations. After the Conversion, the Holding Company
will be classified as a unitary savings and loan holding company subject to
regulation by the OTS, and its principal business will be the ownership of the
Association. Immediately following the Conversion, the only significant assets
of the Holding Company will be the capital stock of the Association, 50% of the
net proceeds of the Offerings as permitted by the OTS to be retained by it and a
note receivable from the ESOP evidencing a loan to enable the ESOP to purchase
8% of the Common Stock issued in the Conversion. See "BUSINESS OF THE HOLDING
COMPANY."
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Association. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings will, should it decide to do so, facilitate the
expansion and diversification of its operations. The holding company structure
will also enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions, including waiting
periods. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulations."
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG
Chartered in 1935, the Association is a federal mutual savings and loan
association located in Spartanburg, South Carolina. As a result of the
Conversion, the Association will convert to a federal capital stock savings and
loan association and will become a wholly-owned subsidiary of the Holding
Company. The Association is regulated by the OTS, its primary regulator, and by
the FDIC, the insurer of its deposits. The Association's deposits have been
federally-insured since 1935 and are currently insured by the FDIC under the
SAIF. The Association has been a member of the FHLB System since 1935. At
December 31, 1996, the Association had total assets of $375.5 million, total
deposits of $324.0 million and total equity of $44.8 million on a consolidated
basis.
The Association is a community oriented financial institution whose
principal business is attracting retail deposits from the general public and
using these funds to originate one- to- four family residential mortgage loans
within its primary market area. The Association is an approved FHA and VA lender
and participates in the Spartanburg Residential Development Program, an
affordable housing program. The Association also actively originates
construction loans and consumer loans. To a lesser extent, the Association
originates land loans and commercial real estate loans. The Association has
hired an experienced commercial loan officer familiar with the Association's
primary market area in an attempt to augment its commercial real estate and
commercial business lending. At December 31, 1996, one- to- four family
residential mortgage loans, consumer loans (including commercial business
loans), construction loans, commercial real estate loans and land loans amounted
to 77.3%, 11.5%, 9.2%, 1.3% and 0.7% of its total loan portfolio, respectively.
Loans receivable, net, constituted 88.3% of total assets at December 31, 1996.
See "RISK FACTORS -- Certain Lending Considerations" and "BUSINESS OF THE
ASSOCIATION -- Lending Activities."
7
The Association considers Spartanburg County and adjacent counties in
Northwest South Carolina to be its primary market area because a large number of
its depositors reside, and a substantial portion of its loan portfolio is
secured by properties located, in that geographic area. See "RISK FACTORS --
Concentration of Credit Risk." Since August 1996, the Association has also
purchased a limited number of one- to- four family residential mortgage loans
and residential construction loans from the regional mortgage banking company in
which the Association's service corporation subsidiary has an equity investment.
At December 31, 1996, a substantial portion of these purchased loans were
secured by properties located in the Association's primary market area. Such
loan purchases are expected to continue and increase in volume as that company's
mortgage banking operations expand, and are likely to include purchases of
loans, including commercial loans and home equity loans, secured by properties
inside and outside of the Association's primary market area. See "BUSINESS OF
THE ASSOCIATION -- Lending Activities -- Loan Originations, Sales and Purchases"
and "-- Subsidiary Activities."
The Association's business strategy is to operate as a
well-capitalized, profitable and independent financial institution dedicated to
a community- oriented approach that emphasizes management involvement with
customers and the community at large, local decision-making and quality customer
service. Management believes that it can best serve an important segment of the
marketplace and enhance the long-term value of the Holding Company by operating
independently and continuing with and expanding its community- oriented
approach, especially in light of recent consolidations of thrift institutions
with large regional commercial banks in the Association's primary market area.
In addition to its lending activities, the Association invests excess
liquidity in short term U.S. Government and agency securities, a mutual fund
that invests in adjustable rate mortgage loans and, to a substantially lesser
extent, short term mortgage-backed securities issued by U.S. Government
agencies. Investment securities and mortgage-backed securities, which
constituted 3.6% of total assets at December 31, 1996, had an amortized cost and
a fair value of $13.6 million at December 31, 1996. See "BUSINESS OF THE
ASSOCIATION -- Investment Activities."
The Association conducts its operations from its main office and three
branch offices located in Spartanburg, South Carolina, a branch office in
Boiling Springs, South Carolina (Spartanburg County) and a loan production
office in Greenville, South Carolina, in adjacent Greenville County. Two
additional branch offices are under construction in Inman, South Carolina
(Spartanburg County), and in Duncan, South Carolina (Spartanburg County). Both
offices are scheduled to open by or around the end of the first half of calendar
1997. See "BUSINESS OF THE ASSOCIATION -- Properties."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $55.7 million to $75.7 million, or up to $87.2 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 Association
to be issued in the Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately $27.9
million to $37.9 million of net proceeds, or up to $43.6 million if the
Estimated Valuation Range is increased by 15%, and the Association receiving an
equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association 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. The
Association also intends to use a portion of the funds (up to approximately $1.5
million) to contribute to the ongoing construction of two branch offices and the
renovation of an existing branch office.
8
In connection with the Conversion and the establishment of the ESOP,
the Holding Company intends to loan the ESOP the amount necessary to purchase 8%
of the shares of Common Stock sold in the Conversion. The Holding Company's loan
to fund the ESOP may range from $4,556,000 to $6,164,000 based on the sale of
227,800 shares to the ESOP (at the minimum of the Estimated Valuation Range) and
308,200 shares (at the maximum of the Estimated Valuation Range), respectively,
at $20.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 4,430,375 shares, are sold in the Conversion, the Holding Company's loan to
the ESOP would be approximately $7,088,600 (based on the sale of 354,430 shares
to the ESOP). It is anticipated that the ESOP loan will have a 12-year term with
interest payable at the prime rate as published in The Wall Street Journal on
the closing date of the Conversion. The loan will be repaid principally from the
Association's contributions to the ESOP and from any dividends paid on shares of
Common Stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in short-term U.S. Government and agency obligations.
Such proceeds will be available for additional contributions to the Association
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 consider
exploring opportunities to use such funds to expand operations through acquiring
or establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any diversification activities.
Following consummation of the Conversion, the 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
Association 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 Association's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. For a discussion of the
regulatory limitations applicable to stock repurchases and current OTS policy
with respect thereto, see "THE CONVERSION -- Restrictions on Repurchase of
Stock."
DIVIDEND POLICY
General
The Holding Company's Board of Directors anticipates declaring and
paying a quarterly cash dividends on the Common Stock at an annual rate of 3%,
or $0.60 per share per year based on the Purchase Price. The first quarterly
cash dividend is expected to be declared and paid during the first full quarter
following the consummation of the Conversion. 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 Holding Company's
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 Association to the
Holding Company
9
discussed below. Under Delaware law, the Holding Company will be
permitted to pay cash dividends after the Conversion either out of surplus or,
if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. In order to pay such cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Offerings and retained by the Holding Company,
dividends received from the Association or earnings on Holding Company assets.
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 Association because the Holding Company initially will have
no source of income other than dividends from the Association and earnings from
the investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require the Association 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 Association 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 Association
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 Association 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
Association below the amount required for the liquidation account to be
established pursuant to the Association's Plan of Conversion. See "REGULATION --
Federal Regulation of Savings Associations -- Limitations on Capital
Distributions," "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- 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
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 Association
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Association to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Association 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 6 of Notes to the Consolidated Financial
Statements included elsewhere herein. The Holding Company does not contemplate
any distribution by the Association that would result in a recapture of the
Association's bad debt reserve or create the above-mentioned federal tax
liabilities.
10
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 conditional approval to list the Common Stock on the Nasdaq
National Market System under the symbol "FSPT," 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 two market
makers and a minimum number of record holders. Trident Securities has agreed to
make a market for the Holding Company's Common Stock following consummation of
the Conversion and will assist the Holding Company in seeking to encourage at
least one additional market maker 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. The Holding Company anticipates that prior to the completion of
the Conversion it will be able to obtain the commitment from at least one
additional broker-dealer 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 Association 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.
11
CAPITALIZATION
The following table presents the historical capitalization of the
Association at December 31, 1996, 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 shares of Common Stock at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The 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 shares to
be issued in the Conversion may materially affect pro forma consolidated
capitalization.
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
2,847,500 3,350,000 3,852,500 4,430,375
Capitalization Shares at Shares at Shares at Shares at
as of $20.00 $20.00 $20.00 $20.00
December 31, 1996 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
(In thousands)
Deposits(3) . . . . . . . $ 323,951 $ 323,951 $ 323,951 $ 323,951 $ 323,951
FHLB advances . . . . . .
--------- --------- --------- --------- ---------
Total deposits and
borrowed funds . . . . . $ 323,951 $ 323,951 $ 323,951 $ 323,951 $ 323,951
Stockholders' equity:
Preferred stock:
250,000 shares, $.01
par value per share,
authorized; none issued
or outstanding . . . -- -- -- -- --
Common Stock:
12,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4) . . . -- 28 34 39 44
Additional paid-in capital -- 55,647 65,566 75,611 87,164
Retained earnings(5) . 44,833 44,833 44,833 44,833 44,833
Less:
Common Stock acquired
by ESOP(6) . . . . -- (4,556) (5,360) (6,164) (7,089)
Common Stock to be acquired
by MRP(7) . . . . -- (2,278) (2,680) (3,082) (3,544)
Total stockholders' equity
$ 44,833 $ 93,674 $ 102,393 $ 111,237 $ 121,408
(footnotes on following page)
12
(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 Association or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of Common Stock issued in the
Conversion 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 Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof. (4) The Association'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.
(5) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Association 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 the Association's Eligible Account Holders and Supplemental
Eligible Account Holders at the time of the Conversion and adjusted
downward thereafter as such account holders reduce their balances or cease
to be depositors. See "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Association -- Liquidation
Account."
(6) Assumes that 8% of the Common Stock sold in the Conversion will be acquired
by the ESOP in the Conversion with funds borrowed from the Holding Company.
Under generally accepted accounting principles ("GAAP"), the amount of
Common Stock to be purchased by the ESOP represents unearned compensation
and is, accordingly, reflected as a reduction of capital. As shares are
released to ESOP participants' accounts, a corresponding reduction in the
charge against capital will occur. Since the funds are borrowed from the
Holding Company, the borrowing will be eliminated in consolidation and no
liability will be reflected in the consolidated financial statements of the
Holding Company. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee
Stock Ownership Plan."
(7) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of Common Stock for the MRP from authorized but
unissued shares of Holding Company Common Stock would dilute the ownership
interest of stockholders by 3.85%. 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 ASSOCIATION --
Benefits -- Management Recognition Plan." The 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.
13
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements at December 31, 1996. The
amount of capital infused into the Association for purposes of the following
table is 50% of the net proceeds of the Offerings. For purpose of the table
below, the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the MRP are 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 capital regulations issued by the OTS. For a discussion of the capital
standards applicable to the Association, see "REGULATION -- Federal Regulation
of Savings Associations -- Capital Requirements."
PRO FORMA AT DECEMBER 31, 1996
15% above
Minimum of Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
2,847,500 Shares 3,350,000 Shares 3,852,500 Shares 4,430,375 Shares
December 31, 1996 at $20.00 Per Share at $20.00 Per Share at $20.00 Per Share at $20.00 Per Share
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets(1) Amount Assets(1) Amount Assets (1) Amount Assets (1)
(Dollars in thousands)
GAAP capital(2) . . . . $44,833 11.94% $65,837 16.41% $69,593 17.16% $73,412 17.89% $77,804 18.72%
Tangible capital(2) . . $44,845 11.94% $65,849 16.42% $69,605 17.16% $73,424 17.90% $77,816 18.72%
Tangible capital
requirement 5,633 1.50 6,016 1.50 6,085 1.50 6,154 1.50 6,234 1.50
Excess . . . . . . . . $39,212 10.44% $59,833 14.92% $63,520 15.66% $67,270 16.40% $71,582 17.22%
Core capital(2) . . . . $44,845 11.94% $65,849 16.42% $69,605 17.16% $73,424 17.90% $77,816 18.72%
Core capital
requirement(3) 11,266 3.00 12,033 3.00 12,169 3.00 12,308 3.00 12,468 3.00
Excess . . . . . . . . $33,579 8.94% $53,816 13.42% $57,436 14.16% $61,116 14.90% $65,348 15.72%
Total capital(4) . . . $46,495 20.78% $67,499 29.50% $71,255 31.02% $75,074 32.55% 79,466 34.29%
Risk-based
capital requirement . 17,897 8.00 18,306 8.00 18,379 8.00 18,453 8.00 18,538 8.00
Excess . . . . . . . . $28,598 12.78% $49,193 21.50% $52,876 23.02% $56,621 24.55% $60,928 26.29%
-------------------
(1) Based upon total adjusted assets of $375.5 million at December 31, 1996
and $401.1 million, $405.7 million, $410.3 million and $415.6 million at
the minimum, midpoint, maximum, and maximum, as adjusted, of the
Estimated Valuation Range, respectively, for purposes of the tangible and
core capital requirements, and upon risk-weighted assets of $223.7
million at December 31, 1996 and $228.8 million, $229.7 million, $230.7
million and $231.7 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) An unrealized loss on securities available-for-sale, net of taxes, of
$12,000 accounts for the difference between GAAP capital and each of
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.
14
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Association as converted, based upon an independent valuation. The Estimated
Valuation Range as of February 21, 1997 is from a minimum of $56,950,000 to a
maximum of $77,050,000 with a midpoint of $67,000,000 or, at a price per share
of $20.00, a minimum number of shares of 2,847,500, a maximum number of shares
of 3,852,500 and a midpoint number of shares of 3,350,000. The actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is completed. However, net proceeds set forth on the following table
are based upon the following assumptions: (i) Trident Securities will receive
fees of $672,000, $797,000, $797,000 and $797,000 at the minimum, midpoint,
maximum and 15% above the Estimated Valuation Range, respectively, assuming all
shares are sold to investors residing in South Carolina (see "THE CONVERSION --
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings); (ii) all of the Common Stock will be sold in the
Subscription and Direct Community Offerings; and (iii) Conversion expenses,
excluding the fees paid to Trident Securities, will total approximately $603,000
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 Association for the six
months ended December 31, 1996 and the year ended June 30, 1996 have been
calculated as if the Conversion had been consummated at the beginning of the
respective periods and the estimated net proceeds received by the Holding
Company and the Association had been invested at 6.44% and 6.48% at the
beginning of the respective periods, which represent the arithmetic average of
the Association's yield on interest-earning assets and interest-bearing deposits
as of December 31, 1996 and June 30, 1996, respectively. As discussed under "USE
OF PROCEEDS," the Holding Company expects to retain 50% of the net proceeds of
the Offerings from which it will fund the ESOP loan. For purposes of calculating
pro forma income on net proceeds, it is assumed that there will be no return on
approximately $1.5 million of net proceeds that will be used to contribute to
the construction of the Inman and Duncan branch offices and the renovation of an
existing branch office. See "USE OF PROCEEDS." A pro forma after-tax return of
3.99% and 4.02% are used for both the Holding Company and the Association for
the periods, after giving effect to an incremental combined federal and state
income tax rate of 38.0% for both periods. 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 respective periods or at December 31, 1996 or June 30,
1996, but without any adjustment of per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
The following tables summarize the historical net income and retained
earnings of the Association and the pro forma consolidated net income and
stockholders' equity of the Holding Company for the periods and at the dates
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 Holding Company's 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; (ii) withdrawals from deposit accounts
for the purpose of purchasing Common Stock in the Conversion; (iii) the issuance
of shares from authorized but unissued shares to the 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; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- 1997
Stock Option Plan" and "THE CONVERSION -- Stock Pricing and Number of Shares
Issued." Shares of Common Stock may be purchased with funds on deposit at the
Association, which will reduce deposits by the amounts of such purchases.
Accordingly, the net amount of funds available for investment will be reduced by
the amount of deposit withdrawals used to fund stock purchases.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion 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 in
accordance with 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.
15
At or For the Six Months Ended December 31, 1996
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
2,847,500 3,350,000 3,852,500 4,430,375(1)
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 . . . . . . . . . . . . $56,950 $67,000 $77,050 $88,608
Less: estimated expenses . . . . . . .
1,275 1,400 1,400 1,400
Estimated net proceeds . . . . . . . . $55,675 $65,600 $75,650 $87,208
Less: Common Stock acquired by ESOP . (4,556) (5,360) (6,164) (7,089)
Less: Common Stock to be acquired by MRP (2,278) (2,680) (3,082) (3,544)
Net investable proceeds . . . . . $48,841 $57,560 $66,404 $76,575
Consolidated net income:
Historical . . . . . . . . . . . . . . $607 $607 $607 $607
Pro forma income on net proceeds(2) . 945 1,119 1,296 1,499
Pro forma ESOP adjustments(3) . . . . (118) (138) (159) (183)
Pro forma MRP adjustments(4) . . . . .
(141) (166) (191) (220)
Pro forma net income . . . . . . . . $1,293 $1,422 $1,553 $1,703
Consolidated net income per share (5)(6):
Historical . . . . . . . . . . . . . . $0.23 $0.20 $0.17 $0.15
Pro forma income on net proceeds . . . 0.36 0.36 0.36 0.37
Pro forma ESOP adjustments(3) . . . . (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustments(4) . . . . . (0.05) (0.05) (0.05) (0.05)
Pro forma net income per share . . . $0.50 $0.47 $0.44 $0.43
Consolidated stockholders' equity (book value):
Historical . . . . . . . . . . . . . . $44,833 $44,833 $44,833 $44,833
Estimated net proceeds . . . . . . . . 55,675 65,600 75,650 87,208
Less: Common Stock acquired by ESOP . (4,556) (5,360) (6,164) (7,089)
Less: Common Stock to be acquired
by MRP(4). . . . . . . . . . . . . . (2,278) (2,680) (3,082) (3,544)
Pro forma stockholders' equity(7) . $93,674 $102,393 $111,237 $121,408
Consolidated stockholders' equity per
share(6)(8):
Historical(6) . . . . . . . . . . . . $15.74 $13.38 $11.64 $10.12
Estimated net proceeds . . . . . . . . 19.55 19.58 19.64 19.68
Less: Common Stock acquired by ESOP . (1.60) (1.60) (1.60) (1.60)
Less: Common Stock to be acquired
by MRP(4) . . . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
Pro forma stockholders' equity per
share(9) . . . . . . . . . . . . . $32.89 $30.56 $28.88 $27.40
Purchase Price as a percentage of pro forma
stockholders' equity per share . . . . 60.81% 65.45% 69.25% 72.99%
Purchase Price as a multiple of pro forma
net income per share . . . . . . . . . 20.00x 21.28x 22.73x 23.26x
(footnotes on second following page)
16
At or For the Year Ended June 30, 1996
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
2,847,500 3,350,000 3,852,500 4,430,375(1)
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 . . . . . . . . . . . . $56,950 $67,000 $77,050 $88,608
Less: estimated expenses . . . . . . . 1,275 1,400 1,400 1,400
Estimated net proceeds . . . . . . . . $55,675 $65,600 $75,650 $87,208
Less: Common Stock acquired by ESOP . . (4,556) (5,360) (6,164) (7,089)
Less: Common Stock to be acquired by MRP (2,278) (2,680) (3,082) (3,544)
Net investable proceeds . . . . . $48,841 $57,560 $66,404 $76,575
Consolidated net income:
Historical . . . . . . . . . . . . . . $3,537 $3,537 $3,537 $3,537
Pro forma income on net proceeds(2) . 1,902 2,252 2,608 3,016
Pro forma ESOP adjustments(3) . . . . (235) (277) (318) (366)
Pro forma MRP adjustments(4) . . . . . (282) (332) (382) (439)
Pro forma net income . . . . . . . . $4,922 $5,180 $5,445 $5,748
Consolidated net income per share (5)(6):
Historical . . . . . . . . . . . . . . $1.35 $1.14 $0.99 $0.86
Pro forma income on net proceeds . . . 0.72 0.73 0.73 0.74
Pro forma ESOP adjustments(3) . . . . (0.09) (0.09) (0.09) (0.09)
Pro forma MRP adjustments(4) . . . . . (0.11) (0.11) (0.11) (0.11)
Pro forma net income per share . . . $1.87 $1.67 $1.52 $1.40
Consolidated stockholders' equity
(book value):
Historical . . . . . . . . . . . . . . $44,154 $44,154 $44,154 $44,154
Estimated net proceeds . . . . . . . . 55,675 65,600 75,650 87,208
Less: Common Stock acquired by ESOP . (4,556) (5,360) (6,164) (7,089)
Less: Common Stock to be acquired by
MRP(4) (2,278) (2,680) (3,082) (3,544)
Pro forma stockholders' equity(7) . $92,995 $101,714 $110,558 $120,729
Consolidated stockholders' equity per
share(6)(8):
Historical(6) . . . . . . . . . . . . $15.51 $13.18 $11.46 $9.97
Estimated net proceeds . . . . . . . . 19.55 19.58 19.64 19.68
Less: Common Stock acquired by ESOP . (1.60) (1.60) (1.60) (1.60)
Less: Common Stock to be acquired
by MRP(4) (0.80) (0.80) (0.80) (0.80)
Pro forma stockholders' equity per
share(9) $32.66 $30.36 $28.70 $27.25
Purchase Price as a percentage of pro forma
stockholders' equity per share . . . . 61.24% 65.88% 69.69% 73.39%
Purchase Price as a multiple of pro forma
net income per share . . . . . . . . . 10.70x 11.98x 13.16x 14.29x
(footnotes on following page)
17
- -------------------
(1) Gives effect to the sale of an additional 577,875 shares in the Conversion,
which may be issued to cover an increase in the pro forma market value of
the Holding Company and the Association 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 Holding Company and the Association
as converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. Since funds on
deposit at the Association 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 Association for investment following
receipt of the net proceeds of the Offerings will be reduced by the amount
of such withdrawals.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
Conversion, which rate is currently 8.25%) from the net proceeds from the
Offerings retained by the Holding Company. The amount of this borrowing has
been reflected as a reduction from gross proceeds to determine estimated
net investable proceeds. The Association intends to make contributions to
the ESOP in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. The Association's payment of the ESOP debt is based upon
equal installments of principal over a 12-year period, assuming a combined
federal and state income tax rate of 38%. Interest income earned by the
Holding Company on the ESOP debt offsets the interest paid by the
Association on the ESOP loan. No reinvestment is assumed on proceeds
contributed to fund the ESOP. The ESOP expense reflects adoption of
Statement of Position ("SOP") 93-6, which will require recognition of
expense based upon shares committed to be released and the exclusion of
unallocated shares from earnings per share computations. The valuation of
shares committed to be released would be based upon the average market
value of the shares during the year, which, for purposes of this
calculation, was assumed to be equal to the $20.00 per share Purchase
Price. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock
Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the 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 38%. 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 3.85% and
pro forma net income per share would be $0.49, $0.46, $0.44 and $0.42 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the six months ended December 31, 1996, respectively,
and $1.83, $1.64, $1.50 and $1.38 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range for the year ended June
30, 1996, respectively, and pro forma stockholders' equity per share would
be $32.40, $30.16, $28.53 and $27.12 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range at December 31,
1996, respectively, and $32.17, $29.96, $28.36 and $26.97 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range at June 30, 1996, respectively. Shares issued under the 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 MRP, total MRP expense would increase.
The total estimated MRP expense was multiplied by 20% (the total percent of
shares for which expense is recognized in the first year) resulting in
pre-tax MRP expense of $227,000, $268,000, $308,000 and $355,000 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the six months ended December 31, 1996, respectively,
and $455,000, $535,000, $616,000 and $708,000 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range for the
year ended June 30, 1996, respectively. No effect has been given to the
shares reserved for issuance under the proposed Stock Option Plan. If
stockholders approve the Stock Option Plan following the Conversion, the
18
Holding Company will have reserved for issuance under the Stock Option Plan
authorized but unissued shares of Common Stock representing an amount of
shares equal to 10% of the shares sold in the Conversion. If all of the
options were to be exercised utilizing these authorized but unissued shares
rather than treasury shares which could be acquired, the voting and
ownership interests of existing stockholders would be diluted by
approximately 9.1%. Assuming stockholder approval of the Stock Option Plan
and that all options were exercised at the end of the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively, at an
exercise price of $20.00 per share, pro forma net earnings per share would
be $0.48, $0.46, $0.43 and $0.41, respectively, for the six months ended
December 31, 1996, and $1.76, $1.59, $1.46 and $1.34, respectively, for the
year ended June 30, 1996, and pro forma stockholders' equity per share
would be $31.72, $29.61, $28.07 and $26.73, respectively, for the six
months ended December 31, 1996, and $31.51, $29.42, $27.91 and $26.59,
respectively for the year ended June 30, 1996 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"MANAGEMENT OF THE ASSOCIATION -- Benefits -- 1997 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 2,624,446,
3,087,583, 3,550,721 and 4,083,329 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the six months
ended December 31, 1996, respectively and 2,629,192, 3,093,167, 3,557,142
and 4,090,713 for the year ended June 30, 1996, respectively, which
includes the shares of Common Stock sold in the Conversion less the number
of shares assumed to be held by the ESOP not committed to be released
within the first year following the Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
Stock expected to be issued in the Conversion 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, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Association'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, or the federal income tax consequences of the restoration to
income of the Association's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" 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 2,847,500,
3,350,000, 3,852,500 and 4,430,375 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.
19
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the
approximate purchases of Common Stock by each director and executive officer of
the Association, including their associates, as defined by applicable
regulations. 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 officers of the Association and their
associates may not purchase in excess of 28% of the shares sold in the
Conversion. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
Directors, officers and employees will pay the same price for the shares for
which they subscribe as the price that will be paid by all other subscribers.
Percent of Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares Purchased (1) Amount Purchased Valuation Range Valuation Range
Robert R. Odom 6,250 $ 125,000 0.22% 0.16%
Chairman of the Board
Billy L. Painter 16,250 325,000 0.57 0.42
President and Director
Robert L. Handell 5,000 100,000 0.18 0.13
Secretary and Director
R. Wesley Hammond 5,000 100,000 0.18 0.13
Director
E. Lea Salter 7,500 150,000 0.26 0.19
Director
E.L. Sanders 15,000 300,000 0.53 0.39
Director
David E. Tate 5,000 100,000 0.18 0.13
Director
J. Stephen Sinclair 16,250 325,000 0.57 0.42
Executive Vice President
Hugh H. Brantley 16,250 325,000 0.57 0.42
Executive Vice President
R. Lamar Simpson 2,500 50,000 0.09 0.06
Chief Financial Officer
Other officers (5 persons)
34,750 695,000 1.22 0.90
Total 129,750 $2,595,000 4.56% 3.37%
- --------------
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of
the number of shares to be purchased by the ESOP and intended awards
under the MRP and Stock Option Plan, see "MANAGEMENT OF THE ASSOCIATION
-- Benefits -- Employee Stock Ownership Plan," "-- Benefits -- 1997 Stock
Option Plan" and "-- Benefits -- Management Recognition Plan."
20
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of First Federal
Savings and Loan Association of Spartanburg and Subsidiary for the fiscal
years ended June 30, 1996, 1995 and 1994 have been audited by Deloitte &
Touche LLP, Greenville, South Carolina, independent auditors, whose report
thereon appears elsewhere in this Prospectus. The Consolidated Statements
of Income for the six months ended December 31, 1996 and 1995 were not
audited by Deloitte & Touche LLP, but, in the opinion of management,
reflect all adjustments (none of which are other than normal recurring
entries) necessary for a fair presentation. The results of operations for
the six months ended December 31, 1996 are not necessarily indicative of
the results of operations that may be expected for the entire fiscal year.
These statements should be read in conjunction with the Consolidated
Financial Statements and related Notes included elsewhere herein.
Six Months
Ended December 31, Years Ended June 30,
1996 1995 1996 1995 1994
(Unaudited)
(In thousands)
INVESTMENT INCOME:
Interest on loans . . . . . . $ 13,305 $ 11,946 $ 24,421 $ 22,086 $ 21,414
Interest and dividends on
investment securities,
mortgage-backed securities
and other . . . . . . . . .
852 1,091 2,024 1,749 1,739
Total investment income . . . 14,157 13,037 26,445 23,835 23,153
INTEREST EXPENSE:
Deposit accounts . . . . . . .
7,568 7,332 14,669 11,302 10,387
NET INTEREST INCOME . . . . . . 6,589 5,705 11,776 12,533 12,766
PROVISION FOR LOAN LOSSES
(Note 3) 675 4 419 9 --
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES . . 5,914 5,701 11,357 12,524 12,766
OTHER INCOME (EXPENSE):
Service charges and fees . . . 596 413 924 674 654
Gain (loss) of sale of
mortgage loans 37 -- -- (1,078) (226)
Unrealized gain (loss) on
loans held for sale -- -- -- 668 (668)
Loss on sale of investments (16) -- -- (396) (109)
Other income, net . . . . . .
85 186 395 466 433
Total other income, net . . . 702 599 1,319 334 84
OTHER OPERATING EXPENSES:
Employee compensation and
benefits 1,733 1,516 3,131 3,020 2,728
Federal deposit insurance premium 2,131 354 737 701 690
Occupancy and equipment expense 497 366 731 631 553
Computer services . . . . . . 250 192 449 388 365
Advertising and promotions . . 235 204 418 286 197
Office supplies, postage,
printing, etc 246 219 502 334 311
Other . . . . . . . . . . . . 552 475 1,060 862 827
Total other operating expenses 5,644 3,326 7,028 6,222 5,671
INCOME BEFORE INCOME TAXES . . 972 2,974 5,648 6,636 7,179
PROVISION FOR INCOME TAXES
(Note 6) . . . . . . . 365 1,115 2,111 2,495 2,707
NET INCOME . . . . . . . $ 607 $ 1,859 $ 3,537 $ 4,141 $ 4,472
See Notes to Consolidated Financial Statements.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Association. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
Operating Strategy
The Association's business consists principally of attracting retail
deposits from the general public and using these funds to originate mortgage
loans secured by one- to- four family residences located in its primary market
area. To a lesser extent, the Association also originates, in order of
magnitude, construction loans, consumer loans (including commercial business
loans), commercial real estate loans and land loans. In addition, the
Association invests in U.S. Government and federal agency obligations, mutual
funds and, to a substantially lesser extent, mortgage-backed securities. The
Association intends to continue to fund its assets primarily with retail
deposits, although FHLB-Atlanta advances may be used as a supplemental source of
funds.
The Association's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Association's profitability is
also affected by the level of other income and expenses. Other income, net,
includes income associated with the origination and sale of FHA and VA mortgage
loans, loan servicing fees, income from real estate owned and net gains and
losses on sales of interest-earning assets. Other expenses include compensation
and benefits, occupancy and equipment expenses, deposit insurance premiums, data
servicing expenses and other operating costs. The Association's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and regulation and monetary and fiscal policies.
The Association's business strategy is to operate as a well-capitalized,
profitable and independent financial institution dedicated to a community-
oriented approach that emphasizes management involvement with customers and the
community at large, local decision-making and quality customer service.
Management believes that it can best serve an important segment of the
marketplace and enhance the long-term value of the Holding Company by operating
independently and continuing with and expanding its community- oriented
approach, especially in light of recent consolidations of thrift institutions
with large regional commercial banks in the Association's market area.
The Association believes that it has successfully implemented its
business strategy by: (i) maintaining a strong capital base (see "HISTORICAL AND
PRO FORMA REGULATORY CAPITAL COMPLIANCE"); (ii) seeking to reduce its exposure
to fluctuations in market interest rates (see "-- Asset and Liability
Management"); (iii) promoting local loan originations (see "BUSINESS OF THE
ASSOCIATION -- Lending Activities -- General"); (iv) supplementing its
traditional menu of mortgage loan products with a variety of consumer loan
products (see "BUSINESS OF THE ASSOCIATION -- Lending Activities -- Consumer and
Other Lending"); (v) providing check imaging services and offering commercial
deposit accounts to complement its commercial real estate and commercial
business lending activities (see BUSINESS OF THE ASSOCIATION -- Deposit
Activities and Other Sources of Funds); (vi) making an equity investment in a
regional mortgage banking company (see BUSINESS OF THE ASSOCIATION -- Subsidiary
Activities"); and (vii) expanding its branch office network (see BUSINESS OF THE
ASSOCIATION -- Properties"). The Association believes that the capital raised in
the Offerings will enhance its ability to continue implementing its business
strategy.
22
Comparison of Financial Condition at December 31, 1996, June 30,
1996 and June 30, 1995
Total assets were $375.5 million, $357.0 million and $322.7 million at
December 31, 1996, June 30, 1996 and June 30, 1995, respectively. This increase
resulted primarily from growth in the loan portfolio, which was funded primarily
by deposit growth.
Loans receivable, net, amounted to $331.7 million, $314.9 million and
$267.4 million at December 31, 1996, June 30, 1996 and June 30, 1995,
respectively. A substantial portion of the Association's loan portfolio is
secured by real estate, either as primary or secondary collateral, located in
its primary market area of Spartanburg County, South Carolina. There are certain
risks associated with this credit concentration. See "RISK FACTORS --
Concentration of Credit Risk." In addition, the period between June 30, 1995 and
December 31, 1996 saw a continuing trend in the growth of the construction and
consumer loan portfolios as the Association emphasized the origination of loans
with shorter maturities for asset and liability management purposes. See "--
Asset and Liability Management." Construction and consumer loans are generally
riskier than one- to- four family mortgage loans. See "RISK FACTORS -- Certain
Lending Risks" and "BUSINESS OF THE ASSOCIATION -- Lending Activities."
Loans held-for-sale were $1.4 million, $1.9 million and $15.3 million at
December 31, 1996, June 30, 1996 and June 30, 1995, respectively. The
Association sold $13.3 million of loans classified as held-for-sale whose
aggregate market value was less than their aggregate principal balances during
the year ended June 30, 1995 after determining that the prospects of their
carrying value equalling or exceeding market value in the foreseeable future was
remote. During the year ended June 30, 1996 the Association reclassified
approximately $20.9 million of loans from held-for-sale to held-for-investment
(at the lower of cost or market at the time of reclassification) after
management reevaluated its intent with respect to their disposition. See "--
Results of Operations -- Comparison of Operating Results for the Years Ended
June 30, 1995 and 1994 -- Other Income (Expense)."
Cash and cash equivalents amounted to $17.1 million, $10.8 million and
$16.0 million at December 31, 1996, June 30, 1996 and June 30, 1995,
respectively. The decrease between June 30, 1996 and 1995 reflects the purchase
of marketable equity securities (mutual fund shares). The increase between
December 31, 1996 and June 30, 1996 reflects proceeds from the sale of such
marketable equity securities, which were sold to increase regulatory liquidity,
and, to a lesser extent, deposit growth. See "-- Liquidity and Capital
Resources."
Held-to-maturity investment securities were $5.5 million at June 30,
1995, with no similar holdings at either December 31, 1996 or June 30, 1996. In
December 1995, the Association adopted the implementation guidance allowed by
the Financial Accounting Standards Board ("FASB") under its Special Report "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities," and reclassified investment securities
classified as held-to-maturity to available-for-sale without tainting the
remainder of the held-to-maturity investment securities portfolio. See Note 1 of
Notes to the Consolidated Financial Statements.
Available-for-sale investment securities were $13.5 million, $18.2
million and $8.2 million at December 31, 1996, June 30, 1996 and June 30, 1995,
respectively. The increase between June 30, 1996 and 1995 reflects the
reclassification of held-to-maturity securities and the purchase of additional
securities, both described above. The decrease between December 31, 1996 and
June 30, 1996 resulted primarily from the sale of marketable equity securities
to increase regulatory liquidity, also described above.
Office properties and equipment, net, were $5.5 million, $5.1 million and
$4.4 million at December 31, 1996, June 30, 1996 and June 30, 1995,
respectively. The increase between June 30, 1996 and 1995 resulted primarily
from the acquisition of land for the construction of the Inman branch office and
property adjacent to the Association's main office for possible future expansion
needs (see "BUSINESS OF THE ASSOCIATION -- Properties") and the purchase of
check imaging equipment and other computer technology upgrades. The increase
between December 31, 1996 and June 30, 1996 resulted primarily from the
acquisition of land adjacent to the Boiling Springs branch office for possible
future expansion needs.
23
Deposit accounts totalled $324.0 million, $305.8 million and $275.9
million at December 31, 1996, June 30, 1996 and June 30, 1995, respectively. The
increases between December 31, 1996, June 30, 1996 and June 30, 1995 were the
result of aggressive marketing and promotion. See "-- Results of Operations --
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995 --
Other Operating Expenses, "-- Results of Operations -- Comparison of Operating
Results for the Years Ended June 30, 1995 and 1994 -- Other Operating Expenses"
and "BUSINESS OF THE ASSOCIATION -- Deposit Activities and Other Sources of
Funds."
Total equity was $44.8 million, $44.2 million and $40.7 million at
December 31, 1996, June 30, 1996 and June 30, 1995, respectively. These
increases were primarily the result of retained earnings.
Results of Operations
The earnings of the Association depend primarily on its level of net
interest income, which is the difference between interest earned on the
Association's interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is a function of the Association's interest
rate spread, which is the difference between the yield earned on
interest-earning assets and the rate paid on interest-bearing liabilities, as
well as a function of the average balance of interest-earning assets as compared
to the average balance of interest-bearing liabilities.
Comparison of Operating Results for the Six Months Ended December 31, 1996 and
1995
Net Income. Net income was $607,000 for the six months ended December 31,
1996 compared to $1.9 million for the six months ended December 31, 1995, a
68.1% decline, primarily as a result of increases in the provision for loan
losses and in other operating expenses, offset by an increase in other income.
The increase in other operating expenses was primarily the result of the
legislatively-mandated, one-time assessment levied by the FDIC on all SAIF-
insured institutions to recapitalize the SAIF. Without this assessment, which
amounted to $1.1 million after tax, net income would have been $1.7 million for
the six months ended December 31, 1996.
Net Interest Income. Net interest income increased 15.8% from $5.7
million for the six months ended December 31, 1995 to $6.6 million for the six
months ended December 31, 1996. Total investment income increased 9.2% from
$13.0 million for the six months ended December 31, 1995 to $14.2 million for
the six months ended December 31, 1996 primarily as a result of an increase in
the average balance of interest-earning assets from $326.8 million to $352.4
million. Interest expense increased 4.1% from $7.3 million for the six months
ended December 31, 1995 to $7.6 million for the six months ended December 31,
1996 as a result of an increase in the average balance of deposits from $289.8
million to $313.7 million. The increase in the average balance of deposits more
than offset a decrease in the average cost of deposits from 5.06% for the six
months ended December 31, 1995 to 4.82% for the six months ended December 31,
1996. The decrease in the average cost of deposits resulted primarily from a
lower average rate paid on certificates of deposit, offset slightly by an
increase in the weighted average rate paid on passbook accounts. The higher
average rates paid on certificates of deposits during the six months ended
December 31, 1995 resulted from a promotion that had expired by the beginning of
the six months ended December 31, 1996. The higher average rate paid on passbook
accounts during the six months ended December 31, 1996 also resulted from a
promotion. Interest rate spread increased to 3.21% for the six months ended
December 31, 1996 from 2.92% for the six months ended December 31, 1995.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Management also
considers the level of problem assets that the Association classifies according
to OTS regulations. The Association gives greater weight to the level of
classified assets than to the level of nonperforming assets (nonaccrual loans,
accruing loans contractually past due 90 days or more, and real estate acquired
in settlement of loans) because classified assets include not only nonperforming
assets but also performing assets that otherwise exhibit, in
24
management's judgment, potential credit weaknesses. See "BUSINESS OF THE
ASSOCIATION -- Lending Activities -- Nonperforming Assets and Delinquencies" and
"-- Lending Activities -- Asset Classification."
The provision for loan losses was $675,000 for the six months ended
December 31, 1996 compared to $4,000 for the same period in 1995. Management
deemed the increase in the provision for loan losses necessary in light of the
increase in the relative level of estimated losses caused by the growth of the
loan portfolio and a continuing increase in classified assets between December
31, 1995 and December 31, 1996. The increase in classified assets resulted
primarily from an increase in construction loan delinquencies, which management
attributes to slower sales of homes of the type sold by the Association's
construction loan borrowers in the Association's primary market area. See "RISK
FACTORS -- Certain Lending Risks." Although no assurances can be given,
management expects the trend of increased classified assets to continue
moderately based upon its expectation for continued loan growth, particularly in
the areas of construction, commercial real estate and consumer lending.
Management deemed the allowance for loan losses adequate at December 31, 1996.
Other Income (Expense). Other income increased from $599,000 for the six
months ended December 31, 1995 to $702,000 for the six months ended December 31,
1996, primarily as a result of the increase in service charges and fees offset
by a decrease in other income. Service charges and fees increased from $413,000
for the six months ended December 31, 1995 to $596,000 for the same period in
1996 primarily as a result of increased income associated with the origination
and sale of FHA and VA mortgage loans and increased deposit account fees,
particularly on the increased number of NOW accounts. Other income, net,
decreased from $186,000 for the six months ended December 31, 1995 to $85,000
for the six months ended December 31, 1996 primarily as a result of a $100,000
loss representing the Association's share of the losses incurred by the mortgage
banking company in which the Association's service corporation subsidiary has an
equity investment. See "BUSINESS OF THE ASSOCIATION -- Subsidiary Activities"
and Note 1 of Notes to the Consolidated Financial Statements.
Other Operating Expenses. Other operating expenses were $5.6 million for
the six months ended December 31, 1996 compared to $3.3 million for the same
period in 1995. This increase resulted primarily from the FDIC special
assessment on all SAIF-insured institutions to recapitalize the SAIF. The
Association's assessment amounted to $1.8 million and was accrued during the
quarter ended September 30, 1996. Prior to the SAIF recapitalization, the
Association'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" and Note 10 of Notes to
the Consolidated Financial Statements. Additionally, employee compensation and
benefits increased from $1.5 million for the six months ended December 31, 1995
to $1.7 million for the same period in 1996 as a result of the hiring of
additional operations personnel to service the increased number of NOW accounts
and the hiring of the Association's current Chief Financial Officer in June
1996. The increases in other categories of other operating expenses generally is
attributable the general growth of the Association and to inflation. The
Association anticipates that other operating expenses will increase in
subsequent periods following the consummation of the Conversion as a result of
increased costs associated with operating as a public company and increased
compensation expense as a result of the adoption of the ESOP and, if approved by
the Holding Company's stockholders, the MRP. The opening of the new branch
offices also will contribute to increased operating expenses in future periods.
See "RISK FACTORS -- Return on Equity After Conversion," "-- New Expenses
Associated With ESOP and MRP" and "BUSINESS OF THE ASSOCIATION -- Properties."
Income Taxes. The provision for income taxes was $365,000 for the six
months ended December 31, 1996 compared to $1.1 million for the six months ended
December 31, 1995 as a result of lower income before taxes.
25
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Net Income. Net income was $3.5 million for the year ended June 30, 1996
compared to $4.1 million a year earlier, a 14.6% decline, primarily as a result
of a decrease in net interest income and increases in the provision for loan
losses and in other operating expenses, offset by an increase in other income.
Net Interest Income. Net interest income was $11.8 million for the year
ended June 30, 1996 compared to $12.5 million for the year ended June 30, 1995,
a 5.6% decline. A 10.9% increase in investment income, from $23.8 million in
1995 to $26.4 million in 1996, was more than offset by a 30.1% increase in
interest expense, from $11.3 million in 1995 to $14.7 million in 1996. The
increase in investment income resulted primarily from an increase in the average
balance of interest-earning assets from $302.2 million in 1995 to $331.4 million
in 1996 and an increase in the average yield on interest-earning assets from
7.89% in 1995 to 7.98% in 1996 as a result of a combination of higher market
interest rates and an increase in the average balance of higher yielding
consumer and other loans. The increase in interest expense was primarily the
result of an increase in the average cost of deposits from 4.18% for 1995 to
4.97% for 1996 as a result of a combination of higher market interest rates and
competitive pricing to increase deposit balances, coupled with an increase in
the average balance of deposits from $270.1 million for 1995 to $295.0 million
for 1996, which resulted in a decline in interest rate spread from 3.71% in 1995
to 3.01% in 1996.
Provision for Loan Losses. The provision for loan losses was $419,000 for
the year ended June 30, 1996 compared to $9,000 for the year ended June 30,
1995. Management deemed the increase in the provision for loan losses necessary
in light of the growth of the loan portfolio, particularly in the areas of
construction and consumer lending, which are generally considered to have a
greater risk of loss than one- to- four family residential mortgage loans, and
an increase in nonperforming assets, primarily construction loans. See "BUSINESS
OF THE ASSOCIATION -- Lending Activities -- Construction Lending" and "--
Lending Activities -- Nonperforming Assets and Delinquencies."
Other Income (Expense). Other income was $1.3 million for the year ended
June 30, 1996 compared to $334,000 for the year ended June 30, 1995. In 1995,
there was a $1.1 million loss on the sale of mortgage loans held for sale and a
$396,000 loss on the sale of investments, both of which were absent in 1996. See
"-- Comparison of Financial Condition at December 31, 1996, June 30, 1996 and
June 30, 1995" and "-- Results of Operations -- Comparison of Operating Results
for the Year Ended June 30, 1996 and 1995 -- Other Income (Expense)."
Other Operating Expenses. Other operating expenses were $7.0 million for
the year ended June 30, 1996 compared to $6.2 million in 1995, an increase of
12.9%, primarily as a result of increases in occupancy and equipment expense,
advertising and promotions expense, and office supplies, postage and printing
expenses. Occupancy and equipment expense increased to $731,000 for the year
ended June 30, 1996 from $631,000 for the year ended June 30, 1995, primarily as
a result of increased depreciation expense of computer and other equipment and,
to a lesser extent, general maintenance and repairs on the Association's
properties. Advertising and promotions expense increased to $418,000 for the
year ended June 30, 1996 from $286,000 for the year ended June 30, 1995 as a
result of increased advertising and promotions developed with the assistance of
a consultant retained to develop and implement strategies to increase the
Association's deposit base. Office supplies, postage and printing expenses
increased to $502,000 for the year ended June 30, 1996 from $334,000 for the
year ended June 30, 1995 as a result of expenses associated with the development
of product marketing materials and increased expenses associated with the
increase in NOW accounts.
Income Taxes. The provision for income taxes was $2.1 million for the
year ended June 30, 1996 compared to $2.5 million for the year ended June 30,
1995 as a result of lower income before taxes.
26
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994
Net Income. Net income was $4.1 million for the year ended June 30, 1995
compared to $4.5 million for the year ended June 30, 1994, a 8.9% decline,
primarily as a result of a decrease in net interest income and an increase in
other operating expenses, offset by an increase in other income (expense).
Net Interest Income. Net interest income remained relatively stable
between 1994 and 1995. Net interest income was $12.5 million for the year ended
June 30, 1995 compared to $12.8 million for the year ended June 30, 1994, a 2.3%
decline. Interest rate spread decreased to 3.71% in 1995 from 3.94% in 1994
primarily as a result of an increase in the average cost of interest-bearing
liabilities to 4.18% in 1995 from 3.86% in 1994, which more than offset
increases in the average balance of interest-earning assets to $302.2 million in
1995 from $296.7 million in 1994 and in the average yield on interest-earning
assets to 7.89% in 1995 from 7.80% in 1994. The increase in the average cost of
liabilities resulted primarily from higher market interest rates, which affected
the weighted average rate paid on certificates of deposit, and, to a lesser
extent, by a shift in the deposit mix from passbook and other transaction
accounts to higher costing certificates of deposit. The increase in the average
yield on interest-earning assets resulted primarily from the combination of a
decrease in the average balances of federal funds and overnight interest-bearing
deposits and investment securities, which generally have lower yields than
loans, and an increase in the average balance of loans receivable, net.
Provision for Loan Losses. The provision for loan losses was $9,000 for
1995. There was no provision for loan losses in 1994 as management deemed the
allowance for loan losses at June 30, 1994 adequate to provide for estimated
loan losses at that date.
Other Income (Expense). Other income was $334,000 for the year ended June
30, 1995 compared to $84,000 for the year ended June 30, 1994. Income from
service charges and fees increased in 1995 primarily as a result of deposit
growth. The sale of mortgage loans held-for-sale during 1995 contributed to a
$1.1 million loss. At June 30, 1994, the aggregate principal balance of loans
held-for-sale exceeded their market value by $668,000. As a result, a valuation
allowance of $668,000 was established and an unrealized loss of $668,000 was
recorded as an other expense in 1994. At June 30, 1995, the aggregate market
value of such loans exceeded their aggregate principal balance. Consequently, no
valuation allowance was established and an unrealized gain of $668,000 was
recorded as other income in 1995. See "-- Comparison of Financial Condition at
December 31, 1996, June 30, 1996 and June 30, 1995."
Other Operating Expenses. Other operating expenses were $6.2 million in
1995 compared to $5.7 million in 1994, an increase of 8.8% primarily as a result
of general increases in all expense categories as a result of the growth of the
Association during the year.
Income Taxes. The provision for income taxes was $2.5 million for the
year ended June 30, 1995 compared to $2.7 million for the year ended June 30,
1994 as a result of lower income before taxes.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated 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 and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances are derived from daily
balances for the six months ended December 31, 1996 and 1995 and for the year
ended June 30, 1996. Average balance for the years ended June 30, 1995 and 1994
were derived from month-end balances. Management does not believe that the use
of month-end balances instead of daily balances has caused any material
inconsistencies in the information presented.
27
Six Months Ended December 31, Years Ended June 30,
1996 1995 1996
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) . . $325,969 $13,305 8.16% $290,257 $11,946 8.23% $298,865 $24,421 8.17%
Mortgage-backed securities . . 148 5 6.76 366 16 8.74 333 29 8.71
Investment securities . . . . 15,235 505 6.63 16,158 451 5.58 17,035 997 5.85
FHLB stock . . . . . . . . . . 2,807 102 7.27 2,649 97 7.32 2,693 196 7.28
Federal funds sold and overnight
interest-bearing deposits . . 8,287 240 5.79 17,385 527 6.06 12,517 802 6.41
Total interest-earning assets 352,446 14,157 8.03 326,815 13,037 7.98 331,443 26,445 7.98
Non-interest-earning assets . . 13,777 11,846 12,947
Total assets . . . . . . . . $366,223 $338,661 $344,390
Interest-bearing liabilities(2):
Passbook accounts . . . . . . $ 54,310 1,043 3.84 $ 36,072 636 3.53 $ 39,289 1,364 3.47
Money market accounts . . . . 14,521 235 3.24 17,583 319 3.63 17,196 626 3.64
NOW accounts . . . . . . . . . 28,346 233 1.64 25,894 261 2.02 27,351 542 1.98
Certificate accounts . . . . . 216,528 6,057 5.59 210,261 6,116 5.82 211,179 12,137 5.75
Total interest-bearing
liabilities . . .......... 313,705 7,568 4.82 289,810 7,332 5.06 295,015 14,669 4.97
Noninterest-bearing liabilities 7,209 6,908 6,422
Total liabilities . . . . . 320,914 296,718 301,437
Retained earnings . . . . . . . 45,309 41,943 42,953
Total liabilities and retained
earnings $366,223 $338,661 $344,390
Net interest income . . . . . . $6,589 $5,705 $ 11,776
Interest rate spread . . . . . 3.21 2.92 3.01
Net interest margin . . . . . . 3.74 3.49 3.55
Ratio of average interest-earning
assets to average interest- 1.12
bearing liabilities . . . . . 1.12 1.13
Years Ended June 30,
1995 1994
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) . . $273,778 $22,086 8.07% $260,135 $21,414 8.23%
Mortgage-backed securities . . 416 35 8.41 710 59 8.31
Investment securities . . . . 17,357 994 5.73 22,866 1,101 4.82
FHLB stock . . . . . . . . . . 2,649 185 6.98 2,625 140 5.33
Federal funds sold and overnight
interest-bearing deposits . . 8,020 535 6.67 10,322 439 4.25
Total interest-earning assets 302,220 23,835 7.89 296,658 23,153 7.80
Non-interest-earning assets . . 11,734 12,250
Total assets . . . . . . . . $313,954 $308,908
Interest-bearing liabilities(2):
Passbook accounts . . . . . . $ 33,306 979 2.94 $ 34,469 1,003 2.91
Money market accounts . . . . 22,376 718 3.21 22,998 765 3.33
NOW accounts . . . . . . . . . 26,244 545 2.08 27,454 517 1.88
Certificate accounts . . . . . 188,140 9,060 4.82 184,393 8,102 4.39
Total interest-bearing
liabilities . . . 270,066 11,302 4.18 269,314 10,387 3.86
Noninterest-bearing liabilities 5,341 4,884
Total liabilities . . . . . 275,407 274,198
Retained earnings . . . . . . . 38,547 34,710
Total liabilities and retained
earnings 313,954 $308,908
Net interest income . . . . . . $ 12,533 $ 12,766
Interest rate spread . . . . . 3.71 3.94
Net interest margin . . . . . . 4.15 4.30
Ratio of average interest-earning
assets to average interest-
bearing liabilities . . . . . 1.12 1.10
- ----------------------
(1) Includes loans held-for-sale. Does not include interest on nonaccrual
loans.
(2) Does not include escrow balances.
28
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 Association's assets and the weighted
average interest rates paid on the Association's liabilities, together with the
net yield on interest-earning assets.
At Six Months Ended
December 31, December 31, Years Ended June 30,
1996 1996 1995 1996 1995 1994
Weighted average yield earned on:
Loans receivable, net . . . . . 8.12% 8.16% 8.23% 8.17% 8.07% 8.23%
Mortgage-backed securities . . 8.40 6.76 8.74 8.71 8.41 8.31
Investment securities . . . . . 6.34 6.63 5.58 5.85 5.73 4.82
FHLB stock . . . . . . . . . . 7.25 7.27 7.32 7.28 6.98 5.33
Federal funds sold and overnight
interest-bearing deposits . . 5.14 5.79 6.06 6.41 6.67 4.25
All interest-earning assets . . 7.96 8.03 7.98 7.98 7.89 7.80
Weighted average rate paid on:
Passbook accounts . . . . . . . 3.72 3.84 3.53 3.47 2.94 2.91
Money market accounts . . . . . 3.17 3.24 3.63 3.64 3.21 3.33
NOW accounts . . . . . . . . . 1.83 1.64 2.02 1.98 2.08 1.88
Certificate accounts . . . . . 5.59 5.59 5.82 5.75 4.82 4.39
All interest-bearing liabilities 4.81 4.82 5.06 4.97 4.18 3.86
Interest rate spread (spread between
weighted average rate earned on
all interest-earning assets and
paid on all interest-
bearing liabilities) . . . . . 3.18 3.21 2.92 3.01 3.71 3.94
Net interest margin (net interest
income as a percentage of average
interest-earning assets) . . . . N/A 3.74 3.49 3.55 4.15 4.30
29
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on the interest income and interest expense of the Association. Information is
provided with respect: (i) to effects attributable to changes in volume (changes
in volume multiplied by prior rate); and (ii) to effects attributable to changes
in rate (changes in rate multiplied by prior volume). The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Six Months Ended December 31, 1996 Year Ended June 30, 1996 Year Ended June 30, 1995
Compared to Six Months Ended Compared to Compared to
December 31, 1995 Year Ended June 30, 1995 Year Ended June 30, 1994
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Rate Volume Total Rate Volume Total Rate Volume Total
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) . $(101) $1,460 $1,359 $ 278 $2,057 $2,335 $(395) $1,067 $ 672
Mortgage-backed securities . (3) (8) (11) 1 (7) (6) 1 (25) (24)
Investment securities . . . 78 (24) 54 21 (18) 3 384 (491) (107)
FHLB stock . . . . . . . . . -- 5 5 8 3 11 44 1 45
Federal funds sold and overnight
interest-bearing deposits . (23) (264) (287) (20) 287 267 158 (62) 96
Total net change in income
on interest-earning assets . (49) 1,169 1,120 288 2,322 2,610 192 490 682
Interest-bearing liabilities:
Passbook accounts . . . . . 60 347 407 193 192 385 10 (34) (24)
Money market accounts . . . (32) (52) (84) 126 (218) (92) (27) (20) (47)
NOW accounts . . . . . . . . (57) 29 (28) (26) 23 (3) 48 (20) 28
Certificate accounts . . . . (240) 181 (59) 1,883 1,194 3,077 794 164 958
Total net change in expense
on interest-bearing liabilities (269) 505 236 2,176 1,191 3,367 825 90 915
Net change in net interest
income. . . . . . . . . . . $ 220 $ 664 $ 884 $(1,888) $1,131 $ (757) $(633) $ 400 $(233)
- ------------------
(1) Does not include interest on nonaccrual loans.
30
Asset and Liability Management
The Association's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest rates.
The Association has sought to reduce the exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. The principal element in achieving this
objective is to increase the interest-rate sensitivity of the Association's
interest-earning assets by retaining for its portfolio loans with interest rates
subject to periodic adjustment to market conditions and periodically selling
fixed-rate one- to- four family mortgage loans. In addition, the Association
maintains an investment portfolio of U.S. Government and agency securities with
contractual maturities of between one and five years. The Association relies on
retail deposits as its primary source of funds. Management believes retail
deposits, compared to brokered deposits, reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds. As
part of its interest rate risk management strategy, the Association promotes
transaction accounts and certificates of deposit with terms up to four years.
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the FHLB-Atlanta, the
Association receives a report which measures interest rate risk by modeling the
change in NPV over a variety of interest rate scenarios. This procedure for
measuring interest rate risk was developed by the OTS to replace the "gap"
analysis (the difference between interest-earning assets and interest-bearing
liabilities that mature or reprice within a specific time period). NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The calculation is intended to illustrate the change in NPV
that will occur in the event of an immediate change in interest rates of at
least 200 basis points with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Under proposed OTS
regulations, an institution with a greater than "normal" level of interest rate
risk will be subject to a deduction from total capital for purposes of
calculating its risk-based capital. An institution with a "normal" level of
interest rate risk is defined as one whose "measured interest rate risk" is less
than 2.0%. Institutions with assets of less than $300 million and a risk-based
capital ratio of more than 12.0% are exempt. The Association is not exempt
because of its asset size. Based on the Association's regulatory capital levels
at December 31, 1996, the Association believes that, if the proposed regulation
was implemented at that date, the regulation would not have had a material
adverse effect on the Association's regulatory capital compliance.
The following table is provided by the FHLB-Atlanta and sets forth the
change in the Association's NPV at December 31, 1996, based on FHLB-Atlanta
assumptions, that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that management might take to
counteract that change.
Basis Point ("bp") Estimated Change in
Change in Rates Net Portfolio Value
(Dollars in thousands)
+400 $(28,191) (49.2)%
+300 (20,537) (35.8)
+200 (12,882) (22.5)
+100 (6,441) (11.2)
0 0 0
(100) 3,862 6.7
(200) 7,724 13.5
(300) 8,514 14.9
(400) 9,304 16.2
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 1996 would reduce the
Association's NPV by approximately $12.9 million, or 22.5%, at that date.
31
Certain assumptions utilized by the FHLB-Atlanta in assessing the
interest rate risk of savings associations within its region were utilized in
preparing the preceding table. These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
under differing interest rate scenarios, among others.
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.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Association's primary sources of funds are customer deposits,
proceeds from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Association must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Association generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At December 31,
1996, cash and cash equivalents totalled $17.1 million, or 4.6% of total assets,
and investment securities classified as available-for-sale with maturities of
one year or less totalled $502,000. At December 31, 1996, the Association also
maintained, but did not draw upon, an uncommitted credit facility with the
FHLB-Atlanta, which provided for immediately available advances up to an
aggregate amount of $40.0 million.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute 1.0%
of the sum of net withdrawable deposit accounts plus short-term borrowings. The
Association's actual short- and long-term liquidity ratios at December 31, 1996
were 7.2% and 6.1%, respectively. In addition, although not includable in
calculating regulatory liquidity, at December 31, 1996, the Association had an
investment in marketable equity securities with a market value of $5.0 million
that is readily saleable to meet liquidity needs. See "-- Comparison of
Financial Condition at December 31, 1996, June 30, 1996 and June 30, 1995" and
"BUSINESS OF THE ASSOCIATION -- Investment Activities."
The Association's primary investing activity is the origination of one-
to- four family mortgage loans. During the six months ended December 31, 1996
and the years ended June 30, 1996, 1995 and 1994, the Association originated
$25.1 million, $59.3 million, $32.8 million and $91.2 million of such loans,
respectively. At December 31, 1996, the Association had loan commitments
totalling $4.4 million and undisbursed loans in process totalling $12.0 million.
The Association anticipates that it will have sufficient funds available to meet
current loan commitments. Certificates of deposit that are scheduled to mature
in less than one year from December 31, 1996 totalled $175.3 million.
Historically, the Association has been able to retain a significant amount of
its deposits as they mature.
OTS regulations require the Association to maintain specific amounts of
regulatory capital. As of December 31, 1996, the Association complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 11.9%, 11.9% and 20.8%, respectively. For a
detailed discussion of regulatory capital
32
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements." See also "HISTORICAL AND PRO FORMA REGULATORY CAPITAL
COMPLIANCE."
Impact of Accounting Pronouncements and Regulatory Policies
Accounting by Creditors for Impairment of a Loan. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." The Association adopted SFAS No. 114 and
SFAS No. 118 effective July 1, 1995, and their adoption did not have a material
effect on the Association's financial condition or results of operations.
Accounting for Employee Stock Ownership Plans. In November 1993 the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value per share in
future periods cannot be predicted due to the uncertainty of the fair value of
the shares at the time they will be committed to be released. See "PRO FORMA
DATA."
Disclosure of Certain Significant Risks and Uncertainties. In December
1994 the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure
of Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities. The
disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties
that could significantly affect the amounts reported in the financial statements
in the near-term functioning of the reporting entity. The risks and
uncertainties discussed in SOP 94-6 stem from the nature of the entity's
operations, from the necessary use of estimates in the preparation of the
entity's financial statements and from significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Association.
Accounting for the Impairment of Long-Lived Assets. See Note 1 of Notes
to the Consolidated Financial Statements for a discussion of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Association adopted SFAS No. 121 on July 1, 1996 and it did
not have a material impact on its financial condition or results of operations.
Accounting for Mortgage Servicing Rights. See Note 1 of Notes to the
Consolidated Financial Statements for a discussion of SFAS No. 122, "Accounting
for Mortgage Servicing Rights." The Association implemented SFAS No. 122,
prospectively, effective July 1, 1996 and its implementation did not have a
material impact on the Association's financial condition or results of
operations. Effective January 1, 1997, SFAS No. 122 was superseded by SFAS No.
125 discussed below.
Accounting for Stock-Based Compensation. 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 Association has not completed an analysis of the potential
33
effects of SFAS No. 123 on its financial condition or results of operations, but
expects to use the intrinsic value method upon consummation of the Conversion.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. See Note 1 of Notes to the Consolidated Financial
Statements for a discussion of SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," and of SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." SFAS No. 127 defers the effective date of the application of certain
portions of SFAS No. 125 until January 1, 1998. The adoption of the provisions
of SFAS No. 125 and SFAS No. 127 did not have a material impact on the
Association's financial condition or results of operations.
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 change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Association's operations. 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.
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation at
the direction of the Association on February 4, 1997 for the purpose of becoming
a holding company for the Association upon completion of the Conversion. As a
result of the Conversion, the Association will be a wholly- owned subsidiary of
the Holding Company and all of the issued and outstanding capital stock of the
Association will be owned by the Holding Company.
Business
Prior to the Conversion, the Holding Company has not and will not engage
in any significant activities other than of an organizational nature. Upon
completion of the Conversion, the Holding Company's sole business activity will
be the ownership of the outstanding capital stock of the Association. 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 Association
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 Association upon consummation of the Conversion, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Association. See "BUSINESS OF THE ASSOCIATION -- Competition."
34
BUSINESS OF THE ASSOCIATION
General
The Association operates, and intends to continue to operate, as a
community oriented financial institution and is devoted to serving the needs of
its customers. The Association'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 Association considers Spartanburg County and adjacent counties in
Northwest South Carolina to be its primary market area because a large number of
its depositors reside, and a substantial portion of its loan portfolio is
secured by properties located, in Spartanburg County. See "RISK FACTORS --
Concentration of Credit Risk." The City of Spartanburg, the county seat of
Spartanburg County, is located on Interstate 85 approximately 75 miles southwest
of Charlotte, North Carolina, and 35 miles northeast of Greenville, South
Carolina.
Spartanburg County and the City of Spartanburg had a 1990 population of
approximately 227,000 and 43,000, respectively, according the Spartanburg Area
Chamber of Commerce. The Spartanburg County economy is diverse and generally
stable. According to the U.S. Bureau of Labor Statistics, the Spartanburg County
unemployment rate was 4.0% for December 1996. According to the Spartanburg Area
Chamber of Commerce, major employers include Milliken & Company, Michelin Tire
Corp., Spartan Mills, Hoechst Celanese Corp., Spartanburg Regional Medical
Center and Bavarian Motor Works (BMW), among others.
The Association faces intense competition from many financial
institutions for deposits and loan originations. See "-Competition" and "RISK
FACTORS -- Competition."
Lending Activities
General. At December 31, 1996, the Association's total loans receivable
portfolio amounted to $346.3 million, or 92.2% of total assets at that date. The
Association has traditionally concentrated its lending activities on
conventional first mortgage loans secured by one- to- four family properties,
with such loans amounting to $267.6 million, or 77.3% of the total loans
receivable portfolio at December 31, 1996. In addition, the Association
originates construction loans, commercial real estate loans, land loans,
consumer loans (including commercial business loans). A substantial portion of
the Association's loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market area. See "RISK FACTORS
- -Concentration of Credit Risk."
35
Loan Portfolio Analysis. The following table sets forth the composition
of the Association's loan portfolio (excluding loans held-for-sale) at the dates
indicated. The Association had no concentration of loans exceeding 10% of total
gross loans other than as disclosed below.
At June 30,
At December 31, 1996 1996 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Mortgage loans:
One- to- four family . . . . . . $267,593 77.3% $258,302 77.6% $217,702 77.3% $210,613 79.9%
Construction . . . . . . . . . . 31,949 9.2 32,954 9.9 30,483 10.8 27,469 10.4
Land . . . . . . . . . . . . . . 2,409 0.7 3,285 1.0 1,762 0.6 1,484 0.6
Commercial and other . . . . . . 4,571 1.3 3,546 1.1 6,203 2.2 5,648 2.1
Total mortgage loans . . . . . 306,522 88.5 298,087 89.6 256,150 90.9 245,214 93.0
Consumer and other loans:
Home equity . . . . . . . . . . 32,555 9.4 28,430 8.5 20,859 7.4 15,104 5.7
Loans secured by
deposit accounts. . . . . . . . 1,979 0.6 1,605 0.5 1,345 0.5 1,030 0.4
Other . . . . . . . . . . . . . . 5,235 1.5 4,681 1.4 3,482 1.2 2,266 0.9
Total consumer and other
loans. . . . . . . . . . . . . 39,769 11.5 34,716 10.4 25,686 9.1 18,400 7.0
Total loans receivable . . . . . 346,291 100.0% 332,803 100.0% 281,836 100.0% 263,614 100.0%
Less:
Undisbursed portion of
loans in process . . . . . . . 12,008 15,839 12,761 14,587
Net deferred loan fees . . . . . 979 1,028 1,082 1,232
Allowance for loan losses. . . . 1,650 1,000 600 600
Total loans receivable, net. . . $331,654 $314,936 $267,393 $247,195
1993 1992
Amount Percent Amount Percent
Mortgage loans:
One- to- four family . . . . . . $202,348 83.2% $196,168 83.1%
Construction . . . . . . . . . . 19,746 8.1 18,084 7.6
Land . . . . . . . . . . . . . . -- -- -- --
Commercial and other . . . . . . 3,989 1.7 4,916 2.1
Total mortgage loans . . . . . 226,083 93.0 219,168 92.8
Consumer and other loans:
Home equity . . . . . . . . . . 14,048 5.8 13,944 5.9
Loans secured by deposit
accounts . . . . . . . . . . . 1,286 0.5 1,352 0.6
Other . . . . . . . . . . . . . 1,693 0.7 1,651 0.7
Total consumer and other loans.
17,027 7.0 16,947 7.2
Total loans receivable . . . . 243,110 100.0% 236,115 100.0%
Less:
Undisbursed portion of
loans in process . . . 10,311 7,227
Net deferred loan fees . 1,031 766
Allowance for loan losse 600 400
Total loans
receivable, net. . . $231,168 $227,722
36
One- to- Four Family Real Estate Lending. Historically, the Association
has concentrated its lending activities on the origination of loans secured by
first mortgage loans on existing one- to- four family residences located in its
primary market area. At December 31, 1996, $267.6 million, or 77.3% of the
Association's total loan portfolio, consisted of such loans. The Association
originated $25.1 million, $59.3 million, $32.8 million and $91.2 million of one-
to- four family residential mortgage loans during the six months ended December
31, 1996 and the years ended June 30, 1996, 1995 and 1994, respectively.
The Association participates in the FHA Direct Endorsement Program,
which allows the Association's in-house, FHA-approved, direct endorsement
underwriters to approve or reject FHA-insured one- to- four family mortgage
loans up to maximum amounts established by the FHA. The Association is also a VA
"automatic approved lender," which enables designated Association personnel to
approve or reject VA-insured, one- to- four family mortgage loans on behalf of
the Association. The Association generally sells all FHA and VA loan
originations, servicing released.
Generally, the Association's fixed-rate one- to- four family mortgage
loans have maturities ranging from ten to 30 years and are fully amortizing with
monthly payments sufficient to repay the total amount of the loan with interest
by the end of the loan term. Generally, they are originated under terms,
conditions and documentation which permit them to be sold to U.S. Government
sponsored agencies such as Fannie Mae ("FNMA"). The Association's fixed-rate
loans customarily include "due on sale" clauses, which give the Association the
right to declare a loan immediately due and payable in the event the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not paid.
The Association offers ARM loans at rates and terms competitive with
market conditions. At December 31, 1996, $96.3 million, or 27.8% of the
Association's gross loan portfolio, were subject to periodic interest rate
adjustments. Substantially all of the Association's ARM loan originations meet
the underwriting standards of FNMA even though the Association originates ARM
loans primarily for its own portfolio. The Association originates for its
portfolio ARM loans which provide for an interest rate which adjusts every year
or which is fixed for five or ten years and then adjusts every year after the
initial period. Most of the Association's one-year and ten-year ARMs adjust
every year based on the one year Treasury constant maturity index while the
interest rate adjustment for its five-year ARMs after the initial fixed period
is based on the ten year U.S. Treasury securities rate. The Association's ARMs
are typically based on a 30-year amortization schedule. The Association
qualifies the borrowers on its ARM loans based on the initial rate. The one-year
ARM loan may generally be converted to a fixed-rate loan within five years of
origination. The ten year ARM provides a conversion option after seven years
have elapsed. The Association does not offer deep discount or "teaser" rates.
The Association's current ARM loans do not provide for negative amortization. At
December 31, 1996, however, 24 loans aggregating $1.1 million provide for
negative amortization at the borrowers' option. These loans were originated more
than ten years ago. The Association's ARM loans generally provide for annual and
lifetime interest rate adjustment limits of 1% to 2% and 4% to 6%, respectively.
Borrower demand for ARM loans 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 initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Association's loan portfolio helps
reduce the Association's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the customer. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased payments required by the
borrower. See "RISK FACTORS -- Interest Rate Risk." In addition, although ARM
loans allow the Association to increase the sensitivity of its asset base to
changes in the interest rates, the extent of this interest sensitivity is
limited by the annual and lifetime interest rate adjustment limits. Because of
these considerations, the Association has no assurance that yields on ARM loans
will be sufficient to offset increases in the Association's cost of funds.
37
The Association believes these risks, which have not had a material adverse
effect on the Association to date, generally are less than the risks
associated with holding fixed-rate loans in portfolio during a rising interest
rate environment.
The Association generally requires title insurance insuring the status
of its lien or an acceptable attorney's opinion on all loans where real estate
is the primary source of security. The Association also requires that fire and
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the outstanding loan balance.
The Association's one- to- four family residential mortgage loans
typically do not exceed 80% of the appraised value of the security property.
Pursuant to underwriting guidelines adopted by the Association's Board of
Directors, the Association can lend up to 95% of the appraised value of the
property securing a one- to- four family residential loan; however, the
Association generally obtains private mortgage insurance on the portion of the
principal amount that exceeds 65% to 70% of the appraised value of the security
property. At December 31, 1996, the Association had 11 one-to-four family
mortgage loans totalling $350,000 with principal balances in excess of 80% of
the appraised value of the real estate collateral and with no private mortgage
insurance. These loans are part of the Spartanburg Residential Development
Program, an affordable housing program.
Construction Lending. The Association originates residential
construction loans to local home builders, generally with whom it has an
established relationship. To a lesser extent, the Association originates such
loans to individuals who have a contract with a builder for the construction of
their residence. The Association's construction loans are secured by property
located in the Association's primary market area. At December 31, 1996,
construction loans amounted to $32.0 million, or 9.2% of the Association's total
loan portfolio.
The Association's construction loans generally have fixed interest
rates and are for a term of nine months. Construction loans to builders are
typically made with a maximum loan to value ratio of 80%. Construction loans to
individuals are typically made in connection with the granting of the permanent
financing on the property. Such loans convert to a fully amortizing adjustable-
or fixed-rate loan at the end of the construction term. The Association
typically requires that permanent financing with the Association or some other
lender be in place prior to closing any construction loan to an individual.
The Association's construction loans to builders are made on either a
pre-sold or speculative (unsold) basis. However, the Association generally
limits the number of outstanding loans on unsold homes under construction to
individual builders, with the amount dependent on the financial strength of the
builder, the present exposure of the builder, the location of the property and
prior sales of homes in the development. At December 31, 1996, speculative
construction loans amounted to $21.1 million. At December 31, 1996, the largest
amount of construction loans outstanding to one builder was $1.5 million, all of
which was for speculative construction.
Prior to making a commitment to fund a construction loan, the
Association requires an appraisal of the property by an independent state-
licensed and qualified appraiser approved by the Board of Directors. The
Association's staff also reviews and inspects each project prior to disbursement
of funds during the term of the construction loan. Loan proceeds are disbursed
after inspection of the project based on a percentage of completion. With
respect to construction loans originated since September 1996, the Association
has enforced the contractual requirement that monthly interest payments be made
during the construction term. With respect to loans originated prior to that
time, monthly payment of accrued interest was at the borrower's option, with all
accrued interest collected at maturity. In recent periods, this former practice
contributed, in part, to the high level of accruing construction loans
contractually past due 90 day or more. See "-- Nonperforming Assets and
Delinquencies."
Construction lending affords the Association the opportunity to charge
higher interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project.
38
The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Association may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value upon completion proves to be inaccurate, the Association may be
confronted at or prior to the maturity of the loan with a project the value of
which is insufficient to assure full repayment. Projects may also be jeopardized
by disagreements between borrowers and builders and by the failure of builders
to pay subcontractors. Loans to builders to construct homes for which no
purchaser has been identified carry more risk because the payoff for the loan is
dependent on the builder's ability to sell the property prior to the time that
the construction loan is due.
The Association has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. It is also the Association's general policy to obtain personal
guarantees from the principals of its corporate borrowers. In the case of
speculative construction loans, the Association has begun limiting the number of
unsold homes to larger borrowers and, on loans originated since September 1996,
enforcing contractual clauses requiring the payment of interest monthly (rather
than at the earlier of loan maturity or sale of home) and assessing monetary
penalties on delinquent balances. The monthly interest payment requirement
provides an earlier indication of potential delinquency. The Association
originated $10.5 million of speculative construction loans during the six months
ended December 31, 1996, compared to $9.3 million during the six months ended
December 31, 1995.
Commercial Real Estate Lending. The Association originates mortgage
loans for the acquisition and refinancing of commercial real estate properties.
The Association generally offers such loans to accommodate its present
customers. Management has hired a commercial loan officer with experience in the
Association's primary market area in an effort to augment its commercial lending
capabilities. However, management does not anticipate that commercial real
estate loans will comprise a substantial portion of the loan portfolio in the
immediate future. At December 31, 1996, $4.6 million, or 1.3% of the
Association's total loan portfolio, consisted of loans secured by existing
commercial real estate properties. The majority of the Association's commercial
real estate properties are secured by office buildings, retail shops and
manufacturing facilities, all of which are secured by property located in the
Association's primary market area.
The Association requires appraisals of all properties securing
commercial real estate loans. Appraisals are performed by an independent
appraiser designated by the Association, all of which are reviewed by
management. The Association considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property.
Loan to value ratios on the Association's commercial real estate loans
are generally limited to 75%. As part of the criteria for underwriting
commercial real estate loans, the Association generally imposes a debt coverage
ratio (the ratio of net cash from operations before payment of debt service to
debt service) of not less than 1.2. It is also the Association's policy to
obtain personal guarantees from the principals of its corporate borrowers on its
commercial real estate loans.
Commercial real estate lending affords the Association an opportunity
to receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than oneto- four family residential
mortgage loans. Because payments on loans secured by multi-family and commercial
properties are often dependent on 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. The Association seeks to minimize these risks
by limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Association also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
39
Land Lending. The Association originates land loans to local developers
for the purpose of developing the land (i.e., installing roads, sewers, water
and other utilities) for sale. At December 31, 1996, land loans amounted to $2.4
million, or 0.7% of the Association's total loan portfolio. Land loans are
secured by a lien on the property, are limited to 75% of the developed value of
the secured property and are made for a period of three years with an interest
rate that adjusts with the prime rate. The Association requires monthly interest
payments during the term of the land loan. The Association's land loans are
structured so that the Association is repaid in full upon the sale by the
borrower of approximately 75% of the available lots. All of the Association's
land loans are secured by property located in its primary market area. In
addition, the Association obtains personal guarantees from the principals of its
corporate borrowers and originates such loans to developers with whom its has
established relationships. At December 31, 1996, the Association had no
nonaccruing land loans.
Loans secured by undeveloped land or improved lots involve greater
risks than one- to- four family residential mortgage loans because such loans
are more difficult to evaluate. If the estimate of value proves to be
inaccurate, in the event of default and foreclosure the Association may be
confronted with a property the value of which is insufficient to assure full
repayment. The Association attempts to minimize this risk by limiting the
maximum loan-to-value ratio on land loans to 75%.
Consumer and Other Lending. The Association originates a variety of
consumer loans primarily on a secured basis. Consumer loans include second
mortgage loans, home equity lines of credit, savings account loans, automobile
loans, boat loans, loans secured by marketable equity securities, VISA credit
card loans and unsecured loans. Consumer loans are made with both fixed and
variable interest rates and with varying terms. At December 31, 1996, consumer
loans amounted to $39.8 million, or 11.5% of the total loan portfolio.
At December 31, 1996, the largest component of the consumer loan
portfolio consisted of second mortgage loans and home equity lines of credit,
which totalled $32.6 million, or 9.4% of the total loan portfolio. At December
31, 1996, unused commitments to extend credit under home equity lines of credit
totalled $25.3 million. Home equity lines of credit and second mortgage loans
are made for purposes such as the improvement of residential properties, debt
consolidation and education expenses, among others. The majority of these loans
are made to existing customers and are secured by a first or second mortgage on
residential property. The Association actively solicits these loans by
contacting its customers directly. The loan-to-value ratio is typically 90% or
less, when taking into account both the first and second mortgage loans. Second
mortgage loans typically carry fixed interest rates with a fixed payment over a
term between five and 15 years. Home equity lines of credit are generally for 15
year terms and the interest rate is tied to The Wall Street Journal prime
lending rate.
At December 31, 1996, automobile loans amounted to $2.5 million. The
Association originates automobile loans for both new and used automobiles for
terms generally not exceeding 60 months. The Association does not engage in
indirect automobile lending.
On June 1, 1995, the Association began issuing VISA credit cards to
customers within its primary market area. At December 31, 1996, there were 316
credit card accounts whose aggregate outstanding balances of $335,000. At
December 31, 1996, total approved lines of credit were $878,000. The Association
does not engage in direct mailings of pre-approved credit cards.
The Association views consumer lending as an important part of its
business because consumer loans generally have shorter terms and higher yields,
thus reducing exposure to changes in interest rates. In addition, the
Association believes that offering consumer loans helps to expand and create
stronger ties to its customer base. Subject to market conditions, the
Association intends to continue emphasizing consumer lending, particularly home
equity lines of credit and automobile loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
40
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
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 that can be recovered on such loans. The Association believes that these
risks are not as prevalent in the case of the Association's consumer loan
portfolio because a large percentage of the portfolio consists of second
mortgage loans and home equity lines of credit that are underwritten in a manner
such that they result in credit risk that is substantially similar to one- to-
four family residential mortgage loans. Nevertheless, second mortgage loans and
home equity lines of credit have greater credit risk than one- to- four family
residential mortgage loans because they are secured by mortgages subordinated to
the existing first mortgage on the property, which may or may not be held by the
Association. At December 31, 1996, $42,000 of consumer loans were delinquent in
excess of 90 days.
The Association employs strict underwriting procedures for consumer
loans. These procedures include an assessment of the applicant's credit history
and the ability to meet existing and proposed debt obligations. Although the
applicant's creditworthiness is the primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, to the
proposed loan amount. The Association generally underwrites and originates its
consumer loans internally, which the Association believes limits its exposure to
credit risks associated with loans underwritten or purchased from brokers and
other external sources.
The Association also engages in limited amounts of commercial business
lending. At December 31, 1996, the Association had $1.2 million of commercial
business loans which represented 0.3% of the total loan portfolio. Commercial
business loans are generally made to customers who are well known to the
Association and are generally secured by business equipment. Unsecured loans
amounted to $260,000 at December 31, 1996. The Association generally requires
annual financial statements from its corporate borrowers and personal guarantees
from the corporate principals.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial 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 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. 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.
41
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Association's portfolio based on their contractual terms to maturity, but
does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loans losses.
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
(In thousands)
Mortgage loans:
One- to- four family . . . . . . $ 86 $ 978 $ 4,156 $27,290 $235,083 $267,593
Construction . . . . . . . . . . 30,149 -- 750 -- 1,050 31,949
Land . . . . . . . . . . . . . . 495 1,622 292 -- -- 2,409
Commercial and other . . . . . . -- 170 1,392 1,066 1,943 4,571
Consumer and other loans . . . . . 3,905 2,996 5,868 7,658 19,342 39,769
Total . . . . . . . . . . . . . $34,635 $5,766 $12,458 $36,014 $257,418 $346,291
The following table sets forth the dollar amount of all loans due after
December 31, 1997, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed- Floating- or
Rates Adjustable-Rates Total
(In thousands)
Mortgage loans:
One- to- four family . . . . . . $191,743 $75,764 $267,507
Construction . . . . . . . . . . 1,800 -- 1,800
Land . . . . . . . . . . . . . . 1,914 -- 1,914
Commercial and other . . . . . . 3,877 694 4,571
Consumer and other loans . . . . . 17,495 18,369 35,864
Total . . . . . . . . . . . . . $216,829 $94,827 $311,656
42
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Association the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates. Furthermore,
management believes that a significant number of the Association's residential
mortgage loans are outstanding for a period less than their contractual terms
because of the transitory nature of many of the borrowers who reside in its
primary market area.
Loan Solicitation and Processing. The Association's lending activities
are subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Association's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, walk-in customers, referrals and
existing customers. A business development program has been implemented where
loan officers and sales personnel make sales calls on building contractors and
realtors. The Association also advertises its loan products by radio and
newspaper.
In its marketing, the Association emphasizes its community ties,
customized personal service and an efficient underwriting and approval process.
The Association uses professional fee appraisers for most residential real
estate loans and construction loans and all commercial real estate and land
loans. The Association requires hazard, title and, to the extent applicable,
flood insurance on all security property.
Mortgage loan applications are initiated by loan officers and are
required to be approved by the Association's Loan Committee, a management
committee consisting of the Association's President, Executive Vice President,
Senior Vice President, and two Vice Presidents. All loans in excess of $250,000
but below $300,000 (or below $275,000 in the case of commercial real estate
loans) must be approved by the Executive Board Loan Committee consisting of
Directors Painter, Salter and Sanders. Commercial real estate loans in excess of
$275,000 and all other loans in excess of $300,000 must be approved by the
Association's Board of Directors.
Loan Originations, Sales and Purchases. While the Association
originates both adjustable-rate and fixed-rate loans, its ability to generate
each type of loan depends upon relative customer demand for loans in its primary
market area.
The Association periodically sells conventional one- to- four family
loans (i.e., non-FHA/VA loans) with servicing retained and without recourse.
However, several pools of loans were sold with recourse in 1983 and had an
aggregate outstanding balance of $3.5 million at December 31, 1996. The
Association does not expect any material losses on these loans due to their
seasoned nature. Recent loan sales have been to the FNMA and primarily consisted
of 30 year, fixed-rate residential real estate loans. These sales reduce the
Association's interest rate risk and the proceeds of sale are used to fund
continuing operations. The Association did not sell any conventional loans
during fiscal 1996 primarily due to the success of several deposit programs
which enabled the Association to grow assets. However, management intends to
sell loans in the future as necessary to manage interest rate risk and fund
continuing operations.
When conventional loans are sold, the Association retains the
responsibility for servicing the loans, including collection and remitting
mortgage loans payments, accounting for principal and interest and holding and
disbursing escrow or impound funds for real estate taxes and insurance premiums.
The Association receives a servicing fee for performing these services for
others. The Association's servicing portfolio amounted to $58.7 million at
December 31, 1996. The Association is generally paid a fee equal to 0.25% of the
outstanding principal balance for servicing sold loans. Loan servicing income
totalled $101,000, $226,000, $245,000 and $233,000 for the six months ended
December 31, 1996 and the years ended June 30, 1996, 1995 and 1994,
respectively. The Association earns late charges collected from delinquent
customers whose loans are serviced by the Association. The Association is
allowed to invest escrow impounds (funds collected from mortgage customers for
the payment of property taxes
43
and insurance premiums on mortgaged real estate) until they are disbursed on
behalf of mortgage customers, but is not required to pay interest on these
funds. At December 31, 1996, borrowers' escrow funds amounted to $288,000.
The Association sells all loans originated under FHA and VA programs,
servicing released, to private investors and the South Carolina State Housing
Authority.
Historically, the Association has not been an active purchaser of loans
or participation interests in loans. However, in September 1996 the Association
began purchasing one-to-four family mortgage loans and residential construction
loans from a start-up mortgage banking company located in Greenville, South
Carolina, in which the Association made an equity investment through its service
corporation subsidiary. As of December 31, 1996, the Association had purchased
23 loans with aggregate principal balances of $2.6 million, $258,000 of which
are residential construction loans. In addition, at December 31, 1996, the
Association has committed to fund $569,000 of undisbursed construction loan
proceeds. Currently, substantially all of the loans purchased through this
mortgage company are secured by properties located in the Association's primary
market area. Such purchases are expected to continue and increase in volume as
that company's operations expand, and are likely to include purchases of loans,
including commercial real estate loans and home equity loans, secured by
properties inside and outside of the Association's primary market area.
Out-of-market lending is generally considered to involve greater risk than
in-market lending because of the lender's unfamiliarity with the other market.
However, the Association's believes this risk is mitigated in the case of any
out-of-market loan purchases from the mortgage banking company primarily because
of (i) the Association's ability to refuse to purchase any loans not meeting its
underwriting criteria and (ii) the Association's input in formulating policies
and procedures for the mortgage banking company though its representation on
its board of directors. See "--Subsidiary Activities."
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Six Months Ended
December 31, Years Ended June 30,
1996 1995 1996 1995 1994
(Dollars in thousands)
Loans originated:
Mortgage loans:
One- to- four family . $25,109 $24,544 $ 59,296 $32,820 $ 91,205
Construction . . . . . 16,333 17,737 42,212 37,334 42,735
Land . . . . . . . . . 118 1,190 2,950 100 --
Commercial and other . 1,025 316 316 237 1,191
Consumer and other . . . 15,070 13,121 28,045 21,050 12,248
Total loans originated 57,655 56,908 132,819 91,541 147,379
Loans purchased:
One- to- four family . . 3,204 -- -- -- --
Whole loans sold . . . . (6,498) (2,863) (7,704) (17,966) (27,840)
Mortgage loan principal
repayments . . . . . . . (41,238) (40,204) (87,446) (57,514) (105,182)
Net increase in other
items . . . . . . . . . . 3,128 3,733 (3,539) 2,569 (5,276)
Net increase in loans
receivable, net . . . . . $16,251 $17,574 $34,130 $18,630 $ 9,081
44
Loan Commitments. The Association issues commitments for 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 20 days from
approval, depending on the type of transaction. At December 31, 1996, the
Association had loan commitments (excluding undisbursed portions of interim
construction loans of $12.0 million) of $4.4 million and unused lines of credit
of $25.3 million. See Note 9 of Notes to the Consolidated Financial Statements.
Loan Fees. In addition to interest earned on loans, the Association
receives income from fees in connection with loan originations, loan
modification, late payments and for miscellaneous service related to its loan.
Income from these activities varies from period to period depending upon the
volume and type of loans made and competitive conditions.
The Association charges loan origination fees which are calculated as a
percentage of the amount borrowed. In accordance with applicable accounting
procedures, loan origination fees and discount points in excess of loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. Discounts and premiums on
loans purchased are accreted and amortized in the same manner. The Association
recognized $83,000, $202,000, $254,000 and $506,000 of deferred loan fees during
the six months ended December 31, 1996 and the years ended June 30, 1996, 1995
and 1994, respectively, in connection with loan refinancings, payoffs, sales and
ongoing amortization of outstanding loans.
Nonperforming Assets and Delinquencies. When a borrowers fails to make
a required payment on a loan, the Association attempts to cure the deficiency by
contacting the borrower and seeking the payment. Contacts are generally made 15
days after a payment is due. In most cases, deficiencies are cured promptly. If
a delinquency continues, additional contact is made either through a notice or
other means and the Association will attempt to work out a payment schedule.
While the Association generally prefers to work with borrowers to resolve such
problems, the Association will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more (except in the case of construction loans originated before September
1996 as discussed under "--Construction Lending"). Interest accrued but not
collected at the date the loan is placed on nonaccrual status is reversed
against income in the current period. Loans may be reinstated to accrual status
when payments are under 90 days past due and, in the opinion of management,
collection of the remaining past due balances can be reasonably expected.
The Association's Board of Directors is informed monthly of the status
of all loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Association.
45
The following table sets forth information with respect to the
Association's nonperforming assets and restructured loans within the meaning of
SFAS No. 15 at the dates indicated.
At December 31, At June 30,
1996 1996 1995 1994 1993 1992
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to- four family . . . . . . . . $ 623 $ 719 $ 348 $ 754 $1,035 $ 936
Construction . . . . . . . . . . . . 847 1,130 471 457 256 409
Land . . . . . . . . . . . . . . . . -- -- -- -- -- --
Commercial and other . . . . . . . . -- -- 48 -- -- --
Consumer and other loans . . . . . . . 42 60 20 53 154 163
Other loans . . . . . . . . . . . . . -- -- -- -- -- --
Total nonaccrual loans . . . . . 1,512 1,909 887 1,264 1,445 1,508
Accruing loans contractually past
due 90 days or more:
Mortgage loans:
One- to- four family . . . . . . . . -- -- -- -- -- --
Construction . . . . . . . . . . . . 2,882 3,965 3,906 1,117 705 1,265
Land . . . . . . . . . . . . . . . . -- -- -- -- -- --
Commercial and other . . . . . . . . -- -- -- -- -- --
Consumer and other loans . . . . . . . -- -- -- -- -- --
Total loans 90 days past due . . 2,882 3,965 3,906 1,117 705 1,265
Total of nonaccrual loans and
loans 90 days past due . . . . . . . . 4,394 5,874 4,793 2,381 2,150 2,773
Real estate acquired in settlement of
loans . . . . . . . . . . . . . . . . 102 58 34 18 391 612
Total nonperforming assets . . . . $4,496 $5,932 $4,827 $2,399 $2,541 $3,385
Restructured loans . . . . . . . . . . $1,033 $1,247 $1,049 $1,029 $1,097 $ 994
Nonaccrual loans and loans 90 days or more
past due as a percentage of loans
receivable, net . . . . . . . . . . 1.32% 1.87% 1.79% 0.96% 0.93% 1.22%
Nonaccrual loans and loans 90 days or more
past due as a percentage of total assets . . 1.17 1.65 1.49 0.77 0.71 0.98
Nonperforming assets as a
percentage of total assets . . . . . . 1.20 1.66 1.50 0.77 0.84 1.19
Interest income that would have been recorded for the six months ended
December 31, 1996 and the year ended June 30, 1996 had nonaccruing loans been
current in accordance with their original terms amounted to $63,000 and
$143,000, respectively. The amount of interest included in interest income on
such loans for such periods amounted to $5,000 and $65,000, respectively.
Interest income that would have been recorded for the six months ended December
31, 1996 and the year ended June 30, 1996 had restructured loans been current in
accordance with their original terms, and the amount of interest included in
interest income on such loans for such periods, were, in both cases, immaterial.
Real Estate Acquired in Settlement of Loans. Real estate acquired by
the Association as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate acquired in settlement of loans until sold. Pursuant
to SOP 92-3, which provides guidance on determining the balance sheet treatment
of foreclosed assets in annual financial statements for periods ended on or
after December 15, 1992, there is a rebuttable presumption that foreclosed
assets are held for sale and such assets are recommended to be carried at fair
value minus estimated costs
46
to sell the property. After the date of acquisition, all costs incurred in
maintaining the property are expensed and costs incurred for the improvement or
development of such property are capitalized up to the extent of their net
realizable value. The Association's accounting for its real estate acquired in
settlement of loans complies with SOP 92-3. At December 31, 1996, the
Association had $102,000 of real estate acquired in settlement of loans, which
consisted of two one-to-four family residences.
Restructured Loans. Under GAAP, the Association is required to account
for certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Association for economic or
legal reasons related to the borrower's financial difficulties grants a
concession to the borrowers that the Association would not otherwise consider.
Debt restructurings or loan modifications for a borrower do not necessarily
always constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in nonaccrual loans. The Association
had $1.0 million of restructured loans as of December 31, 1996, which consisted
of 25 one- to- four family mortgage loans.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The 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 have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies 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 as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Association.
The aggregate amounts of the Association's classified and special
mention assets, and of the Association's general and specific loss allowances at
the dates indicated, were as follows:
At December 31, At June 30,
1996 1996 1995
(In thousands)
Classified assets:
Loss . . . . . . . . . $ 1 $ 1 $ 13
Doubtful . . . . . . . 11 -- --
Substandard assets . . 2,907 2,586 1,247
Special mention . . . 2,020 820 580
Loan loss allowances:
General loss allowances
1,638 999 587
Specific loss allowances 12 1 13
At December 31, 1996, substandard assets consisted of 23 oneto- four
family mortgage loans totalling $1.1 million, eight construction loans totalling
$1.4 million, 28 other loans totalling $301,000, and two one- to- four family
properties acquired through foreclosure totalling $108,000.
47
At December 31, 1996, special mention assets consisted of 16 one- to-
four family mortgage loans totalling approximately $592,000 and nine
construction loans totalling approximately $1.5 million.
Allowance for Loan Losses. The Association has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Association recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Association increases its allowance
for loan losses by charging provisions for loan losses against the Association's
income.
The general valuation allowance is maintained to cover losses inherent
in the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Association's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions. Specific valuation allowances are established
to absorb losses on loans for which full collectibility cannot be reasonably
assured. The amount of the allowance is based on the estimated value of the
collateral securing the loan and other analyses pertinent to each situation.
Generally, a provision for losses is charged against income quarterly to
maintain the allowances.
At December 31, 1996, the Association had an allowance for loan losses
of $1.7 million. Management believes that the amount maintained in the
allowances at December 31, 1996 will be adequate to absorb losses inherent in
the portfolio. Although management believes that it uses the best information
available to make such determinations, future adjustments to the allowance for
loan losses may be necessary and results of operations could be significantly
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations. Furthermore, while the
Association believes it has established its existing allowance for loan losses
in accordance with GAAP, there can be no assurance that regulators, in reviewing
the Association's loan portfolio, will not request the Association to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect the Association's financial
condition and results of operations.
48
The following table sets forth an analysis of the Association's
allowance for loan losses.
Six Months Ended
December 31, Years Ended June 30,
1996 1995 1996 1995 1994 1993 1992
(Dollars in thousands)
Total loans outstanding at end of period . . $346,291 $294,289 $332,803 $281,836 $263,614 $243,110 $236,115
Average loans outstanding during period . . . $325,969 $290,257 $298,865 $273,778 $260,135 $251,453 $237,877
Allowance balance at beginning of period . . $ 1,000 $ 600 $ 600 $ 600 $ 600 $ 400 $ 400
Provision for loan losses . . . . . . . . . 675 4 419 9 -- 208 503
Charge-offs:
Mortgage loans:
One- to- four family . . . . . . . . . . . 15 -- -- -- -- -- --
Construction . . . . . . . . . . . . . . . -- -- -- -- -- -- --
Land . . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- --
Commercial and other . . . . . . . . . . . -- -- -- -- -- -- 486
Consumer and other . . . . . . . . . . . . 10 6 23 9 -- 8 17
Total charge-offs . . . . . . . . . . . . 25 6 23 9 -- 8 503
Recoveries:
Mortgage loans:
One- to- four family . . . . . . . . . . . -- -- -- -- -- -- --
Construction . . . . . . . . . . . . . . . -- -- -- -- -- -- --
Land . . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- --
Commercial and other . . . . . . . . . . . -- -- -- -- -- -- --
Consumer and other . . . . . . . . . . . . -- 2 4 -- -- -- --
Total recoveries . . . . . . . . . . . . -- 2 4 -- -- -- --
Allowance balance at end of period . . . . . $ 1,650 $ 600 $ 1,000 $ 600 $ 600 $ 600 $ 400
Allowance for loan losses as a percent of total loans
receivable at end of period . . . . . . . . 0.48% 0.20% 0.30% 0.21% 0.23% 0.25% 0.17%
Net charge-offs as a percentage of average loans
outstanding during the period . . . . . . . 0.01% --% 0.01% --% --% --% 0.21%
Ratio of allowance for loan losses to total
nonperforming loans at end of period . . . . 37.55% 31.70% 17.02% 12.52% 25.20% 27.91% 14.42%
For additional discussion regarding the provisions for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Results of Operations -- Comparison of Operating
Results for the Six Months Ended December 31, 1996 and 1995 -- Provision for
Loan Losses," "-Results of Operations -- Comparison of Operating Results for the
Years Ended June 30, 1996 and 1995 -- Provision for Loan Losses," and "--
Results of Operations -- Comparison of Operating Results for the Years Ended
June 30, 1995 and 1994 -- Provision for Loan Losses." The fluctuation in the
ratio of allowance for loan losses to nonperforming loans at end of period set
forth in the above table results primarily from the Association giving greater
weight to the level of classified assets than to the level of nonperforming
assets (nonaccrual loans, accruing loans contractually past due 90 days or more,
and real estate acquired in settlement of loans) when determining the adequacy
of the allowance for loan losses. Greater weight is given to classified assets
because they include not only nonperforming assets but also performing assets
that otherwise exhibit, in management's judgment, potential credit weaknesses.
See "-- Nonperforming Assets and Delinquencies" and "-- Asset Classification."
49
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
At
December 31, At June 30,
1996 1996 1995 1994
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Category in Category in Category in Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Mortgage loans
Residential . . . . . . . . $1,334 86.5% $ 675 87.5% $400 88.1% $436 90.3%
Nonresidential . . . . . . . 173 2.0 28 2.1 17 2.8 46 2.7
Consumer and other loans . . 143 11.5 297 10.4 183 9.1 118 7.0
Total allowance for loan losses $1,650 100.0% $1,000 100.0% $600 100.0% $600 100.0%
At June 30,
1993 1992
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
Mortgage loans:
Residential . . . . . . . . $422 91.3% $300 90.7%
Nonresidential . . . . . . . 64 1.7 28 2.1
Consumer and other loans . . 114 7.0 72 7.2
Total allowance for loan losses $600 100.0% $400 100.0%
50
Investment Activities
The Association is permitted under federal law to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB-Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Association may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like the Association are also
required to maintain an investment in FHLB stock. The Association is required
under federal regulations to maintain a minimum amount of liquid assets. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
The Association purchases investment securities with excess liquidity
arising when investable funds exceed loan demand. The Association's investment
securities purchases have been limited to U.S. Government and agency securities
with contractual maturities of between one and five years. At December 31, 1996,
the Association also had an investment in a mutual fund that invests in
adjustable rate mortgage-backed securities.
At December 31, 1996, the Association's management classified all
securities in the Association's investment portfolio as available for sale under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." During the year ended June 30, 1996, pursuant to special
implementation guidance allowed by the FASB under SFAS No. 115, the Association
reclassified securities held to maturity with a fair value and amortized cost of
approximately $4.0 million as securities available for sale. Such
reclassification is disclosed as a noncash transaction in the Consolidated
Statements of Cash Flows included elsewhere herein. See Note 1 of Notes to the
Consolidated Financial Statements.
The Association's investment policies generally limit investments to
U.S. Government and agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed securities and
certain types of mutual funds. The Association's investment policy does not
permit engaging directly in hedging activities or purchasing high risk mortgage
derivative products or non-investment grade corporate bonds. Mutual funds held
by the Association may periodically engage in hedging activities and invest in
derivative securities. Investments are made based on certain considerations,
which include the interest rate, yield, settlement date and maturity of the
investment, the Association's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Association's credit and interest
rate risk and risk-based capital is also considered.
The following table sets forth certain information with respect to each
security (other than U.S. Government and agency securities and mutual funds
which invest exclusively in such securities) which had an aggregate book value
in excess of 10% of the Association's retained earnings at the dates indicated.
At December 31, At June 30,
1996 1996 1995 1994
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
(In thousands)
Asset Management
Fund Inc. Adjustable
Rate Mortgage-Backed
Securities . . . . $5,028 $5,024 $9,819 $9,780 $5,295 $5,272 $10,027 $9,857
51
The following table sets forth the amortized cost and fair value of the
Association's securities, by accounting classification and by type of security,
at the dates indicated.
At June 30,
At December 31, 1996 1996 1995 1994
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
(In thousands)
Held to Maturity:
Debt securities:
U.S. Treasury obligations .... $ -- $ -- $ -- $ -- $ 2,001 $ 1,999 $ 3,004 $ 2,949
U.S. Government
agency obligations .......... -- -- -- -- 3,501 3,450 9,992 9,592
Total ...................... -- -- -- -- 5,502 5,449 12,996 12,541
Mortgage-backed securities .... 128 142 195 209 383 397 470 489
Marketable equity securities(1) -- -- -- -- -- -- 10,027 9,857
Total held to maturity ...... 128 142 195 209 5,885 5,846 23,493 22,887
Available for Sale:
Debt securities:
U.S. Treasury obligations .... 1,989 1,985 1,986 1,975 500 493 -- --
U.S. Government
agency obligatzions ........... 6,493 6,483 6,486 6,400 2,499 2,463 -- --
Total ...................... 8,482 8,468 8,472 8,375 2,999 2,956 -- --
Marketable equity securities(1) 5,028 5,024 9,819 9,780 5,295 5,272 -- --
Total available for sale .... 13,510 13,492 18,291 18,155 8,294 8,228 -- --
Total .......................... $13,638 $13,634 $18,486 $18,364 $14,179 $14,074 $23,493 $22,887
- -----------------
(1) Marketable equity securities at December 31, 1996 and June 30, 1996, 1995
and 1994 consist of a mutual fund that invests in adjustable rate
mortgage-backed securities. At December 31, 1996, the mutual fund yielded
6.38%.
The following table sets forth certain information regarding the
carrying value, weighted average yields and maturities or periods to repricing
of the Association's debt securities and mortgage-backed securities at December
31, 1996. U.S. Treasury obligations and certain U.S. Government agency
obligations are exempt from state taxation. Their yields, however, have not been
computed on a tax equivalent basis for purposes of the table.
Less Than One to
One Year Five Years
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
(Dollars in thousands)
Debt securities:
U.S. Treasury obligations ................. $ 500 $ 502 6.65% $1,489 $1,483 5.64%
U.S. Government agency
obligations .............................. -- -- -- 6,493 6,483 6.44
Mortgage-backed securities ................. -- -- -- 128 142 8.40
Total ...................................... $ 500 $ 502 6.65% $8,110 $8,108 6.32
52
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the
Association's lending and other investment activities. In addition, the
Association also generates funds internally from loan principal repayments and
prepayments and maturing investment securities. Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and money
market conditions. Borrowings from the FHLB-Atlanta may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. Presently, the Association has no other borrowing arrangements.
Deposit Accounts. A substantial number of the Association's depositors
reside in South Carolina. The Association's deposit products include a broad
selection of deposit instruments, including NOW accounts, demand deposit
accounts, money market accounts, regular passbook savings, statement savings
accounts and term certificate accounts. Deposit account terms vary with the
principal difference being the minimum balance deposit, early withdrawal
penalties and the interest rate. The Association reviews its deposit mix and
pricing weekly. The Association does not utilize brokered deposits, nor has it
aggressively sought jumbo certificates of deposit.
The Association believes it is competitive in the type of accounts and
interest rates it offers on its deposit products. The Association does not seek
to pay the highest deposit rates but a competitive rate. The Association
determines the rates paid based on a number of conditions, including rates paid
by competitors, rates on U.S. Treasury securities, rates offered on various
FHLB-Atlanta lending programs, and the deposit growth rate the Association is
seeking to achieve.
The Association intends to continue to use premiums to attract new
checking accounts, particularly in conjunction with new branch openings. These
premium offers are reflected in the growth in the Association's advertising and
promotion expense, as well as its cost of funds, in recent periods. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS -- Results of Operations." The Association has introduced a number of
new savings products. These include VIP Checking, VIP Passbook Savings and an
18-month "Bump Rate CD," which allows for a one-time rate change during the term
of the CD. The Association also plans to seek business checking accounts and to
promote individual retirement accounts ("IRAs") and Self Employment Plan
retirement accounts to businesses.
In the unlikely event the Association is liquidated after the
Conversion, depositors will be entitled to full payment of their deposit
accounts before any payment is made to the Holding Company as the sole
stockholder of the Association.
53
The following table sets forth information concerning the Association's
time deposits and other interest-bearing deposits at December 31, 1996.
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
(In thousands)
1.83% None NOW accounts $ 100 $ 30,009 9.3%
3.17 None Money market accounts 2,500 13,967 4.3
3.72 None Passbook savings accounts 100 55,869 17.2
Certificate Accounts
5.38 Within 6 months Fixed term, fixed rate 25 - 500 110,590 34.1
5.75 7 - 12 months Fixed term, fixed rate 25 - 500 62,644 19.3
5.71 13 - 36 months Fixed term, fixed rate 25 - 500 28,862 8.9
6.13 37 - 60 months Fixed term, fixed rate 25 - 500 19,007 5.9
6.20 61 - 120 months Fixed term, fixed rate 25 - 500 376 0.1
5.36 7 - 12 months Fixed term, adjustable rate 25 2,096 0.7
5.36 13 - 36 months Fixed term, adjustable rate 25 531 0.2
$323,951 100.0%
The following table indicates the amount of the Association's jumbo
certificate accounts by time remaining until maturity as of December 31, 1996.
Jumbo certificate accounts have principal balances of $100,000 or more.
Certificate
Maturity Period Accounts
(In thousands)
Three months or less $ 9,285
Over three through six months 5,598
Over six through 12 months 5,767
Over 12 months 1,542
Total $22,192
54
Deposit Flow. The following table sets forth the balances
(inclusive of interest credited) and changes in dollar amounts of deposits in
the various types of accounts offered by the Association between the dates
indicated.
At December 31, At June 30,
1996 1996 1995 1994
Percent Percent Percent Percent
of Increase of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease) Amount Total
(Dollars in thousands)
NOW checking . . . . . . . . . . .$ 30,009 9.3% $ (36) $ 30,045 9.8% $ 4,298 $ 25,747 9.3% $1,665 $ 24,082 8.9%
Passbook savings accounts . . . . . 55,869 17.3 12,925 42,944 14.0 11,051 31,893 11.7 (6,042) 37,935 14.0
Money market deposit . . . . . . . 13,967 4.3 (2,727) 16,694 5.5 (2,749) 19,443 7.0 (7,321) 26,764 9.9
Fixed-rate certificate accounts
which mature in the year ending:
Within 1 year . . . . . . . . . . . 175,330 54.1 11,029 164,301 53.7 7,455 156,846 56.8 28,037 128,809 47.7
After 1 year, but within 2 years . 22,469 6.9 (1,521) 23,990 7.9 6,605 17,385 6.3 (14,032) 31,417 11.6
After 2 years, but within 3 years . 6,925 2.1 (969) 7,894 2.6 1,742 6,152 2.2 256 5,896 2.2
Certificate accounts maturing 19,382 6.0 (581) 19,963 6.5 1,514 18,449 6.7 3,170 15,279 5.7
thereafter
Total . . . . . . . . . . . . . . $323,951 100.0% $18,120 $305,831 100.0% $29,916 $275,915 100.0% $5,733 $270,182 100.0%
55
Time Deposits by Rates. The following table sets forth the amount
of time deposits in the Association categorized by rates at the dates indicated.
At
December 31, At June 30,
1996 1996 1995 1994
(Dollars in thousands)
Less than 3.00% $ 758 $ 3,329 $ 54 $ 480
3.01% - 5.00% 5,755 7,656 44,027 149,669
5.01% - 7.00% 217,186 204,734 153,350 29,648
7.01% - 9.00% 407 429 906 1,604
Total $224,106 $216,148 $198,832 $181,401
Time Deposits by Maturities. The following table sets forth the amount
of time deposits in the Association categorized by maturities at December 31,
1996.
Amount Due
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
(Dollars in thousands)
Less than 3.00% $ 758 $ -- $ -- $ -- $ -- $ 758
3.01% - 5.00% 3,479 1,717 559 -- -- 5,755
5.01% - 7.00% 170,851 20,688 6,356 15,514 3,777 217,186
7.01% - 9.00% 242 64 10 60 31 407
Total . . . $175,330 $22,469 $6,925 $15,574 $3,808 $224,106
Deposit Activity. The following table set forth the deposit activity of
the Association for the periods indicated.
Six Months Ended
December 31, Year Ended June 30,
1996 1995 1996 1995 1994
(In thousands)
Beginning balance . . $305,831 $275,915 $275,915 $270,182 $267,461
Net deposits (withdrawals)
before interest credited . 11,654 17,906 17,240 (3,363) (5,979)
Interest credited . .
6,466 6,001 12,676 9,096 8,700
Net increase in deposits . .
18,120 23,907 29,916 5,733 2,721
Ending balance . . . $323,951 $299,822 $305,831 $275,915 $270,182
56
Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association has the ability to use advances from the FHLB- Atlanta
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Atlanta functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Atlanta, the Association is required to own capital
stock in the FHLB-Atlanta and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit 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 on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit.
In recent periods, the Association has been able to fund its lending
and other investment activities through internally generated funds and deposits.
Consequently, at December 31, 1996 and 1995 and during each of the six months
then ended, and at June 30, 1996, 1995 and 1994, and during each of the years
then ended, the Association had no borrowings from the FHLB-Atlanta outstanding.
The Association, however, may use advances from the FHLB-Atlanta should the need
for additional funds arise.
Competition
The Association faces intense competition in its primary market area
for the attraction of savings deposits (its primary source of lendable funds)
and in the origination of loans. Its most direct competition for savings
deposits has historically come from commercial banks, credit unions, other
thrifts operating in its market area, and other financial institutions such as
brokerage firms and insurance companies. As of December 31, 1996, there were 14
commercial banks and three other thrifts operating in Spartanburg County, South
Carolina. Particularly in times of high interest rates, the Association has
faced additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities. The
Association's competition for loans comes from commercial banks, thrift
institutions, credit unions and mortgage bankers. Such competition for deposits
and the origination of loans may limit the Association's growth in the future.
See "RISK FACTORS -Competition."
Subsidiary Activities
Under OTS regulations, the Association generally may invest up to 3% of
its assets in service corporations, provided that at least one-half of
investment in excess of 1% is used primarily for community, inner-city and
community development projects. The Association's investment in its wholly-owned
service corporation, First Spartan Service Corporation ("First Spartan"), which
was $369,000 at December 31, 1996, did not exceed these limits.
First Spartan sells alternative investment products such as mutual
funds, deferred annuities and insurance. In addition, in August 1996 it
purchased for $400,000 a one-third equity interest in First Trust Mortgage
Corporation, Greenville, South Carolina ("First Trust"), a start-up mortgage
banking company. The Association has purchased loans from First Trust in recent
periods. See "-- Lending Activities -- Loan Originations, Sales and Purchases."
All loans are purchased from First Trust subject to the Association's
underwriting standards. The Association intends to purchase at least $1.5
million of loans from First Trust monthly. At December 31, 1996, the
Association's financial commitment to First Trust and its maximum exposure to
share in any losses incurred by First Trust were limited solely to its equity
investment through First Spartan. The Association, either directly or through
First Spartan, may undertake additional financial commitments in the future that
would increase its loss exposure to First Trust's operations; however, there are
no such agreements, plans or understandings at present. The Association recorded
a loss of approximately $100,000 related to First Trust's operations for the six
months ended December 31, 1996 as a result of expenses exceeding revenues, which
is typical for a start-up operation. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
57
OPERATIONS -- Results of Operations-Comparison of Operating Results for
the Six Months Ended December 31, 1996 and 1995 -- Other Income (Expense)."
Billy L. Painter, the Association's President and Chief Executive Officer, and
J. Stephen Sinclair, the Association's Executive Vice President of Lending, are
directors of First Trust.
Properties
The following table sets forth certain information regarding the
Association's offices at December 31, 1996, all of which are owned except for
the Loan Production Office which is leased from month-to-month. The branch
office located at 1488 W.O. Ezzell Boulevard, Spartanburg, South Carolina, is
situated on leased land. The current lease expires in 2012 with an option to
renew for three 5-year periods.
Approximate
Location Year Opened Square Footage Deposits
(In thousands)
Main Office:
380 E. Main Street 1974 32,820 $204,512
Spartanburg, South Carolina
Branch Offices:
280 N. Church Street 1986 1,080 32,903
Spartanburg, South Carolina
1488 W.O. Ezzell Boulevard 1980 2,453 48,110
Spartanburg, South Carolina
1585 E. Main Street 1991 2,166 19,868
Spartanburg, South Carolina
2701 Boiling Springs Road 1994 3,300 18,558
Boiling Springs, South Carolina
Loan Production Office:
Merovan Center 1995 180 N/A
120 Woodruff Road
Building 3-A
Greenville, South Carolina
A new branch office in Inman, South Carolina, and one in Duncan, South
Carolina, are under construction and are scheduled to open by the end of the
first half of calendar 1997. The Association owns the land and building at both
of these locations.
The Association uses the services of an outside service bureau for its
significant data processing applications. At December 31, 1996, the Association
had three proprietary automated teller machines. At December 31, 1996, the net
book value of the Association's office properties and the Association's
fixtures, furniture and equipment was $5.5 million.
58
Personnel
As of December 31, 1996, the Association had 100 full-time and 26
part-time employees, none of whom is represented by a collective bargaining
unit. The Association believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, such as claims to enforce liens, condemnation proceedings on
properties in which the Association holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Association's business. The Association 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 Association.
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. The Holding Company's Board of Directors consists of seven persons
divided into three classes, each of which contains approximately one third of
the Board. One class, consisting of Messrs. Hammond and Salter, has a term of
office expiring at the first annual meeting of stockholders; a second class,
consisting of Messrs. Sanders and Tate, has a term of office expiring at the
second annual meeting of stockholders; and a third class, consisting of Messrs.
Painter, Handell and Odom, has 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
---- ---------
Robert R. Odom Chairman of the Board
Billy L. Painter President and Chief Executive Officer
R. Lamar Simpson Treasurer, Secretary and Chief Financial Officer
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 ASSOCIATION
- -- Biographical Information."
MANAGEMENT OF THE ASSOCIATION
Directors and Executive Officers
The Board of Directors of the Association is presently composed of
seven members who are elected for terms of three years, approximately one third
of whom are elected annually in accordance with the Bylaws of the Association.
The executive officers of the Association 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
Association.
59
Directors
Current
Director Term
Name Age (1) Position with Association Since Expires
- ---- ------- ------------------------- ------ -------
E. Lea Salter 61 Director 1988 1997
David E. Tate 56 Director 1993 1997
Robert L. Handell 79 Director and Secretary 1950 1998
Robert R. Odom 75 Chairman of the Board 1953 1998
E.L. Sanders 62 Director 1987 1999
Billy L. Painter 51 Director, President and
Chief Executive Officer 1984 1999
R. Wesley Hammond 47 Director 1990 1999
Executive Officers Who Are Not Directors
Name Age (1) Position with Association
- ---- ------- -------------------------
Hugh H. Brantley 53 Executive Vice President -- --
and Chief Operating Officer
J. Stephen Sinclair 55 Executive Vice President of
Lending -- --
R. Lamar Simpson 38 Chief Financial Officer -- --
______________
(1) As of December 31, 1996.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Association. Unless otherwise stated, each Director
and executive officer has held his current occupation for the last five years.
There are no family relationships among or between the Directors or executive
officers.
E. Lea Salter is President of Christman & Parson, Inc., general
contractors. Mr. Salter is a member of the Association's Personnel and Audit
Committees. He is active in the Lions Club of Spartanburg and is the past
Chairman of the Board of Visitors of Columbia College.
David E. Tate has been President and sole owner of Tate Metal Works,
Inc., a tank fabrication and erection company, since 1972. Mr. Tate is an Elder
at First Presbyterian Church in Spartanburg, South Carolina.
Robert L. Handell is retired from the Association after 51 years of
service. He is the Secretary of the Civitan Rehabilitation Workshop and a
Director of the Civitan Club of Spartanburg, South Carolina. Mr. Handell is an
active member of the Bethel United Methodist Church.
Robert R. Odom is a senior partner in the law firm of Odom, Terry,
Cantrell & Hammett, Spartanburg, South Carolina, with which he has been
associated for 45 years.
E.L. Sanders is a retired insurance executive. He is past Chairman of
the Board of Directors for Mobile Meals of Spartanburg, South Carolina, Vice
Chairman of the Board of Directors of the Foundation for the Multi- Handicapped,
Blind and Deaf of South Carolina, and on the Board of Directors of the Civitan
Club of Spartanburg, South Carolina.
60
Billy L. Painter has served as the Association's President and Chief
Executive Officer since 1984. Mr. Painter is a former Chairman of the
Spartanburg Area Chamber of Commerce. He serves on the Advisory Board for the
Piedmont Interstate Fair, the Advisory Board of Salvation Army, and on the Board
of the Spartanburg Development Council.
R. Wesley Hammond is the President and Chief Operating Officer of
Hammond-Brown-Jennings, a furniture company. He is President-elect from South
Carolina and a member of the Executive Committee of Southern Home Furnishings
Association. He is an active member of the Church of the Advent in Spartanburg,
South Carolina.
Hugh H. Brantley is the Association's Executive Vice President and
Chief Operating Officer. Mr. Brantley serves on the Boards of Directors of the
Downtown Rescue Mission, the Impact Ministries, Upward Basketball and the YMCA,
in Spartanburg, South Carolina.
J. Stephen Sinclair is the Association's Executive Vice President of
Lending. Mr. Sinclair is Senior Vice President of First Spartan. He is a
Director and Treasurer of Safe Homes - Rape Crisis Coalition, a Director of
Communities and Schools through the Chamber of Commerce and a member of the Home
Builder Association of Greater Spartanburg.
R. Lamar Simpson has served as the Association's Chief Financial
Officer since June 1996. Prior to his employment with the Association, he was a
senior manager with Deloitte & Touche LLP, where he was employed for nine years.
He is a member of the Board of Directors and Treasurer of the Boys Home of the
South, a member of the American Institute of Certified Public Accountants, a
member of the South Carolina Association of Certified Public Accountants and a
member of the Financial Managers Society.
Meetings and Committees of the Board of Directors
The business of the Association is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended June 30, 1996, the Board of Directors held 12 regular meetings and nine
special meetings. No director attended fewer than 75% of the total meetings of
the Board of Directors and of committees on which such director served.
The Executive Committee, consisting of Directors Odom (Chairman),
Handell and Salter, has the authority to act on behalf of the Board of Directors
between regular meetings. All actions of the Executive Committee are presented
for ratification by the Board of Directors at its next regularly scheduled
meeting. The Executive Committee did not meet during the year ended June 30,
1996.
The Personnel Committee, consisting of Directors Odom (Chairman),
Sanders and Salter, is responsible for all personnel issues, including
recommending compensation levels for all employees and senior management to the
Board of Directors. The Personnel Committee met four times during the year ended
June 30, 1996.
The Audit Committee, consisting of Directors Salter (Chairman), Hammond
and Handell, receives and reviews all reports prepared by the Association's
external and internal auditor. The internal auditor reports monthly to the Audit
Committee. The Audit Committee met three times during the year ended June 30,
1996.
The full Board of Directors acts as a Nominating Committee for the
annual selection of management's nominees for election as directors. The full
Board of Directors met once in its capacity as Nominating Committee during the
year ended June 30, 1996.
The Association also maintains standing Asset/Liability, Loan, Asset
Classification, Community Reinvestment Act ("CRA"), Compliance, and Conflict of
Interest Committees.
61
Directors' Compensation
Fees. Currently, directors receive a fee of $1,500 per month.
Directors' fees totalled $84,000 for the year ended June 30, 1996. In addition,
Mr. Odom receives annual compensation of $10,200 for his service as Chairman of
the Board. Following consummation of the Conversion, directors' fees will
continue to be paid by the Association and, initially, no separate fees are
expected to be paid for service on the Holdings Company's Board of Directors.
Director Emeritus Plan. In connection with the Conversion, the
Association has formalized, with certain modifications, its existing policy
regarding director emeritus status by adopting the Director Emeritus Plan. The
Director Emeritus Plan provides that each director elected to the Board of
Directors of the Association on or after March 17, 1987 shall become a director
emeritus on the later to occur of (i) the date the director attains age 72 or
(ii) the expiration of the director's then current term of office after
attaining age 72. In addition, a director with at least ten years of service on
the Board may, upon attaining age 65, apply to the Board to assume director
emeritus status. Under the Director Emeritus Plan, a director emeritus receives
50% of the fee payable to regular Board members for attendance at monthly Board
meetings. If the director emeritus attends the monthly Board meeting, the amount
payable is increased to 75% of the fee payable to regular Board members. The
Board may also designate as a director emeritus a director who becomes disabled.
An additional feature of the Director Emeritus Plan provides that, in the event
of a change in control of the Holding Company or the Association (as defined in
the Director Emeritus Plan), each director would be treated as a director
emeritus on the effective date of the change in control. Within 30 days of such
date, each director emeritus would receive a payment equal to three times the
fees received by the director during the 12-month period ending prior to the
effective date of the change in control. Assuming a change in control had
occurred at December 31, 1996, the aggregate amount payable under the Director
Emeritus Plan to all directors would be approximately $378,000.
Executive Compensation
Summary Compensation Table. The following information is furnished for
Messrs. Painter, Brantley and Sinclair for the year ended June 30, 1996.
Annual Compensation(1)
----------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation
- --------- ---- ------ ----- --------------- ------------
Billy L. Painter 1996 $132,993 $30,000 $-- $36,661(3)
President and Chief
Executive Officer
Hugh H. Brantley 1996 83,444 11,000 -- 16,966(4)
Executive Vice
President and Chief
Operating Officer
J. Stephen Sinclair 1996 83,432 11,000 -- 16,966(5)
Executive Vice
President of Lending
(footnotes on following page)
62
______________
(1) Compensation information for the years ended June 30, 1995 and 1994 has
been omitted as the Association was not a public company nor a subsidiary
thereof at such time.
(2) The aggregate amount of perquisites and other personal benefits was less
than 10% of the total annual salary and bonus reported.
(3) Consists of directors' fees ($12,000), employer retirement plan
contributions ($19,946), employer 401(k) Plan matching contributions
($4,035) and term life insurance premiums ($680).
(4) Consists of employer retirement plan contributions ($12,502), employer
401(k) Plan matching contributions ($4,035) and term life insurance
premiums ($428).
(5) Consists of employer retirement plan contributions ($12,502), employer
401(k) Plan matching contributions ($4,035) and term life insurance
premiums ($428).
Employment Agreements. In connection with the Conversion, the Holding
Company and the Association (collectively, the "Employers") will enter into
three-year employment agreements ("Employment Agreements") with Messrs. Painter,
Sinclair and Brantley (individually, the "Executive"). Under the Employment
Agreements, the initial salary levels for Messrs. Painter, Sinclair and Brantley
will be $140,000, $90,000 and $90,000, respectively, which amounts will be paid
by the Association and may be increased at the discretion of the Board of
Directors or an authorized committee of the Board. 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 following the occurrence of
an event described in the preceding sentence, the Association would be required
to honor the terms of the agreement through the expiration of the 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 value of which does not exceed 2.99 times the Executive's
base amount. Assuming that a change in control had occurred at December 31, 1996
and that each Executive elected to receive a lump sum cash payment, Messrs.
Painter, Sinclair and Brantley would be entitled to payments of approximately
$434,000, $262,000 and $250,000, 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
63
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 each 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 voluntarily terminates employment, except in the
event of a change in control.
Severance Agreements. In connection with the Conversion, the Holding
Company and the Association will enter into severance agreements with R. Lamar
Simpson, the Holding Company's Treasurer, Secretary and Chief Financial Officer
and the Association's Chief Financial Officer, and Thomas Bridgeman and Rand
Peterson, each a Senior Vice President of the Association. On each anniversary
of the commencement date of the severance agreements, the term of each agreement
may be extended for an additional year at the discretion of the Board. It is
anticipated that the three severance agreements will have an initial term of two
years.
The severance agreements will provide for severance payments and
continuation of insured employee welfare benefits in the event of involuntary
termination of employment in connection with any change in control of the
Employers in the same manner as provided for in the employment agreements.
Severance payments and benefits also will be provided on a similar basis in
connection with a voluntary termination of employment where, subsequent to a
change in control, an officer 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.
Assuming that a change in control had occurred at December 31, 1996,
and excluding any other benefits due under the severance agreements, the
aggregate value of the severance benefits payable to the three officers would be
approximately $438,000.
Employee Severance Compensation Plan. In connection with the
Conversion, the Board of Directors of the Association intends to adopt the
Severance Plan to provide benefits to eligible employees in the event of a
change in control of the Holding Company or the Association. In general, all
employees (except for officers who enter into separate employment or severance
agreements with the Holding Company and the Association) will be eligible to
participate in the Severance Plan. Under the Severance Plan, in the event of a
change in control of the Holding Company or the Association, eligible employees,
other than officers of the Association, who are terminated or who terminate
employment (but only upon the occurrence of events specified in the Severance
Plan) within 12 months of the effective date of a change in control will be
entitled to a payment based on years of service with the Association. However,
the maximum payment for any eligible employee would be equal to 52 weeks of
their current compensation. In addition, vice presidents of the Association
would be eligible to receive a severance payment equal to 18 months of their
current compensation. The Severance Plan also provides that employees who have
not met the three year service requirement for participation would receive a
payment equal to two weeks' compensation and other officers would receive
between six and twelve months of their current compensation depending on years
of service and position. Assuming that a change in control had occurred at
December 31, 1996 and the termination of all eligible employees, the maximum
aggregate payment due under the Severance Plan would be approximately $1.2
million.
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Benefits
General. The Association currently pays 100% of the premiums for
medical, life and disability insurance benefits for full-time employees, subject
to certain deductibles.
401(k) Plan. The Association maintains the First Federal Savings and
Loan Association of Spartanburg 401(k) Plan ("401(k) Plan") for the benefit of
eligible employees of the Association. The 401(k) Plan is intended to be a
tax-qualified plan under Sections 401(a) and 401(k) of the Code. Employees of
the Association who have completed 1,000 hours of service during 12 consecutive
months and who have attained age 21 are eligible to participate in the 401(k)
Plan. Participants may contribute from 2%-10% of their annual compensation to
the 401(k) Plan through a salary reduction election. The Association matches
participant contributions on a discretionary basis to a maximum of 5% of
compensation contributed by the participant. In addition to employer matching
contributions, the Association may contribute a discretionary amount to the
401(k) Plan in any plan year which is allocated to individual participants in
the proportion that their annual compensation bears to the total compensation of
all participants during the plan year. To be eligible to receive a discretionary
employer contribution, the participant must complete 1,000 hours of service
during the plan year and remain employed by the Association on the last day of
the plan year. Participants are at all times 100% vested in salary reduction and
employer matching contributions. With respect to discretionary employer
contributions, participants vest in such contributions at the rate of 20% per
year beginning with the completion of one year of participation with full
vesting occurring after five years of participation. For the year ended June 30,
1996, the Association incurred total contribution-related expenses of $72,000 in
connection with the 401(k) Plan.
The Association previously maintained a tax-qualified money purchase
pension plan for the benefit of eligible employees. The money purchase pension
plan was merged with and into the 401(k) Plan, effective March 31, 1997.
Participant account balances under the money purchase plan were fully vested in
connection with the merger and the accounts of former money purchase pension
plan participants have been maintained as separate accounts under the 401(k)
Plan, subject to certain rights of the participants under the terms of the money
purchase pension plan.
Generally, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the Conversion, the investment options
available to participants will be expanded to include the opportunity to direct
the investment of up to 100% 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 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 -- Limitations on Purchases of Shares."
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by the Association of an ESOP for employees of the Association to
become effective upon the completion of the Conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Association who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be
issued in the Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the Common Stock. The loan to the ESOP will be repaid principally from the
Association's contributions to the ESOP and dividends payable on Common Stock
held by the ESOP over the anticipated 12-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in The Wall
Street Journal on the closing date of the Conversion. See "PRO FORMA DATA." To
the
65
extent that the ESOP is unable to acquire 8% of the Common Stock issued in
the Conversion, such additional shares will be acquired following the Conversion
through open market purchases.
In any plan year, the Association may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by Holding
Company. 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, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the
rate of 20% per year, beginning upon the completion of one year of
participation. A participant is fully vested at retirement, in the event of
disability or upon termination of the ESOP. Benefits are distributable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Association's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
It is anticipated that Messrs. Odom, Handell and Salter will be
appointed by the Board of Directors of the Association to serve as trustees of
the ESOP. Under the ESOP, the trustees must vote all allocated shares held in
the ESOP in accordance with the instructions of plan participants and
unallocated shares and allocated shares for which no instructions are received
must be voted in the same ratio on any matter as those shares for which
instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is
recorded at the fair market value of the ESOP shares when committed to be
released to participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Results of Operations -Comparison of Operating Results for the Six Months Ended
December 31, 1996 and 1995."
If the ESOP purchases newly issued shares from the Holding Company,
total stockholders' equity would neither increase nor decrease. However, on a
per share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the
regulations of the IRS and the Department of Labor issued thereunder. The
Association intends to request a determination letter from the IRS regarding the
tax-qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Association expects that a
favorable determination letter will be received by the ESOP.
1997 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the Conversion. 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 Stock Option Plan within one year of
the consummation of the Conversion. The Stock Option Plan will comply with all
applicable regulatory requirements. However, the Stock Option Plan will not be
approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, 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 Association,
66
and to reward officers and key employees for outstanding performance. The Stock
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
nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the
Stock Option Plan, stock options may be granted to key employees of the Holding
Company and its subsidiaries, including the Association. Unless sooner
terminated, the Stock Option Plan will continue in effect for a period of ten
years from the date the Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the
number of shares of Common Stock issued in connection with the Conversion will
be reserved for future issuance under the Stock Option Plan (385,250 shares
based on the issuance of 3,852,500 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 Stock 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 Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee"). Subject to applicable OTS
regulations, the Committee will determine which nonemployee directors, officers
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.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Conversion, (i) no officer or
employees could 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, could not receive in excess of 30% of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock 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 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 Stock Option Plan) of the
Holding Company or the Association to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Association.
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 Committee. 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. 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
67
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 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 Association anticipate that if stockholder approval
is obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
The size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting.
Management Recognition Plan. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Association,
subject to shareholder approval. The MRP will enable the Holding Company and the
Association to provide participants with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Association. The MRP will comply with all applicable regulatory
requirements. However, the MRP will not be approved or endorsed by the OTS.
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 MRP
within one year of the consummation of the Conversion.
The MRP expects to acquire a number of shares of Common Stock equal to
4% of the Common Stock issued in connection with the Conversion (154,100 shares
based on the issuance of 3,852,500 shares in the Conversion at the maximum of
the Estimated Valuation Range). Such shares will be acquired on the open market,
if available, with funds contributed by the Holding Company or the Association
to a trust which the Holding Company may establish in conjunction with the MRP
("MRP Trust") or from authorized but unissued shares or treasury shares of the
Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company or the Association to the MRP Trust.
The Board of Directors of the Holding Company may terminate the MRP at any time
and, upon termination, all unallocated shares of Common Stock will revert to the
Holding Company.
Shares of Common Stock granted pursuant to the MRP will be in the form
of restricted stock payable ratably over a specified vesting 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 MRP Trust. Under OTS regulations, if the
MRP is implemented within the first year following consummation of the
Conversion, the minimum vesting period will be five years. All unvested MRP
awards will vest in the event of the recipient's death or disability. Unvested
MRP awards will also vest following a change in control (as defined in the MRP)
of the Holding Company or the Association to the extent authorized or not
prohibited by applicable law or regulations. OTS regulations currently provide
that, if the MRP is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Association.
A recipient of an 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
68
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 at this time,
the Holding Company and the Association anticipate that if stockholder approval
is obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the MRP is implemented within one year of the
consummation of the Conversion, (i) no officer or employees could receive an
award covering in excess of 25%, (ii) no nonemployee director could receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. The
size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
Transactions with the Association
Federal regulations require that all loans or extensions of credit 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 Association's policy is not to make any new
loans or extensions of credit to the Association'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
related interests, are in excess of the greater of $25,000 or 5% of the
Association'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 Savings Associations -- Transactions
with Affiliates." The aggregate amount of loans by the Association to its
executive officers and directors was $957,000 at December 31, 1996, or
approximately 0.9% of pro forma stockholders' equity (based on the issuance of
the maximum of the Estimated Valuation Range).
Robert R. Odom, Chairman of the Board of the Holding Company and the
Association, is a senior partner with the law firm of Odom, Terry, Cantrell &
Hammett, Spartanburg, South Carolina, which serves as general counsel to the
Association. The Association paid a retainer of $18,000 and legal fees of
approximately $43,000 to the firm during the year ended June 30, 1996 for
services rendered to the Association.
E. Lea Salter, a Director of the Holding Company and the Association,
is the President of Christman & Parson, Inc., a general contractor. In recent
years, it has submitted sealed bids for and has been awarded contracts to
perform work for the Association. The Association did not award any contract or
pay any material amount of monies to Christman & Parson, Inc. during the year
ended June 30, 1996.
REGULATION
General
The Association 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.
69
In addition, the Association's relationship with its depositors and
borrowers is also regulated to a greatextent, especially in such matters as the
ownership of deposit accounts and the form and content of the Association's
mortgage documents. The Association 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 Association'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 Association 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
Securities and Exchange Commission ("SEC").
Federal Regulation of Savings Associations
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 Association, 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. The Association is in
compliance with this requirement with an investment in FHLB-Atlanta stock of
$2.8 million at December 31, 1996. 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 BIF and the SAIF. As insurer of the Association's deposits, the FDIC
has examination, supervisory and enforcement authority over all savings
associations.
The Association's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Association 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 matrix so created results in nine assessment
risk classifications, with rates that until September 30, 1996 ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. The
Association's assessments expensed for the year ended June 30, 1996 equaled
$737,000.
70
Pursuant to the DIF Act, which was enacted on September 30, 1996, the
FDIC imposed a special assessment on each depository institution with SAIF-
assessable deposits which resulted in the SAIF achieving its designated reserve
ratio. In connection therewith, the FDIC reduced the assessment schedule for
SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most
institutions, including the Association, paying 0%. This assessment schedule is
the same as that for the BIF, which reached its designated reserve ratio in
1995. In addition, since January 1, 1997, SAIF members are charged an assessment
of 0.065% of SAIF-assessable deposits for the purpose of paying interest on the
obligations issued by the Financing Corporation ("FICO") in the 1980s to help
fund the thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be the
same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Association.
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 Association.
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
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), 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%.
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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 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 December 31, 1996, the Association 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 Association fails to meet any standard prescribed by the
Guidelines, the agency may require the Association 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 qualified thrift lender ("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 Federal Home Loan Mortgage Corporation or
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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 December 31, 1996, the qualified thrift investments of the
Association were approximately 93.6% 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.
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 Savings Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain 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
73
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 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. 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 Association's historical amounts and
percentages at December 31, 1996 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 Association 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
74
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 Association 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 Association'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 December 31, 1996, the Association's
limit on loans to one borrower was $7.0 million. At December 31, 1996, the
Association's largest aggregate amount of loans to one borrower was $2.8
million.
Activities of Associations 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 Association 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 Association has not been significantly affected by the
rules regarding transactions with affiliates.
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The Association'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 Association may make to such persons based, in part,
on the Association'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 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 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 Association
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,
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(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 Savings Associations --
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.
TAXATION
Federal Taxation
General. The Holding Company and the Association 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 Association'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 Association or the Holding Company.
Bad Debt Reserve. Historically, savings institutions such as the
Association 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 Association'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 Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, 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 Association 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
Association'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 Association 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 Association 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
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of December 31, 1987 (or a lesser amount if the Association'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 Association's taxable income.
Nondividend distributions include distributions in excess of the Association'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 Association'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 Association'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 Association makes a
"nondividend 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 Association. The Association 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 Association'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 Association, 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 Association 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 Association will not file a consolidated
tax return, except that if the Holding Company or the Association owns more than
20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
Audits. The Association's federal income tax returns have not been
audited within the past five years.
State Taxation
South Carolina. The provisions of South Carolina tax law mirror the
Code, with certain modifications, as it relates to savings and loan
associations. The Association is subject to South Carolina income tax at the
rate of 6%. This rate of tax is imposed on savings and loan associations in lieu
of the general state business corporation income tax. The Association'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.
78
THE CONVERSION
The OTS has approved the Plan of Conversion subject to its approval by
the members of the Association 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 February 3, 1997, the Board of Directors of the Association
unanimously adopted the Plan of Conversion, pursuant to which the Association
will be converted from a federally chartered mutual savings and loan association
to a federally chartered stock savings and loan association to be held as a
wholly-owned subsidiary of the Holding Company, a newly formed Delaware
corporation. The following discussion of the Plan of Conversion is qualified in
its entirety by reference to the Plan of Conversion, which is attached as
Exhibit A to the Association's Proxy Statement and is available to members of
the Association 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
Association entitled to vote on the matter at a Special Meeting called for that
purpose to be held on June 25, 1997, and subject to the satisfaction of certain
other conditions imposed by the OTS in its approval.
If the Board of Directors of the Association decides for any reason,
such as possible delays resulting from overlapping regulatory processing or
policies or conditions that could adversely affect the Association's or the
Holding Company's ability to consummate the Conversion and transact its business
as contemplated herein and in accordance with the Association's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Association
will promptly refund all subscriptions or orders received together with accrued
interest, will withdraw the Holding Company's registration statement from the
SEC and will take all steps necessary to complete the Conversion and proceed
with a new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Association
determines not to complete the Conversion, the Association will issue and sell
the common stock of the Association. There can be no assurance that the OTS
would approve the Conversion if the Association decided to proceed without the
Holding Company. The following description of the Plan of Conversion assumes
that a holding company form of organization will be utilized in the Conversion.
In the event that a holding company form of organization is not utilized, all
other pertinent terms of the Plan of Conversion as described below will apply to
the Conversion of the Association from mutual to stock form of organization and
the sale of the Association's common stock.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. Pursuant to the Plan of Conversion, 2,847,500 to 3,852,500 shares
of Common Stock are being offered for sale by the Holding Company at the
Purchase Price of $20.00 per share. As part of the Conversion, the Association
will issue all of its newly issued common stock (1,000 shares) to the Holding
Company in exchange for 50% of the net proceeds from the sale of Common Stock by
the Holding Company.
The Plan of Conversion provides generally that: (i) the Association
will convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association; (ii) the Common Stock
will be offered by the Holding Company in the Subscription Offering to persons
having Subscription Rights; (iii) if necessary, shares of Common Stock not
subscribed for in the Subscription Offering will be offered in a Direct
Community Offering to certain members of the general public, with preference
given to natural persons and trusts of natural persons residing in the Local
Community, and then to certain members of the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers pursuant to
selected dealers agreements; and (iv) the Holding Company will purchase all of
the capital stock of the Association to be issued in
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connection with the Conversion. The Conversion will be effected only upon
completion of the sale of at least $56,950,000 of Common Stock to be issued
pursuant to the Plan of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of December 31, 1995); (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of March 31, 1997); and (iv) Other Members (depositors of the Association as
of May 1, 1997 and borrowers of the Association with loans outstanding as of
March 12, 1997 which continue to be outstanding as of May 1, 1997).
Shares of Common Stock 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 to natural persons and trusts of
natural persons residing in the Local Community. The Direct Community Offering,
if one is held, is expected to begin immediately after the Expiration Date, but
may begin at any time during the Subscription Offering. Shares of Common Stock
not sold in the Subscription and Direct 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 Association
or the Holding Company with the approval of the regulatory authorities. If the
Syndicated Community Offering is determined not to be feasible, the Board of
Directors of the Association will consult with the regulatory authorities to
determine an appropriate alternative method for selling the unsubscribed shares
of Common Stock. The Plan of Conversion provides that the Conversion must be
completed within 24 months after the date of the approval of the Plan of
Conversion by the members of the Association.
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 Association.
The completion of the Offerings, however, is subject to market
conditions and other factors beyond the Association's control. No assurance can
be given as to the length of time after approval of the Plan of Conversion at
the Special Meeting that will be required to complete the Direct Community or
Syndicated Community Offerings or other sale of the Common Stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Association as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the Common Stock. In the event the Conversion is terminated, the
Association would be required to charge all Conversion expenses against current
income.
Orders for shares of Common Stock will not be filled until at least
2,847,500 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion 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, 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 Association'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 is not completed, all withdrawal authorizations will be terminated
and all funds held will be promptly returned together with accrued interest at
the Association's passbook rate from the date payment is received until the
Conversion is terminated.
Purposes of Conversion
The Board of Directors and management believe that the Conversion is in
the best interests of the Association, its members and the communities it
serves. The Association's Board of Directors has formed the Holding Company to
serve as a holding company, with the Association as its subsidiary, upon the
consummation
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of the Conversion. By converting to the stock form of organization, the
Holding Company and the Association will be structured in the form used by
holding companies of commercial banks and by a growing number of savings
institutions. Management of the Association believes that the Conversion offers
a number of advantages which will be important to the future growth and
performance of the Association. The capital raised in the Conversion is intended
to support the Association's current lending and investment activities and may
also support possible future expansion and diversification of operations,
although there are no current specific plans, arrangements or understandings,
written or oral, regarding any such expansion or diversification. The Conversion
is also expected to afford the Association's members and others the opportunity
to become stockholders of the Holding Company and participate more directly in,
and contribute to, any future growth of the Holding Company and the Association.
The Conversion will also enable the Holding Company and the Association to raise
additional capital in the public equity or debt markets should the need arise,
although there are no current specific plans, arrangements or understandings,
written or oral, regarding any such financing activities. The Association, as a
mutual savings and loan association, does not have the authority to issue
capital stock or debt instruments, other than by accepting deposits.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Savings members and borrowers will have no voting rights
in the converted Association or the Holding Company and therefore will not be
able to elect directors of the Association or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Association. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Association and the
holders of the Common Stock as to matters pertaining to the Holding Company.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of Common Stock owned.
Savings Accounts and Loans. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the loan
accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
Tax Effects. The Association has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Association
in its mutual or stock form by reason of the Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Association immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Association in its
mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Association immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. 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
Association, 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
81
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 Association 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 Association has also received an opinion from Deloitte & Touche
LLP, Greenville, South Carolina, that, assuming the Conversion does not result
in any federal income tax liability to the Association, its account holders, or
the Holding Company, implementation of the Plan of Conversion will not result in
any South Carolina income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Deloitte & Touche LLP and the
letter from RP Financial are filed as exhibits to the Registration Statement.
See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account to the total value of all deposit accounts in the Association at the
time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the
Association, including certificates of deposit ("Savings Account(s)"), shall not
be entitled to share in any residual assets in the event of liquidation of the
Association. However, pursuant to OTS regulations, the Association shall, at the
time of the Conversion, establish a liquidation account in an amount equal to
its total equity as of the date of the latest statement of financial condition
contained herein.
The liquidation account shall be maintained by the Association
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of such holder's "qualifying
deposit" in the Savings Account and the denominator is the total amount of the
"qualifying deposits" of all such holders. Such initial subaccount balance shall
not be increased, and it shall be subject to downward adjustment as provided
below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing day of the Association subsequent to December 31, 1995 or March
31, 1997 is less than the lesser of (i) the deposit balance in such Savings
Account at the close of business on any other annual closing date subsequent to
December 31, 1995 or March 31, 1997 or (ii) the amount of the "qualifying
deposit" in such Savings Account on December 31, 1995 or March 31, 1997, then
the subaccount balance for such Savings Account shall be adjusted by reducing
such subaccount balance in an amount proportionate to the reduction in such
deposit balance. In the event of a downward adjustment, such subaccount balance
shall not be subsequently increased, notwithstanding any increase in the deposit
balance of the related Savings Account. If any such Savings Account is closed,
the related subaccount balance shall be reduced to zero.
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In the event of a complete liquidation of the Association (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Association is not the surviving institution shall be considered to
be a complete liquidation. In any such transaction the liquidation account shall
be assumed by the surviving institution.
In the unlikely event the Association is liquidated after the
Conversion, depositors will be entitled to full payment of their deposit
accounts before any payment is made to the Holding Company as the sole
stockholder of the Association.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Common Stock have been
issued to persons and entities entitled to purchase the Common Stock in the
Subscription Offering. The amount of the Common Stock which these parties may
purchase will be subject to the availability of the Common Stock 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 Common Stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at the Association as of December 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$325,000 of Common Stock, 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 shares of Common Stock 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, shares of Common Stock 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 Association in the one year period preceding
December 31, 1995 are subordinated to the Subscription Rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of the
shares of Common Stock issued in the Conversion. In the event the number of
shares offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the Common Stock.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of March 31, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $325,000 of Common
Stock, 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 shares of Common Stock 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,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible
83
Account Holder, to the extent possible, to purchase a n umber 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.
Category 4: Other Members. Each depositor of the Association as of the
Voting Record Date (May 1, 1997) and each borrower with a loan outstanding on
March 12, 1997 which continues to be outstanding as of the Voting Record Date
will receive nontransferable Subscription Rights to purchase up to $325,000 of
Common Stock in the Conversion to the extent shares are available following
subscriptions by Eligible Account Holders, the Association's ESOP 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 ASSOCIATION AND THE HOLDING COMPANY.
The Holding Company and the Association 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 12 Noon, Eastern Time, on the
Expiration Date, whether or not the Association 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 Association after the Expiration
Date will not be accepted. The Subscription Offering may be extended by the
Holding Company and the Association up to July 7, 1997 without the OTS's
approval. OTS regulations require that the Holding Company complete the sale of
Common Stock within 45 days after the close of the Subscription Offering. If the
Direct Community Offering and the Syndicated Community Offerings are not
completed by August 1, 1997 (or August 21, 1997, if the Subscription Offering is
fully extended), all funds received will be promptly returned with interest at
the Association'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. Any shares of Common Stock which remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given 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 $325,000 of Common Stock in the Conversion. 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, if held, is expected to commence immediately subsequent to the
Expiration Date, but may begin at anytime during the Subscription Offering. The
Direct 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 Association, 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
84
certain other large Subscribers in the discretion of the Holding Company and the
Association may be, given the opportunity to continue 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 Association'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 is subject to the absolute right of the
Holding Company and the Association 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.
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.
Syndicated Community Offering. The Plan of Conversion provides that, if
necessary, all shares of Common Stock not purchased in the Subscription Offering
and Direct Community Offering, if any, 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 Trident Securities
acting as agent of the Holding Company. The Holding Company and the Association
have the right to reject orders, in whole or part, in their sole discretion in
the Syndicated Community Offering. Neither Trident Securities nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Syndicated Community Offering; however, Trident Securities
has agreed to use its best efforts in the sale of shares in the Syndicated
Community Offering.
Stock sold in the Syndicated Community Offering also will be sold at
the $20.00 Purchase Price. See "-- Stock Pricing and Number of Shares to be
Issued." No person will be permitted to subscribe in the Syndicated Community
Offering for shares of Common Stock with an aggregate purchase price of more
than $325,000. See "-- Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings" for a description of the
commission to be paid to the selected dealers and to Trident Securities.
Trident Securities 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 Trident Securities 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, Trident Securities will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations 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 Association's passbook rate until the
completion of the Offerings. At the completion of the Conversion, the funds
received in the Offerings will be used to purchase the shares of Common Stock
ordered. The shares issued in the Conversion cannot and will not be insured by
the FDIC or any other government agency. In the event the Conversion is not
consummated as described above, funds with interest will be returned promptly to
the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The Syndicated Community Offering may 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
Association, with approval of the OTS.
85
In the event the Association 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 Association, 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 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
Association 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
Association 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 Association 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
Association 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 Association 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 for the Subscription, Direct Community and Syndicated
Community Offerings
The Association and the Holding Company have retained Trident
Securities to consult with and advise the Association and to assist the
Association and the Holding Company, on a best efforts basis, in the
distribution of shares in the Offerings. Trident Securities is a broker-dealer
registered with the SEC and a member of the NASD. Trident Securities will assist
the Association in the Conversion as follows: (i) it will act as marketing
advisor with respect to the Subscription Offering and will represent the
Association as placement agent on a best efforts basis in the sale of the Common
Stock in the Direct Community Offering if one is held; (ii) it will conduct
training sessions with directors, officers and employees of the Association
regarding the Conversion process; and (iii) it will assist in the establishment
and supervision of the Stock Information Center and, with management's input,
will train the Association's staff to record properly and tabulate orders for
the purchase of Common Stock and to respond appropriately to customer inquiries.
Based upon negotiations between Trident Securities on the one hand and
the Holding Company and the Association on the other hand concerning fee
structure, Trident Securities will receive a commission equal to 1.35% of the
aggregate amount of Common Stock sold to investors who reside in South Carolina
and a commission equal to 1.15% of the aggregate amount of Common Stock sold to
investors who reside outside of South Carolina; provided, however, that such
commissions shall be capped at the midpoint of the Estimated Valuation Range as
set forth on the cover page of this Prospectus. In the event that the number of
shares of Common Stock issued in the Offerings exceeds the midpoint of the
Estimated Valuation Range as set forth on the cover page of this Prospectus,
such commissions will be applied pro rata as if the Offerings had closed at such
point. Trident and selected dealers
86
participating in the Syndicated Community Offering may receive a commission in
the Syndicated Community Offering in an amount to be agreed upon by the Holding
Company and the Association. Fees and commissions paid to Trident Securities and
to any selected dealers may be deemed to be underwriting fees, and Trident
Securities and such selected dealers may be deemed to be underwriters. Trident
Securities will also be reimbursed for its reasonable out-of-pocket expenses not
to exceed $10,000 and its legal fees not to exceed $35,000. Trident Securities
has received an advance of $10,000 towards its reimbursable expenses. For
additional information, see "-- Stock Pricing and Number of Shares to be Issued"
and "USE OF PROCEEDS."
Subject to certain limitations, the Holding Company and the Association
have also agreed to indemnify Trident Securities against liabilities and
expenses (including legal fees) incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering material for the Common Stock or with regard to allocations of
shares (in the event of oversubscription) or determinations of eligibility to
purchase shares.
Description of Sales Activities
The Common Stock will be offered in the Subscription Offering and
Direct Community Offering principally by the distribution of this Prospectus and
through activities conducted at the Association's Stock Information Center at
its main office facility. The Stock Information Center is expected to operate
during normal business hours throughout the Subscription Offering and Direct
Community Offering. It is expected that at any particular time one or more
Trident Securities employees will be working at the Stock Information Center.
Such employees of Trident Securities will be responsible for mailing materials
relating to the Offerings, responding to questions regarding the Conversion and
the Offerings and processing stock orders.
Sales of Common Stock will be made by registered representatives
affiliated with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of the Association may participate in
the Offerings in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution of
the Order Form. Management of the Association may answer questions regarding the
business of the Association when permitted by state securities laws. 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 Holding Company and the Association have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock.
No officer, director or employee of the Association or the Holding
Company will be compensated, directly or indirectly, for any activities in
connection with the offer or sale of securities issued in the Conversion.
None of the Association's personnel participating in the Offerings is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
The Association's 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.
87
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 Association will
accept for processing only orders submitted on original Order Forms. The
Association 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.
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 Association (which may be given by completing the
appropriate blanks in the Order Form), must be received by the Association by 12
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 Association 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 Association 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 Association 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 Association unless the Conversion 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 Eligibility Record Date (December 31,
1995) and/or the Supplemental Eligibility Record Date (March 31, 1997) and/or
the Voting Record Date (May 1, 1997) 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 Association. 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 Association's passbook rate from the date payment is received until the
completion or termination of the Conversion. 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 (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), but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or termination
of the Conversion. At the completion of the Conversion, the funds received in
the Offerings will be used to purchase the shares of Common Stock ordered. The
shares of Common Stock issued in the Conversion cannot and will not be insured
by the FDIC or any other government agency. In the event that the Conversion is
not consummated for any reason, all funds submitted will be promptly refunded
with interest as described above.
If a subscriber authorizes the Association to withdraw the amount of
the aggregate Purchase Price from his deposit account, the Association will do
so as of the effective date of Conversion, though the account must contain the
full amount necessary for payment at the time the subscription order is
received. The Association 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
88
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 Association's passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Conversion,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Holding
Company to lend to the ESOP, at such time, the aggregate Purchase Price of the
shares for which it subscribed.
IRAs maintained in the Association do not permit investment in the
Common Stock. A depositor interested in using his IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Association 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 the Holding
Company's Common Stock in the Offerings. There will be no early withdrawal or
IRS interest penalties for such transfers. The new trustee would hold the Common
Stock in a self-directed account in the same manner as the Association now holds
the depositor's IRA funds. An annual administrative fee may be payable to the
new trustee. Depositors interested in using funds in an Association 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.
Certificates representing shares of Common Stock purchased, and any
refund due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms or to the last address of such persons appearing
on the records of the Association as soon as practicable following consummation
of the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. Purchasers
may not be able to sell the shares of Common Stock which they purchased until
certificates for the Common Stock are available and delivered to them, even
though trading of the Common Stock may have commenced.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the Conversion be based upon an estimated pro
forma value of the Holding Company and the Association as converted (i.e.,
taking into account the expected receipt of proceeds from the sale of securities
in the Conversion), as determined by an independent appraisal. The Association
and the Holding Company have retained RP Financial to prepare an appraisal of
the pro forma market value of the Holding Company and the Association as
converted, as well as a business plan. RP Financial will receive a fee expected
to total approximately $42,500 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal. The Association has agreed to indemnify RP
Financial under certain circumstances against liabilities and expenses
(including legal fees) arising out of, related to, or based upon the Conversion.
RP Financial has prepared an appraisal of the estimated pro forma
market value of the Holding Company and the Association as converted taking into
account the formation of the Holding Company as the holding company for the
Association. For its analysis, RP Financial undertook substantial investigations
to learn about the Association's business and operations. Management supplied
financial information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this information, RP Financial reviewed the Association's Form AC
Application for Approval of Conversion and the Holding Company's Form S-1
Registration Statement. Furthermore, RP Financial visited the Association's
facilities and had discussions with the Association's management and its special
conversion legal counsel, Breyer & Aguggia. No detailed individual analysis of
the separate components of the Holding Company's or the Association's assets and
liabilities was performed in connection with the evaluation.
89
In estimating the pro forma market value of the Holding Company and the
Association as converted, as required by applicable regulatory guidelines, RP
Financial's analysis utilized three selected valuation procedures, the
Price/Book ("P/B") method, the Price/Earnings ("P/E") method, and Price/Assets
("P/A") method, all of which are described in its report. RP Financial placed
the greatest emphasis on the P/E and P/B methods in estimating pro forma market
value. In applying these procedures, RP Financial reviewed, among other factors,
the economic make-up of the Association's primary market area, the Association's
financial performance and condition in relation to publicly-traded institutions
that RP Financial deemed comparable to the Association, the specific terms of
the offering of the Holding Company's Common Stock, the pro forma impact of the
additional capital raised in the Conversion, conditions of securities markets in
general, and the market for thrift institution common stock in particular. RP
Financial's analysis provides an approximation of the pro forma market value of
the Holding Company and the Association as converted based on the valuation
methods applied and the assumptions outlined in its report. Included in its
report were certain assumptions as to the pro forma earnings of the Holding
Company after the Conversion that were utilized in determining the appraised
value. These assumptions included expenses of $1,400,000 at the midpoint of the
Estimated Valuation Range, an assumed after-tax rate of return on the net
Conversion proceeds of 4.02%, purchases by the ESOP of 8% of the Common Stock
sold in the Conversion and purchases in the open market by the MRP of a number
of shares equal to 4% of the Common Stock sold in the Conversion at the Purchase
Price. See "PRO FORMA DATA" for additional information concerning these
assumptions. The use of different assumptions may yield different results.
On the basis of the foregoing, RP Financial has advised the Holding
Company and the Association that, in its opinion, as of February 21, 1997, the
aggregate estimated pro forma market value of the Holding Company and the
Association as converted and, therefore, the Common Stock was within the
valuation range of $56,950,000 to $77,050,000 with a midpoint of $67,000,000.
After reviewing the methodology and the assumptions used by RP Financial in the
preparation of the appraisal, the Board of Directors established the Estimated
Valuation Range which is equal to the valuation range of $56,950,000 to
$77,050,000 with a midpoint of $67,000,000. Assuming that the shares are sold at
$20.00 per share in the Conversion, the estimated number of shares would be
between 2,847,500 and 3,852,500 with a midpoint of 3,350,000. The Purchase Price
of $20.00 was determined by discussion among the Boards of Directors of the
Association and the Holding Company and Trident Securities, taking into account,
among other factors (i) the requirement under OTS regulations that the Common
Stock be offered in a manner that will achieve the widest distribution of the
stock, (ii) desired liquidity in the Common Stock subsequent to the Conversion,
and (iii) the expense of issuing shares for purposes of Delaware franchise
taxes. Since the outcome of the Offerings relate in large measure to market
conditions at the time of sale, it is not possible to determine the exact number
of shares that will be issued by the Holding Company at this time. The Estimated
Valuation Range may be amended, with the approval of the OTS, if necessitated by
developments following the date of such appraisal in, among other things, market
conditions, the financial condition or operating results of the Association,
regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the
Registration Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of the Holding Company and the
Association as converted, as of the close of the Subscription Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the OTS that, to the best of RP Financial's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Association as converted at the time of the sale. If, however, the facts do not
justify such a statement, the Offerings or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held. Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription
90
funds returned promptly with interest and holds on funds authorized for
withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares discussed herein.
In the event the total amount of shares issued is less than 2,847,500 or more
than 4,430,375 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $56,950,000 or more than $88,607,500,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is established
by RP Financial, such new range will be subject to approval by the OTS.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of the Association and the Holding Company, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS and may provide for purchases for investment purposes by directors,
officers, their associates and other persons in excess of the limitations
provided in the Plan of Conversion and in excess of the proposed director
purchases set forth herein, although no such purchases are currently intended.
If such other purchase arrangements cannot be made, the Plan of Conversion will
terminate.
In formulating its appraisal, RP Financial relied upon the
truthfulness, accuracy and completeness of all documents the Association
furnished to it. RP Financial also considered financial and other information
from regulatory agencies, other financial institutions, and other public
sources, as appropriate. While RP Financial believes this information to be
reliable, RP Financial does not guarantee the accuracy or completeness of such
information and did not independently verify the financial statements and other
data provided by the Association and the Holding Company or independently value
the assets or liabilities of the Holding Company and the Association. The
appraisal by RP Financial is not intended to be, and must not be interpreted as,
a recommendation of any kind as to the advisability of voting to approve the
Plan of Conversion or of purchasing shares of Common Stock. Moreover, because
the appraisal is necessarily based on many factors which change from time to
time, there is no assurance that persons who purchase such shares in the
Conversion will later be able to sell shares thereafter at prices at or above
the Purchase Price.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain limitations to be placed
upon the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With the
exception of the ESOP, which is expected to subscribe for 8% of the shares of
Common Stock issued in the Conversion, the Plan of Conversion provides for the
following purchase limitations: (i) No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including, in each case, all persons on
a joint account, may purchase shares of Common Stock with an aggregate purchase
price of more than $325,000, (ii) no person (including all persons on a joint
account), either alone or together with associates of or persons acting in
concert with such person, may purchase in the Direct Community Offering, if any,
or in the Syndicated Community Offering, if any, shares of Common Stock with an
aggregate purchase price of more than $325,000, and (iii) no person, either
alone or together with associates of or persons acting in concert with such
person, may purchase in the aggregate more than the overall maximum purchase
limitation of 1% of the total number of shares of Common Stock issued in the
Conversion (exclusive of any shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15%), or shares with an aggregate purchase
price of more than $770,500. 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.
The Association's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion
91
may not exceed, in the aggregate, 10% of the shares sold in the Conversion. The
Association 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 shares of Common Stock will be, and other large subscribers in
the discretion of the Holding Company and the Association 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 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 Association or a
majority-owned subsidiary of the Association) 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 Association 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 Association, 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 Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Association and the Holding Company and by NASD members. See "-- Restrictions on
Transferability by Directors and Officers and NASD Members."
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.
92
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Offerings by directors and
officers of the Holding Company may not be sold for a period of one year
following consummation of the Conversion, 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 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 Association after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion 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.
The Holding Company has filed with the SEC a registration statement
under the Securities Act of 1933, as amended ("Securities Act") for the
registration of the Common Stock to be issued pursuant to the Conversion. The
registration under the Securities Act of shares of the Common Stock to be issued
in the Conversion 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.
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, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, 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 and to the Certificate of Incorporation and Bylaws of the Holding
Company contained in the Registration Statement filed with the SEC. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
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
93
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 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 Association's Federal Stock
Charter will contain 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 Association 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. 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, stockholders of
the Association will not be permitted to call a special meeting of stockholders
relating to a change of control of the Association 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
94
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.
Anti-takeover Provisions in the Holding Company's Certificate of Incorporation
and Bylaws and in Delaware Law
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Holding Company's Certificate of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Holding Company stockholders may deem to be in their best
interests or in 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 an opportunity to do
so. Such provisions will also render the removal of the incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made in each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to where to
obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of common stock (the "Limit") be entitled or permitted to any vote in respect of
the shares held in excess of the Limit, unless permitted by a resolution adopted
by a majority of the board of directors. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act
and includes shares beneficially owned by such person or any of his affiliates
(as defined in the Certificate of Incorporation), shares which such person or
his affiliates have the right to acquire upon the exercise of conversion rights
or options and shares as to which such person and his affiliates have or share
investment or voting power, but shall not include shares beneficially owned by
the ESOP or directors, officers and employees of the Association or Holding
Company or shares that are subject to a revocable proxy and that are not
otherwise beneficially, or deemed by the Holding Company to be beneficially,
owned by such person and his affiliates.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class shall
be elected for a term of three years, with the terms of office of all members of
one class expiring each year so that approximately one-third of the total number
of directors are elected each year. The Holding Company's Certificate of
Incorporation provides that the size of the Board shall be as set forth in the
Bylaws. The Bylaws currently set the number of directors at seven. The
Certificate of Incorporation provides that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors, shall be
filled by a vote of two-thirds of the directors then in office and any director
so chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which the director has been
chosen expires. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that a
director may be removed from the Board of Directors prior to the expiration of
his term only for cause and only upon the vote of 80% of the outstanding shares
of voting stock. In the absence of this provision, the vote of the holders of a
majority of the shares could remove the entire Board, but only with cause, and
replace it with persons of such holders' choice.
95
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 12,000,000 shares of Common Stock and 250,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, 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 tender offer,
merger or other transaction by which a third party seeks control of the Holding
Company, and thereby assist members of management to retain their positions. The
Holding Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of Common Stock upon exercise of stock
options and in connection with the MRP.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The 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.
96
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Certificate of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Stockholder Nominations and Proposals. The Certificate of Incorporation
of the Holding Company requires a stockholder who intends to nominate a
candidate for election to the Board of Directors, or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the
Association 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 Association in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Association 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, 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
than300, thereby allowing forderegistration under theExchange Act.
97
Despite the belief of the Association 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 Association and the Holding Company, however, have
concluded that the potential benefits outweigh the possible disadvantages.
Following the Conversion, 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.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 12,000,000 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 3,852,500 shares of Common Stock and no shares of preferred stock in
the Conversion. 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 -- Restrictions on Repurchase of Stock" and "USE OF
PROCEEDS."
Voting Rights. Upon Conversion, 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 Delaware law or as are
otherwise presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE
98
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 mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association and who fill any vacancies on the Board of Directors
as it exists upon Conversion. Subsequent to Conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of the
Association, 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 Association.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Association, the Holding Company, as holder of the Association's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Association (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"), all assets of the Association available
for distribution. In the event of liquidation, dissolution or winding up of the
Holding Company, the holders 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 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."
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 will not deregister its Common Stock for a period of at least
three years following the completion of the Conversion. Upon such registration,
the proxy and tender offer rules, insider trading reporting and restrictions,
annual and periodic reporting and other requirements of the Exchange Act will be
applicable.
99
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 Offerings have been opined upon by Breyer & Aguggia and the South Carolina
tax consequences of the Offerings have been opined upon by Deloitte & Touche
LLP, Greenville, South Carolina. Breyer & Aguggia and Deloitte & Touche LLP have
consented to the references herein to their opinions. Certain legal matters will
be passed upon for Trident Securities by Housley Kantarian & Bronstein, P.C.,
Washington, D.C.
EXPERTS
The consolidated financial statements of the Association as of June 30,
1996 and 1995 and for the years ended June 30, 1996, 1995 and 1994 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Association setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Association 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. 333-23015) under the Securities Act with respect to the
Common Stock offered in the Conversion. 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 Association has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Association's Special 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 Southeast Regional Office of the OTS, 1475 Peachtree Street, N.E., Atlanta,
Georgia 30309.
100
Index To Consolidated Financial Statements
First Federal Savings and Loan Association of Spartanburg and Subsidiary
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1996 (unaudited)
and June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income for the
Six Months Ended December 31, 1996 and 1995 (unaudited)
and the Years Ended June 30, 1996, 1995 and 1994 . . . . . . . . . 21
Consolidated Statements of Equity for the Six Months Ended
December 31, 1996 and 1995 (unaudited) and for the Years
Ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1996 and 1995 (unaudited)
and the Years Ended June 30, 1996, 1995 and 1994 . . . . . . . . . F-4
Notes to 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 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.
101
(Deloitte & Touche LLP Logo)
1200 NationsBank Plaza Telephone: (864) 240-5700
7 North Laurens Street Facsimile: (864) 235-8563
Greenville, South Carolina 29601
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Federal Savings and Loan Association of Spartanburg
Spartanburg, South Carolina
We have audited the accompanying consolidated balance sheets of First Federal
Savings and Loan Association of Spartanburg and its subsidiary (the
"Association") as of June 30, 1996 and 1995, and the related consolidated
statements of income, equity, and cash flows for each of the three years in the
period ended June 30, 1996. These consolidated financial statements are the
responsibility of the Association'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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Association at June 30, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, effective July 1, 1994, the
Association changed its method of accounting for investments in debt and equity
securities to conform with the provisions of Statement of Financial Accounting
Standards No. 115.
DELOITTE & TOUCHE LLP
August 23, 1996 (October 1, 1996 as to
the 4th paragraph of Note 1)
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
F-1
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996, JUNE 30, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------
(Unaudited)
December 31, June 30,
-----------------------------
ASSETS 1996 1996 1995
Cash $ 5,918 $ 6,798 $ 6,362
Federal funds sold and overnight interest bearing deposits 11,186 3,986 9,605
Total cash and cash equivalents 17,104 10,784 15,967
Investment securities (Note 2):
Held-to-maturity - at amortized cost (fair value: $5,449) - - 5,502
Available-for-sale - at fair value (amortized cost: $13,510,
$18,291 and $8,294 at December 31, 1996 and June 30, 1996
and 1995, respectively) 13,492 18,155 8,228
Mortgage-backed securities held-to-maturity - at amortized cost
(fair value: $142, $209, and $397 at December 31, 1996 and
June 30, 1996 and 1995, respectively) 128 195 383
Loans receivable, net (Note 3) 331,654 314,936 267,393
Loans held-for-sale - at lower of cost or market (market value:
$1,444, $1,911 and $15,580 at December 31, 1996 and June 30,
1996 and 1995, respectively) 1,444 1,911 15,324
Office properties and equipment, net (Note 4) 5,481 5,112 4,379
Federal Home Loan Bank Stock - at cost 2,806 2,806 2,649
Accrued interest receivable 2,439 2,427 2,127
Real estate acquired in settlement of loans 102 58 34
Other assets 876 582 749
TOTAL $ 375,526 $ 356,966 $ 322,735
LIABILITIES AND EQUITY
LIABILITIES:
Deposit accounts (Note 5) $ 323,951 $ 305,831 $ 275,915
Advances from borrowers for taxes and insurance 894 1,247 1,439
Other liabilities 5,848 5,734 4,721
Total liabilities 330,693 312,812 282,075
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
EQUITY (Notes 6 and 10):
Retained earnings 44,845 44,238 40,701
Unrealized loss on securities available-for-sale (net of
deferred taxes of $6, $52 and $25, respectively) (12) (84) (41)
Total equity 44,833 44,154 40,660
TOTAL $ 375,526 $ 356,966 $ 322,735
See notes to consolidated financial statements.
F-2
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
SIX MONTHS ENDED DECEMBER 31, 1996 AND
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
Net Unrealized
Gain (Loss) on
Marketable Equity
Securities and
Securities Available- Retained
for-Sale (1) Earnings Total
BALANCE, JUNE 30, 1993 $ - $ 32,088 $ 32,088
Net income for the year ended June 30, 1994 - 4,472 4,472
Net unrealized loss on marketable equity
securities (105) - (105)
BALANCE, JUNE 30, 1994 (105) 36,560 36,455
Net income for the year ended June 30, 1995 - 4,141 4,141
Net unrealized loss on securities available-for-sale
upon adoption of SFAS No. 115 (194) - (194)
Change in net unrealized loss on securities
available-for-sale for the year ended June 30,
1995 258 - 258
BALANCE JUNE 30, 1995 (41) 40,701 40,660
Net income for the year ended June 30, 1996 - 3,537 3,537
Change in net unrealized loss on securities
available-for-sale for the year ended June 30,
1996 (43) - (43)
BALANCE, JUNE 30, 1996 (84) 44,238 44,154
Net income for the six month period ended
December 31, 1996 (unaudited) - 607 607
Change in net unrealized loss on securities
available-for-sale for the six months ended
December 31, 1996 (unaudited) 72 - 72
BALANCE, DECEMBER 31, 1996 (UNAUDITED) $ (12) $ 44,845 $ 44,833
(1) Net of deferred income taxes.
See notes to consolidated financial statements.
F-3
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
December 31, Year Ended June 30,
-------------------------- ----------------------------------------
1996 1995 1996 1995 1994
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 607 $ 1,859 $ 3,537 $ 4,141 $ 4,472
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 675 4 419 9 -
Deferred income tax provision (benefit) (325) 90 175 476 366
Amortization of deferred income (83) (113) (202) (254) (506)
Amortization (accretion) of premiums
and discounts on investments and
mortgage-backed securities (11) 1 (3) (3) (26)
Depreciation 300 145 311 277 247
(Increase) decrease in other assets (306) 121 (133) 1,441 (1,541)
Additions to loans held-for-sale (6,031) (4,210) (15,198) (16,009) (19,276)
Proceeds from sale of loans 6,535 2,863 7,704 16,888 26,946
(Gain) loss on sale of mortgage loans (37) - - 1,078 894
Unrealized (gain) loss on loans held-
for-sale - - - (668) 668
(Gain) loss on disposal of property and
equipment 16 - (3) - -
Loss (gain) on sale of real estate acquired
in settlement of loans - 8 10 (1) (76)
Loss on sale of investments available-
for-sale 16 - - 396 -
Loss on sale of investment securities - - - - 109
Increase (decrease) in other liabilities 41 (339) 672 1,188 (1,001)
FHLB stock dividend - - - - (103)
Net cash provided by (used in)
operating activities 1,397 429 (2,711) 8,959 11,173
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net loan originations and principal
collections (20,616) (16,141) (26,968) (19,749) (17,937)
Purchase of loans 3,204 - - - -
Purchase of investment securities (1,226) (6,231) (9,992) (395) (11,628)
Proceeds from sale of investments
available-for-sale 5,000 - - 7,727 -
Proceeds from maturities of investments
available-for-sale 1,000 2,000 5,500 1,500 -
Proceeds from sale and maturities of
investments - - - - 8,847
Principal repayments and proceeds from
maturities of mortgage-backed securities 68 35 189 88 460
Proceeds from sale of real estate
acquired in settlement of loans 58 49 81 60 570
F-4
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
December 31, Year Ended June 30,
-------------------------- ----------------------------------------
1996 1995 1996 1995 1994
CASH FLOWS FROM INVESTING
ACTIVITIES (Continued):
Purchase of Federal Home Loan Bank stock $ - $ - $ (157) $ - $ -
Purchase of property and equipment (685) (321) (1,168) (899) (689)
Proceeds from sale of property and
equipment - - 127 - -
Net cash used in investing activities (13,197) (20,609) (32,388) (11,668) (20,377)
CASH FLOWS FROM FINANCING
ACTIVITIES - Net increase in deposits 18,120 23,924 29,916 5,783 2,721
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 6,320 3,744 (5,183) 3,074 (6,483)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 10,784 15,967 15,967 12,893 19,376
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 17,104 $ 19,711 $ 10,784 $ 15,967 $ 12,893
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,279 $ 6,933 $ 14,461 $ 10,962 $ 10,478
Income taxes $ 469 $ 1,185 $ 2,274 $ 2,130 $ 2,700
Transfers from loans to real estate
acquired in settlement of loans $ 102 $ 23 $ 115 $ 75 $ 130
Increase (decrease) in net unrealized
losses on available-for-sale investments
and marketable equity securities $ (118) $ (99) $ 70 $ (103) $ 170
Increase (decrease) in deferred tax asset
related to unrealized losses on
investments $ (46) $ (38) $ 27 $ (40) $ 65
Investment securities transferred from
held-to-maturity to available-for-sale,
at fair value $ - $ 4,002 $ 4,002 $ - $ -
Loans held-for-sale transferred to loans
held-for-investments, at lower of
cost or market $ - $ - $ 20,907 $ - $ -
Investment securities transferred from
held-for-investments to available-
for-sale, at fair value $ - $ - $ - $ 5,211 $ -
See notes to consolidated financial statements.
F-5
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. ORGANIZATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Customer Concentration - First Federal Savings
and Loan Association of Spartanburg and Subsidiary (the "Association") is
a federally chartered, mutual savings and loan association engaged in the
business of accepting savings and demand deposits and providing mortgage,
consumer and commercial loans to its members and others. The Association's
business is primarily limited to the Spartanburg and adjacent county areas
of South Carolina.
Basis of Accounting - The accounting and reporting policies of the
Association conform to generally accepted accounting principles and to
general practices within the savings and loan industry.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Association and its wholly-owned subsidiary,
First Spartan Service Corporation ("First Spartan"). Significant
intercompany balances and transactions have been eliminated in
consolidation.
Equity Method of Accounting for Investment - On August 22, 1996, First
Spartan purchased approximately a one-third ownership interest in a
mortgage banking company (the "Company") located in Greenville, South
Carolina, for $400,000. The investment is accounted for under the equity
method of accounting whereby the Association's investment will be
increased by any additional investment in the Company and the
Association's share of the Company's earnings and decreased by dividends
received and the Association's share of the Company's losses.
The investment is included in Other Assets in the December 31, 1996
balance sheet. The Association's share of the Company's losses in the six
month period ended December 31, 1996 totaled approximately $100,000 and
the amount is included in Other Income in the Statement of Income.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash
includes cash on hand and amounts due from depository institutions,
federal funds sold and overnight interest-bearing deposits.
Investment Securities - The Association adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, effective July 1, 1994. SFAS No. 115 requires investments to
be classified in three categories. Debt securities that the enterprise has
the positive intent and ability to hold to maturity are to be classified
as "held-to-maturity" securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term are to be
F-6
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
classified as "trading" securities and reported at fair value with
unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity 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 in a separate component of equity net of taxes. No securities
have been classified as trading securities.
Prior to the adoption of SFAS No. 115, all investments were classified as
held-for-investment. Under this classification, investments in debt
securities and mortgage-backed securities were stated at amortized cost.
Investments in marketable equity securities (mutual funds) were stated at
the lower of cost or market with any unrealized losses being reported as a
separate component of equity. Concurrent with the adoption of SFAS No.
115, management reevaluated its intent with respect to its portfolio and,
accordingly, reclassified securities with a fair value of approximately
$5.2 million (amortized cost approximately $5.4 million) previously
classified as held-for-investment to available-for-sale securities.
In November 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Debt and Equity
Securities, which included a transition provision allowing entities that
adopted SFAS No. 115 to reassess the appropriateness of the
classifications of securities held and account for any resulting
reclassifications at fair value. Reclassifications from the
held-to-maturity category resulting from this one-time reassessment will
not call into question, or "taint," the intent of the entity to hold other
debt securities to maturity in the future. In accordance with this Special
Report, on December 28, 1995, the Association transferred securities with
a fair value and amortized cost of approximately $4.0 million from
held-to-maturity to available-for-sale. This transfer is disclosed as a
noncash transaction in the statement of cash flows.
Gains and losses on sales of securities are determined on the specific
identification method. Premiums and discounts are amortized to maturity on
a method which approximates the level yield method.
Loans - Loans held for investment are recorded at cost.
Nonaccrual loans are those loans on which the accrual of interest has
ceased. Loans are placed on nonaccrual status if, generally, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or
interest is past due 90 days or more. Interest accrued but not collected
at the date a loan is placed on nonaccrual status is reversed against
interest income in the current period.
Restructured loans are those for which concessions, such as the reduction
of interest rates or deferral of interest or principal payments, have been
granted due to a deterioration in the borrowers' financial condition.
Interest on restructured loans is accrued at the restructed rates. The
difference between interest that would have been recognized under the
original terms of nonaccrual and restructed loans and interest actually
recognized on such loans was not a material amount for the six months
ended December 31, 1996 and 1995 and for the years ended June 30, 1996,
1995 and 1994.
F-7
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Effective July 1, 1995, the Association adopted SFAS No. 114, Accounting
by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures.
SFAS No. 114 requires that the carrying value of an impaired loan be based
on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the loan
is collateral-dependent. Under SFAS No. 114, a loan is considered impaired
when, based on current information, it is probable that the borrower will
be unable to pay contractual interest or principal payments as scheduled
in the loan agreement. SFAS No. 114 applies to all loans except
smaller-balance homogenous mortgage and consumer loans, loans carried at
fair value or the lower of cost or fair value, debt securities, and
leases. Generally, the Association applies SFAS No. 114 to nonaccrual
commercial loans and renegotiated loans. The adoption of the statements
did not affect operating results, the level of the overall allowance or
the comparability of credit related data. Income recognition or charge-off
policies were not changed as a result of SFAS No. 114 and SFAS No. 118.
The total principal balances of impaired loans at December 31, 1996 and
June 30, 1996 was not material.
Allowance for Loan Losses - The Association 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. Because of the
uncertainty inherent in the estimation process, management's estimate of
the allowance for loan losses may change in the near term. However, the
amount of the change that is reasonably possible cannot be estimated.
Loan Sales - The Association periodically sells and retains servicing on
certain whole and participating interests in real estate loans. The
Association does not recognize gains or losses on loan sales if the loans
sold have the same approximate average interest rate, adjusted for normal
servicing fees, as the contractual yield to the purchaser. However, gains
or losses are recognized if, at the time of sale, the average interest
rate on the loans sold, adjusted for normal servicing costs, differs from
the contractual yield to the purchaser. Gains or losses on such loan sales
are determined based on the present value of the difference between
estimated future receipts and normal servicing costs. The stated value of
the resulting asset (in the case of a gain) is reviewed periodically and,
if necessary, adjustments are charged to income to reflect changes in the
repayments of the serviced loans. Such adjustments, if any, are determined
on a disaggregated basis using the discount rate inherent in the original
present value calculation. Such assets are amortized over the estimated
lives of the serviced loans using a method approximating a level yield.
Loans Held-for-Sale - Loans originated and intended for sale in the
secondary market are stated at the lower of cost or estimated market
value. Net unrealized losses are recognized in a valuation allowance by
charges to income. During the year ended June 30, 1996, the Association
reclassified approximately $20.9 million of loans from held-for-sale to
held-for-investment at the lower of cost or market at the time the loans
were reclassified.
F-8
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Office Properties and Equipment - Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
over the estimated useful lives of the related assets using the
straight-line method.
Real Estate Acquired in Settlement of Loans - Real estate acquired in
settlement of loans is initially recorded at fair value less estimated
cost of disposal at the date of foreclosure, establishing a new cost
basis. Any accrued interest on the related loan at the date of acquisition
is charged to operations. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
cost or fair value minus estimated costs to sell. Revenues, expenses and
additions to the valuation allowance related to real estate acquired in
settlement of loans are charged to operations. Such amounts were not
material in the six months ended December 31, 1996 and 1995 and in the
years ended June 30, 1996, 1995 and 1994 and are included in other
operating expenses.
Deferred Loan Origination Fees and Costs - Nonrefundable loan fees and
certain direct loan origination costs are deferred and recognized over the
contractual lives of the loans using the level yield method. Amortization
of these deferrals is recognized as interest income.
Advertising - The Association expenses the production cost of advertising
as incurred.
Income Taxes - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Recently Adopted Accounting Standards - In March 1995, the FASB issued
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangible assets and goodwill related to those assets to be held and used
and for long-lived assets to be held and certain intangible assets to be
disposed of. This standard was adopted July 1, 1996 and the adoption did
not have a significant impact on financial conditions or results of
operations.
The FASB has issued SFAS No. 122, Accounting for Mortgage Servicing
Rights, which amends SFAS No. 65 and the principal effect for the
Association is the elimination of the accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions.
When a mortgage banking enterprise purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained, it
should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values if it is practicable to estimate those
fair values. Any cost allocated to mortgage servicing rights should be
recognized as a separate asset and amortized in proportion to and over the
period of the estimated net servicing income. SFAS No. 122 was
implemented, prospectively, effective July 1, 1996 and implementation of
its provisions did not have a material impact on the Association's
financial condition or results of operations.
F-9
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement amends SFAS Nos. 65 and 115 and supersedes SFAS Nos. 76, 77 and
122 and provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. It
requires that liabilities and derivatives incurred or obtained by
transferors as part of financial assets be initially measured at fair
value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer. Servicing assets and liabilities must be subsequently measured
by amortization in proportion to and over the period of estimated net
servicing income or loss and assessment for asset impairment or increased
obligation based on their fair values. This Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. In December 1996, the FASB
issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125. This Statement defers the effective date of
application of certain transfer and collateral provisions of SFAS No. 125
until January 1, 1998.
The adoption of the provisions of SFAS Nos. 125 and 127 did not have a
significant impact on financial position or results of operations.
Unaudited Financial Information - Information as of December 31, 1996 and
for the six month periods ended December 31, 1996 and 1995 is unaudited.
The unaudited information furnished reflects all adjustments, which
consist solely of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position at
December 31, 1996 and the results of operations and cash flows for the
six-month periods ended December 31, 1996 and 1995. The results of the
six-month periods are not necessarily indicative of the results of the
Association which may be expected for the entire year.
Reclassifications - Certain June 30, 1996, 1995 and 1994 amounts have been
reclassified to conform to the December 31, 1996 presentation.
F-10
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment securities at December 31, 1996 and June 30, 1996 and 1995 are
summarized as follows (in thousands of dollars):
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
Available for sale:
Debt securities:
U.S. Treasury obligations $ 1,989 $ 2 $ (6) $ 1,985
U.S. Government Agency
obligations 6,493 11 (21) 6,483
Total 8,482 13 (27) 8,468
Marketable equity securities 5,028 - (4) 5,024
Total $ 13,510 $ 13 $ (31) $ 13,492
June 30, 1996
Available for sale:
Debt securities:
U.S. Treasury obligations $ 1,986 $ 4 $ (15) $ 1,975
U.S. Government Agency
obligations 6,486 - (86) 6,400
Total 8,472 4 (101) 8,375
Marketable equity securities 9,819 - (39) 9,780
Total $ 18,291 $ 4 $ (140) $ 18,155
June 30, 1995
Held to maturity:
U.S. Treasury obligations $ 2,001 $ 7 $ (9) $ 1,999
U.S. Government Agency
obligations 3,501 1 (52) 3,450
Total $ 5,502 $ 8 $ (61) $ 5,449
F-11
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
Available for sale:
Debt securities:
U.S. Treasury obligations $ 500 $ - $ (7) $ 493
U.S. Government Agency
obligations 2,499 1 (37) 2,463
Total 2,999 1 (44) 2,956
Marketable equity securities 5,295 - (23) 5,272
Total $ 8,294 $ 1 $ (67) $ 8,228
Marketable equity securities at December 31, 1996, June 30, 1996 and 1995
consist principally of a mutual fund that invests in adjustable rate
mortgages.
Investment securities totaling approximately $2.0 million at December 31,
1996 were pledged as collateral for public deposits.
The contractual maturities of debt securities (at amortized cost and
estimated fair value) are summarized as follows at December 31, 1996 (in
thousands of dollars):
Available for Sale
-----------------------------
Amortized Fair
Cost Value
Due within one year $ 500 $ 502
Due after one through five years 7,982 7,966
Mortgage-backed securities at December 31, 1996, June 30, 1996 and 1995
consist of U.S. Government Agency obligations. Gross unrealized gains were
approximately $14,000 and gross unrealized losses were $0 at December 31,
1996 and June 30, 1996 and 1995. The contractual maturity of the entire
balance of mortgage-backed securities at June 30, 1996 is due within five
to ten years.
F-12
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and June 30, 1996 and 1995 consisted
of the following (in thousands of dollars):
June 30,
December 31, -------------------
1996 1996 1995
Real estate mortgage loans:
Residential (1-4 family) $ 267,593 $ 258,302 $217,702
Construction 31,949 32,954 30,483
Land 2,409 3,285 1,762
Commercial and other 4,571 3,546 6,203
Total real estate mortgage loans 306,522 298,087 256,150
Consumer and commercial loans:
Home equity 32,555 28,430 20,859
Loans secured by deposit accounts 1,979 1,605 1,345
Other 5,235 4,681 3,482
Total consumer and commercial loans 39,769 34,716 25,686
Total 346,291 332,803 281,836
Less:
Undisbursed portion of loans in process (12,008) (15,839) (12,761)
Net deferred loan fees (979) (1,028) (1,082)
Allowance for loan losses (1,650) (1,000) (600)
Total, net $ 331,654 $ 314,936 $267,393
The changes in the allowance for loan losses consisted of the following
(in thousands of dollars):
December 31, June 30,
------------- ---------------------
1996 1995 1996 1995 1994
Allowance, beginning of year $1,000 $600 $600 $600 $600
Provision 675 4 419 9 -
Write-offs (25) (6) (23) (9) -
Recoveries - 2 4 - -
Total $1,650 $600 $1,000 $600 $600
Residential real estate loans are presented net of loans serviced for
others totaling approximately $58.7 million, $64.7 million, $59.2 million,
$69.1 million and $62.5 million at December 31, 1996 and 1995 and June 30,
1996, 1995 and 1994, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. In connection
with these loans serviced for others, the Association held borrower's
escrow balances of $288,000, $502,000, $390,000, $560,000 and $588,000 at
December 31, 1996 and 1995 and June 30, 1996, 1995 and 1994, respectively.
F-13
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
The Association originates loans to officers and directors at terms
substantially identical to other borrowers. Mortgage and consumer loans to
officers and directors at December 31, 1996, June 30, 1996 and 1995 were
approximately $957,000, $975,000 and $1,091,000, respectively.
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1996 and June 30, 1996 and
1995 are summarized as follows (in thousands of dollars):
June 30,
December 31, -----------------------
Major Classification 1996 1996 1995
Land $ 1,658 $ 1,389 $ 1,004
Office buildings and improvements 4,914 4,791 4,659
Furniture, fixtures and equipment 2,090 2,119 1,619
Automobiles 37 37 57
Total 8,699 8,336 7,339
Less accumulated depreciation (3,218) (3,224) (2,960)
Office properties and equipment, net $ 5,481 $ 5,112 $ 4,379
5. DEPOSIT ACCOUNTS
Deposit accounts at December 31, 1996 and June 30, 1996 and 1995 are
summarized as follows (in thousands of dollars):
December 31, 1996 June 30, 1996 June 30, 1995
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
Demand accounts:
Passbook $ 55,869 3.72 % $ 42,944 3.40 % $ 31,893 3.04 %
NOW 30,009 1.83 30,045 1.84 25,747 2.01
Money market 13,967 3.17 16,694 3.36 19,443 3.60
Certificate accounts 224,106 5.59 216,148 5.54 198,832 5.56
Total $ 323,951 4.81 $ 305,831 4.76 $ 275,915 4.80
F-14
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Scheduled maturities of certificate accounts at December 31, 1996 are as
follows (in thousands of dollars):
Within 1 year $ 175,330
After 1 but within 2 years 22,469
After 2 but within 3 years 6,925
Thereafter 19,382
Total certificate accounts $ 224,106
The aggregate amount of certificate accounts in excess of $100,000 was
$22.2 million, $24.5 million and $26.7 million at December 31, 1996 and
June 30, 1996 and 1995, respectively. Deposits in excess of $100,000 are
not federally insured.
Interest expense by type of deposit is summarized as follows (in thousands
of dollars):
Six Months Ended Year Ended
December 31, June 30,
-------------- ----------------------------
1996 1995 1996 1995 1994
Demand accounts:
Passbook $1,043 $636 $ 1,364 $ 979 $1,003
NOW 233 261 542 545 517
Money market 235 319 626 718 765
Certificate accounts 6,057 6,116 12,137 9,060 8,102
Total $7,568 $7,332 $14,669 $11,302 $10,387
F-15
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
6. INCOME TAXES
The tax effects of significant items comprising the Association's net
deferred tax liability (included in other liabilities on the balance
sheet) as of December 31, 1996 and June 30, 1996 and 1995 are as follows
(in thousands of dollars):
June 30,
December 31, --------------
1996 1996 1995
Deferred tax liabilities:
Tax basis bad debt reserves arising after
December 31, 1987 in excess of book reserves $ 390 $ 649 $ 662
Differences between book and tax basis of
Federal Home Loan Bank stock 431 431 431
Unamortized premiums on loans sold 93 106 142
Differences between book and tax basis of property 110 133 107
Deferred loan fees 157 85 26
Other 85 187 48
Total 1,266 1,591 1,416
Deferred tax asset - Unrealized loss on securities
available for sale 6 52 25
Net deferred tax liability $1,260 $1,539 $1,391
The Association has been permitted under the Internal Revenue Code to
deduct an annual addition to a reserve for bad debts in determining
taxable income, subject to certain limitations. The deduction was based on
either specified experience formulas or a percentage of taxable income
before such deduction. The Association used the percentage of taxable
income method for the years ended June 30, 1996, 1995 and 1994. This
deduction was historically greater than the loan loss provisions recorded
for financial accounting purposes. Deferred income taxes are provided on
differences between the bad debt reserve for tax and financial reporting
purposes only to the extent of the tax reserves arising subsequent to
December 31, 1987. Retained earnings as of December 31, 1996, includes
approximately $4,092,000 representing such bad debt deductions prior to
December 31, 1987 for which no deferred income taxes have been provided.
Legislation enacted in August 1996 repealed the reserve method for
determining income tax deductions described above. Under the legislation,
the Association will be required to recapture the post-1987 additions to
its bad debt reserve as taxable income over a six to eight year period. As
a tax deferred liability has been recorded, this legislation will have no
impact on equity or results of operations.
F-16
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
The legislation also eliminated certain conditions under which recapture
of the pre-1987 additions to the tax bad debt reserve would be required.
Such conditions are principally conversion to a commercial bank charter or
merger with a commercial bank. The pre-1987 reserves would be required to
be recaptured under certain other conditions such as payment of dividends
in excess of accumulated earnings and profits or other distributions made
in connection with the dissolution or liquidation of the Association.
The provision for income taxes is summarized as follows (in thousands of
dollars):
Six Months Ended
December 31, Year Ended June 30,
-------------------------- -----------------------------------------
1996 1995 1996 1995 1994
Current provision:
Federal $ 600 $ 888 $ 1,679 $ 1,792 $ 2,022
State 90 137 257 227 319
Total current 690 1,025 1,936 2,019 2,341
Deferred provision:
Federal (275) 77 148 400 278
State (50) 13 27 76 88
Total deferred (325) 90 175 476 366
Total provision for income taxes $ 365 $ 1,115 $ 2,111 $ 2,495 $ 2,707
For the six months ended December 31, 1996 and 1995 and for the years
ended June 30, 1996, 1995 and 1994, a tax provision (benefit) of $46,000,
$38,000, $(27,000), $40,000 and $(65,000), respectively, was allocated to
equity for the tax effects of unrealized losses on securities
available-for-sale and marketable equity securities.
The Association's effective tax rate is greater than the statutory Federal
income tax rate for the following reasons (in thousands of dollars):
Six Months Ended
December 31, Years Ended June 30,
-------------------------- ----------------------------------------
1996 1995 1996 1995 1994
Tax at statutory Federal income
tax rate (34%) $ 330 $ 1,011 $ 1,920 $ 2,256 $ 2,440
Increase (decrease) resulting from:
State income taxes 26 99 187 200 269
Other - net 9 5 4 39 (2)
Total $ 365 $ 1,115 $ 2,111 $ 2,495 $ 2,707
Effective rate 37.6% 37.5% 37.4% 37.6% 37.7%
F-17
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
7. EMPLOYEE BENEFIT PLANS
The Association has a noncontributory defined-contribution retirement plan
("retirement plan") to which the Association contributes fifteen percent
of eligible employee salaries. Expense under the plan amounted to
approximately $182,000, $163,000, $331,000, $283,000 and $272,000 in the
six months ended December 31, 1996 and 1995 and in the years ended June
30, 1996, 1995 and 1994, respectively.
During the year ended June 30, 1995, the Association adopted a 401(k) plan
to which eligible employees may elect to contribute 2% - 10% of their
compensation, with limitations. The Association makes discretionary
matching contributions, with certain limitations. Expense under the Plan
amounted to approximately $42,000, $42,000, $72,000 and $17,000 in the six
months ended December 31, 1996 and 1995 and in the years ended June 30,
1996 and 1995, respectively.
All employees with 1,000 hours or greater who have completed twelve months
of continuous employment as of each Plan's entry dates are eligible to
participate in the Plans.
On February 3, 1997 the Board of Directors adopted a resolution to merge
the retirement plan with the 401(k) plan. All balances in the retirement
plan will be vested and contributions discontinued effective with the
merger. The balances related to the retirement plan will be maintained as
a separate account in the 401(k) plan.
8. BORROWING ARRANGEMENTS WITH FEDERAL HOME LOAN BANK OF ATLANTA
The Association has executed an advance and collateral agreement with the
Federal Home Loan Bank of Atlanta ("FHLB"). This agreement allows the
Association to borrow funds under various credit programs offered by the
FHLB. Terms, credit availability and collateral requirements vary by
program.
9. COMMITMENTS AND CONTINGENT LIABILITIES
Loan Commitments - The Association, in the normal course of business, is a
party to financial instruments and commitments which involve, to varying
degrees, elements of risk in excess of the amounts recognized in the
consolidated financial statements. These financial instruments and
commitments include unused consumer lines of credit and commitments to
extend credit. The Association had loan commitments, excluding undisbursed
portions of interim construction loans, of approximately $4.4 million
($3.9 million at fixed rates ranging from 7.000% - 8.875%) at December 31,
1996. Commitments, which are disbursed subject to certain limitations,
extend over periods of time with the majority of such commitments
disbursed within a 30-day period. Additionally, at December 31, 1996,
customers of the Association had unused lines of credit extended by the
Association (principally variable-rate consumer lines secured by real
estate) of approximately $25.3 million.
F-18
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Loans Sold with Recourse - At December 31, 1996, approximately $3.5
million of loans serviced for others had been sold by the Association with
recourse (i.e., the Association retained all credit risk associated with
these loans). Loans sold with recourse resulted from the sale of several
pools of loans in 1983. Due to the seasoned nature of these loans and
their typical low loan-to-value ratios, management of the Association
believes that these loans do not present a significant risk to the
Association.
Financial Instruments with Off-Balance Sheet Risk - The Association has no
other additional financial instruments with off-balance sheet risk.
Concentration of Credit Risk - The Association's business activity is
principally with customers located in South Carolina. Except for loans in
the Association's market area, the Association has no other significant
concentration of credit risk. The majority of the Association's loans are
residential mortgage loans, construction loans, home equity loans and
other mortgage loans. The Association's policy will generally allow first
mortgage loans up to 80% of the value of the real estate pledged as
collateral or up to 95% with private mortgage insurance. Home equity loans
are generally allowed up to 90% of the value of the real estate pledged as
collateral.
Potential Impact of Changes in Interest Rates - The Association's
profitability depends to a large extent on its net interest income, which
is the difference between interest income on loans and investments and
interest expense on deposits. Like most financial institutions, the
Association's interest income and interest expense are significantly
affected by changes in market interest rates and other economic factors
beyond its control. The Association's interest earning assets consist
primarily of mortgage loans and investments which adjust more slowly to
changes in interest rates than its interest-bearing savings deposits.
Accordingly, the Association's earnings would be adversely affected during
periods of rising interest rates.
Litigation - The Association is involved in legal actions in the normal
course of business. Management, based on advice of counsel, does not
expect any significant losses from any current litigation.
10. REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal financial institution regulatory agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the
Association's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Association
must meet specific capital guidelines that involve quantitative measures
of the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
F-19
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios. Under
regulations of the Office of Thrift Supervision ("OTS"), the Association
must have: (i) core capital equal to 3.0% of adjusted total assets, (ii)
tangible capital equal to 1.5% of adjusted total assets and (iii) total
capital equal to 8.0% of risk-weighted assets. In measuring compliance
with all three capital standards, institutions must deduct from their
capital (with several exceptions primarily for mortgage banking
subsidiaries and insured depository institution subsidiaries) their
investments in, and advances to, subsidiaries engaged (as principal) in
activities not permissible for national banks, and certain other
adjustments. Management believes, as of December 31, 1996, that the
Association meets all capital adequacy requirements to which it is
subject.
The following is a reconciliation of the Association's equity reported in
the consolidated financial statements under generally accepted accounting
principles to OTS regulatory capital requirements (in thousands of
dollars):
Tangible Core Risk-Based
Capital Capital Capital
December 31, 1996
Total equity as reported in the consolidated
financial statements $44,833 $44,833 $44,833
General allowance for loan losses - - 1,638
Unrealized loss on available-for-sale securities 12 12 12
Regulatory capital $44,845 $44,845 $46,483
June 30, 1996
Total equity as reported in the consolidated
financial statements $44,154 $44,154 $44,154
General allowance for loan losses - - 999
Unrealized loss on available-for-sale securities 84 84 84
Regulatory capital $44,238 $44,238 $45,237
June 30, 1995
Total equity as reported in the consolidated
financial statements $40,660 $40,660 $40,660
General allowance for loan losses - - 587
Unrealized loss on available-for-sale securities 41 41 41
Regulatory capital $40,701 $40,701 $41,288
F-20
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
The Association's actual and required capital amounts and ratios are
summarized as follows (in thousands of dollars):
Minimum
Actual Requirement
-------------------- ------------------------
Amount Ratio Amount Ratio
December 31, 1996
Tangible capital (to total assets) $ 44,845 11.9% $ 5,633 1.5%
Core capital (to adjusted total assets) $ 44,845 11.9% $ 11,266 3.0%
Risk-based capital (to risk-weighted assets) $ 46,483 20.8% $ 17,897 8.0%
June 30, 1996
Tangible capital (to total assets) $ 44,238 12.4% $ 5,356 1.5%
Core capital (to adjusted total assets) $ 44,238 12.4% $ 10,712 3.0%
Risk-based capital (to risk-weighted assets) $ 45,237 21.5% $ 16,806 8.0%
June 30, 1995
Tangible capital (to total assets) $ 40,701 12.6% $ 4,841 1.5%
Core capital (to adjusted total assets) $ 40,701 12.6% $ 9,682 3.0%
Risk-based capital (to risk-weighted assets) $ 41,288 22.1% $ 14,918 8.0%
As of December 31, 1996, June 30, 1996 and June 30, 1995, the most recent
respective notifications from the OTS classified the Association as well
capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since the most recent notification that
management believes have changed the Association's category. To be
categorized as well capitalized, the Association must maintain minimum
ratios of total capital to risk-weighted assets, core capital to
risk-weighted assets and core capital to adjusted total assets. The
Association's actual and minimum capital requirements to be well
capitalized under prompt corrective action provisions are as follows:
Minimum
Actual Requirement
------------------- -------------------
Amount Ratio Amount Ratio
December 31, 1996
Tier I Capital (to adjusted total assets) $ 44,845 11.9% $ 18,776 5.0%
Tier I Capital (to risk-weighted assets) $ 44,845 20.0% $ 13,422 6.0%
Total Capital (to risk-weighted assets) $ 46,483 20.8% $ 22,371 10.0%
June 30, 1996
Tier I Capital (to adjusted total assets) $ 44,238 12.4% $ 17,848 5.0%
Tier I Capital (to risk-weighted assets) $ 44,238 21.1% $ 12,605 6.0%
Total Capital (to risk-weighted assets) $ 45,237 21.5% $ 21,008 10.0%
June 30, 1995
Tier I Capital (to adjusted total assets) $ 40,701 12.6% $ 16,137 5.0%
Tier I Capital (to risk-weighted assets) $ 40,701 21.8% $ 11,189 6.0%
Total Capital (to risk-weighted assets) $ 41,288 22.1% $ 18,648 10.0%
F-21
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
On September 30, 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund. The effect of this legislation is to require a
one-time assessment on all federally insured savings associations'
deposits and was levied by the Federal Depository Insurance Corporation
("FDIC") at .657% of insured deposits at March 31, 1995. The amount of the
Association's assessment was approximately $1.78 million. The assessment
was accrued as a charge to earnings in the quarter ended September 30,
1996 and paid on November 27, 1996.
11. FINANCIAL INSTRUMENTS
The stated and fair value amounts of financial instruments as of December
31, 1996 and June 30, 1996 and 1995, are summarized below (in thousands of
dollars):
December 31, 1996 June 30, 1996 June 30, 1995
---------------------------- ----------------------------- -----------------------------
Stated Fair Stated Fair Stated Fair
Amount Value Amount Value Amount Value
Financial Assets:
Cash and cash
equivalents $ 17,104 $ 17,104 $ 10,784 $ 10,784 $ 15,967 $ 15,967
Investment securities 13,492 13,492 18,155 18,155 13,730 13,677
Mortgage-backed
securities 128 142 195 209 383 397
Loans receivable, net 331,654 333,585 314,936 313,727 267,393 269,486
Loans held for sale 1,444 1,444 1,911 1,911 15,324 15,580
Federal Home Loan
Bank Stock 2,806 2,806 2,806 2,806 2,649 2,649
Other assets 2,439 2,439 2,427 2,427 2,127 2,127
Retained servicing
on mortgage
loans - 614 - 640 - 143
Total $ 369,067 $ 371,626 $ 351,214 $ 350,659 $ 317,573 $ 320,026
Financial Liabilities:
Deposits:
Demand accounts $ 99,845 $ 99,845 $ 89,683 $ 89,683 $ 77,083 $ 77,083
Certificate accounts 224,106 224,224 216,148 215,660 198,832 197,298
Other liabilities 4,561 4,561 4,781 4,781 4,015 4,015
Total $ 328,512 $ 328,630 $ 310,612 $ 310,124 $ 279,930 $ 278,396
The Association had off-balance sheet financial commitments, which include
$29.7 million, $27.4 million and $21.6 million at December 31, 1996, June
30, 1996 and 1995, respectively, to originate loans and unused consumer
lines of credit. Since these commitments are based on current rates, the
commitment amount is considered to be a reasonable estimate of fair market
value.
F-22
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
The following methods and assumptions were used by the Association in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - Both cash and cash equivalents have maturities
of three months or less, and, accordingly, the stated amount of such
instruments is deemed to be a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities - Fair values for investments
and mortgage-backed securities are based on quoted market prices. If a
quoted market price is not available, fair value is estimated using market
prices of similar securities.
Loans - Fair values of loans held for investment are estimated by
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio.
A prepayment assumption is used as an estimate of the portion of loans
that will be repaid prior to their scheduled maturity. Loans held for sale
are valued at the lower of cost or market as determined by outstanding
commitments from investors or current investor yield requirements
calculated on the aggregate loan basis.
Federal Home Loan Bank Stock - No ready market exists for this stock, and
it has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the stated amount is deemed
to be a reasonable estimate of fair value.
Retained Servicing on Mortgage Loans - The fair value of retained
servicing is calculated by discounting the expected future cash flows
using current rates.
Deposits - The fair values disclosed for demand deposits are equal to the
amounts payable on demand at the reporting date (i.e., their stated
amounts). The fair value of certificates of deposit are estimated by
discounting the amounts payable at the certificate rate using the rates
currently offered for deposits of similar remaining maturities.
Other Assets and Other Liabilities - Other assets represent principally
accrued interest receivable; other liabilities represent advances from
borrowers for taxes and insurance, outstanding checks and accrued interest
payable. Since these financial instruments will typically be received or
paid within three months, the stated amounts of such instruments are
deemed 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 Association's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Association'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
F-23
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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 also would significantly effect
the estimates. Further, the fair value estimates were calculated as of
December 31, 1996 and June 30, 1996 and 1995. Changes in market interest
rates and prepayment assumptions could change significantly the fair
value.
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 Association has
significant assets and liabilities that are not considered financial
assets or liabilities including loan servicing portfolio, real estate,
deferred tax liabilities and premises and equipment. 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.
12. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On February 3, 1997, the Board of Directors of the Association adopted a
Plan of Conversion to convert from a federally chartered mutual savings
and loan association to a federally chartered capital stock savings and
loan association with the concurrent formation of a holding company,
subject to approval by regulatory authorities and depositors of the
Association. The conversion is expected to be accomplished through the
adoption of a federal stock charter for the Association, the sale of all
of the Association's stock to the holding company and the sale of the
holding company's common stock to the public. A subscription offering of
the shares of common stock will be offered initially to eligible account
holders, employee benefit plans of the Association, supplemental eligible
account holders and other members of the Association. Shares of common
stock remaining unsold after the subscription offering, if any, will be
offered for sale in a community offering.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a liquidation account in an amount equal to its
retained income as of the date of the latest statement of financial
condition appearing in the final prospectus used in connection with the
conversion. 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 the Association 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 or supplemental eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation (and only in such event) of the Association, 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.
F-24
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SPARTANBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Subsequent to the conversion, the Association 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 requirements.
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. As of December 31, 1996, no significant
conversion costs have been incurred.
**********
F-25
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 FirstSpartan Financial Corp. or First Federal Savings and Loan
Association of Spartanburg. 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 FirstSpartan Financial Corp. or First
Federal Savings and Loan Association of Spartanburg since any of the dates as of
which information is furnished herein or since the date hereof.
Table of Contents
Page
Prospectus Summary . . . . . . . . . . . (i)
Selected Consolidated Financial
Information . . . . . . . . . . . . . . (ix)
Recent Developments . . . . . . . . . . . (xi)
Risk Factors . . . . . . . . . . . . . . 1
FirstSpartan Financial Corp. . . . . . . 7
First Federal Savings and Loan Association
of Spartanburg . . . . . . . . . . . .. 7
Use of Proceeds . . . . . . . . . . . . . 8
Dividend Policy . . . . . . . . . . . . . 9
Market for Common Stock . . . . . . . . . 11
Capitalization . . . . . . . . . . . . . 12
Historical and Pro Forma Regulatory
Capital Compliance . ... . . . . . . . . 14
Pro Forma Data . . . . . . . . . . . . . 15
Shares to be Purchased by Management
Pursuant to Subscription Rights . . . . 20
First Federal Savings and Loan
Association of Spartanburg and Subsidiary
Consolidated Statements of Income . . . 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . .22
Business of the Holding Company . . . . . 34
Business of the Association . . . . . . . 35
Management of the Holding Company . . . . 59
Management of the Association . . . . . . 59
Regulation . . . . . . . . . . . . . . .. 69
Taxation . . . . . . . . . . . . . . . . 77
The Conversion . . . . . . . . . . . 79
Restrictions on Acquisition of the Holding
Company . . . . . . . . . . . . . . . . .93
Description of Capital Stock of the
Holding Company . . .. . . . . . . . . . 98
Registration Requirements . . . . . . . .100
Legal and Tax Opinions . . . . . . . . . 100
Experts . . . . . . . . . . . . . . . . .100
Additional Information . . . . . . . . . 100
Index to Consolidated Financial
Statements . . . . . . . . . . . . . . .101
Until the later of June 17, 1997, 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.
FIRSTSPARTAN FINANCIAL CORP.
(Proposed Holding Company for
First Federal Savings and Loan)
Association of Spartanburg)
2,847,500 to 3,852,500 Shares of
Common Stock
Prospectus
TRIDENT SECURITIES, INC.
May 14, 1997
SUBSCRIPTION RIGHTS
SPECIAL NOTICE
Any transfer of, or attempt to transfer, a subscription right to any
other person is illegal and subject to civil fines and/or penalties
and even criminal fines and/or penalties. The Association intends to
prosecute vigorously any transfer of, or attempt to transfer,
subscription rights that comes to its attention.
If you are (or have been already) contacted by anyone offering to give
you money to buy stock in exchange for transferring the stock to them
later or to share in any way proceeds upon the sale of the stock, or
to transfer your subscription rights in any other way, please call us
immediately at (864) 580-5510.
FIRSTSPARTAN FINANCIAL CORP.
STOCK ORDER FORM
FIRST FEDERAL SAVINGS EXPIRATION DATE
AND LOAN ASSOCIATION OF for Stock Order Forms:
SPARTANBURG June 17, 1997
STOCK INFORMATION CENTER 12:00 Noon, Eastern Time,
380 E. MAIN STREET unless extended
SPARTANBURG, SOUTH CAROLINA
29302
(864) 580-5510
IMPORTANT -- PLEASE NOTE: A properly completed original stock order form must be used to subscribe for common stock. Faxes or
copies of this form are not required to be accepted. Please read the Stock Ownership Guide and Stock Order Form Instructions as you
complete this Form.
(1) NUMBER OF SHARES SUBSCRIPTION PRICE (2) TOTAL PAYMENT DUE
X $20.00 =
The minimum number of shares that may be subscribed for
is 25 shares. The maximum number of shares that may be
purchased by any individual in the Subscription Offering
or in the Community Offering and joint accounts is 16,250
shares. The maximum number of shares that may be
purchased in the conversion by any person together with
associates or groups acting in concert is 38,525 shares.
Management has the authority to increase or decrease
these limits.
[ ] (3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION
Check here if you are a director, officer or employee of
FirstSpartan Financial Corp. or First Federal or a member of
such person's immediate family.
[ ] (4) METHOD OF PAYMENT/CHECK CHECK AMOUNT
Enclosed is a check, bank draft or
money order made payable to
FirstSpartan Financial Corp.
in the amount of:
[ ] (5) METHOD OF PAYMENT/WITHDRAWAL
The undersigned authorizes withdrawal from the following
account(s) at First Federal. There is no penalty for early
withdrawal used for this payment. Please call the Stock
Information Center no later than June 10, 1997 for information
to withdraw funds from a First Federal IRA account.
ACCOUNT NUMBER(S) WITHDRAWAL AMOUNT(S)
TOTAL WITHDRAWAL AMOUNT
(6) PURCHASER INFORMATION
A. [ ] Eligible Account Holder -- Check here if you were a
depositor with $50.00 or more on deposit at First
Federal as of December 31, 1995. Enter information
below for all deposit accounts that you had at First
Federal on December 31, 1995.
B. [ ] Supplemental Eligible Account Holder -- Check here if
you were a depositor with $50.00 or more on deposit at
First Federal as of March 31, 1997, but are not an
Eligible Account Holder. Enter information below for
all deposit accounts that you had at First Federal on
March 31, 1997.
C. [ ] Other Member -- Check here if you were a depositor of
First Federal as of May 1, 1997, but are not an
Eligible Account Holder or a Supplemental Eligible
Account Holder, or if you had a loan outstanding at
First Federal as of March 12, 1997, which was still
outstanding as of May 1, 1997.
D. [ ] Local Community Resident -- Check here if you are a
permanent resident of Spartanburg County, South
Carolina.
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S)
PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT
IN THE LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS. IF
ADDITIONAL SPACE IS NEEDED, PLEASE UTILIZE THE BACK OF
THIS STOCK ORDER FORM.
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
[ ] Individual [ ] Joint Tenants [ ] Tenants in Common
[ ] Fiduciary (i.e. trust, estate, etc.) [ ] Corporation or Partnership [ ] Uniform Gifts to Minors Act [ ] Other
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE
PRINT CLEARLY) Social Security # or Tax ID
Name(s) continued Social Security # or Tax ID
Street Address City State Zip Code
(9) TELEPHONE INFORMATION Daytime Evening County of Residence
( ) ( )
[ ] (10) NASD AFFILLIATION [ ] (11) ASSOCIATE -- ACTING IN CONCERT
Check here if you are a member of the National Association of Securities Check here, and complete the reverse side
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of this Form, if you or any associates
of the immediate family of any such person to whose support such person (as defined on the reverse side of this
contributes, directly or indirectly, or the holder of an account in which Form) or persons acting in concert with
an NASD member or person associated with an NASD member has a beneficial you have submitted other orders for
interest. To comply with conditions under which an exemption from the shares in the Subscription and/or
NASD's Interpretation With Respect to Free-Riding and Withholding is Community Offerings.
available, you agree, if you have checked the NASD Affiliation box,
(i) not to sell, transfer or hypothecate the stock for a period of 90 days
following issuance, and (ii) to report this subscription in writing to the
applicable NASD member within one day of payment therefor.
(12) ACKNOWLEDGMENT
To be effective, this fully completed Stock Order Form must be actually
received by First Federal, no later than 12:00 Noon, Eastern Time on June 17,
1997, unless extended; otherwise this Stock Order Form and all subscription
rights will be void. Completed Stock Order Forms, together with the required
payment or withdrawal authorization, may be delivered to First Federal or may
be mailed to the Post Office Box indicated on the enclosed business reply
envelope. All rights exercisable hereunder are not transferable and shares
purchased upon exercise of such rights must be purchased for the account of
the person exercising such rights.
It is understood that this Stock Order Form will be accepted in accordance
with, and subject to, the terms and conditions of the Plan of Conversion of
First Federal described in the accompanying Prospectus, dated May 14, 1997,
the receipt of which is hereby acknowledged. If the Plan of Conversion is not
approved by the voting members of First Federal at a Special Meeting to be
held on June 25, 1997, or any adjournment thereof, all orders will be
cancelled and funds received as payment, with accrued interest, will be
returned promptly.
The undersigned agrees that after receipt by First Federal, this Stock Order
Form may not be modified, withdrawn or cancelled without First Federal's
consent, and if authorization to withdraw from deposit accounts at First
Federal has been given as payment for shares, the amount authorized for
withdrawal shall not otherwise be available for withdrawal by the undersigned.
Under penalty of perjury, I certify that the Social Security or Tax ID Number
and the other information provided under item 8 of this Stock Order Form are
true, correct and complete, that I am purchasing for my own account, and that
there is no agreement or understanding regarding the transfer of my
subscription rights or the sale or transfer of these shares.
Applicable regulations prohibit any person from transferring or entering into
any agreement directly or indirectly to transfer the legal or beneficial
ownership of conversion subscription rights, or the underlying securities to
the account of another. First Federal and FirstSpartan Financial Corp. may
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 such transfer. I acknowledge that the common stock offered is not a
savings or deposit account and is not federally insured or guaranteed.
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE
ACKNOWLEDGEMENT FORM ON THE REVERSE HEREOF.
SIGNATURE DATE SIGNATURE DATE
A SIGNED ACKNOWLEDGEMENT FORM MUST ACCOMPANY ALL STOCK ORDER FORMS (SEE REVERSE
SIDE)
DATE REC'D
CATEGORY
ORDER # BATCH
DEPOSIT
ITEM (6) A, B, C -- (CONTINUED)
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S)
ITEM (11) -- (CONTINUED)
List below all other orders submitted by you or your Associates (as defined) or
by persons acting in concert with you.
NUMBER OF
NAME(S) LISTED ON OTHER SHARES
STOCK ORDER FORMS ORDERED
"Associate" is defined as: (i) any corporation or organization (other than First
Federal, FirstSpartan Financial Corp., or a majority-owned subsidiary of First
Federal or FirstSpartan Financial Corp., 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 a director or in a similar fiduciary capacity; provided, however, such term
shall not include FirstSpartan Financial Corp. or First Federal's employee
benefit plans in which such person has a substantial beneficial interest or
serves as a director or in a similar fiduciary capacity; 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 of FirstSpartan Financial Corp. or
First Federal or any subsidiaries thereof.
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED BELOW AND ON THE FRONT OF THIS
FORM.
ACKNOWLEDGEMENT FORM
I/WE ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND IS
NOT FEDERALLY INSURED, AND IS NOT GUARANTEED BY FIRSTSPARTAN FINANCIAL CORP.,
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG OR BY THE FEDERAL
GOVERNMENT.
If anyone asserts that this security is federally insured or guaranteed, or is
as safe as an insured deposit, I/We should call the Office of Thrift
Supervision, Southeast Regional Director, at (404) 888-0771.
I/We further certify that, before purchasing the common stock, par value $.01
per share, of FIRSTSPARTAN FINANCIAL CORP., the proposed holding company for
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG, I/we received a
Prospectus dated May 14, 1997 (the "Prospectus").
The Prospectus that I/we received contains disclosure concerning the nature of
the security being offered and describes the risks involved in the investment,
including but not limited to:
1. Interest Rate Risk (Page 1)
2. Certain Lending Risks (Page 2)
3. Competition (Page 2)
4. Concentration of Credit Risk (Page 2)
5. Return on Equity After Conversion (Page 3)
6. New Expenses Associated With ESOP and MRP (Page 3)
7. Anti-takeover Considerations (Page 3)
8. Possible Dilutive Effect of Benefit Programs (Page 5)
9. Absence of Prior Market for the Common Stock (Page 5)
10. Possible Increase in Estimated Price Range and Number of Shares Issued (Page 5)
11. Possible Delay in Consummating the Conversion (Page 6)
12. Recent Legislation and the Future of the Thrift Industry (Page 6)
13. Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights (Page 6)
Signature Date Signature Date
Name (Please Print) Name (Please Print)
FIRSTSPARTAN FINANCIAL CORP.
STOCK OWNERSHIP GUIDE
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder. Avoid the use of two initials. Please omit words that
do not affect ownership rights, such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or more owners. When stock is held by joint tenants
with right of survivorship, ownership is intended to pass automatically to the surviving joint tenant(s) upon the death of any
joint tenant. All parties must agree to the transfer or sale of shares held by joint tenants.
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When stock is held by tenants in common, upon the
death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased
co-tenant. All parties must agree to the transfer of sale of shares held by tenants in common.
UNIFORM GIFT TO MINORS ACT ("UGMA")
Stock may be held in the name of a custodian for a minor under the Uniform Gift to Minors Act of each state. There may be only
one custodian and one minor designated on a stock certificate. The standard abbreviation for Custodian is "CUST", while the
Uniform Gift to Minors Act is "UGMA". Standard U.S. Postal Service state abbreviations should be used to describe the
appropriate state. For example, stock held by John Doe as custodian for Susan Doe under the South Carolina Uniform Gift to
Minors Act will be abbreviated John Doe, CUST Susan Doe UGMA, SC (use minor's social security number).
FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary capacity must contain the following:
(Bullet) The name(s) of the fiduciary. If an individual, list the first name, middle initial and last name. If a corporation,
list the full corporate title (name). If an individual and a corporation, list the corporation's title before the
individual.
(Bullet) The fiduciary capacity, such as administrator, executor, personal representative, conservator, trustee, committee,
etc.
(Bullet) A description of the document governing the fiduciary relationship, such as living trust agreement or court order.
Documentation establishing a fiduciary relationship may be required to register your stock in a fiduciary capacity.
(Bullet) The date of the document governing the relationship, except that the date of trust created by a will need not be
included in the description.
(Bullet) The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John Doe, Trustee Under Agreement Dated 10-1-87 for
Susan Doe.
STOCK ORDER FORM INSTRUCTIONS
ITEMS 1 AND 2 --
Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying
the number of shares purchased by the Purchase Price of $20.00 per share. The minimum purchase is 25 shares. No Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member, including individuals on a joint account, may purchase
in their capacity as such in the Subscription Offering more than 16,250 shares, or $325,000 of Common Stock. No person,
including associates of and persons acting in concert with such person, may purchase in the Community Offering more than
16,250 shares, or $325,000 of Common Stock. No person or entity, together with associates or persons acting in concert, may
purchase more than 38,525 shares, or $770,500 of the Common Stock in the Conversion. FirstSpartan Financial Corp. reserves the
right to reject the order received in the Community Offering, in whole or in part.
ITEM 3 --
Please check this box to indicate whether you are a director, officer or employee of First Federal or FirstSpartan or a member
of such person's immediate family.
ITEM 4 --
Payment for shares may be made in cash (only if delivered by you in person) or by check, bank draft or money order made
payable to FirstSpartan Financial Corp. Your funds will earn interest at First Federal's passbook rate of interest until the
Conversion is completed. DO NOT MAIL CASH TO PURCHASE STOCK! Please check this box if your method of payment is by check, bank
draft or money order.
ITEM 5 --
If you pay for your stock by a withdrawal from a deposit account at First Federal, insert the account number(s) and the amount
of your withdrawal authorization for each account. The total amount withdrawn should equal the amount of your stock purchase.
There will be no penalty assessed for early withdrawals from certificate accounts used for stock purchases. THIS FORM OF
PAYMENT MAY NOT BE USED IF YOUR ACCOUNT IS AN INDIVIDUAL RETIREMENT ACCOUNT. PLEASE CONTACT THE STOCK INFORMATION CENTER FOR
INFORMATION REGARDING PURCHASES FROM AN INDIVIDUAL RETIREMENT ACCOUNT.
ITEM 6 --
Please check the appropriate box if you were:
(a) A depositor with $50.00 or more on deposit at First Federal as of December 31, 1995. Enter information below for all
deposit accounts that you had at First Federal on December 31, 1995.
(b) A depositor with $50.00 or more on deposit at First Federal as of March 31, 1997, but are not an Eligible Account Holder.
Enter information below for all deposit accounts that you had at First Federal on March 31, 1997.
(c) A depositor of First Federal as of May 1, 1997, but are not an Eligible Account Holder or a Supplemental Eligibile Account
Holder, or if you had a loan outstanding at First Federal as of March 12, 1997, which was still outstanding as of May 1, 1997.
(d) A permanent resident of Spartanburg County, South Carolina.
ITEM 7, 8 AND 9 --
The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of
your FirstSpartan Financial Corp. Common Stock. Please complete items 7, 8 and 9 as fully and accurately as possible, and be
certain to supply your social security or Tax I.D. number(s) and your daytime and evening telephone number(s). We will need to
call you if we cannot execute your order as given. If you have any questions regarding the registration of your stock, please
consult your legal advisor. Stock ownership must be registered in one of the ways described above under "Stock Ownership
Guide."
ITEM 10 --
Please check this box if you are a member of the NASD or if this item otherwise applies to you.
ITEM 11 --
Please check this box if you or any associate (as defined on the reverse side of the Stock Order Form) or person acting in
concert with you has submitted another order for shares and complete the reverse side of the Stock Order Form.
ITEM 12 --
Please sign and date the Stock Order Form and Acknowledgment Form where indicated. Before you sign, review the Stock Order
Form, including the acknowledgment, and the Acknowledgment Form. Normally, one signature is required. An additional signature
is required only when payment is to be made by withdrawal from a deposit account that requires multiple signatures to withdraw
funds.
You may mail your completed Stock Order Form and Acknowledgment Form in the envelope that has been provided, or you may
deliver your Stock Order Form and Acknowledgment Form directly to First Federal. Your Stock Order Form and Acknowledgment
Form, properly completed, and payment in full (or withdrawal authorization) at the subscription price must be received by
First Federal no later than 12:00 Noon, Eastern Time, on June 17, 1997 or it will become void. Stock Order Forms and
Acknowledgment Forms shall be deemed received only upon actual receipt at First Federal. If you have any remaining questions,
or if you would like assistance in completing your Stock Order Form, you may call the Stock Information Center at (864)
580-5510. The Stock Information Center will be open between the hours of 9:00 a.m. and 4:00 pm., Eastern Time, Monday through
Friday, except Monday, May 26, 1997, in observance of Memorial Day.
(First Spartan Financial Corp. logo)
Questions and Answers
Regarding the Subscription
and Community Offering and
the Mutual to Stock Conversion
Q&A
(First Federal of Spartanburg logo)
MUTUAL TO STOCK CONVERSION
The Board of Directors of First Federal Savings and Loan Association of
Spartanburg ("First Federal") has unanimously voted to convert First Federal
from its present mutual form to a stock institution ("Conversion"), subject to
approval of the conversion by First Federal's members and regulatory
authorities. Complete details on the Conversion, including reasons for
Conversion, are contained in the Prospectus and Proxy Statement. We urge you to
read them carefully.
This brochure is provided to answer basic questions you might have about
the Conversion. Remember, the Conversion will not affect the rate on any of your
savings accounts, deposit certificates, or loans.
1. Q. WHAT IS A "CONVERSION"?
A. Conversion is a change in the legal form of organization. First
Federal currently operates as a federally-chartered mutual savings
and loan association with no shareholders. Through the Conversion,
First Federal will form a holding company, FirstSpartan Financial
Corp. ("FirstSpartan Financial"), which will ultimately own all of
the outstanding stock of First Federal. FirstSpartan Financial will
issue common stock in the Conversion, as described below, and will be
a publicly-owned company.
2. Q. WHY IS FIRST FEDERAL CONVERTING?
A. As a federally-chartered mutual savings and loan, First Federal does
not have stockholders and has no authority to issue stock. By
converting to the stock form of organization, First Federal will be
structured in the form used by all commercial banks, most business
entities and a growing number of savings institutions. The Conversion
will be important to the future growth and performance of First
Federal by providing a larger capital base on which it may operate,
enhance future access to capital markets and, if desired, enhance
First Federal's ability to diversify into other financial
service-related activities. Currently, First Federal has no specific
plans, agreements, arrangements or understandings regarding such
diversification.
3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS ACCOUNTS,
CERTIFICATES OF DEPOSIT OR LOANS WITH FIRST FEDERAL?
A. No. The Conversion will not change the amount, interest rate or
withdrawal rights of any savings and checking accounts or certificates
of deposit. The rights and obligations of borrowers under their loan
agreements will not be affected. However, upon consummation of the
Conversion, First Federal's deposit account holders and borrowers will
no longer have voting rights unless they purchase common stock in
FirstSpartan Financial.
4. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR MANAGEMENT?
A. No. The Conversion will not cause any changes in personnel or
management. The normal day-to-day operations will continue as before.
5. Q. DID THE BOARD OF DIRECTORS OF FIRST FEDERAL APPROVE THE CONVERSION?
A. Yes. The Board of Directors unanimously adopted the Plan of Conversion
on February 3, 1997.
THE SUBSCRIPTION AND COMMUNITY OFFERING
6. Q. WHO IS ENTITLED TO SUBSCRIBE FOR FIRSTSPARTAN FINANCIAL COMMON
STOCK?
A. Rights to subscribe for common stock will be given in order of
priority to (i) depositors of First Federal as of December 31, 1995
with $50.00 or more on deposit at that date ("Eligible Account
Holders"); (ii) First Federal's employee stock ownership plan (the
"ESOP"), a tax qualified employee stock benefit plan; (iii) depositors
of First Federal, who are not Eligible Account Holders, with $50.00 or
more on deposit as of March 31, 1997 ("Supplemental Eligible Account
Holders"); and
(iv) depositors of First Federal as of May 1, 1997 ("Voting Record
Date") and borrowers of First Federal with loans outstanding as of
March 12, 1997 which continue to be outstanding as of the Voting
Record Date ("Other Members"), subject to the purchase limitations set
forth in the Plan of Conversion ("Subscription Offering").
Shares that are not subscribed for during the Subscription Offering,
if any, may be offered to the general public through a community
offering with preference given to natural persons and trusts of
natural persons who are permanent residents of Spartanburg County,
South Carolina ("Local Community") ("Community Offering"). It is
anticipated that any shares not subscribed for in the Subscription and
Community Offerings will be offered to certain members of the general
public through a syndicate of registered broker dealers pursuant to
selected dealers agreements in a syndicated community offering
("Syndicated Community Offering").
7. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. Eligible customers wishing to exercise their subscription rights must
return the enclosed Stock Order Form to First Federal. The Stock Order
Form must be completed and returned along with full payment or
appropriate instructions authorizing a withdrawal from a deposit
account at First Federal on or prior to the expiration of the
Subscription Offering, which is 12:00 Noon, Eastern Time, on June 17,
1997, unless extended.
8. Q. HOW CAN I PAY FOR MY SUBSCRIPTION STOCK ORDER?
A. First, you may pay for your stock in cash (if delivered in person to
First Federal) or by check or money order. Subscription funds will
earn interest at First Federal's passbook rate from the day we receive
them until the completion or termination of the Conversion.
Second, you may authorize us to withdraw funds from your First Federal
savings account or certificate of deposit without early withdrawal
penalty. These funds will continue to earn interest at the rate in
effect for your account until completion or termination of the
offering at which time your funds will be withdrawn for your purchase.
Funds remaining in this account (if any) will continue at the
contractual rate unless the withdrawal reduces the account balance
below the applicable minimum in which case you will receive interest
at the passbook rate. A hold will be placed on your account for the
amount you specify for stock payment. You will not have access to
these funds from the day we receive your order until the completion or
termination of the Conversion.
If you want to use Individual Retirement Account deposits held at
First Federal to purchase stock, call our Stock Information Center at
(864) 580-5510 for assistance. There will be no early withdrawal or
IRS penalties incurred by these transactions, but additional paperwork
is necessary.
9. Q. WHEN MUST I PLACE MY ORDER FOR SHARES OF STOCK?
A. To exercise subscription rights in the Subscription Offering, a Stock
Order Form must be received by First Federal with full payment for all
shares subscribed for not later than 12:00 Noon, Eastern Time, on June
17, 1997, unless extended.
Non-customers desiring to order shares through the Community Offering,
if any, must order shares before the close of the Community Offering,
if any, which will be no sooner than 12:00 noon, Eastern time on June
17, 1997, unless extended.
10. Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED?
A. FirstSpartan Financial is offering up to 3,852,500 shares of common
stock at a price of $20.00 per share. The number of shares may be
decreased to 2,847,500 or increased to 4,430,375 in response to
the independent appraiser's final determination of the consolidated
PRO FORMA market value of FirstSpartan Financial and First Federal, as
converted.
11. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT I CAN
PURCHASE DURING THE OFFERING PERIOD?
A. The minimum number of shares that may be purchased is 25 shares. No
Stock Order Form will be accepted for less than $500. The maximum
number of shares may not exceed a total aggregate purchase price of
$325,000 for any individual or individuals through a single account.
Associates or groups acting in concert as defined in First Federal's
Plan of Conversion may not exceed a total purchase price of $770,500
(1% of the total number of shares to be issued at the maximum of the
Estimated Valuation Range as defined in the Prospectus).
12. Q. HOW WAS IT DETERMINED THAT BETWEEN 2,847,500 SHARES AND 4,430,375
SHARES OF STOCK WOULD BE ISSUED AT $20.00 PER SHARE?
A. The share range was determined through an appraisal of FirstSpartan
Financial and First Federal, as converted, by RP Financial LC., an
independent appraisal firm specializing in the thrift industry.
13. Q. MUST I PAY A COMMISSION ON THE STOCK FOR WHICH I SUBSCRIBE?
A. No. You will not pay a commission on stock purchased in the
Subscription Offering, the Community Offering, if any, or Syndicated
Community Offering, if any.
14. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR STOCK PURCHASES?
A. Yes. First Federal will pay its current passbook rate from the date
funds are received (with a completed Stock Order Form) during the
subscription and community offerings until completion of the
Conversion.
15. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM, WHAT SHOULD I DO?
A. First Federal will mail you another order form or you may obtain one
from First Federal's main office. If you need assistance in obtaining
or completing a Stock Order Form, please call or visit the Stock
Information Center.
16. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE STOCK?
A. Subject to regulatory and other considerations, the Company intends to
establish a quarterly cash dividend following the Conversion of $0.15
per share (or $0.60 per share annually) commencing during the first
full calendar quarter following the Conversion. In addition, the Board
of Directors may determine to pay periodic special cash dividends in
addition to, or in lieu of, regular cash dividends. No assurance can
be given that any dividends (regular or special) will be paid on the
Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods.
17. Q. HOW MUCH STOCK DO THE DIRECTORS AND OFFICERS OF FIRST FEDERAL
INTEND TO PURCHASE THROUGH THE SUBSCRIPTION OFFERING?
A. Directors and executive officers intend to submit orders to purchase
approximately $2.6 million (approximately 4% at the sale of 3,350,000
shares in the offering) of the stock to be offered in the Conversion.
The purchase price paid by directors and officers will be the same as
that paid by customers and the general public.
18. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY?
A. No. Pursuant to federal regulations, subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may be exercised only by the person(s) to whom they are
granted. Any person found to be transferring or selling subscription
rights will be subject to forfeiture of such rights and other
penalties.
19. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD ME THAT I AM
STILL ELIGIBLE TO BUY STOCK. IS THAT TRUE?
A. If you were an account holder on the Eligibility Record Date, December
31, 1995, or the Supplemental Eligibility Record Date, March 31, 1997,
you are entitled to purchase stock regardless of whether or not you
continue to hold your First Federal account.
20. Q. MAY I OBTAIN A LOAN FROM FIRST FEDERAL USING STOCK AS COLLATERAL TO
PAY FOR MY SHARES?
A. No. Federal regulations do not allow First Federal to make loans for
this purpose, but other financial institutions may make a loan for
this purpose.
21. Q. WILL THE FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) INSURE THE
SHARES OF STOCK?
A. No. The shares will not be insured by the FDIC. However, the Savings
Association Insurance Fund of the FDIC will continue to insure savings
accounts and certificates of deposit up to the applicable limits
allowed by law.
22. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION?
A. FirstSpartan Financial has never issued stock before, and consequently
there is no established market for its common stock. FirstSpartan
Financial has received conditional approval to have the common stock
listed on the Nasdaq National Market under the symbol "FSPT." Trident
Securities, Inc. intends to make a market in the common stock.
However, purchasers of common stock should recognize that no assurance
can be given than an active and liquid trading market will develop or,
if developed, will be maintained.
23. Q. CAN I PURCHASE STOCK USING FUNDS IN A FIRST FEDERAL IRA ACCOUNT?
A. Yes. Contact the Stock Information Center for the additional
information. It takes several days to process the necessary IRA forms
and, therefore, it is necessary that you make arrangements by June 10,
1997, to accommodate your order.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
24. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD
TO CONSIDER THE PLAN OF CONVERSION?
A. At the Special Meeting of Members to be held on June 25, 1997 you are
eligible to vote if you are one of the "Voting Members," who are
holders of First Federal's deposits or other authorized accounts or
loans as of the Voting Record Date (May 1, 1997) for the Special
Meeting. However, members of record as of the close of business on the
Voting Record Date who cease to be depositors or borrowers prior to
the date of the Special Meeting are no longer members and will not be
entitled to vote at the Special Meeting. If you are a Voting Member,
you should have received a proxy statement and proxy card with which
to vote.
25. Q. HOW MANY VOTES DO I HAVE AS A VOTING MEMBER?
A. Each account holder is entitled to one vote for each $100, or fraction
thereof, on deposit in such account. Each borrower who holds eligible
borrowings is entitled to cast one vote in addition to the number of
votes, if any, he or she is entitled to cast as an account holder. No
member may cast more than 1,000 votes.
26. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED, WILL
I BE PROHIBITED FROM BUYING STOCK DURING THE SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts you from
purchasing stock in either the Subscription Offering or the Community
Offering, if any.
27. Q. WHAT HAPPENS IF FIRST FEDERAL DOES NOT GET ENOUGH VOTES TO APPROVE
THE PLAN OF CONVERSION?
A. The Conversion would not take place and First Federal would remain a
mutual savings and loan association.
28. Q. AS A QUALIFYING DEPOSITOR OR BORROWER OF FIRST FEDERAL, AM I
REQUIRED TO VOTE?
A. No. However, failure to return your proxy card will have the same
effect as a vote "Against" the Plan of Conversion.
29. Q. WHAT IS A PROXY CARD?
A. A Proxy Card gives you the ability to vote without attending the
Special Meeting in person. However, you may attend the meeting and
vote in person, even if you have returned your proxy card, if you
choose to do so.
30. Q. HOW DOES THE CONVERSION AFFECT ME?
A. The Conversion is intended, among other things, to assist First
Federal in maintaining and expanding its many services to First
Federal's customers and community. By purchasing stock, you will also
have the opportunity to invest in FirstSpartan Financial, the proposed
holding company for First Federal. However, there is no obligation to
purchase stock; the purchase of stock is strictly optional.
31. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
A. You may call the Stock Information Center at (864) 580-5510 for
further information or to obtain a copy of the Prospectus, Stock Order
Form, Proxy Statement and Proxy Card.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. A PROSPECTUS CAN BE
OBTAINED AT A FIRST FEDERAL OFFICE OR BY CALLING THE STOCK INFORMATION CENTER.
THERE SHALL BE NO SOLICITATION OF AN OFFER OR SALE OF STOCK IN ANY JURISDICTION
IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE UNLAWFUL.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR
GUARANTEED.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have
established a Stock Information Center to answer your questions. Please call:
(864) 580-5510
TRIDENT SECURITIES, INC.
4601 SIX FORKS ROAD, SUITE 400
RALEIGH, NORTH CAROLINA 27609
TELEPHONE (919) 781-8900
FACSIMILE (919) 787-1670
May 23, 1997
To Members and Friends of First Federal Savings and Loan Association of
Spartanburg:
Trident Securities, Inc., a member of the National Association of
Securities Dealers, Inc., is assisting First Federal Savings and Loan
Association of Spartanburg in its conversion to a capital stock savings and loan
association and the concurrent offering of shares of common stock by
FirstSpartan Financial Corp. (the "Company"), a Delaware corporation recently
formed for the purpose of acquiring all of the stock of First Federal Savings
and Loan Association of Spartanburg.
At the request of First Federal Savings and Loan Association of
Spartanburg, we are enclosing materials explaining the conversion process and
your right to subscribe for common shares of the Company. Please read the
enclosed offering materials carefully before subscribing for stock.
If you have any questions, please call the Stock Information Center at
(864) 580-5510.
Sincerely,
TRIDENT SECURITIES, INC.
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO SALE OF STOCK
IN ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD
BE UNLAWFUL.
(First Federal of Spartanburg logo)
May 23, 1997
Dear Valued Customer:
First Federal Savings and Loan Association of Spartanburg is pleased to
announce that we have received regulatory approval to proceed with our plan to
convert to a federally chartered stock savings and loan association, conditioned
upon receipt of approval by First Federal's members, among other things. This
stock Conversion is the most significant event in the history of First Federal
in that it allows customers, community members, directors and employees an
opportunity to subscribe for stock in FirstSpartan Financial Corp., the proposed
holding company for First Federal.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
First Federal, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with First Federal. Let us also
assure you that the stock Conversion will not result in any changes in the
management, personnel or the Board of Directors of First Federal. A special
meeting of the members of First Federal will be held on June 25, 1997 at 2:00
p.m., Eastern Time, at First Federal's main office, 380 E. Main Street,
Spartanburg, South Carolina, to consider and vote upon First Federal's Plan of
Conversion. Enclosed is a proxy card. Your Board of Directors solicits your vote
"FOR" First Federal's Plan of Conversion. A vote in favor of the Plan of
Conversion does not obligate you to purchase stock. If you do not plan to attend
the special meeting, please sign and return your proxy card promptly; your vote
is important to us.
As one of our valued members, you have the opportunity to invest in First
Federal's future by purchasing stock in FirstSpartan Financial Corp. during the
Subscription Offering, without paying a sales commission.
If you decide to exercise your subscription rights to purchase shares, you
must return a properly completed stock order form together with full payment for
the subscribed shares so that it is received by First Federal not later than
12:00 Noon, Eastern Time on June 17, 1997.
We also have enclosed a Prospectus and Proxy Statement which fully
describes the conversion and provides financial and other information about
FirstSpartan Financial Corp. and First Federal. Please review these materials
carefully before you vote or make an investment decision. For your convenience
we have established a Stock Information Center. If you have any questions,
please call the Stock Information Center at (864) 580-5510.
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
/s/ Billy L. Painter
Billy L. Painter
President and Chief Executive
Officer
Enclosures
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO SALE OF STOCK
IN ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD
BE UNLAWFUL.
P.O. Box 1806 (Bullet) Spartanburg SC 29304-1806 (Bullet) 864-582-2391
(First Federal of Spartanburg logo)
May 23, 1997
Dear Interested Investor:
First Federal Savings and Loan Association of Spartanburg is pleased to
announce that we have received regulatory approval to proceed with our plan to
convert to a federally chartered stock savings and loan association, conditioned
upon receipt of approval by First Federal's members, among other things. This
stock Conversion is the most significant event in the history of First Federal
in that it allows customers, community members, directors and employees an
opportunity to subscribe for stock in FirstSpartan Financial Corp., the proposed
holding company for First Federal.
We want to assure you that the Conversion will not result in any changes in
the management, personnel or the Board of Directors of First Federal.
Enclosed is a Prospectus which fully describes First Federal, its
management, board and financial condition. Please review it carefully before you
make an investment decision. If you decide to invest, please return to First
Federal a properly completed stock order form together with full payment for
shares at your earliest convenience. For your convenience we have established a
Stock Information Center. If you have any questions, please call the Stock
Information Center at (864) 580-5510.
Sincerely,
/s/ Billy L. Painter
Billy L. Painter
President and Chief Executive
Officer
Enclosures
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO SALE OF STOCK
IN ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD
BE UNLAWFUL.
P.O. Box 1806 (Bullet) Spartanburg SC 29304-1806 (Bullet) 864-582-2391
(First Federal of Spartanburg logo)
May 23, 1997
Dear Friend:
First Federal Savings and Loan Association of Spartanburg is pleased to
announce that we have received regulatory approval to proceed with our plan to
convert to a federally chartered stock savings and loan association, conditioned
upon receipt of approval by First Federal's members, among other things. This
stock Conversion is the most significant event in the history of First Federal
in that it allows customers, community members, directors and employees an
opportunity to subscribe for stock in FirstSpartan Financial Corp., the proposed
holding company for First Federal.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
First Federal, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with First Federal. Let us also
assure you that the Conversion will not result in any changes in the management,
personnel or the Board of Directors of First Federal. Our records indicate that
you were a depositor of First Federal on December 31, 1995. Therefore, under
applicable law, you are entitled to subscribe for Common Stock in First
Federal's Subscription Offering. Orders submitted by you and others in the
Subscription Offering are contingent upon the current members' approval of the
Plan of Conversion at a special meeting of members to be held on June 25, 1997
and upon receipt of all required regulatory approvals.
If you decide to exercise your subscription rights to purchase shares, you
must return a properly completed stock order form together with full payment for
the subscribed shares so that it is received at First Federal not later than
12:00 Noon, Eastern Time on June 17, 1997.
Enclosed is a Prospectus which fully describes First Federal, its
management, board and financial condition. Please review it carefully before you
make an investment decision. For your convenience, we have established a Stock
Information Center. If you have any questions, please call the Stock Information
Center at (864) 580-5510.
Sincerely,
/s/ Billy L. Painter
Billy L. Painter
President and Chief Executive
Officer
Enclosures
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO SALE OF STOCK
IN ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD
BE UNLAWFUL.
P.O. Box 1806 (Bullet) Spartanburg SC 29304-1806 (Bullet) 864-582-2391
P R O X Y G R A M
(First Federal of Spartanburg logo)
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
VOTING AGAINST THE PLAN.
VOTING FOR THE PLAN OF CONVERSION WILL NOT AFFECT THE INSURANCE COVERAGE OF YOUR
ACCOUNT. IT WILL CONTINUE TO BE INSURED UP TO THE LEGAL LIMIT ($100,000 PER
ACCOUNT AS DEFINED BY LAW) BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION, AN AGENCY OF THE U.S. GOVERNMENT.
REMEMBER, VOTING FOR CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR DELIVER IT TO A
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG OFFICE.
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION.
THANK YOU!
THE BOARD OF DIRECTORS OF FIRST
FEDERAL SAVINGS AND LOAN
ASSOCIATION OF SPARTANBURG
REVOCABLE PROXY
SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SPARTANBURG
FOR THE SPECIAL MEETING OF MEMBERS
TO BE HELD ON JUNE 25, 1997
The undersigned member of First Federal Savings and Loan Association of
Spartanburg ("Association") hereby appoints the Board of Directors, with full
powers of substitution, as attorneys-in-fact and agents for and in the name of
the undersigned, to vote such shares as the undersigned may be entitled to cast
at the Special Meeting of Members ("Meeting") of the Association to be held at
the Association's main office at 380 E. Main Street, Spartanburg, South
Carolina, on the date and time indicated on the Notice of Special Meeting of
Members, and at any adjournment thereof. They are authorized to cast all votes
to which the undersigned is entitled, as follows:
FOR AGAINST
(1) To approve a Plan of Conversion adopted by the Board of Directors on February 3,
1997 to convert the Association from a federally chartered mutual savings and loan
association to a federally chartered capital stock savings and loan association to
be held as a wholly-owned subsidiary of a new holding company, FirstSpartan
Financial Corp., including the adoption of a Federal Stock Charter and Bylaws for
the Association, pursuant to the laws of the United States and the rules and
regulations of the Office of Thrift Supervision. [ ] [ ]
(2) Such other matters that may properly come before the Meeting or any adjournments
thereof.
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting.
IMPORTANT: PLEASE SIGN DATE AND RETURN THIS PROXY IN THE PRE-ADDRESSED
ENVELOPE PROVIDED. VOTING FOR THE PLAN OF CONVERSION IN NO WAY OBLIGATES YOU TO
BUY ANY STOCK.
THIS PROXY WILL BE VOTED FOR THE PROPOSITION
STATED IF NO CHOICE IS MADE HEREIN
Should the undersigned be present and elect to vote at said Meeting or at
any adjournment thereof and, after notification to the Secretary of the
Association at said Meeting of the member's decision to terminate this Proxy,
then the power of said attorney-in-fact or agents shall be deemed terminated and
of no further force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Members of the Association called on the date and time indicated on the Notice
of Special Meeting, and a Proxy Statement relating to said Meeting from the
Association, prior to the execution of this Proxy.
DATE
SIGNATURE
SIGNATURE
NOTE: ONLY ONE SIGNATURE IS
REQUIRED IN THE CASE OF A
JOINT ACCOUNT BUT ALL
ACCOUNT HOLDERS SHOULD
SIGN, IF POSSIBLE. WHEN
SIGNING AS AN ATTORNEY,
ADMINISTRATOR, AGENT,
CORPORATE OFFICER,
EXECUTOR, TRUSTEE,
GUARDIAN OR OTHER
FIDUCIARY CAPACITY,
INDICATE YOUR FULL TITLE.
SUBSCRIPTION RIGHTS
SPECIAL NOTICE
ANY TRANSFER OF, OR ATTEMPT TO TRANSFER, A SUBSCRIPTION RIGHT TO ANY OTHER
PERSON IS ILLEGAL AND SUBJECT TO CIVIL FINES AND/OR PENALTIES AND EVEN CRIMINAL
FINES AND/OR PENALTIES. THE ASSOCIATION INTENDS TO PROSECUTE VIGOROUSLY ANY
TRANSFER OF, OR ATTEMPT TO TRANSFER, SUBSCRIPTION RIGHTS THAT COMES TO ITS
ATTENTION.
IF YOU ARE (OR HAVE BEEN ALREADY) CONTACTED BY ANYONE OFFERING TO GIVE YOU MONEY
TO BUY STOCK IN EXCHANGE FOR TRANSFERRING THE STOCK TO THEM LATER OR TO SHARE IN
ANY WAY PROCEEDS UPON THE SALE OF THE STOCK, OR TO TRANSFER YOUR SUBSCRIPTION
RIGHTS IN ANY OTHER WAY, PLEASE CALL US IMMEDIATELY AT (864) 580-5510.